SBRA 10Q 03.31.12
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-34950
 
 SABRA HEALTH CARE REIT, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Maryland
 
27-2560479
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
18500 Von Karman Avenue, Suite 550
Irvine, CA 92612
(888) 393-8248
(Address, zip code and telephone number of Registrant)
 
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
o
  
Accelerated filer
 
x
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of May 1, 2012, there were 37,051,242 shares of the Registrant’s $0.01 par value Common Stock outstanding.

Table of Contents

SABRA HEALTH CARE REIT, INC. AND SUBSIDIARIES
Index
 
 
Page
Numbers
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1a.
 
 
 
Item 6.
 
 

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Table of Contents

References throughout this document to “Sabra,” “we,” “our,” “ours” and “us” refer to Sabra Health Care REIT, Inc. and its direct and indirect consolidated subsidiaries and not any other person.
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q (this “10-Q”) contain “forward-looking” information as that term is defined by the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include all statements regarding our expected future financial position, results of operations, cash flows, liquidity, financing plans, business strategy, budgets, the expected amounts and timing of dividends and other distributions, projected expenses and capital expenditures, competitive position, growth opportunities, potential acquisitions, plans and objectives for future operations, and compliance with and changes in governmental regulations. You can identify some of the forward-looking statements by the use of forward-looking words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “may” and other similar expressions, although not all forward-looking statements contain these identifying words.
Our actual results may differ materially from those projected or contemplated by our forward-looking statements as a result of various factors, including, among others, the following:
•
our dependence on Sun Healthcare Group, Inc. until we are able to further diversify our portfolio;
•
our dependence on the operating success of our tenants;
•
changes in general economic conditions and volatility in financial and credit markets;
•
the dependence of our tenants on reimbursement from governmental and other third-party payors;
•
the significant amount of and our ability to service our indebtedness;
•
covenants in our debt agreements that may restrict our ability to make acquisitions, incur additional indebtedness and refinance indebtedness on favorable terms;
•
increases in market interest rates;
•
our ability to raise capital through equity financings;
•
the relatively illiquid nature of real estate investments;
•
competitive conditions in our industry;
•
the loss of key management personnel or other employees;
•
the impact of litigation and rising insurance costs on the business of our tenants;
•
uninsured or underinsured losses affecting our properties and the possibility of environmental compliance costs and liabilities;
•
our ability to qualify and maintain our status as a REIT; and
•
compliance with REIT requirements and certain tax matters related to status as a REIT.
We urge you to carefully consider these risks and review the additional disclosures we make concerning risks and other factors that may affect our business and operating results, including those referred to in Part I, Item 1A of our Annual Report on Form 10-K for the period ended December 31, 2011 (our “2011 Annual Report on Form 10-K”), as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission (the “SEC”) in the future, including subsequent Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. We caution you that any forward-looking statements made in this 10-Q are not guarantees of future performance and you should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not intend, and we undertake no obligation, to update any forward-looking information to reflect events or circumstances after the date of this 10-Q or to reflect the occurrence of unanticipated events, unless required by law to do so.
SUN HEALTHCARE GROUP, INC. INFORMATION
This 10-Q includes information regarding Sun Healthcare Group, Inc. (formerly known as SHG Services, Inc.; “Sun”), a Delaware corporation. Sun is subject to the reporting requirements of the SEC and is required to file with the SEC annual reports containing audited financial information and quarterly reports containing unaudited financial information. The information related to Sun provided in this 10-Q has been provided by Sun or derived from its public filings. We have not independently verified this information. We have no reason to believe that such information is inaccurate in any material respect. We are providing this data for informational purposes only. Sun’s filings with the SEC can be found at www.sec.gov.

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PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)  
 
 
March 31,
2012
 
December 31,
2011
 
(unaudited)
 
 
Assets
 
 
 
Real estate investments, net of accumulated depreciation of $116,166 and $108,916 as of March 31, 2012 and December 31, 2011, respectively
$
680,635

 
$
658,377

Cash and cash equivalents
2,675

 
42,250

Restricted cash
6,664

 
6,093

Deferred tax assets
25,540

 
25,540

Prepaid expenses, deferred financing costs and other assets
31,031

 
17,390

Total assets
$
746,545

 
$
749,650

Liabilities and stockholders’ equity
 
 
 
Mortgage notes payable
$
157,603

 
$
158,398

Senior unsecured notes payable
225,000

 
225,000

Accounts payable and accrued liabilities
17,804

 
14,139

Tax liability
25,540

 
25,540

Total liabilities
425,947

 
423,077

Commitments and contingencies (Note 11)

 

Stockholders’ equity
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized, zero shares issued and outstanding as of March 31, 2012 and December 31, 2011
—

 
—

Common stock, $.01 par value; 125,000,000 shares authorized, 37,009,602 and 36,891,712 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively
370

 
369

Additional paid-in capital
346,827

 
344,995

Cumulative distributions in excess of net income
(26,599
)
 
(18,791
)
Total stockholders’ equity
320,598

 
326,573

Total liabilities and stockholders’ equity
$
746,545

 
$
749,650

See accompanying notes to condensed consolidated financial statements.

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SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)  
(unaudited)
 
 
Three Months Ended March 31,
 
2012
 
2011
Revenues:
 
 
 
Rental income
$
23,663

 
$
17,561

Interest income
64

 
40

 
 
 
 
Total revenues
23,727

 
17,601

 
 
 
 
 
 
 
 
Expenses:
 
 
 
Depreciation and amortization
7,303

 
6,086

Interest
7,698

 
7,597

General and administrative
4,321

 
2,670

 
 
 
 
Total expenses
19,322

 
16,353

 
 
 
 
Net income
$
4,405

 
$
1,248

 
 
 
 
Net income per common share, basic
$
0.12

 
$
0.05

 
 
 
 
Net income per common share, diluted
$
0.12

 
$
0.05

 
 
 
 
Weighted-average number of common shares outstanding, basic
37,035,970

 
25,136,140

 
 
 
 
Weighted-average number of common shares outstanding, diluted
37,058,886

 
25,211,585

 
 
 
 
Dividends per common share
$
0.33

 
$
—

 
 
 
 
See accompanying notes to condensed consolidated financial statements.

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SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(dollars in thousands, except per share data)  
(unaudited)
 
 
Common Stock
 
Additional
Paid-in Capital
 
Cumulative Distributions in Excess of Net Income
 
Total
Stockholders’
Equity
 
Shares
 
Amounts
 
 
 
Balance, December 31, 2010
25,061,072

 
$
251

 
$
177,275

 
$
7

 
$
177,533

Net income
—

 
—

 
—

 
1,248

 
1,248

Amortization of stock-based compensation
—

 
—

 
1,142

 
—

 
1,142

Stock issuance
23,662

 
—

 
—

 
—

 
—

Balance, March 31, 2011
25,084,734

 
$
251

 
$
178,417

 
$
1,255

 
$
179,923

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
Cumulative Distributions in Excess of Net Income
 
Total
Stockholders’
Equity
 
Shares
 
Amounts
 
 
 
Balance, December 31, 2011
36,891,712

 
$
369

 
$
344,995

 
$
(18,791
)
 
$
326,573

Net income
—

 
—

 
—

 
4,405

 
4,405

Amortization of stock-based compensation
—

 
—

 
2,203

 
—

 
2,203

Stock issuance
117,890

 
1

 
(371
)
 
—

 
(370
)
Common dividends ($0.33 per share)
—

 
—

 
—

 
(12,213
)
 
(12,213
)
Balance, March 31, 2012
37,009,602

 
$
370

 
$
346,827

 
$
(26,599
)
 
$
320,598

 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.

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SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Three Months Ended March 31,
 
2012
 
2011
Cash flows from operating activities:

 
 
Net income
$
4,405

 
$
1,248

Adjustments to reconcile net income to net cash provided by operating activities:

 
 
Depreciation and amortization
7,303

 
6,086

Amortization of deferred financing costs
566

 
495

Stock-based compensation expense
2,203

 
1,142

Amortization of premium on notes payable
(4
)
 
(4
)
Straight-line rental income adjustments
(969
)
 
—

Changes in operating assets and liabilities:


 
 
Prepaid expenses and other assets
(126
)
 
391

Accounts payable and accrued liabilities
4,053

 
4,106

Restricted cash
(967
)
 
(1,006
)

 
 
 
Net cash provided by operating activities
16,464

 
12,458


 
 
 
Cash flows from investing activities:

 
 
Acquisitions of real estate
(29,850
)
 
—

Origination of note receivable
(10,103
)
 
—

Acquisition of note receivable
—

 
(5,329
)
Additions to real estate
(256
)
 
(86
)

 
 
 
Net cash used in investing activities
(40,209
)
 
(5,415
)

 
 
 
Cash flows from financing activities:

 
 
Principal payments on mortgage notes payable
(791
)
 
(760
)
Payments of deferred financing costs
(2,456
)
 
(306
)
Payments related to the issuance of common stock
(370
)
 
—

Dividends paid
(12,213
)
 
—


 
 
 
Net cash used in financing activities
(15,830
)
 
(1,066
)

 
 
 
Net (decrease) increase in cash and cash equivalents
(39,575
)
 
5,977

Cash and cash equivalents, beginning of period
42,250

 
74,233


 
 
 
Cash and cash equivalents, end of period
$
2,675

 
$
80,210


 
 
 
Supplemental disclosure of cash flow information:

 
 
Interest paid
$
2,140

 
$
2,447


 
 
 
See accompanying notes to condensed consolidated financial statements.

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SABRA HEALTH CARE REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
1.
BUSINESS
Overview
Sabra Health Care REIT, Inc. (“Sabra” or the “Company”) was incorporated on May 10, 2010 as a wholly owned subsidiary of Sun Healthcare Group, Inc. (“Old Sun”) and commenced operations upon completion of the Separation and REIT Conversion Merger (discussed below) on November 15, 2010 (the “Separation Date”). Sabra is organized to qualify as a real estate investment trust (“REIT”) and will elect to be treated as a REIT for U.S. federal income tax purposes upon the filing of its U.S. federal income tax return for the taxable year beginning January 1, 2011. Sabra’s primary business consists of acquiring, financing and owning real estate property to be leased to third party tenants in the healthcare sector. Sabra owns substantially all of its assets and properties and conducts its operations through Sabra Health Care Limited Partnership, a Delaware limited partnership (the “Operating Partnership”), of which Sabra is the sole general partner, or by subsidiaries of the Operating Partnership. As of March 31, 2012, Sabra’s investment portfolio included 99 properties (consisting of (i) 89 skilled nursing/post-acute facilities, (ii) nine senior housing facilities, and (iii) one acute care hospital). In addition, as of March 31, 2012, a wholly owned subsidiary of the Company was the lender under a loan (the "Mezzanine Loan") secured by the borrowers' equity interests in three skilled nursing facilities and one assisted living facility located in Texas and including a purchase option on these four facilities. The Mezzanine Loan was originated on March 15, 2012 for $10.0 million.
Separation and REIT Conversion Merger
On May 24, 2010, Old Sun announced its intention to restructure its business by separating its real estate assets and its operating assets into two separate publicly traded companies, Sabra and SHG Services Inc. (which has been renamed “Sun Healthcare Group, Inc.” or “Sun”). In order to effect the restructuring, Old Sun distributed to its stockholders on a pro rata basis all of the outstanding shares of common stock of Sun (this distribution is referred to as the “Separation”), together with an additional cash distribution. Immediately following the Separation, Old Sun merged with and into Sabra, with Sabra surviving the merger and Old Sun stockholders receiving shares of Sabra common stock in exchange for their shares of Old Sun common stock (this merger is referred to as the “REIT Conversion Merger”). Effective November 15, 2010, the Separation and REIT Conversion Merger were completed and Sabra and Sun began operations as separate companies.
Following the Separation, Sun, through its subsidiaries, continued the business and operations of Old Sun and its subsidiaries. Sabra did not operate prior to the Separation. Immediately following the Separation, subsidiaries of Sabra owned substantially all of Old Sun’s owned real property. The owned real property held by subsidiaries of Sabra following the Separation includes fixtures and certain personal property associated with the real property. The historical consolidated financial statements of Old Sun became the historical consolidated financial statements of Sun at the time of the Separation. At the time of the Separation, the balance sheet of Sabra included the owned real property and mortgage indebtedness to third parties on the real property as well as indebtedness incurred by Sabra prior to completion of the Separation. The statements of income and cash flows of Sabra consist solely of its operations after the Separation. The Separation was accounted for as a reverse spinoff. Accordingly, Sabra’s assets and liabilities are recorded at the historical carrying values of Old Sun.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The condensed consolidated financial statements include the accounts of Sabra and its wholly owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the Securities and Exchange Commission (the "SEC"), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for financial statements. In the opinion of management, the financial statements for the unaudited interim period presented include all adjustments, which are of a normal and recurring nature, necessary for a fair statement of the results for such period. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s 2011 Annual Report on

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Form 10-K filed with the SEC.

Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

Real Estate Acquisition Valuation
The Company accounts for the acquisition of income-producing real estate or real estate that will be used for the production of income as a business combination. All assets acquired and liabilities assumed in a business combination are measured at their acquisition-date fair values. Acquisition pursuit costs are expensed as incurred and restructuring costs that do not meet the definition of a liability at the acquisition date are expensed in periods subsequent to the acquisition date. During the three months ended March 31, 2012, the Company expensed $0.5 million of acquisition pursuit costs, which is included in general and administrative expense on the accompanying condensed consolidated statements of income.
Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require the Company to make significant assumptions to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate assumptions would result in an incorrect valuation of the Company’s acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact the amount of the Company’s net income.

Interest Income
Interest income on the Company’s loan receivable is recognized on an accrual basis over the life of the investment using the interest method. Direct loan origination costs are amortized over the term of the loan as an adjustment to interest income. When concerns exist as to the ultimate collection of principal or interest due under a loan, the loan is placed on nonaccrual status and the Company will not recognize interest income until the cash is received, or the loan returns to accrual status. If the Company determines the collection of interest according to the contractual terms of the loan is probable, the Company will resume the accrual of interest. On March 15, 2012, a wholly owned subsidiary of the Company entered into the Mezzanine Loan. The Mezzanine Loan has a five year term, bears interest at a fixed rate of 11.0% per annum and is secured by the borrowers' equity interests in three skilled nursing facilities and one assisted living facility located in Texas. The Company has an option to purchase the three skilled nursing facilities and one assisted living facility before March 31, 2013 for up to an aggregate purchase price of $43.0 million and increasing 2.5% for each of the two years thereafter. Upon exercise of the purchase option, the Company would expect to enter into a new 15 year triple-net master lease having 2 five-year renewal options.

3.
ACQUISITIONS OF REAL ESTATE
During the three months ended March 31, 2012, the Company acquired two skilled nursing facilities for a total purchase price of $29.9 million. The purchase price was allocated as follows (in thousands):
 
 
Intangibles
 
Land
Building and Improvements
Tenant Origination and Absorption Costs
Tenant Relationship
Total Purchase Price
$
5,100

$
24,150

$
500

$
100

$
29,850

    
As of March 31, 2012, the purchase price allocations for these properties are preliminary pending the receipt of information necessary to complete the valuation of certain tangible and intangible assets and liabilities and therefore are subject to change.
The tenant origination and absorption costs intangible assets and tenant relationship intangible assets acquired in connection with these acquisitions have weighted-average amortization periods as of the date of acquisition of 15 years and 25 years, respectively.
For the three months ended March 31, 2012, the Company recognized $18,000 of total revenues from these properties.

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4.
REAL ESTATE INVESTMENTS
The Company’s investments in real estate consisted of the following (dollars in thousands):
As of March 31, 2012
Property Type
 
Number of
Properties
 
Number of
Beds/Units
 
Total
Real Estate
at Cost
 
Accumulated
Depreciation
 
Total
Real Estate
Investments, Net
Skilled Nursing/Post-Acute
 
89

 
10,154

 
$
687,473

 
$
(105,903
)
 
$
581,570

Senior Housing
 
9

 
773

 
47,449

 
(8,582
)
 
38,867

Acute Care Hospital
 
1

 
70

 
61,640

 
(1,616
)
 
60,024

 
 
99

 
10,997

 
796,562

 
(116,101
)
 
680,461

Corporate Level
 
 
 
 
 
239

 
(65
)
 
174

 
 
 
 
 
 
$
796,801

 
$
(116,166
)
 
$
680,635

As of December 31, 2011
Property Type
 
Number of
Properties
 
Number of
Beds/Units
 
Total
Real Estate
at Cost
 
Accumulated
Depreciation
 
Total
Real Estate
Investments, Net
Skilled Nursing/Post-Acute
 
87

 
10,034

 
$
658,222

 
$
(99,570
)
 
$
558,652

Senior Housing
 
9

 
773

 
47,192

 
(8,140
)
 
39,052

Acute Care Hospital
 
1

 
70

 
61,640

 
(1,154
)
 
60,486

 
 
97

 
10,877

 
767,054

 
(108,864
)
 
658,190

Corporate Level
 
 
 
 
 
239

 
(52
)
 
187

 
 
 
 
 
 
$
767,293

 
$
(108,916
)
 
$
658,377

 
March 31, 2012
 
December 31, 2011
Building and improvements
$
650,784

 
$
626,877

Furniture and equipment
44,546

 
44,045

Land improvements
4,640

 
4,640

Land
96,831

 
91,731

 
796,801

 
767,293

Accumulated depreciation
(116,166
)
 
(108,916
)
 
$
680,635

 
$
658,377


Operating Leases
All of the Company’s real estate properties are leased under triple-net operating leases with expirations ranging from 9 to 23 years. As of March 31, 2012, the leases have a weighted-average remaining term of 12 years. The leases include provisions to extend the lease terms and other negotiated terms and conditions. The Company, through its subsidiaries, retains substantially all of the risks and benefits of ownership of the real estate assets leased to the tenants. In addition, the Company may receive additional security under these operating leases in the form of security deposits from the lessee or guarantees from the parent of the lessee. As of March 31, 2012, 86 of the Company's 99 real estate properties were leased to subsidiaries of Sun. For further discussion of the Company’s tenant and revenue concentration, see “Note 11. Commitments and Contingencies—Concentration of Credit Risk.”
As of March 31, 2012, the future minimum rental income from the Company’s properties under non-cancelable operating leases is as follows (in thousands):
April 1, 2012 through December 31, 2012
$
73,536

2013
98,048

2014
98,048

2015
98,048

2016
98,048

Thereafter
676,676

 
$
1,142,404

 
 
 

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5.
DEBT
Mortgage Indebtedness. The Company’s mortgage notes payable consist of the following (dollars in thousands):
 
Interest Rate Type
Principal
Outstanding as of
March 31, 2012 (2)
 
Principal
Outstanding as of
December 31, 2011 (2)
 
Weighted Average
Interest Rate at
March 31, 2012
 
Maturity
Date
Fixed Rate
$
98,249

 
$
98,739

 
6.29
%
 
August 2015 - June 2047
Variable Rate(1)
58,858

 
59,159

 
5.50
%
 
August 2015
 
$
157,107

 
$
157,898

 
 
 
 
 
(1) 
Contractual interest rates under variable rate mortgages are equal to the 90-day LIBOR plus 4.5% (subject to a 1.0% LIBOR floor). 
(2) 
Outstanding principal balance for mortgage indebtedness does not include mortgage premium of $0.5 million as of March 31, 2012 and December 31, 2011. 
8.125% Senior Notes due 2018. On October 27, 2010, the Operating Partnership and Sabra Capital Corporation, wholly owned subsidiaries of the Company (the “Issuers”), issued $225.0 million aggregate principal amount of senior, unsecured notes (the “Senior Notes”) in a private placement. The Senior Notes were sold at par, resulting in gross proceeds of $225.0 million and net proceeds of approximately $219.9 million after deducting commissions and expenses. On December 6, 2010, substantially all of the net proceeds were used by Sun to redeem the $200.0 million in aggregate principal amount outstanding of Old Sun’s 9.125% senior subordinated notes due 2015, including accrued and unpaid interest and the applicable redemption premium. In March 2011, the Issuers completed an exchange offer to exchange the Senior Notes for substantially identical 8.125% senior unsecured notes registered under the Securities Act of 1933, as amended (also referred to herein as the “Senior Notes”).
The obligations under the Senior Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by Sabra and certain of Sabra’s other existing and, subject to certain exceptions, future subsidiaries; provided, however, that such guarantees are subject to release under certain customary circumstances.  See "Note 9. Summarized Condensed Consolidating Information" for additional information concerning the circumstances pursuant to which the guarantors will be automatically and unconditionally released from their obligations under the guarantees.
The Senior Notes are redeemable at the option of the Issuers, in whole or in part, at any time, and from time to time, on or after November 1, 2014, at the redemption prices set forth in the indenture governing the Senior Notes (the “Indenture”), plus accrued and unpaid interest to the applicable redemption date. In addition, prior to November 1, 2014, the Issuers may redeem all or a portion of the Senior Notes at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus a “make-whole” premium, plus accrued and unpaid interest to the applicable redemption date. At any time, or from time to time, on or prior to November 1, 2013, the Issuers may redeem up to 35% of the principal amount of the Senior Notes, using the proceeds of specific kinds of equity offerings, at a redemption price of 108.125% of the principal amount to be redeemed, plus accrued and unpaid interest, if any, to the applicable redemption date. Assuming the Senior Notes are not redeemed, the Senior Notes mature on November 1, 2018.
The Indenture governing the Senior Notes contains restrictive covenants that, among other things, restrict the ability of Sabra, the Issuers and their restricted subsidiaries to: (i) incur or guarantee additional indebtedness; (ii) incur or guarantee secured indebtedness; (iii) pay dividends or distributions on, or redeem or repurchase, their capital stock; (iv) make certain investments or other restricted payments; (v) sell assets; (vi) create liens on their assets; (vii) enter into transactions with affiliates; (viii) merge or consolidate or sell all or substantially all of their assets; and (ix) create restrictions on the ability of Sabra and its restricted subsidiaries to pay dividends or other amounts to Sabra. The Indenture governing the Senior Notes also provides for customary events of default, including, but not limited to, the failure to make payments of interest or premium, if any, on, or principal of, the Senior Notes, the failure to comply with certain covenants and agreements specified in the Indenture for a period of time after notice has been provided, the acceleration of other indebtedness resulting from the failure to pay principal on such other indebtedness prior to its maturity, and certain events of insolvency. If any event of default occurs, the principal of, premium, if any, and accrued interest on all the then outstanding Senior Notes may become due and payable immediately. As of March 31, 2012, the Company was in compliance with all applicable financial covenants under the Senior Notes.

Secured Revolving Credit Facility. On November 3, 2010, the Operating Partnership and certain subsidiaries of the Operating Partnership (together with the Operating Partnership, the “Borrowers”) entered into a secured revolving credit facility with certain lenders as set forth in the related credit agreement and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (each as defined in such credit agreement). The secured revolving credit facility is secured by, among other things, a first priority lien against certain of the properties owned by certain of the Company’s subsidiaries.

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The obligations of the Borrowers under the secured revolving credit facility are guaranteed by the Company and certain of its subsidiaries. On February 10, 2012, the Borrowers amended the secured revolving credit facility (the “Amended Secured Revolving Credit Facility”) to increase the borrowing capacity from $100.0 million to $200.0 million (up to $20.0 million of which may be utilized for letters of credit) and to include an accordion feature that allows the Borrowers to increase borrowing availability under the Amended Secured Revolving Credit Facility by up to an additional $150.0 million, subject to certain terms and conditions. Borrowing availability under the Amended Secured Revolving Credit Facility is subject to a borrowing base calculation based on, among other factors, the lesser of (i) the mortgageability cash flow (as such term is defined in the credit agreement ) or (ii) the appraised value, in each case of the properties securing the Amended Secured Revolving Credit Facility. The entire $200.0 million was available for borrowing under the Amended Secured Revolving Credit Facility as of March 31, 2012. Borrowing availability under the Amended Secured Revolving Credit Facility terminates, and all borrowings mature, on February 10, 2015, subject to a one-year extension option. As of March 31, 2012, there were no amounts outstanding on the Company’s Amended Secured Revolving Credit Facility.
Borrowings under the Amended Secured Revolving Credit Facility bear interest on the outstanding principal amount at a rate equal to an applicable percentage plus, at the Borrowers' option, either (a) LIBOR or (b) a base rate determined as the greater of (i) the federal funds rate plus 0.5%, (ii) the prime rate, and (iii) one-month LIBOR plus 1.0% (the “Base Rate”). The applicable percentage for borrowings will vary based on the Consolidated Leverage Ratio, as defined in the amended credit agreement, and will range from 2.00% to 3.00% per annum for borrowings at the Base Rate and 3.00% to 4.00% per annum for LIBOR based borrowings. In addition, the Borrowers are required to pay a facility fee to the lenders equal to between 0.35% and 0.50% per annum based on the amount of unused borrowings under the Amended Secured Revolving Credit Facility. During the three months ended March 31, 2012, the Company incurred $0.2 million of unused facility fees.

The Amended Secured Revolving Credit Facility contains customary covenants that include restrictions on the ability to make acquisitions and other investments, pay dividends, incur additional indebtedness, engage in non-healthcare related business activities, enter into transactions with affiliates and sell or otherwise transfer certain assets as well as customary events of default. The Amended Secured Revolving Credit Facility also requires the Company, through the Borrowers, to comply with specified financial covenants, which include a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum tangible net worth requirement. As of March 31, 2012, the Company was in compliance with all applicable financial covenants under the Amended Secured Revolving Credit Facility.
During the three months ended March 31, 2012 and 2011, the Company incurred interest expense of $7.7 million and $7.6 million, respectively. Included in interest expense for the three months ended March 31, 2012 and 2011, was $0.6 million and $0.5 million, respectively, of deferred financing costs amortization. As of March 31, 2012 and December 31, 2011, the Company had $8.4 million and $4.0 million, respectively, of accrued interest included in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheets.
The following is a schedule of maturities for the Company’s outstanding debt as of March 31, 2012 (in thousands): 
 
Mortgage
Indebtedness  (1)
 
Senior Notes
 
Amended Secured Revolving
Credit Facility
 
Total
April 1, 2012 through December 31, 2012
$
2,413

 
$
—

 
$
—

 
$
2,413

2013
3,428

 
—

 
—

 
3,428

2014
3,649

 
—

 
—

 
3,649

2015
86,048

 
—

 
—

 
86,048

2016
1,689

 
—

 
—

 
1,689

Thereafter
59,880

 
225,000

 
—

 
284,880

 
$
157,107

 
$
225,000

 
$
—

 
$
382,107

 
(1) 
Outstanding principal balance for mortgage indebtedness does not include mortgage premium of $0.5 million as of March 31, 2012.

6.FAIR VALUE DISCLOSURES

The fair value for certain financial instruments is derived using a combination of market quotes, pricing models and other valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments.
Financial instruments for which actively quoted prices or pricing parameters are available and whose markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments whose markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or

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when market transactions are not orderly. The carrying values of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities are reasonable estimates of fair value because of the short-term maturities of these instruments. Fair values for other financial instruments are derived as follows:
Mezzanine Loan: This instrument is presented in the accompanying condensed consolidated balance sheets at its amortized cost and not at fair value. The fair value of the Mezzanine Loan was estimated using an internal valuation model that considered the expected cash flows for the Mezzanine Loan, the underlying collateral value and other credit enhancements.
Senior Notes: The fair values of the Senior Notes were determined using third-party market quotes derived from orderly trades.
Mortgage indebtedness: The fair values of the Company’s notes payable were estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements.
The following are the carrying amounts and fair values of the Company’s financial instruments as of March 31, 2012 and December 31, 2011 whose carrying amounts do not approximate their fair value:
 
 
March 31, 2012
 
December 31, 2011
 
Face
Value (1)
 
Carrying
Amount (2)
 
Fair
Value
 
Face
Value (1)
 
Carrying
Amount (2)
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Mezzanine Loan
$
10,000

 
$
10,128

 
$
10,000

 
$
—

 
$
—

 
$
—

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Senior Notes
225,000

 
225,000

 
237,938

 
225,000

 
225,000

 
227,813

Mortgage indebtedness
157,107

 
157,603

 
171,583

 
157,898

 
158,398

 
172,829

 
(1) Face value represents amounts contractually due under the terms of the respective agreements.
(2) Carrying amounts represent the book value of financial instruments and include unamortized premiums (discounts).
The Company determined the fair value of financial instruments as of March 31, 2012 whose carrying amounts do not approximate their fair value with valuation methods utilizing the following types of inputs (in thousands):
 
 
 
Fair Value Measurements Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Financial assets:
 
 
 
 
 
 
 
Mezzanine Loan
$
10,000

 
$
—

 
$
—

 
$
10,000

Financial liabilities:
 
 
 
 
 
 
 
Senior Notes
$
237,938

 
$
—

 
$
237,938

 
$
—

Mortgage indebtedness
$
171,583

 
$
—

 
$
—

 
$
171,583

Disclosure of the fair value of financial instruments is based on pertinent information available to the Company at the applicable dates and requires a significant amount of judgment. Despite increased capital market and credit market activity, transaction volume for certain financial instruments remains relatively low. This has made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of fair value at a future date could be materially different.
During the three months ended March 31, 2012, the Company measured the following assets at fair value with valuation methods utilizing the following types of inputs (in thousands):
 
 
 
Fair Value Measurements Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Nonrecurring Basis:
 
 
 
 
 
 
 
Investments in real estate (1)
$
29,850

 
$
—

 
$
—

 
$
29,850

(1) Amount reflects acquisition date fair value of real estate acquired in 2012.

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The significant unobservable inputs used in the measurement of the Company's real estate acquisition date fair value include comparable transaction prices for similar properties, market lease rates, discount rates and lease-up periods. Significant increases or decreases in any of these inputs in isolation would result in a significantly different fair value measurement.
7.
EQUITY

Common Stock
 
The following table lists the cash dividends on common stock declared and paid by the Company during the three months ended March 31, 2012:
 
Declaration Date
 
Record Date
 
Amount Per Share
 
Dividend Payable Date
February 29, 2012
 
March 15, 2012
 
$
0.33

 
March 30, 2012
 
On April 24, 2012, the Company announced that its board of directors declared a quarterly cash dividend of $0.33 per share of common stock. The dividend will be paid on May 31, 2012 to stockholders of record as of the close of business on May 15, 2012.
On August 1, 2011, the Company completed an underwritten public offering of 11.7 million newly issued shares of its common stock pursuant to a registration statement filed with the SEC, which became effective on July 26, 2011.  The Company received net proceeds, before expenses, of $163.9 million from the offering, after giving effect to the issuance and sale of all 11.7 million shares of common stock (which included 1.5 million shares sold to the underwriters upon exercise of their option to purchase additional shares to cover over-allotments), at a price to the public of $14.75 per share.
During the three months ended March 31, 2012, the Company issued 117,890 shares of common stock as a result of restricted stock unit vestings and in connection with incentive bonus payments payable under the Company's 2011 Bonus Plan pursuant to an election to receive the bonus payment in shares of the Company's common stock.
8.
EARNINGS PER COMMON SHARE
The following table illustrates the computation of basic and diluted earnings per share for the three months ended March 31, 2012 and 2011 (in thousands, except share and per share amounts):
 
Three Months Ended March 31,
 
2012
 
2011
Numerator
 
 
 
Net income
$
4,405

 
$
1,248

 
 
 
 
Denominator
 
 
 
Basic weighted average common shares
37,035,970

 
25,136,140

Dilutive stock options and restricted stock units
22,916

 
75,445

 
 
 
 
Diluted weighted average common shares
37,058,886

 
25,211,585

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.12

 
$
0.05

 
 
 
 
Diluted earnings per common share
$
0.12

 
$
0.05

Restricted stock and certain of the Company’s performance restricted stock units are considered participating securities which require the use of the two-class method when computing basic and diluted earnings per share. During the three months ended March 31, 2012 and 2011, approximately 0.2 million and 0.5 million restricted stock units, respectively, and options to purchase approximately 0.4 million shares were not included because they were anti-dilutive.

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9.SUMMARIZED CONDENSED CONSOLIDATING INFORMATION
In connection with the offering of the Senior Notes by the Issuers in October 2010, the Company and certain 100% owned subsidiaries of the Company (the “Guarantors”) have, jointly and severally, fully and unconditionally guaranteed the Senior Notes, subject to release under certain customary circumstances as described below. These guarantees are subordinated to all existing and future senior debt and senior guarantees of the Guarantors and are unsecured. The Company conducts all of its business through and derives virtually all of its income from its subsidiaries. Therefore, the Company’s ability to make required payments with respect to its indebtedness (including the Senior Notes) and other obligations depends on the financial results and condition of its subsidiaries and its ability to receive funds from its subsidiaries.
A Guarantor will be automatically and unconditionally released from its obligations under the guarantees with respect to the Senior Notes in the event of:
•
Any sale of the subsidiary Guarantor or of all or substantially all of its assets;
•
A merger or consolidation of a subsidiary Guarantor with an issuer of the Senior Notes or another Guarantor, provided that the surviving entity remains a Guarantor;
•
A subsidiary Guarantor is declared "unrestricted" for covenant purposes under the Indenture;
•
The requirements for legal defeasance or covenant defeasance or to discharge the Indenture have been satisfied;
•
A liquidation or dissolution, to the extent permitted under the Indenture, of a subsidiary Guarantor; and
•
The release or discharge of the guaranty that resulted in the creation of the subsidiary guaranty, except a discharge or release by or as a result of payment under such guaranty.
Pursuant to Rule 3-10 of Regulation S-X, the following summarized consolidating information is provided for the Company (the “Parent Company”), the Issuers, the Guarantors, and the Company’s non-Guarantor subsidiaries with respect to the Senior Notes. This summarized financial information has been prepared from the books and records maintained by the Company, the Issuers, the Guarantors and the non-Guarantor subsidiaries. The summarized financial information may not necessarily be indicative of the results of operations or financial position had the Issuers, the Guarantors or non-Guarantor subsidiaries operated as independent entities. Sabra’s investments in its consolidated subsidiaries are presented based upon Sabra's proportionate share of each subsidiary's net assets. The Guarantor subsidiaries’ investments in the non-Guarantor subsidiaries and non-Guarantor subsidiaries’ investments in Guarantor subsidiaries are presented under the equity method of accounting. Intercompany activities between subsidiaries and the Parent Company are presented within operating activities on the condensed consolidating statement of cash flows.
Condensed consolidating financial statements for the Company and its subsidiaries, including the Parent Company only, the Issuers, the combined Guarantor subsidiaries and the combined non-Guarantor subsidiaries, are as follows:

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Table of Contents


CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2012
(in thousands, except share and per share amounts)
(unaudited)
 
 
Parent
Company
 
Issuers
 
Combined
Guarantor
Subsidiaries
 
Combined  Non-
Guarantor
Subsidiaries
 
Elimination
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Real estate investments, net of accumulated depreciation
$
175

 
$
—

 
$
498,583

 
$
181,877

 
$
—

 
$
680,635

Cash and cash equivalents
1,634

 
—

 
—

 
1,041

 
—

 
2,675

Restricted cash
—

 
—

 
—

 
6,664

 
—

 
6,664

Deferred tax assets
25,540

 
—

 
—

 
—

 
—

 
25,540

Prepaid expenses, deferred financing costs and other assets
995

 
4,893

 
22,211

 
2,932

 
—

 
31,031

Intercompany
1,049

 
145,017

 
—

 
27,634

 
(173,700
)
 
—

Investment in subsidiaries
322,261

 
404,968

 
24,195

 
—

 
(751,424
)
 
—

Total assets
$
351,654

 
$
554,878

 
$
544,989

 
$
220,148

 
$
(925,124
)
 
$
746,545

Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Mortgage notes payable
$
—

 
$
—

 
$
—

 
$
157,603

 
$
—

 
$
157,603

Senior unsecured notes payable
—

 
225,000

 
—

 
—

 
—

 
225,000

Accounts payable and accrued liabilities
5,516

 
7,617

 
3,805

 
866

 
—

 
17,804

Tax liability
25,540

 
—

 
—

 
—

 
—

 
25,540

Intercompany
—

 
—

 
173,700

 
—

 
(173,700
)
 
—

Total liabilities
31,056

 
232,617

 
177,505

 
158,469

 
(173,700
)
 
425,947

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized, zero shares issued and outstanding as of March 31, 2012
—

 
—

 
—

 
—

 
—

 
—

Common stock, $.01 par value; 125,000,000 shares authorized, 37,009,602 shares issued and outstanding as of March 31, 2012
370

 
—

 
—

 
—

 
—

 
370

Additional paid-in capital
346,827

 
289,452

 
316,978

 
52,313

 
(658,743
)
 
346,827

Cumulative distributions in excess of net income

(26,599
)
 
32,809

 
50,506

 
9,366

 
(92,681
)
 
(26,599
)
Total stockholders’ equity
320,598

 
322,261

 
367,484

 
61,679

 
(751,424
)
 
320,598

Total liabilities and stockholders’ equity
$
351,654

 
$
554,878

 
$
544,989

 
$
220,148

 
$
(925,124
)
 
$
746,545


15
Table of Contents


CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2011
(in thousands, except share and per share amounts)
 
 
Parent
Company
 
Issuers
 
Combined
Guarantor
Subsidiaries
 
Combined  Non-
Guarantor
Subsidiaries
 
Elimination
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Real estate investments, net of accumulated depreciation
$
187

 
$
—

 
$
474,256

 
$
183,934

 
$
—

 
$
658,377

Cash and cash equivalents
41,736

 
—

 
—

 
514

 
—

 
42,250

Restricted cash
—

 
—

 
—

 
6,093

 
—

 
6,093

Deferred tax assets
25,540

 
—

 
—

 
—

 
—

 
25,540

Prepaid expenses, deferred financing costs and other assets
874

 
5,079

 
8,544

 
2,893

 
—

 
17,390

Intercompany
—

 
145,018

 
—

 
25,237

 
(170,255
)
 
—

Investment in subsidiaries
313,181

 
391,131

 
23,611

 
—

 
(727,923
)
 
—

Total assets
$
381,518

 
$
541,228

 
$
506,411

 
$
218,671

 
$
(898,178
)
 
$
749,650

Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Mortgage notes payable
$
—

 
$
—

 
$
—

 
$
158,398

 
$
—

 
$
158,398

Senior unsecured notes payable
—

 
225,000

 
—

 
—

 
—

 
225,000

Accounts payable and accrued liabilities
6,296

 
3,047

 
4,107

 
689

 
—

 
14,139

Tax liability
25,540

 
—

 
—

 
—

 
—

 
25,540

Intercompany
23,109

 
—

 
147,146

 
—

 
(170,255
)
 
—

Total liabilities
54,945

 
228,047

 
151,253

 
159,087

 
(170,255
)
 
423,077

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized, zero shares issued and outstanding as of December 31, 2011
—

 
—

 
—

 
—

 
—

 
—

Common stock, $.01 par value; 125,000,000 shares authorized, 36,891,712 shares issued and outstanding as of December 31, 2011
369

 
—

 
—

 
—

 
—

 
369

Additional paid-in capital
344,995

 
288,665

 
316,011

 
52,110

 
(656,786
)
 
344,995

Cumulative distributions in excess of net income

(18,791
)
 
24,516

 
39,147

 
7,474

 
(71,137
)
 
(18,791
)
Total stockholders’ equity
326,573

 
313,181

 
355,158

 
59,584

 
(727,923
)
 
326,573

Total liabilities and stockholders’ equity
$
381,518

 
$
541,228

 
$
506,411

 
$
218,671

 
$
(898,178
)
 
$
749,650


16
Table of Contents


CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended March 31, 2012
(in thousands, except share and per share amounts)
(unaudited)
 
 
Parent Company
 
Issuers
 
Combined
Guarantor
Subsidiaries
 
Combined  Non-
Guarantor
Subsidiaries
 
Elimination
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Rental income
$
—

 
$
—

 
$
17,215

 
$
6,448

 
$
—

 
$
23,663

Interest income
6

 
—

 
58

 
—

 
—

 
64

Total revenues
6

 
—

 
17,273

 
6,448

 
—

 
23,727

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
12

 
—

 
5,232

 
2,059

 
—

 
7,303

Interest
—

 
4,757

 
463

 
2,478

 
—

 
7,698

General and administrative
3,882

 
—

 
419

 
20

 
—

 
4,321

Income in subsidiary
(8,293
)
 
(13,050
)
 
(202
)
 
—

 
21,545

 
—

Total expenses
(4,399
)
 
(8,293
)
 
5,912

 
4,557

 
21,545

 
19,322

Net income
$
4,405

 
$
8,293

 
$
11,361

 
$
1,891

 
$
(21,545
)
 
$
4,405

Net income per common share, basic
 
 
 
 
 
 
 
 
 
 
$
0.12

Net income per common share, diluted
 
 
 
 
 
 
 
 
 
 
$
0.12

Weighted-average number of common shares outstanding, basic
 
 
 
 
 
 
 
 
 
 
37,035,970

Weighted-average number of common shares outstanding, diluted
 
 
 
 
 
 
 
 
 
 
37,058,886


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Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended March 31, 2011
(in thousands, except share and per share amounts)
(unaudited)

 
Parent Company
 
Issuers
 
Combined
Guarantor
Subsidiaries
 
Combined  Non-
Guarantor
Subsidiaries
 
Elimination
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Rental income
$
—

 
$
—

 
$
11,270

 
$
6,291

 
$
—

 
$
17,561

Interest income
28

 
—

 
12

 
—

 
—

 
40

Total revenues
28

 
—

 
11,282

 
6,291

 
—

 
17,601

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
15

 
—

 
3,939

 
2,132

 
—

 
6,086

Interest
—

 
4,749

 
322

 
2,526

 
—

 
7,597

General and administrative
2,631

 
—

 
2

 
37

 
—

 
2,670

Income in subsidiary
(3,866
)
 
(8,615
)
 
(94
)
 
—

 
12,575

 
—

Total expenses
(1,220
)
 
(3,866
)
 
4,169

 
4,695

 
12,575

 
16,353

Net income
$
1,248

 
$
3,866

 
$
7,113

 
$
1,596

 
$
(12,575
)
 
$
1,248

Net income per common share, basic
 
 
 
 
 
 
 
 
 
 
$
0.05

Net income per common share, diluted
 
 
 
 
 
 
 
 
 
 
$
0.05

Weighted-average number of common shares outstanding, basic
 
 
 
 
 
 
 
 
 
 
25,136,140

Weighted-average number of common shares outstanding, diluted
 
 
 
 
 
 
 
 
 
 
25,211,585



18
Table of Contents


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2012
(in thousands)
(unaudited)

Parent Company
 
Issuers
 
Combined
Guarantor
Subsidiaries
 
Combined  Non-
Guarantor
Subsidiaries
 
Elimination
 
Consolidated
Net cash provided by operating activities
$
15,369

 
$
—

 
$
—

 
$
1,095

 
$
—

 
$
16,464

Cash flows from investing activities:

 

 

 

 

 

Acquisitions of real estate
—

 
—

 
(29,850
)
 
—

 
—

 
(29,850
)
Origination of note receivable
—

 
—

 
(10,103
)
 
—

 
—

 
(10,103
)
Additions to real estate
—

 
—

 
(256
)
 
—

 
—

 
(256
)
Investment in Subsidiary
(728
)
 
 
 
 
 
 
 
728

 
—

Net cash used in investing activities
(728
)
 
—

 
(40,209
)
 
—

 
728

 
(40,209
)
Cash flows from financing activities:

 

 

 

 

 

Principal payments on mortgage notes payable
—

 
—

 
—

 
(791
)
 
—

 
(791
)
Payments of deferred financing costs
—

 
—

 
(2,296
)
 
(160
)
 
—

 
(2,456
)
Payments related to the issuance of common stock
(370
)
 
—

 
—

 
—

 
—

 
(370
)
Dividends paid
(12,213
)
 
—

 
—

 
—

 
—

 
(12,213
)
Contribution from Parent
—

 
—

 
—

 
728

 
(728
)
 
—

Distribution to Parent
—

 
—

 
—

 
(345
)
 
345

 
—

Distribution from Subsidiary
345

 
—

 
—

 
—

 
(345
)
 
—

Intercompany financing
(42,505
)
 
—

 
42,505

 
—

 
—

 
—

Net cash provided by (used in) financing activities
(54,743
)
 
—

 
40,209

 
(568
)
 
(728
)
 
(15,830
)
Net decrease in cash and cash equivalents
(40,102
)
 
—

 
—

 
527

 
—

 
(39,575
)
Cash and cash equivalents, beginning of period
41,736

 
—

 
—

 
514

 
—

 
42,250

Cash and cash equivalents, end of period
$
1,634

 
$
—

 
$
—

 
$
1,041

 
$
—

 
$
2,675




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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2011
(in thousands)
(unaudited)

 
Parent Company
 
Issuers
 
Combined
Guarantor
Subsidiaries
 
Combined  Non-
Guarantor
Subsidiaries
 
Elimination
 
Consolidated
Net cash provided by operating activities
$
8,038

 
$
—

 
$
—

 
$
4,420

 
$
—

 
$
12,458

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Acquisition of note receivable
(5,329
)
 
—

 
—

 
—

 
—

 
(5,329
)
Additions to real estate
(86
)
 
—

 
—

 
—

 
—

 
(86
)
Net cash used in investing activities
(5,415
)
 
—

 
—

 
—

 
—

 
(5,415
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Principal payments on mortgage notes payable
—

 
—

 
—

 
(760
)
 
—

 
(760
)
Payments of deferred financing costs
(306
)
 
—

 
—

 
—

 
—

 
(306
)
Intercompany financing
3,636

 
—

 
—

 
(3,636
)
 
—

 
—

Net cash provided by (used in) financing activities
3,330

 
—

 
—

 
(4,396
)
 
—

 
(1,066
)
Net decrease in cash and cash equivalents
5,953

 
—

 
—

 
24

 
—

 
5,977

Cash and cash equivalents, beginning of period
70,841

 
—

 
—

 
3,392

 
—

 
74,233

Cash and cash equivalents, end of period
$
76,794

 
$
—

 
$
—

 
$
3,416

 
$
—

 
$
80,210

 
 
 
 
 
 
 
 
 
 
 
 












20
Table of Contents

10.
PRO FORMA FINANCIAL INFORMATION

The following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company for the three months ended March 31, 2012 and 2011. The Company acquired two properties and originated the Mezzanine Loan during the three months ended March 31, 2012. The following unaudited pro forma information for the three months ended March 31, 2012 and 2011 has been prepared to give effect to these transactions and for the eleven acquisitions that occurred during 2011, as well as the offering of 11.7 million shares of common stock that closed in August 2011, as if they had occurred on January 1, 2011. This pro forma information does not purport to represent what the actual results of operations of the Company would have been had these acquisitions occurred on this date, nor does it purport to predict the results of operations for future periods (in thousands, except share and per share amounts):
 
 
Three Months Ended March 31,
 
 
2012
 
2011
 
 
 
 
 
Revenues
 
$
24,775

 
$
24,102

Depreciation and amortization
 
7,488

 
7,738

Net income
 
5,703

 
6,097

Net income per common share, basic
 
0.15

 
0.17

Net income per common share, diluted
 
0.15

 
0.17

Weighted-average number of common shares outstanding, basic
 
37,035,970

 
36,866,140

Weighted-average number of common shares outstanding, diluted
 
37,058,886

 
36,941,585


11.COMMITMENTS AND CONTINGENCIES

Concentration of Credit Risk
Concentrations of credit risks arise when a number of operators, tenants or obligors related to the Company’s investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors its portfolio to assess potential concentrations of risks.
Sun
As of March 31, 2012, 86 of the Company’s 99 real estate properties were leased to subsidiaries of Sun. During the three months ended March 31, 2012, 76% of the Company’s total revenues were derived from these leases. Sun is a publicly traded company and is subject to the informational filing requirements of the Securities Exchange Act of 1934, as amended, and is required to file periodic reports on Form 10-K and Form 10-Q with the SEC. As of March 31, 2012, Sun's continuing operations, through its subsidiaries, operated 190 inpatient centers spread across 23 states. Sun’s net revenues and adjusted earnings before interest, depreciation, amortization, restructuring costs and rent were $458.5 million and $52.3 million, respectively, for the three months ended March 31, 2012 and $466.3 million and $64.5 million, respectively, for the three months ended March 31, 2011. As of March 31, 2012, Sun’s outstanding debt, net of cash, totaled $44.7 million. As of March 31, 2012, Sun had approximately $104.8 million in liquidity, consisting of unrestricted cash and cash equivalents of $44.8 million and available borrowings of $60.0 million under Sun's revolving credit facility.
Cadia Portfolio
On August 1, 2011, the Company closed the purchase of four skilled nursing facilities (the “Cadia Portfolio”). The four skilled nursing facilities are located in Delaware, range in age from 2 to 15 years and have a combined total of 500 beds. In connection with the acquisition, the Company, through an indirect wholly owned subsidiary, entered into a new 15-year triple-net master lease agreement with the sellers (collectively, the “Cadia Tenants”). None of the Cadia Tenants are affiliated with the Company or any of its subsidiaries. As of March 31, 2012, the Company's investment in the Cadia Portfolio totaled 13% of the Company's assets, and during the three months ended March 31, 2012, 11% of the Company's total revenues were derived from the Cadia Portfolio lease. The Company believes that the financial condition and results of operations of the Cadia Tenants are more relevant to the Company’s investors than the financial statements of the Cadia Portfolio and enable investors to evaluate the credit-worthiness of the Cadia Tenants in their capacity as the tenants under the Cadia Portfolio lease. As a result, the Company has presented below unaudited summary financial information of the combined Cadia Tenants as of and for the three months ended March 31, 2012. The summary financial information presented below has been provided by the Cadia Tenants and has not been independently verified by the Company. The Company has no reason to believe that such information is inaccurate in any material respect.

21
Table of Contents

 
Three Months Ended March 31, 2012 (unaudited)
(in thousands)
Statements of Operations
 
Revenues
$
14,959

Operating expenses
14,217

Net income
554

 
 
 
As of March 31, 2012 (unaudited)
(in thousands)
Balance Sheets
 
Cash and cash equivalents
$
5,950

Total current assets
10,614

Total current liabilities
7,132

Total debt
—

 
 

Other than the Company’s tenant concentrations, management believes the Company's current portfolio is reasonably diversified across healthcare related real estate and geographical location and does not contain any other significant concentration of credit risks. The Company’s portfolio of 99 real estate properties is diversified by location across 24 states. The properties in any one state did not account for more than 14% and 19%, respectively, of the Company’s total revenue during the three months ended March 31, 2012 and 2011.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities. Compliance with existing environmental laws is not expected to have a material adverse effect on the Company’s financial condition and results of operations as of March 31, 2012.
Indemnification Agreement
In connection with the Separation and REIT Conversion Merger, any liability arising from or relating to legal proceedings involving the Company’s real estate investments has been assumed by the Company and the Company will indemnify Sun (and its subsidiaries, directors, officers, employees and agents and certain other related parties) against any losses arising from or relating to such legal proceedings. In addition, pursuant to a distribution agreement entered into among Old Sun, the Company and Sun in connection with the Separation and REIT Conversion Merger, Sun has agreed to indemnify the Company (and the Company's subsidiaries, directors, officers, employees and agents and certain other related parties) for any liability arising from or relating to legal proceedings involving Old Sun’s healthcare business prior to the Separation, and, pursuant to the lease agreements between the Company and subsidiaries of Sun, the tenants agree to indemnify the Company for any liability arising from operations at the real property leased from the Company.
Immediately prior to the Separation, Old Sun was a party to various legal actions and administrative proceedings, including various claims arising in the ordinary course of its healthcare business, which are subject to the indemnities to be provided by Sun to the Company. While these actions and proceedings are not believed to be material, individually or in the aggregate, the ultimate outcome of these matters cannot be predicted. The resolution of any such legal proceedings, either individually or in the aggregate, could have a material adverse effect on Sun’s business, financial position or results of operations, which, in turn, could have a material adverse effect on the Company's business, financial position or results of operations if Sun or its subsidiaries are unable to meet their indemnification obligations.
Legal Matters
From time to time, the Company is party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings where the likelihood of a loss contingency is reasonably possible and the amount or range of reasonably possible losses is material to the Company's results of operations, financial condition or cash flows.

22
Table of Contents


12.
SUBSEQUENT EVENTS
The Company evaluates subsequent events up until the date the condensed consolidated financial statements are issued.
Dividend Declaration
On April 24, 2012, the Company’s board of directors declared a quarterly cash dividend of $0.33 per share of common stock. The dividend will be paid on May 31, 2012 to stockholders of record as of May 15, 2012.


23
Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The discussion below contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those which are discussed in the “Risk Factors” section in Part I, Item 1A of our 2011 Annual Report on Form 10-K. Also see “Statement Regarding Forward-Looking Statements” preceding Part I.
The following discussion and analysis should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:
•
Overview
•
Recent Transactions
•
Critical Accounting Policies
•
Results of Operations
•
Liquidity and Capital Resources
•
Change in Skilled Nursing Facility Reimbursement Rates
•
Obligations and Commitments
•
Off-Balance Sheet Arrangements
Overview
We were incorporated on May 10, 2010 as a wholly owned subsidiary of Sun Healthcare Group, Inc. (“Old Sun”), a provider of nursing, rehabilitative and related specialty healthcare services principally to the senior population in the United States. Pursuant to a restructuring plan by Old Sun, Old Sun restructured its business by separating its real estate assets and its operating assets into two separate publicly traded companies, Sabra and SHG Services Inc. (which has been renamed “Sun Healthcare Group, Inc.” or “Sun”). In order to effect the restructuring, Old Sun distributed to its stockholders on a pro rata basis all of the outstanding shares of common stock of Sun (this distribution is referred to as the “Separation”), together with an additional cash distribution. Immediately following the Separation, Old Sun merged with and into Sabra, with Sabra surviving the merger and Old Sun stockholders receiving shares of Sabra common stock in exchange for their shares of Old Sun common stock (this merger is referred to as the “REIT Conversion Merger”). The Separation and REIT Conversion Merger were completed on November 15, 2010, which we refer to as the Separation Date.
Following the restructuring of Old Sun’s business and the completion of the Separation and REIT Conversion Merger, we became a self-administered, self-managed real estate investment trust (“REIT”) that, directly or indirectly, owns and invests in real estate serving the healthcare industry.
As of March 31, 2012, our investment portfolio included 99 real estate properties (consisting of (i) 89 skilled nursing/post-acute facilities, (ii) nine senior housing facilities, and (iii) one acute care hospital) and a mezzanine loan secured by the borrowers' equity interests in three skilled nursing facilities and one assisted living facility located in Texas and including a purchase option on these four facilities. As of March 31, 2012, our real estate properties had a total of 10,997 licensed beds, or units, spread across 24 states. As of March 31, 2012, all of our real estate properties are leased under triple-net operating leases with expirations ranging from 9 to 23 years.
We expect to continue to grow our portfolio primarily through the acquisition of healthcare facilities, including skilled nursing facilities, senior housing facilities (which may include assisted living, independent living and continuing care retirement community facilities) and hospitals, and through the origination of financing secured directly or indirectly by healthcare facilities. We intend to finance our investments with cash on hand and availability under our Amended Secured Revolving Credit Facility (as defined below). As we acquire additional properties and expand our portfolio, we expect to further diversify by tenant, asset class and geography within the healthcare sector. We employ a disciplined, opportunistic approach in our healthcare real estate investment strategy by investing in assets that provide attractive opportunities for dividend growth and appreciation of asset values, while maintaining balance sheet strength and liquidity, thereby creating long-term stockholder value.
We are organized to qualify as a REIT and we will elect to be treated as a REIT for U.S. federal income tax purposes upon the filing of our U.S. federal income tax return for the taxable year beginning January 1, 2011. We operate through an umbrella partnership (commonly referred to as an UPREIT) structure in which substantially all of our properties and assets are held by Sabra Health Care Limited Partnership, a Delaware limited partnership (the "Operating Partnership"), of which we are the sole general partner, or by subsidiaries of the Operating Partnership.

24
Table of Contents

Recent Transactions
Pennsylvania Subacute Portfolio Acquisition
On March 30, 2012, we closed the purchase of two specialized skilled nursing facilities (the "Pennsylvania Subacute Portfolio") in a sale-leaseback transaction with affiliates of the sellers for $29.9 million. Each facility has 60 licensed beds and one facility was most recently renovated in 1990, while the other facility was most recently renovated in 2008. In connection with the acquisition, we, through an indirect wholly owned subsidiary, entered into a single 15-year triple-net master lease agreement with the sellers with two five-year renewal options. The Pennsylvania Subacute Portfolio lease provides for annual rent escalators equal to the greater of the change in the Consumer Price Index or 2.5%, resulting in annual lease revenues determined in accordance with GAAP of $3.4 million and an initial yield on cash rent of 9.50%. The purchase price was funded with available cash.

Meridian Mezzanine Loan
On March 15, 2012, we entered into a $10.0 million mezzanine loan agreement ("Mezzanine Loan") with affiliates of Meridian Equity Investors, L.P. (the "Meridian Borrowers"), with an option to purchase three skilled nursing facilities and one assisted living facility located in Texas and owned by the Meridian Borrowers (the "Meridian Facilities") before March 31, 2013 for up to an aggregate purchase price of $43.0 million and increasing by 2.5% for each of the two years thereafter. The Mezzanine Loan is secured by the Meridian Borrowers' equity interests in four entities that own and operate the Meridian Facilities. The Mezzanine Loan has a five year term and bears interest at a fixed rate of 11.0% per annum. Upon exercise of the purchase option, we would expect to enter into a new 15 year triple-net master lease having 2 five-year renewal options at an initial cash yield of the greater of 9.25% or fair market rent as determined at the start of the lease. The facilities range in age from 9 to 17 years and have a total of 394 licensed beds.
Amended Secured Revolving Credit Facility
On February 10, 2012, the Operating Partnership and certain subsidiaries of the Operating Partnership (together with the Operating Partnership, the “Borrowers”) amended the secured revolving credit facility (as amended, the “Amended Secured Revolving Credit Facility”) to increase the borrowing capacity from $100.0 million to $200.0 million (up to $20.0 million of which may be utilized for letters of credit) and to include an accordion feature that allows the Borrowers to increase borrowing availability under the Amended Secured Revolving Credit Facility by up to an additional $150.0 million, subject to certain terms and conditions. Borrowings under the Amended Secured Revolving Credit Facility bear interest on the outstanding principal amount at a rate equal to an applicable percentage plus, at the Borrowers' option, either (a) LIBOR or (b) a base rate determined as the greater of (i) the federal funds rate plus 0.5%, (ii) the prime rate, and (iii) one-month LIBOR plus 1.0% (the “Base Rate”). The applicable percentage for borrowings will vary based on the Consolidated Leverage Ratio, as defined in the credit agreement, and will range from 2.00% to 3.00% per annum for borrowings at the Base Rate and 3.00% to 4.00% per annum for LIBOR-based borrowings. See "—Liquidity and Capital Resources" for further information. In addition, the Borrowers are required to pay a facility fee to the lenders equal to between 0.35% and 0.50% per annum based on the amount of unused borrowings under the Amended Secured Revolving Credit Facility.
Critical Accounting Policies
Our consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our 2011 Annual Report on Form 10-K filed with the SEC. There have been no significant changes to our critical accounting policies during the three months ended March 31, 2012.
Results of Operations
As of March 31, 2011, our investment portfolio included 86 real estate properties and an investment in a mortgage note, which was subsequently repaid. As of March 31, 2012, our investment portfolio included 99 real estate properties and an investment in a mezzanine loan. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of owning investments acquired in 2011 for an entire period and the anticipated future acquisition of additional investments. The results of operations presented for the three months ended March 31, 2012 and 2011 are not directly comparable due to the increase in acquisition activity subsequent to March 31, 2011.

25
Table of Contents


Comparison of the three months ended March 31, 2012 versus the three months ended March 31, 2011 (dollars in thousands):
 
Three Months Ended March 31,
 
Increase
 
Percentage
Difference
 
Increase due to Acquisitions (1)
 
Increase (Decrease) Due to Properties Held Throughout Both Periods (2)