Edgar Filing: Sabra Health Care REIT, Inc.

Large accelerated filer

Accelerated filer

Non-accelerated filer

o (Do not check if a smaller reporting company)

Smaller reporting company

SBRA 10Q 2015 Q2

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 June 30, 2015



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

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 (§ 232.405 of this chapter) 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):

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 August 1, 2015, there were 65,134,056 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
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Income	4

	Condensed Consolidated Statements of Comprehensive Income	5

	Condensed Consolidated Statements of Equity	6

	Condensed Consolidated Statements of Cash Flows	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4.	Controls and Procedures	48

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	49

Item 1a.	Risk Factors	49

Item 6.	Exhibits	50

Signatures		52

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. Any statements that do not relate to historical or current facts or matters are forward-looking statements. 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 investments, 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 Genesis Healthcare, Inc. (“Genesis”) and certain wholly owned subsidiaries of Holiday AL Holdings LP (collectively, “Holiday”) until we are able to further diversify our portfolio;


•	our dependence on the operating success of our tenants;


•	the significant amount of and our ability to service our indebtedness;


•	covenants in our debt agreements that may restrict our ability to pay dividends, make investments, incur additional indebtedness and refinance indebtedness on favorable terms;


•	increases in market interest rates;


•	changes in foreign currency exchange rates;


•	our ability to raise capital through equity and debt financings;


•	the impact of required regulatory approvals of transfers of healthcare properties;


•	the effect of increasing healthcare regulation and enforcement on our tenants and the dependence of our tenants on reimbursement from governmental and other third-party payors;


•	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;


•	the effect of our tenants declaring bankruptcy or becoming insolvent;


•	uninsured or underinsured losses affecting our properties and the possibility of environmental compliance costs and liabilities;


•	the ownership limits and anti-takeover defenses in our governing documents and Maryland law, which may restrict change of control or business combination opportunities;


•	the impact of a failure or security breach of information technology in our operations;


•	our ability to find replacement tenants and the impact of unforeseen costs in acquiring new properties;


•	our ability to maintain our status as a real estate investment trust (“REIT”); and


•	compliance with REIT requirements and certain tax and tax regulatory matters related to our 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 materially affect the outcome of our forward-looking statements and our future business and operating results, including those made in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014 (our “2014 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”), 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, events or results, 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.

Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

SABRA HEALTH CARE REIT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)



	June 30, 2015			December 31, 2014
	(unaudited)
Assets
Real estate investments, net of accumulated depreciation of $213,735 and $185,994 as of June 30, 2015 and December 31, 2014, respectively	$	1,933,831		$	1,645,805
Loans receivable and other investments, net	278,507			251,583
Cash and cash equivalents	6,042			61,793
Restricted cash	7,093			7,024
Prepaid expenses, deferred financing costs and other assets, net	112,329			98,687
Total assets	$	2,337,802		$	2,064,892

Liabilities
Mortgage notes	$	142,252		$	124,022
Revolving credit facility	122,000			68,000
Term loans	272,846			200,000
Senior unsecured notes	699,323			699,272
Accounts payable and accrued liabilities	30,573			31,775
Total liabilities	1,266,994			1,123,069

Commitments and contingencies (Note 13)

Equity
Preferred stock, $.01 par value; 10,000,000 shares authorized, 5,750,000 shares issued and outstanding as of June 30, 2015 and December 31, 2014	58			58
Common stock, $.01 par value; 125,000,000 shares authorized, 65,134,056 and 59,047,001 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively	651			590
Additional paid-in capital	1,201,155			1,053,601
Cumulative distributions in excess of net income	(126,167		)	(110,841		)
Accumulated other comprehensive loss	(4,826		)	(1,542		)
Total Sabra Health Care REIT, Inc. stockholders’ equity	1,070,871			941,866
Noncontrolling interests	(63		)	(43		)
Total equity	1,070,808			941,823
Total liabilities and equity	$	2,337,802		$	2,064,892

See accompanying notes to condensed consolidated financial statements.

Table of Contents

SABRA HEALTH CARE REIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share data)

(unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Revenues:
Rental income	$	49,896		$	37,485		$	99,401		$	73,578
Interest and other income	6,690			5,488			12,757			10,245

Total revenues	56,586			42,973			112,158			83,823

Expenses:
Depreciation and amortization	14,497			9,755			28,647			19,105
Interest	14,052			10,994			27,932			22,128
General and administrative	9,862			5,031			16,721			10,785
Provision for doubtful accounts and write-offs	2,972			2,895			4,116			2,994

Total expenses	41,383			28,675			77,416			55,012

Other income (expense):
Loss on extinguishment of debt	—			(162		)	—			(22,296		)
Other (expense) income	(100		)	660			(200		)	960
Gain on sale of real estate	1,723			—			1,723			—

Total other income (expense)	1,623			498			1,523			(21,336		)

Net income	16,826			14,796			36,265			7,475

Net loss attributable to noncontrolling interests	9			5			20			23

Net income attributable to Sabra Health Care REIT, Inc.	16,835			14,801			36,285			7,498

Preferred stock dividends	(2,560		)	(2,560		)	(5,121		)	(5,121		)

Net income attributable to common stockholders	$	14,275		$	12,241		$	31,164		$	2,377


Net income attributable to common stockholders, per:

Basic common share	$	0.24		$	0.28		$	0.53		$	0.06

Diluted common share	$	0.24		$	0.28		$	0.52		$	0.06

Weighted-average number of common shares outstanding, basic	59,323,799			43,655,292			59,254,895			41,324,795

Weighted-average number of common shares outstanding, diluted	59,543,781			44,096,297			59,510,164			41,791,470

See accompanying notes to condensed consolidated financial statements.

Table of Contents

SABRA HEALTH CARE REIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



	Three Months Ended June 30,					Six Months Ended June 30,
	2015			2014		2015			2014

Net income	$	16,826		$	14,796	$	36,265		$	7,475
Other comprehensive loss:
Foreign currency translation	(595		)	—		(595		)	—
Unrealized loss on cash flow hedges	(1,144		)	—		(2,689		)	—

Comprehensive income	15,087			14,796		32,981			7,475

Comprehensive loss attributable to noncontrolling interest	9			5		20			23

Comprehensive income attributable to Sabra Health Care REIT, Inc.	$	15,096		$	14,801	$	33,001		$	7,498

See accompanying notes to condensed consolidated financial statements.

SABRA HEALTH CARE REIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(dollars in thousands, except per share data)

(unaudited)



	Preferred Stock			Common Stock			Additional Paid-in Capital		Cumulative Distributions in Excess of Net Income			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity			Noncontrolling Interests			Total Equity
	Shares	Amount		Shares	Amounts		Additional Paid-in Capital		Cumulative Distributions in Excess of Net Income			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity			Noncontrolling Interests			Total Equity
Balance, December 31, 2013	5,750,000	$	58	38,788,745	$	388	$	534,639	$	(74,921	)	$	—		$	460,164		$	—		$	460,164
Net income (loss)	—	—		—	—		—		7,498			—			7,498			(23		)	7,475
Amortization of stock-based compensation	—	—		—	—		5,195		—			—			5,195			—			5,195
Common stock issuance, net	—	—		8,474,406	85		220,424		—			—			220,509			—			220,509
Preferred dividends	—	—		—	—		—		(5,121		)	—			(5,121		)	—			(5,121		)
Common dividends ($0.74 per share)	—	—		—	—		—		(32,407		)	—			(32,407		)	—			(32,407		)
Balance, June 30, 2014	5,750,000	$	58	47,263,151	$	473	$	760,258	$	(104,951	)	$	—		$	655,838		$	(23	)	$	655,815


	Preferred Stock			Common Stock			Additional Paid-in Capital		Cumulative Distributions in Excess of Net Income			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity			Noncontrolling Interests			Total Equity
	Shares	Amount		Shares	Amounts		Additional Paid-in Capital		Cumulative Distributions in Excess of Net Income			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity			Noncontrolling Interests			Total Equity
Balance, December 31, 2014	5,750,000	$	58	59,047,001	$	590	$	1,053,601	$	(110,841	)	$	(1,542	)	$	941,866		$	(43	)	$	941,823
Net income (loss)	—	—		—	—		—		36,285			—			36,285			(20		)	36,265
Other comprehensive loss	—	—		—	—		—		—			(3,284		)	(3,284		)	—			(3,284		)
Amortization of stock-based compensation	—	—		—	—		4,940		—			—			4,940			—			4,940
Common stock issuance, net	—	—		6,087,055	61		142,614		—			—			142,675			—			142,675
Preferred dividends	—	—		—	—		—		(5,121		)	—			(5,121		)	—			(5,121		)
Common dividends ($0.78 per share)	—	—		—	—		—		(46,490		)	—			(46,490		)	—			(46,490		)
Balance, June 30, 2015	5,750,000	$	58	65,134,056	$	651	$	1,201,155	$	(126,167	)	$	(4,826	)	$	1,070,871		$	(63	)	$	1,070,808

See accompanying notes to condensed consolidated financial statements.

Table of Contents

SABRA HEALTH CARE REIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Six Months Ended June 30,
	2015			2014
Cash flows from operating activities:
Net income	$	36,265		$	7,475
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	28,647			19,105
Non-cash interest income adjustments	212			140
Amortization of deferred financing costs	2,529			1,872
Stock-based compensation expense	4,672			4,792
Amortization of debt discount (premium)	51			(33		)
Loss on extinguishment of debt	—			1,418
Straight-line rental income adjustments	(11,834		)	(8,433		)
Provision for doubtful accounts and write-offs	4,116			2,994
Change in fair value of contingent consideration	200			(960		)
Gain on sale of real estate	(1,723		)	—
Changes in operating assets and liabilities:
Prepaid expenses and other assets	(11,292		)	(1,171		)
Accounts payable and accrued liabilities	1,014			3,312
Restricted cash	(1,550		)	(1,590		)

Net cash provided by operating activities	51,307			28,921

Cash flows from investing activities:
Acquisitions of real estate	(301,851		)	(118,389		)
Origination and fundings of loans receivable	(21,737		)	(38,373		)
Preferred equity investments	(5,131		)	(6,458		)
Additions to real estate	(1,033		)	(783		)
Repayment of loans receivable	2,052			—
Release of contingent consideration held in escrow	5,240			—
Net proceeds from the sale of real estate	1,800			—

Net cash used in investing activities	(320,660		)	(164,003		)

Cash flows from financing activities:
Proceeds from issuance of senior unsecured notes	—			350,000
Principal payments on senior unsecured notes	—			(211,250		)
Net proceeds (repayments) from revolving credit facility	54,000			(135,500		)
Proceeds from term loan	73,242			—
Proceeds from mortgage notes	—			57,703
Principal payments on mortgage notes	(1,340		)	(87,733		)
Payments of deferred financing costs	(834		)	(10,135		)
Issuance of common stock	140,062			219,899
Dividends paid on common and preferred stock	(51,343		)	(37,125		)

Net cash provided by financing activities	213,787			145,859

Net (decrease) increase in cash and cash equivalents	(55,566		)	10,777
Effect of foreign currency translation on cash and cash equivalents	(185		)	—
Cash and cash equivalents, beginning of period	61,793			4,308

Cash and cash equivalents, end of period	$	6,042		$	15,085

Supplemental disclosure of cash flow information:
Interest paid	$	25,441		$	15,298
Supplemental disclosure of non-cash investing and financing activities:
Assumption of mortgage indebtedness	$	19,677		$	14,102

See accompanying notes to condensed consolidated financial statements.

Table of Contents

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. (“Sun”) and commenced operations on November 15, 2010 following Sabra's separation from Sun. Sabra elected to be treated as a real estate investment trust (“REIT”) with the filing of its U.S. federal income tax return for the taxable year beginning January 1, 2011. Sabra believes that it has been organized and operated, and it intends to continue to operate, in a manner to qualify as a REIT. 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 primarily generates revenues by leasing properties to tenants and operators throughout the United States and Canada. Sabra owns substantially all of its properties and assets 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 and Sabra’s wholly owned subsidiaries are currently the only limited partners, or by subsidiaries of the Operating Partnership. The Company’s investment portfolio is primarily comprised of skilled nursing/transitional care facilities, senior housing facilities, acute care hospitals, investments in loans receivable and preferred equity investments.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Sabra and its wholly owned subsidiaries as of June 30, 2015 and December 31, 2014 and for the periods ended June 30, 2015 and 2014. All significant intercompany transactions and balances have been 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 periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair statement of the results for such periods. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2014 included in the Company’s 2014 Annual Report on Form 10-K filed with the SEC.

GAAP requires the Company to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIEs”). A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity's activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. If the Company were determined to be the primary beneficiary of the VIE, the Company would consolidate investments in the VIE. The Company may change its original assessment of a VIE due to events such as modifications of contractual arrangements that affect the characteristics or adequacy of the entity's equity investments at risk and the disposal of all or a portion of an interest held by the primary beneficiary.

The Company identifies the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity's economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. The Company performs this analysis on an ongoing basis.

As of June 30, 2015, the Company identified one VIE, a senior housing facility leased to a 50%/50% RIDEA-compliant

Table of Contents

joint venture tenant, where it determined it was the primary beneficiary and has consolidated the operations of the facility in the accompanying condensed consolidated financial statements. As of June 30, 2015, the Company determined that operations of the facility were not material to the Company’s results of operations, financial condition or cash flows.

As it relates to investments in loans, in addition to the Company's assessment of VIEs and whether the Company is the primary beneficiary of those VIEs, the Company evaluates the loan terms and other pertinent facts to determine if the loan investment should be accounted for as a loan or as a real estate joint venture. If an investment has the characteristics of a real estate joint venture, including if the Company participates in the majority of the borrower's expected residual profit, the Company would account for the investment as an investment in a real estate joint venture and not as a loan investment. Expected residual profit is defined as the amount of profit, whether called interest or another name, such as an equity kicker, above a reasonable amount of interest and fees expected to be earned by a lender. At June 30, 2015, none of the Company's investments in loans are accounted for as real estate joint ventures.

As it relates to investments in joint ventures, based on the type of rights held by the limited partner(s), GAAP may preclude consolidation by the sole general partner in certain circumstances in which the general partner would otherwise consolidate the joint venture. The Company assesses limited partners' rights and their impact on the presumption of control of the limited partnership by the sole general partner when an investor becomes the sole general partner, and the Company reassesses if: there is a change to the terms or in the exercisability of the rights of the limited partners; the sole general partner increases or decreases its ownership of limited partnership interests; or there is an increase or decrease in the number of outstanding limited partnership interests. The Company also applies this guidance to managing member interests in limited liability companies.

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.

Reclassifications

Certain amounts in the Company’s condensed consolidated financial statements for prior periods have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods. As a result, certain reclassifications were made to the condensed consolidated statements of income and the condensed consolidated statements of cash flows for all periods presented.

Foreign Currency

Certain of the Company's subsidiaries’ functional currencies are the local currencies of their respective foreign jurisdictions. The Company translates the results of operations of its foreign subsidiaries into U.S. dollars using average rates of exchange in effect during the period presented, and it translates balance sheet accounts using exchange rates in effect at the end of the period presented. The Company records resulting currency translation adjustments in accumulated other comprehensive income, a component of stockholders’ equity, on its condensed consolidated balance sheets, and it records foreign currency transaction gains and losses as a component of interest and other income on its condensed consolidated statements of income.

Derivative Instruments

The Company uses certain types of derivative instruments for the purpose of managing interest rate and currency risk. To qualify for hedge accounting, derivative instruments used for risk management purposes must effectively reduce the risk exposure that they are designed to hedge. In addition, at inception the Company must make an assessment that the transaction that the Company intends to hedge is probable of occurring and this assessment must be updated each reporting period.

The Company recognizes all derivative instruments as assets or liabilities in the condensed consolidated balance sheets at their fair value. For derivatives designated and qualified as a hedge, the change in fair value of the effective portion of the derivatives is recognized in accumulated other comprehensive income (loss), whereas the change in fair value of the ineffective portion is recognized in earnings. Changes in the fair value of derivative instruments that are not designated in hedging relationships or that do not meet the criteria for hedge accounting would be recognized in earnings. As of June 30, 2015, all of the Company's derivative instruments meet the criteria for hedge accounting.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objectives and strategy for undertaking various hedge transactions. This process includes designating all derivatives that are part of a hedging relationship to specific transactions as well as recognizing obligations or assets in the condensed consolidated balance sheets. The Company also assesses and documents, both at inception of the hedging

Table of Contents

relationship and on a quarterly basis thereafter, whether the derivatives are highly effective in offsetting the designated risks associated with the respective hedged items. If it is determined that a derivative ceases to be highly effective as a hedge, or that it is probable the underlying transaction will not occur, the Company would discontinue hedge accounting prospectively and record the appropriate adjustment to earnings based on the then-current fair value of the derivative.

Recently Issued Accounting Standards Update

In January 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-01, Income Statement–Extraordinary and Unusual (“ASU 2015-01”). ASU 2015-01 simplifies income statement presentation by eliminating the concept of extraordinary items. An entity will no longer be allowed to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is unusual in nature and occurs infrequently. ASU 2015-01 is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted, and may be applied either prospectively or retrospectively. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation–Amendments to the Consolidation Analysis (Topic 810) (“ASU 2015-02”). ASU 2015-02 updates guidance related to accounting for consolidation of certain limited partnerships. ASU 2015-02 does not add or remove any of the five characteristics that determine if an entity is a VIE; however, it changes the manner in which a reporting entity assesses its ability to make decisions about the entity's activities. Additionally, ASU 2015-02 removes three of the six criteria that must be met for a fee arrangement to not be a VIE and modifies how an entity assesses interests held through related parties. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements when adopted.

In April 2015, the FASB issued ASU 2015-03, Interest–Imputation of Interest-Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30) (“ASU 2015-03”). ASU 2015-03 requires debt issuance costs related to a recognized debt liability paid to a third party other than the lender to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of this guidance is permitted for financial statements that have not been previously issued, and an entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

3.RECENT REAL ESTATE ACQUISITIONS

During the six months ended June 30, 2015, the Company acquired three skilled nursing/transitional care facilities and 10 senior housing facilities. During the six months ended June 30, 2014, the Company acquired six skilled nursing/transitional care facilities and three senior housing facilities. The consideration was allocated as follows (in thousands):



	Six Months Ended June 30,
	2015		2014
Land	$	20,767	$	11,939
Building and Improvements	294,911		126,855
Tenant Origination and Absorption Costs	4,421		2,075
Tenant Relationship	1,428		677

Total Consideration	$	321,527	$	141,546

As of June 30, 2015, the purchase price allocations for the acquisitions completed during the three months ended June 30, 2015 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 respective date of acquisition of 13 years and 22 years, respectively.

Table of Contents

For the three and six months ended June 30, 2015, the Company recognized $0.7 million of total revenues and net income attributable to common stockholders, excluding acquisition pursuit costs of $0.4 million, from the properties acquired during the six months ended June 30, 2015.

On June 11, 2015, the Company acquired nine senior housing facilities with a total of 865 units located in British Columbia and Ontario, Canada (the “Canadian Portfolio”) for a purchase price of CAD $170.5 million (U.S. $138.8 million). Concurrently with the acquisition, the Company entered into a triple-net master lease agreement with an affiliate of Senior Lifestyle Corporation. The master lease has an initial term of 10 years with two five-year renewal options with annual rent increases of 4.0% in years two and three and the greater of 3.0% or the Canadian Consumer Price Index ("CPI") during the remainder of the lease term. The master lease is expected to generate annual lease revenues determined in accordance with GAAP of CAD $11.9 million. In connection with the acquisition of the Canadian Portfolio, the Company assumed three existing mortgage loans with outstanding principal amounts totaling CAD $24.2 million.

On June 30, 2015, the Company acquired three skilled nursing facilities that specialize in transitional care and medically complex post-surgical, ventilator and dialysis patients with a total of 472 licensed beds located in Maryland (collectively, the "NMS Portfolio") for a purchase price of $175.2 million. Concurrently with the acquisition, the Company entered into a triple-net master lease agreement with the current operator (“NMS Operator”). The master lease has an initial term of 15 years with two 10-year renewal options and annual rent escalators equal to the greater of 2.50% or CPI, but not to exceed 2.75%. The lease is expected to generate annual lease revenues determined in accordance with GAAP of $18.3 million. Also on June 30, 2015, the Company entered into a purchase and sale agreement with the seller of the NMS Portfolio to acquire a fourth skilled nursing facility that also specializes in transitional care and medically complex post-surgical, ventilator and dialysis patients with a total of 206 licensed beds located in Maryland for $58.8 million. The transaction is expected to close during the fourth quarter of 2015 and the facility will be operated by the NMS Operator under a separate lease agreement with similar terms.


4.	REAL ESTATE PROPERTIES HELD FOR INVESTMENT

The Company’s real estate properties held for investment consisted of the following (dollars in thousands):

As of June 30, 2015



Property Type	Number of Properties	Number of Beds/Units	Total Real Estate at Cost		Accumulated Depreciation			Total Real Estate Investments, Net
Skilled Nursing/Transitional Care	106	11,813	$	1,026,652	$	(166,313	)	$	860,339
Senior Housing	64	6,112	944,831		(32,965		)	911,866
Acute Care Hospitals	2	124	175,807		(14,225		)	161,582
	172	18,049	2,147,290		(213,503		)	1,933,787
Corporate Level			276		(232		)	44
			$	2,147,566	$	(213,735	)	$	1,933,831

As of December 31, 2014



Property Type	Number of Properties	Number of Beds/Units	Total Real Estate at Cost		Accumulated Depreciation			Total Real Estate Investments, Net
Skilled Nursing/Transitional Care	103	11,336	$	851,252	$	(151,978	)	$	699,274
Senior Housing	55	5,258	804,475		(22,487		)	781,988
Acute Care Hospitals	2	124	175,807		(11,324		)	164,483
	160	16,718	1,831,534		(185,789		)	1,645,745
Corporate Level			265		(205		)	60
			$	1,831,799	$	(185,994	)	$	1,645,805

Table of Contents



	June 30, 2015			December 31, 2014
Building and improvements	$	1,833,604		$	1,551,548
Furniture and equipment	95,818			82,812
Land improvements	3,646			3,646
Land	214,498			193,793
	2,147,566			1,831,799
Accumulated depreciation	(213,735		)	(185,994		)
	$	1,933,831		$	1,645,805

Contingent Consideration Liability

On February 14, 2014, the Company acquired four skilled nursing facilities and two senior housing facilities for $90.0 million. The Company may pay an earn-out based on incremental portfolio value created through the improvement of current operations as well as through expansion and conversion projects associated with these facilities. The earn-out amount will be determined based on portfolio performance following the third anniversary of the Company's entry into the master lease. To determine the value of the contingent consideration, the Company used significant inputs not observable in the market to estimate the earn-out, made assumptions regarding the probability of the portfolio achieving the incremental value and then applied an appropriate discount rate. The Company estimated a contingent consideration liability of $3.2 million at the time of purchase. As of June 30, 2015, based on the potential future performance of the facilities, the contingent consideration liability is estimated at $4.1 million and is included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheet. During the three and six months ended June 30, 2015, the Company recorded an adjustment to increase the contingent consideration liability by $0.1 million and $0.2 million, respectively, and included this amount in other income (expense) on the accompanying condensed consolidated statements of income.

On October 22, 2013, the Company purchased one acute care hospital for $119.8 million, of which approximately $10.5 million was to be held in escrow for up to 20 months. The amount ultimately released from escrow was contingent on the tenant achieving certain performance hurdles. The seller was paid a fee of $0.5 million per annum during the escrow period through November 2014 . As of October 22, 2013, the amount the Company expected to release from escrow was valued at $7.3 million and was treated as contingent consideration. During the second quarter of 2014, $5.3 million was released from escrow to the seller as a result of the facility achieving certain of its performance hurdles. The facility did not meet the required performance hurdles for the remaining $5.2 million held in escrow and during the second quarter of 2015, the remaining $5.2 million was released to the Company. During the six months ended June 30, 2015, no adjustment was made to the contingent consideration liability.

Operating Leases

As of June 30, 2015, all of the Company’s real estate properties were leased under triple-net operating leases with expirations ranging from two to 17 years. As of June 30, 2015, the leases had a weighted-average remaining term of 10 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 letters of credit and security deposits from the lessee or guarantees from the parent of the lessee. Security deposits received in cash related to tenant leases are included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets and totaled $0.4 million as of June 30, 2015 and December 31, 2014. As of June 30, 2015, 80 of the Company's 172 real estate properties held for investment were leased to subsidiaries of Genesis.

The Company monitors the creditworthiness of its tenants by reviewing credit ratings (if available) and evaluating the ability of the tenants to meet their lease obligations to the Company based on the tenants’ financial performance, including the evaluation of any parent guarantees (or the guarantees of other related parties) of tenant lease obligations. Because formal credit ratings may not be available for most of the Company’s tenants, the primary basis for the Company’s evaluation of the credit quality of its tenants (and more specifically the tenants’ ability to pay their rent obligations to the Company) is the tenants’ lease coverage ratios. These coverage ratios include earnings before interest, taxes, depreciation, amortization and rent (“EBITDAR”) to rent coverage and earnings before interest, taxes, depreciation, amortization, rent and management fees (“EBITDARM”) to rent coverage at the facility level and consolidated EBITDAR to total fixed charge coverage at the parent guarantor level when such a guarantee exists. The Company obtains various financial and operational information from its tenants each month and reviews this information in conjunction with the above-described coverage metrics to determine trends and the operational and financial impact of the environment in the industry (including the impact of government reimbursement) and the management of the tenant’s operations. These metrics help the Company identify potential areas of

Table of Contents

concern relative to its tenants’ credit quality and ultimately the tenants’ ability to generate sufficient liquidity to meet its obligations, including its obligation to continue to pay the rent due to the Company.

As of June 30, 2015, the future minimum rental payments from the Company’s properties under non-cancelable operating leases was as follows (in thousands):



July 1, 2015 through December 31, 2015	$	98,019
2016	201,174
2017	207,060
2018	212,935
2019	219,469
Thereafter	1,457,487
	$	2,396,144

Forest Park - Frisco Update

In January 2015, the tenant of the Forest Park-Frisco hospital ("Frisco") became unable to pay its rent obligations and as of June 30, 2015 owed the Company rent of $4.5 million. In addition, the Company had $4.7 million of accumulated straight-line rental income receivable. In the second quarter of 2015, the Frisco tenant approached Sabra to discuss modifications to the hospital lease to provide additional operating flexibility. On May 29, 2015, the Company entered into a Memorandum of Understanding ("MOU") with the Frisco tenant to restructure the terms of the lease effective June 2015, subject to the tenant and the management company for Forest Park obtaining additional financing for Frisco. As of July 21, 2015, such financing had not yet been secured and Sabra amended the MOU (“Amended MOU”) to, among other things, revise the payment to be made towards outstanding rents from the proceeds of the new financing to $250,000 with the remaining outstanding rents due as of May 31, 2015 being paid over time beginning in 2016. As of August 4, 2015, the additional financing has not closed and there continues to be uncertainty around the timing of financing and the adequacy of such financing to provide the Frisco tenant with the necessary liquidity to operate under the modified lease terms. Due to this uncertainty, the Company has increased its reserve associated with rents due and the accumulated straight-line rental income receivable balance to $4.6 million as of June 30, 2015. This reserve resulted in a $3.0 million provision for doubtful accounts during the three months ended June 30, 2015 included in the accompanying condensed consolidated statements of income. As more clarity is obtained around the financing and its adequacy, the Company will continue to monitor and update the reserve requirements and will continue to evaluate alternative solutions, which may include selling the Frisco hospital investment, which could result in additional reserves in the future.

Table of Contents

5.LOANS RECEIVABLE AND OTHER INVESTMENTS

As of June 30, 2015 and December 31, 2014, the Company’s loans receivable and other investments consisted of the following (dollars in thousands):



Investment	Quantity	Facility Type	Principal Balance as of June 30, 2015		Book Value as of June 30, 2015		Book Value as of December 31, 2014		Weighted Average Contractual Interest Rate / Rate of Return		Weighted Average Annualized Effective Interest Rate / Rate of Return		Maturity Date
Loans Receivable:
Mortgage	6	Skilled Nursing / Senior Housing / Acute Care Hospital	$	161,934	$	162,258	$	144,383	8.4	%	8.2	%	10/13/15 - 4/30/18
Construction	3	Acute Care Hospital / Senior Housing	70,910		71,170		65,525		7.7	%	7.6	%	9/30/16 - 10/31/18
Mezzanine	2	Skilled Nursing / Senior Housing	19,819		19,867		21,491		11.3	%	11.1	%	9/30/15 - 8/31/17
Pre-development	3	Senior Housing	2,454		2,541		3,777		9.0	%	7.5	%	1/28/17 - 9/09/17

	14		255,117		255,836		235,176		8.4	%	8.3	%

Other Investments:
Preferred Equity	8	Skilled Nursing / Senior Housing	22,332		22,671		16,407		13.0	%	13.0	%	N/A

Total	22		$	277,449	$	278,507	$	251,583	8.8	%	8.7	%

On a quarterly basis, the Company reviews credit quality indicators of its loans receivable and other investments such as payment status, changes affecting the underlying real estate collateral (for collateral dependent loans), changes affecting the operations of the facilities securing the loans, and national and regional economic factors. The Company considers a loan to be impaired when, based upon current information and events, it believes that it is probable that the Company will be unable to collect all amounts due under the contractual terms of the loan agreement resulting from the borrower’s failure to repay contractual amounts due, the granting of a concession by the Company or the Company’s expectation that it will receive assets with fair values less than the carrying value of the loan in satisfaction of the loan.

As of June 30, 2015, the deferred interest under the Forest Park - Dallas (“Dallas”) mortgage loan totaled $1.9 million. Under the terms of the amended loan agreement entered into in February 2015, the borrower under the Dallas mortgage loan (“Dallas Borrower”) is required to pay all rents received from the Dallas hospital tenant toward its interest obligations to the Company. Contractual rents due under the lease agreement are sufficient to fully repay the remaining deferred amounts by mid-2016 and future contractual rent payments due under the lease agreement are adequate to allow the Dallas Borrower to timely service its debt obligations to the Company in the future. In addition, the Company's $110.0 million investment in the Dallas mortgage loan is less than the estimated fair value of the real estate collateral, based on a third party appraisal of the real estate.

As of June 30, 2015, based on the Company's assessment, the Company’s loan investments were performing under the terms of the respective agreements and none were considered to be impaired.


6.	DEBT

Mortgage Indebtedness

The Company’s mortgage notes payable consist of the following (dollars in thousands):



Interest Rate Type	Book Value as of June 30, 2015		Book Value as of December 31, 2014		Weighted Average Effective Interest Rate at June 30, 2015 ⁽¹⁾		Maturity Date
Fixed Rate	$	142,252	$	124,022	3.77	%	December 2021 - August 2051

⁽¹⁾Weighted average effective rate includes private mortgage insurance.

Table of Contents

Mortgage Debt Assumption. In June 2015, in connection with the acquisition of the Canadian Portfolio, the Company assumed three existing mortgage loans with outstanding principal amounts totaling CAD $24.2 million (U.S. $19.7 million) with annual interest rates of 3.74%. The assumed mortgage loans mature in December 2021.

Mortgage Debt Modification. In March 2015, the Company modified six existing mortgage notes insured by the United States Department of Housing and Urban Development (“HUD”) totaling $59.2 million. The Company maintained the original maturity dates and reduced the weighted average interest rate from 4.39% to 3.98% per annum.

Senior Unsecured Notes

2021 Notes and 2023 Notes

The Company’s senior unsecured notes consist of the following (dollars in thousands):



		Principal Balance as of
Title	Maturity Date	June 30, 2015 ⁽¹⁾		December 31, 2014 ⁽¹⁾

5.5% senior unsecured notes due 2021 (“2021 Notes”)	February 1, 2021	$	500,000	$	500,000
5.375% senior unsecured notes due 2023 (“2023 Notes”)	June 1, 2023	200,000		200,000

		$	700,000	$	700,000

⁽¹⁾ Outstanding principal balance for Senior Notes does not include discount of $0.7 million as of June 30, 2015 and December 31, 2014.

The 2021 Notes and the 2023 Notes (collectively, the “Senior Notes”) were issued by the Operating Partnership and Sabra Capital Corporation, wholly owned subsidiaries of the Company (the “Issuers”). The 2021 Notes accrue interest at a rate of 5.5% per annum payable semiannually on February 1 and August 1 of each year and the 2023 Notes accrue interest at a rate of 5.375% per annum payable semiannually on June 1 and December 1 of each year.

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 material subsidiaries; provided, however, that such guarantees are subject to release under certain customary circumstances. See Note 11, “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 indentures governing the Senior Notes (the “Senior Notes Indentures”) include customary events of default and require us to comply with specified restrictive covenants. As of June 30, 2015, the Company was in compliance with all applicable financial covenants under the Senior Notes Indentures.

2018 Notes

On January 8, 2014, the Company commenced a cash tender offer with respect to the remaining $211.3 million aggregate principal amount of 8.125% senior unsecured notes due 2018 (the “2018 Notes”) then outstanding that were originally issued by the Issuers in October 2010 and July 2012. Pursuant to the tender offer, the Company retired $210.9 million of the 2018 Notes at a premium of 109.837%, plus accrued and unpaid interest, on January 23, 2014. Pursuant to the terms of the indenture governing the 2018 Notes, the remaining $0.4 million of the 2018 Notes were called and were retired on February 11, 2014 at a redemption price of 109.485% plus accrued and unpaid interest. The tender offer and redemption resulted in $21.6 million of tender offer and redemption related costs and write-offs for the six months ended June 30, 2014, including $20.8 million in payments made to noteholders for early redemption and $0.8 million of write-offs associated with unamortized deferred financing and premium costs. These amounts are included in loss on extinguishment of debt on the accompanying condensed consolidated statements of income for the six months ended June 30, 2014.

Revolving Credit Facility

The Operating Partnership has entered into an unsecured revolving credit facility (the “Revolving Credit Facility”) that provides for a borrowing capacity of $650.0 million and an accordion feature allowing for an additional $100.0 million of capacity, subject to terms and conditions. On October 10, 2014, the Operating Partnership converted $200.0 million of the outstanding borrowings under the Revolving Credit Facility to a term loan. Concurrent with the term loan conversion, the Company entered into a five-year interest rate cap contract that caps LIBOR at 2.0%.

The Revolving Credit Facility, including amounts that are converted into a term loan, has a maturity date of September 10, 2018, and includes a one year extension option. In addition to the $200.0 million term loan, as of June 30, 2015, there was $122.0 million outstanding under the Revolving Credit Facility and $328.0 million available for borrowing.

Table of Contents

Borrowings under the Revolving Credit Facility bear interest on the outstanding principal amount at a rate equal to an applicable percentage plus, at the Operating Partnership's option, either (a) LIBOR or (b) the Base Rate, with such percentage varying based on the Consolidated Leverage Ratio, each term as defined in the credit agreement for the Revolving Credit Facility. As of June 30, 2015, the interest rate on the Revolving Credit Facility was 2.29%. In addition, the Operating Partnership pays a fee to the lenders equal to 0.25% or 0.35% per annum based on the amount of unused borrowings under the Revolving Credit Facility. During the three and six months ended June 30, 2015, the Company incurred $0.3 million and $0.5 million, respectively, in interest expense on amounts outstanding under the Revolving Credit Facility. During the three and six months ended June 30, 2015, the Company incurred $0.4 million and $0.7 million, respectively, of unused facility fees.

The obligations of the Operating Partnership under the Revolving Credit Facility are guaranteed by Sabra and certain subsidiaries of Sabra. The Revolving Credit Facility contains customary restrictive covenants as well as customary events of default. The Revolving Credit Facility also requires Sabra, through the Operating Partnership, 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 June 30, 2015, the Company was in compliance with all applicable financial covenants under the Revolving Credit Facility.

Canadian Term Loan

On June 10, 2015, Sabra Canadian Holdings, LLC, a wholly-owned subsidiary of the Company, entered into a new Canadian dollar denominated term loan of CAD $90.0 million (U.S. $73.2 million) (the "Canadian Term Loan") with a variable interest rate of the Canadian Dollar Offer Rate (“CDOR”) plus 2.00%-2.60% depending on the Company's consolidated leverage ratio. The Canadian Term Loan matures on June 10, 2020. Concurrently with entering into the Canadian Term Loan, the Company entered into an interest rate swap agreement to fix the CDOR portion of the interest rate for this term loan at 1.59%.

The obligations under the Canadian Term Loan are guaranteed by Sabra and certain subsidiaries of Sabra. The Canadian Term Loan contains customary restrictive covenants as well as customary events of default. The Canadian Term Loan also requires Sabra, through the Operating Partnership, 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 June 30, 2015, the Company was in compliance with all applicable financial covenants under the Canadian Term Loan.

Interest Expense

During the three and six months ended June 30, 2015, the Company incurred interest expense of $14.1 million and $27.9 million, respectively, and $11.0 million and $22.1 million during the three and six months ended June 30, 2014, respectively. Interest expense includes deferred financing costs amortization of $1.3 million and $2.5 million for the three and six months ended June 30, 2015, respectively, and $0.9 million and $1.9 million for the three and six months ended June 30, 2014, respectively. As of June 30, 2015 and December 31, 2014, the Company had $13.1 million and $13.2 million, respectively, of accrued interest included in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheets.

Maturities

The following is a schedule of maturities for the Company’s outstanding debt as of June 30, 2015 (in thousands):



	Mortgage Indebtedness		Senior Notes ⁽¹⁾		Revolving Credit Facility ⁽²⁾		Term Loans ⁽²⁾		Total
July 1, 2015 through December 31, 2015	$	1,705	$	—	$	—	$	—	$	1,705
2016	3,494		—		—		—		3,494
2017	3,608		—		—		—		3,608
2018	3,727		—		122,000		200,000		325,727
2019	3,849		—		—		—		3,849
Thereafter	125,869		700,000		—		72,846		898,715
	$	142,252	$	700,000	$	122,000	$	272,846	$	1,237,098

⁽¹⁾ Outstanding principal balance for Senior Notes does not include discount of $0.7 million as of June 30, 2015.

⁽²⁾ Revolving Credit Facility and U.S. term loan are subject to a one-year extension option.

Table of Contents


7.	DERIVATIVE AND HEDGING INSTRUMENTS

The Company is exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign exchange rates. The Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates and foreign exchange rates. The Company’s derivative financial instruments are used to manage differences in the amount of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

Certain of the Company’s foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency. The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar. The Company does not enter into derivatives for speculative purposes.

Cash Flow Hedges

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. The notional value of the Company's interest rate cap was $200.0 million as of each of June 30, 2015 and December 31, 2014, respectively. The notional value of the Company's interest rate swap was CAD $90.0 million as of June 30, 2015. Approximately $0.9 million of losses, which are included in accumulated other comprehensive loss, are expected to be reclassified into earnings in the next 12 months.

Net Investment Hedges

The Company is exposed to fluctuations in foreign exchange rates on investments it holds in Canadian entities. The Company uses cross currency interest rate swaps to hedge its exposure to changes in foreign exchange rates on these foreign investments. The notional value of these contracts was CAD $56.3 million as of June 30, 2015. The Company also holds a CAD $90.0 million term loan which was designated as a net investment hedge. The Company did not hold any net investment hedges as of December 31, 2014.

The following is a summary of the derivative and financial instruments designated as hedging instruments held by the Company at June 30, 2015 and December 31, 2014 (in thousands):



			June 30, 2015		December 31, 2014		Maturity Dates
Type	Designation	Count	Fair Value				Maturity Dates	Balance Sheet Location
Assets:
Interest rate cap	Cash Flow	1	$	3,066	$	4,618	2019	Prepaid expenses, deferred financing costs and other assets, net

Liabilities:
Interest rate swap	Cash Flow	1	$	1,137	$	—	2020	Accounts payable and accrued liabilities
Cross currency interest rate swaps	Net Investment	2	164		—		2025	Accounts payable and accrued liabilities
CAD Term Loan	Net Investment	1	72,846		—		2020	Term loans
			$	74,147	$	—

Table of Contents

The following presents the effect of the Company’s derivative financial instruments on the condensed consolidated statements of income and the condensed consolidated statements of equity for the three and six months ended June 30, 2015:



	Gain (Loss) Recognized in Other Comprehensive Income (Effective Portion)						Gain (Loss) Reclassified from Accumulated Other Comprehensive Income Into Income (Effective Portion)						Income Statement Location
	Three Months Ended June 30, 2015			Six Months Ended June 30, 2015			Three Months Ended June 30, 2015			Six Months Ended June 30, 2015

Cash Flow Hedges:
Interest Rate Products	$	(1,169	)	$	(2,714	)	$	(25	)	$	(25	)	Interest Expense
Net Investment Hedges:
Foreign Currency Products	(164		)	(164		)	—			—			N/A
CAD Term Loan	(396		)	(396		)	—			—			N/A

	$	(1,729	)	$	(3,274	)	$	(25	)	$	(25	)

During the three and six months ended June 30, 2015, the Company recorded no hedge ineffectiveness in earnings.

Offsetting Derivatives

We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 2015:



							Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Assets / Liabilities		Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets / Liabilities presented in the Balance Sheet		Financial Instruments			Cash Collateral Received		Net Amount
Offsetting Assets:
Derivatives	$	3,066	$	—	$	3,066	$	(32	)	$	—	$	3,034
Offsetting Liabilities:
Derivatives	$	1,301	$	—	$	1,301	$	(32	)	$	—	$	1,269

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

As of June 30, 2015, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $1.6 million. As of June 30, 2015, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at June 30, 2015, it could have been required to settle its obligations under the agreements at their termination value of $1.6 million.

8.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 when market transactions are not orderly. The carrying values of cash and cash equivalents, restricted cash, accounts payable, accrued liabilities, the Revolving Credit Facility and term loans 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:

Table of Contents

Loans receivable: These instruments are presented in the accompanying condensed consolidated balance sheets at their amortized cost and not at fair value. The fair value of the loans receivable were estimated using an internal valuation model that considered the expected cash flows for the loans receivable, the underlying collateral value and other credit enhancements.

Preferred equity investments: These instruments are presented in the accompanying condensed consolidated balance sheets at their cost and not at fair value. The fair value of the preferred equity investments were estimated using an internal valuation model that considered the expected future cash flows for the preferred equity investment, the underlying collateral value and other credit enhancements.

Derivative instruments: The Company’s derivative instruments are presented at fair value on the accompanying condensed consolidated balance sheets. The Company estimates the fair value of derivative instruments, including its interest rate cap, interest rate swap and cross currency swaps, using the assistance of a third party using inputs that are observable in the market, which includes forward yield curves and other relevant information. As such, the Company classifies these inputs as Level 2 inputs.

Senior Notes: These instruments are presented in the accompanying condensed consolidated balance sheets at their cost and not at fair value. The fair values of the Senior Notes were determined using third-party market quotes derived from orderly trades.

Mortgage indebtedness: These instruments are presented in the accompanying condensed consolidated balance sheets at their cost and not at fair value. The fair values of the Company’s mortgage 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 face values, carrying amounts and fair values of the Company’s financial instruments as of June 30, 2015 and December 31, 2014 whose carrying amounts do not approximate their fair value (in thousands):



	June 30, 2015						December 31, 2014
	Face Value ⁽¹⁾		Carrying Amount ⁽²⁾		Fair Value		Face Value ⁽¹⁾		Carrying Amount ⁽²⁾		Fair Value
Financial assets:
Loans receivable	$	255,117	$	255,836	$	259,771	$	234,359	$	235,176	$	234,227
Preferred equity investments	22,332		22,671		24,341		16,125		16,407		17,115
Financial liabilities:
Senior Notes	700,000		699,323		725,000		700,000		699,272		723,625
Mortgage indebtedness	142,252		142,252		141,962		124,022		124,022		122,131

⁽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 June 30, 2015 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:
Loans receivable	$	259,771	$	—	$	—	$	259,771
Preferred equity investments	24,341		—		—		24,341
Financial liabilities:
Senior Notes	725,000		—		725,000		—
Mortgage indebtedness	141,962		—		—		141,962

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.

Table of Contents

During the six months ended June 30, 2015, the Company recorded the following amounts measured at fair value (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)
Recurring Basis:
Financial assets:
Interest rate cap	$	3,066	$	—	$	3,066	$	—
Financial liabilities:
Contingent consideration liability	4,100		—		—		4,100
Interest rate swap	1,137		—		1,137		—
Cross currency swap	164		—		164		—

The Company’s contingent consideration liability is the result of one acquisition of real estate (see Note 4, “Real Estate Properties Held for Investment”). In order to determine the fair value of the Company’s contingent consideration liability, the Company used significant inputs not observable in the market to estimate the liability. In addition to using an appropriate discount rate, the Company used projections provided by the facilities to estimate future earnings at the facilities, then developed probability-weighted scenarios of the potential future performance of the tenant and the resulting payout from these scenarios. As of June 30, 2015, the total contingent consideration liability was valued at $4.1 million. The following reconciliation provides the details of activity during the six months ended June 30, 2015 for contingent consideration liability recorded at fair value using Level 3 inputs:



Balance as of December 31, 2014	$	3,900
Increase in contingent liability	200
Balance as of June 30, 2015	$	4,100

A corresponding amount equal to the increase in contingent liability was included as other expense on the accompanying condensed consolidated statements of income for the six months ended June 30, 2015.


9.	EQUITY

Preferred Stock

On March 21, 2013, the Company completed an underwritten public offering of 5.8 million shares of 7.125% Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") at a price of $25.00 per share, pursuant to an effective registration statement. The Company received net proceeds of $138.3 million from the offering, after deducting underwriting discounts and other offering expenses. The Company classified the par value as preferred equity on its condensed consolidated balance sheets with the balance of the liquidation preference, net of any issuance costs, recorded as an increase in paid-in capital.

The holders of the Company’s Series A Preferred Stock rank senior to the Company’s common stock with respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding up of its affairs. At June 30, 2015, there were no dividends in arrears.

The Series A Preferred Stock does not have a stated maturity date, but the Company may redeem the Series A Preferred Stock on or after March 21, 2018, for $25.00 per share, plus any accrued and unpaid dividends. The Company may redeem the Series A Preferred Stock prior to March 21, 2018, in limited circumstances to preserve its status as a REIT or pursuant to a specified change of control. Upon the occurrence of a specified change of control, each holder of Series A Preferred Stock will have the right to convert some or all of the shares of Series A Preferred Stock held by such holder into a number of shares of the Company’s common stock equivalent to $25.00 plus accrued and unpaid dividends, but not to exceed a cap of 1.7864 shares of common stock per share of Series A Preferred Stock (subject to certain adjustments).

Common Stock

The following table lists the cash dividends on common stock declared and paid by the Company during the six months ended June 30, 2015:



Declaration Date	Record Date	Amount Per Share		Dividend Payable Date
January 12, 2015	February 13, 2015	$	0.39	February 27, 2015
May 5, 2015	May 15, 2015	$	0.39	May 29, 2015

On June 30, 2015, the Company completed an underwritten public offering of 5.9 million newly issued shares of its common stock pursuant to an effective registration statement. The Company received net proceeds, before expenses, of $147.9 million from the offering, after giving effect to the issuance and sale of all 5.9 million shares of common stock, at a price of $25.06 per share. These proceeds were primarily used to repay borrowings outstanding under the Revolving Credit Facility.

On October 3, 2014, the Company completed an underwritten public offering of 6.9 million newly issued shares of its common stock pursuant to an effective registration statement. The Company received net proceeds, before expenses, of $160.6 million from the offering, after giving effect to the issuance and sale of all 6.9 million shares of common stock (which included 0.9 million shares sold to the underwriters upon exercise of their option to purchase additional shares), at a price to the public of $24.25 per share. These proceeds were used to repay borrowings outstanding under the Revolving Credit Facility.

On May 12, 2014, the Company completed an underwritten public offering of 8.1 million newly issued shares of its common stock pursuant to an effective registration statement. The Company received net proceeds, before expenses, of $219.1 million from the offering, after giving effect to the issuance and sale of all 8.1 million shares of common stock (which included 1.1 million shares sold to the underwriters upon exercise of their option to purchase additional shares), at a price to the public of $28.35 per share. These proceeds were primarily used to repay borrowings outstanding under the Company's prior Revolving Credit Facility.

During the six months ended June 30, 2015, the Company issued 0.2 million shares of common stock as a result of restricted stock unit vestings and in connection with amounts payable under the Company's 2014 Bonus Plan pursuant to an election by certain participants to receive their bonus payment in shares of the Company's common stock.

Upon any payment of shares as a result of restricted stock unit vestings, the participant is required to satisfy the related tax withholding obligation. The 2009 Performance Incentive Plan provides that the Company has the right at its option to (a) require the participant to pay such tax withholding or (b) reduce the number of shares to be delivered by a number of shares necessary to satisfy the related minimum applicable statutory tax withholding obligation. During the six months ended June 30, 2015, pursuant to advance elections made by certain participants, the Company incurred $4.7 million in tax withholding obligations on behalf of its employees that were satisfied through a reduction in the number of shares delivered to those participants.

At-The-Market Common Stock Offering Program (“ATM Program”)

On December 1, 2014, the Company entered into a sales agreement (the “2014 Sales Agreements”) with each of Barclays Capital Inc., Cantor Fitzgerald & Co., Credit Agricole Securities (USA) Inc., Jefferies LLC, J.P. Morgan Securities LLC, MLV & Co. LLC, Raymond James & Associates, Inc., RBC Capital Markets, LLC, Stifel, Nicolaus & Company, Incorporated, SunTrust Robinson Humphrey, Inc. and Wells Fargo Securities, LLC (individually, a “Sales Agent” and together, the “Sales Agents”) to sell shares of its common stock, $0.01 par value per share, having aggregate gross proceeds of up to $200.0 million from time to time through the Sales Agents (the “2014 ATM Program”).

Pursuant to the terms of the 2014 Sales Agreements, the shares may be sold by any method permitted by law deemed to be an “at-the-market” offering, including without limitation sales made directly on the NASDAQ Global Select Market, on any other existing trading market for our common stock or to or through a market maker. In addition, with the Company's prior consent, the Sales Agents may also sell shares in privately negotiated transactions. The Company will pay each Sales Agent a commission equal to 2% of the gross proceeds from the sales of shares sold pursuant to the applicable 2014 Sales Agreement. The offering of shares pursuant to any 2014 Sales Agreement will terminate upon the earlier of (i) the sale of the maximum aggregate amount of shares subject to the 2014 Sales Agreements, or (ii) termination of such 2014 Sales Agreement as permitted therein. The Company is not obligated to sell and the Sales Agents are not obligated to buy or sell any shares under the 2014 Sales Agreements.

The Company sold no shares under the 2014 ATM Program during the six months ended June 30, 2015. As of June 30, 2015, shares of the Company's common stock having an aggregate offering price of $76.5 million were available for sale under the 2014 ATM Program.


10.	EARNINGS PER COMMON SHARE

The following table illustrates the computation of basic and diluted earnings per share for the three and six months ended June 30, 2015 and 2014 (in thousands, except share and per share amounts):



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Numerator
Net income attributable to common stockholders	$	14,275	$	12,241	$	31,164	$	2,377

Denominator
Basic weighted average common shares and common equivalents	59,323,799		43,655,292		59,254,895		41,324,795
Dilutive restricted stock units	219,982		441,005		255,269		466,675

Diluted weighted average common shares	59,543,781		44,096,297		59,510,164		41,791,470

Net income attributable to common stockholders, per:

Basic common share	$	0.24	$	0.28	$	0.53	$	0.06

Diluted common share	$	0.24	$	0.28	$	0.52	$	0.06

Certain restricted stock units are considered participating securities because dividend payments are not forfeited even if the underlying award does not vest. Accordingly, the Company uses the two-class method when computing basic and diluted earnings per share. During the three and six months ended June 30, 2015 approximately 10,700 and 11,000 restricted stock units, respectively, were not included because they were considered anti-dilutive. During the three and six months ended June 30, 2014, approximately 9,000 and 10,000 restricted stock units, respectively, were not included because they were anti-dilutive. No stock options were considered anti-dilutive during the three and six months ended June 30, 2014. No stock options were outstanding during the six months ended June 30, 2015.

11.SUMMARIZED CONDENSED CONSOLIDATING INFORMATION

In connection with the offerings of the Senior Notes by the Issuers, 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 Senior Notes Indentures;


•	The requirements for legal defeasance or covenant defeasance or to discharge the Senior Notes Indentures have been satisfied;


•	A liquidation or dissolution, to the extent permitted under the Senior Notes Indentures, 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.

Table of Contents

The Guarantors were also subject to the guarantees described above while the 2018 Notes were outstanding, but such guarantees were released following the redemption of all of the remaining 2018 Notes in the six months ended June 30, 2014. As of June 30, 2015, no 2018 Notes were outstanding.

Pursuant to Rule 3-10 of Regulation S-X, the following summarized condensed 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:

Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2015

(in thousands)

(unaudited)



	Parent Company		Issuers		Combined Guarantor Subsidiaries		Combined Non- Guarantor Subsidiaries		Elimination			Consolidated
Assets
Real estate investments, net of accumulated depreciation	$	44	$	—	$	1,766,502	$	167,285	$	—		$	1,933,831
Loans receivable and other investments, net	—		—		278,507		—		—			278,507
Cash and cash equivalents	2,455		—		—		3,587		—			6,042
Restricted cash	—		—		160		6,933		—			7,093
Prepaid expenses, deferred financing costs and other assets, net	2,269		23,870		76,491		9,699		—			112,329
Intercompany	577,489		795,386		—		—		(1,372,875		)	—
Investment in subsidiaries	495,905		712,059		27,023