Sabra Health Care REIT, Inc.: Form 10-Q for the period ended Sep 30, 2023

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 2022 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 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
• Critical Accounting Policies and Estimates
• Recently Issued Accounting Standards Update
• Results of Operations
• Liquidity and Capital Resources
• Concentration of Credit Risk
• Skilled Nursing Facility Reimbursement Rates

Overview

We operate as a self-administered, self-managed REIT that, through our subsidiaries, owns and invests in real estate serving the healthcare industry.

Our primary business consists of acquiring, financing and owning real estate property to be leased to third party tenants in the healthcare sector. We primarily generate revenues by leasing properties to tenants and owning properties operated by third-party property managers throughout the United States (“U.S.”) and Canada.

Our investment portfolio is primarily comprised of skilled nursing/transitional care facilities, senior housing communities (“Senior Housing - Leased”), behavioral health facilities, and specialty hospitals and other facilities, in each case leased to third-party operators; senior housing communities operated by third-party property managers pursuant to property management agreements (“Senior Housing - Managed”); investments in joint ventures; loans receivable; and preferred equity investments.

We expect to grow our investment portfolio while diversifying our portfolio by tenant, facility type and geography within the healthcare sector. We plan to achieve these objectives primarily through making investments directly or indirectly in healthcare real estate, including the development of purpose-built healthcare facilities with select developers. We also intend to achieve our objective of diversifying our portfolio by tenant and facility type through select asset sales and other arrangements with our tenants.

We employ a disciplined 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 elected to be treated as a REIT with the filing of our U.S. federal income tax return for the taxable year beginning January 1, 2011. We believe that we have been organized and have operated, and we intend to continue to operate, in a manner to qualify as a REIT. 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 and a wholly owned subsidiary of ours is currently the only limited partner, or by subsidiaries of the Operating Partnership.

Market Trends and Uncertainties

Our operations have been and are expected to continue to be impacted by economic and market conditions. Increases in interest rates, labor shortages, supply chain disruptions, high inflation and increased volatility in public equity and fixed income markets have led to increased costs and limited the availability of capital. If our tenants, borrowers and Senior Housing -

Managed communities experience increased costs or financing difficulties due to these macroeconomic conditions, our tenants and borrowers may be unable to meet their financial obligations to us and our results of operations may be adversely affected.

The above factors, together with the impact of COVID-19, have resulted in decreased occupancy and increased operating costs for our tenants and borrowers, which have negatively impacted their operating results and may adversely impact their ability to make full and timely rental payments and debt service payments, respectively, to us. Our Senior Housing - Managed portfolio has been similarly impacted, and we expect that decreased occupancy and increased operating costs will continue to negatively impact the operating results of these investments. While our tenants, borrowers and Senior Housing - Managed portfolio have experienced increases in occupancy, certain of those occupancy rates are still below pre-pandemic levels. Similarly, while our tenants, borrowers and Senior Housing - Managed portfolio have more recently experienced small, incremental improvements in both labor availability and overall labor costs, labor supply remains lower and costs remain higher than pre-pandemic levels. In some cases, we may have to restructure or temporarily defer tenants’ long-term rent obligations and may not be able to do so on terms that are as favorable to us as those currently in place. Reduced or modified rental and debt service amounts could result in the determination that the full amounts of our investments are not recoverable, which could result in an impairment charge. If our tenants and borrowers default on these obligations, such defaults could materially and adversely affect our results of operations and liquidity, in addition to resulting in potential impairment charges. Further, prolonged deterioration in the operating results for our investments in our Senior Housing - Managed portfolio could result in the determination that the full amounts of our investments are not recoverable, which could result in an impairment charge.

We regularly monitor the effects of economic and market conditions on our operations and financial position, as well as on the operations and financial position of our tenants and borrowers, in order to respond and adapt to the ongoing changes in our operating environment.

Investment in Unconsolidated Joint Venture

During the nine months ended September 30, 2023, our joint venture with Marlin Spring (the “Marlin Spring Joint Venture”) completed the acquisition of one additional senior housing community with a gross investment of CAD $30.0 million, excluding acquisition costs. In addition, the Marlin Spring Joint Venture assumed and financed an aggregate CAD $23.6 million of debt associated with the additional acquisition. Our equity investment in the additional acquisition was CAD $6.1 million. See Note 4, “Investment in Real Estate Properties—Investment in Unconsolidated Joint Ventures,” in the Notes to Consolidated Financial Statements for additional information regarding this investment.

Acquisitions

During the nine months ended September 30, 2023, we acquired one Senior Housing - Leased community and one Senior Housing - Managed community for aggregate consideration of $51.5 million, including acquisition costs. See Note 3, “Recent Real Estate Acquisitions,” in the Notes to Consolidated Financial Statements for additional information regarding these acquisitions.

Dispositions

During the nine months ended September 30, 2023, we completed the sale of 24 skilled nursing/transitional care facilities (including one leased to a tenant under a sales-type lease) and four senior housing communities for aggregate consideration, net of closing costs, of $281.8 million. The net carrying value of the assets and liabilities of these facilities was $357.7 million, which resulted in an aggregate $75.9 million net loss on sale. We continue to evaluate additional assets for sale as part of our initiative to recycle capital and further improve our portfolio quality.

Credit Agreement

Effective on January 4, 2023, we and certain of our subsidiaries entered into the Credit Agreement. See “—Liquidity and Capital Resources—Material Cash Requirements—Credit Agreement.”

At-The-Market Common Stock Offering Program

On February 23, 2023, we established the ATM Program (as defined below) pursuant to which shares of our common stock having an aggregate gross sales price of up to $500.0 million may be sold from time to time. See “—Liquidity and Capital Resources.”

Critical Accounting Policies and Estimates

Our consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“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 and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results is included in Part II, Item 7 of our 2022 Annual Report on Form 10-K filed with the SEC. There have been no significant changes to our critical accounting policies during the nine months ended September 30, 2023.

Recently Issued Accounting Standards Update

See Note 2, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements for information concerning recently issued accounting standards updates.

Results of Operations

As of September 30, 2023, our investment portfolio consisted of 377 real estate properties held for investment, 12 investments in loans receivable, five preferred equity investments and two investments in unconsolidated joint ventures. As of September 30, 2022, our investment portfolio consisted of 407 real estate properties held for investment, one asset held for sale, one investment in a sales-type lease, 15 investments in loans receivable, seven preferred equity investments and two investments in unconsolidated joint ventures. In general, we expect that income and expenses related to our portfolio will fluctuate in future periods in comparison to the corresponding prior periods as a result of investment and disposition activity and anticipated future changes in our portfolio. The results of operations presented are not directly comparable due to ongoing acquisition and disposition activity, including our capital recycling initiative.

Comparison of results of operations for the three months ended September 30, 2023 versus the three months ended September 30, 2022 (dollars in thousands):

(1) Represents the dollar amount increase (decrease) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 as a result of investments/dispositions made after July 1, 2022.

(2) Represents the dollar amount increase (decrease) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 that is not a direct result of investments/dispositions made after July 1, 2022.

Rental and Related Revenues

During the three months ended September 30, 2023, we recognized $93.1 million of rental income compared to $84.2 million for the three months ended September 30, 2022. The $8.9 million net increase in rental income is related to (i) a $15.6 million decrease in straight-line rental income receivable write-offs primarily due to the termination of the North American leases in 2022, (ii) a $1.2 million increase in earned cash rents and operating expense recoveries related to leases that are no longer accounted for on an accrual basis, (iii) a $0.7 million increase due to lease amendments and annual rental increases based on changes in the Consumer Price Index and (iv) a $0.5 million increase from properties acquired after July 1, 2022. These increases are partially offset by (i) a $4.6 million decrease from properties disposed of after July 1, 2022, (ii) a $2.5 million decrease from properties that were transitioned to new operators and (iii) a $2.2 million decrease in Genesis excess rents in accordance with the terms of the memorandum of understanding entered into in 2017.

Our reported rental and related revenues may be subject to increased variability in the future as a result of lease accounting standards. If at any time we cannot determine that it is probable that substantially all rents over the life of a lease are collectible, rental revenue will be recognized only to the extent of payments received and all receivables associated with the lease will be written off, irrespective of amounts expected to be collectible. However, there can be no assurances regarding the timing and amount of these revenues. Amounts due under the terms of all of our lease agreements are subject to contractual increases, and contingent rental income may be derived from certain lease agreements. No material contingent rental income was derived during the three months ended September 30, 2023 and 2022.

Resident Fees and Services

During the three months ended September 30, 2023, we recognized $59.7 million of resident fees and services compared to $47.6 million for the three months ended September 30, 2022. The $12.1 million increase is due to (i) a $6.9 million increase related to nine facilities that were transitioned to Senior Housing - Managed communities after July 1, 2022, (ii) a $4.4 million increase from three Senior Housing - Managed communities acquired after July 1, 2022 and (iii) a $2.3 million increase related to increased occupancy and an increase in rates. These increases are partially offset by a $1.0 million decrease related to one community that is closed due to a fire and a $0.5 million decrease related to one Senior Housing - Managed community disposed of after July 1, 2022.

Interest and Other Income

Interest and other income primarily consists of income earned on our loans receivable investments and preferred returns earned on our preferred equity investments. During the three months ended September 30, 2023, we recognized $8.8 million of interest and other income compared to $8.9 million for the three months ended September 30, 2022. The net decrease of $0.1 million is due to a $1.1 million decrease in income from investments repaid after July 1, 2022, partially offset by a $0.6 million increase due to increased fundings for existing investments and a $0.4 million increase from investments made after July 1, 2022.

Depreciation and Amortization

During the three months ended September 30, 2023, we incurred $43.2 million of depreciation and amortization expense compared to $47.4 million for the three months ended September 30, 2022. The net decrease of $4.2 million is due to a $3.4 million decrease from properties disposed of after July 1, 2022 and a $3.4 million decrease due to assets that have been fully amortized. These decreases are partially offset by a $1.7 million increase from properties acquired after July 1, 2022 and a $1.1 million increase from additions to real estate.

Interest Expense

We incur interest expense comprised of costs of borrowings plus the amortization of deferred financing costs related to our indebtedness. During the three months ended September 30, 2023, we incurred $28.2 million of interest expense compared to $27.1 million for the three months ended September 30, 2022. The $1.1 million net increase is primarily related to an increase in the borrowings outstanding under the Credit Agreement (as defined below) and an increase in interest rates.

Triple-Net Portfolio Operating Expenses

During the three months ended September 30, 2023, we recognized $4.3 million of triple-net portfolio operating expenses compared to $5.1 million during the three months ended September 30, 2022. The $0.8 million net decrease is related to a $0.4 million decrease due to properties disposed of after July 1, 2022 and a $0.4 million decrease due to facilities that have since been transitioned to new operators who are now paying the property taxes directly.

Senior Housing - Managed Portfolio Operating Expenses

During the three months ended September 30, 2023, we recognized $44.5 million of Senior Housing - Managed portfolio operating expenses compared to $36.7 million for the three months ended September 30, 2022. The $7.8 million net increase is due to a $6.3 million increase related to nine facilities that were transitioned to Senior Housing - Managed communities after July 1, 2022 and a $2.8 million increase related to three Senior Housing - Managed communities acquired after July 1, 2022. The increases are partially offset by a $0.5 million decrease related to one Senior Housing - Managed community disposed of after July 1, 2022 and a $0.6 million decrease due to one community that is closed due to a fire.

General and Administrative Expenses

General and administrative expenses include compensation-related expenses as well as professional services, office costs, other costs associated with asset management, and merger and acquisition costs. During the three months ended September 30, 2023, general and administrative expenses were $10.8 million compared to $9.7 million during the three months ended September 30, 2022. The $1.1 million net increase is related to (i) a $0.7 million increase in compensation for our team members as a result of increased staffing and annual salary adjustments, (ii) a $0.2 million increase in insurance premiums and (iii) a $0.2 million increase in conference and travel expenses primarily related to the 2023 Sabra operator conference.

Provision for (Recovery of) Loan Losses and Other Reserves

During the three months ended September 30, 2023 and 2022, we recognized a $0.3 million provision for and a $0.2 million recovery of loan losses and other reserves, respectively, primarily associated with our loans receivable investments.

Impairment of Real Estate

No impairment of real estate was recognized during the three months ended September 30, 2023. During the three months ended September 30, 2022, we recognized a $60.9 million impairment related to six skilled nursing/transitional care facilities that have sold. See Note 5, “Impairment of Real Estate and Dispositions,” in the Notes to Consolidated Financial Statements for additional information regarding these impairments.

Loss on Extinguishment of Debt

No loss on extinguishment of debt was recognized during the three months ended September 30, 2023. During the three months ended September 30, 2022, we recognized $0.1 million of loss on extinguishment of debt related to write-offs of deferred financing costs in connection with the partial pay downs of the U.S. dollar term loan (˝Prior Term Loan”) under our Prior Credit Agreement (as defined below).

Other Income

During the three months ended September 30, 2023, we recognized $2.2 million of other income related to a $3.7 million gain on insurance proceeds received related to property damage incurred by a vacant facility and $0.5 million of business interruption insurance income related to one Senior Housing - Managed community that is closed due to a fire. This income is partially offset by $1.4 million of transition-related expenses related to the transition of 14 Senior Housing - Managed communities to new operators in 2023. During the three months ended September 30, 2022, we recognized $1.0 million of other income primarily related to settlement payments related to legacy Care Capital Properties investments.

Net Loss on Sales of Real Estate

During the three months ended September 30, 2023, we recognized an aggregate net loss of $46.5 million related to the disposition of 13 skilled nursing/transitional care facilities and two Senior Housing - Leased communities. During the three months ended September 30, 2022, we recognized an aggregate net loss of $0.1 million related to the disposition of three skilled nursing/transitional care facilities.

Loss from Unconsolidated Joint Ventures

During the three months ended September 30, 2023, we recognized $0.6 million of loss from our unconsolidated joint ventures compared to $4.4 million of loss for the three months ended September 30, 2022. The $3.7 million net decrease in loss is primarily related a $4.2 million decrease in loss from our joint venture with affiliates of TPG Real Estate, the real estate platform of TPG (the “Enlivant Joint Venture”). Effective January 1, 2023, we discontinued applying the equity method of accounting to the Enlivant Joint Venture and no loss was recognized during the three months ended September 30, 2023. Effective May 1, 2023, we withdrew and resigned our membership in the Enlivant Joint Venture and accordingly, no longer have an equity interest in the Enlivant Joint Venture as of such date. We have not guaranteed any obligations of and are not required to provide any support to the Enlivant Joint Venture. The decrease in loss is partially offset by $0.7 million of net loss, including $0.8 million of depreciation expense and $0.9 million of interest expense, related to four senior housing communities acquired by one joint venture after July 1, 2022.

Income Tax Expense

During the three months ended September 30, 2023, we recognized $0.5 million of income tax expense compared to $0.6 million during the three months ended September 30, 2022. The $0.1 million decrease is due to adjusting our foreign income tax estimates.

Comparison of results of operations for the nine months ended September 30, 2023 versus the nine months ended September 30, 2022 (dollars in thousands):

(1) Represents the dollar amount increase (decrease) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 as a result of investments/dispositions made after January 1, 2022.

(2) Represents the dollar amount increase (decrease) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 that is not a direct result of investments/dispositions made after January 1, 2022.

Rental and Related Revenues

During the nine months ended September 30, 2023, we recognized $283.2 million of rental income compared to $297.3 million for the nine months ended September 30, 2022. The $14.0 million net decrease in rental income is related to (i) a $14.8 million decrease from properties disposed of after January 1, 2022, (ii) a $6.5 million decrease from properties that were transitioned to new operators, (iii) a $6.2 million decrease in Genesis excess rents in accordance with the terms of the memorandum of understanding entered into in 2017, (iv) a $4.1 million decrease in earned cash rents and operating expense recoveries related to leases that are no longer accounted for on an accrual basis, of which $1.5 million is due to the Avamere lease amendment effective February 1, 2022, and (v) a $1.1 million decrease from facilities transitioned from triple-net lease to Senior Housing - Managed communities. These decreases are partially offset by (i) a $15.6 million decrease in straight-line rental income receivable write-offs primarily due to the termination of the North American leases in 2022, (ii) a $1.6 million increase due to lease amendments and annual rental increases based on changes in the Consumer Price Index, (iii) a $0.9 million increase due to incremental revenue related to capital expenditures and (iv) a $1.0 million increase from properties acquired after January 1, 2022.

Our reported rental and related revenues may be subject to increased variability in the future as a result of lease accounting standards. If at any time we cannot determine that it is probable that substantially all rents over the life of a lease are collectible, rental revenue will be recognized only to the extent of payments received and all receivables associated with the lease will be written off, irrespective of amounts expected to be collectible. However, there can be no assurances regarding the timing and amount of these revenues. Amounts due under the terms of all of our lease agreements are subject to contractual increases, and contingent rental income may be derived from certain lease agreements. No material contingent rental income was derived during the nine months ended September 30, 2023 and 2022.

Resident Fees and Services

During the nine months ended September 30, 2023, we recognized $174.9 million of resident fees and services compared to $134.0 million for the nine months ended September 30, 2022. The $40.9 million increase is due to (i) a $19.2 million increase related to nine facilities that were transitioned to Senior Housing - Managed communities after January 1, 2022, (ii) a $17.5 million increase from four Senior Housing - Managed communities acquired after January 1, 2022 and (iii) an $8.2 million increase related to increased occupancy and an increase in rates. These increases are partially offset by a $2.9 million decrease related to one community that is closed due to a fire and a $1.1 million decrease related to one Senior Housing - Managed community disposed of after January 1, 2022.

Interest and Other Income

Interest and other income primarily consists of income earned on our loans receivable investments and preferred returns earned on our preferred equity investments. During the nine months ended September 30, 2023, we recognized $26.0 million of interest and other income compared to $28.6 million for the nine months ended September 30, 2022. The net decrease of $2.6 million is due to a $3.1 million decrease in income from investments repaid after January 1, 2022 and a $2.3 million lease termination payment related to one skilled nursing/transitional care facility that sold in 2022, partially offset by a $2.1 million increase from investments made after January 1, 2022 and a $0.6 million increase due to increased fundings for existing investments.

Depreciation and Amortization

During the nine months ended September 30, 2023, we incurred $140.2 million of depreciation and amortization expense compared to $137.9 million for the nine months ended September 30, 2022. The net increase of $2.4 million is due to (i) a $7.8 million increase due to accelerating the remaining useful life of a facility that is being demolished, (ii) a $5.5 million increase from properties acquired after January 1, 2022 and (iii) a $2.1 million increase from additions to real estate. The increases are partially offset by a $9.4 million decrease from properties disposed of after January 1, 2022 and a $3.1 million decrease due to assets that have been fully amortized.

Interest Expense

We incur interest expense comprised of costs of borrowings plus the amortization of deferred financing costs related to our indebtedness. During the nine months ended September 30, 2023, we incurred $85.0 million of interest expense compared to $77.6 million for the nine months ended September 30, 2022. The $7.5 million net increase is primarily related to an increase in the borrowings outstanding under the Credit Agreement and an increase in interest rates.

Triple-Net Portfolio Operating Expenses

During the nine months ended September 30, 2023, we recognized $13.2 million of triple-net portfolio operating expenses compared to $15.0 million for the nine months ended September 30, 2022. The $1.7 million net decrease is related to a $1.3 million decrease due to facilities that have since transitioned to new operators who are now paying the property taxes directly and a $0.9 million decrease due to properties disposed of after January 1, 2022. These decreases are partially offset by an increase in our estimates related to property taxes.

Senior Housing - Managed Portfolio Operating Expenses

During the nine months ended September 30, 2023, we recognized $132.1 million of Senior Housing - Managed portfolio operating expenses compared to $103.8 million for the nine months ended September 30, 2022. The $28.3 million net increase is due to (i) an $18.2 million increase related to nine facilities that were transitioned to Senior Housing - Managed communities after January 1, 2022, (ii) an $11.3 million increase related to four Senior Housing - Managed communities acquired after January 1, 2022, (iii) a $0.8 million increase in employee compensation primarily due to increased labor rates and staffing and (iv) a $0.6 million increase in insurance premiums. These increases are partially offset by a $1.6 million decrease in operating expenses related to one community that is closed due to a fire and a $1.2 million decrease related to one Senior Housing - Managed community disposed of after January 1, 2022.

General and Administrative Expenses

General and administrative expenses include compensation-related expenses as well as professional services, office costs, other costs associated with asset management, and merger and acquisition costs. During the nine months ended September 30, 2023, general and administrative expenses were $30.8 million compared to $28.7 million during the nine months ended September 30, 2022. The $2.1 million net increase is related to (i) a $1.0 million increase in compensation for our team members as a result of increased staffing and annual salary adjustments, (ii) a $0.5 million increase in insurance premiums and (iii) a $0.3 million increase in conference and travel expenses primarily related to the 2023 Sabra operator conference.

Provision for (Recovery of) Loan Losses and Other Reserves

During the nine months ended September 30, 2023 and 2022, we recognized a $0.5 million provision for and a $12,000 recovery of loan losses and other reserves, respectively, associated with our loans receivable investments and sales-type lease that was terminated in March 2023.

Impairment of Real Estate

During the nine months ended September 30, 2023, we recognized a $7.1 million impairment related to one skilled nursing/transitional care facility that was sold. During the nine months ended September 30, 2022, we recognized a $72.6 million impairment related to ten skilled nursing/transitional care facilities that have sold.

Loss on Extinguishment of Debt

During the nine months ended September 30, 2023, we recognized a $1.5 million loss on extinguishment of debt related to write-offs of deferred financing costs in connection with amending and restating the fifth amended and restated unsecured credit agreement entered into by the Operating Partnership and Sabra Canadian Holdings, LLC and the other parties thereto on September 9, 2019 (“Prior Credit Agreement”). During the nine months ended September 30, 2022, we recognized a $0.4 million loss on extinguishment of debt related to write-offs of deferred financing costs in connection with the partial pay downs of the U.S. dollar Prior Term Loan.

Other Income (Expense)

During the nine months ended September 30, 2023, we recognized $2.6 million of other income related to (i) a $3.7 million gain on insurance proceeds received related to property damage incurred by a vacant facility, (ii) $0.5 million of business interruption insurance income related to one Senior Housing - Managed community that is closed due to a fire and (iii) $0.3 million of income related to the sale of licensed beds. This income is partially offset by $1.5 million of transition-related expenses related to the transition of 14 Senior Housing - Managed communities to new operators in 2023. During the nine months ended September 30, 2022, we recognized $1.1 million of other expense primarily related to foreign currency transaction loss related to our Canadian borrowings.

Net Loss on Sales of Real Estate

During the nine months ended September 30, 2023, we recognized an aggregate net loss of $75.9 million related to the disposition of 23 skilled nursing/transitional care facilities, three Senior Housing - Leased communities and one Senior Housing - Managed community. During the nine months ended September 30, 2022, we recognized an aggregate net loss of $4.6 million related to the disposition of six skilled nursing/transitional care facilities and five Senior Housing - Leased communities.

Loss from Unconsolidated Joint Ventures

During the nine months ended September 30, 2023, we recognized $2.1 million of loss, including $6.5 million of depreciation expense and $2.9 million of interest expense, related to 16 senior housing communities acquired by two joint ventures after January 1, 2022.

During the nine months ended September 30, 2022, we recognized $9.7 million of loss primarily from the Enlivant Joint Venture. Effective January 1, 2023, we discontinued applying the equity method of accounting to the Enlivant Joint Venture and no loss was recognized during the nine months ended September 30, 2023. Effective May 1, 2023, we withdrew and resigned our membership in the Enlivant Joint Venture and accordingly, no longer have an equity interest in the Enlivant Joint Venture as of such date. We have not guaranteed any obligations of and are not required to provide any support to the Enlivant Joint Venture.

Income Tax Expense

During the nine months ended September 30, 2023, we recognized $1.5 million of income tax expense compared to $1.1 million for the nine months ended September 30, 2022. The $0.4 million increase is due to adjusting our estimates related to state and foreign income taxes.

Funds from Operations and Adjusted Funds from Operations

We believe that net income as defined by GAAP is the most appropriate earnings measure. We also believe that funds from operations (“FFO”), as defined in accordance with the definition used by the National Association of Real Estate Investment Trusts (“Nareit”), and adjusted funds from operations (“AFFO”) (and related per share amounts) are important non-GAAP supplemental measures of our operating performance. Because the historical cost accounting convention used for real estate assets requires straight-line depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. However, since real estate values have historically risen or fallen with market and other conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. Thus, Nareit created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. FFO is defined as net income, computed in accordance with GAAP, excluding gains or losses from real estate dispositions and our share of gains or losses from real estate dispositions related to our unconsolidated joint ventures, plus real estate depreciation and amortization, net of amounts related to noncontrolling interests, plus our share of depreciation and amortization related to our unconsolidated joint ventures, and real estate impairment charges of both consolidated and unconsolidated entities when the impairment is directly attributable to decreases in the value of the depreciable real estate held by the entity. AFFO is defined as FFO excluding merger and acquisition costs, stock-based compensation expense, non-cash rental and related revenues, non-cash interest income, non-cash interest expense, non-cash portion of loss on extinguishment of debt, provision for loan losses and other reserves, non-cash lease termination income and deferred income taxes, as well as other non-cash revenue and expense items (including ineffectiveness gain/loss on derivative instruments, and non-cash revenue and expense amounts related to noncontrolling interests) and our share of non-cash adjustments related to our unconsolidated joint ventures. We believe that the use of FFO and AFFO (and the related per share amounts), combined with the required GAAP presentations, improves the understanding of our operating results among investors and makes comparisons of operating results among REITs more meaningful. We consider FFO and AFFO to be useful measures for reviewing comparative operating and financial performance because, by excluding the applicable items listed above, FFO and AFFO can help investors compare our operating performance between periods or as compared to other companies. While FFO and AFFO are relevant and widely used measures of operating performance of REITs, they do not represent cash flows from operations or net income as defined by GAAP and should not be considered an alternative to those measures in evaluating our liquidity or operating performance. FFO and AFFO also do not consider the costs associated with capital expenditures related to our real estate assets nor do they purport to be indicative of cash available to fund our future cash requirements. Further, our computation of FFO and AFFO may not be comparable to FFO and AFFO reported by other REITs that do not define FFO in accordance with the current Nareit definition or that interpret the current Nareit definition or define AFFO differently than we do.

The following table reconciles our calculations of FFO and AFFO for the three and nine months ended September 30, 2023 and 2022, to net income, the most directly comparable GAAP financial measure, for the same periods (in thousands, except share and per share amounts):

(1) Other adjustments for the nine months ended September 30, 2022 includes $2.2 million of foreign currency transaction loss related to our Canadian borrowings.

The following table sets forth additional information related to certain other items included in net income above, and the portions of each that are included in FFO and AFFO, which may be helpful in assessing our operating results. Please refer to “—Results of Operations” above for additional information regarding these items (in millions):

(1) Consists of funds specifically paid to communities in our Senior Housing - Managed portfolio from state or federal governments related to the pandemic and were incremental to the amounts that would have otherwise been received for providing care to residents.

(2) Funding for support payments did not require capital contributions from Sabra but rather were funded with proceeds received by the Enlivant Joint Venture from TPG for the issuance of senior preferred interests.

Liquidity and Capital Resources

As of September 30, 2023, we had approximately $1.0 billion in liquidity, consisting of unrestricted cash and cash equivalents of $33.3 million and available borrowings under our Revolving Credit Facility (as defined below) of $967.4 million. The Credit Agreement also contains an accordion feature that can increase the total available borrowings to $2.75 billion (from U.S. $1.4 billion plus CAD $150.0 million), subject to terms and conditions.

We have filed a shelf registration statement with the SEC that expires in November 2025, which allows us to offer and sell shares of common stock, preferred stock, warrants, rights, units, and certain of our subsidiaries to offer and sell debt securities, through underwriters, dealers or agents or directly to purchasers, on a continuous or delayed basis, in amounts, at prices and on terms we determine at the time of the offering, subject to market conditions.

On February 23, 2023, we established an at-the-market equity offering program (the “ATM Program”) pursuant to which shares of our common stock having an aggregate gross sales price of up to $500.0 million may be sold from time to time (i) by us through a consortium of banks acting as sales agents or directly to the banks acting as principals or (ii) by a consortium of banks acting as forward sellers on behalf of any forward purchasers pursuant to a forward sale agreement.

During the three and nine months ended September 30, 2023, no shares were sold under the ATM Program and we did not utilize the forward feature of the ATM Program. As of September 30, 2023, we had $500.0 million available under the ATM Program.

Our short-term liquidity requirements consist primarily of operating expenses, including our planned capital expenditures and funding commitments, interest expense, scheduled debt service payments under our loan agreements, dividend requirements, general and administrative expenses and other requirements described under “Material Cash Requirements” below. Based on our current assessment, we believe that our available cash, operating cash flows and borrowings available to us under our Revolving Credit Facility provide sufficient funds for such requirements for the next twelve months. In addition, we do not believe that the restrictions under our Senior Notes Indentures (as defined below) or Credit Agreement significantly limit our ability to use our available liquidity for these purposes.

Our long-term liquidity requirements consist primarily of future investments in properties, including any improvements or renovations of current or newly-acquired properties, as well as scheduled debt maturities. We expect to meet these liquidity needs using the sources above as well as the proceeds from issuances of common stock, preferred stock, debt or other securities, additional borrowings, including mortgage debt or a new or refinanced credit facility, and proceeds from the sale of properties. In addition, we may seek financing from U.S. government agencies, including through Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development, in appropriate circumstances in connection with acquisitions.

Cash Flows from Operating Activities

Net cash provided by operating activities was $221.8 million for the nine months ended September 30, 2023. Operating cash inflows were derived primarily from the rental payments received under our lease agreements, resident fees and services net of the corresponding operating expenses, and interest payments from borrowers under our loan and preferred equity investments. Operating cash outflows consisted primarily of interest payments on borrowings and payment of general and administrative expenses, including corporate overhead. Increases to operating cash flows primarily relate to completed investment activity, and decreases to operating cash flows primarily relate to disposition activity and interest expense from increased borrowing activity and higher interest rates. In addition, the change in operating cash flows was impacted by the timing of collections from our tenants and borrowers and fluctuations in the operating results of our Senior Housing - Managed communities. We expect our annualized cash flows provided by operating activities to fluctuate as a result of such activity.

Cash Flows from Investing Activities

During the nine months ended September 30, 2023, net cash provided by investing activities was $164.9 million and included $248.2 million of net proceeds from the sales of real estate, $25.5 million of net proceeds from the sale of a facility under a sales-type lease, $8.7 million in repayments of loans receivable, $6.0 million in insurance proceeds, $4.8 million in repayments of preferred equity investments and $0.5 million of distributions in excess of earnings from an unconsolidated joint venture, partially offset by $63.8 million used for additions to real estate, $39.6 million used for the acquisition of two facilities, $11.0 million used to provide funding for preferred equity investments, $9.6 million used to provide funding for loans receivable and $4.8 million used for the investment in an unconsolidated joint venture.

Cash Flows from Financing Activities

During the nine months ended September 30, 2023, net cash used in financing activities was $400.9 million and included $208.1 million of dividends paid to stockholders, $165.3 million of net repayments of our Revolving Credit Facility, $18.1 million of payments of deferred financing costs related to the Credit Agreement, $17.9 million of payments of contingent consideration, $2.2 million of net costs related to payroll tax payments related to the issuance of common stock pursuant to equity compensation arrangements and our ATM Program and $1.5 million of principal repayments on secured debt, partially offset by $12.2 million of proceeds from Term Loans (as defined below).

Please see the accompanying consolidated statements of cash flows for details of our operating, investing and financing cash activities.

Material Cash Requirements

Our material cash requirements include the following contractual and other obligations.

Senior Unsecured Notes. Our senior unsecured notes consisted of the following (collectively, the “Senior Notes”) as of September 30, 2023 (dollars in thousands):

(1) Principal balance does not include discount, net of $4.1 million and deferred financing costs, net of $10.9 million as of September 30, 2023.

See Note 7, “Debt,” in the Notes to Consolidated Financial Statements and “Subsidiary Issuer and Guarantor Financial Information” below for additional information concerning the Senior Notes, including information regarding the indentures and agreements governing the Senior Notes (the “Senior Notes Indentures”). As of September 30, 2023, we were in compliance with all applicable covenants under the Senior Notes Indentures.

Credit Agreement. Effective January 4, 2023, the Operating Partnership and Sabra Canadian Holdings, LLC (together, the “Borrowers”), and the other parties thereto entered into a sixth amended and restated unsecured credit agreement (the “Credit Agreement”). The Credit Agreement includes a $1.0 billion revolving credit facility (the “Revolving Credit Facility”), a $430.0 million U.S. dollar term loan and a CAD $150.0 million Canadian dollar term loan (collectively, the “Term Loans”). Further, up to $350.0 million of the Revolving Credit Facility may be used for borrowings in certain foreign currencies. The Credit Agreement also contains an accordion feature that can increase the total available borrowings to $2.75 billion, subject to terms and conditions.

The Revolving Credit Facility has a maturity date of January 4, 2027, and includes two six-month extension options. The Term Loans have a maturity date of January 4, 2028.

The obligations of the Borrowers under the Credit Agreement are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by us and one of our non-operating subsidiaries, subject to release under certain customary circumstances.

See Note 7, “Debt,” in the Notes to Consolidated Financial Statements for additional information concerning the Credit Agreement, including information regarding covenants contained in the Credit Agreement. As of September 30, 2023, we were in compliance with all applicable covenants under the Credit Agreement.

Secured Indebtedness. As of September 30, 2023, eight of our properties held for investment were subject to secured indebtedness to third parties, and our secured debt consisted of the following (dollars in thousands):

(1) Principal balance does not include deferred financing costs, net of $0.9 million as of September 30, 2023.

Interest. Our estimated interest and facility fee payments based on principal amounts of debt outstanding as of September 30, 2023, applicable interest rates in effect as of September 30, 2023, and including the impact of interest rate swaps and collars are $29.2 million for the remainder of 2023, $97.9 million in 2024, $99.3 million in 2025, $99.2 million in 2026, $66.0 million in 2027 and $141.5 million thereafter.

Capital and Other Expenditures and Funding Commitments. For the nine months ended September 30, 2023 and 2022, our aggregate capital expenditures were $63.8 million and $33.8 million, respectively. As of September 30, 2023, our aggregate commitment for future capital and other expenditures related to facilities leased under triple-net operating leases was approximately $44 million, of which $36 million will directly result in incremental rental income, and approximately $26 million will be spent over the next 12 months. Additionally, as of September 30, 2023, anticipated capital expenditures related to our Senior Housing - Managed communities were approximately $41 million, of which we expect to spend approximately $34 million over the next 12 months.

Dividends. To maintain REIT status, we are required each year to distribute to stockholders at least 90% of our annual REIT taxable income after certain adjustments. All distributions will be made by us at the discretion of our board of directors and will depend on our financial position, results of operations, cash flows, capital requirements, debt covenants (which include limits on distributions by us), applicable law, and other factors as our board of directors deems relevant.

We paid dividends of $208.1 million on our common stock during the nine months ended September 30, 2023. On November 6, 2023, our board of directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on November 30, 2023 to common stockholders of record as of November 17, 2023.

Subsidiary Issuer and Guarantor Financial Information. In connection with the Operating Partnership’s assumption of the 2026 Notes, we have fully and unconditionally guaranteed the 2026 Notes. The 2029 Notes and 2031 Notes are issued by the Operating Partnership and guaranteed, fully and unconditionally, by us.

These guarantees are subordinated to all existing and future senior debt and senior guarantees of us, as guarantor, and are unsecured. We conduct all of our business through and derive virtually all of our income from our subsidiaries. Therefore, our ability to make required payments with respect to our indebtedness (including the Senior Notes) and other obligations depends on the financial results and condition of our subsidiaries and our ability to receive funds from our subsidiaries.

In accordance with Regulation S-X, the following aggregate summarized financial information is provided for Sabra and the Operating Partnership. This aggregate summarized financial information has been prepared from the books and records maintained by us and the Operating Partnership. The aggregate summarized financial information does not include the investments in, nor the earnings from, subsidiaries other than the Operating Partnership and therefore is not necessarily indicative of the results of operations or financial position had the Operating Partnership operated as an independent entity. Intercompany transactions have been eliminated. The aggregate summarized balance sheet information as of September 30, 2023 and December 31, 2022 and aggregate summarized statement of loss information for the nine months ended September 30, 2023 is as follows (in thousands):

Concentration of Credit Risk

Concentrations of credit risk arise when a number of tenants or obligors related to our 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 us, to be similarly affected by changes in economic conditions. We regularly monitor our portfolio to assess potential concentrations of risks.

Management believes our current portfolio is reasonably diversified across healthcare related real estate and geographical location and does not contain any other significant concentration of credit risks. Our portfolio of 377 real estate properties held for investment as of September 30, 2023 is diversified by location across the U.S. and Canada.

For the three and nine months ended September 30, 2023, no tenant relationship represented 10% or more of our total revenues.

Skilled Nursing Facility Reimbursement Rates

For the nine months ended September 30, 2023, 42.5% of our revenues was derived directly or indirectly from skilled nursing/transitional care facilities. Medicare reimburses skilled nursing facilities for Medicare Part A services under the Prospective Payment System (“PPS”), as implemented pursuant to the Balanced Budget Act of 1997 and modified pursuant to subsequent laws, most recently the Patient Protection and Affordable Care Act of 2010. PPS regulations predetermine a payment amount per patient, per day, based on a market basket index calculated for all covered costs.

On October 1, 2019, a case-mix classification system called the skilled nursing facility Patient-Driven Payment Model (“PDPM”) became effective pursuant to a Centers for Medicare & Medicaid Services (“CMS”) final rule. PDPM focuses on clinically relevant factors, rather than volume-based service, for determining Medicare payment. PDPM adjusts Medicare payments based on each aspect of a resident’s care, most notably for non-therapy ancillaries, which are items and services not related to the provision of therapy such as drugs and medical supplies, thereby more accurately addressing costs associated with medically complex patients. It further adjusts the skilled nursing facility per diem payments to reflect varying costs throughout the stay and incorporates safeguards against potential financial incentives to ensure that beneficiaries receive care consistent with their unique needs and goals.

On July 29, 2022, CMS issued a final rule regarding fiscal year 2023 Medicare rates for skilled nursing facilities providing an estimated net increase of 2.7% compared to fiscal year 2022 comprised of an increase as a result of an update to the payment rates of 5.1% (which is based on (i) a market basket increase of 3.9% plus (ii) a market basket forecast error adjustment of 1.5% and less (iii) a productivity adjustment of 0.3%), partially offset by the recalibrated PDPM parity adjustment of 2.3% (the total PDPM parity adjustment is 4.6%, and it is being phased in over a two-year period). These figures do not incorporate any of the estimated value-based purchasing reductions for skilled nursing facilities. The new payment rates became effective on October 1, 2022.

On July 31, 2023, CMS issued a final rule regarding fiscal year 2024 Medicare rates for skilled nursing facilities providing an estimated net increase of 4.0% compared to fiscal year 2023 comprised of an increase as a result of an update to the payment rates of 6.4% (which is based on (i) a market basket increase of 3.0% plus (ii) a market basket forecast error adjustment of 3.6% and less (iii) a productivity adjustment of 0.2%), partially offset by the second phase of the recalibrated PDPM parity adjustment of 2.3%. These figures do not incorporate any of the estimated value-based purchasing reductions for skilled nursing facilities. The new payment rates became effective on October 1, 2023.

There have been no material changes to the quantitative and qualitative disclosures about market risk set forth in our 2022 Annual Report on Form 10-K.

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2023 to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes in our assessment of our risk factors from those set forth in Part I, Item 1A of our 2022 Annual Report on Form 10-K.