Annual Statements Open main menu

Sabra Health Care REIT, Inc. - Quarter Report: 2014 June (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-34950
 
 SABRA HEALTH CARE REIT, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Maryland
 
27-2560479
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
18500 Von Karman Avenue, Suite 550
Irvine, CA 92612
(888) 393-8248
(Address, zip code and telephone number of Registrant)
 
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
x
  
Accelerated filer
 
o
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of July 29, 2014, there were 47,263,151 shares of the Registrant’s $0.01 par value Common Stock outstanding.


Table of Contents

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

1

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 LLC, the parent of Sun Healthcare Group, Inc., until we are able to further diversify our portfolio;
our dependence on the operating success of our tenants;
changes in general economic conditions and volatility in financial and credit markets;
the dependence of our tenants on reimbursement from governmental and other third-party payors;
the significant amount of and our ability to service our indebtedness;
covenants in our debt agreements that may restrict our ability to make investments, incur additional indebtedness and refinance indebtedness on favorable terms;
increases in market interest rates;
our ability to raise capital through equity financings;
the relatively illiquid nature of real estate investments;
competitive conditions in our industry;
the loss of key management personnel or other employees;
the impact of litigation and rising insurance costs on the business of our tenants;
uninsured or underinsured losses affecting our properties and the possibility of environmental compliance costs and liabilities;
our ability to maintain our status as a real estate investment trust (“REIT”); and
compliance with REIT requirements and certain tax 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, 2013 (our “2013 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.
GENESIS HEALTHCARE LLC INFORMATION
This 10-Q includes information regarding Genesis HealthCare LLC (“Genesis”). Genesis is not subject to SEC reporting requirements. The information related to Genesis provided in this 10-Q has been provided by Genesis and we have not independently verified this information. We have no reason to believe that such information is inaccurate in any material respect. We are providing this data for informational purposes only.


2

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,
2014
 
December 31,
2013
 
(unaudited)
 
 
Assets
 
 
 
Real estate investments, net of accumulated depreciation of $169,763 and $151,078 as of June 30, 2014 and December 31, 2013, respectively
$
1,036,312

 
$
915,418

Loans receivable and other investments, net
225,787

 
185,293

Cash and cash equivalents
15,085

 
4,308

Restricted cash
6,125

 
5,352

Deferred tax assets
24,212

 
24,212

Prepaid expenses, deferred financing costs and other assets
68,990

 
63,252

Total assets
$
1,376,511

 
$
1,197,835

 
 
 
 
Liabilities
 
 
 
Mortgage notes
$
125,400

 
$
141,328

Secured revolving credit facility

 
135,500

Senior unsecured notes
550,000

 
414,402

Accounts payable and accrued liabilities
21,084

 
22,229

Tax liability
24,212

 
24,212

Total liabilities
720,696

 
737,671

 
 
 
 
Commitments and contingencies (Note 12)

 

 
 
 
 
Equity
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized, 5,750,000 shares issued and outstanding as of June 30, 2014 and December 31, 2013
58

 
58

Common stock, $.01 par value; 125,000,000 shares authorized, 47,263,151 and 38,788,745 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively
473

 
388

Additional paid-in capital
760,258

 
534,639

Cumulative distributions in excess of net income
(104,951
)
 
(74,921
)
Total Sabra Health Care REIT, Inc. stockholders’ equity
655,838

 
460,164

Noncontrolling interests
(23
)
 

Total equity
655,815

 
460,164

Total liabilities and equity
$
1,376,511

 
$
1,197,835

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(dollars in thousands, except per share data)  
(unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Rental income
$
37,485

 
$
31,518

 
$
73,578

 
$
62,993

Interest and other income
5,488

 
757

 
10,245

 
1,304

 
 
 
 
 
 
 
 
Total revenues
42,973

 
32,275

 
83,823

 
64,297

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Depreciation and amortization
9,755

 
8,222

 
19,105

 
16,468

Interest
10,994

 
10,143

 
22,128

 
20,145

General and administrative
7,926

 
3,422

 
13,779

 
8,139

 
 
 
 
 
 
 
 
Total expenses
28,675

 
21,787

 
55,012

 
44,752

 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
Loss on extinguishment of debt
(162
)
 
(9,750
)
 
(22,296
)
 
(9,750
)
Other income (expense)
660

 
(1,400
)
 
960

 
(900
)
 
 
 
 
 
 
 
 
Total other income (expense)
498

 
(11,150
)
 
(21,336
)
 
(10,650
)
 
 
 
 
 
 
 
 
Net income (loss)
14,796

 
(662
)
 
7,475

 
8,895

 
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interests
5

 

 
23

 

 
 
 
 
 
 
 
 
Net income (loss) attributable to Sabra Health Care REIT, Inc.
14,801

 
(662
)
 
7,498

 
8,895

 
 
 
 
 
 
 
 
Preferred stock dividends
(2,560
)
 
(2,523
)
 
(5,121
)
 
(2,827
)
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
12,241

 
$
(3,185
)
 
$
2,377

 
$
6,068

 
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 
Net income (loss) attributable to common stockholders, per:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic common share
$
0.28

 
$
(0.09
)
 
$
0.06

 
$
0.16

 
 
 
 
 
 
 
 
Diluted common share
$
0.28

 
$
(0.09
)
 
$
0.06

 
$
0.16

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding, basic
43,655,292

 
37,357,112

 
41,324,795

 
37,321,813

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding, diluted
44,096,297

 
37,357,112

 
41,791,470

 
37,789,804

 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.

4


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
 
Total
Stockholders’
Equity
 
Noncontrolling Interests
 
Total Equity
 
 
Shares
 
Amount
 
Shares
 
Amounts
 
 
 
 
 
Balance, December 31, 2012
 

 
$

 
37,099,209

 
$
371

 
$
353,861

 
$
(48,744
)
 
$
305,488

 
$

 
$
305,488

Net income
 

 

 

 

 

 
8,895

 
8,895

 

 
8,895

Amortization of stock-based compensation
 

 

 

 

 
4,182

 

 
4,182

 

 
4,182

Preferred stock issuance
 
5,750,000

 
58

 

 

 
138,288

 

 
138,346

 

 
138,346

Common stock issuance
 

 

 
234,734

 
2

 
(2,852
)
 

 
(2,850
)
 

 
(2,850
)
Preferred dividends
 

 

 

 

 

 
(2,827
)
 
(2,827
)
 

 
(2,827
)
Common dividends ($0.68 per share)
 

 

 

 

 

 
(25,667
)
 
(25,667
)
 

 
(25,667
)
Balance, June 30, 2013
 
5,750,000

 
$
58

 
37,333,943

 
$
373

 
$
493,479

 
$
(68,343
)
 
$
425,567

 
$

 
$
425,567

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in Capital
 
Cumulative Distributions in Excess of Net Income
 
Total
Stockholders’
Equity
 
Noncontrolling Interests
 
Total Equity
 
 
Shares
 
Amount
 
Shares
 
Amounts
 
 
 
 
 
Balance, December 31, 2013
 
5,750,000

 
$
58

 
38,788,745

 
$
388

 
$
534,639

 
$
(74,921
)
 
$
460,164

 
$

 
$
460,164

Net income
 

 

 

 

 

 
7,498

 
7,498

 
(23
)
 
7,475

Amortization of stock-based compensation
 

 

 

 

 
5,195

 

 
5,195

 

 
5,195

Common stock issuance
 

 

 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended June 30,
 
2014
 
2013
Cash flows from operating activities:

 
 
Net income
$
7,475

 
$
8,895

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

 
 
Depreciation and amortization
19,105

 
16,468

Non-cash interest income adjustments
140

 
12

Amortization of deferred financing costs
1,872

 
1,589

Stock-based compensation expense
4,792

 
3,933

Amortization of premium
(33
)
 
(401
)
Loss on extinguishment of debt
1,418

 
508

Straight-line rental income adjustments
(8,433
)
 
(7,300
)
Write-off of straight-line rental income
2,994

 

Change in fair value of contingent consideration
(960
)
 
900

Changes in operating assets and liabilities:


 
 
Prepaid expenses and other assets
(1,171
)
 
(1,563
)
Accounts payable and accrued liabilities
3,312

 
1,877

Restricted cash
(1,590
)
 
(1,932
)

 
 
 
Net cash provided by operating activities
28,921

 
22,986


 
 
 
Cash flows from investing activities:

 
 
Acquisitions of real estate
(118,389
)
 
(6,175
)
Origination and fundings of loans receivable
(38,373
)
 
(25,244
)
Preferred equity investment
(6,458
)
 
(5,144
)
Additions to real estate
(783
)
 
(226
)
Net proceeds from the sale of real estate

 
2,208


 
 
 
Net cash used in investing activities
(164,003
)
 
(34,581
)

 
 
 
Cash flows from financing activities:

 
 
Proceeds from issuance of senior unsecured notes
350,000

 
200,000

Principal payments on senior unsecured notes
(211,250
)
 
(113,750
)
Proceeds from secured revolving credit facility
80,000

 

Payments on secured revolving credit facility
(215,500
)
 
(92,500
)
Proceeds from mortgage notes
57,703

 

Principal payments on mortgage notes
(87,733
)
 
(9,193
)
Payments of deferred financing costs
(10,135
)
 
(5,378
)
Issuance of preferred stock

 
138,345

Issuance of common stock
219,899

 
(2,851
)
Dividends paid on common and preferred stock
(37,125
)
 
(27,409
)

 
 
 
Net cash provided by financing activities
145,859

 
87,264


 
 
 
Net increase in cash and cash equivalents
10,777

 
75,669

Cash and cash equivalents, beginning of period
4,308

 
17,101


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

 
$
92,770


 
 
 
Supplemental disclosure of cash flow information:

 
 
Interest paid
$
15,298

 
$
19,839


 
 
 
Supplemental disclosure of non-cash transaction:
 
 
 
Assumption of mortgage indebtedness
$
14,102

 
$

 
 
 
 
See accompanying notes to condensed consolidated financial statements.

6

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. (“Old Sun”) and commenced operations on November 15, 2010. 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 owns substantially all of its assets and properties and conducts its operations through Sabra Health Care Limited Partnership, a Delaware limited partnership (the “Operating Partnership”), of which Sabra is the sole general partner, or by subsidiaries of the Operating Partnership. The Company’s investment portfolio is primarily comprised of skilled nursing/post-acute facilities, senior housing facilities, acute care hospitals, debt investments and preferred equity investments.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The condensed consolidated financial statements include the accounts of Sabra, its wholly owned subsidiaries and a consolidated variable interest entity (“VIEs”). All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).
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 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, 2014, the Company determined it was the primary beneficiary of one senior housing facility and has consolidated the operations of the facility in the accompanying condensed consolidated financial statements. As of June 30, 2014, the 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, 2014, 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

7

Table of Contents

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.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with 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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. For further information, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2013 included in the Company’s 2013 Annual Report on Form 10-K filed with the SEC.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Recently Issued Accounting Standards Update
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance specifically notes that lease contracts with customers are a scope exception. ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption is not permitted. The Company is currently in the process of evaluating the impact the adoption of ASU 2014-09 will have on the Company’s financial position or results of operations.
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU No. 2014-08”), which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The standard no longer precludes presentation as a discontinued operation if (i) there are operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations, or (ii) there is significant continuing involvement with a component after its disposal. ASU No. 2014-08 is effective for public entities for interim and annual periods beginning after December 15, 2014, and will be applied prospectively.  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, 2014, the Company acquired six skilled nursing facilities and three senior housing facilities for consideration totaling $141.5 million. The consideration was allocated as follows (in thousands):
 
 
Intangibles
 
Land
Building and Improvements
Tenant Origination and Absorption Costs
Tenant Relationship
Total Consideration
$
11,939

$
126,855

$
2,075

$
677

$
141,546


8

Table of Contents

As of June 30, 2014, the purchase price allocations for the acquisition completed during the three months ended June 30, 2014 are preliminary pending the receipt of information necessary to complete the valuation of certain tangible and intangible assets and liabilities and therefore are subject to change.
The tenant origination and absorption costs intangible assets and tenant relationship intangible assets acquired in connection with these acquisitions have weighted-average amortization periods as of the date of acquisition of 12 years and 21 years, respectively.
For the three and six months ended June 30, 2014, the Company recognized $3.1 million and $4.3 million, respectively, of total revenues and $1.9 million and $2.3 million, respectively, of net income attributable to common stockholders from these properties.
Acquisition Earn-Out
On February 14, 2014, the Company acquired four skilled nursing facilities and two senior housing facilities (the “Nye Portfolio”) 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 master lease. To determine 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, 2014, based on the potential future performance of the Nye Portfolio, the contingent consideration liability is estimated at $3.3 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, 2014, the Company recorded an adjustment to the contingent consideration liability of $0.1 million and included this amount in Other (expense) income on the accompanying condensed consolidated statements of income (loss).
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, 2014
Property Type
 
Number of
Properties
 
Number of
Beds/Units
 
Total
Real Estate
at Cost
 
Accumulated
Depreciation
 
Total
Real Estate
Investments, Net
Skilled Nursing/Post-Acute
 
102

 
11,460

 
$
825,011

 
$
(145,207
)
 
$
679,804

Senior Housing
 
26

 
1,966

 
205,003

 
(15,955
)
 
189,048

Acute Care Hospitals
 
2

 
124

 
175,807

 
(8,422
)
 
167,385

 
 
130

 
13,550

 
1,205,821

 
(169,584
)
 
1,036,237

Corporate Level
 
 
 
 
 
254

 
(179
)
 
75

 
 
 
 
 
 
$
1,206,075

 
$
(169,763
)
 
$
1,036,312

As of December 31, 2013
Property Type
 
Number of
Properties
 
Number of
Beds/Units
 
Total
Real Estate
at Cost
 
Accumulated
Depreciation
 
Total
Real Estate
Investments, Net
Skilled Nursing/Post-Acute
 
96

 
10,826

 
$
737,188

 
$
(132,068
)
 
$
605,120

Senior Housing
 
23

 
1,518

 
153,247

 
(13,337
)
 
139,910

Acute Care Hospitals
 
2

 
124

 
175,807

 
(5,520
)
 
170,287

 
 
121

 
12,468

 
1,066,242

 
(150,925
)
 
915,317

Corporate Level
 
 
 
 
 
254

 
(153
)
 
101

 
 
 
 
 
 
$
1,066,496

 
$
(151,078
)
 
$
915,418



9

Table of Contents

 
June 30, 2014
 
December 31, 2013
Building and improvements
$
1,000,240

 
$
879,926

Furniture and equipment
57,891

 
50,567

Land improvements
4,393

 
4,392

Land
143,551

 
131,611

 
1,206,075

 
1,066,496

Accumulated depreciation
(169,763
)
 
(151,078
)
 
$
1,036,312

 
$
915,418

Operating Leases
As of June 30, 2014, all of the Company’s real estate properties were leased under triple-net operating leases with expirations ranging from seven to 18 years. As of June 30, 2014, 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 or other related parties. 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 $0.5 million and $1.6 million as of June 30, 2014 and December 31, 2013, respectively. As of June 30, 2014, 81 of the Company's 130 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 (currently the Genesis lease portfolio). 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 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, 2014, the future minimum rental payments from the Company’s properties under non-cancelable operating leases were as follows (in thousands):
July 1, 2014 through December 31, 2014
$
67,130

2015
139,039

2016
141,993

2017
145,642

2018
149,414

Thereafter
944,560

 
$
1,587,778

 
 
 

10

Table of Contents

5.LOANS RECEIVABLE AND OTHER INVESTMENTS
As of June 30, 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, 2014
 
Book Value as of June 30, 2014
 
Weighted Average Contractual Rate
 
Weighted Average Annualized Effective Rate
 
Maturity Date
Loans Receivable:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage
 
4

 
Skilled Nursing / Senior Housing / Acute Care Hospital
 
$
149,756

 
$
150,203

 
8.2
%
 
8.1
%
 
10/31/16 - 1/31/18
Construction
 
3

 
Acute Care Hospital / Memory Care
 
50,989

 
51,309

 
7.4
%
 
7.3
%
 
9/30/16 - 10/31/18
Mezzanine
 
1

 
Skilled Nursing
 
6,517

 
6,536

 
12.0
%
 
11.6
%
 
12/27/14
Pre-development
 
4

 
Senior Housing
 
2,709

 
2,818

 
9.0
%
 
8.0
%
 
8/16/15 - 5/8/17
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12

 
 
 
209,971

 
210,866

 
8.2
%
 
8.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Investments:
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Equity
 
5

 
Skilled Nursing / Senior Housing
 
14,711

 
14,921

 
14.2
%
 
14.1
%
 
NA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
17

 
 
 
$
224,682

 
$
225,787

 
8.6
%
 
8.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Chai Acquisition Option Exercise
On March 5, 2014, the Company exercised its option to purchase two skilled nursing facilities indirectly securing a related mezzanine loan for $24.5 million.
At the closing of the acquisition, $5.8 million of the sales proceeds were used to repay a portion of the mezzanine loan, resulting in the Company funding an additional $18.7 million for the acquisition and leaving $6.5 million outstanding under the mezzanine loan. The Company continues to have an option to purchase up to an additional $25.5 million of the remaining ten properties securing the mezzanine loan.

6.
DEBT
Mortgage Indebtedness
The Company’s mortgage notes payable consisted of the following (dollars in thousands):
Interest Rate Type
Book Value as of
June 30, 2014
 
Book Value as of
December 31, 2013
 
Weighted Average
Effective Interest Rate at
June 30, 2014
 
Maturity
Date
Fixed Rate
$
125,400

 
$
54,688

 
3.96
%
 
May 2031 - August 2051
Variable Rate

 
86,640

 
NA

 
NA
 
$
125,400

 
$
141,328

 
3.96
%
 
 
Mortgage Debt Refinancing. On January 21, 2014, the Company refinanced $44.8 million of existing variable rate mortgage indebtedness due August 2015 with mortgages guaranteed by the United States Department of Housing and Urban Development (“HUD”) at an interest rate of 4.25% with maturities between 2039 and 2044. In addition, on April 8, 2014, the Company refinanced of $11.6 million of variable rate mortgage indebtedness that was previously repaid with funds from its Revolving Credit Facility. This new $11.6 million mortgage loan is guaranteed by HUD, has an interest rate of 4.10% and matures in 2044. In connection with these refinancings, the Company wrote off $0.5 million in unamortized deferred financing costs during the six months ended June 30, 2014 and included this amount in loss on extinguishment of debt on the accompanying condensed consolidated statements of income (loss).
Mortgage Debt Repayment. On May 1, 2014, the Company repaid $29.8 million of existing variable rate mortgage indebtedness, having an interest rate of 5.0% per annum, with proceeds from its Revolving Credit Facility. In connection with this repayment, the Company wrote off $0.1 million in unamortized deferred financing costs during the six months ended

11

Table of Contents

June 30, 2014 and included this amount in loss on extinguishment of debt on the accompanying condensed consolidated statements of income (loss).
Senior Unsecured Notes
 5.5% Notes due 2021. On January 23, 2014, the Operating Partnership and Sabra Capital Corporation, wholly owned subsidiaries of the Company (the “Issuers”), completed an underwritten public offering of $350.0 million aggregate principal amount of 5.5% senior unsecured notes (the “2021 Notes”). The 2021 Notes were sold at par, resulting in gross proceeds of $350.0 million and net proceeds of approximately $340.8 million after deducting underwriting discounts and other offering expenses. The 2021 Notes accrue interest at a rate of 5.5% per annum payable semiannually on February 1 and August 1 of each year.
The 2021 Notes are redeemable at the option of the Issuers, in whole or in part, at any time, and from time to time, on or after February 1, 2017, at the redemption prices set forth in the supplemental indenture governing the 2021 Notes (the “2021 Notes Indenture”), plus accrued and unpaid interest to the applicable redemption date. In addition, prior to February 1, 2017, the Issuers may redeem all or a portion of the 2021 Notes at a redemption price equal to 100% of the principal amount of the 2021 Notes redeemed, plus a “make-whole” premium, plus accrued and unpaid interest to the applicable redemption date. At any time, or from time to time, on or prior to February 1, 2017, the Issuers may redeem up to 35% of the principal amount of the 2021 Notes, using the proceeds of specific kinds of equity offerings, at a redemption price of 105.5% of the principal amount to be redeemed, plus accrued and unpaid interest, if any, to the applicable redemption date. Assuming the 2021 Notes are not redeemed, the 2021 Notes mature on February 1, 2021.
5.375% Notes Due 2023. On May 23, 2013, the Issuers completed an underwritten public offering of $200.0 million aggregate principal amount of 5.375% senior unsecured notes (the “2023 Notes”). The 2023 Notes were sold at par, resulting in gross proceeds of $200.0 million and net proceeds of approximately $194.6 million after deducting underwriting discounts and other offering expenses. 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 2023 Notes are redeemable at the option of the Issuers, in whole or in part, at any time, and from time to time, on or after June 1, 2018, at the redemption prices set forth in the supplemental indenture governing the 2023 Notes (the “2023 Notes Indenture”), plus accrued and unpaid interest to the applicable redemption date. In addition, prior to June 1, 2018, the Issuers may redeem all or a portion of the 2023 Notes at a redemption price equal to 100% of the principal amount of the 2023 Notes redeemed, plus a “make-whole” premium, plus accrued and unpaid interest to the applicable redemption date. At any time, or from time to time, on or prior to June 1, 2016, the Issuers may redeem up to 35% of the principal amount of the 2023 Notes, using the proceeds of specific kinds of equity offerings, at a redemption price of 105.375% of the principal amount to be redeemed, plus accrued and unpaid interest, if any, to the applicable redemption date. Assuming the 2023 Notes are not redeemed, the 2023 Notes mature on June 1, 2023.
8.125% Notes due 2018. On October 27, 2010 and July 26, 2012, the Issuers issued $225.0 million and $100.0 million aggregate principal amount of 8.125% senior unsecured notes (the “2018 Notes”), respectively. Pursuant to exchange offers completed on March 14, 2011 and November 14, 2012, the Issuers exchanged the 2018 Notes that were issued in October 2010 and July 2012 for substantially identical 2018 Notes registered under the Securities Act of 1933, as amended. The 2018 Notes accrued interest at a rate of 8.125% per annum payable semiannually on May 1 and November 1 of each year.
On June 24, 2013, pursuant to the terms of the indenture governing the 2018 Notes (the “2018 Notes Indenture”), the Issuers redeemed $113.8 million in aggregate principal amount of the then-outstanding 2018 Notes, representing 35% of the aggregate principal amount of the 2018 Notes outstanding. The 2018 Notes were redeemed at a redemption price of 108.125% of the principal amount redeemed, plus accrued and unpaid interest up to the redemption date. The redemption resulted in a $9.8 million loss on extinguishment of debt, including $9.3 million in payments made to noteholders for early redemption and $0.5 million of write-offs associated with unamortized deferred financing costs and issuance premium.
On January 8, 2014, the Company commenced a cash tender offer with respect to any and all of the outstanding $211.3 million of the 2018 Notes. 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 2018 Notes Indenture, 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 (loss).

12

Table of Contents

The obligations under the 2021 Notes and 2023 Notes (collectively, 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 10, “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”) contain restrictive covenants that, among other things, restrict the ability of Sabra, the Issuers and their restricted subsidiaries to: (i) incur or guarantee additional indebtedness; (ii) incur or guarantee secured indebtedness; (iii) pay dividends or distributions on, or redeem or repurchase, their capital stock; (iv) make certain investments or other restricted payments; (v) sell assets; (vi) create liens on their assets; (vii) enter into transactions with affiliates; (viii) merge or consolidate or sell all or substantially all of their assets; and (ix) create restrictions on the ability of Sabra’s restricted subsidiaries to pay dividends or other amounts to Sabra. Such limitations on distributions also include a limitation on the extent of allowable cumulative distributions made not to exceed the greater of (a) the sum of (x) 95% of cumulative Adjusted Funds from Operations and (y) the net proceeds from the issuance of common and preferred equity and (b) the minimum amount of distributions required for the Company to maintain its REIT status. The Senior Notes Indentures also provide for customary events of default, including, but not limited to, the failure to make payments of interest or premium, if any, on, or principal of, the Senior Notes, the failure to comply with certain covenants and agreements specified in the Senior Notes Indentures for a period of time after notice has been provided, the acceleration of other indebtedness resulting from the failure to pay principal on such other indebtedness prior to its maturity, and certain events of insolvency. If any event of default occurs, the principal of, premium, if any, and accrued interest on all the then-outstanding Senior Notes may become due and payable immediately. The Company was in compliance with all applicable financial covenants under the Senior Notes Indentures related to the Senior Notes outstanding as of June 30, 2014.
Revolving Credit Facility
On July 29, 2013, the Operating Partnership entered into an amended and restated secured revolving credit facility (the “Revolving Credit Facility”) with certain lenders as set forth in the related credit agreement and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (each as defined in such credit agreement). The Revolving Credit Facility provides for a borrowing capacity of $375.0 million and includes an accordion feature that allows the Operating Partnership to increase the borrowing availability by up to an additional $225.0 million, subject to terms and conditions. The Revolving Credit Facility is secured by pledges of equity by the Company's wholly-owned subsidiaries that own certain of the Company's real estate assets. Borrowing availability under the Revolving Credit Facility is subject to a borrowing base calculation based on, among other factors, the mortgageability cash flow (as such term is defined in the related credit agreement). The Revolving Credit Facility has a maturity date of July 29, 2016, and includes a one year extension option. As of June 30, 2014, there were no amounts outstanding under the Company’s Revolving Credit Facility, and the Company had $289.5 million available for borrowing.
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) a base rate determined as the greater of (i) the federal funds rate plus 0.5%, (ii) the prime rate, and (iii) one-month LIBOR plus 1.0% (referred to as the “Base Rate”). The applicable percentage for borrowings will vary based on the Consolidated Leverage Ratio, as defined in the Revolving Credit Facility, and will range from 2.50% to 3.50% per annum for LIBOR based borrowings and 1.50% to 2.50% per annum for borrowings at the Base Rate. As of June 30, 2014, the interest rate on the Revolving Credit Facility was 3.66%. In addition, the Operating Partnership is required to pay a facility fee to the lenders equal to between 0.35% and 0.50% per annum based on the amount of unused borrowings under the Revolving Credit Facility. During the three and six months ended June 30, 2014, the Company incurred $0.8 million and $2.0 million, respectively, in interest expense on amounts outstanding under the Revolving Credit Facility. During the three and six months ended June 30, 2014, the Company incurred $0.4 million and $0.6 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 covenants that include restrictions or limitations on the ability to make acquisitions and other investments, make distributions, incur additional indebtedness, engage in non-healthcare related business activities, enter into transactions with affiliates and sell or otherwise transfer certain assets as well as customary events of default. The 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, 2014, the Company was in compliance with all applicable financial covenants under the Revolving Credit Facility.

13

Table of Contents

Interest Expense
The Company incurred interest expense of $11.0 million and $22.1 million during the three and six months ended June 30, 2014, respectively, and $10.1 million and $20.1 million during the three and six months ended June 30, 2013, respectively. Interest expense includes deferred financing costs amortization of $0.9 million and $1.9 million for the three and six months ended June 30, 2014, respectively, and $0.8 million and $1.6 million for the three and six months ended June 30, 2013, respectively. As of June 30, 2014 and December 31, 2013, the Company had $9.7 million and $4.7 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, 2014 (in thousands): 
 
 
Mortgage
Indebtedness 
 
Senior Notes
 
Total
July 1, 2014 through December 31, 2014
 
$
1,377

 
$

 
$
1,377

2015
 
2,823

 

 
2,823

2016
 
2,917

 

 
2,917

2017
 
3,013

 

 
3,013

2018
 
3,114

 

 
3,114

Thereafter
 
112,156

 
550,000

 
662,156

 
 
$
125,400

 
$
550,000

 
$
675,400



7.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, the Revolving Credit Facility, accounts payable and accrued liabilities are reasonable estimates of fair value because of the short-term maturities of these instruments. Fair values for other financial instruments are derived as follows:
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.
Senior Notes: The fair values of the Senior Notes were determined using third-party market quotes derived from orderly trades.
Mortgage indebtedness: The fair values of the Company’s 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.

14

Table of Contents

The following are the face values, carrying amounts and fair values of the Company’s financial instruments as of June 30, 2014 and December 31, 2013 whose carrying amounts do not approximate their fair value (in thousands):
 
June 30, 2014
 
December 31, 2013
 
Face
Value (1)
 
Carrying
Amount (2)
 
Fair
Value
 
Face
Value (1)
 
Carrying
Amount
(2)
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Loans receivable
$
209,971

 
$
210,866

 
$
209,187

 
$
176,558

 
$
177,509

 
$
176,985

Preferred equity investments
14,711

 
14,921

 
14,975

 
7,695

 
7,784

 
7,950

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Senior Notes
550,000

 
550,000

 
572,500

 
411,250

 
414,402

 
421,122

Mortgage indebtedness
125,400

 
125,400

 
108,943

 
141,328

 
141,328

 
130,622

 
(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, 2014 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
$
209,187

 
$

 
$

 
$
209,187

Preferred equity investments
14,975

 

 

 
14,975

Financial liabilities:
 
 
 
 
 
 
 
Senior Notes
572,500

 

 
572,500

 

Mortgage indebtedness
108,943

 

 

 
108,943

Disclosure of the fair value of financial instruments is based on pertinent information available to the Company at the applicable dates and requires a significant amount of judgment. Despite increased capital market and credit market activity, transaction volume for certain financial instruments remains relatively low. This has made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of fair value at a future date could be materially different.
During the six months ended June 30, 2014, 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:
 
 
 
 
 
 
 
Contingent consideration liability
$
4,500

 
$

 
$

 
$
4,500

The Company’s contingent consideration liability is the result of two acquisitions of real estate properties (see Note 3, “Recent Real Estate Acquisitions” for further details regarding the new contingent liability). 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, then developed probability-weighted scenarios of the potential future performance of the tenant and the resulting payout from these scenarios. As of June 30, 2014, the total contingent consideration liability was valued at $4.5 million. The following reconciliation provides the details of activity during the six months ended June 30, 2014 for financial instruments recorded at fair value using Level 3 inputs:


15

Table of Contents

Balance as of December 31, 2013
 
$
7,500

New contingent liability
 
3,200

Decrease in contingent liability
 
(960
)
Payment of contingent liability
 
(5,240
)
Balance as of June 30, 2014
 
$
4,500

 
 
 
A corresponding amount equal to the decrease in contingent liability was included as other income on the accompanying condensed consolidated statements of income (loss) for the three and six months ended June 30, 2014.

8.
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, 2014, 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, 2014:
 
Declaration Date
 
Record Date
 
Amount Per Share
 
Dividend Payable Date
January 23, 2014
 
February 15, 2014
 
$
0.36

 
February 28, 2014
May 5, 2014
 
May 15, 2014
 
0.38

 
May 30, 2014
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.
During the six months ended June 30, 2014, 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 2013 Bonus Plan pursuant to an election by certain participants to receive their bonus payment in shares of the Company's common stock. During the six months ended June 30, 2014, the Company issued 11,515 shares of common stock as a result of stock options exercised.
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, 2014, pursuant to advance elections made by certain participants, the Company paid $5.1 million in tax withholding obligations 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 March 18, 2013, the Company entered into a sales agreement (each, a “Sales Agreement”) with each of Barclays Capital Inc., Cantor Fitzgerald & Co., Credit Agricole Securities (USA) Inc., RBC Capital Markets, LLC, RBS Securities Inc. and Wells Fargo Securities, LLC (individually, a “Sales Agent” and together, the “Sales Agents”) to sell shares of its common stock having aggregate gross proceeds of up to $100.0 million (the “ATM Shares”) from time to time through the Sales Agents.
Pursuant to the terms of the Sales Agreements, the ATM 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 the Company's common stock or to or through a market maker. In addition, with the Company's prior consent, the Sales Agents may also sell the ATM Shares in privately negotiated transactions. The Company will pay each Sales Agent a commission of up to 2% of the gross proceeds from the sales of ATM Shares sold pursuant to the applicable Sales Agreement.
During the three months ended June 30, 2014, the Company sold 0.1 million ATM Shares, at an average price of $27.77 per share, generating gross proceeds of approximately $1.9 million, before $39,000 of commissions. During the six months ended June 30, 2014, the Company sold 0.2 million ATM Shares, at an average price of $27.71 per share, generating gross proceeds of approximately $6.6 million, before $0.1 million of commissions. As of June 30, 2014, the Company had $55.2 million available under the ATM Program.

9.
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, 2014 and 2013 (in thousands, except share and per share amounts):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Numerator
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
 
$
12,241

 
$
(3,185
)
 
$
2,377

 
$
6,068

 
 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
 
Basic weighted average common shares
 
43,655,292

 
37,357,112

 
41,324,795

 
37,321,813

Dilutive stock options and restricted stock units
 
441,005

 

 
466,675

 
467,991

 
 
 
 
 
 
 
 
 
Diluted weighted average common shares
 
44,096,297

 
37,357,112

 
41,791,470

 
37,789,804

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders, per:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic common share
 
$
0.28

 
$
(0.09
)
 
$
0.06

 
$
0.16

 
 
 
 
 
 
 
 
 
Diluted common share
 
$
0.28

 
$
(0.09
)
 
$
0.06

 
$
0.16

Certain of our outstanding 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, 2014, approximately 9,000 and 10,000 restricted stock units, respectively, were not included because they were considered anti-dilutive. During the three months ended June 30, 2013, all restricted stock units and stock options were not included because they were anti-dilutive. During the six months ended June 30, 2013, approximately 5,000 restricted stock units 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 and during the six months ended June 30, 2013.
10.SUMMARIZED CONDENSED CONSOLIDATING INFORMATION
In connection with the offerings of the Senior Notes by the Issuers and the Issuers’ previous offerings of the 2018 Notes (which were no longer outstanding as of June 30, 2014), 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

16


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.
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:

17



CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2014
(dollars in thousands, except per share amounts)
(unaudited)
 
 
Parent
Company
 
Issuers
 
Combined
Guarantor
Subsidiaries
 
Combined Non-
Guarantor
Subsidiaries
 
Elimination
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Real estate investments, net of accumulated depreciation
$
75

 
$

 
$
844,136

 
$
192,101

 
$

 
$
1,036,312

Loans receivable and other investments, net

 

 
225,787

 

 

 
225,787

Cash and cash equivalents
12,209

 

 

 
2,876

 

 
15,085

Restricted cash

 

 
160

 
5,965

 

 
6,125

Deferred tax assets
24,212

 

 

 

 

 
24,212

Prepaid expenses, deferred financing costs and other assets
985

 
13,466

 
45,875

 
8,664

 

 
68,990

Intercompany
243,557

 
369,569

 

 

 
(613,126
)
 

Investment in subsidiaries
403,710

 
580,020

 
9,326

 

 
(993,056
)
 

Total assets
$
684,748

 
$
963,055

 
$
1,125,284

 
$
209,606

 
$
(1,606,182
)
 
$
1,376,511

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Mortgage notes
$

 
$

 
$

 
$
125,400

 
$

 
$
125,400

Secured revolving credit facility

 

 

 

 

 

Senior unsecured notes

 
550,000

 

 

 

 
550,000

Accounts payable and accrued liabilities
4,698

 
9,345

 
5,691

 
1,350

 

 
21,084

Tax liability
24,212

 

 

 

 

 
24,212

Intercompany

 

 
598,992

 
14,134

 
(613,126
)
 

Total liabilities
28,910

 
559,345

 
604,683

 
140,884

 
(613,126
)
 
720,696

Equity
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized, 5,750,000 shares issued and outstanding as of June 30, 2014
58

 

 

 

 

 
58

Common stock, $.01 par value; 125,000,000 shares authorized, 47,263,151 shares issued and outstanding as of June 30, 2014
473

 

 

 

 

 
473

Additional paid-in capital
760,258

 
280,220

 
309,266

 
33,509

 
(622,995
)
 
760,258

Cumulative distributions in excess of net income

(104,951
)
 
123,490

 
211,335

 
35,236

 
(370,061
)
 
(104,951
)
Total Sabra Health Care REIT, Inc. stockholders' equity
655,838

 
403,710

 
520,601

 
68,745

 
(993,056
)
 
655,838

Noncontrolling interests

 

 

 
(23
)
 

 
(23
)
Total equity
655,838

 
403,710

 
520,601

 
68,722

 
(993,056
)
 
655,815

Total liabilities and equity
$
684,748

 
$
963,055

 
$
1,125,284

 
$
209,606

 
$
(1,606,182
)
 
$
1,376,511


18



CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2013
(dollars in thousands, except per share amounts)
 
 
Parent
Company
 
Issuers
 
Combined
Guarantor
Subsidiaries
 
Combined  Non-
Guarantor
Subsidiaries
 
Elimination
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Real estate investments, net of accumulated depreciation
$
101

 
$

 
$
751,771

 
$
163,546

 
$

 
$
915,418

Loans receivable and other investments, net

 

 
185,293

 

 

 
185,293

Cash and cash equivalents
3,551

 

 

 
757

 

 
4,308

Restricted cash

 

 
121

 
5,231

 

 
5,352

Deferred tax assets
24,212

 

 

 

 

 
24,212

Prepaid expenses, deferred financing costs and other assets
1,217

 
9,207

 
46,694

 
6,134

 

 
63,252

Intercompany
63,125

 
270,194

 

 
42,637

 
(375,956
)
 

Investment in subsidiaries
398,640

 
537,505

 
25,205

 

 
(961,350
)
 

Total assets
$
490,846

 
$
816,906

 
$
1,009,084

 
$
218,305

 
$
(1,337,306
)
 
$
1,197,835

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Mortgage notes
$

 
$

 
$

 
$
141,328

 
$

 
$
141,328

Secured revolving credit facility

 

 
135,500

 

 

 
135,500

Senior unsecured notes

 
414,402

 

 

 

 
414,402

Accounts payable and accrued liabilities
6,470

 
3,864

 
11,008

 
887

 

 
22,229

Tax liability
24,212

 

 

 

 

 
24,212

Intercompany

 

 
375,956

 

 
(375,956
)
 

Total liabilities
30,682

 
418,266

 
522,464

 
142,215

 
(375,956
)
 
737,671

Equity
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized, 5,750,000 shares issued and outstanding as of December 31, 2013
58

 

 

 

 

 
58

Common stock, $.01 par value; 125,000,000 shares authorized, 38,788,745 shares issued and outstanding as of December 31, 2013
388

 

 

 

 

 
388

Additional paid-in capital
534,639

 
291,226

 
323,574

 
48,507

 
(663,307
)
 
534,639

Cumulative distributions in excess of net income
(74,921
)
 
107,414

 
163,046

 
27,583

 
(298,043
)
 
(74,921
)
Total Sabra Health Care REIT, Inc. stockholders' equity
460,164

 
398,640

 
486,620

 
76,090

 
(961,350
)
 
460,164

Total liabilities and equity
$
490,846

 
$
816,906

 
$
1,009,084

 
$
218,305

 
$
(1,337,306
)
 
$
1,197,835



19



CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended June 30, 2014
(dollars in thousands, except per share amounts)
(unaudited)
 
 
Parent Company
 
Issuers
 
Combined
Guarantor
Subsidiaries
 
Combined Non-
Guarantor
Subsidiaries
 
Elimination
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Rental income
$

 
$

 
$
29,795

 
$
7,690

 
$

 
$
37,485

Interest and other income
3

 

 
4,806

 
679

 

 
5,488

Total revenues
3

 

 
34,601

 
8,369

 

 
42,973

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
13

 

 
7,725

 
2,017

 

 
9,755

Interest

 
7,964

 
1,613

 
1,417

 

 
10,994

General and administrative
3,869

 
1

 
3,483

 
573

 

 
7,926

Total expenses
3,882

 
7,965

 
12,821

 
4,007

 

 
28,675

 
 
 
 
 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
 
 
 
 
Loss on extinguishment of debt

 
(70
)
 

 
(92
)
 

 
(162
)
Other income (expense)

 

 
660

 

 

 
660

 
 
 
 
 
 
 
 
 
 
 
 
Total other (expense) income

 
(70
)
 
660

 
(92
)
 

 
498

 
 
 
 
 
 
 
 
 
 
 
 
Income in subsidiary
18,680

 
26,715

 
1,078

 

 
(46,473
)
 

 
 
 
 
 
 
 
 
 
 
 
 
Net income
14,801

 
18,680

 
23,518

 
4,270

 
(46,473
)
 
14,796

 
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interests

 

 

 
5

 

 
5

 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Sabra Health Care REIT, Inc.
14,801

 
18,680

 
23,518

 
4,275

 
(46,473
)
 
14,801

 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock dividends
(2,560
)
 

 

 

 

 
(2,560
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
12,241

 
$
18,680

 
$
23,518

 
$
4,275

 
$
(46,473
)
 
$
12,241

 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders, per:
 
 
 
 
 
 
 
 
 
 
 
Basic common share
 
 
 
 
 
 
 
 
 
 
$
0.28

Diluted common share
 
 
 
 
 
 
 
 
 
 
$
0.28

Weighted-average number of common shares outstanding, basic
 
 
 
 
 
 
 
 
 
 
43,655,292

Weighted-average number of common shares outstanding, diluted
 
 
 
 
 
 
 
 
 
 
44,096,297


20


CONDENSED CONSOLIDATING STATEMENT OF (LOSS) INCOME
For the Three Months Ended June 30, 2013
(dollars in thousands, except per share amounts)
(unaudited)

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

 
$

 
$
24,219

 
$
7,299

 
$

 
$
31,518

Interest and other income
16

 

 
741

 

 

 
757

Total revenues
16

 

 
24,960

 
7,299

 

 
32,275

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
13

 

 
6,302

 
1,907

 

 
8,222

Interest

 
7,722

 
639

 
1,782

 

 
10,143

General and administrative
3,091

 
2

 
299

 
30

 

 
3,422

Total expenses
3,104

 
7,724

 
7,240

 
3,719

 

 
21,787

 
 
 
 
 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
 
 
 
 
Loss on extinguishment of debt

 
(9,750
)
 

 

 

 
(9,750
)
Other income (expense)

 

 
(1,400
)
 

 

 
(1,400
)
 
 
 
 
 
 
 
 
 
 
 
 
Total other (expense) income

 
(9,750
)
 
(1,400
)
 

 

 
(11,150
)
 
 
 
 
 
 
 
 
 
 
 
 
Income in subsidiary
2,426

 
19,900

 
930

 

 
(23,256
)
 

 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
(662
)
 
2,426

 
17,250

 
3,580

 
(23,256
)
 
(662
)
 
 
 
 
 
 
 
 
 
 
 
 
Preferred dividends
(2,523
)
 

 

 

 

 
(2,523
)
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income attributable to common stockholders
$
(3,185
)
 
$
2,426

 
$
17,250

 
$
3,580

 
$
(23,256
)
 
$
(3,185
)
 
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders, per:
 
 
 
 
 
 
 
 
 
 
 
Basic common share
 
 
 
 
 
 
 
 
 
 
$
(0.09
)
Diluted common share
 
 
 
 
 
 
 
 
 
 
$
(0.09
)
Weighted-average number of common shares outstanding, basic
 
 
 
 
 
 
 
 
 
 
37,357,112

Weighted-average number of common shares outstanding, diluted
 
 
 
 
 
 
 
 
 
 
37,357,112

















21


CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Six Months Ended June 30, 2014
(dollars in thousands, except per share amounts)
(unaudited)


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

 
$

 
$
58,572

 
$
15,006

 
$

 
$
73,578

Interest and other income
7

 

 
8,898

 
1,340

 

 
10,245

Total revenues
7

 

 
67,470

 
16,346

 

 
83,823

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
25

 

 
15,146

 
3,934

 

 
19,105

Interest

 
15,754

 
3,488

 
2,886

 

 
22,128

General and administrative
8,559

 
2

 
3,928

 
1,290

 

 
13,779

Total expenses
8,584

 
15,756

 
22,562

 
8,110

 

 
55,012

 
 
 
 
 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
 
 
 
 
Loss on extinguishment of debt

 
(21,689
)
 

 
(607
)
 

 
(22,296
)
Other income (expense)

 

 
960

 

 

 
960

 
 
 
 
 
 
 
 
 
 
 
 
Total other (expense) income

 
(21,689
)
 
960

 
(607
)
 

 
(21,336
)
 
 
 
 
 
 
 
 
 
 
 
 
Income in subsidiary
16,075

 
53,520

 
2,419

 

 
(72,014
)
 

 
 
 
 
 
 
 
 
 
 
 
 
Net income
7,498

 
16,075

 
48,287

 
7,629

 
(72,014
)
 
7,475

 
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interests

 

 

 
23

 

 
23

 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Sabra Health Care REIT, Inc.
7,498

 
16,075

 
48,287

 
7,652

 
(72,014
)
 
7,498

 
 
 
 
 
 
 
 
 
 
 
 
Preferred dividends
(5,121
)
 

 

 

 

 
(5,121
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
2,377


$
16,075

 
$
48,287


$
7,652

 
$
(72,014
)
 
$
2,377

 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders, per:
 
 
 
 
 
 
 
 
 
 
 
Basic common share
 
 
 
 
 
 
 
 
 
 
$
0.06

Diluted common share
 
 
 
 
 
 
 
 
 
 
$
0.06

Weighted-average number of common shares outstanding, basic
 
 
 
 
 
 
 
 
 
 
41,324,795

Weighted-average number of common shares outstanding, diluted
 
 
 
 
 
 
 
 
 
 
41,791,470











22


CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Six Months Ended June 30, 2013
(dollars in thousands, except per share amounts)
(unaudited)

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

 
$

 
$
48,353

 
$
14,640

 
$

 
$
62,993

Interest and other income
69

 

 
1,235

 

 

 
1,304

Total revenues
69

 

 
49,588

 
14,640

 

 
64,297

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
25

 

 
12,617

 
3,826

 

 
16,468

Interest

 
14,438

 
1,979

 
3,728

 

 
20,145

General and administrative
7,675

 
4

 
412

 
48

 

 
8,139

Total expenses
7,700

 
14,442

 
15,008

 
7,602

 

 
44,752

 
 
 
 
 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
 
 
 
 
Loss on extinguishment of debt

 
(9,750
)
 

 

 

 
(9,750
)
Other income (expense)

 

 
(900
)
 

 

 
(900
)
 
 
 
 
 
 
 
 
 
 
 
 
Total other (expense) income

 
(9,750
)
 
(900
)
 

 

 
(10,650
)
 
 
 
 
 
 
 
 
 
 
 
 
Income in subsidiary
16,526

 
40,718

 
1,909

 

 
(59,153
)
 

 
 
 
 
 
 
 
 
 
 
 
 
Net income
8,895

 
16,526

 
35,589

 
7,038

 
(59,153
)
 
8,895

 
 
 
 
 
 
 
 
 
 
 
 
Preferred dividends
(2,827
)
 

 

 

 

 
(2,827
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
6,068

 
$
16,526

 
$
35,589

 
$
7,038

 
$
(59,153
)
 
$
6,068

 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders, per:
 
 
 
 
 
 
 
 
 
 
 
Basic common share
 
 
 
 
 
 
 
 
 
 
$
0.16

Diluted common share
 
 
 
 
 
 
 
 
 
 
$
0.16

Weighted-average number of common shares outstanding, basic
 
 
 
 
 
 
 
 
 
 
37,321,813

Weighted-average number of common shares outstanding, diluted
 
 
 
 
 
 
 
 
 
 
37,789,804



23



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2014
(in thousands)
(unaudited)

Parent Company
 
Issuers
 
Combined
Guarantor
Subsidiaries
 
Combined  Non-
Guarantor
Subsidiaries
 
Elimination
 
Consolidated
Net cash (used in) provided by operating activities
$
(1,746
)
 
$

 
$

 
$
30,667

 
$

 
$
28,921

Cash flows from investing activities:

 

 

 

 

 

Acquisitions of real estate

 

 
(108,650
)
 
(9,739
)
 

 
(118,389
)
Origination of note receivable

 

 
(38,373
)
 

 

 
(38,373
)
Preferred equity investment

 

 
(6,458
)
 

 

 
(6,458
)
Additions to real estate

 

 
(783
)
 

 

 
(783
)
Investment in Subsidiary
(12,122
)
 
(12,122
)
 

 

 
24,244

 

Intercompany financing
(160,248
)
 
(289,776
)
 

 

 
450,024

 

Net cash used in investing activities
(172,370
)
 
(301,898
)
 
(154,264
)
 
(9,739
)
 
474,268

 
(164,003
)
Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of senior unsecured notes

 
350,000

 

 



 
350,000

Principal payments on senior unsecured notes

 
(211,250
)
 

 

 

 
(211,250
)
Proceeds from secured revolving credit facility

 

 
80,000

 

 

 
80,000

Payments on secured revolving credit facility

 

 
(215,500
)
 

 

 
(215,500
)
Proceeds from mortgage notes

 

 

 
57,703

 

 
57,703

Principal payments on mortgage notes

 

 

 
(87,733
)
 

 
(87,733
)
Payments of deferred financing costs

 
(9,222
)
 
(12
)
 
(901
)
 

 
(10,135
)
Issuance of common stock
219,899

 

 

 

 

 
219,899

Dividends paid on common and preferred stock
(37,125
)
 

 

 

 

 
(37,125
)
Contribution from Parent

 
12,122

 

 
12,122

 
(24,244
)
 

Intercompany financing

 
160,248

 
289,776

 

 
(450,024
)
 

Net cash provided by (used in) financing activities
182,774

 
301,898

 
154,264

 
(18,809
)
 
(474,268
)
 
145,859

Net increase in cash and cash equivalents
8,658

 

 

 
2,119

 

 
10,777

Cash and cash equivalents, beginning of period
3,551

 

 

 
757

 

 
4,308

Cash and cash equivalents, end of period
$
12,209

 
$

 
$

 
$
2,876

 
$

 
$
15,085



24



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2013
(in thousands)
(unaudited)

 
Parent Company
 
Issuers
 
Combined
Guarantor
Subsidiaries
 
Combined  Non-
Guarantor
Subsidiaries
 
Elimination
 
Consolidated
Net cash provided by operating activities
$
12,200

 
$

 
$

 
$
10,786

 
$

 
$
22,986

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Acquisitions of real estate

 

 
(6,175
)
 

 

 
(6,175
)
Origination of note receivable

 

 
(25,244
)
 

 

 
(25,244
)
Preferred equity investment

 

 
(5,144
)
 

 

 
(5,144
)
Additions to real estate

 

 
(226
)
 

 

 
(226
)
Net proceeds from the sale of real estate

 

 

 
2,208

 

 
2,208

Investment in Subsidiary

 

 

 

 

 

Distribution from Subsidiary
1,920

 
1,920

 

 

 
(3,840
)
 

Intercompany financing
(46,072
)
 
(127,163
)
 

 

 
173,235

 

Net cash (used in) provided by investing activities
(44,152
)
 
(125,243
)
 
(36,789
)
 
2,208

 
169,395

 
(34,581
)
Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of senior unsecured notes

 
200,000

 

 

 

 
200,000

Principal payments on senior unsecured notes

 
(113,750
)
 

 

 

 
(113,750
)
Payments on secured revolving credit facility

 

 
(92,500
)
 

 

 
(92,500
)
Principal payments on mortgage notes

 

 

 
(9,193
)
 

 
(9,193
)
Payments of deferred financing costs

 
(5,159
)
 
(82
)
 
(137
)
 

 
(5,378
)
Issuance of common stock
(2,851
)
 

 

 

 

 
(2,851
)
Issuance of preferred stock
138,345

 

 

 

 

 
138,345

Dividends paid
(27,409
)
 

 

 

 

 
(27,409
)
Distribution to Parent

 
(1,920
)
 

 
(1,920
)
 
3,840

 

Intercompany financing

 
46,072

 
129,371

 
(2,208
)
 
(173,235
)
 

Net cash provided by (used in) financing activities
108,085

 
125,243

 
36,789

 
(13,458
)
 
(169,395
)
 
87,264

Net increase (decrease) in cash and cash equivalents
76,133

 

 

 
(464
)
 

 
75,669

Cash and cash equivalents, beginning of period
15,075

 

 

 
2,026

 

 
17,101

Cash and cash equivalents, end of period
$
91,208

 
$

 
$

 
$
1,562

 
$

 
$
92,770

 
 
 
 
 
 
 
 
 
 
 
 


25

Table of Contents

11.PRO FORMA FINANCIAL INFORMATION
The following table summarizes, on an unaudited pro forma basis, the consolidated results of operations of the Company for the three and six months ended June 30, 2014 and 2013. The Company acquired six skilled nursing facilities and three senior housing facilities during the six months ended June 30, 2014. The following unaudited pro forma information has been prepared to give effect to these acquisitions as if these acquisitions occurred on January 1, 2013. This pro forma information does not purport to represent what the actual results of operations of the Company would have been had these acquisitions occurred on January 1, 2013, nor does it purport to predict the results of operations for future periods (in thousands, except share and per share amounts):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Revenues
 
$
43,142

 
$
35,532

 
$
86,011

 
$
70,812

Depreciation and amortization
 
9,801

 
9,237

 
19,659

 
18,498

Net income (loss) attributable to common stockholders
 
12,497

 
(1,075
)
 
4,420

 
10,144

 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders, per:
 
 
 
 
 
 
 
 
Basic common share
 
$
0.29

 
$
(0.03
)
 
$
0.11

 
$
0.27

Diluted common share
 
$
0.28

 
$
(0.03
)
 
$
0.11

 
$
0.27

 
 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding, basic
 
43,655,292

 
37,357,112

 
41,324,795

 
37,321,813

Weighted-average number of common shares outstanding, diluted
 
44,096,297

 
37,357,112

 
41,791,470

 
37,789,804


12.COMMITMENTS AND CONTINGENCIES

Environmental

As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities. Compliance with existing environmental laws is not expected to have a material adverse effect on the Company’s financial condition and results of operations as of June 30, 2014.

Separation and REIT Conversion Merger
On May 24, 2010, Old Sun announced its intention to restructure its business by separating its real estate assets and its operating assets into two separate publicly traded companies, Sabra and SHG Services Inc. (which was then renamed “Sun Healthcare Group, Inc.” or “Sun”). In order to effect the restructuring, Old Sun distributed to its stockholders on a pro rata basis all of the outstanding shares of common stock of Sun (this distribution is referred to as the “Separation”), together with an additional cash distribution. Immediately following the Separation, Old Sun merged with and into Sabra, with Sabra surviving the merger and Old Sun stockholders receiving shares of Sabra common stock in exchange for their shares of Old Sun common
stock (this merger is referred to as the “REIT Conversion Merger”). Effective November 15, 2010, the Separation and REIT Conversion Merger were completed and Sabra and Sun began operations as separate companies.
Following the Separation, Sun, through its subsidiaries, continued the business and operations of Old Sun and its subsidiaries. Sabra did not operate prior to the Separation. Immediately following the Separation, subsidiaries of Sabra owned substantially all of Old Sun’s owned real property. The owned real property held by subsidiaries of Sabra following the Separation includes fixtures and certain personal property associated with the real property. The historical consolidated financial statements of Old Sun became the historical consolidated financial statements of Sun at the time of the Separation. At the time of the Separation, the balance sheet of Sabra included the owned real property and mortgage indebtedness to third parties on the real property as well as indebtedness incurred by Sabra prior to completion of the Separation. The statements of income and cash flows of Sabra consist solely of its operations after the Separation. The Separation was accounted for as a reverse spinoff. Accordingly, Sabra’s assets and liabilities are recorded at the historical carrying values of Old Sun.

26

Table of Contents

In connection with the Separation and REIT Conversion Merger, any liability arising from or relating to legal proceedings involving the Company’s real estate investments has been assumed by the Company and the Company will indemnify Sun (and its subsidiaries, directors, officers, employees and agents and certain other related parties) against any losses arising from or relating to such legal proceedings. In addition, pursuant to a distribution agreement entered into among Old Sun, the Company and Sun in connection with the Separation and REIT Conversion Merger, Sun has agreed to indemnify the Company (and the Company’s subsidiaries, directors, officers, employees and agents and certain other related parties) for any liability arising from or relating to legal proceedings involving Old Sun’s healthcare business prior to the Separation, and, pursuant to the lease agreements between the Company and subsidiaries of Sun, the tenants agree to indemnify the Company for any liability arising from operations at the real property leased from the Company.
Immediately prior to the Separation, Old Sun was a party to various legal actions and administrative proceedings, including various claims arising in the ordinary course of its healthcare business, which are subject to the indemnities to be provided by Sun to the Company. While these actions and proceedings are not believed to be material, individually or in the aggregate, the ultimate outcome of these matters cannot be predicted. The resolution of any such legal proceedings, either individually or in the aggregate, could have a material adverse effect on Sun’s business, financial position or results of operations, which, in turn, could have a material adverse effect on the Company’s business, financial position or results of operations if Sun or its subsidiaries are unable to meet their indemnification obligations.
For income tax purposes, the Company is the surviving taxpayer of the Separation. Accordingly, tax positions taken by Old Sun prior to the Separation remained the Company’s obligations after the Separation. However, under an agreement with Sun relating to tax allocation matters, Sun is responsible for and will indemnify the Company against, among other things, federal, state and local taxes (including penalties and interest) related to periods prior to the Separation to the extent the deferred tax assets allocated to the Company as part of the Separation are not sufficient and/or cannot be utilized to satisfy these taxes. After the 2010 tax year, the Company and Sun have agreed, to the extent allowable by applicable law, to allocate all net operating loss attributes generated in prior years to Sun. In addition, Sun will generally have the right to control the conduct and disposition of any tax audits or other proceedings with regard to such periods, and will be entitled to any refund or credit for such periods.
Effective December 1, 2012, Sun was acquired by Genesis HealthCare LLC (“Genesis”). As a result of its acquisition of Sun, Genesis became successor to the obligations of Sun described above.
Legal Matters
From time to time, the Company is party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings where the likelihood of a loss contingency is reasonably possible and the amount or range of reasonably possible losses is material to the Company's results of operations, financial condition or cash flows.

13.
SUBSEQUENT EVENTS
The Company evaluates subsequent events up until the date the condensed consolidated financial statements are issued.
Dividend Declaration
On July 30, 2014, the Company announced that its board of directors declared a quarterly cash dividend of $0.38 per share of common stock. The dividend will be paid on August 29, 2014 to common stockholders of record as of the close of business on August 15, 2014.
On July 30, 2014, the Company also announced that its board of directors declared a quarterly cash dividend of $0.4453125 per share of Series A Preferred Stock. The dividend will be paid on August 29, 2014 to preferred stockholders of record as of the close of business on August 15, 2014.
Revolving Credit Facility
As of July 30, 2014, the Company received over $500.0 million in lender commitments for a new unsecured revolving credit facility. The total availability under the agreement is expected to be $500.0 million with an accordion feature for up to $250.0 million of additional capacity. The terms will include a four year term with a one-year extension option and improvements in pricing across the pricing matrix including an improvement of 90 basis points based on our leverage as of June 30, 2014. The lender commitments are non-binding and are subject to the parties' negotiation of final terms, and there is no assurance that the Company will enter into any new unsecured revolving credit facility on the terms set forth above or at all.

27

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The discussion below contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those which are discussed in the “Risk Factors” section in Part I, Item 1A of our 2013 Annual Report on Form 10-K. Also see “Statement Regarding Forward-Looking Statements” preceding Part I.
The following discussion and analysis should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:
Overview
Recent Transactions
Critical Accounting Policies
Recently Issued Accounting Standards Update
Results of Operations
Liquidity and Capital Resources
Concentration of Credit Risk
Skilled Nursing Facility Reimbursement Rates
Obligations and Commitments
Off-Balance Sheet Arrangements
Overview
We were incorporated on May 10, 2010 as a wholly owned subsidiary of Sun Healthcare Group, Inc. (“Old Sun”), a provider of nursing, rehabilitative and related specialty healthcare services principally to the senior population in the United States. Pursuant to a restructuring plan by Old Sun, Old Sun restructured its business by separating its real estate assets and its operating assets into two separate publicly traded companies, Sabra and SHG Services Inc. (which was then renamed “Sun Healthcare Group, Inc.” or “Sun”). In order to effect the restructuring, Old Sun distributed to its stockholders on a pro rata basis all of the outstanding shares of common stock of Sun (this distribution is referred to as the “Separation”), together with an additional cash distribution. Immediately following the Separation, Old Sun merged with and into Sabra, with Sabra surviving the merger and Old Sun stockholders receiving shares of Sabra common stock in exchange for their shares of Old Sun common stock (this merger is referred to as the “REIT Conversion Merger”). The Separation and REIT Conversion Merger were completed on November 15, 2010, which we refer to as the Separation Date.
Following the restructuring of Old Sun’s business and the completion of the Separation and REIT Conversion Merger, we began operating as a self-administered, self-managed REIT that, directly or indirectly, owns and invests in real estate serving the healthcare industry.
Our investment portfolio is primarily comprised of skilled nursing/post-acute facilities, senior housing facilities, acute care hospitals, debt investments and preferred equity investments.
We expect to continue to grow our portfolio primarily through the acquisition of senior housing and memory care facilities and with a secondary focus on acquiring skilled nursing facilities. We have and will continue to opportunistically acquire other types of healthcare real estate (including acute care hospitals) and originate financing secured directly or indirectly by healthcare facilities. We also expect to grow our portfolio through the development of purpose-built healthcare facilities through pipeline agreements and other arrangements with select developers. We further expect to work with existing operators to identify strategic development opportunities. These opportunities may involve replacing or renovating facilities in our portfolio that may have become less competitive and new development opportunities that present attractive risk-adjusted returns. In addition to pursuing acquisitions with triple-net leases, we expect to continue to pursue other forms of investment, including investments in senior housing through RIDEA-compliant structures, mezzanine and secured debt investments, and joint ventures for senior housing, memory care and skilled nursing assets.
With respect to our debt investments, in general, we originate loans in situations where an attractive investment opportunity is presented but either (a) the property is under development or (b) the property is completed but the operations of the facility are not yet stabilized. A key component of our strategy related to loan originations is the option to purchase the underlying real estate that secures our loan investments. These options become exercisable upon the occurrence of various criteria, such as the passage of time or the achievement of certain operating goals, and the purchase price is set based on the same valuation methods we use to value our investments in healthcare real estate. This strategy allows us to diversify our revenue streams, build relationships with operators and developers, and provides us with the option to add newer properties to

28

Table of Contents

our existing real estate portfolio if we determine that those properties enhance our investment portfolio and stockholder value at the time the options are exercisable.
As we acquire additional properties and expand our portfolio, we expect to further diversify by tenant, asset class and geography within the healthcare sector. We employ a disciplined, opportunistic approach in our healthcare real estate investment strategy by investing in assets that provide attractive opportunities for dividend growth and appreciation of asset values, while maintaining balance sheet strength and liquidity, thereby creating long-term stockholder value.
We 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, or by subsidiaries of the Operating Partnership.
Recent Transactions
Revolving Credit Facility
As of July 30, 2014, we received over $500.0 million in lender commitments for a new unsecured revolving credit facility. The total availability under the agreement is expected to be $500.0 million with an accordion feature for up to $250.0 million of additional capacity. The terms will include a four year term with a one-year extension option and improvements in pricing across the pricing matrix including an improvement of 90 basis points based on our leverage as of June 30, 2014. The lender commitments are non-binding and are subject to the parties' negotiation of final terms, and there is no assurance that we will enter into any new unsecured revolving credit facility on the terms set forth above or at all.
Equity Offering
On May 12, 2014, we completed an underwritten public offering of 8.1 million newly issued shares of our common stock pursuant to an effective registration statement.  We 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. We used a portion of the proceeds from the offering to repay $192.0 million then-outstanding under our Revolving Credit Facility. The remaining proceeds to us will be used to fund possible future acquisitions or for general corporate purposes.
Mortgage Debt Repayment
On May 1, 2014, we repaid $29.8 million of existing variable rate mortgage indebtedness with proceeds from our Revolving Credit Facility. As a result of our recent financing activities, we have reduced our weighted-average effective interest rate, excluding borrowings under our Revolving Credit Facility, to 5.17% per annum from 5.96% per annum as of December 31, 2013. Also, excluding borrowings under our Revolving Credit Facility, all our borrowings are now at fixed interest rates and we have no significant debt maturities until 2021.
Park Place Acquisition
On April 29, 2014, we acquired a senior housing campus in Fort Wayne, Indiana (“Park Place”) with a total of 140 units (24 independent living units, 76 assisted living units and 40 memory care units) for $23.8 million. Park Place is encumbered by a HUD-insured mortgage with an outstanding principal balance of approximately $14.1 million and an annual interest rate of 4.84%. At closing, $1.1 million of the purchase price was used to repay an interim loan made by us to affiliates of the Leo Brown Group, the operator of Park Place, and we assumed the $14.1 million HUD-insured mortgage, resulting in a cash investment of $8.6 million.
Concurrently with the purchase, we entered into a triple-net master lease agreement with affiliates of the Leo Brown Group. The lease has an initial term of 15 years with two renewal options of five years each and provides for an annual rent escalator of the greater of (i) Consumer Price Index (“CPI”) and (ii) 3.0%, but not to exceed 4.0%, resulting in annual lease revenues, determined in accordance with GAAP, of $2.2 million and an initial yield on cash rent of 7.38%.
Critical Accounting Policies
Our condensed consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial

29

Table of Contents

statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our 2013 Annual Report on Form 10-K filed with the SEC. There have been no significant changes to our critical accounting policies during the six months ended June 30, 2014.
Recently Issued Accounting Standards Update
In May 2014, the the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance specifically notes that lease contracts with customers are a scope exception. ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption is not permitted. We are are currently in the process of evaluating the impact the adoption of ASU 2014-09 will have on our financial position or results of operations.
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU No. 2014-08”), which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The standard no longer precludes presentation as a discontinued operation if (i) there are operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations, or (ii) there is significant continuing involvement with a component after its disposal. ASU No. 2014-08 is effective for public entities for interim and annual periods beginning after December 15, 2014, and will be applied prospectively.  The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
Results of Operations
As of June 30, 2014, our investment portfolio included 130 real estate properties held for investment, 12 investments in loans receivable and five preferred equity investments. As of June 30, 2013, our investment portfolio included 120 real estate properties held for investment, four investments in loans receivable and two preferred equity investments. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of investments made in 2014 and 2013 that we have owned for an entire period and anticipated future investments. The results of operations presented for the three and six months ended June 30, 2014 and 2013 are not directly comparable due to the increase in investments made subsequent to the beginning of the respective comparable period in the preceding year.

30

Table of Contents

Comparison of results of operations for the three months ended June 30, 2014 versus the three months ended June 30, 2013 (dollars in thousands):
 
Three Months Ended June 30,
 
Increase
 
Percentage
Difference
 
Increase due to Acquisitions and Originations (1)
 
Remaining Increase (Decrease) (2)
 
2014
 
2013
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Rental income
$
37,485

 
$
31,518

 
$
5,967

 
19
%
 
$
6,561

 
$
(594
)
Interest and other income
5,488

 
757

 
4,731

 
625
%
 
3,636

 
1,095

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
9,755

 
8,222

 
1,533

 
19
%
 
2,032

 
(499
)
Interest
10,994

 
10,143

 
851

 
8
%
 

 
851

General and administrative
7,926

 
3,422

 
4,504

 
132
%
 
244

 
4,260

Other (expense) income:
 
 
 
 


 
 
 
 
 
 
Loss on extinguishment of debt
(162
)
 
(9,750
)
 
9,588

 
98
%
 

 
9,588

Other income (expense)
660

 
(1,400
)
 
2,060

 
147
%
 

 
2,060

(1) Represents the dollar amount increase for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 as a result of investments made on or after April 1, 2013.
(2) Represents the dollar amount increase (decrease) for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 that is not a direct result of investments made after April 1, 2013.
Rental Income
During the three months ended June 30, 2014, we recognized $37.5 million of rental income compared to $31.5 million for the three months ended June 30, 2013. The $6.0 million increase in rental income is primarily due to an increase of $6.6 million from properties acquired on or after April 1, 2013, partially offset by a decrease of $0.6 million in rental income from properties acquired before April 1, 2013. The $0.6 million decrease is primarily due to a $0.2 million decrease related to a change in ownership of one of our tenants and the resulting modification of the terms of a lease between us and the new tenant entity and a $0.2 million decrease due to the senior housing facility that is part of our RIDEA-compliant joint venture. The rental revenue related to the senior housing facility that is part of our RIDEA-compliant joint venture is eliminated upon consolidation. Amounts due under the terms of all of our lease agreements are subject to contractual increases, and there is no contingent rental income that may be derived from our properties.
Interest and Other Income
During the three months ended June 30, 2014, we recognized $5.5 million of interest and other income compared to $0.8 million for the three months ended June 30, 2013. Interest and other income during the three months ended June 30, 2014 primarily consisted of income earned on our 12 loans receivable investments and preferred dividends on our five preferred equity investments. Our loans receivable investments and preferred equity investments had a combined book value of $225.8 million as of June 30, 2014. Interest and other income during the three months ended June 30, 2013 primarily consisted of income earned on our four loans receivable investments and preferred dividends on our two preferred equity investments. These investments had a combined book value of $43.1 million as of June 30, 2013. Interest and other income during the three months ended June 30, 2014 also includes operating revenues associated with the consolidation of our RIDEA-compliant joint venture. As a result of consolidating, we reflect the joint venture's operating revenues of $0.7 million in our condensed consolidated statements of income (loss) beginning as of January 1, 2014.
Depreciation and Amortization
During the three months ended June 30, 2014, we incurred $9.8 million of depreciation and amortization expense compared to $8.2 million for the three months ended June 30, 2013. The $1.5 million net increase in depreciation and amortization was primarily due to an increase of $2.0 million from properties acquired on or after April 1, 2013, partially offset by a decrease of $0.5 million related to assets that have been fully depreciated.

31

Table of Contents

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 June 30, 2014, we incurred $11.0 million of interest expense compared to $10.1 million for the three months ended June 30, 2013. The $0.9 million net increase is primarily related to (i) a $5.1 million increase in interest expense and amortization of deferred financing costs related to the January 2014 issuance of the $350.0 million aggregate principal amount of 2021 Notes (defined below), (ii) a $1.6 million increase in interest expense and amortization of deferred financing costs related to the May 2013 issuance of the $200.0 million aggregate principal amount of 2023 Notes (defined below) and (iii) a $1.0 million increase in interest expense related to the borrowings outstanding on the Revolving Credit Facility during the three months ended June 30, 2014, partially offset by (x) a $6.5 million net decrease in interest expense, amortization of deferred financing costs and premium related to the redemption of the then-outstanding 2018 Notes (defined below) completed in February 2014 and (y) a $0.3 million decrease in interest expense primarily due to decreased interest rates on refinanced mortgage notes and the repayment of a $29.8 million variable rate mortgage note.
General and Administrative Expenses
General and administrative expenses include compensation-related expenses as well as professional services, office costs, facility operating costs and other costs associated with acquisition pursuit activities. During the three months ended June 30, 2014, general and administrative expenses were $7.9 million compared to $3.4 million during the three months ended June 30, 2013. The $4.5 million increase is primarily related to (i) a $2.9 million straight-line rental income write-off primarily related to a change in ownership of one of our tenants and the resulting modification of the terms of a lease between us and the new tenant entity, (ii) a $0.1 million holdback fee expense related to the Forest Park - Frisco contingent consideration, (iii) $0.5 million of facility operating expenses and (iv) a $0.8 million increase in stock-based compensation. The increase in stock-based compensation expense, from $1.5 million during the three months ended June 30, 2013 to $2.3 million during the three months ended June 30, 2014, is primarily related to an increase in stock-based compensation as a result of meeting certain performance criteria under the terms of our performance-based stock units and annual bonuses paid to our management team. Management has elected to receive annual bonuses in stock rather than in cash and therefore changes in our stock price will result in changes to our bonus expense. The increase in stock-based compensation as a result of the annual bonuses to be received in stock is due to the increase in our stock price during the three months ended June 30, 2014 (an increase of $1.21 per share) compared to the three months ended June 30, 2013 (a decrease of $2.90 per share). We expect stock-based compensation expense to fluctuate from period to period depending upon changes in our stock price and estimates associated with performance-based compensation.
Loss on Extinguishment of Debt
During the three months ended June 30, 2014, we recognized $0.2 million of loss on debt extinguishment. Of this amount, $0.1 million related to the write-offs of unamortized deferred financing costs in connection with the repayment of a variable rate mortgage note and $0.1 million related to fees paid related to the redemption of the then-outstanding 2018 Notes. During the three months ended June 30, 2013, we recognized $9.8 million of loss on debt extinguishment. This amount related to the redemption fee paid and the write-offs of deferred financing costs and issuance premium in connection with the June 2013 redemption of $113.8 million in aggregate principal amount of the then-outstanding 2018 Notes.
Other Income (Expense)
During the three months ended June 30, 2014, we recognized $0.7 million in other income as a result of adjusting the fair value of our contingent consideration liability related to two acquisitions of real estate properties (see Note 3, “Recent Real Estate Acquisitions” in the Notes to Condensed Consolidated Financial Statements for further details). During the three months ended June 30, 2013, we recognized $1.4 million in other expense as a result of adjusting the fair value of our contingent consideration liability related to the Stoney River Marshfield facility acquisition.

32

Table of Contents

Comparison of results of operations for the six months ended June 30, 2014 versus the six months ended June 30, 2013 (dollars in thousands):
 
Six Months Ended June 30,
 
Increase / (Decrease)
 
Percentage
Difference
 
Increase due to Acquisitions and Originations (1)
 
Remaining Increase (Decrease) (2)
 
2014
 
2013
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Rental income
$
73,578

 
$
62,993

 
$
10,585

 
17
 %
 
$
11,277

 
$
(692
)
Interest and other income
10,245

 
1,304

 
8,941

 
686
 %
 
7,349

 
1,592

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
19,105

 
16,468

 
2,637

 
16
 %
 
3,600

 
(963
)
Interest
22,128

 
20,145

 
1,983

 
10
 %
 

 
1,983

General and administrative
13,779

 
8,139

 
5,640

 
69
 %
 
637

 
5,003

Other (expense) income:
 
 
 
 
 
 
 
 
 
 
 
Loss on extinguishment of debt
(22,296
)
 
(9,750
)
 
(12,546
)
 
(129
)%
 

 
(12,546
)
Other income (expense)
960

 
(900
)
 
1,860

 
207
 %
 

 
1,860

(1) Represents the dollar amount increase for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 as a result of investments made on or after January 1, 2013.
(2) Represents the dollar amount increase (decrease) for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 that is not a direct result of investments made after January 1, 2013.
Rental Income
During the six months ended June 30, 2014, we recognized $73.6 million of rental income compared to $63.0 million for the six months ended June 30, 2013. The $10.6 million increase in rental income is primarily due to an increase of $11.3 million from properties acquired on or after January 1, 2013, partially offset by a decrease of $0.7 million in rental income. The $0.7 million decrease is primarily due to a $0.2 million decrease related to a change in ownership of one of our tenants and the resulting modification of the terms of a lease between us and the new tenant entity and a $0.4 million decrease due to the senior housing facility that is part of our RIDEA-compliant joint venture. The rental revenue related to the senior housing facility that is part of our RIDEA-compliant joint venture is eliminated upon consolidation. Amounts due under the terms of all of our lease agreements are subject to contractual increases, and there is no contingent rental income that may be derived from our properties.
Interest and Other Income
During the six months ended June 30, 2014, we recognized $10.2 million of interest and other income compared to $1.3 million for the six months ended June 30, 2013. Interest and other income during the six months ended June 30, 2014 primarily consisted of income earned on our 12 loans receivable investments and preferred dividends on our five preferred equity investments. Our loans receivable investments and preferred equity investments had a combined book value of $225.8 million as of June 30, 2014. Interest and other income during the six months ended June 30, 2013 primarily consisted of income earned on our four loans receivable investments and preferred dividends on our two preferred equity investments. These investments had a combined book value of $43.1 million as of June 30, 2013. Interest and other income during the six months ended June 30, 2014 also includes operating revenues associated with consolidation of our RIDEA-compliant joint venture. As a result of consolidating, we reflect the joint venture's operating revenues of $1.3 million in our condensed consolidated statements of income (loss) beginning as of January 1, 2014.
Depreciation and Amortization
During the six months ended June 30, 2014, we incurred $19.1 million of depreciation and amortization expense compared to $16.5 million for the six months ended June 30, 2013. The $2.6 million net increase in depreciation and amortization was primarily due to an increase of $3.6 million from properties acquired on or after January 1, 2013, partially offset by a decrease of $1.0 million related to assets that have been fully depreciated.
Interest Expense
We incur interest expense comprised of costs of borrowings plus the amortization of deferred financing costs related to our indebtedness. During the six months ended June 30, 2014, we incurred $22.1 million of interest expense compared to $20.1 million for the six months ended June 30, 2013. The $2.0 million net increase is primarily related to (i) a $9.0 million increase

33

Table of Contents

in interest expense and amortization of deferred financing costs related to the January 2014 issuance of the $350.0 million aggregate principal amount of 2021 Notes, (ii) a $4.5 million increase in interest expense and amortization of deferred financing costs related to the May 2013 issuance of the $200.0 million aggregate principal amount of 2023 Notes and (iii) a $1.5 million increase in interest expense related to the borrowings outstanding on the Revolving Credit Facility during the six months ended June 30, 2014, partially offset by (x) a $12.2 million net decrease in interest expense, amortization of deferred financing costs and premium related to the redemption of the then-outstanding 2018 Notes completed in February 2014 and (y) a $0.8 million decrease in interest expense primarily due to decreased interest rates on refinanced mortgage notes and the repayment of a $29.8 million existing variable rate mortgage note.
General and Administrative Expenses
General and administrative expenses include compensation-related expenses as well as professional services, office costs, facility operating costs and other costs associated with acquisition pursuit activities. During the six months ended June 30, 2014, general and administrative expenses were $13.8 million compared to $8.1 million during the six months ended June 30, 2013. The $5.6 million increase is primarily related to (i) a $3.0 million straight-line rental income write-off primarily related to a change in ownership of one of our tenants and the resulting modification of the terms of a lease between us and the new tenant entity, (ii) a $0.2 million holdback fee expense related to the Forest Park - Frisco contingent consideration, (iii) $1.0 million of facility operating expenses, (iv) a $0.2 million increase in acquisition pursuit costs from $0.4 million during the six months ended June 30, 2013 to $0.6 million during the six months ended June 30, 2014 and (v) a $0.9 million increase in stock-based compensation. The increase in stock-based compensation expense, from $3.9 million during the six months ended June 30, 2013 to $4.8 million during the six months ended June 30, 2014, is primarily related to an increase in stock-based compensation as a result of meeting certain performance criteria under the terms of our performance-based stock units. We expect acquisition pursuit costs to fluctuate from period to period depending on acquisition activity. We also expect stock-based compensation expense to fluctuate from period to period depending upon changes in our stock price and estimates associated with performance-based compensation.
Loss on Extinguishment of Debt
During the six months ended June 30, 2014, we recognized $22.3 million of loss on debt extinguishment. Of this amount, $21.7 million related to the redemption fee paid, the write-offs of deferred financing costs and issuance premium and legal fees paid in connection with the redemption of the then-outstanding 2018 Notes and $0.6 million related to the write-offs of deferred financing costs in connection with our mortgage debt refinancing and repayment. During the six months ended June 30, 2013, we recognized $9.8 million of loss on debt extinguishment related to the redemption fee paid and the write-offs of deferred financing costs and issuance premium in connection with the June 2013 redemption of $113.8 million in aggregate principal amount of the then-outstanding 2018 Notes.
Other Income (Expense)
During the six months ended June 30, 2014, we recognized $1.0 million in other income as a result of adjusting the fair value of our contingent consideration liability related to two acquisitions of real estate properties (see Note 3, “Recent Real Estate Acquisitions” in the Notes to Condensed Consolidated Financial Statements for further details). During the six months ended June 30, 2013, we recognized $0.9 million in other expense as a result of adjusting the fair value of our contingent consideration liability related to the Stoney River Marshfield facility acquisition.
Funds from Operations and Adjusted Funds from Operations
We believe that net income attributable to common stockholders 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 uses 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 attributable to common stockholders, as defined by GAAP. FFO is defined as net income attributable to common stockholders, computed in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization and impairment charges. AFFO is defined as FFO excluding non-cash revenues (including, but not limited to, straight-line rental income adjustments and write-offs, non-cash interest income adjustments and amortization of debt premium), non-cash expenses (including, but not limited to, stock-based compensation expense, amortization of deferred financing costs and amortization of debt discounts) and acquisition pursuit costs. We believe that the use of FFO and AFFO

34

Table of Contents

(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 gains or losses from real estate dispositions, impairment charges, and real estate depreciation and amortization, and for AFFO, by excluding non-cash revenues (including, but not limited to, straight-line rental income adjustments and write-offs, non-cash interest income adjustments and amortization of debt premium), non-cash expenses (including, but not limited to, stock-based compensation expense, amortization of deferred financing costs and amortization of debt discounts) and acquisition pursuit costs, 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 attributable to common stockholders 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 six months ended June 30, 2014 and 2013, to net income (loss) attributable to common stockholders, the most directly comparable GAAP financial measure, for the same periods (in thousands, except share and per share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss) attributable to common stockholders
$
12,241

 
$
(3,185
)
 
$
2,377

 
$
6,068

Depreciation and amortization of real estate assets
9,755

 
8,222

 
19,105

 
16,468

 
 
 
 
 
 
 
 
FFO
21,996

 
5,037

 
21,482

 
22,536

 
 
 
 
 
 
 
 
Acquisition pursuit costs
187

 
229

 
579

 
426

Stock-based compensation expense
2,279

 
1,459

 
4,792

 
3,933

Straight-line rental income adjustments
(4,247
)
 
(3,617
)
 
(8,433
)
 
(7,300
)
Amortization of deferred financing costs
927

 
823

 
1,872

 
1,589

Amortization of debt premiums

 
(202
)
 
(33
)
 
(401
)
Change in fair value of contingent consideration
(660
)
 
1,400

 
(960
)
 
900

Non-cash portion of loss on extinguishment of debt
80

 
508

 
1,418

 
508

Non-cash interest income adjustments
70

 
7

 
140

 
12

Write-off of straight-line rental income
2,895

 

 
2,994

 

 
 
 
 
 
 
 
 
AFFO
$
23,527

 
$
5,644

 
$
23,851

 
$
22,203

 
 
 
 
 
 
 
 
FFO per diluted common share
$
0.50

 
$
0.13

 
$
0.51

 
$
0.60

 
 
 
 
 
 
 
 
AFFO per diluted common share
$
0.53

 
$
0.15

 
$
0.57

 
$
0.58

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding, diluted:
 
 
 
 
 
 
 
FFO
44,096,297

 
37,834,496

 
41,791,470

 
37,789,804

 
 
 
 
 
 
 
 
AFFO
44,335,381

 
38,190,891

 
42,075,917

 
38,125,087

 
 
 
 
 
 
 
 
Set forth below is additional information related to certain other items included in net income (loss) attributable to common stockholders above, which may be helpful in assessing our operating results. Please see the accompanying condensed consolidated statements of cash flows for details of our operating, investing, and financing cash activities.
Significant Items Included in Net Income (Loss):

During the three and six months ended June 30, 2014, we incurred $0.2 million and $22.3 million, respectively, of debt extinguishment loss. The $0.2 million of debt extinguishment loss during the three months ended June 30, 2014 includes $0.1 million related to the write-offs of unamortized deferred financing costs in connection with the repayment of a variable rate mortgage note and $0.1 million in additional fees paid related to the redemption of the then-outstanding 2018 Notes. The $22.3 million of debt extinguishment loss during the six months ended June 30, 2014 also includes $20.8 million in payments made to noteholders for early redemption of the then-outstanding 2018

35

Table of Contents

Notes, $0.8 million of write-offs associated with unamortized deferred financing and premium costs and $0.5 million in write-offs of deferred financing costs in connection with our mortgage debt refinancing. The entire amount of the loss on extinguishment of debt is included in FFO for the three and six months ended June 30, 2014. The $0.1 million in fees paid related to the redemption of the then-outstanding 2018 Notes is included in AFFO for the three months ended June 30, 2014, and AFFO for the six months ended June 30, 2014 also includes the $20.8 million early redemption premium.
During the three and six months ended June 30, 2014, we recognized $0.7 million and $1.0 million, respectively, of other income, as a result of adjusting the fair value of our contingent consideration liability related to two acquisitions of real estate properties. See Note 3, “Recent Real Estate Acquisitions” in the Notes to Condensed Consolidated Financial Statements for further details. This entire amount is included in FFO for the three and six months ended June 30, 2014.
During the three and six months ended June 30, 2014, we recognized $2.9 million and $3.0 million, respectively, of straight-line rental income write-off. The straight-line rental income write-off during the three and six months ended June 30, 2014 is primarily due to a write-off related to a change in ownership of one of our tenants and the resulting modification of the terms of a lease between us and the new tenant entity. This entire amount is included in FFO for the three and six months ended June 30, 2014.
During the three and six months ended June 30, 2013, we incurred $9.8 million of debt extinguishment loss which consisted of $9.3 million for the cash payment made to noteholders for early redemption of $113.8 million in aggregate principal amount of the then-outstanding 2018 Notes and $0.5 million for the write-off of unamortized deferred financing costs and issuance premiums. The entire amount of the loss on extinguishment of debt is included in FFO for the three and six months ended June 30, 2013, and the $9.3 million early redemption premium is included in AFFO for the three and six months ended June 30, 2013.
During the three and six months ended June 30, 2013, we incurred $1.4 million and $0.9 million, respectively, of other expense, as a result of adjusting the fair value of our contingent consideration liability related to the Stoney River Marshfield facility acquisition. This entire amount is included in FFO for the three and six months ended June 30, 2013.
Liquidity and Capital Resources
As of June 30, 2014, we had approximately $304.5 million in liquidity, consisting of unrestricted cash and cash equivalents of $15.0 million (excluding cash and cash equivalents associated with our RIDEA-compliant joint venture), and available borrowings under our Revolving Credit Facility of $289.5 million. As further described above under “—Recent Transactions—Equity Offering,” we completed an equity offering in May 2014, which provided net proceeds, before expenses, of $219.1 million. A portion of these proceeds was used to repay the $192.0 million outstanding balance under our Revolving Credit Facility. The Revolving Credit Facility provides, subject to borrowing availability limitations, for a borrowing capacity of $375.0 million and includes an accordion feature that allows the Operating Partnership to increase the borrowing availability by up to an additional $225.0 million, subject to terms and conditions.
On January 23, 2014, we completed an underwritten public offering of $350.0 million aggregate principal amount of the 2021 Notes, providing net proceeds of approximately $340.8 million after deducting underwriting discounts and other offering expenses. A portion of these proceeds was used to (i) fund a tender offer for the 2018 Notes, (ii) fund the redemption price for 2018 Notes that were not retired in the tender offer and (iii) acquire the Nye Portfolio. See “—Loan Agreements.”
On March 18, 2013, we entered into a sales agreement (each, a “Sales Agreement”) with each of Barclays Capital Inc., Cantor Fitzgerald & Co., Credit Agricole Securities (USA) Inc., RBC Capital Markets, LLC, RBS Securities Inc. and Wells Fargo Securities, LLC (individually, a “Sales Agent” and together, the “Sales Agents”) to sell shares of our common stock having aggregate gross proceeds of up to $100.0 million (the “ATM Shares”) from time to time through the Sales Agents.
Pursuant to the terms of the Sales Agreements, the ATM 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 our prior consent, the Sales Agents may also sell the ATM Shares in privately negotiated transactions. We will pay each Sales Agent a commission of up to 2% of the gross proceeds from the sales of ATM Shares sold pursuant to the applicable Sales Agreement. We are not obligated to sell and the Sales Agents are not obligated to buy or sell any ATM Shares under the Sales Agreements. No assurance can be given as to the price or amount of shares that we sell, or the dates when such sales will take place. During the three months ended June 30, 2014, we sold 0.1 million ATM Shares, at an average price of $27.77 per share, generating gross proceeds of approximately $1.9 million, before $39,000 of commissions. During the six months ended June 30, 2014, we sold 0.2 million ATM Shares, at an average price of $27.71 per share, generating gross proceeds of approximately $6.6 million, before $0.1 million of commissions. In addition, as of June 30, 2014, we had $55.2 million available under the ATM Program.

36

Table of Contents

In addition, we have filed a shelf registration statement with the SEC that expires in May 2016, which will allow 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.
We believe that our available cash, operating cash flows and borrowings available to us under the Revolving Credit Facility provide sufficient funds for our operations, scheduled debt service payments with respect to our Senior Notes (defined below), mortgage indebtedness on our properties, and dividend requirements for the next twelve months. In addition, we do not believe that the restrictions under our Senior Notes Indentures (defined below) significantly limit our ability to use our available liquidity for these purposes.
We intend to invest in additional healthcare properties as suitable opportunities arise and adequate sources of financing are available. We expect that future investments in properties, including any improvements or renovations of current or newly-acquired properties, will depend on and will be financed, in whole or in part, by our existing cash, borrowings available to us under our Revolving Credit Facility, future borrowings or the proceeds from issuances of common stock (including through our ATM Program), preferred stock, debt or other securities. In addition, we expect to seek financing from U.S. government agencies, including through Fannie Mae and HUD, in appropriate circumstances in connection with acquisitions.
Cash Flows from Operating Activities
Net cash provided by operating activities was $28.9 million for the six months ended June 30, 2014. Operating cash inflows were derived primarily from the rental payments received under the lease agreements with subsidiaries of Genesis, rental payments from our other tenants and interest payments from borrowers under our loan investments. Operating cash outflows consisted primarily of interest and early redemption payments on our outstanding debt and payment of general and administrative expenses. Net cash provided by operating activities increased during the six months ended June 30, 2014, primarily as a result of acquisitions and investments that resulted in increased rental and interest income, partially offset by the $20.8 million in payments made to noteholders for early redemption of the then-outstanding 2018 Notes. We expect our annualized cash flows provided by operating activities to increase as a result of completed and anticipated future real estate investments.
Cash Flows from Investing Activities
During the six months ended June 30, 2014, net cash used in investing activities was $164.0 million and consisted of $118.4 million used in the acquisition of six skilled nursing facilities and three senior housing facilities, $38.4 million used to originate two loans receivable and provide additional funding for existing loans receivable, $6.5 million used for three preferred equity investments and $0.8 million used for tenant improvements.
We expect to continue using available liquidity in connection with anticipated future real estate investments and loan originations.
Cash Flows from Financing Activities
During the six months ended June 30, 2014, net cash provided by financing activities was $145.9 million and consisted of $350.0 million in proceeds from the January 2014 offering of 2021 Notes and $219.9 million in net proceeds from the May 2014 equity offering and shares sold through the ATM Program, partially offset by the redemption of $211.3 million in aggregate principal amount of the then-outstanding 2018 Notes, $37.1 million of dividends paid to stockholders, a net decrease in mortgage borrowings resulting from the repayment of $30.0 million in mortgage indebtedness and $10.1 million of payments for deferred financing costs primarily related to the issuance of the 2021 Notes. In addition, during the six months ended June 30, 2014, we borrowed $80.0 million on our Revolving Credit Facility and repaid $215.5 million during the same period. 
Loan Agreements
2021 Notes. On January 23, 2014, the Operating Partnership and Sabra Capital Corporation (the “Issuers”) issued $350.0 million aggregate principal amount of 5.5% senior unsecured notes (the “2021 Notes”). The 2021 Notes were sold at par, resulting in gross proceeds of $350.0 million and net proceeds of approximately $340.8 million after deducting underwriting discounts and other offering expenses. The 2021 Notes accrue interest at a rate of 5.5% per annum payable semiannually on February 1 and August 1 of each year. See Note 6, “Debt,” in the Notes to Condensed Consolidated Financial Statements for additional information concerning the 2021 Notes.
2023 Notes. On May 23, 2013, the Issuers issued $200.0 million aggregate principal amount of 5.375% senior notes due 2023 (the “2023 Notes”). The 2023 Notes were sold at par, resulting in gross proceeds of $200.0 million and net proceeds of approximately $194.6 million after deducting underwriting discounts and other offering expenses. The 2023 Notes accrue

37

Table of Contents

interest at a rate of 5.375% per annum payable semiannually on June 1 and December 1 of each year. See Note 6, “Debt,” in the Notes to Condensed Consolidated Financial Statements for additional information concerning the 2023 Notes.
2018 Notes. On October 27, 2010 and July 26, 2012, the Issuers issued $225.0 million and $100.0 million aggregate principal amount of 8.125% senior unsecured notes (the “2018 Notes”), respectively. Pursuant to exchange offers completed on March 14, 2011 and November 14, 2012, the Issuers exchanged the 2018 Notes that were issued in October 2010 and July 2012 for substantially identical 2018 Notes registered under the Securities Act of 1933, as amended. The 2018 Notes accrued interest at a rate of 8.125% per annum payable semiannually on May 1 and November 1 of each year.
On June 24, 2013, pursuant to the terms of the indenture governing the 2018 Notes (the “2018 Notes Indenture”), the Issuers redeemed $113.8 million in aggregate principal amount of the then-outstanding 2018 Notes, representing 35% of the aggregate principal amount of the 2018 Notes outstanding. The 2018 Notes were redeemed at a redemption price of 108.125% of the principal amount redeemed, plus accrued and unpaid interest up to the redemption date. The redemption resulted in a $9.8 million loss on extinguishment of debt, including $9.3 million in payments made to noteholders for early redemption and $0.5 million of write-offs associated with unamortized deferred financing costs and issuance premium.
On January 8, 2014, we commenced a cash tender offer with respect to any and all of the outstanding $211.3 million of the 2018 Notes. Pursuant to the tender offer, we 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 2018 Notes Indenture, 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 obligations under the 2021 Notes and the 2023 Notes (collectively, the “Senior Notes”) are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by us and certain of our 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 10, “Summarized Condensed Consolidating Information,” in the Notes to Condensed Consolidated Financial Statements for additional information concerning the circumstances pursuant to which the guarantors will be automatically and unconditionally released from their obligations under the guarantees.
See Note 6, “Debt,” in the Notes to Condensed Consolidated Financial Statements for additional information concerning restrictive covenants and events of default in the indentures governing the Senior Notes (the “Senior Notes Indentures”). As of June 30, 2014, we were in compliance with all applicable financial covenants under the Senior Notes Indentures.
Revolving Credit Facility. On July 29, 2013, the Operating Partnership entered into an amended and restated secured revolving credit facility (the “Revolving Credit Facility”) with certain lenders as set forth in the related credit agreement and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (each as defined in such credit agreement). The Revolving Credit Facility provides for a borrowing capacity of $375.0 million and includes an accordion feature that allows the Operating Partnership to increase the borrowing availability by up to an additional $225.0 million, subject to terms and conditions. The Revolving Credit Facility is secured by pledges of equity by our wholly-owned subsidiaries that own certain of our real estate assets. Borrowing availability under the Revolving Credit Facility is subject to a borrowing base calculation based on, among other factors, the mortgageability cash flow (as such term is defined in the related credit agreement). The Revolving Credit Facility has a maturity date of July 29, 2016, and includes a one year extension option.  As of June 30, 2014, there were no amounts outstanding under the Revolving Credit Facility, and we had $289.5 million available for borrowing.
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) a base rate determined as the greater of (i) the federal funds rate plus 0.5%, (ii) the prime rate, and (iii) one-month LIBOR plus 1.0% (the “Base Rate”). The applicable percentage for borrowings will vary based on the Consolidated Leverage Ratio, as defined in the Revolving Credit Facility, and will range from 2.50% to 3.50% per annum for LIBOR based borrowings and 1.50% to 2.50% per annum for borrowings at the Base Rate.  As of June 30, 2014, the interest rate on the Revolving Credit Facility was 3.66%. In addition, the Operating Partnership is required to pay a facility fee to the lenders equal to between 0.35% and 0.50% per annum based on the amount of unused borrowings under the Revolving Credit Facility. During the three and six months ended June 30, 2014, we incurred $0.8 million and $2.0 million, respectively, in interest expense on amounts outstanding under the Revolving Credit Facility. During the three and six months ended June 30, 2014, we incurred $0.4 million and $0.6 million, respectively, of unused facility fees.
The obligations of the Operating Partnership under the Revolving Credit Facility are guaranteed by us and certain of our subsidiaries. See Note 6, “Debt,” in the Notes to Condensed Consolidated Financial Statements for additional information concerning covenants contained in the Revolving Credit Facility. As of June 30, 2014, we were in compliance with all applicable financial covenants under the Revolving Credit Facility.

38

Table of Contents

Mortgage Indebtedness
Of our 130 properties held for investment, 14 are subject to mortgage indebtedness to third parties that, as of June 30, 2014, totaled approximately $125.4 million. As of June 30, 2014 and December 31, 2013, our mortgage notes payable consisted of the following (dollars in thousands):
Interest Rate Type
 
Book Value as of
June 30, 2014
 
Book Value as of
December 31, 2013
 
Weighted Average
Effective Interest Rate at
June 30, 2014
 
Maturity
Date
Fixed Rate
 
$
125,400

 
$
54,688

 
3.96
%
 
May 2031 - August 2051
Variable Rate
 

 
86,640

 
NA

 
NA
 
 
$
125,400

 
$
141,328

 
3.96
%
 
 
 
Capital Expenditures
There were $0.8 million and $0.2 million of capital expenditures for the six months ended June 30, 2014 and 2013, respectively. There are no present plans for the improvement or development of any unimproved or undeveloped property; however, from time to time we may agree to fund improvements our tenants make at our facilities. Accordingly, we anticipate that our aggregate capital expenditure requirements for the next 12 months will not exceed $2.0 million, and that such expenditures will principally be for improvements to our facilities and result in incremental rental income.
Dividends
We paid dividends of $37.1 million on our common and preferred stock during the six months ended June 30, 2014. On July 30, 2014, our board of directors declared a quarterly cash dividend of $0.38 per share of common stock. The dividend will be paid on August 29, 2014 to common stockholders of record as of August 15, 2014. Also on July 30, 2014, our board of directors declared the a quarterly cash dividend of $0.4453125 per share of Series A Preferred Stock. The dividend will be paid on August 29, 2014 to preferred stockholders of record as of the close of business on August 15, 2014.
Concentration of Credit Risk
Concentrations of credit risks arise when a number of operators, 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.
Genesis
Effective December 1, 2012, Sun was acquired by Genesis, becoming a wholly owned subsidiary of Genesis. In connection with this transaction, we obtained a parent guaranty from Genesis to replace the then-existing Sun guaranty of the lease obligations of its subsidiaries that are tenants under our lease agreements. As of June 30, 2014, 81 of our 130 real estate properties held for investment were leased to subsidiaries of Genesis. During the six months ended June 30, 2014 and 2013, 48% and 63%, respectively, of our total revenues were derived from these leases. Genesis is not an SEC registrant and is not subject to SEC reporting requirements. As of June 30, 2014, Genesis and its subsidiaries operated or managed 371 skilled nursing centers, 33 assisted or independent living centers and 6 mental health centers across 28 states. Genesis also provides rehabilitation therapy services to approximately 1,400 affiliated and non-affiliated centers in 45 states. During the three and six months ended June 30, 2014, Genesis’s net revenues were $1.2 billion and $2.4 billion, respectively, and adjusted normalized earnings before interest, taxes, depreciation, amortization and rent were $161.8 million and $313.2 million, respectively. During the three and six months ended June 30, 2013, Genesis’s net revenues were $1.2 billion and $2.3 billion, respectively, and adjusted normalized earnings before interest, taxes, depreciation, amortization and rent were $158.5 million and $301.1 million, respectively. As of June 30, 2014 and December 31, 2013, Genesis's long-term debt, net of cash, totaled $455.0 million and $428.0 million, respectively. As of June 30, 2014 and December 31, 2013, Genesis had liquidity of approximately $122.7 million and $153.7 million, respectively, consisting of unrestricted cash and cash equivalents and available borrowings under its revolving credit facility.
We have presented below unaudited summary financial information for Genesis as of June 30, 2014 and December 31, 2013 and for the three and six months ended June 30, 2014 and 2013. As described above, Genesis has provided a parent guaranty of the lease obligations of its subsidiaries that are tenants under our lease agreements. The summary financial information presented below has been provided by Genesis, is unaudited and has not been independently verified by us. We have no reason to believe that such information is inaccurate in any material respect.

39

Table of Contents

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(unaudited)
(in thousands)
Statements of Operations:
 
 
 
 
 
 
 
Revenues
$
1,200,650

 
$
1,173,362

 
$
2,387,194

 
$
2,346,331

Operating expenses (including building expenses)
1,072,789

 
1,048,281

 
2,144,777

 
2,113,372

Net loss
(32,259
)
 
(30,673
)
 
(76,426
)
 
(78,776
)
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
 
 
 
 
 
(unaudited)
(in thousands)
 
 
Balance Sheets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
51,627

 
$
61,413

 
 
 
 
Total current assets
894,987

 
927,027

 
 
 
 
Total current liabilities
619,410

 
685,683

 
 
 
 
Long-term debt, excluding current portion
491,023

 
473,165

 
 
 
 
Capital lease obligations, excluding current portion
995,307

 
972,760

 
 
 
 
Financing obligation, excluding current portion
2,872,225

 
2,785,103

 
 
 
 
 
 
 
 
 
 
 
 
Other than our significant tenant concentrations, 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 130 real estate properties held for investment as of June 30, 2014 is diversified by location across 28 states. The properties in any one state did not account for more than 19% of our total rental revenue during the three and six months ended June 30, 2014.
Skilled Nursing Facility Reimbursement Rates
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 (the “Affordable Care Act”). PPS regulations predetermine a payment amount per patient, per day, based on a market basket index calculated for all covered costs. The amount to be paid is determined by classifying each patient into one of 66 Resource Utilization Group (“RUG”) categories that represent the level of services required to treat different conditions and levels of acuity.
The current system of 66 RUG categories, or Resource Utilization Group version IV (“RUG IV”), became effective as of October 1, 2010. RUG IV resulted from research performed by the Centers for Medicare & Medicaid Services (“CMS”) and was part of CMS's continuing effort to increase the correlation of the cost of services to the condition of individual patients.
On July 31, 2013, CMS released final fiscal year 2014 Medicare rates for skilled nursing facilities providing a net increase of 1.3% over fiscal year 2013 payments (comprised of a market basket increase of 2.3% less 0.5% for a forecast error correction and less the productivity adjustment of 0.5%).
On May 1, 2014, CMS released projections for fiscal year 2015 Medicare rates for skilled nursing facilities of a net increase of 2.0% over fiscal year 2014 payments (comprised of a market basket increase of 2.4% and less the productivity adjustment of 0.4%).

40

Table of Contents

Obligations and Commitments
The following table summarizes our contractual obligations and commitments in future years, including our Senior Notes, our Revolving Credit Facility and our mortgage indebtedness to third parties on certain of our properties. The following table is presented as of June 30, 2014 (in thousands):
 
 
 
July 1 Through
 
 
 
Year Ended December 31,
 
 
 
 
 
Total
 
December 31, 2014
 
2015
 
2016
 
2017
 
2018
 
After 2018
Mortgage indebtedness(1)
$
203,232

 
$
3,585

 
$
7,171

 
$
7,171

 
$
7,171

 
$
7,171

 
$
170,963

Revolving Credit Facility (2)
3,958

 
958

 
1,901

 
1,099

 

 

 

Senior Notes(3)
781,500

 
15,000

 
30,000

 
30,000

 
30,000

 
30,000

 
646,500

Contingent consideration
4,500

 

 
1,200

 

 
3,300

 

 

Operating lease
139

 
48

 
91

 

 

 

 

Total
$
993,329

 
$
19,591

 
$
40,363

 
$
38,270

 
$
40,471

 
$
37,171

 
$
817,463

 
(1) 
Mortgage indebtedness includes principal payments and interest payments through the maturity dates. Total interest on mortgage indebtedness, based on contractual rates, is $77.8 million.
(2) 
Revolving Credit Facility includes payments related to the facility fee due to the lenders based on the amount of unused borrowings under the Revolving Credit Facility.
(3) 
Senior Notes includes interest payments through the maturity dates. Total interest on the Senior Notes is $231.5 million.
In addition to the above, we have committed to provide up to $95.9 million of funding related to three debt investments and four preferred equity investments. As of June 30, 2014, we had funded $61.8 million of these commitments. The debt investments have maturity dates ranging from 2016 through 2018.
Off-Balance Sheet Arrangements
None.


41

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposure is interest rate risk with respect to our indebtedness. As of June 30, 2014, this indebtedness included $550.0 million aggregate principal amount of Senior Notes outstanding and $125.4 million of mortgage indebtedness to third parties on certain of the properties that our subsidiaries own. As of June 30, 2014, none of our outstanding indebtedness had a variable interest rate. As of June 30, 2014, we had no amounts outstanding and $289.5 million available for borrowing under our Revolving Credit Facility. From time to time, we may borrow under the Revolving Credit Facility to finance future investments in properties, including any improvements or renovations of current or newly acquired properties, or for other purposes. Because borrowings under the Revolving Credit Facility bear interest on the outstanding principal amount at a rate equal to an applicable percentage plus, at our option, either (a) LIBOR or (b) a base rate determined as the greater of (i) the federal funds rate plus 0.5%, (ii) the prime rate, and (iii) one-month LIBOR plus 1.0%, the interest rate we will be required to pay on any such borrowings will depend on then applicable rates and may vary. An increase in interest rates could make the financing of any investment by us more costly. Rising interest rates could also limit our ability to refinance our debt when it matures or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness.
We expect to manage our exposure to interest rate risk by maintaining a mix of fixed and variable rates for our indebtedness. We also may manage, or hedge, interest rate risks related to our borrowings by means of interest rate swap agreements, although we are not currently a party to any swap agreements.
ITEM 4. CONTROLS AND PROCEDURES
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 June 30, 2014 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 June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


42

Table of Contents

PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None of the Company or any of its subsidiaries is a party to, and none of their respective property is the subject of, any material legal proceeding, although we are from time to time party to legal proceedings that arise in the ordinary course of our business.
ITEM 1A. RISK FACTORS

There have been no material changes in our assessment of our risk factors from those set forth in our 2013 Annual Report on Form 10-K.

ITEM 6. EXHIBITS
Ex.
  
Description
 
 
2.1
  
Agreement and Plan of Merger, dated as of September 23, 2010, by and between Sun Healthcare Group, Inc. and Sabra Health Care REIT, Inc. (incorporated by reference to Annex A to the proxy statement/prospectus included in Amendment No. 4 to the Registration Statement on Form S-4 (File No. 333-167040) filed by Sabra Health Care REIT, Inc. on September 28, 2010).
 
 
2.2
  
Distribution Agreement, dated November 4, 2010, by and among Sun Healthcare Group, Inc., Sabra Health Care REIT, Inc. and SHG Services, Inc. (which has been renamed Sun Healthcare Group, Inc.) (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed by Sabra Health Care REIT, Inc. on November 5, 2010).†
 
 
3.1
  
Articles of Amendment and Restatement of Sabra Health Care REIT, Inc., dated October 20, 2010, filed with the State Department of Assessments and Taxation of the State of Maryland on October 21, 2010 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed by Sabra Health Care REIT, Inc. on October 26, 2010).
 
 
3.1.1
 
Articles Supplementary designating Sabra Health Care REIT, Inc.'s 7.125% Series A Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed by Sabra Health Care REIT, Inc. on March 21, 2013).
 
 
 
3.2
  
Amended and Restated Bylaws of Sabra Health Care REIT, Inc. (incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K filed by Sabra Health Care REIT, Inc. on October 26, 2010).
 
 
10.1*+
 
Sabra Health Care REIT, Inc. Directors’ Compensation Policy, effective June 24, 2014.
 
 
 
10.2+
 
Sabra Health Care REIT, Inc. 2009 Performance Incentive Plan, effective April 2, 2014 (incorporated by
reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Sabra Health Care REIT, Inc. on June 25,
2014).
 
 
 
12.1*
  
Statement Re: Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends.
 
 
31.1*
  
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2*
  
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1**
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 

43

Table of Contents

32.2**
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS*
 
XBRL Instance Document.
 
 
 
101.SCH*
 
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
*
Filed herewith.
**
Furnished herewith.

Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrants hereby agree to furnish supplementally copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.

+
Designates a management compensation plan, contract or arrangement.


44

Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
SABRA HEALTH CARE REIT, INC.
 
 
 
Date: August 4, 2014
By:
/S/    RICHARD K. MATROS
 
 
Richard K. Matros
 
 
Chairman, President and
 
 
Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
Date: August 4, 2014
By:
/S/    HAROLD W. ANDREWS, JR.
 
 
Harold W. Andrews, Jr.
 
 
Executive Vice President,
 
 
Chief Financial Officer and Secretary
 
 
(Principal Financial and Accounting Officer)

45