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EX-31.2 - SECTION 302 CFO CERTIFICATION - Sabra Health Care REIT, Inc.sbraex3122014q3.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - Sabra Health Care REIT, Inc.sbraex3112014q3.htm
EX-12.1 - COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES - Sabra Health Care REIT, Inc.sbraex1212014q3.htm
EXCEL - IDEA: XBRL DOCUMENT - Sabra Health Care REIT, Inc.Financial_Report.xls
EX-32.1 - SECTION 906 CEO CERTIFICATION - Sabra Health Care REIT, Inc.sbraex3212014q3.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - Sabra Health Care REIT, Inc.sbraex3222014q3.htm

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 September 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 October 31, 2014, there were 54,527,984 shares of the Registrant’s $0.01 par value Common Stock outstanding.



SABRA HEALTH CARE REIT, INC. AND SUBSIDIARIES
Index
 

1


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 (“Genesis”) until we are able to further diversify our portfolio;
our dependence on the operating success of our tenants;
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 and debt 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.
TENANT INFORMATION
This 10-Q includes information regarding certain of our tenants, none of which are subject to SEC reporting requirements. The information related to our tenants provided in this 10-Q have been provided by such tenants 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


PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)  
 
 
September 30, 2014
 
December 31, 2013
 
(unaudited)
 
 
Assets
 
 
 
Real estate investments, net of accumulated depreciation of $179,301 and $151,078 as of September 30, 2014 and December 31, 2013, respectively
$
1,568,268

 
$
915,418

Loans receivable and other investments, net
250,674

 
185,293

Cash and cash equivalents
25,479

 
4,308

Restricted cash
6,537

 
5,352

Deferred tax assets
24,212

 
24,212

Prepaid expenses, deferred financing costs and other assets
142,196

 
63,252

Total assets
$
2,017,366

 
$
1,197,835

 
 
 
 
Liabilities
 
 
 
Mortgage notes
$
124,714

 
$
141,328

Revolving credit facility
614,000

 
135,500

Senior unsecured notes
550,000

 
414,402

Accounts payable and accrued liabilities
40,719

 
22,229

Tax liability
24,212

 
24,212

Total liabilities
1,353,645

 
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 September 30, 2014 and December 31, 2013
58

 
58

Common stock, $.01 par value; 125,000,000 shares authorized, 47,627,984 and 38,788,745 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively
476

 
388

Additional paid-in capital
771,844

 
534,639

Cumulative distributions in excess of net income
(108,628
)
 
(74,921
)
Total Sabra Health Care REIT, Inc. stockholders’ equity
663,750

 
460,164

Noncontrolling interests
(29
)
 

Total equity
663,721

 
460,164

Total liabilities and equity
$
2,017,366

 
$
1,197,835

See accompanying notes to condensed consolidated financial statements.

3


SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)  
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Rental income
$
38,165

 
$
31,699

 
$
111,743

 
$
94,692

Interest and other income
5,819

 
1,227

 
16,064

 
2,531

 
 
 
 
 
 
 
 
Total revenues
43,984

 
32,926

 
127,807

 
97,223

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Depreciation and amortization
9,762

 
8,258

 
28,867

 
24,726

Interest
10,540

 
9,739

 
32,668

 
29,884

General and administrative
6,226

 
3,057

 
20,005

 
11,196

 
 
 
 
 
 
 
 
Total expenses
26,528

 
21,054

 
81,540

 
65,806

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Loss on extinguishment of debt
(158
)
 
(351
)
 
(22,454
)
 
(10,101
)
Other income (expense)
(100
)
 
300

 
860

 
(600
)
 
 
 
 
 
 
 
 
Total other income (expense)
(258
)
 
(51
)
 
(21,594
)
 
(10,701
)
 
 
 
 
 
 
 
 
Net income
17,198

 
11,821

 
24,673

 
20,716

 
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interests
6

 

 
29

 

 
 
 
 
 
 
 
 
Net income attributable to Sabra Health Care REIT, Inc.
17,204

 
11,821

 
24,702

 
20,716

 
 
 
 
 
 
 
 
Preferred stock dividends
(2,561
)
 
(2,579
)
 
(7,682
)
 
(5,406
)
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
14,643

 
$
9,242

 
$
17,020

 
$
15,310

 
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 
Net income attributable to common stockholders, per:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic common share
$
0.31

 
$
0.25

 
$
0.39

 
$
0.41

 
 
 
 
 
 
 
 
Diluted common share
$
0.31

 
$
0.24

 
$
0.39

 
$
0.41

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding, basic
47,359,949

 
37,358,334

 
43,358,620

 
37,334,120

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding, diluted
47,877,202

 
37,828,573

 
43,840,550

 
37,777,458

 
 
 
 
 
 
 
 
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
 

 

 

 

 

 
20,716

 
20,716

 

 
20,716

Amortization of stock-based compensation
 

 

 

 

 
5,693

 

 
5,693

 

 
5,693

Preferred stock issuance
 
5,750,000

 
58

 

 

 
138,199

 

 
138,257

 

 
138,257

Common stock issuance
 

 

 
234,734

 
2

 
(2,951
)
 

 
(2,949
)
 

 
(2,949
)
Preferred dividends
 

 

 

 

 

 
(5,406
)
 
(5,406
)
 

 
(5,406
)
Common dividends ($1.02 per share)
 

 

 

 

 

 
(38,609
)
 
(38,609
)
 

 
(38,609
)
Balance, September 30, 2013
 
5,750,000

 
$
58

 
37,333,943

 
$
373

 
$
494,802

 
$
(72,043
)
 
$
423,190

 
$

 
$
423,190

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 

 

 

 

 

 
24,702

 
24,702

 
(29
)
 
24,673

Amortization of stock-based compensation
 

 

 

 

 
7,092

 

 
7,092

 

 
7,092

Common stock issuance
 

 

 
8,839,239

 
88

 
230,113

 

 
230,201

 

 
230,201

Preferred dividends
 

 

 

 

 

 
(7,682
)
 
(7,682
)
 

 
(7,682
)
Common dividends ($1.12 per share)
 

 

 

 

 

 
(50,727
)
 
(50,727
)
 

 
(50,727
)
Balance, September 30, 2014
 
5,750,000

 
$
58

 
47,627,984

 
$
476

 
$
771,844

 
$
(108,628
)
 
$
663,750

 
$
(29
)
 
$
663,721

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.

5


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

 
 
Net income
$
24,673

 
$
20,716

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

 
 
Depreciation and amortization
28,867

 
24,726

Non-cash interest income adjustments
217

 
29

Amortization of deferred financing costs
2,812

 
2,395

Stock-based compensation expense
6,337

 
5,209

Amortization of premium
(33
)
 
(535
)
Loss on extinguishment of debt
1,576

 
858

Straight-line rental income adjustments
(13,074
)
 
(10,836
)
Write-off of straight-line rental income
2,994

 

Change in fair value of contingent consideration
(860
)
 
600

Changes in operating assets and liabilities:


 
 
Prepaid expenses and other assets
(2,529
)
 
(1,494
)
Accounts payable and accrued liabilities
22,607

 
10,413

Restricted cash
(2,348
)
 
(2,870
)

 
 
 
Net cash provided by operating activities
71,239

 
49,211


 
 
 
Cash flows from investing activities:

 
 
Acquisitions of real estate
(721,879
)
 
(6,175
)
Origination and fundings of loans receivable
(59,256
)
 
(26,393
)
Preferred equity investment
(11,300
)
 
(6,624
)
Additions to real estate
(1,151
)
 
(388
)
Repayment of loans receivable
287

 

Net proceeds from the sale of real estate

 
2,208


 
 
 
Net cash used in investing activities
(793,299
)
 
(37,372
)

 
 
 
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 revolving credit facility
699,000

 

Payments on revolving credit facility
(220,500
)
 
(92,500
)
Proceeds from mortgage notes
57,703

 

Principal payments on mortgage notes
(88,419
)
 
(10,081
)
Payments of deferred financing costs
(15,474
)
 
(8,598
)
Issuance of preferred stock

 
138,257

Issuance of common stock
229,825

 
(2,950
)
Dividends paid on common and preferred stock
(57,654
)
 
(42,677
)

 
 
 
Net cash provided by financing activities
743,231

 
67,701


 
 
 
Net increase in cash and cash equivalents
21,171

 
79,540

Cash and cash equivalents, beginning of period
4,308

 
17,101


 
 
 
Cash and cash equivalents, end of period
$
25,479

 
$
96,641


 
 
 
Supplemental disclosure of cash flow information:

 
 
Interest paid
$
26,705

 
$
21,937


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

 
$

 
 
 
 
Repayment of preferred equity investments
$
6,949

 
$

 
 
 
 
See accompanying notes to condensed consolidated financial statements.

6


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/transitional care 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 September 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 September 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 September 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

7


consolidate the joint venture. The Company assesses limited partners' rights and their impact on the presumption of control of the limited partnership by the sole general partner when an investor becomes the sole general partner, and the Company reassesses if: there is a change to the terms or in the exercisability of the rights of the limited partners; the sole general partner increases or decreases its ownership of limited partnership interests; or there is an increase or decrease in the number of outstanding limited partnership interests. The Company also applies this guidance to managing member interests in limited liability companies.
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 nine months ended September 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 April 2014, the FASB issued Accounting Standards Update (“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.
In May 2014, the FASB issued 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 August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. ASU 2014-15 is effective for the annual period ended December 31, 2016 and for annual periods and interim periods thereafter with early adoption permitted. The adoption of ASU 2014-15 is not expected to materially impact the Company’s consolidated financial statements.


8


3.RECENT REAL ESTATE ACQUISITIONS
During the nine months ended September 30, 2014, the Company acquired six skilled nursing/transitional care facilities and 27 senior housing facilities for consideration totaling $690.8 million. The consideration was allocated as follows (in thousands):
 
 
Intangibles
 
Land
Building and Improvements
Tenant Origination and Absorption Costs
Tenant Relationship
Total Consideration
$
54,387

$
625,536

$
7,924

$
2,991

$
690,838

As of September 30, 2014, the purchase price allocations for the acquisitions completed during the three months ended September 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 14 years and 24 years, respectively.
For the three and nine months ended September 30, 2014, the Company recognized $3.9 million and $8.3 million, respectively, of total revenues and $1.0 million and $3.3 million, respectively, of net income attributable to common stockholders from these properties.
Holiday Portfolio
On September 25, 2014, the Company acquired a portfolio of 21 independent living facilities (the “Holiday Portfolio”), located in 15 states, from affiliates of Holiday Acquisition Holdings Corp. (“Holiday”) for a total cash purchase price of $550.0 million. Concurrently with the acquisition, certain wholly owned subsidiaries of the Company entered into a triple-net master lease agreement with certain wholly-owned subsidiaries of Holiday AL Holdings LP (collectively, “Holiday Tenant”), an affiliate of Holiday. The master lease has an initial term of 15 years with two five-year renewal options and provides for base rent in the first year of approximately $30.3 million, with annual rent increases of 4.0% in years two and three and the greater of 3.5% or the change in the Consumer Price Index during the remainder of the lease term. The master lease is expected to generate annual lease revenues determined in accordance with GAAP, of $39.3 million. The closing of the acquisition of one facility was deferred until October 7, 2014 and Holiday Tenant agreed to pay the full rental amount due under the lease notwithstanding the delay in the closing of the acquisition of this facility.
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 the value of the contingent consideration, the Company used significant inputs not observable in the market to estimate the earn-out, made assumptions regarding the probability of the portfolio achieving the incremental value and then applied an appropriate discount rate. The Company estimated a contingent consideration liability of $3.2 million at the time of purchase. As of September 30, 2014, based on the potential future performance of the Nye Portfolio, the contingent consideration liability is estimated at $3.4 million and is included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheet. During the three and nine months ended September 30, 2014, the Company recorded an adjustment to the contingent consideration liability of $0.1 million and $0.2 million, respectively, and included this amount in Other (expense) income on the accompanying condensed consolidated statements of income.

9


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 September 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/Transitional Care
 
102

 
11,460

 
$
825,378

 
$
(151,842
)
 
$
673,536

Senior Housing
 
50

 
4,818

 
746,130

 
(17,395
)
 
728,735

Acute Care Hospitals
 
2

 
124

 
175,807

 
(9,873
)
 
165,934

 
 
154

 
16,402

 
1,747,315

 
(179,110
)
 
1,568,205

Corporate Level
 
 
 
 
 
254

 
(191
)
 
63

 
 
 
 
 
 
$
1,747,569

 
$
(179,301
)
 
$
1,568,268

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/Transitional Care
 
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


 
September 30, 2014
 
December 31, 2013
Building and improvements
$
1,476,202

 
$
879,926

Furniture and equipment
80,977

 
50,567

Land improvements
4,392

 
4,392

Land
185,998

 
131,611

 
1,747,569

 
1,066,496

Accumulated depreciation
(179,301
)
 
(151,078
)
 
$
1,568,268

 
$
915,418

Operating Leases
As of September 30, 2014, all of the Company’s real estate properties were leased under triple-net operating leases with expirations ranging from six to 18 years. As of September 30, 2014, the leases had a weighted-average remaining term of 11 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 $15.6 million and $1.6 million as of September 30, 2014 and December 31, 2013, respectively. As of September 30, 2014, 81 of the Company's 154 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

10


(“EBITDARM”) to rent coverage at the facility level and consolidated EBITDAR to total fixed charge coverage at the parent guarantor level when such a guarantee exists. The Company obtains various financial and operational information from its tenants each month and reviews this information in conjunction with the above-described coverage metrics to determine trends and the operational and financial impact of the environment in the industry (including the impact of government reimbursement) and the management of the tenant’s operations. These metrics help the Company identify potential areas of 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 September 30, 2014, the future minimum rental payments from the Company’s properties under non-cancelable operating leases were as follows (in thousands):
October 1, 2014 through December 31, 2014
$
41,907

2015
171,645

2016
175,883

2017
180,825

2018
185,817

Thereafter
1,410,600

 
$
2,166,677

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

 
Skilled Nursing / Senior Housing / Acute Care Hospital
 
$
150,112

 
$
150,515

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

 
Acute Care Hospital / Memory Care
 
62,541

 
62,845

 
7.5
%
 
7.3
%
 
9/30/16 - 10/31/18
Mezzanine
 
2

 
Skilled Nursing / Senior Housing
 
21,730

 
21,797

 
11.3
%
 
11.1
%
 
12/27/14 - 08/31/17
Pre-development
 
5

 
Senior Housing
 
3,572

 
3,696

 
9.0
%
 
8.2
%
 
8/16/15 - 09/09/17
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14

 
 
 
237,955

 
238,853

 
8.3
%
 
8.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Investments:
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Equity
 
4

 
Senior Housing
 
11,631

 
11,821

 
11.9
%
 
11.9
%
 
NA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
18

 
 
 
$
249,586

 
$
250,674

 
8.5
%
 
8.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Meridian Mezzanine Loan
On August 15, 2014, the Company originated a $15.5 million mezzanine loan (the “Meridian Mezzanine Loan”) with affiliates of Meridian ALZ Investors, LLC (“Meridian”) in connection with the Company’s previously announced pipeline agreement with Meridian. The proceeds of the mezzanine loan were used to repay the Company's existing preferred equity investment in an affiliate of Meridian totaling $8.3 million (including accrued and unpaid preferred returns), resulting in a net investment by the Company of $7.2 million. The Meridian Mezzanine Loan has a three-year term and bears interest at a fixed rate of 11.0% per annum. It is secured by Meridian's equity interest in two memory care facilities and a skilled nursing facility.
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

11


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
September 30, 2014
 
Book Value as of
December 31, 2013
 
Weighted Average
Effective Interest Rate at
September 30, 2014
 
Maturity
Date
Fixed Rate
$
124,714

 
$
54,688

 
3.96
%
 
May 2031 - August 2051
Variable Rate

 
86,640

 
NA

 
NA
 
$
124,714

 
$
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 (defined below). 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 nine months ended September 30, 2014 and included this amount in loss on extinguishment of debt on the accompanying condensed consolidated statements of income.
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 nine months ended September 30, 2014 and included this amount in loss on extinguishment of debt on the accompanying condensed consolidated statements of income.
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.
On October 10, 2014, the Issuers issued an additional $150.0 million aggregate principal amount of 2021 Notes, which are treated as a single class with, and have the same terms as, the existing 2021 Notes. The notes were issued at 99.5% providing net proceeds of approximately $145.8 million (not including pre-issuance accrued interest), after deducting underwriting discounts and other offering expenses and a yield-to-maturity of 5.593%. The Company used the proceeds from this offering to repay borrowings outstanding under the Revolving Credit Facility.
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

12


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 nine months ended September 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.
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 September 30, 2014.

13


Revolving Credit Facility
On September 10, 2014, the Operating Partnership entered into a second amended and restated unsecured 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 amends and restates the amended and restated secured revolving credit facility (the “Prior Revolving Credit Facility”) that the Operating Partnership and certain subsidiaries of the Operating Partnership entered into on July 29, 2013 and amended on October 15, 2013.
The Revolving Credit Facility provides for a borrowing capacity of $650.0 million and provides an accordion feature allowing for an additional $100.0 million of capacity, subject to terms and conditions, resulting in a maximum borrowing capacity of $750.0 million. The Operating Partnership also has an option to convert up to $200.0 million of the Revolving Credit Facility to a term loan subject to terms and conditions. On October 10, 2014, the Operating Partnership converted $200.0 million of the outstanding borrowings under the Revolving Credit Facility to a term loan. Concurrent with the term loan conversion, the Company entered into a five-year interest rate cap contract that caps LIBOR at 2.0%.
While the Prior Revolving Credit Facility was secured by pledges of equity by the Company’s wholly-owned subsidiaries that own certain of the Company's real estate assets, the Revolving Credit Facility is unsecured. The Revolving Credit Facility, including amounts that are converted into a term loan, has a maturity date of September 10, 2018, and includes a one year extension option. As of September 30, 2014, there was $614.0 million outstanding under the Company’s Revolving Credit Facility.
In connection with the Revolving Credit Facility, the Company wrote off $0.2 million of unamortized deferred financing costs during the nine months ended September 30, 2014. These amounts are included in loss on extinguishment of debt on the accompanying condensed consolidated statements of income.
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 2.00% to 2.60% per annum for LIBOR based borrowings and 1.00% to 1.60% per annum for borrowings at the Base Rate. As of September 30, 2014, the interest rate on the Revolving Credit Facility was 2.46%. In addition, the Operating Partnership is required to pay an unused fee to the lenders equal to 0.25% or 0.35% per annum based on the amount of unused borrowings under the Revolving Credit Facility. During the three and nine months ended September 30, 2014, the Company incurred $0.3 million and $2.3 million, respectively, in interest expense on amounts outstanding under the Revolving Credit Facility. During the three and nine months ended September 30, 2014, the Company incurred $0.5 million and $1.1 million, respectively, of unused facility fees.
In the event that Sabra achieves at least two investment grade ratings from S&P, Moody’s and/or Fitch, the Operating Partnership can elect to reduce the applicable percentage for LIBOR or Base Rate borrowings. If the Operating Partnership makes this election, the applicable percentage for borrowings will vary based on the Debt Ratings at each Pricing Level, as defined in the credit agreement, and will range from 0.90% to 1.70% per annum for LIBOR based borrowings and 0.00% to 0.70% per annum for borrowings at the Base Rate. In addition, should the Operating Partnership elect this option, the unused fee will no longer apply and a facility fee ranging between 0.125% and 0.300% per annum will take effect based on the borrowing capacity regardless of amounts outstanding under the Revolving Credit Facility.
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 September 30, 2014, the Company was in compliance with all applicable financial covenants under the Revolving Credit Facility.
Interest Expense
The Company incurred interest expense of $10.5 million and $32.7 million during the three and nine months ended September 30, 2014, respectively, and $9.7 million and $29.9 million during the three and nine months ended September 30,

14


2013, respectively. Interest expense includes deferred financing costs amortization of $0.9 million and $2.8 million for the three and nine months ended September 30, 2014, respectively, and $0.8 million and $2.4 million for the three and nine months ended September 30, 2013, respectively. As of September 30, 2014 and December 31, 2013, the Company had $7.9 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 September 30, 2014 (in thousands): 
 
 
Mortgage
Indebtedness 
 
Senior Notes
 
Revolving Credit Facility (1) (2)
 
Total
October 1, 2014 through December 31, 2014
 
$
691

 
$

 
$

 
$
691

2015
 
2,823

 

 

 
2,823

2016
 
2,917

 

 

 
2,917

2017
 
3,013

 

 

 
3,013

2018
 
3,114

 

 
614,000

 
617,114

Thereafter
 
112,156

 
550,000

 

 
662,156

 
 
$
124,714

 
$
550,000

 
$
614,000

 
$
1,288,714

(1) Subject to a one-year extension option.
(2) On October 10, 2014, the Operating Partnership converted $200.0 million of the outstanding borrowings under the Revolving Credit Facility to a term loan.

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.

15


The following are the face values, carrying amounts and fair values of the Company’s financial instruments as of September 30, 2014 and December 31, 2013 whose carrying amounts do not approximate their fair value (in thousands):
 
September 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
$
237,955

 
$
238,853

 
$
237,385

 
$
176,558

 
$
177,509

 
$
176,985

Preferred equity investments
11,631

 
11,821

 
12,268

 
7,695

 
7,784

 
7,950

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Senior Notes
550,000

 
550,000

 
547,000

 
411,250

 
414,402

 
421,122

Mortgage indebtedness
124,714

 
124,714

 
108,467

 
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 September 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
$
237,385

 
$

 
$

 
$
237,385

Preferred equity investments
12,268

 

 

 
12,268

Financial liabilities:
 
 
 
 
 
 
 
Senior Notes
547,000

 

 
547,000

 

Mortgage indebtedness
108,467

 

 

 
108,467

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 nine months ended September 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
$
4,600

 
$

 
$

 
$
4,600

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 September 30, 2014, the total contingent consideration liability was valued at $4.6 million. The following reconciliation provides the details of activity during the nine months ended September 30, 2014 for contingent consideration liability recorded at fair value using Level 3 inputs:


16


Balance as of December 31, 2013
 
$
7,500

New contingent liability
 
3,200

Decrease in contingent liability
 
(860
)
Payment of contingent liability
 
(5,240
)
Balance as of September 30, 2014
 
$
4,600

 
 
 
A corresponding amount equal to the decrease in contingent liability was included as other income on the accompanying condensed consolidated statements of income for the three and nine months ended September 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 September 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 nine months ended September 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
July 30, 2014
 
August 15, 2014
 
0.38

 
August 29, 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.
On October 3, 2014, the Company completed an underwritten public offering of 6.9 million newly issued shares of its common stock pursuant to an effective registration statement.  The Company received net proceeds, before expenses, of $160.6 million from the offering, after giving effect to the issuance and sale of all 6.9 million shares of common stock (which included 0.9 million shares sold to the underwriters upon exercise of their option to purchase additional shares), at a price to the public of $24.25 per share.
During the nine months ended September 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 nine months ended September 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 nine months ended September 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 September 30, 2014, the Company sold 0.4 million ATM Shares, at an average price of $28.28 per share, generating gross proceeds of approximately $10.3 million, before $0.2 million of commissions. During the nine months ended September 30, 2014, the Company sold 0.6 million ATM Shares, at an average price of $28.05 per share, generating gross proceeds of approximately $16.9 million, before $0.3 million of commissions. As of September 30, 2014, the Company had $44.8 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 nine months ended September 30, 2014 and 2013 (in thousands, except share and per share amounts):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Numerator
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
 
$
14,643

 
$
9,242

 
$
17,020

 
$
15,310

 
 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
 
Basic weighted average common shares
 
47,359,949

 
37,358,334

 
43,358,620

 
37,334,120

Dilutive stock options and restricted stock units
 
517,253

 
470,239

 
481,930

 
443,338

 
 
 
 
 
 
 
 
 
Diluted weighted average common shares
 
47,877,202

 
37,828,573

 
43,840,550

 
37,777,458

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders, per:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic common share
 
$
0.31

 
$
0.25

 
$
0.39

 
$
0.41

 
 
 
 
 
 
 
 
 
Diluted common share
 
$
0.31

 
$
0.24

 
$
0.39

 
$
0.41

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 months ended September 30, 2014 and 2013, no restricted stock units were considered anti-dilutive. During the nine months ended September 30, 2014, approximately 5,000 restricted stock units were not included because they were considered anti-dilutive. During the nine months ended September 30, 2013, approximately 3,000 restricted stock units were not included because they were anti-dilutive. No stock options were considered anti-dilutive during the three and nine months ended September 30, 2014 and 2013.

17


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 September 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 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:

18



CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2014
(in thousands)
(unaudited)
 
 
Parent
Company
 
Issuers
 
Combined
Guarantor
Subsidiaries
 
Combined Non-
Guarantor
Subsidiaries
 
Elimination
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Real estate investments, net of accumulated depreciation
$
63

 
$

 
$
1,426,998

 
$
141,207

 
$

 
$
1,568,268

Loans receivable and other investments, net

 

 
250,674

 

 

 
250,674

Cash and cash equivalents
21,475

 

 

 
4,004

 

 
25,479

Restricted cash

 

 
160

 
6,377

 

 
6,537

Deferred tax assets
24,212

 

 

 

 

 
24,212

Prepaid expenses, deferred financing costs and other assets
977

 
20,920

 
112,615

 
7,684

 

 
142,196

Intercompany
230,614

 
965,828

 

 

 
(1,196,442
)
 

Investment in subsidiaries
417,157

 
602,179

 
24,887

 

 
(1,044,223
)
 

Total assets
$
694,498

 
$
1,588,927

 
$
1,815,334

 
$
159,272

 
$
(2,240,665
)
 
$
2,017,366

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Mortgage notes
$

 
$

 
$

 
$
124,714

 
$

 
$
124,714

Revolving credit facility

 
614,000

 

 

 

 
614,000

Senior unsecured notes

 
550,000

 

 

 

 
550,000

Accounts payable and accrued liabilities
6,536

 
7,770

 
24,864

 
1,549

 

 
40,719

Tax liability
24,212

 

 

 

 

 
24,212

Intercompany

 

 
1,191,119

 
5,323

 
(1,196,442
)
 

Total liabilities
30,748

 
1,171,770

 
1,215,983

 
131,586

 
(1,196,442
)
 
1,353,645

Total equity
663,750

 
417,157

 
599,351

 
27,686

 
(1,044,223
)
 
663,721

Total liabilities and equity
$
694,498

 
$
1,588,927

 
$
1,815,334

 
$
159,272

 
$
(2,240,665
)
 
$
2,017,366


19



CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2013
(in thousands)
 
 
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

Total 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



20



CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended September 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
$

 
$

 
$
33,290

 
$
4,875

 
$

 
$
38,165

Interest and other income
2

 

 
5,141

 
676

 

 
5,819

Total revenues
2

 

 
38,431

 
5,551

 

 
43,984

Expenses: