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EX-32.2 - EXHIBIT 32.2 - Sabra Health Care REIT, Inc.sbraex3222017q3.htm
EX-32.1 - EXHIBIT 32.1 - Sabra Health Care REIT, Inc.sbraex3212017q3.htm
EX-31.2 - EXHIBIT 31.2 - Sabra Health Care REIT, Inc.sbraex3122017q3.htm
EX-31.1 - EXHIBIT 31.1 - Sabra Health Care REIT, Inc.sbraex3112017q3.htm
EX-12.1 - EXHIBIT 12.1 - Sabra Health Care REIT, Inc.sbraex1212017q3.htm
EX-10.3 - EXHIBIT 10.3 - Sabra Health Care REIT, Inc.sbraex103stockagmtnon-empl.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, 2017
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-34950
 
 SABRA HEALTH CARE REIT, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Maryland
 
27-2560479
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
18500 Von Karman Avenue, Suite 550
Irvine, CA 92612
(888) 393-8248
(Address, zip code and telephone number of Registrant)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 30, 2017, there were 178,232,213 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, tenants, 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:
changes in healthcare regulation and political or economic conditions;
the anticipated benefits of our merger with Care Capital Properties, Inc. (“CCP”) may not be realized;
the anticipated and unanticipated costs, fees, expenses and liabilities related to our merger with CCP;
our dependence on the operating success of our tenants;
our ability to implement the previously announced rent repositioning program for certain of our tenants who were legacy tenants of CCP on the timing or terms we have previously disclosed;
our ability to dispose of facilities currently leased to Genesis Healthcare, Inc. (“Genesis”) on the timing or terms we have previously disclosed;
the significant amount of and our ability to service our indebtedness;
covenants in our debt agreements that may restrict our ability to pay dividends, make investments, incur additional indebtedness and refinance indebtedness on favorable terms;
increases in market interest rates;
changes in foreign currency exchange rates;
our ability to raise capital through equity and debt financings;
the impact of required regulatory approvals of transfers of healthcare properties;
the relatively illiquid nature of real estate investments;
competitive conditions in our industry;
the loss of key management personnel or other employees;
the impact of litigation and rising insurance costs on the business of our tenants;
the effect of our tenants declaring bankruptcy or becoming insolvent;
uninsured or underinsured losses affecting our properties and the possibility of environmental compliance costs and liabilities;
the impact of a failure or security breach of information technology in our operations;
our ability to find replacement tenants and the impact of unforeseen costs in acquiring new properties;
the possibility that the conditions to closing the acquisition of a 49% equity interest in the Enlivant Joint Ventures (as defined below) may not be satisfied, such that the transaction will not close or that the closing may be delayed;
the possibility that Sabra may not acquire the remaining majority interest in the Enlivant Joint Ventures;
our ability to maintain our status as a real estate investment trust (“REIT”);
changes in tax laws and regulations affecting REITs;
compliance with REIT requirements and certain tax and tax regulatory matters related to our status as a REIT; and
the ownership limits and anti-takeover defenses in our governing documents and Maryland law, which may restrict change of control or business combination opportunities.
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, 2016 (our “2016 Annual Report on Form 10-K”) and in Part II, Item 1A, “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, 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

2


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.


3


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, 2017
 
December 31, 2016
 
(unaudited)
 
 
Assets
 
 
 
Real estate investments, net of accumulated depreciation of $336,689 and $282,812 as of September 30, 2017 and December 31, 2016, respectively
$
5,972,785

 
$
2,009,939

Loans receivable and other investments, net
149,766

 
96,036

Cash and cash equivalents
30,873

 
25,663

Restricted cash
12,489

 
9,002

Lease intangible assets, net
262,817

 
26,250

Accounts receivable, prepaid expenses and other assets, net
159,577

 
99,029

Total assets
$
6,588,307

 
$
2,265,919

 
 
 
 
Liabilities
 
 
 
Secured debt, net
$
257,571

 
$
160,752

Revolving credit facility
251,000

 
26,000

Term loans, net
1,190,887

 
335,673

Senior unsecured notes, net
1,305,996

 
688,246

Accounts payable and accrued liabilities
116,146

 
39,639

Lease intangible liabilities, net
94,878

 

Total liabilities
3,216,478

 
1,250,310

 
 
 
 
Commitments and contingencies (Note 14)

 

 
 
 
 
Equity
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized, 5,750,000 shares issued and outstanding as of September 30, 2017 and December 31, 2016
58

 
58

Common stock, $.01 par value; 250,000,000 shares authorized, 175,832,213 and 65,285,614 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
1,758

 
653

Additional paid-in capital
3,588,510

 
1,208,862

Cumulative distributions in excess of net income
(225,459
)
 
(192,201
)
Accumulated other comprehensive income (loss)
4,236

 
(1,798
)
Total Sabra Health Care REIT, Inc. stockholders’ equity
3,369,103

 
1,015,574

Noncontrolling interests
2,726

 
35

Total equity
3,371,829

 
1,015,609

Total liabilities and equity
$
6,588,307

 
$
2,265,919


See accompanying notes to condensed consolidated financial statements.

4


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,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Rental income
$
100,145

 
$
56,833

 
$
213,273

 
$
167,442

Interest and other income
4,090

 
3,157

 
8,062

 
25,482

Resident fees and services
7,554

 
1,937

 
17,840

 
5,811

 
 
 
 
 
 
 
 
Total revenues
111,789

 
61,927

 
239,175

 
198,735

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Depreciation and amortization
25,933

 
17,102

 
62,290

 
51,273

Interest
24,568

 
15,794

 
56,218

 
49,139

Operating expenses
5,102

 
1,404

 
11,929

 
4,256

General and administrative
12,944

 
4,966

 
24,159

 
13,513

Merger and acquisition costs
23,299

 
1,051

 
29,750

 
1,222

Provision for doubtful accounts and loan losses
5,149

 
540

 
7,454

 
3,286

Impairment of real estate

 

 

 
29,811

 
 
 
 
 
 
 
 
Total expenses
96,995

 
40,857

 
191,800

 
152,500

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Loss on extinguishment of debt
(553
)
 

 
(553
)
 
(556
)
Other income
51

 
2,945

 
3,121

 
5,345

Net gain (loss) on sale of real estate
582

 
1,451

 
4,614

 
(3,203
)
 
 
 
 
 
 
 
 
Total other income (expense)
80

 
4,396

 
7,182

 
1,586

 
 
 
 
 
 
 
 
Income before income tax expense
14,874

 
25,466

 
54,557

 
47,821

 
 
 
 
 
 
 
 
Income tax benefit (expense)
195

 
(154
)
 
(161
)
 
(786
)
 
 
 
 
 
 
 
 
Net income
15,069

 
25,312

 
54,396

 
47,035

 
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interests
26

 
25

 
42

 
66

 
 
 
 
 
 
 
 
Net income attributable to Sabra Health Care REIT, Inc.
15,095

 
25,337

 
54,438

 
47,101

 
 
 
 
 
 
 
 
Preferred stock dividends
(2,561
)
 
(2,561
)
 
(7,682
)
 
(7,682
)
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
12,534

 
$
22,776

 
$
46,756

 
$
39,419

 
 
 
 
 
 
 
 
Net income attributable to common stockholders, per:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic common share
$
0.11

 
$
0.35

 
$
0.58

 
$
0.60

 
 
 
 
 
 
 
 
Diluted common share
$
0.11

 
$
0.35

 
$
0.57

 
$
0.60

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding, basic
112,149,638

 
65,312,288

 
81,150,846

 
65,285,591

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding, diluted
112,418,100

 
65,591,428

 
81,429,044

 
65,470,589

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.36

 
$
0.42

 
$
1.21

 
$
1.25


See accompanying notes to condensed consolidated financial statements.

5


SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net income
$
15,069

 
$
25,312

 
$
54,396

 
$
47,035

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
412

 
(500
)
 
552

 
(749
)
Unrealized gain (loss) on cash flow hedges (1)
4,657

 
398

 
5,482

 
(1,300
)
 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
5,069

 
(102
)
 
6,034

 
(2,049
)
 
 
 
 
 
 
 
 
Comprehensive income
20,138

 
25,210

 
60,430

 
44,986

 
 
 
 
 
 
 
 
Comprehensive loss attributable to noncontrolling interest
26

 
25

 
42

 
66

 
 
 
 
 
 
 
 
Comprehensive income attributable to Sabra Health Care REIT, Inc.
$
20,164

 
$
25,235

 
$
60,472

 
$
45,052


(1) 
Amounts are net of provision for income taxes of $0.4 million and $0.6 million for the three and nine months ended September 30, 2017, respectively, and none for the three and nine months ended September 30, 2016.

See accompanying notes to condensed consolidated financial statements.


6


SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(dollars in thousands, except per share data)  
(unaudited)
 
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in Capital
 
Cumulative Distributions in Excess of Net Income
 
Accumulated Other Comprehensive Loss
 
Total
Stockholders’
Equity
 
Noncontrolling Interests
 
Total Equity
 
 
Shares
 
Amount
 
Shares
 
Amounts
 
 
 
 
 
 
Balance, December 31, 2015
 
5,750,000

 
$
58

 
65,182,335

 
$
652

 
$
1,202,541

 
$
(142,148
)
 
$
(7,333
)
 
$
1,053,770

 
$
106

 
$
1,053,876

Net income (loss)
 

 

 

 

 

 
47,101

 

 
47,101

 
(66
)
 
47,035

Other comprehensive loss
 

 

 

 

 

 

 
(2,049
)
 
(2,049
)
 

 
(2,049
)
Amortization of stock-based compensation
 

 

 

 

 
6,775

 

 

 
6,775

 

 
6,775

Common stock issuance, net
 

 

 
108,731

 
1

 
(1,104
)
 

 

 
(1,103
)
 

 
(1,103
)
Repurchase of common stock
 

 

 
(31,230
)
 

 
(725
)
 

 

 
(725
)
 

 
(725
)
Preferred dividends
 

 

 

 

 

 
(7,682
)
 

 
(7,682
)
 

 
(7,682
)
Common dividends ($1.25 per share)
 

 

 

 

 

 
(82,240
)
 

 
(82,240
)
 

 
(82,240
)
Balance, September 30, 2016
 
5,750,000

 
$
58

 
65,259,836

 
$
653

 
$
1,207,487

 
$
(184,969
)
 
$
(9,382
)
 
$
1,013,847

 
$
40

 
$
1,013,887

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in Capital
 
Cumulative Distributions in Excess of Net Income
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Stockholders’
Equity
 
Noncontrolling Interests
 
Total Equity
 
 
Shares
 
Amount
 
Shares
 
Amounts
 
 
 
 
 
 
Balance, December 31, 2016
 
5,750,000

 
$
58

 
65,285,614

 
$
653

 
$
1,208,862

 
$
(192,201
)
 
$
(1,798
)
 
$
1,015,574

 
$
35

 
$
1,015,609

Net income (loss)
 

 

 

 

 

 
54,438

 

 
54,438

 
(42
)
 
54,396

Other comprehensive income
 

 

 

 

 

 

 
6,034

 
6,034

 

 
6,034

Change in noncontrolling interests
 

 

 

 

 

 

 

 

 
2,733

 
2,733

Amortization of stock-based compensation
 

 

 

 

 
8,768

 

 

 
8,768

 

 
8,768

Common stock issuance, net
 

 

 
110,546,599

 
1,105

 
2,370,880

 

 

 
2,371,985

 

 
2,371,985

Preferred dividends
 

 

 

 

 

 
(7,682
)
 

 
(7,682
)
 

 
(7,682
)
Common dividends ($1.21 per share)
 

 

 

 

 

 
(80,014
)
 

 
(80,014
)
 

 
(80,014
)
Balance, September 30, 2017
 
5,750,000

 
$
58

 
175,832,213

 
$
1,758

 
$
3,588,510

 
$
(225,459
)
 
$
4,236

 
$
3,369,103

 
$
2,726

 
$
3,371,829

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes to condensed consolidated financial statements.

7


SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,

2017
 
2016
Cash flows from operating activities:

 

Net income
$
54,396

 
$
47,035

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

 

Depreciation and amortization
62,290

 
51,273

Amortization of above and below market lease intangibles, net
637

 

Non-cash interest income adjustments
(137
)
 
549

Amortization of deferred financing costs
4,132

 
3,767

Stock-based compensation expense
8,329

 
6,137

Amortization of debt premium/discount
(99
)
 
81

Loss on extinguishment of debt
553

 
556

Straight-line rental income adjustments
(18,260
)
 
(16,710
)
Provision for doubtful accounts and loan losses
7,454

 
3,286

Change in fair value of contingent consideration
(552
)
 
50

Net (gain) loss on sales of real estate
(4,614
)
 
3,203

Impairment of real estate

 
29,811

Changes in operating assets and liabilities:


 


Accounts receivable, prepaid expenses and other assets
(5,752
)
 
1,381

Accounts payable and accrued liabilities
(53,570
)
 
6,217

Restricted cash
(5,036
)
 
(2,820
)

 
 

Net cash provided by operating activities
49,771

 
133,816

Cash flows from investing activities:

 

Acquisition of real estate
(393,064
)
 
(109,619
)
Cash received in CCP Merger
77,858

 

Origination and fundings of loans receivable
(5,642
)
 
(9,478
)
Origination and fundings of preferred equity investments
(2,713
)
 
(6,845
)
Additions to real estate
(3,233
)
 
(901
)
Repayment of loans receivable
8,710

 
214,947

Repayments of preferred equity investments
3,239

 

Net proceeds from the sales of real estate
11,723

 
85,449


 
 

Net cash (used in) provided by investing activities
(303,122
)
 
173,553

Cash flows from financing activities:

 

Net repayments of revolving credit facility
(137,000
)
 
(255,000
)
Proceeds from term loans
181,000

 
69,360

Principal payments on secured debt
(3,094
)
 
(13,756
)
Payments of deferred financing costs
(15,316
)
 
(5,933
)
Issuance of common stock, net
319,026

 
(1,289
)
Dividends paid on common and preferred stock
(86,813
)
 
(89,283
)

 
 

Net cash provided by (used in) financing activities
257,803

 
(295,901
)

 
 

Net increase in cash and cash equivalents
4,452

 
11,468

Effect of foreign currency translation on cash and cash equivalents
758

 
772

Cash and cash equivalents, beginning of period
25,663

 
7,434


 
 

Cash and cash equivalents, end of period
$
30,873

 
$
19,674

Supplemental disclosure of cash flow information:

 

Interest paid
$
48,836

 
$
49,009

Supplemental disclosure of non-cash investing and financing activities:





Acquisition of business in CCP Merger (see Note 3)
$
3,726,093

 
$

Assumption of indebtedness in CCP Merger
$
(1,751,373
)
 
$

Stock exchanged in CCP Merger
$
(2,052,578
)
 
$

Real estate acquired through loan receivable foreclosure
$


$
10,100

See accompanying notes to condensed consolidated financial statements.

8


SABRA HEALTH CARE REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
1.     BUSINESS
Overview
Sabra Health Care REIT, Inc. (“Sabra” or the “Company”) was incorporated on May 10, 2010 as a wholly owned subsidiary of Sun Healthcare Group, Inc. (“Sun”) and commenced operations on November 15, 2010 following Sabra's separation from Sun (the “Separation Date”). Sabra elected to be treated as a real estate investment trust (“REIT”) with the filing of its U.S. federal income tax return for the taxable year beginning January 1, 2011. Sabra believes that it has been organized and operated, and it intends to continue to operate, in a manner to qualify as a REIT. Sabra’s primary business consists of acquiring, financing and owning real estate property to be leased to third party tenants in the healthcare sector. Sabra primarily generates revenues by leasing properties to tenants and operators throughout the United States and Canada. Sabra owns substantially all of its 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 and Sabra's wholly owned subsidiaries are currently the only limited partners, or by subsidiaries of the Operating Partnership. The Company’s investment portfolio is comprised of skilled nursing/transitional care facilities, senior housing communities and specialty hospitals and other facilities, in each case leased to third-party operators; senior housing communities operated by third-party property managers pursuant to property management agreements (“Senior Housing - Managed”); investments in loans receivable; and preferred equity investments.
On May 7, 2017, the Company, the Operating Partnership, PR Sub, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“Merger Sub”), Care Capital Properties, Inc., a Delaware corporation (“CCP”), and Care Capital Properties, L.P. (“CCPLP”), a Delaware limited partnership and wholly-owned subsidiary of CCP, entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, on August 17, 2017, CCP merged with and into Merger Sub, with Merger Sub continuing as the surviving corporation (the “CCP Merger”), following which Merger Sub merged with and into the Company, with the Company continuing as the surviving entity (the “Subsequent Merger”), and, simultaneous with the Subsequent Merger, CCPLP merged with and into the Operating Partnership, with the Operating Partnership continuing as the surviving entity.
Pursuant to the Merger Agreement, as of the effective time of the CCP Merger, each share of CCP common stock, par value $0.01 per share, issued and outstanding immediately prior to the effective time of the CCP Merger (other than shares of CCP common stock owned directly by CCP, the Company or their respective subsidiaries, in each case not held on behalf of third parties) was converted into the right to receive 1.123 newly issued shares of Company common stock, par value $0.01 per share, plus cash in lieu of any fractional shares. See Note 3, “CCP Merger and Recent Real Estate Acquisitions” for additional information regarding the CCP Merger.
The acquisition of CCP has been reflected in the Company's condensed consolidated financial statements since the effective date of the CCP Merger.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Sabra and its wholly owned subsidiaries as of September 30, 2017 and December 31, 2016 and for the periods ended September 30, 2017 and 2016. All significant intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the 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, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. For further information, refer to the Company’s consolidated financial statements and notes thereto

9


for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.
GAAP requires the Company to identify entities for which control is achieved through voting rights or other means and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIEs”). A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity's activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. If the Company were determined to be the primary beneficiary of the VIE, the Company would consolidate investments in the VIE. The Company may change its original assessment of a VIE due to events such as modifications of contractual arrangements that affect the characteristics or adequacy of the entity's equity investments at risk and the disposal of all or a portion of an interest held by the primary beneficiary.
The Company identifies the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity's economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. The Company performs this analysis on an ongoing basis.
As of September 30, 2017, the Company determined it was the primary beneficiary of two variable interest entities—a senior housing community and an exchange accommodation titleholder variable interest entity—and has consolidated the operations of these entities in the accompanying condensed consolidated financial statements. As of September 30, 2017, the Company determined that operations of these entities 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, 2017, none of the Company's investments in loans are accounted for as real estate joint ventures.
As it relates to investments in joint ventures, the Company assesses any limited partners' rights and their impact on the presumption of control of the limited partnership by any single partner. The Company also applies this guidance to managing member interests in limited liability companies.The Company reassesses its determination of which entity controls the joint venture if: there is a change to the terms or in the exercisability of the rights of any partners or members, the sole general partner or managing member increases or decreases its ownership interests, or there is an increase or decrease in the number of outstanding ownership interests. As of September 30, 2017, the Company's determination of which entity controls its investments in joint ventures has not changed as a result of any reassessment.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Reclassifications
Certain amounts in the Company's consolidated financial statements for prior periods have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods. As a result, certain reclassifications were made to the condensed consolidated balance sheets and condensed consolidated statements of income.
Net Investment in Direct Financing Lease
As of September 30, 2017, the Company had a $22.9 million net investment in one skilled nursing/transitional care facility leased to an operator under a direct financing lease, as the tenant is obligated to purchase the property at the end of the

10


lease term. The net investment in direct financing lease is recorded in accounts receivable, prepaid expenses and other assets, net on the condensed consolidated balance sheets and represents the total undiscounted rental payments (including the tenant's purchase obligation), plus the estimated unguaranteed residual value, less the unearned lease income. Unearned lease income represents the excess of the minimum lease payments and residual values over the cost of the investment. Unearned lease income is deferred and amortized to income over the lease term to provide a constant yield when collectability of the lease payments is reasonably assured. Income from the Company's net investment in direct financing lease was $0.3 million for the three and nine months ended September 30, 2017 and is reflected in interest and other income on the condensed consolidated statements of income. Future minimum lease payments contractually due under the direct financing lease at September 30, 2017, were as follows: $0.5 million for the remainder of 2017; $2.2 million for 2018; $2.2 million for 2019; $2.3 million for 2020; and $2.1 million for 2021.
Recently Issued Accounting Standards Update
Between May 2014 and May 2016, the FASB issued three Accounting Standards Updates (each, an “ASU”) changing the requirements for recognizing and reporting revenue (together, herein referred to as the “Revenue ASUs”): (i) ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), (ii) ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”) and (iii) ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). ASU 2014-09 provides guidance for revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2016-08 is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2016-12 provides practical expedients and improvements on the previously narrow scope of ASU 2014-09. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 defers the effective date of ASU 2014-09 by one year to fiscal years, and interim periods within, beginning after December 15, 2017. All subsequent ASUs related to ASU 2014-09, including ASU 2016-08 and ASU 2016-12, assumed the deferred effective date enforced by ASU 2015-14. Early adoption of the Revenue ASUs is permitted for annual periods, and interim periods within, beginning after December 15, 2016. A reporting entity may apply the amendments in the Revenue ASUs using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or full retrospective approach. As the primary source of revenue for the Company is generated through leasing and financing arrangements, which are excluded from the Revenue ASUs, the Company expects that the impact of the Revenue ASUs to the Company will be limited to the recognition of non-lease revenue, such as certain resident fees in its Senior Housing - Managed properties structures (a portion of which are not generated through leasing arrangements) ), and its recognition of real estate sale transactions. Under ASU 2014-09, revenue recognition for real estate sales is primarily based on the transfer of control versus continuing involvement under current guidance. Accordingly, the Company anticipates that the new guidance will result in more transactions qualifying as sales of real estate and gains on sale being recognized at an earlier date than under current accounting guidance. Additionally, upon adoption of the Revenue ASUs in 2018, the Company anticipates that it will be required to separately disclose the components of its total revenue between lease revenue accounted for under existing lease guidance and service revenue accounted for under the new Revenue ASUs, but does not anticipate a material change in the timing of revenue recognition. The Company has not yet elected a transition method and is evaluating the complete impact of the adoption of the Revenue ASUs on January 1, 2018 to its consolidated financial position, results of operations and disclosures. The Company expects to complete its evaluation of the impacts of the Revenue ASUs during the fourth quarter of 2017. 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 supersedes guidance related to accounting for leases. ASU 2016-02 updates guidance around the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The objective of ASU 2016-02 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. ASU 2016-02 does not fundamentally change lessor accounting; however, some changes have been made to lessor accounting to conform and align that guidance with the lessee guidance and other areas within GAAP. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements when adopted.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business with the objective of providing guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. When substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business. To be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. To be a business without outputs, there will now need to be an organized workforce. ASU 2017-01 is effective for fiscal years and interim periods within those

11


years beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU 2017-01 on October 1, 2016 on a prospective basis. The Company expects that the majority of its future acquisitions of real estate will be accounted for as asset acquisitions under the new guidance. This adoption will impact how the Company accounts for merger and acquisition costs and contingent consideration, which may result in lower expensed merger and acquisition costs and eliminate fair value adjustments related to future contingent consideration arrangements.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock compensation (Topic 718): Scope of modification accounting (“ASU 2017-09”). ASU 2017-09 clarifies and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of ASU 2017-09 to have a material impact on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 is intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and to simplify the application of the hedge accounting guidance in current GAAP. ASU 2017-12 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements when adopted.

3.     CCP MERGER AND RECENT REAL ESTATE ACQUISITIONS
CCP Merger
On August 17, 2017, the Company completed the CCP Merger. Under the terms of the Merger Agreement, each share of CCP common stock issued and outstanding immediately prior to the effective time of the CCP Merger (other than any shares owned directly by CCP, the Company or their respective subsidiaries, in each case not held on behalf of third parties) was converted into the right to receive 1.123 newly issued shares of Company common stock, resulting in the issuance of approximately 94.0 million shares of Company common stock at the effective time of the CCP Merger. As a result of the CCP Merger, the Company acquired 330 properties (consisting of 296 skilled nursing/transitional care facilities, 13 senior housing communities and 21 specialty hospitals and other facilities), one skilled nursing/transitional care facility leased to an operator under a direct financing lease (see Note 2, “Summary of Significant Accounting Policies—Net Investment in Direct Financing Lease”), 18 investments in loans receivable (see Note 6, “Loans Receivable and Other Investments”) and one specialty valuation firm. Sabra also assumed certain outstanding equity awards and other debt and liabilities of CCP (see Note 7, “Debt”). Based on the closing price of Sabra’s common stock on August 16, 2017, the Company estimates the fair value of the consideration exchanged or assumed to be approximately $2.1 billion. The Company’s estimated fair values of CCP’s assets acquired and liabilities assumed on the closing date of the CCP Merger are determined based on certain valuations and analyses that have yet to be finalized, and accordingly, the assets acquired and liabilities assumed, as detailed below, are preliminary and are subject to adjustment once the analyses are completed.

12


The following table summarizes the preliminary purchase price allocation for the CCP Merger based on the Company's initial valuation, including estimates and assumptions of the acquisition date fair value of the tangible and intangible assets acquired and liabilities assumed on August 17, 2017 (in thousands):
Real estate investments
$
3,629,447

Loans receivable and other investments
57,064

Cash and cash equivalents
77,858

Restricted cash
779

Lease intangible assets, net
234,426

Accounts receivable, prepaid expenses and other assets, net
35,829

Secured debt, net
(98,500
)
Revolving credit facility
(362,000
)
Unsecured term loans
(674,000
)
Senior unsecured notes, net
(616,873
)
Accounts payable and accrued liabilities
(132,860
)
Lease intangible liabilities, net
(95,859
)
Noncontrolling interests
(2,733
)
Total consideration
$
2,052,578

 
 
The lease intangible assets and lease intangible liabilities acquired in connection with the CCP Merger have weighted-average amortization periods as of the closing date of the CCP Merger of 11 years and 10 years, respectively.
For the three and nine months ended September 30, 2017, the Company recognized $45.1 million of total revenues and $30.6 million of net income attributable to common stockholders, excluding acquisition related costs, from the CCP Merger investments. Acquisition related costs associated with the CCP Merger were $23.3 million and $29.7 million, respectively, during the three and nine months ended September 30, 2017.
Recent Real Estate Acquisitions
During the nine months ended September 30, 2017, in addition to the properties acquired as a result of the CCP Merger, the Company acquired 21 skilled nursing/transitional care facilities and one senior housing community. During the nine months ended September 30, 2016, the Company acquired one skilled nursing/transitional care facility and three senior housing communities. The consideration was allocated as follows (in thousands):
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Land
 
$
55,579

 
$
5,521

Building and improvements
 
329,462

 
102,094

Tenant origination and absorption costs
 
6,143

 
1,565

Tenant relationship
 
1,880

 
439

 
 
 
 
 
Total consideration
 
$
393,064

 
$
109,619

 
 
 
 
 
The tenant origination and absorption costs intangible assets and tenant relationship intangible assets acquired in connection with these acquisitions have weighted-average amortization periods as of the respective dates of acquisition of 13 years and 23 years, respectively.
For the three and nine months ended September 30, 2017, the Company recognized $1.5 million and $1.6 million of total revenues, respectively, and $1.4 million of net income attributable to common stockholders from the facilities acquired during the nine months ended September 30, 2017. For the three and nine months ended September 30, 2016, the Company recognized $1.7 million of total revenues and $0.1 million of net income attributable to common stockholders from the facilities acquired during the nine months ended September 30, 2016.


13


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, 2017
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
 
409

 
45,710

 
$
4,386,543

 
$
(215,921
)
 
$
4,170,622

Senior Housing - Leased(1)
 
88

 
8,110

 
1,149,278

 
(96,790
)
 
1,052,488

Senior Housing - Managed(1)
 
11

 
999

 
170,866

 
(10,884
)
 
159,982

Specialty Hospitals and Other
 
22

 
1,085

 
602,339

 
(12,820
)
 
589,519

 
 
530

 
55,904

 
6,309,026

 
(336,415
)
 
5,972,611

Corporate Level
 
 
 
 
 
448

 
(274
)
 
174

 
 
 
 
 
 
$
6,309,474

 
$
(336,689
)
 
$
5,972,785

As of December 31, 2016
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
 
97

 
10,819

 
$
1,042,754

 
$
(190,038
)
 
$
852,716

Senior Housing - Leased(1)
 
83

 
7,855

 
1,153,739

 
(80,449
)
 
1,073,290

Senior Housing - Managed(1)
 
2

 
134

 
34,212

 
(1,682
)
 
32,530

Specialty Hospitals and Other
 
1

 
70

 
61,640

 
(10,387
)
 
51,253

 
 
183

 
18,878

 
2,292,345

 
(282,556
)
 
2,009,789

Corporate Level
 
 
 
 
 
406

 
(256
)
 
150

 
 
 
 
 
 
$
2,292,751

 
$
(282,812
)
 
$
2,009,939


 
September 30, 2017
 
December 31, 2016
Building and improvements
$
5,410,572

 
$
1,983,769

Furniture and equipment
234,901

 
85,196

Land improvements
3,563

 
3,744

Land
660,438

 
220,042

 
6,309,474

 
2,292,751

Accumulated depreciation
(336,689
)
 
(282,812
)
 
$
5,972,785

 
$
2,009,939

(1) 
During the nine months ended September 30, 2017, the Company transitioned nine senior housing communities into a managed property structure whereby the Company owns the operations of the communities and the communities are operated by a third-party property manager.
Contingent Consideration Arrangements
In connection with three of its prior real estate acquisitions, the Company entered into contingent consideration arrangements pursuant to which it could be required to pay out additional amounts based on incremental value created through the improvement of operations of the applicable acquired facility (a contingent consideration liability). The estimated value of the contingent consideration liabilities at the time of purchase was $3.2 million. The contingent consideration amounts would be determined based on portfolio performance and the facility achieving certain performance hurdles during 2017. During the nine months ended September 30, 2017, one earn-out arrangement expired and resulted in a $0 payout and a second earn-out arrangement was terminated in connection with the transition of the eight senior housing communities to Senior Housing - Managed properties. To determine the value of the remaining contingent consideration arrangement, the Company used significant inputs not observable in the market to estimate the contingent consideration, made assumptions regarding the probability of the facility achieving the incremental value and then applied an appropriate discount rate. As of September 30, 2017, based on the performance of this facility, the contingent consideration liability had an estimated value of $0.3 million, which is included in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheets.

14


During the three and nine months ended September 30, 2017, the Company recorded an increase of $0.3 million and a decrease of $0.6 million, respectively, to the contingent consideration liability. These amounts are included in other income on the accompanying condensed consolidated statements of income.
Operating Leases
As of September 30, 2017, the substantial majority of the Company’s real estate properties (excluding 11 Senior Housing - Managed properties) were leased under triple-net operating leases with expirations ranging from one to 15 years. As of September 30, 2017, the leases had a weighted-average remaining term of nine years. The leases include provisions to extend the lease terms and other negotiated terms and conditions. The Company, through its subsidiaries, retains substantially all of the risks and benefits of ownership of the real estate assets leased to the tenants. In addition, the Company may receive additional security under these operating leases in the form of letters of credit and security deposits from the lessee or guarantees from the parent of the lessee. Security deposits received in cash related to tenant leases are included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets and totaled $35.6 million as of September 30, 2017 and $2.7 million as of December 31, 2016. As of September 30, 2017, the Company had a $3.5 million reserve for unpaid cash rents and a $2.8 million reserve associated with accumulated straight-line rental income. As of December 31, 2016, the Company had a $3.2 million reserve for unpaid cash rents and a $3.7 million reserve associated with accumulated straight-line rental income.
The following table provides information regarding significant tenant relationships representing 10% or more of the Company's total revenues as of September 30, 2017 (dollars in thousands):
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
September 30, 2017
 
 
Number of Investments
 
Rental Revenue
 
% of Total Revenue
 
Rental Revenue
 
% of Total Revenue
 
 
 
 
 
 
 
 
 
 
 
Genesis Healthcare, Inc.
 
76

 
$
20,257

 
18.1
%
 
$
60,470

 
25.3
%
Holiday AL Holdings, LP
 
21

 
9,813

 
8.8

 
29,438

 
12.3

 
 
 
 
 
 
 
 
 
 
 
The Company has entered into memoranda of understanding with Genesis to market for sale 35 skilled nursing facilities (the “MOU Disposition Facilities”). As of September 30, 2017, the Company completed the sale of two of the MOU Disposition Facilities, and subsequent to September 30, 2017, the Company completed the sale of two additional MOU Disposition Facilities. The Company has also entered into a definitive agreement to sell an additional 20 MOU Disposition Facilities, which is expected to be completed in the fourth quarter of 2017. The Company expects the remaining MOU Disposition Facilities to be sold by the end of the first quarter of 2018, though there can be no assurance that the sales will be completed in that timeframe, if at all. The Company has also begun the process of marketing for sale up to all of the remaining 43 facilities leased to Genesis, with sales expected to occur in 2018.
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 tenant’s ability to pay their rent obligations to the Company) is the tenant’s lease coverage ratio or the parent’s fixed charge coverage ratio for those entities with a parent guarantee. These coverage ratios include earnings before interest, taxes, depreciation, amortization and rent (“EBITDAR”) to rent and earnings before interest, taxes, depreciation, amortization, rent and management fees (“EBITDARM”) to rent at the lease level and consolidated EBITDAR to total fixed charges 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 identify financial and operational trends, evaluate the impact of the industry’s operational and financial environment (including the impact of government reimbursement), and evaluate 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 tenant’s ability to generate sufficient liquidity to meet its obligations, including its obligation to continue to pay the rent due to the Company.

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As of September 30, 2017, the future minimum rental payments from the Company’s properties held for investment under non-cancelable operating leases was as follows (in thousands):
October 1, 2017 through December 31, 2017
$
146,223

2018
590,222

2019
599,100

2020
592,748

2021
582,633

Thereafter
3,508,262

 
$
6,019,188

 
 
 

5.    ASSET HELD FOR SALE AND DISPOSITIONS
Asset Held for Sale
As of September 30, 2017, the Company determined that one skilled nursing/transitional care facility, with a net book value of $2.0 million, met the criteria to be classified as held for sale. The net book value is included in accounts receivable, prepaid expenses and other assets, net on the condensed consolidated balance sheets.
2017 Dispositions
During the nine months ended September 30, 2017, the Company completed the sale of four skilled nursing/transitional care facilities for aggregate consideration of $11.7 million. The net carrying value of the assets and liabilities of these facilities was $7.1 million, which resulted in an aggregate $4.6 million net gain on sale.
2016 Dispositions
During the nine months ended September 30, 2016, the Company completed the sale of two skilled nursing/transitional care facilities and one acute care hospital for aggregate consideration of $85.4 million after selling expenses of $2.3 million. The net carrying value of the assets and liabilities of these facilities, after the impairment loss of $29.8 million recognized in relation to the acute care hospital, was $88.6 million, resulting in an aggregate $3.2 million loss on sale.
During the nine months ended September 30, 2017, the Company recognized $0.3 million of net income, excluding the net gain on sale, from the asset held for sale and the dispositions made during the nine months ended September 30, 2017. During the nine months ended September 30, 2016, the Company recognized $38,000 of net income, excluding the net loss on sale and real estate impairment, from the dispositions made during the nine months ended September 30, 2017 and 2016. The sale of these facilities do not represent a strategic shift that has or will have a major effect on the Company's operations and financial results and therefore the results of operations attributable to these facilities have remained in continuing operations.


16


6.    LOANS RECEIVABLE AND OTHER INVESTMENTS
As of September 30, 2017 and December 31, 2016, the Company’s loans receivable and other investments consisted of the following (dollars in thousands):
Investment
 
Quantity as of September 30, 2017
 
Property Type
 
Principal Balance as of September 30, 2017 (1)
 
Book Value as of
September 30, 2017
 
Book Value as of
December 31, 2016
 
Weighted Average Contractual Interest Rate / Rate of Return as of September 30, 2017
 
Maturity Date as of September 30, 2017
Loans Receivable:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage
 
5

 
Skilled Nursing / Senior Housing
 
$
45,064

 
$
42,664

 
$
38,262

 
9.2
%
 
11/07/16- 02/10/27
Construction
 
2

 
Senior Housing
 
2,354

 
2,418

 
842

 
8.0
%
 
03/31/21- 05/31/22
Mezzanine
 
2

 
Senior Housing
 
34,640

 
28,391

 
9,656

 
10.3
%
 
02/28/18- 05/25/20
Pre-development
 
1

 
Senior Housing
 
2,357

 
2,357

 
4,023

 
9.0
%
 
04/01/20
Other
 
14

 
Multiple
 
44,926

 
27,859

 

 
8.6
%
 
10/28/17- 04/30/27
Debtor-in-possession
 

 
Acute Care Hospital
 

 

 
813

 
N/A

 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
24

 
 
 
129,341

 
103,689

 
53,596

 
9.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan loss reserve
 
 
 

 
(6,211
)
 
(2,750
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
129,341

 
$
97,478

 
$
50,846

 
 
 
 
Other Investments:
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Equity
 
13

 
Skilled Nursing / Senior Housing
 
51,833

 
52,288

 
45,190

 
12.8
%
 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
37

 
 
 
$
181,174

 
$
149,766

 
$
96,036

 
10.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
Principal balance includes amounts funded and accrued but unpaid interest / preferred return and excludes capitalizable fees.
In connection with the CCP Merger, the Company acquired 18 loan receivable investments with a book value of $54.1 million as of September 30, 2017.
As of September 30, 2017, the Company considered six loan receivable investments to be impaired. The aggregate principal balance of the impaired loans was $35.2 million as of September 30, 2017 and December 31, 2016. The Company recorded a provision for loan losses of $3.0 million and $4.8 million related to four loan receivable investments during the three and nine months ended September 30, 2017, respectively, two of which were written-off during the nine months ended September 30, 2017. As of September 30, 2017, six loans receivable investments totaling $35.2 million were on nonaccrual status. During the three and nine months ended September 30, 2017, the Company reduced its portfolio-based loan loss reserve by $32,000 and $0.3 million, respectively. The Company's specific loan loss reserve was $6.1 million and the portfolio-based loan loss reserve was $0.1 million as of September 30, 2017. The Company's specific loan loss reserve and portfolio-based loan loss reserve were $2.3 million and $0.4 million, respectively, as of December 31, 2016.

7.    DEBT
Secured Indebtedness
The Company’s secured debt consists of the following (dollars in thousands):
Interest Rate Type
Book Value as of
September 30, 2017
(1)
 
Book Value as of
December 31, 2016
 (1)
 
Weighted Average
Effective Interest Rate at
September 30, 2017
(2)
 
Maturity
Date
Fixed Rate
$
161,871

 
$
163,638

 
3.87
%
 
December 2021 - 
August 2051
Variable Rate
98,500

 

 
3.02
%
 
July 2019
 
$
260,371

 
$
163,638

 
3.55
%
 
 
(1)  
Principal balance does not include deferred financing costs, net of $2.8 million and $2.9 million as of September 30, 2017 and December 31, 2016, respectively.
(2)  
Weighted average effective interest rate includes private mortgage insurance.

17


On August 17, 2017, in connection with the CCP Merger (see Note 3, “CCP Merger and Recent Real Estate Acquisitions”), the Company assumed a $98.5 million variable rate secured term loan that bears interest at LIBOR plus 1.80% and matures in July 2019.
Senior Unsecured Notes
The Company’s senior unsecured notes consist of the following (dollars in thousands):
 
 
 
 
Principal Balance as of
Title
 
Maturity Date
 
September 30, 2017 (1)
 
December 31, 2016 (1)
 
 
 
 
 
 
 
5.5% senior unsecured notes due 2021 (“2021 Notes”)

 
February 1, 2021
 
$
500,000

 
$
500,000

5.375% senior unsecured notes due 2023 (“2023 Notes”)

 
June 1, 2023
 
200,000

 
200,000

5.125% senior unsecured notes due 2026 (“2026 Notes”)
 
August 15, 2026
 
500,000

 

5.38% senior unsecured notes due 2027 (“2027 Notes”)
 
May 17, 2027
 
100,000

 

 
 
 
 
$
1,300,000

 
$
700,000

 
 
 
 
 
 
 
(1) 
Principal balance does not include premium, net of $16.3 million and deferred financing costs, net of $10.3 million as of September 30, 2017 and does not include discount, net of $0.5 million and deferred financing costs, net of $11.2 million as of December 31, 2016.
The 2021 Notes and the 2023 Notes were issued by the Operating Partnership and Sabra Capital Corporation, wholly owned subsidiaries of the Company (the “Issuers”). The 2021 Notes accrue interest at a rate of 5.5% per annum payable semiannually on February 1 and August 1 of each year, and the 2023 Notes accrue interest at a rate of 5.375% per annum payable semiannually on June 1 and December 1 of each year.
The 2026 Notes and the 2027 Notes were assumed as a result of the CCP Merger (see Note 3, “CCP Merger and Recent Real Estate Acquisitions”) and accrue interest at a rate of 5.125% and 5.38%, respectively, per annum. Interest is payable semiannually on February 15 and August 15 of each year for the 2026 Notes and on May 17 and November 17 of each year for the 2027 Notes.
The obligations under the 2021 Notes, 2023 Notes and 2027 Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by Sabra and certain subsidiaries of Sabra; provided, however, that such guarantees are subject to release under certain customary circumstances. The obligations under the 2026 Notes are fully and unconditionally guaranteed, on an unsecured basis, by Sabra; provided, however, that such guarantee is subject to release under certain customary circumstances. See Note 12, “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 and agreements (the “Senior Notes Indentures”) governing the 2021 Notes, 2023 Notes, 2026 Notes and 2027 Notes (collectively, the “Senior Notes”) include customary events of default and require the Company to comply with specified restrictive covenants. As of September 30, 2017, the Company was in compliance with all applicable financial covenants under the Senior Notes Indentures.
Revolving Credit Facility and Term Loans
On January 14, 2016, the Operating Partnership and Sabra Canadian Holdings, LLC (together, the “Borrowers”) entered into a third amended and restated unsecured credit facility (the “Prior Credit Facility”).
The Prior Credit Facility included a revolving credit facility (the “Prior Revolving Credit Facility”) and U.S. dollar and Canadian dollar term loans (collectively, the “Prior Term Loans”). The Prior Revolving Credit Facility provided for a borrowing capacity of $500.0 million and, in addition, provided for U.S. dollar and Canadian dollar term loans of $245.0 million and CAD $125.0 million, respectively. Further, up to $125.0 million of the Prior Revolving Credit Facility could be used for borrowings in certain foreign currencies. The Prior Credit Facility also contained an accordion feature that allowed for an increase in the total available borrowings to $1.25 billion, subject to terms and conditions. In addition, the Canadian dollar term loan was re-designated as a net investment hedge (see Note 8, “Derivative and Hedging Instruments” for further information).
The Prior Revolving Credit Facility had a maturity date of January 14, 2020, and included two six-month extension options. The Prior Term Loans had a maturity date of January 14, 2021.
Borrowings under the Prior Revolving Credit Facility bore 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

18


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 varied based on the Consolidated Leverage Ratio, as defined in the credit agreement for the Prior Credit Facility, and ranged from 1.80% to 2.40% per annum for LIBOR based borrowings and 0.80% to 1.40% per annum for borrowings at the Base Rate. In addition, the Operating Partnership paid an unused facility fee to the lenders equal to 0.25% or 0.30% per annum, which was determined by usage under the Prior Revolving Credit Facility.    
The Prior Term Loans bore interest as follows: the U.S. dollar term loan bore interest on the outstanding principal amount at a rate equal to an applicable percentage plus, at the Operating Partnership’s option, either (a) LIBOR or (b) the Base Rate (the applicable percentage varied based on the Consolidated Leverage Ratio, as defined in the credit agreement for the Prior Credit Facility, and ranged from 1.75% to 2.35% per annum for LIBOR based borrowings and 0.75% to 1.35% per annum for borrowings at the Base Rate); and the Canadian dollar term loan bore interest on the outstanding principal amount at a rate equal to the Canadian Dollar Offer Rate (“CDOR”) plus 1.75% to 2.35% depending on the Consolidated Leverage Ratio.
Effective on August 17, 2017, the Borrowers, Sabra and the other parties thereto entered into a fourth amended and restated unsecured credit facility (the “Credit Facility”). The Credit Facility amends and restates the Prior Credit Facility. The Company recognized a $0.6 million loss on extinguishment of debt related to write-offs of deferred financing costs in connection with amending and restating the Prior Credit Facility during the three and nine months ended September 30, 2017.
The Credit Facility includes a $1.0 billion revolving credit facility (the “Revolving Credit Facility”), $1.1 billion in U.S. dollar term loans and a CAD $125 million Canadian dollar term loan (collectively, the “Term Loans”). Further, up to $175 million of the Revolving Credit Facility may be used for borrowings in certain foreign currencies. The Credit Facility also contains an accordion feature that can increase the total available borrowings to $2.5 billion, subject to terms and conditions.
The Revolving Credit Facility has a maturity date of August 17, 2021, and includes two six-month extension options. $200 million of the U.S. dollar Term Loans has a maturity date of August 17, 2020, and the other Term Loans have a maturity date of August 17, 2022.
As of September 30, 2017, there was $251.0 million outstanding under the Revolving Credit Facility and $749.0 million available for borrowing.
Borrowings under the Revolving Credit Facility bear interest on the outstanding principal amount at a rate equal to an applicable interest margin plus, at the Operating Partnership’s option, either (a) LIBOR or (b) the Base Rate. On August 17, 2017, Sabra’s ratings met the Investment Grade Ratings Criteria (as defined in the credit agreement), and Sabra elected to use the ratings-based applicable interest margin for borrowings which will vary based on the Debt Ratings (as defined in the credit agreement) and will range from 0.875% to 1.65% per annum for LIBOR based borrowings and 0.00% to 0.65% per annum for borrowings at the Base Rate. As of September 30, 2017, the interest rate on the Revolving Credit Facility was 2.47%. In addition, the Operating Partnership pays a facility fee ranging between 0.125% and 0.300% per annum based on the aggregate amount of commitments under the Revolving Credit Facility regardless of amounts outstanding thereunder.
The U.S. dollar Term Loans bear interest on the outstanding principal amount at a rate equal to an applicable interest margin plus, at the Operating Partnership's option, either (a) LIBOR or (b) the Base Rate. The ratings-based applicable interest margin for borrowings will vary based on the Debt Ratings, as defined in the credit agreement, and will range from 0.90% to 1.90% per annum for LIBOR based borrowings and 0.00% to 0.90% per annum for borrowings at the Base Rate. The Canadian dollar term loan bears interest on the outstanding principal amount at a rate equal to CDOR plus an interest margin that will range from 0.90% to 1.90% depending on the Debt Ratings.
On June 10, 2015, the Company entered into an interest rate swap agreement to fix the CDOR portion of the interest rate for CAD $90.0 million of its Canadian term loan at 1.59%. In addition, CAD $90.0 million of the Canadian dollar term loan was designated as a net investment hedge. On August 10, 2016, the Company entered into two interest rate swap agreements to fix the LIBOR portion of the interest rate for $245.0 million of its U.S. dollar Term Loan at 0.90% and one interest rate swap agreement to fix the CDOR portion on CAD $35.0 million of its Canadian dollar term loan at 0.93%. See Note 8, “Derivative and Hedging Instruments” for further information.
As a result of the CCP Merger (see Note 3, “CCP Merger and Recent Real Estate Acquisitions”), the Company assumed eight interest rate swap agreements that fix the LIBOR portion of the interest rate for $600 million of the Company’s U.S. dollar Term Loans at a weighted average rate of 1.31%. See Note 8, “Derivative and Hedging Instruments” for further information.
The obligations of the Borrowers under the Credit Facility are guaranteed by Sabra and certain subsidiaries of Sabra.
The Credit Facility contains customary covenants that include restrictions or limitations on the ability to make acquisitions and other investments, pay dividends, incur additional indebtedness, engage in non-healthcare related business

19


activities, enter into transactions with affiliates and sell or otherwise transfer certain assets as well as customary events of default. The 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, 2017, the Company was in compliance with all applicable financial covenants under the Credit Facility.
Interest Expense
During the three and nine months ended September 30, 2017, the Company incurred interest expense of $24.6 million and $56.2 million, respectively, and $15.8 million and $49.1 million during the three and nine months ended September 30, 2016, respectively. Interest expense includes financing costs amortization of $1.6 million and $4.1 million for the three and nine months ended September 30, 2017, respectively, and $1.3 million and $3.8 million for the three and nine months ended September 30, 2016, respectively. As of September 30, 2017 and December 31, 2016, the Company had $15.4 million and $13.8 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, 2017 (in thousands): 
 
 
Secured
Indebtedness 
 
Revolving Credit
    Facility (1)
 
Term Loans
 
Senior Notes
 
Total
October 1, 2017 through December 31, 2017
 
$
1,054

 
$

 
$

 
$

 
$
1,054

2018
 
4,304

 

 

 

 
4,304

2019
 
102,948

 

 

 

 
102,948

2020
 
4,598

 

 
200,000

 

 
204,598

2021
 
20,587

 
251,000

 

 
500,000

 
771,587

Thereafter
 
126,880

 

 
1,000,225

 
800,000

 
1,927,105

Total Debt
 
260,371

 
251,000

 
1,200,225

 
1,300,000

 
3,011,596

Premium, net
 

 

 

 
16,259

 
16,259

Deferred financing costs, net
 
(2,800
)
 

 
(9,338
)
 
(10,263
)
 
(22,401
)
Total Debt, Net
 
$
257,571

 
$
251,000

 
$
1,190,887

 
$
1,305,996

 
$
3,005,454

(1) 
Revolving Credit Facility is subject to two six-month extension options.
    
8.    DERIVATIVE AND HEDGING INSTRUMENTS
The Company is exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign exchange rates. The Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates and foreign exchange rates. The Company’s derivative financial instruments are used to manage differences in the amount of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
Certain of the Company’s foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value in the Company’s functional currency, the U.S. dollar, of the Company’s investment in foreign operations, the cash receipts and payments related to these foreign operations and payments of interest and principal under Canadian dollar denominated debt. The Company enters into derivative financial instruments to protect the value of its foreign investments and fix a portion of the interest payments for certain debt obligations. The Company does not enter into derivatives for speculative purposes.
Cash Flow Hedges
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Approximately $3.5 million of losses, which are included in accumulated other comprehensive loss, as of September 30, 2017, are expected to be reclassified into earnings in the next 12 months. In 2016 the

20


Company terminated its interest rate cap, generating cash proceeds of $0.3 million. The balance of the loss in other comprehensive income will be reclassified to earnings through 2019.
Net Investment Hedges
The Company is exposed to fluctuations in foreign exchange rates on investments it holds in Canada. The Company uses cross currency interest rate swaps to hedge its exposure to changes in foreign exchange rates on these foreign investments.
The following presents the notional amount of derivatives instruments as of the dates indicated (in thousands):
 
 
September 30, 2017
 
December 31, 2016
Derivatives designated as cash flow hedges:

 
 
 
 
Denominated in U.S. Dollars
 
$
845,000

 
$
245,000

Denominated in Canadian Dollars
 
$
125,000

 
$
125,000

 
 
 
 
 
Derivatives designated as net investment hedges:
 
 
 
 
Denominated in Canadian Dollars
 
$
56,300

 
$
56,300

 
 
 
 
 
Financial instrument designated as net investment hedge:
 
 
 
 
Denominated in Canadian Dollars
 
$
125,000

 
$
125,000

 
 
 
 
 
Derivative and Financial Instruments Designated as Hedging Instruments
The following is a summary of the derivative and financial instruments designated as hedging instruments held by the Company at September 30, 2017 and December 31, 2016 (dollars in thousands):    
 
 
 
 
 
 
Fair Value
 
Maturity Dates
 
 
Type
 
Designation
 
Count as of September 30, 2017
 
September 30, 2017
 
December 31, 2016
 
 
Balance Sheet Location
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
Cash flow
 
12

 
$
18,957

 
$
8,083

 
2020 - 2023
 
Accounts receivable, prepaid expenses and other assets, net
Cross currency interest rate swaps
 
Net investment
 
2

 
827

 
3,157

 
2025
 
Accounts receivable, prepaid expenses and other assets, net
 
 
 
 
 
 
$
19,784

 
$
11,240

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
Cash flow
 

 
$

 
$
716

 
2020
 
Accounts payable and accrued liabilities
CAD term loan
 
Net investment
 
1

 
100,225

 
93,000

 
2022
 
Term loans, net
 
 
 
 
 
 
$
100,225

 
$
93,716

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following presents the effect of the Company’s derivative and financial instruments designated as hedging instruments on the condensed consolidated statements of income and the condensed consolidated statements of equity for the three and nine months ended September 30, 2017 (in thousands):
 
 
Gain (Loss) Recognized in Other Comprehensive Income
(Effective Portion)
 
Income Statement Location
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
Interest rate products
 
$
4,372

 
$
(40
)
 
$
4,462

 
$
(2,019
)
 
Interest expense
Net Investment Hedges:
 
 
 
 
 
 
 
 
 
 
Foreign currency products
 
(1,080
)
 
102

 
(2,239
)
 
(2,118
)
 
N/A
CAD term loan
 
(3,938
)
 
1,363

 
(7,225
)
 
(5,863
)
 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(646
)
 
$
1,425

 
$
(5,002
)
 
$
(10,000
)
 
 
 
 
 
 
 
 
 
 
 
 
 

21


 
 
Loss Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)
 
Income Statement Location
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Cash Flow Hedges: