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Sabra Buys Keep Pace Brisk on Diversification Plan

Irvine-based Sabra Health Care REIT Inc. is ahead of schedule in its plan to reduce its dependence on primary tenant Sun Healthcare Group Inc.

“By the time we finish our deals for this year, by the end of year, we’ll have Sun at 60% tenant exposure … which in two years is much better than we would have anticipated,” Sabra Chief Executive Richard Matros said in an interview last week.

Sabra owns various types of healthcare and senior real estate including nursing homes, medical office buildings, assisted living and memory care centers, and a hospital.

Genesis HealthCare LLC of Kennett Square, Pa., last week closed its $215 million buy of Sun, which spun its real estate out to create Sabra in late 2010.

“By the second half of next year sometime, we’ll have [Sun] down to about 50%” tenancy in Sabra’s properties, Matros said.

Ratings agencies such as Moody’s Investors Service will give Sabra a ratings upgrade when the company can get its exposure to Sun down to about 50%, he said.

“As we work towards investment-grade status, all that’s critical to us,” Matros said.

Sabra added to its diversification push last week when it said it made two deals.

The investor said it exercised an option to buy four nursing homes and an assisted living facility in Texas for net price of $33 million. Sabra had given the seller, the Meridian Properties Fund I LP, a $10 million mezzanine loan under which Sabra had the option to buy the properties for $43 million. The loan that was repaid when the deal closed.

The nursing homes and assisted living facility that Sabra bought have a total of 394 beds between them.

Sabra also said it bought the Camden Care Center, an 87-bed nursing home in Minneapolis, for $7.2 million. Sabra entered into a lease with Novi, Mich.-based Trinity Health Systems LLC in conjunction with the purchase.

“These are very attractive assets and primarily recent vintage,” Matros said.

Sabra has been doing roughly about $200 million a year in deals on average.

Matros said that the REIT has mainly bought newer properties, “which in the skilled [nursing] sector are kind of hard to find.”

Senior Housing

Sabra’s diversification efforts have caused it to focus on senior housing like assisted living and memory-care centers that handle patients with Alzheimer’s disease and other forms of dementia.

Such properties are attractive to Sabra because they generally take payment from sources other than Medicare and Medicaid, which are vulnerable to government cuts.

Wall Street approves.

Sabra “continues to successfully reduce exposure to both [Sun] and the [nursing home]sector through accretive acquisitions,” said Omotayo Okusanya, an analyst with Stamford, Conn.-based brokerage Jefferies & Co., in an October research note.

Diversification

Healthcare is the “only sector where diversification is the norm” in the real estate investment trust world, said Jeff Theiler, a research analyst with Newport Beach-based Green Street Advisors.

Having a diverse portfolio allows healthcare REITs to have a lower cost of debt and a lower overall cost of capital, which enables them to be more effective in competing to buy properties, said Theiler, who does not specifically follow Sabra.

“We really needed to get our cost of capital down to compete for senior housing acquisitions,” Matros said. “Our cost of capital has come down because of the diversification we’ve accomplished.”

Sabra will still do skilled nursing deals, “but a bigger priority is now senior housing primarily,” he added.

The REIT has also moved into development.

First Phoenix Agreement

Sabra entered an agreement with Wisconsin-based First Phoenix Group in August to develop up to 10 senior housing and memory-care properties. First Phoenix is going to identify and develop the facilities, with the first one to be built in Ramsey, Minn.

Affiliates of Sabra will buy the properties and a 50-50 joint venture between Sabra and First Phoenix will operate the facilities subject to certain terms and conditions. Sabra will own all the real estate.

Sabra expects to announce more development deals soon and is able to do both development deals as well as buying properties, Matros said.

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