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Sabra Starts to Thrive Despite Medicare Cutbacks

Matros: most recent acquisitions not affected by Medicare cuts

Irvine-based Sabra Health Care REIT Inc. is set to report its financial results this week amid reports of investors taking a shine to it and other niche real estate investors.

Sabra owns real estate that it leases to nursing homes and other healthcare facility operators, primarily Sun Healthcare Group Inc., also in Irvine, which it spun out from in 2010.

Analysts on average expect Sabra to post earnings of $8.9 million, versus earnings of $7,000 a year ago.

Revenue is seen as coming in at $24.1 million, up from $8.8 million a year ago.

Dow Jones News-wires recently reported that Sabra was the second highest-performing real estate trust in its All REIT index, with an average return to investors of 39%. Sabra only trailed Pennsyl-vania Real Estate In-vestment Trust, a Philadelphia-based owner of 49 shopping centers.

Sabra’s performance in the first quarter marks a reversal from the same period in 2011, when the Dow Jones index determined it had a 29% negative return to investors. That reading came as Sabra and others in the healthcare segment faced uncertainty on pending Medicare cuts. Some analysts speculated the cuts would make it tough for tenants of care facilities to make rent payments, and expressed concerns that the chain reaction would hit real estate owners.

The cuts in Medicare reimbursements came to about 11%, slightly lower than feared. That, combined with several acquisitions of facilities less sensitive to Medicare payments, helped Sabra dodge the brunt of the cuts.

Sabra should be able to cut expenses to offset remaining effects of cuts in Medicare, Joel Beam, a fund manager at San Francisco-based Forward Management LLC’s Forward Select Income Fund, told Dow Jones. Forward Select owns about 5% of Sabra.

Sabra’s shares had risen by about 36% for the year though last week to a market value of about $612 million.

Model, Objectives

A pair of Sabra executives explained the company’s business model and objectives during a late March high-yield bond and syndicated loan conference presented by London-based Barclays Bank.

“Our thesis was that the large healthcare REITS have gotten so big, they are really not able to pay the attention that these small operators need to provide capital for those guys because it just doesn’t move the needle for them,” Harold Andrews, Sabra’s chief financial officer, said at the presentation.

Andrews reiterated that Sabra’s near-term objective is to diversify away from Sun, which remains its primary tenant.

Sabra’s portfolio included 99 properties in 24 states and 10,997 licensed beds as of March 30. Sun now leases about 75% of Sabra’s real estate, a total that dropped steadily in the past two years.

Assets

“[When] we started out, over 90% of our assets were skilled nursing, and so we would like to see more of a balance in our portfolio between skilled nursing and assisted living facilities,” Andrews said.

Sabra isn’t going to eschew skilled nursing, though.

Andrews said, “if a good deal comes along, we will continue to look at those, but we would like to see more [assisted living].”

A good-sized deal for Sabra is $100 million or less, Andrews told attendees.

Sabra has made several deals in that range, including a recent $29.9 million deal for a pair of skilled nursing facilities in Pennsylvania from Meridian Equity Investors LP, a real estate insurance agent.

“They are skilled nursing facilities in name only,” Chief Executive Richard Matros said, adding that both have a specialty of treating patients on ventilators.

The Pennsylvania facilities “do a negligible amount of Medicare business and therefore the [Centers for Medicaid & Medicaid Services] final rule did not impact this business,” Matros said.

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