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Sun Healthcare Real Estate Spinoff Nears

A healthcare real estate investment company emerging from Irvine nursing home operator Sun Healthcare Group Inc. is set to debut on Wall Street and start looking for acquisitions.

“I love to build companies, so we’re looking forward to a nice run where we can grow,” said Richard Matros, Sun Healthcare’s chief executive who is set to head spinoff Sabra Health Care REIT Inc.

Shareholders of Sun Healthcare, which runs some 90 nursing homes, assisted living centers and rehabilitation facilities across the country, are expected to vote Thursday on spinning off Sabra as owner of Sun Healthcare’s buildings.

Sun Healthcare is set to continue operations in the buildings with Sabra as its landlord.

The goal for Sabra is to move beyond buildings that house Sun Healthcare facilities by acquiring medical office buildings, hospitals and buildings housing medical technology companies.

Sabra first plans to focus on acquiring other nursing homes and assisted senior living facilities before moving on to other types of healthcare buildings.

The company’s looking at acquisitions in the $10 million to $30 million range, according to Matros.

Sabra hasn’t set a timetable for buying, according to a filing with the Securities and Exchange Commission.


The company is set to start out with a “pretty healthy amount of liquidity,” Matros said.

It has $60 million in cash and a $100 million revolving credit line that can be expanded to $200 million, he said.

“As we get a couple of deals done, then we will use equity,” Matros said.

Sabra will have some $116 million of equity on its books to start, he said.

The company, which is set to see its shares debut sometime after the shareholder vote, is projected to see a market value of $350 million to $400 million, according to Matros and an analyst who follows Sun Healthcare.

The shares are set to trade on Nasdaq as “SBRA.”

Sabra’s real estate and other assets are valued at about $720 million, according to Matros.

The company will join a niche among real estate investment trusts, which pass along most profits to shareholders.

“The appeal to investors will be that there’s not a lot of small-cap healthcare REITs anymore,” said Robert Mains, an analyst with Morgan Keegan & Co., a Memphis investment bank. “If they can have a fairly robust acquisition pace, they can grow earnings faster than other (real estate investors).”

Other healthcare real estate investors include Long Beach-based HCP Inc., with a recent market value of $11.2 billion, Ventas Inc. of Chicago at $8.3 billion, Health Care REIT Inc. of Toledo, Ohio, at $6.3 billion and Newport Beach’s Nationwide Health Properties Inc. at $5 billion. Matros, who’s run Sun Healthcare since 2001, said he’s looking to his industry ties to come across deals.

“Because I’ve been in the business for longer than I can remember, I really know an awful lot of the operators in both the (nursing home) and senior housing sectors,” he said. “I know a lot of the smaller guys who are looking for financing.”

Management at Sabra has “significant expertise in skilled nursing” which should make it easy for executives to buy senior housing, said John Arabia, managing director of Green Street Advisors Inc., a Newport Beach real estate investor and market tracker.

By splitting off Sabra, Matros is looking to generate money for shareholders that isn’t reflected in Sun Healthcare’s market value, which stood at about $580 million last week.

“The alchemy that (Matros) is seeking to take advantage of in this case is that the valuations right now for REITs are considerably higher than for operating companies,” analyst Mains said.

In preparation for the split, Sun Healthcare raised $240 million in a stock offering a few weeks ago and used proceeds to pay down debt.

Sabra is set to start out with about $225 million of long-term debt, according to its SEC filing. It recently sold that amount of bonds to institutional investors.

The company’s also taking on $162.7 million in mortgage debt on 26 Sun Healthcare properties.

Upon splitting, Sabra is set to own 86 properties, 67 of which are nursing homes. The buildings are spread out among 19 states.

Sabra stands to be the second big corporate split in Orange County this year.

First American Corp. of Santa Ana broke into title insurer First American Financial Corp. and CoreLogic Inc., a real estate data provider, back in June.


For Sun Healthcare, the split is an evolution for a company that almost was left for dead in the late 1990s.

Sun Healthcare emerged from bankruptcy reorganization nearly a decade ago. It and some of its competitors filed for bankruptcy after the federal government slashed Medicare payments for nursing homes.

Under Matros, Sun Healthcare expanded with a series of acquisitions that made it a big real estate owner.

Besides Matros, Sabra’s management team is set to include Chief Financial Officer Harold Andrews, who previously worked with Matros at Regency Health Services Inc., a Tustin nursing home operator that Sun Healthcare bought in the late 1990s.

The team also includes Michael Costa as corporate controller and Talya Nevo-Hacohen as chief investment officer. Her background includes a stint at HCP, which moved from Newport Beach to Long Beach in 2004.

Later this month, Sabra’s set to move to the Irvine Towers office complex near John Wayne Airport and a few blocks from Sun Healthcare.

Sabra is set to have six or seven workers, including the executive officers.

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