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Rebound for Nursing Home Operators, Healthcare REIT

Shares of two publicly traded nursing home operators and a related real estate investor based in Orange County have staged comebacks, thanks largely to acquisitions that helped offset cuts in government funding that sent them reeling 18 months ago.

The dip started in August 2011, when federal officials said they would cut Medicare payments for nursing-home care by more than 11%. Shares of Mission Viejo-based Ensign Group Inc. fell by 22% on the day the cuts were announced. Skilled Healthcare Group Inc. in Foothill Ranch dropped by 43%. Sabra Health Care REIT Inc., which owns 96 nursing homes that it leases to operators, saw its shares plummet 23%.

All three companies are on the Business Journal’s list of the largest publicly traded companies based in Orange County (list starts on page 10; related stories throughout issue). No. 17 Sabra’s shares have risen 153% since the federal cuts were announced, to a market value of about $1.1 billion. No. 24 Ensign Group’s stock is up 48%, to a market value of about $727 million. No. 37 Skilled Healthcare is up 28% to a market value of approximately $253 million.

The three have outpaced some of their competitors. Shares of Louisville, Ky.-based Kindred Healthcare Inc., for example, are down 24% over the same period.

The big dip 18 months ago came in part because the Medicare cuts “were a surprise,” said Robert Mains, an analyst with St. Louis-based Stifel Nicolaus & Co. who follows Ensign, Skilled and Sabra.

“What the operators have been able to prove over the subsequent year and a half is that not only were they not going to go bankrupt, but that they’re flexible enough in the way that they run their businesses that they can handle a deep rate cut,” Mains said.

Acquisitions

Acquisitions have been a key to the rebounds.

Skilled bought a hospice company and a home healthcare company in mid-2012, moves that “took some of the sting out of” the Medicare cuts, according to trade publication Modern Healthcare.

“Hospice and home care represent important service elements within the continuum of care for seniors,” Skilled Chief Executive Boyd Hendrickson said when the deals were made.

Ensign also has been an aggressive buyer of nursing homes, including a deal announced last week for three facilities in Texas.

“As we stay nimble and keep close track of our markets, we expect to see both opportunistic and strategic growth opportunities, things that might not appeal to others but are just what we’re always looking for,” said Gregory Stapley, Ensign’s executive vice president and corporate secretary.

Sabra has gained more favor on Wall Street over the past year and a half because it added more non-nursing-home properties to its ranks and reduced its dependence on its former parent company. Sabra was spun out of Sun Healthcare Group Inc. in 2010. Sun Healthcare was based in Irvine at the time; it was sold last year to Kennett Square, Pa.-based competitor Genesis HealthCare LLC for $215 million.

Sabra started with nearly all of its property leased to Sun Healthcare. It has since bought a number of properties, including nursing homes not operated by its former parent; medical office buildings; assisted living facilities; and a hospital.

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