Sabra Health Care REIT Inc. in Irvine said its pending merger with Care Capital Properties Inc. in Chicago strengthens its portfolio, despite a return to a majority skilled nursing concentration.
The combined company will be based in Irvine and operate under the Sabra name, and Sabra executives will have management and board control, despite Care Capital owning 59% of the new entity.
Sabra Chief Executive and Chairman Richard Matros said the company plans to expand local office space and hire additional employees with expertise in accounting, finance, asset management and acquisition—approximately doubling its workforce to 30.
The all-stock merger—Care Capital shareholders get 1.123 shares of Sabra stock for their Care Capital stock—will create a 564-property portfolio valued at an approximately $4.3 billion market cap.
“We got increased size, increased liquidity, increased debt, and [rating agencies] Fitch and S&P made us investment grade …,” Matros said. “The only concern people have is our skilled nursing [concentration].”
Sabra on its own ranks 14th on this year’s Business Journal public companies list by market valuation, the deal with Care Capital would likely push it into the top 10 next year.
Care Capital was spun out of Ventas Inc. in 2015 as a pure-play skilled nursing real estate investment trust. Its portfolio is comprised of 345 properties with approximately 38,000 beds spread across 36 states, according to Securities and Exchange Commission filings.
Sabra and Care Capital traded under $27 per share the Friday before the news was announced on May 8. Sabra shares were down about 9% in recent trading to a $1.5 billion market cap. Care Capital was up about 8% immediately following the announcement and has since dropped down to about $26.50 per share and a $2.14 billion market cap.
Skilled Nursing Exposure
Sabra started out as a primarily skilled nursing-focused REIT when it spun out of Sun Healthcare Group Inc. in 2010. The nursing home company split its operations into two separate publicly traded businesses—Sabra and Sun Healthcare. Sabra acquired the real estate assets. The portfolio, valued at $700 million, was comprised of 86 properties—including 67 skilled nursing facilities, or 78%—in 19 states.
Sabra has since taken steps to limit exposure to skilled nursing in light of new variable reimbursements, a strategy that other REITs, such as HCP Inc. in Irvine, Ventas Inc. and Welltower Inc., have taken. It earlier announced the sale of 35 Genesis HealthCare Inc.-occupied properties that’s scheduled to be completed later this year, further reducing its exposure to skilled nursing.
Genesis is one of the country’s largest skilled nursing and rehabilitation therapy providers, with more than 450 skilled nursing centers and assisted senior living communities in 30 states.
“We are now about 50-50 [skilled nursing versus senior housing exposure],” Matros said. “The deal would bring us to more than 70% in skilled nursing.”
Sabra’s portfolio is comprised of 97 skilled nursing facilities, 85 senior housing properties and one acute hospital across 38 states, according to regulatory filings. “But that is not to say we can’t bring that exposure [to skilled nursing] down again like what we’ve done before,” Matros added.
Diversification
While the deal tilts its property type concentration back to one end of revenue inflow—Sabra senior housing properties are mostly private pay, whereas skilled nursing is based on reimbursement from Medicare, Medicaid and Obamacare—Matros said it adds diversification to its tenant and geography concentrations.
“The deal reduces tenant concentration for both Sabra and Care Capital,” he said. “Our largest tenant will be Genesis, which will represent 11% [of operating income]. That is taking into account after we dispose of those 35 properties.”
Apart from Genesis, both Sabra and CCP’s largest tenants—Holiday AL Holdings LP, NMS Healthcare, SeniorCare Centers LLC, Signature HealthCare LLC and Avamere Group LLC—will each make up less than 10% of annual revenue after the merger is complete.
Matros said that Sabra will continue to grow its portfolio through acquisitions of senior housing properties, including assisted living, independent living and memory care facilities.
Sabra’s net income was about $70 million on revenue of about $233 million last year. Care Capital’s net income was $123 million on revenue of $339 million. The combined REITs will have about $2.6 billion in debt. Matros said the company plans to fold in term loans and restructure variable-rate debt.
Firm Leadership
Sabra will lead the combined company, with Matros continuing to serve as chief executive and chairman, Harold Andrews as chief financial officer, and Talya Nevo-Hacohen as chief investment officer. The Sabra board of directors will be expanded from five to eight members, adding Raymond Lewis, Care Capital’s current chief executive, and two additional directors from Care Capital.
UBS Investment Bank acted as financial adviser on the merger, and O’Melveny & Meyers LLP and Fried, Frank, Harris, Shriver & Jacobson LLP provided legal guidance. Care Capital appointed BofA Merrill Lynch and Barclays as financial advisers and Sidley Austin LLP as legal advisers.
