Irvine nursing home operator Sun Healthcare Group Inc. sold shares last week and plans to issue debt in the coming months on the road to splitting itself into two publicly traded companies.
The company is set to spin off its real estate holdings as Sabra Health Care REIT Inc. in the fourth quarter, perhaps around late October, according to Richard Matros, Sun’s chief executive and Sabra’s future chief.
The spinoff stands to be the second large corporate split in Orange County this year, after First American Corp. of Santa Ana broke into title insurer First American Financial Corp. and real estate data provider CoreLogic Inc. in June.
Sun announced plans in May to split the company in a bid to create value on Wall Street for its real estate.
The real estate holdings are an outgrowth of Sun’s main business in which the company runs more than 90 nursing homes, assisted living centers and rehabilitation facilities across the country.
Sun is raising about $200 million after fees in a sale of about 27 million shares that wraps up this week. The company plans to use the proceeds to repay debt as a prelude to the split.
A debt offering for both Sun and Sabra is set for September and October.
Sabra will “be ready to go at any given time,” Matros told analysts and investors on a recent conference call. “It’s just a function of looking at the market conditions and picking what we think is the most optimal time to do it.”
In a Securities and Exchange Commission filing, Sabra said it plans to trade its shares on Nasdaq under the ticker “SBRA.” It’s unclear what the spinoff’s market value will be.
After Sabra breaks away, the nursing home company is set to retain the Sun name.
Matros called the split a “very unique deal.”
“This isn’t the kind of deal where the success or the accretion is somewhat dependent on synergies or concerns about diversion,” he said.
The split is designed to “create an opportunity for a second company whose value is currently unrealized,” Matros said.
According to the company’s filing, Sun’s valuation on Wall Street doesn’t “fully recognize the value of Sun’s real estate assets, which primarily consist of the land and buildings in which many of Sun’s inpatient facilities operate.”
Last year, the company hired financial adviser MTS Health Partners LP of New York to look at ways of boosting value for shareholders.
Sun had a market value last week of about $500 million. The stock is down about 12% from the start of the year.
Several healthcare real estate investment trusts have market values that dwarf Sun’s, including Long Beach’s HCP Inc. ($10.7 billion), Ventas Inc. of Chicago ($7.9 billion), Toledo, Ohio-based Health Care REIT Inc. ($5.6 billion) and Newport Beach-based Nationwide Health Properties Inc. ($4.7 billion).
At a February board meeting, Matros and other Sun executives told directors they felt separating real estate from the nursing home company would be the best way of increasing value.
There are risks.
Sabra said in its filing that its business “would be substantially dependent on New Sun” until it starts to acquire other healthcare properties. Sun is set to lease buildings from Sabra.
Sabra also will incur about $205 million worth of debt prior to the separation. After the real estate owner becomes independent, it also will take on about $163 million in mortgages for its buildings.
On the flipside, Sun will be freed of mortgage debt in the split.
There should be room for Sabra as a specialty buyer of healthcare real estate, according to John Arabia, managing director of Newport Beach-based real estate investor Green Street Advisors Inc.
“There’s a lot of room for what we call ‘local sharpshooters,’ or people who are really good at managing a particular business,” he said. “Sabra would be more of a pure-play skilled nursing facility owner. That’s one of the points of differentiation compared to some of the larger REITs currently on the market.”
Harold Andrews, who earlier worked with Matros at Regency Health Services Inc.—a Tustin nursing home operator that Sun bought in 1997—will become Sabra’s chief financial officer.
Most of Sun’s current executives are set to stay with the nursing home company, including William Mathies, who will become chief executive, and financial chief L. Bryan Shaul.
