Another Sabra Shareholder Opposes $7.4 Billion Merger

Yet another shareholder has come out against Irvine, California-based senior housing owner Sabra Health Care REIT, Inc.’s (Nasdaq: SBRA)  planned $7.4 billion merger with Chicago-based Care Capital Properties, Inc. (NYSE: CCP).

Eminence Capital, LP, a New York City-based hedge fund, owns 3.9% of Sabra’s common stock. With the announcement that it intends to vote against the Sabra-CCP merger, Eminence follows fellow New York hedge fund Hudson Bay Capital Management in opposing the plan.

Sandler’s Appeal

In an appeal to Sabra Chairman Richard K. Matros, Eminence CEO and Chief Investment Officer Ricky C. Sandler gave four primary reasons for voting against the deal.

First and foremost, Sandler expressed concerns about the “tremendous pressure” facing the skilled nursing industry; given that CCP’s exposure to SNFs is between 80% to 85%, Sandler feels that CCP is “terribly positioned” to handle the industry.

Further, larger rent cuts and portfolio repositioning will ensue after the merger, Sandler claimed, leading to “value destruction” for Sabra shareholders.

“[Sabra] is swapping its own valuable currency for CCP assets that will be worth materially less three to five years from now,” said Sandler.

Sandler also questioned the overall motive and rationale behind the deal, and, lastly, he said that the transaction is a “poor strategic fit,” saying that the price that Sabra is paying for CCP is “meaningfully too high.”

“As Sabra shareholders, we recommend that [Sabra] take an alternative path – one similar to the previous strategy of diversifying away from large tenants, SNFs, and government reimbursement, and we welcome the opportunity to discuss this further,” Sandler wrote in closing.

Continued Opposition

The $7.4 billion merger of two real estate investment trusts (REITs) has faced various forms of opposition since its announcement. In addition to Hudson Bay and Eminence’s votes against the transaction, several class-action lawsuits were filed against CCP — including a Delaware action lodged by Glenn Parrish, who posits that CCP and its board of investors have violated the Securities Exchange Act of 1934.

Parrish’s overall intention is to prevent a stockholder vote until further materials regarding CCP’s financial disclosures come to light. Specifically, Parrish’s suit claims that the original registration statement presents shareholders with misinformation and omissions that prevent them from casting a “fully-informed vote in connection with the transaction.”

Sandler’s Analysis

To support his company’s vote against the merger, Sandler provided an analysis that focused on CCP’s financial health and overall profitability.

Among his findings, Sandler highlighted that Signature HealthCARE — CCP’s second-largest tenant, accounting for 15% of its annual rent — is on thin financial ice and could “very likely” need to file for bankruptcy protection. Further, Sandler also mentioned that some of CCP’s tenants had begun requesting rent concessions, according to the company itself — which he also found troubling.

SNF Headwinds

Sandler expressed extensive concerns about the future of SNFs, including the usual suspects of regulatory burdens; reimbursement risks amid the continuing shift from private-pay to value-based models, as well as Medicare to Medicare Advantage; and the old age of SNF buildings.

But in an interview with Skilled Nursing News last month, Sabra’s Matros acknowledged the challenges that the industry faces, and remained upbeat about its prospects — and also deflected the notion that the purchase of CCP, a former “pure play” SNF REIT, was indicative of his personal outlook for the industry.

“Our whole diversification effort has nothing to do with our point of view on skilled nursing, but just building a more diversified REIT,” Matros said, noting that the deal would provide Sabra with a lower overall cost of capital and facilitate general expansion.

He also had positive words for the industry as a whole.

“I think it’s a great business. I think it’s a necessary service,” Matros told SNN. “I think it’s becoming more complex, but it’s becoming more invaluable.”

Written by Carlo Calma