Sabra Health Care REIT, Inc. (NASDAQ:SBRA) recently acquired two skilled nursing facilities located in Pennsylvania for $29.9 million, and also funded a mezzanine loan investment for Meridian Equity Investors.
The nursing facility acquisitions were a sale-leaseback transaction with affiliates of the sellers; the purchase prices was funded with available cash. Each facility has 60 licensed beds.
The two properties are “unique in a number of ways,” according to Rick Matros, Sabra’s Chairman and CEO, because they’re skilled nursing in name only: they are actually subacute ventilator facilities that do a “negligible amount” of Medicare business, meaning the CMS cuts to Medicare reimbursements didn’t impact their business.
“The primary source of revenue is state-funded Medicaid and Managed Care through specialized rates for ventilator and other complex conditions,” Matros said in a statement. “States are recognizing that there needs to be an alternative to the acute-care setting for these patients and the cost is appreciably less in the skilled nursing setting than in any other institutional setting. Most importantly, this management team takes a programmatic approach to provide quality outcomes to the population it serves which is what truly is important to both the state and the managed care companies.”
These facilities also treat other diseases such as MS and ACLS, Matros continued, but the patient population consists primarily of ventilator dependent individuals.
“Now that Medicare has increased reimbursement for these types of patients these facilities may see increased Medicare revenues over time,” he said.
In connection with the acquisition, Sabra, through an indirect, wholly-owned subsidiary, entered into a single 15-year triple-net master lease agreement with the sellers with two five-year renewal options. The two-property portfolio lease provides for annual rent escalators equal to the greater of the change in the Consumer Price Index or 2.5%, resulting in annual lease revenues determined in according with GAAP of $3.4 million and an initial yield of cash rent of 9.50%.
Meridian Mezzanine Loan
A couple weeks before the SNF acquisitions, Sabra entered into a $10 million mezzanine loan agreement with affiliates of Meridian Equity Investors, L.P., with an option to purchase three skilled nursing facilities and one assisted living facility located in Texas and owned by Meridian, before March 31, 2013, for up to an aggregate purchase price of $43 million, and increasing by 2.5% for each of the two years thereafter.
The Meridian mezzanine loan is secured by Meridian’s equity interests in four entities that own and operate the Meridian facilities. The loan has a five-year term and bears interest at a fixed rate of 11% a year. If Sabra does execute the purchase option, the company expects to enter into a new 15-year master lease with two five-year renewal options as an initial cash yield of the greater of 9.25% or fair market rent, as determined at the start of the lease.
The facilities range in age from nine to 17 years, with a total of 394 licensed beds.
“The Meridian Mezzanine Loan is an opportunistic investment that should generate an attractive yield for our shareholders while providing us with the flexibility to purchase the properties and add to our increasing list of operator relationships,” said Matros, who added that the investment gives Sabra an opportunity to fund Meridian’s capital needs and, in time, expand his company’s portfolio with quality skilled nursing and assisted living assets.
Written by Alyssa Gerace
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