How Sabra’s ‘Transformational’ Merger Could Sharpen Its Competitive Edge

Following its planned $7.4 billion merger with Care Capital Properties (NYSE: CCP), Sabra Health Care REIT (Nasdaq: SBRA) will be the eighth-largest health care real estate investment trust (REIT) in the country—but that’s not the company’s end goal.

Rather, the Irvine, California-based REIT aims to eventually become a far more competitive player in the senior housing deal space, according to CEO Rick Matros. The merger will help it get there.

“The significant jump in scale will improve our access to capital in the future,” Matros explained during a Monday morning call with analysts.

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The “obviously transformational” deal between Sabra and Care Capital Properties was struck to diversify Sabra’s assets between senior housing and skilled nursing, Matros said. The arrangement is also expected to help improve Sabra’s future purchasing abilities—something the company has struggled with for a while.

“When I think about some of the deals that we couldn’t get done last year… [with] our cost of capital now, we could have done it,” Matros said.

Credit ratings agency Fitch predicts that it will upgrade Sabra’s long-term issuer default rating to ‘BBB-‘ upon completion of the merger. Moody’s and S&P also placed Sabra’s corporate rating and issue-level ratings on its unsecured notes and preferred shares on positive watch, or review for upgrade.

What SNF headwinds?

The skilled nursing industry has dealt with a plethora of headwinds lately, from a troublesome labor market and heightened regulatory pressures to challenging liability environments in some U.S. states. Still, Matros isn’t very concerned with any of these issues, he told Senior Housing News.

“There’s a difference between real headwinds and market sentiment,” Matros told SHN. “It’s all about the operator, I think, and we align ourselves with really good operators. If you look at our skilled tenants outside of Genesis, our skilled tenants are bucking the trends. They’re handling things the right way.”

As for Kennett Square, Pennsylvania-based Genesis, the REIT is in the process of significantly reducing its exposure to the post-acute care giant. On April 27, Sabra executed a non-binding letter of intent to sell 20 skilled nursing facilities currently leased to Genesis for a sale price of $103.3 million. The marketing of an additional 14 Genesis facilities owned by Sabra is ongoing, and is anticipated to be completed during the second half of 2017.

Matros is even optimistic about the Centers for Medicare & Medicaid Services’ (CMS) potential overhaul of the payment system for skilled nursing facilities.

“Everything that we see happening, we think is good for the sector,” he told SHN.

While Matros thinks there are “really interesting” skilled nursing deals out there, the goal of the Care Capital Properties merger isn’t to make Sabra “a skilled nursing REIT.”

Indeed, one of the main benefits of the deal for Sabra is greater portfolio diversification, while the transaction also has advantages for CCP, according to Stifel analyst Chad Vanacore.

“This transaction benefits both parties,” Vanacore wrote in a note. “Sabra shares have performed well, but the company lacked scale and diversification while CCP shares struggled to gain traction post spin-off from Ventas in mid-2015 and has some portfolio repositioning to do.”

The new company will have a total of 564 investments—including senior housing, skilled nursing, behavioral health hospitals and transitional care facilities—across 43 U.S. states and Canada. Sabra’s current development pipeline is “almost exclusively” made up of senior housing, and it will bring “almost $600 million in new purpose-built assets to the company, Matros said on Monday’s call.

The integration ahead

The deal between Care Capital Properties and Sabra, internally dubbed “Purple Rain” by the companies in a nod to the late great Prince, has been “going on for a while,” Matros told SHN.

“[Care Capital Properties CEO] Ray [Lewis] and I have known each other for a long time,” he explained.

Sabra is uniquely qualified to merge with a skilled nursing company like Care Capital Properties, Matros added. He will remain as CEO of the combined company, and this also could play well among investors, according to Vanacore.

“We believe the company will have strong leadership as Sabra management is well thought of in the investment community,” he wrote.

As part of the integration of the two companies, Sabra will ensure that it takes advantage of all of Care Capital Properties’ best practices, as well as its own, Matros said. The total number of employees currently employed by the two companies is about 45, but Matros would not comment on how many employees the combined company will have.

In terms of what might challenge the newly combined company, Vanacore points to underperforming leases, which currently are a “large portion of CCP’s portfolio.”

Sabra intends to “spend quality time with those tenants” of Care Capital Properties that are struggling to help them move forward, Matros said on the call.

At least in the immediate aftermath of the deal, Sabra investors appeared to be not entirely enthusiastic about taking on CCP’s assets, with SBRA shares trading down 5.13% as of late afternoon. CCP shares were up 4.96%.

But overall, Sabra expects the integration won’t pose too much trouble, with expected synergies running to $20 million.

“I really don’t see…challenges that cause me any great concern,” Matros said.

Written by Mary Kate Nelson

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