Irvine, California-based Sabra Health Care REIT (Nasdaq: SBRA) is on the hunt for an investor to take a minority stake in a portfolio of 170 senior living communities operated by Chicago-based Enlivant.
Sabra purchased a 49% equity stake in the portfolio in 2017, in a deal that valued the overall portfolio at $1.2 billion. The REIT has an option to buy out San Francisco-based private equity firm TPG to take 100% ownership of the portfolio by Jan. 1, 2021.
However, Sabra has decided to pursue an alternative path: buying out TPG’s majority interest, while simultaneously bringing in a new JV partner to hold a minority stake.
“Nothing’s changed for us in how we view that portfolio and desire to own 100%, but there’s not a rush for us,” Sabra CEO Rick Matros said Thursday on the company’s Q2 2019 earnings call. “You get in a bit of a box right now, because in addition to the equity from our ATM … it’s a big check to write, and it creates an overhang on the stock.”
This line of thinking makes sense to Green Street Advisors analyst Lukas Hartwich.
“I think pursuing a JV partner for Enlivant … is the right move given Sabra’s valuation, leverage, and coverage metrics,” he told Senior Housing News.
In addition, Sabra will be able to limit its downside risk by giving Enlivant more time to increase occupancy and overall performance as supply pressures and other headwinds ease, Matros said. Occupancy in the portfolio came in at 81.8% in Q2, which was up 0.9% year-over-year. Other metrics are also trending up, including cash net operating income (NOI), which was 6% higher in the first half of 2019 compared to the same period in 2018.
Still, it likely will take several years before the portfolio is mature, in Matros’ view, given that there is still oversupply to be worked out in some areas. However, he is bullish on Enlivant’s prospects because many of the communities are in secondary markets that are more insulated from new development.
Enlivant also offers a middle-market price point that is impossible for new entrants to achieve given current development and construction costs, Sabra’s Executive Vice President, Chief Investment Officer and Treasurer Talya Nevo-Hacohen said on the earnings call.
Sabra is seeking a partner with a long-term horizon and appreciation of the Enlivant platform, she added.
“It’s a pretty large universe of potential partners out there,” Matros said.
The exact structure of the new JV could take different forms.
Sabra wants a controlling stake — so, at least 51% — but that number is not “fixed,” according to Nevo-Hacohen.
“We’ll see what investors say — if there’s an interest for someone to come in at 30%, we’ll have to gauge that,” she said.
TPG and Enlivant are both working cooperatively with Sabra on the effort to bring in a new investor, Matros emphasized.
The managed senior housing portfolio, including the unconsolidated joint venture with TPG and Enlivant, currently accounts for about 16.4% of Sabra’s overall cash income. Sabra is open to adding more senior housing in RIDEA relationships as opportunities arise; at the moment, the REIT is still not seeing attractive triple-net lease deals, Matros said.
Outside of senior living, Sabra is interested in increasing its presence in behavioral health and in addiction treatment centers. It is exploring conversions of existing skilled nursing facilities for these purposes.
Sabra’s Q2 earnings per share of $0.46 beat consensus estimates by $0.22, and its revenue of about $219.4 million beat estimates by $22.7 million. Sabra shares were trading up 3.50% late Thursday, at $21.32.