Sabra CEO Rebukes Activists, Sees Skilled Nursing Upsides

Sabra Health Care REIT, Inc. (Nasdaq: SBRA) came out swinging against activist shareholders on the company’s quarterly earnings call Thursday afternoon, trumpeting the potential of skilled nursing facilities in the future and questioning the credentials of those who have criticized its impending merger with Care Capital Properties (NYSE: CCP).

A nearly “pure play” SNF real estate investment trust (REIT), CCP’s integration into Sabra would bring the firms’ combined skilled nursing exposure to 73%, a figure that has some players worried due to the uncertainty surrounding the industry. But Sabra CEO Rick Matros sought to quell those voices early in the call.

“This is all about the operators. You can’t paint a broad brush across the space,” Matros said, referencing the anti-SNF arguments that shareholders Eminence Capital and Hudson Bay Capital — a pair of New York City-based hedge funds — have made in deciding to vote against the merger of real estate investment trusts.

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“We know how to assess and choose operators that understand and know how to execute,” Matros continued. “We applied that same level of scrutiny to the CCP operators.”

As for Eminence and Hudson Bay, Matros called them “a couple of dissident shareholders that do not have the requisite experience to address the fundamentals of this space” — a tag he then immediately applied to Institutional Shareholder Services as well, the third-party proxy advisory firm that similarly came out against the impending merger.

All three dissidents expressed concerns about the future of the skilled nursing industry, such as shifting payment models and older physical plants. But Matros asserted that the SNF payment model is relatively solid compared to those in other health care sectors, pointing to the Centers for Medicare & Medicaid Services’ (CMS) decision to raise SNF reimbursements by 1% in 2018, while other providers — including home health care — are facing funding cuts.

“Skilled nursing is a core part of the health care delivery system,” Matros said. “It’s not going anywhere.”

Matros and Sabra got an additional boost late Thursday when Glass, Lewis & Co., another proxy advisory firm, announced that it was advising shareholders to vote yes on the deal, according to a Sabra press release.

Glass Lewis expressed doubts about the reasoning behind Eminence and Hudson Bay’s objections, noting the “short-term nature of their positions and likely investment horizons.”

“We believe other shareholders of Sabra — particularly those who actually owned Sabra stock before the CCP acquisition announcement — should strongly consider the motivations of these new investors and whether their interests are aligned with the long-term interests of the company and its other shareholders,” Glass Lewis said in its analysis, excerpted in the release.

The advisory firm also expressed confidence in Sabra’s leadership and the financial benefits of the deal.

Expansion Play

Matros touted an estimated EBITDAR coverage of 1.51 times for the combined SNF portfolio should shareholders approve the merger on August 15, and also repeated the sentiment that the deal will allow the firm to expand due to a larger size and lower cost of capital.

“This is in line with where the Sabra portfolio is today, and among the best in the industry,” chief financial officer Harold Andrews said of the EBITDAR coverage.

Matros also noted that high prices in the senior housing acquisition market have prevented the company from making deals in that space, interfering with what he called a “mandate” to grow the company as it attempts to improve its rating to investment-grade. In order to do that, and reduce its concentration with key tenant Genesis HealthCare (NYSE: GEN), Sabra needed to make the CCP move to expand the size of the company and dilute Genesis’ impact, Matros said.

“Every time Genesis blinks, we take a hit,” Matros said.

Genesis Offload Continues

The company saw its SNF occupancy increase during the 12 months ended June 30, rising to 88.4% from 86.9% during the previous 12-month period. Senior housing occupancy took a slight dip over that span, falling from 89.7% to 88.3%, with Matros saying the decline was less extreme than some competitors and was isolated to a few properties.

Sabra also announced a plan for the disposition of 34 Genesis SNFs — including the 29 properties the company announced its intention to sell last fall — starting with a single sale on July 10 for $5.2 million. The company plans to sell 21 of the SNFs by the end of the third quarter, and the remaining 12 by the end of 2017 for a total of $170 million to $180 million.

In addition, should the CCP deal go through, Sabra will receive a host of loans — including a $1 billion revolving facility, term loans of $1.1 billion, and a Canadian term loan of $125 million CAD.

Overall, the company has a current acquisition pipeline of $1 billion, Matros said, split evenly between senior housing and skilled nursing, along with a $100 million development portfolio consisting solely of senior housing properties.

Sabra posted second-quarter revenues of $64.7 million, down from $74.2 million in the same quarter of 2016 but ahead of projections by $1.3 million.

SBRA shares were up 1.38% in late-afternoon trading.

Written by Alex Spanko

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