Despite Signature Troubles, Sabra Sees Bright Post-Merger Future

Fresh off the approval of its blockbuster merger with Care Capital Properties, Sabra Healthcare REIT, Inc. (Nasdaq: SBRA) on Friday trumpeted the better-than-estimated value of the deal — and predicted an orderly solution to one of its continuing problems.

The company had been conservative in its pre-merger projections, CEO Rick Matros said on a conference call with investors and analysts. In addition, Sabra didn’t take into account cost savings that would come from the REIT receiving investment-grade status once the deal closed; Fitch Ratings, Moody’s, Standard & Poor’s boosted Sabra’s ratings at the end of last month.

For those reasons, Matros said, the merger with CCP ended up being more accretive than expected.

“We feel really good about where we are in terms of actually getting everything done,” Matros said on the call.

Signature solution

Matros also addressed an elephant in the room: Signature HealthCARE, LLC, the troubled Louisville, Ky.-based operator that accounts for 9% of Sabra’s portfolio. The REIT is exploring a restructuring of its leases with Signature, either through an out-of-court solution or prepackaged bankruptcy. Either way, Matros said, the company plans to have a solution as soon as the end of the year or shortly thereafter.

“We feel like we’re at a pretty good place with Signature,” Matros said.

Whispers of a Signature shake-up have been looming for some time now, with another landlord — Omega Healthcare Investors, Inc. (NYSE: OHI) — denying a report in May that it had hired a third-party advisory firm to probe its options regarding Signature. On its second-quarter earnings call, Omega identified Signature as one of two tenants that had fallen behind on its rent, owing the REIT $10 million.

The Signature problem has turned into “a cooperative effort” with Omega, according to a post-call analysis by Mizuho Securities USA, LLC. The investment bank also said it expects “a reasonable outcome” to the situtation.

“But if the route taken does involve bankruptcy, that could temporarily spook the system,” Mizuho added.

Matros expressed less confidence in tenant Genesis HealthCare (NYSE: GEN). Sabra has already entered into an agreement to sell off 20 of its Genesis-operated properties, a deal that Matros said will close by October, with an additional 15 set to be sold by the end of 2017 — and Matros indicated that the company isn’t done shedding Genesis facilities.

“Genesis, we’re not happy about it, and that’s why we’re going to be talking about additional plans to dispose of the facilities,” Matros said, saying that a plan to get rid of the remaining Genesis properties will come “in the not-too-distant future.”

Rent reduction

The conference call came one day after the REIT released a plan to handle 16 former CCP assets that Sabra identified as underperforming. After consulting with the facilities’ management teams, Sabra decided to pursue a combination of lease modifications, working capital advances, operations transfers, and strategic sales or closures, according to the original release.

These moves will lead to rent reductions of $33.5 million, though Matros took pains to emphasize that the number represents the “worst-case scenario” and could end up being lower. When pressed by analysts, Sabra CFO Harold Andrews, Jr. allowed that because a few larger tenants will account for the majority of the rent reductions, the final figure will likely still end up being close to the $33.5 million estimate.

Mizuho predicted that most of the $33.5 million would come from the eventual resolution to the Signature situation.

Overall, Matros said, Sabra’s in-depth analysis of the former CCP properties revealed a strong portfolio of facilities with “sound operating strategies,” and a few with enough income from ancillary services to mitigate any need for rent adjustments.

The REIT also has an existing acquisition pipeline of more than $500 million, and Matros hinted that the first of deals could be announced in the next few months.

“The fact that we were focused on CCP didn’t take us away from anything else that we were working on,” Matros said.

Sabra stock closed Friday’s trading at $22.78, a gain of 1.97% or $0.44.

Written by Alex Spanko