Sabra Takes Steps to Improve Underperforming CCP Properties

Sabra Health Care REIT (Nasdaq: SBRA) is pursuing a multi-pronged repositioning strategy to improve the performance of certain new additions to its portfolio, following the mega-merger with Care Capital Properties.

The merger with real estate investment trust CCP added 359 properties, mostly skilled nursing, to Sabra’s existing portfolio of 205 skilled nursing, private-pay senior housing, and other health care assets. After reviewing all the CCP tenants, Sabra zeroed in on 16 with below-market lease coverage, the Irvine, California-based REIT explained in a press release issued Thursday.

The following steps are being pursued, sometimes in combination with each other, with respect to these 16 tenants:

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– lease modifications

– working capital advances

– transitioning operations to other Sabra tenants

– strategic sales or closures

The repositioning strategy is expected to be completed in 2018 and reduce rents by up to $33.5 million, which is in line with what Sabra anticipated in pursuing the merger, according to the press release.

Taking into account that full $33.5 million rent reduction, Sabra expects skilled nursing/transitional care lease coverage to improve from 1.31x to 1.47x, excluding properties operated by Genesis HealthCare (NYSE: GEN) and those with significant corporate guarantees.

“The overall quality of the operations and management teams of the tenants in the CCP portfolio is impressive,” Sabra CEO Rick Matros stated. “These steps we are taking together, as new partners, will provide these tenants with additional operating cash flow to make the necessary investments back into their operations and therefore strengthen our overall portfolio as well.”

In cases where rent is going to be reduced through lease modifications, Sabra does expect to recoup some or all of the lost rent as operations improve. However, this recoupment was not factored into the company’s future financial outlook.

For 2018, Sabra is forecasting a meaningful bump in normalized adjusted funds from operations (AFFO) per share.

“When comparing our second quarter 2017 actual normalized AFFO of $0.53 per share to our $0.61 per share quarterly average normalized AFFO at the midpoint of our 2018 outlook, our 2018 outlook reflects a 15.1% year over year increase, primarily attributed to the CCP merger, including the impact of the expected rent reductions we are pursuing,” Matros stated.

That means Sabra expects the CCP deal to be more accretive than previously communicated, when the REIT put the AFFO increase in the high single digits following these restructuring moves, Matros emphasized in an email to Skilled Nursing News.

Certain Sabra shareholders objected to the merger with CCP, questioning the decision to acquire so many skilled nursing assets at a time when the industry is facing serious headwinds. Matros expressed confidence in the long-term prospects for skilled nursing, and said that the CCP assets were high quality, with good operators.

The merger ultimately was approved, and in late August, Sabra’s credit rating was boosted by Moody’s, Fitch, and Standard & Poor’s.

Written by Tim Mullaney

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