March 26, 2018, Alex Spanko, Skilled Nursing News - By at least one analyst’s assessment, Sabra Health Care REIT’s (Nasdaq: SBRA) decision to diversify away from skilled nursing facilities has boosted its fortunes. Bank of America Merrill Lynch upgraded the real estate investment trust’s (REIT) stock from “underperform” to “neutral”.
Bank of America research analyst Juan C. Sanabria pointed to Sabra’s ongoing divestment from properties operated by Genesis Healthcare, Inc. (NYSE: GEN) and its acquisition of senior housing properties operated by Enlivant.
“Today, SBRA is in a stronger financial position with a significantly more diversified portfolio and a solid balance sheet,” Sanabria wrote. “Going forward, a resolution to Signature (6% of rents) outside of bankruptcy and further GEN asset sales are key potential positive catalysts.”
The upbeat take comes after a period of major change for the Irvine, Calif.-based REIT, which raised eyebrows last year when it acquired the nearly “pure play” skilled nursing REIT Care Capital Properties.
The move met with resistance from some of Sabra’s shareholders, who balked at increasing the company’s exposure to skilled nursing assets, but Sabra CEO Rick Matros continued to insist that the move would decrease the cost of capital and open the REIT up to more opportunities.
That strategy appeared to be playing out when Sabra snapped up 49% of a joint venture that owns 183 Enlivant-managed senior housing communities for $371 million back in September.
That same month, the company also bought 24 skilled nursing and transitional care units on the West Coast, and rolled out its so-called “Genesis Exodus” plan — under which it plans to sell off all but eight Genesis-operated SNFs in its portfolio. Sabra now has lower SNF exposure than competitor Omega Healthcare Investors (NYSE: OHI), Sanabria pointed out, along with better pro-forma EBITDAR coverage.
Still, Sanabria noted that the industry as a whole continues to face a difficult operating environment, saying Bank of America Merrill Lynch “can’t rule out pressures and associated noise.” He suggested that Sabra look into further reducing its SNF exposure, with the resulting cash invested in “lower-risk” senior housing.
“Given a weaker cost of capital and recent significant changes, capital management discipline and a clear strategy outlook are key,” Sanabria concluded.