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A Health Care Pair Trade From Bank Of America: Sell Sabra Health, Hold Omega Health

Shanthi Rexaline

Bank of America Merrill Lynch maintained its bearish stance on health care REITs in the wake of third-quarter results and the the National Association of Real Estate Investment Trusts annual conference.

On Friday, the sell-side firm identified a pair trade within the sector. 

The Analyst

Analyst Juan Sanabria upgraded Omega Healthcare Investors Inc (NYSE: OHI) from Underperform to Neutral and increased the price target from $26.50 to $35.

Sanabria downgraded Sabra Health Care REIT Inc (NASDAQ: SBRA) from Neutral to Underperform and trimmed the price target from $23 to $21.

Tenant Tailwind, Accretive External Growth Positives For Omega

With majority of tenant issues now behind it, Omega is poised to grow inorganically, Sanabria said in the Friday note. (See the analyst's track record here.)

The assumption is based on the belief that the company can finalize its Orianna exit, likely by the first quarter of 2019, and reinvest the proceeds, he said. 

Although cautious on skilled nursing facility fundamentals and long-term reimbursement pressures, Sanabria said the the bottom is in sight given the quarter-over-quarter increase in Q3 rent coverage.

"Moreover, OHI's cost of capital (44-percent premium to NAV) should allow it to drive accretive external growth, which is unique among peers." 

Headwinds Ahead For Sabra 

Sabra is facing significant dilution from a senior care sale, Sanabria said. If the sale does not go through, the execution of Plan B will take longer and might be at a less attractive price, he said.

The headwinds the company faces from its RIDEA portfolio led to a 5-cent cut in the 2018 funds from operations guidance, the analyst said. 

Sabra's adjusted funds from operations coverage of 97 percent does not leave any room for further problems, and also limits future dividend growth, Sanabria said. 

The company's cost of capital is challenged, he said. 

"Lastly, we note SBRA may look to raise equity to finance the purchase of its JV partner's stake in Enlivant (an $800-million value) in late '19 or early '20, which could be done at a dilutive price." 

The Price Action

Omega shares were set to close 2.65 percent higher at $35.26 Friday, while Sabra was down 2.28 percent at $18.68. 

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Latest Ratings for OHI

Date Firm Action From To
Nov 2018 Raymond James Upgrades Market Perform Outperform
Nov 2018 Bank of America Upgrades Underperform Neutral
Aug 2018 Stifel Nicolaus Maintains Hold Hold

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