67 WALL STREET, New York - August 14, 2012 - The Wall Street Transcript has just published its Medical Real Estate Report offering a timely review of the sector to serious investors and industry executives. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: REIT Access to Capital - Affordable Care Act and Reimbursements - Hospitals, Senior Housing, Skilled Nursing and Acute Care
Companies include: Sabra Healthcare REIT (SBRA), Sun Healthcare Group (SUNH), and many more.
In the following interview excerpt, the CEO of the Sabra Health Care REIT discusses the outlook for his company:
TWST: Please start with a company history, including the decision to spin off from Sun Healthcare and use the REIT structure for ownership of the properties.
Mr. Matros: If you go back and look at the skilled nursing industry specifically over a decade, unlike the senior housing sector - which has always been a real estate model - skilled nursing facility valuations have never been driven by real estate because, much like hospitals, the business is so complex, and you are dependent upon government reimbursement. Those businesses get valued both from a stock multiple perspective and an M&A transaction perspective based on a multiple of EBIDTA. All that changed in the middle of the last decade, when everything went nuts, and the CMBS market was hot, and the real estate bubble happened. All of a sudden, you had all these private equity guys buying nursing home companies based on the real estate value. That had never happened before.
At the same time at Sun, we had taken Sun out of bankruptcy. I had sold off about 60% of the assets, and we were rebuilding Sun through acquisition. We bought two large regional chains, both of which owned a lot of their real estate. Prior to that, Sun historically had leased all of its assets. But when we were looking at the transactions, I felt, we are not really paying for the real estate anyway, we're just getting with the business, and with as hot as the market is now, this may create some new opportunities for us at some point in time.
In 2007, everybody knows what happened, everything crashed. And so there we were at Sun, we owned about 45% of our real estate. The value of our real estate at the company's peak was worth as much as the market cap of the company, and at other points in time, when the stock wasn't at its peak, the value of the real estate was worth more than the market cap of the company. I started to think about ways that we could maybe monetize the real estate, and one of the more traditional ways REITs do that is to do a sale leaseback. But a sale leaseback didn't make sense because the step up in basis we would have by selling our real estate was so huge that the taxable effect on a sale leaseback was a deal killer.
But I was warming up to the idea that if we took the company and split it into two and created a REIT, then what we would've done is created two companies out of one, both of which can continue to grow and create value for the shareholders. As we contemplated doing the split, the shareholders would each get a share in each new company, so one plus one equals three. Everybody argued over how much the three was worth, but no one argued that one plus one equaled less than two.
So we decided to go down that path. It was pretty complicated, it took us a few months to figure out what the best structure was. We got through that, and took about a year to get the deal done. And then, the day the split happened, the market cap of the two companies combined was three times as much as Sun was the day before the split, so that's proof of what we were thinking.
And even if you go back to last fall, after CMS announced the Medicare cuts and both stocks hit their low, even at that point, if you look at the market cap of the two companies, they were still a 20% premium off of where Sun was at the time of the split. No one wanted to see the stocks at their low, but it further proved the point that, even in the worst of times, there was still better value for shareholders than if the split hadn't happened.
Of course, since then, we've taken our exposure to Sun down from 100% on day one to close to 70% today at about a year and a half, so that's happened pretty quickly. We expect to have Sun close to 60% of our tenant exposure by year end, and then, by some time in the latter half of 2013, have them to about 50% - all this has happened pretty well for us.
TWST: There recently was an announcement that Sun is going to be acquired by Genesis. It is still the company's largest tenant. Do you see that as a positive in terms of tenant credit profile?
Mr. Matros: Yes, I think Genesis is a great company. I've known the management team there for years. Health Care REIT did a big sale leaseback deal with them last year. They used to be public, but they're not public anymore. The one downside, from a shareholder perspective, is maybe that at least with Sun it was public, so there was complete transparency, and Genesis is private. Because Genesis is private, there are no filings for us to incorporate by reference in our filings, so we're going to be putting Genesis's numbers in our filings as is required by the SEC. Everybody will be able to see Genesis's numbers, so I think that will give comfort to everybody.
But in terms of the impact, I think most people will view it as a positive one, because Genesis does have historically a very good reputation, and our lease agreement is actually stronger with Genesis than it was with Sun. We had a parent guarantee with Sun. We have a parent guarantee with Genesis as well. But the parent guarantee with Genesis includes a net-worth covenant, which we didn't have with Sun, and it cross-defaults to their term loans. Because of those two components, it's actually a much stronger guarantee than we had with Sun.
And then, our lease escalators with Sun were the lower of 2.5% or CPI, and this is a fixed 2.5%, so that's obviously more predictable and a bit better as well.
Overall, both from a guarantee perspective and from an economic perspective, it's a net positive for Sabra, and it doesn't change anything for Sabra in terms of deal flow or what our strategic focus is. All that stays the same. We still want to get them to a lower percentage of exposure within the company.
TWST: Please tell us more about the portfolio currently in terms of size and geographic reach, and tell us what opportunities and prospects you see for growth and diversification.
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