Sabra Health Care REIT (SBRA: $24), a Maryland Corporation, is a self-administered, self-managed real estate investment trust that owns and invests in real estate serving the Healthcare industry. Sabra leases properties to tenants and operators throughout the United States. Sabra's portfolio consists of skilled nursing facilities, senior housing facilities, a hospital, and one mezzanine loan nationwide. Its property portfolio consists of over 180 real estate properties held for investment, consisting of 100 skilled nursing/transitional care facilities, 85 senior housing facilities, and one acute care hospital. Capital Care Properties (CCP: $27) has over 340 primarily skilled nursing and senior housing facilities. The combined company will have over 500 properties.
Care Capital shareholders will receive a fixed exchange ratio of 1.12 shares of Sabra for each Care Capital share. At closing, estimated for 3Q17, Sabra shareholders will own approximately 40% of the combined entity and Care Capital shareholders 60%. The new company would create a more diversified real-estate investment trust with better access to debt markets. The combined company is expected to have a market capitalization of about $7.4 billion. Sabra management will lead the combined entity with three Care Capital directors taking board seats. We hope that management will aggressively use asset sales to create a portfolio with a higher percentage of sustainable rents. If they do, we see compelling upside to the stock.
Also, the combined entity's reduced cost of capital and back office savings will also provide management better flexibility to deal with tough issues within the Care Capital portfolio, specifically an increasingly difficult skilled nursing operating environment. Progress here could unlock real excitement for investors to own the stock.
Lastly, the combined company expects to have modest leverage, excellent liquidity and strong fixed charge coverage, with investment grade credit metrics. Sabra and Care Capital believe the greater scale will promote investor interest and increased shareholder liquidity, positioning the combined company to benefit from a more attractive cost of capital, allowing it to successfully compete for future investment opportunities. More acquisitions provide a path towards improved earnings power, a trait we love to see in our Bull Market Report portfolio companies.
BMR Take: We cheer the benefits and rationale for this transaction. We eagerly await the 3Q17 closing timeline as we see upside to the stock as the acquisition closes and the synergies begin to be realized. We hereby remove Capital Care from our REIT portfolio at $27, flat with the price when the stock was added, but collecting the big 8.5% dividend since September is a nice return. We add Sabra to the REIT portfolio at $24 and expect it to get back to $29 where it was in late April. We’ll set a Target of $30 on the stock and a Sell Price of $21.