August 1, 2017
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Two hedge funds invested in Sabra Health Care REIT Inc. are opposed to the merger with another REIT, Care Capital Properties Inc. Eminence Capital LLC and Hudson Bay Capital Management LP say they will vote against the proposal, which would create a $7.4 billion company.
Eminence Capital began buying Sabra stock in May, and currently has a 3.9% stake in the REIT. Hudson Bay Capital, which has roughly a 3.4% stake, began scooping up shares in June.
The hedge funds contend that Care Capital’s portfolio of 305 skilled-nursing facilities is suffering difficulties and will continue to deteriorate. They also contend that Irvine, CA-based Sabra is overpaying for the assets.
Sabra’s Chairman & CEO Richard Matros disagrees with the funds’ assessment, and pointed out that the deal would make the company investment grade and allow for greater access to debt markets. The REIT’s shares have fallen roughly 12% since the announcement.
Sabra says the cap rate for Care Capital’s properties is about 7%, adjusting for potential rent cuts. That number isn’t in line with the hedge funds’ cap rate calculations of 8.4%.
Many REITs are selling off their skilled-nursing assets, and previously, Sabra indicated it planned to diversify from skilled-nursing facilities. The deal with Care Capital would increase Sabra’s reliance on skilled nursing revenue from 50% to 73%, according to financial filings.
In particular, the hedge funds are concerned about one of Care Capital’s major tenants, Signature Health. They say the company is ailing, and will probably file for bankruptcy.
“We think Sabra is making a big mistake in getting bigger in skilled nursing facilities,” says Ricky Sandler, founder of Eminence Capital.
The meeting to vote on the proposed merger is Aug. 15.
For questions, comments or concerns, please contact Jennifer Duell Popovec