Sabra (SBRA) Closes Sale/Leaseback Transaction, Offers Outlook

Sabra Health Care REIT, Inc. (NASDAQ: SBRA) (NASDAQ: SBRAP) announced today that it closed a sale/leaseback transaction with a premier west coast operator for 21 of 24 total skilled nursing/transitional care facilities for a purchase price of $378 million and expects to close the remaining three by year end 2017 for an additional $52 million. Sabra also announced today that it has begun the process of marketing for sale its remaining 43 facilities leased to Genesis Healthcare, Inc. (“Genesis”), with sales expected to occur in 2018 for expected aggregate sales proceeds of $425 to $475 million (the “Genesis Exodus Plan”). The Genesis Exodus Plan is in addition to the ongoing sales of the 33 facilities subject to the previously announced memoranda of understanding with Genesis (the “Pending Genesis Dispositions”).

HIGHLIGHTS FROM THIS TRANSFORMATIONAL ACTIVITY:

• Sabra 3.0 to be rolled out in 2018 The transformation of Sabra began with Sabra 2.0 following the Care Capital Properties, Inc. (“CCP”) merger and the Pending Genesis Dispositions, and now moves into Sabra 3.0 with acquisition and investment announcements totaling $801 million, and the Genesis Exodus Plan. We expect that the culmination of our portfolio transformation activities will result in a high-quality healthcare real estate portfolio with enhanced scale and increased diversification, a lower cost of capital and future acquisition opportunities, all of which we believe will drive increased shareholder value. This transformation into Sabra 3.0 is clearly demonstrated as follows:

• CCP acquisition was the catalyst We believe that Sabra 3.0 was made possible by the CCP merger and the related increase in the Company’s $1 billion unsecured revolving credit facility, which provided the scale to enable the acceleration of these portfolio enhancing transactions.
• The right moves at the right time We believe that the Genesis Exodus Plan is also a key step to improving our portfolio by eliminating the remaining skilled nursing operator in our portfolio that does not fit Sabra’s preferred profile. We intend to execute the Genesis Exodus Plan in 2018.
• Impact on 2018 Outlook Currently we are assuming that the Genesis Exodus Plan will occur ratably over the course of 2018 (effectively an exit at mid-year 2018) and accordingly are setting our updated 2018 Outlook for normalized AFFO per share at a range of $2.33 to $2.39. See the “Updated 2018 Outlook” below for further details. Before giving pro forma effect to any reduction in earnings resulting from the Genesis Exodus Plan, 2018 normalized AFFO per share is expected to increase as a result of our 49% equity interest in the Enlivant joint ventures and the skilled nursing portfolio acquisition by $0.07 over our prior 2018 Outlook, to a range of $2.48 to $2.54.
• Portfolio transformation the right trade-off We believe that eliminating our Genesis exposure in 2018 is an important step toward fully realizing the portfolio improvements that we believe will create a clear path to sustained growth in shareholder value in the future. Together with our acquisition of a 49% equity interest in the Enlivant joint ventures and the skilled nursing portfolio acquisition described in this press release, we believe that the Genesis Exodus Plan will create a more stable, secure and valuable earnings stream compared to historical levels. Despite the dilutive impact of the Genesis Exodus Plan, our expected 2018 normalized AFFO per share quarterly run rate increases by 3.8% (assuming a full elimination of Genesis revenues as of January 1, 2018) over our pre-CCP merger normalized AFFO per share in the second quarter of 2017.
• Company committed to maintaining investment grade capital structure We expect to fund the announced investments with a mix of issuance of new equity, borrowings under our revolving credit facility and proceeds from our previously announced planned dispositions (including the Pending Genesis Dispositions), subject to market conditions. While we anticipate that leverage will increase modestly from current levels in the short term until proceeds from the previously announced planned dispositions and the Genesis Exodus Plan are realized, we remain committed to maintaining our investment grade balance sheet during this period as well as maintaining leverage in line with our historical target range of 4.5x – 5.5x (inclusive of our ratable share of the Enlivant joint ventures’ debt and EBITDA) over the long-term. In addition, we expect that these steps will take us in the right direction to obtain further rating upgrades in the future.

Sale/Leaseback Transaction

On September 19, 2017, Sabra completed the first step of a two-step sale/leaseback transaction that encompasses a 24 facility skilled nursing/transitional care portfolio having 2,216 licensed beds on the west coast. The combined transaction has an aggregate purchase price of $430 million. The first step included the acquisition of 21 facilities for a purchase price of $378 million. The second step consists of the remaining three facilities for a purchase price of $52 million and is expected to close by the end of 2017. Closing of the remaining three facilities is subject to customary conditions.

Sabra entered into three cross-defaulted triple-net master lease agreements on the 21 facilities concurrent with the closing of the first step of the acquisition. The master leases have initial terms of 12, 13 and 14 years with three 5-year renewal options and annual rent escalators equal to the greater of 2.0% or CPI, but not to exceed 2.5%. The leases are collectively expected to generate annual lease revenues determined in accordance with GAAP of $34.1 million for the facilities acquired in the first step of this transaction with an initial yield on cash rent of 8.0% and an underwritten EBITDAR coverage of 1.4x. The three facilities in the second step will be added to the master leases and are expected to add an additional $4.7 million in annual GAAP lease revenues.

Commenting on the transaction, Rick Matros, Chairman and CEO of Sabra, said, “The operator is a standout provider in the skilled nursing space. I have known the principals for over 20 years and the CEO was my COO at Regency Health Services in the early 1990’s. They have built an amazing team. Their commitment to quality is exemplified by their impressive star ratings under CMS’s Quality Rating System, with 21 of the 24 facilities at 5 stars and the other 3 facilities at 4 stars. Skilled mix at 59% and occupancy at 92% demonstrate their commitment to providing care to high acuity patients as they continue to accommodate the dynamic changes in the space. We believe that this portfolio is a perfect fit for Sabra’s perspective on where the industry is going and is an ideal replacement for the facilities we sell as we execute on the Genesis Exodus Plan. We look forward to partnering with this terrific team for years to come.”

The Seller was advised by Laca Wong-Hammond of Duff & Phelps, LLC.

Genesis Exodus Plan

After completing the Pending Genesis Dispositions, Sabra will have 43 remaining facilities leased to Genesis. The Company has engaged a broker and begun discussions with Genesis around the plans to market the remaining facilities. That Genesis Exodus Plan is expected to include selling facilities subject to multiple revised master lease arrangements with Genesis as the tenant and in some cases potentially pulling facilities out of the current leases and selling them independent of any relationship with Genesis. Sabra expects to have the Genesis Exodus Plan in place soon and expects to provide an update on the third quarter earnings call in early November. Proceeds from the sales contemplated by the Genesis Exodus Plan are preliminarily anticipated to fall within a range of $425 to $475 million, with all such sales expected to occur in 2018.

Commenting on this recent activity, Mr. Matros said, “2017 began with Sabra. The CCP merger created Sabra 2.0, which, as a result of today’s announcements, was essentially a Formula 1 pit stop: critical in its execution to achieve the desired mission. In this case, the increased scale, new credit facility, diversity of tenant base and investment grade ratings positioned the Company to become Sabra 3.0. The combined announcements of the Enlivant joint ventures and the skilled nursing portfolio acquisition, along with the Genesis Exodus Plan, repositions the Company well beyond the CCP merger. The CCP transaction was critical to this execution of our vision and has allowed us to bring in a premier skilled nursing operator as well as demonstrate our commitment and ability to expand our senior housing asset base with a true platform in a sector where there are few platforms left, much less one of Enlivant’s quality and upside. We remain focused on creating long term shareholder value.”

2017 Outlook

The Company reaffirms its previously issued 2017 outlook.

Updated 2018 Outlook

The table below sets forth Sabra's updated 2018 full year earnings outlook:

The above 2018 Outlook assumes that the Genesis Exodus Plan is completed such that the impact is realized ratably over 2018 beginning on January 1, 2018 and ending after December 31, 2018 (effectively a mid-year elimination of Genesis revenues).

The 2018 Outlook also includes the impact of all investments and financings expected in 2017, and as disclosed in our prior guidance, assumes that Sabra retires its 5.8 million shares of 7.125% Series A Cumulative Redeemable Preferred Stock in March 2018, and assumes that approximately $123.0 million of proceeds from sales of facilities acquired in the CCP merger pursuant to the portfolio repositioning activities described in our press release on September 7, 2017 are reinvested at an average first year cash yield of 8%. These re-investments consist of anticipated investments under Sabra’s proprietary development pipeline and an incremental investment in the Signature Behavioral hospital portfolio.

In summary, our updated 2018 outlook for normalized AFFO can be reconciled to our prior outlook as follows:

It is difficult to predict, with a high degree of accuracy, the timing of the Genesis Exodus Plan. In addition, the Company expects to negotiate certain incentives for Genesis to expedite the Genesis Exodus Plan that will likely result in some rent reductions in advance of completing all the dispositions contemplated by the Genesis Exodus Plan. Accordingly, the Company’s full-year 2018 normalized AFFO per share would decline by an additional $0.15 per share assuming an earlier than expected complete exit and loss of all Genesis rental revenues on January 1, 2018.

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