Eminence Capital LP, which owns 3.9% of the common stock of Sabra Health Care REIT Inc. recently told the board of directors of Sabra Health Care REIT that with they planned to vote against the proposed merger deal with Care Capital Properties.
In a letter to the board, Eminence Capital’s Ricky C. Sandler, CEO and chief investment officer said that skilled nursing facilities are under tremendous pressure, for various reasons, and he says they see no end in sight. “CCP is 80-85% exposed to SNFs and, in our view, its SNF portfolio, in particular, is terribly positioned to navigate through this increasingly challenged industry.”
These pressures will drive larger rent cuts and more dramatic portfolio repositioning versus what the company represents, resulting in value destruction for shareholders, he continued. “The company is swapping its own valuable currency for CCP assets that will be worth materially less three-to-five years from now.”
He adds that they have “serious questions with respect to the motivation and rationale for this deal.”
Also in the letter, Sandler says that the price Sabra is paying “is also meaningfully too high” and that Sabra is “underestimating the risk” and only focused on “the near-term issues.”
He concludes that “the deal may be near-term accretive, we strongly believe it will be decidedly dilutive after larger rent adjustments and continued industry pressures. As Sabra shareholders, we recommend that the company take an alternative path – one similar to the previous strategy of diversifying away from large tenants, SNFs and government reimbursement, and we welcome the opportunity to discuss this further.”
While we will continue to follow details of the potential merger, the Sabra Health Care REIT, Inc. and Care Capital Properties agreement would create a premier healthcare REIT. The combined company is expected to have a pro forma total market capitalization of approximately $7.4 billion and an equity market capitalization of approximately $4.3 billion.