NEW YORK--(BUSINESS WIRE)--Hudson Bay Capital Management LP, a New York-based investment manager, and its affiliated investment funds (collectively “Hudson Bay”), which beneficially own approximately 3.9% of the common stock of Sabra Health Care REIT, Inc. (NASDAQ:SBRA) (“Sabra”), today released an open letter to SBRA shareholders to set the record straight on the highly misleading points Sabra stated in its press release and presentation on July 28, 2017 and to reiterate why SBRA shareholders must reject Sabra’s value destroying, proposed acquisition of Care Capital Properties, Inc. (NYSE:CCP) (“CCP”). A special meeting to vote on the proposed merger is scheduled to be held August 15, 2017.
The full text of the letter follows below:
July 31, 2017
Dear Fellow Sabra Shareholders,
Hudson Bay Capital Management LP and its affiliated investment funds (collectively “Hudson Bay”) are the beneficial owners of approximately 3.9% of Sabra Health Care REIT, Inc. (NASDAQ:SBRA) (“Sabra” or the “Company”). We are writing to you today to set the record straight by addressing the highly misleading points Sabra made in its press release and presentation dated July 28, 2017 and to reiterate our opposition to Sabra’s acquisition of Care Capital Properties, Inc. (NYSE:CCP) (“CCP”). Hudson Bay is calling upon fellow Sabra shareholders to protect the fair value of their investment and to VOTE AGAINST the CCP acquisition at a special meeting to vote on the proposed merger to be held August 15, 2017.
The misleading points put forth by Sabra on July 28, 2017 include:
1) Sabra cherry-picking analysts’ commentary to show support for the CCP acquisition, including from analysts that actually OPPOSE the transaction (in particular Mizhuo and Jefferies).
Sabra said: “Sabra is encouraged by the strong level of support from shareholders and positive commentary from Wall Street analysts following the transaction…Industry analyst commentary from reports regarding the CCP merger highlight these and other benefits for shareholders.”
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| Quotes Sabra uses to defend the merger: | Quotes Sabra omitted: | ||
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"The balance sheet will be strong and trading liquidity should improve, and would also allow for more flexibility to manage the portfolio through asset sales given the increased size/scale." (Mizuho, May 7, 2017) |
Sabra Health Care REIT (SBRA, $23 PT): Downgrade to Underperform from Neutral “…We are thinking a bit more short-term on this downgrade, which is entirely a function of the lingering risks and continued investor backlash to the merger with Care Capital Properties (CCP)…as we are generally cautious on the healthcare REIT sector (our only Buy rating is medical office REIT, HTA), the added headwinds and event risk of the CCP undertaking leaves us on the sidelines for now.” (Mizuho, July 10, 2017) |
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"A strong positive is the diversification the deal brings with no one tenant representing more than 11% of annualized cash NOI once SBRA's previously announced Genesis dispositions are closed and CCP closes its previously announced behavioral hospitals acquisition. Sabra on a stand-alone basis has 32% exposure to Genesis as a tenant and 16% to Holiday. Per the press release concerning the deal, SBRA expects the deal to be 14-16% accretive to AFFO in the first full year which our analysis supports. Drivers of accretion include 1) $20M of synergies; 2) assumption of relatively cheap debt from CCP." (Jefferies, May 8, 2017) |
“Investors continue to view the CCP deal negatively, given the significant increased exposure to the skilled nursing facility (SNF) sector as well as riskier tenants such as Signature Healthcare….The concerns continue to stem from the increased SNF exposure which will now be 73% of total cash NOI (vs. 56% prior). Given the increased SNF exposure, SBRA stock has experienced meaningful multiple compression and is now trading like SNF Healthcare REIT peers such as OHI at about 9.5x P/FFO.
Raising Estimates But Lowering Price Target: We are raising our Normalized AFFO/sh estimates for FY 2017, 2018, and 2019 to $2.39, $2.53, & $2.59 vs. $2.18, $2.27, & $2.37 prior to reflect deal accretion with $25M in annualized rent concessions. We maintain our Hold rating but lower our PT to $25 from $28 as we believe SBRA will trade more like a SNF focused REIT until there is more clarity around the tenant related issues in the CCP portfolio.” (Jefferies, July 7, 2017) |
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2) Sabra claims its “management team’s interests are directly aligned with all Sabra shareholders” when in reality CEO Rick Matros’s compensation structure raises serious conflicts of interest.
While Sabra has dodged the CEO compensation issues we raised previously, the Company does not deny that this transaction causes Mr. Matros’s compensation to increase meaningfully – we think by 37%+.
Furthermore, Mr. Matros’s annual bonus is 100% driven by adjusted funds from operations (FFO) benchmarking and not by stock price performance1 – his incentives are NOT directly aligned with that of shareholders. In fact, we believe that Mr. Matros’s annual bonus compensation structure is setup in a manner to potentially perversely incentivize him to do transactions like this one, which are focused on maximizing his annual bonus rather than maximizing shareholder value.
In addition, for the last three years, Mr. Matros’s performance has been measured only off of fourth quarter adjusted FFO benchmarking and not adjusted FFO benchmarking for the entire year.2 This measurement is very troubling as it is potentially much easier to manipulate one quarter of results as opposed to the entire year. This odd measurement period leads us to ask: is the Sabra Board independent and do they have shareholders’ best interests in mind?
3) SBRA called the CCP acquisition a “turnaround opportunity,” but we all know that is just a nice way of saying they acquired troubled assets at inflated values.
Rather than overpaying for the troubled assets of CCP, Sabra should be acquiring assets at reasonable valuations that are not in need of major restructuring. And if SBRA insists on acquiring assets that are in need of major restructuring, it should at least acquire them at values that offer sufficient margin of safety commensurate with the level of risk absorbing such assets entail. Sabra has done neither of these with the CCP transaction, but instead has wildly overpaid. As highlighted in our prior presentation, Sabra’s CFO admits that SBRA paid a 7.6% cap rate for CCP (assuming $35mm in rent adjustments) in a SNF market in which SBRA CEO Rick Matros admits as recently as May 9, 2017, trade at over a 9% cap rate. In effect, Sabra’s management team admits that they overpaid for CCP by over 20%...we believe they overpaid by over 30%.
Furthermore, should CCP tenant quality continue to degrade remotely anywhere near the rate it did last quarter (sub 1.2x EBITDAR coverage grew dramatically from 38% of the portfolio to 65% quarter over quarter), we believe the CCP acquisition, should it be approved, could prove fatally expensive to Sabra’s shareholders.
WE HAVE CLEARLY ARTICULATED OUR POSITION:
THIS
TRANSACTION IS DISASTROUS FOR SHAREHOLDERS AND MUST BE REJECTED.
The upcoming vote is a shareholder referendum on whether Sabra should continue with the prior strategy of steadily diversifying its SNF exposure. If SBRA shareholders vote down this acquisition, we believe Sabra management MUST follow the will of its shareholders and continue executing its strategy of diversifying SNF exposure. In addition, if SBRA shareholders vote against this transaction and management continues to fail to listen to the voices of shareholders, we believe the SBRA Board MUST exercise its fiduciary duty and replace Rick Matros with a CEO who will listen to shareholders and act in their best interests – focusing first and foremost on maximizing shareholder value.
Furthermore, Sabra should explore all strategic alternatives to maximize shareholder value, including putting itself up for sale. SBRA trades at a depressed multiple as a direct consequence of announcing this poorly conceived transaction. Given its derating of over two FFO multiple turns versus peers since announcing the CCP acquisition, we believe SBRA would be a compellingly accretive and logical acquisition target to a wide range of potential acquirers. And, in recent conversations with industry participants, we believe there is interest in standalone Sabra as a potential acquisition target.
WE BELIEVE THE ACQUISITION OF CCP IS DISASTROUS AND MUST BE BLOCKED.
We urge you to PROTECT AND MAXIMIZE your investment in Sabra by VOTING AGAINST the CCP acquisition at the upcoming Special Meeting.
Sincerely,
Sander Gerber
Chief Executive Officer and Chief Investment Officer
John Chen
Portfolio Manager
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We urge stockholders to vote “AGAINST” the CCP Acquisition at the Special Meeting on the Company’s proxy card. This is not a solicitation of authority to vote your proxy. Please do not send us your proxy card; we are not able to vote your proxies nor does this communication contemplate such an event. |
About Hudson Bay Capital
Hudson Bay Capital Management LP (along with its affiliates, “Hudson Bay”) is a manager of alternative investment opportunities in the global markets targeting traditional and non-traditional sources of alpha by employing a diverse set of catalyst-driven absolute return strategies that are intended to be uncorrelated to each other and to the major indices. Our portfolio teams invest across the corporate capital structure and often trade around or in conjunction with an event or catalyst in an effort to exploit market inefficiencies. Founded in December 2005, with Sander Gerber as Chief Investment Officer, the firm seeks to achieve persistently positive returns while maintaining a focus on risk management and capital preservation.
Warning Regarding Forward Looking Statements
THIS PRESS RELEASE CONTAINS FORWARD LOOKING STATEMENTS. FORWARD LOOKING STATEMENTS CAN BE IDENTIFIED BY USE OF WORDS SUCH AS "OUTLOOK", "BELIEVE", "INTEND", "EXPECT", "POTENTIAL", "WILL", "MAY", "SHOULD", "ESTIMATE", "ANTICIPATE", AND DERIVATIVES OR NEGATIVES OF SUCH WORDS OR SIMILAR WORDS. FORWARD LOOKING STATEMENTS IN THIS PRESS RELEASE ARE BASED UPON PRESENT BELIEFS OR EXPECTATIONS. HOWEVER, FORWARD LOOKING STATEMENTS AND THEIR IMPLICATIONS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR AS A RESULT OF VARIOUS RISKS, REASONS AND UNCERTAINTIES. EXCEPT AS REQUIRED BY LAW, HUDSON BAY CAPITAL MANAGEMENT LP AND ITS AFFILIATES AND RELATED PERSONS UNDERTAKE NO OBLIGATION TO UPDATE ANY FORWARD LOOKING STATEMENT, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE DEVELOPMENTS OR OTHERWISE.
1 “As described in more detail below, Bonus Units under 2016 bonus program became earned based on our adjusted normalized FFO performance for 2016 relative to pre-established objective targets for 2016.” Sabra 2016 definitive proxy statement, page 27.
2 “Like our 2015 and 2014 bonus plan designs, for the 2016 bonus program, we determined in February 2016 to measure our 2016 adjusted normalized FFO performance by measuring our performance against adjusted normalized FFO targets established for the fourth quarter of the 2016 calendar year. The Compensation Committee determined to establish targets for the fourth quarter of the 2016 calendar year instead of annual targets for the entire 2016 calendar year because, given the anticipated level of 2016 investment and divestment activity at the time the bonus program was established, it believed a quarterly snapshot at the end of the year would better measure the Named Executive Officers’ execution on Sabra’s anticipated business plan during the year and our overall performance for the year.” Sabra 2016 definitive proxy, page 28.
