Sabra Health Care REIT has entered into an agreement to invest in a 49% interest in a joint venture that will own 183 senior living properties operated by Enlivant with the remaining 51% held by TPG Real Estate, which currently owns 100%. They have valued the transaction at $1.62 billion, or $195,600 per unit, with Sabra’s equity investment coming to $371 million.

In 2013, TPG bought the former Assisted Living Concepts (ALC) for $458.5 million, or about $58,000 per owned unit, when occupancy had dropped to 60% after the company decided to get out of the Medicaid business. TPG changed the name to Enlivant, partly because there had been a few too many scandals associated with the previous name. Revenues were just under $200 million, and our adjusted EBITDA at the time was about $37 million. Expenses, however, were understated largely because staffing was short by several hundred. That became a top priority for the new management, led by Jack Callison.

In the four years since the acquisition, occupancy has increased to 82%, and while we give credit to Enlivant’s management for that increase, we had actually thought they had reached that level a year ago. Revenues appear to be just over $340 million with EBITDA expected to be between $90 million and $100 million in 2017. The targeted EBITDA for 2018 is between $100 million and $110 million before capex of $10 million. This results in an estimated cap rate of 5.8% for the entire transaction value based on current cash flow before capex. The cap rate increases for Sabra after taking into effect leverage.

Readers may remember we never particularly liked this portfolio, partly because the average building size is just 45 units, partly because of the previous ALC management which should have been fired long before, and partly because of the locations, which were mostly secondary and tertiary markets. TPG, however, had little risk at its low purchase price, and better management could easily have increased census by at least 10 percentage points. We questioned four years ago whether TPG could pull off a “Blackstone,” which meant buying a lower-end portfolio for a cheap price and turning around and selling it for two, three or four times their original price. It looks like they bested Blackstone on this one.

For Sabra, coming on the heels of its acquisition of Care Capital Properties, which increased its exposure to the skilled nursing sector, this decreases that exposure (at least on a percentage basis), and takes Sabra’s seniors housing business to about 33% when and if it buys the remaining 51%, which it has an option for three years. While this is important for Sabra, we believe it is an expensive way to get there. While the levered cash-on-cash return on 2018 cash flow is forecast to be as high as 7.9%, it is the $195,600 per unit value that we have a hard time getting over.