Sabra Health Care REIT has another 10 months to pull the trigger on its purchase option to buy the remaining 51% of Enlivant still owned by private equity giant TPG. Sabra closed on its 49% interest at the beginning of 2018, when occupancy at Enlivant was just 82%. This was a sharp improvement from the 60% census when TPG hired financially and operationally distressed Assisted Living Concepts in 2013. TPG brought in Jack Callison to run it and turn it around. Going from 60% to 82% in less than five years was no small feat, especially after the bridges that the former ALC management burned with several state regulators. 

When Sabra bought its 49% share, the price per unit was quite high and the in-place cap rate quite low. The REIT, however, was looking at the future and saw the census continuing its rise under Callison’s leadership. But then the overdevelopment problem hit the market, with price discounting and staff poaching. Today, Enlivant’s occupancy rate is still about 82%, so no improvement, except that it has recently increased both sequentially and year over year. We suppose that all things considered, that is a victory. 

Buy or Not Buy 

Sabra, especially after its purchase of Care Capital Properties, has always been heavily weighted towards skilled nursing. Investors wanted to see the diversification to the private pay senior living market, and that is what CEO Rick Matros and his team are doing. It is not easy in this market, because even though interest rates are low, Sabra’s cost of equity is higher than many of its REIT competitors and certainly higher than the large PE firms going after quality senior living properties. Consequently, it will be hard to win in bidding contests, and they all have become bidding contests.  

Between now and the end of the year, if the market continues to improve, there may be enough momentum for Sabra to pull the trigger on its option. But the market improvement may not be enough to push the needle in secondary markets, where Enlivant mostly operates. We believe TPG still likes the senior living business, and we would not rule out further joint ventures between the two companies. Meanwhile, Callison would like to see his company grow, whether organically or by acquisition. Matros wants to see the organic side of things before pulling that million-dollar trigger. 

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