Nursing Deal Gets Approval -- WSJ

By Esther Fung Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 16, 2017).

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Shareholders of Sabra Health Care REIT on Tuesday voted in favor of a proposed merger with another skilled nursing company, Care Capital Properties Inc., despite a backlash from investors that threatened to derail the deal.

Some Sabra shareholders, including hedge funds Eminence Capital LLC and Hudson Bay Capital Management LP, which own 3.9% and 3.4% of the real-estate investment trust, respectively, had argued against the proposed merger.

Sabra, based in Irvine, Calif., said the two shareholders offered no strategic alternative that would benefit shareholders over the long term and questioned whether they had the long-term interests of the REIT in mind.

"In the near-term, we believe this transaction achieves our long stated goals while providing us with a stronger platform for continued growth," Sabra said in a statement on Tuesday after the deal passed a shareholder vote by winning more than two-thirds of the votes.

Both hedge funds in July released open letters questioning the deal, arguing that a major tenant of Care Capital, Signature Healthcare, is going through financial distress and could file for bankruptcy protection. Eminence Capital and Hudson Bay Capital didn't immediately respond to a request for comment.

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Shares of Sabra have fallen 19% since the company announced on May 7 it was planning a merger with Care Capital, a Chicago-based skilled nursing REIT that had been spun out from Ventas Inc. in 2015. Shares of Care Capital initially rose but have declined by around 11% since the announcement.

Hudson Bay also has said Sabra Chief Executive Richard Matros' incentives aren't aligned with shareholders' interests, and that the proposed deal could cause Mr. Matros's compensation to increase by an estimated 37%.

"We believe that Mr. Matros's annual bonus compensation structure is set up 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," said Hudson Bay in a letter to Sabra's shareholders in late July.

Sabra has said its management team's interests are directly aligned with all of its shareholders.

Sabra refuted the hedge funds' criticisms of the economics of the deal, arguing that combining with Care Capital diversifies its tenant base, reduces its concentration from its top five tenants, increases scale and improves its access to debt markets.

Changes to medical billing practices are contributing to shorter lengths of stay and lower rates, which have been weighing on operators of skilled nursing facilities. Many health care REITs, including Sabra, earlier had reduced their exposure to the group to focus on more profitable senior housing and medical office buildings.

Proxy advisory firm Institutional Shareholder Services Inc. recommended that shareholders vote against the deal, while advisers Egan-Jones Proxy Services and Glass Lewis & Co. recommended shareholders vote for the deal.

Glass Lewis argued that the short term nature of the positions held by Hudson Bay and Eminence as well as a lack of alternative strategy for long-term value creation raised questions over whether the motivations of the new investors and their interests are aligned with the long-term interests of the company and other shareholders. Eminence started investing in Sabra in May while Hudson Bay Capital invested in June.

At the announcement of the deal in May 7, Sabra said the merger would create a $7.4 billion company that would make it investment-grade and provide greater access to debt markets. The transaction is scheduled to close on Aug. 17.

Write to Esther Fung at esther.fung@wsj.com

(END) Dow Jones Newswires

August 16, 2017 02:48 ET (06:48 GMT)