S&P Raises Sabra Health Care REIT (SBRA) to 'BB-'; Outlook Stable

Standard & Poor's Ratings Services raised its corporate credit rating on Sabra Health Care REIT (Nasdaq: SBRA) to 'BB-' from 'B+'. The outlook is stable.

At the same time, we raised our issue-level rating on the senior unsecured notes issued by Sabra's wholly owned subsidiaries, Sabra Health Care L.P. and Sabra Capital Corp, to 'BB' from 'BB-'. Our recovery rating on this debt remains '2', indicating our expectation for a substantial (70% to 90%) recovery in the event of payment default. We also raised our issue-level rating on the company's revolving credit facility to 'BB' from 'BB-' and the issue-level rating on the company's preferred stock to 'B-' from 'CCC+'.

"Our 'BB-' corporate credit rating on Sabra reflects our view that the company's business risk profile is "weak" and its financial risk profile is "significant". Our business risk assessment reflects Sabra's smaller size (undepreciated real estate investments of approximately $1.7 billion), concentrated tenant base (top two tenants contribute nearly 54% of revenues), and improving but continued heavy reliance on skilled nursing/post-acute facilities (SNFs), which contribute approximately 54% of Sabra's revenue," said credit analyst Michael Souers. "We note that this asset concentration remains dependent on potentially volatile government reimbursement programs such as Medicare and Medicaid. In late July, the Centers for Medicare & Medicaid Services (CMS) finalized their 2015 payment and policy changes, with skilled nursing facilities set to receive a $750 million (2.0%) increase in Medicare payments."

The outlook is stable. We expect relatively steady tenant-level rent coverage and negligible lease expirations to support Sabra's near-term core cash flow and credit metrics. We also believe that profitable, leverage-neutral investments will continue to gradually strengthen Sabra's scale and portfolio diversification.

Downside scenario

We see limited downside for the ratings at this time, given our expectation for steady core cash flow and improving credit metrics. However, we could consider lowering the ratings if leverage rises significantly above its current level, pressuring FCC below 1.8x, or if the cushion on Sabra's debt covenants narrows modestly. This could be a result of debt-financed expansion or the restructuring of leases for tenants that can't mitigate rising expenses or potential reimbursement cuts.

Upside scenario

Sabra's relatively small capital structure and still-significant portfolio concentration constrains upward ratings momentum. Longer term, we would consider raising the ratings by one notch if Sabra maintains a steady investment and funding strategy that preserves its credit metrics while continuing to gradually strengthen its scale and portfolio diversification.

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