Jim Royal, one of The Motley Fool’s “Rising Stars”, sure has taken a liking to spinoffs. He recently penned a brief note pegging recent spinoff Sabra Healthcare REIT(SBRA), and future spinoffs Rainbow Media and Northrup Grumman’s(NOC) shipbuilding unit as “Spinoff Stocks Worth Watching“.
In a followup piece, Royal recommends buying Sabra, which recently spun out from Sun Healthcare(SUNH). He finds it attractive thanks to its yield and its projected ability to deploy its cash horde.
Disclosure: The author owns no stock mentioned
While I agree with you that SBRA will be a nimble, fast growing REIT out of the gate, at $17/share it looks expensive for multiple reasons:
1. Their closest competitor, OHI, is trading at a 2 turn discount on Funds from Operations (FFO) to SBRA..this is unwarranted for several reasons:
a. SBRA has a much higher cost of capital (they recently raised HY debt at over 8%
b. SBRA is a one tenant REIT, OHI has over 20 operators
c. SBRA has much more Medicaid reimbursement risk. State Medicaid budgets are at risk going into spring
2. They have about ~$120mn of dry powder to do small, one-off, M&A deals. Rick is targeting about $10mn worth of deals per quarter. Assuming they do ALL of the $120mn in 2011 at a 10% yield that’s $12mn of additional rent – this would be on top of $70mn of PF revenues so would definitely move the needle here….BUT they would add about $8mn to FFO and put 2010 Pro Forma FFO at 10.6x vs. OHI at 11.0x…STILL NOT LOOKING CHEAP
Bottom Line: This is a stock that should trade at a 1 to 2 times discount to OHI…not premium
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