A 2018 rally for stocks of skilled nursing-focused real estate investment trusts, combined with a second-half slide in MedEquities Realty Trust Inc.'s share price, created the conditions for Omega Healthcare Investors Inc. to buy the flagging company.
The approximately $600 million transaction is priced at a substantial premium to where MedEquities' shares were trading before the transaction was announced, but it is roughly in line with the value of the company's assets, analysts said in notes published after the deal.
MedEquities was reported to be exploring a sale in August, and the company suffered through a bumpy autumn in which it cut its full-year earnings guidance, decided against paying a third-quarter dividend and scrambled to contain the damage to its cash flow from struggling tenants. For much of that period, BlueMountain Capital Management LLC, one of the company's top investors, was steadily trimming its stake.
BlueMountain, which also controls two seats on the MedEquities board, sold 885,970 shares of the company from May through the end of the year, for a total of $8.1 million, according to S&P Global Market Intelligence data. As of its most recent disclosed sale, on Dec. 6, it owned about 1.7 million shares, down from about 2.2 million at the end of the third quarter.
At the same time, Omega, which focuses on skilled nursing assets, was riding growing investor optimism about that industry to a strong market valuation. By the end of 2018, the company's shares traded at about a 40% premium to the value of its assets, compared to a roughly 40% net asset value discount for MedEquities.
Skilled nursing-oriented REITs, including Omega and Sabra Health Care REIT Inc., had "a heck of a year," Jeffrey Yurk, a portfolio manager at Heitman LLC, said in an interview. Their rally was driven in part by a belief that several large operators' worst difficulties are behind them, and by optimism about a new government reimbursement system that is set to debut in October 2019, he said.
Given the two REITs' diverging fortunes in recent months, Omega's stock-and-cash acquisition of MedEquities was a natural fit, Yurk added.
"MedEquities needed to do something," he said. "Omega had the cost of capital, liked enough of the portfolio, and there you go."
In a Jan. 2 note, Jefferies analyst Omotayo Okusanya said the transaction will diversify Omega's tenant base and its property types, by bringing more properties outside of the skilled nursing sector into its portfolio. Omega's offer of $10.26 per share came at a 50.0% premium to MedEquities' Dec. 31, 2018, share price, which the analyst said reflects the fact that the market was undervaluing MedEquities' assets.
The transaction represented an approximate 9.0% capitalization rate and will be accretive to Omega's per-share earnings, he said.
B. Riley FBR analyst Bryan Maher said in a Jan. 3 note that the transaction was the best possible near-term solution for MedEquities, given the effect that tenant problems were having on the company's revenue, combined with "unrelenting selling pressure" on its shares. Maher said he does not anticipate a higher offer from a competing bidder.
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