OREANDA-NEWS. Fitch Ratings has affirmed the ratings of Sabra Health Care REIT, Inc. (NASDAQ: SBRA) and its operating partnership, Sabra Health Care Limited Partnership (collectively, Sabra or SBRA) with the Issuer Default Ratings (IDRs) at 'BB+' and a Stable Outlook. A full list of rating actions follows at the end of the release.

KEY RATING DRIVERS
The affirmation reflect that despite the issues at three of its largest assets, SBRA was operating with sufficient cushion in its headline credit metrics to withstand the related deterioration in cash earnings. Over the longer term, Fitch is concerned that the company's common equity could persistently trade at a discount to past highs and net asset value (NAV) even after resolutions, making it more challenging for SBRA to achieve its growth and diversification objectives on a leverage-neutral basis. Fitch has not revised SBRA's Outlook to Negative or downgraded the IDR because maintaining or increasing leverage from current levels would constitute a change in the issuer's financial policies that they have not communicated. Moreover, the issuer publicly reiterated its long-term leverage targets of 4x-5.5x net debt-to-EBITDA as recently as the third-quarter 2015 (3Q15) earnings call.

ASSET CONCENTRATION RISKS REALIZED
The risks from asset concentration previously highlighted by Fitch were realized when the tenants/borrowers under SBRA's investments in three acute-care hospitals defaulted after they failed to meet expectations and the operator lost financing. The hospitals operate as Forest Park Medical Center (FPMC) and total $27 million of potential GAAP revenues. In 3Q15, SBRA reported $240 million of total revenues on an annualized basis, of which $13 million was from FPMC. Of the three hospitals, SBRA owns one and is the lender to the owner on the other two. At present, each of the three obligors to SBRA have filed for bankruptcy protection and SBRA is working to resolve the issue by either re-tenanting or selling the owned hospital and either being repaid or selling its interests in the remaining two properties. SBRA is targeting a resolution by the end of 1Q16. Regardless, we have conservatively excluded all earnings from the properties in its metrics.

LEVERAGE HIGHER THAN TARGETED BUT CONSISTENT WITH 'BB+' IDR
Fitch has and will continue to exclude FPMC-related earnings from its calculations as they are either not expected to occur going forward or, in the case of the owned asset, are being funded by debtor-in-possession financing that SBRA is providing. Fitch forecasts leverage will be in the low 6x range in 4Q15 excluding these assets. Leverage is forecast to remain in the 6x-6.5x range until SBRA resolves the assets and receives cash proceeds from their sale or income if they are leased by a new tenant. Leverage is materially higher than the 4x-5.5x range that the issuer was targeting and operating at through its history. Nonetheless, it was the issuer's previously low leverage that insulated it from FPMC's issues. We have not assumed SBRA will invest any material capital into the resolution of the assets; thus, should they decide to do so, leverage could increase beyond Fitch's expectations. Fitch calculates leverage as debt less readily available cash-to-recurring operating EBITDA.

Fitch projects fixed-charge coverage to remain appropriate for the ratings in the 2.5x-3x range through 2017. Fixed-charge coverage is calculated as recurring operating EBITDA less straight-line rent and maintenance capital expenditures-to-total interest and preferred dividends.

LONGER-TERM, FPMC MAY PRESSURE OBJECTIVES AND POLICIES
Although Fitch's ratings assume no change in financial policies, there is a risk that the price of SBRA's common shares may remain at levels at which management is less willing to issue at, even after a resolution at FPMC. An important part of the investment thesis in SBRA's shares relative to other healthcare REITs was that it had a multitude of achievable positive catalysts, including above-average growth due to a smaller base, diversification from its largest tenant, and potentially a lower cost of capital as it moved up the ratings curve. While Fitch does not speculate or comment on absolute or relative equity values, we are nonetheless cognizant that SBRA is trading at a 42% discount to past highs, a 13% discount to consensus NAV, and that consensus NAV has declined by more than 10% from its 2015 highs. Thus, should the shares fail to revert to past levels, SBRA would be forced to either accept lower than originally expected growth and diversification or revise its financial policies to allow for higher leverage in order to achieve the first two goals. On its 3Q15 earnings call, SBRA indicated it would use cash proceeds from the FPMC resolution to reduce leverage and/or repurchase shares.

STRONG LIQUIDITY DRIVEN BY LONG-DATED CONCENTRATED MATURITIES ALLOW ISSUER TO MANAGE
SBRA's corporate liquidity is strong for the rating and alleviates some of the downside risk related to the timeframe that could take to resolve FPMC (i.e. re-tenant or sell the assets or be repaid in the case of the debt investments). Fitch estimates SBRA has $251 million of liquidity, of which $246 million is available under the revolving credit facility (RCF) due 2018 and extendable into 2019. This compares to only $9 million of debt maturities and amortization and $32 million of funding commitments through Dec. 31, 2017. Fitch would be more concerned over how quickly SBRA was able to resolve FPMC should it have had a sizable unsecured debt maturity coming due within the rating horizon. SBRA's liquidity is driven by its long-dated yet concentrated debt maturities. This is somewhat common for smaller REITs (especially those that issue public unsecured bonds as opposed to smaller denomination term loans and private placements) and results in a lower probability of default in the initial years but greater bullet maturity risk in the later years.

SBRA's nearest debt maturity will be the $200 million term loan and any balance on the RCF in 2018 (both of which can be extended at SBRA's option to 2019). SBRA's liquidity could improve should it receive cash proceeds from the sale or repayment of its FPMC assets. After 2018, SBRA's debt maturities are concentrated in 2021 (39% of total debt) and 2023 (15%).

SBRA maintains appropriate contingent liquidity in the form of unencumbered assets which cover unsecured debt net of readily available cash between 1.8x-2.2x assuming a stressed 8.5%-10.5% cap rate.

STABLE OUTLOOK
The Rating Outlook remains at Stable due to the expectation that the issuer can manage to metrics consistent with a 'BB+' IDR through the rating horizon regardless of whether it resolves FPMC in a timely fashion. Should the issuer put incremental capital into the assets, leverage may increase beyond Fitch's expectations. The Stable Outlook is also predicated on the issuer maintaining its existing financial policies.

PREFERRED NOTCHING AND NOTE COVENANTS
The two-notch differential between SBRA's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BB+'. Based on Fitch research on 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', available at 'www.fitchratings.com', these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.

Certain covenants of SBRA's senior unsecured notes, most notably the limitation on indebtedness and maintenance of total unencumbered assets, can be suspended upon certain events. SBRA would still be subject to the financial covenants in its bank credit facility agreement; however, those may be renegotiated with greater ease and a breach would not trigger a cross-default so long as the bank lending group did not accelerate repayment. While Fitch does not rate to the covenants, the lack of covenants would be a differentiating factor between SBRA's unsecured notes and those of its REIT peers.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for SBRA include:
--FPMC assets are sold in 2016 resulting in cash proceeds of $177 million;
--Should the FPMC assets not be sold during the rating horizon, SBRA will curtail investments to maintain leverage below 6.5x;
--SBRA will not access the capital markets beyond using its bank credit facilities.

RATING SENSITIVITIES
Fitch does not envision positive momentum in the ratings and/or Outlook due to the FPMC issues and the issuer operating above its financial targets. Upon resolution, Fitch views SBRA's targeted leverage and fixed charge coverage as being consistent with higher ratings. As such, positive action on SBRA's ratings and/or Outlook will be driven by continued material diversification that reduces reliance on individual assets and/or tenants.

The following factors may result in negative momentum in SBRA's ratings and/or Outlook:
--A change in its financial policies;
--Increasing asset and/or tenant concentration;
--Deteriorating coverage in the Holiday portfolio;
--Forest Park Medical Center issues are not resolved in a leverage-neutral manner;
--Fitch's expectation of leverage sustaining above 6.5x (leverage was 5.8x at Sept. 30, 2015 and projected to be in the 6x-6.5x range after removing the FPMC income).

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Sabra Health Care REIT, Inc.
--IDR at 'BB+';
--Cumulative redeemable preferred stock at 'BB-/RR6'.

Sabra Health Care Limited Partnership
--IDR at 'BB+';
--Unsecured revolving credit facility at 'BB+/RR4';
--Unsecured term loan at 'BB+/RR4';
--Senior unsecured notes at 'BB+/RR4'.

Sabra Canadian Holdings, LLC
--Senior guaranteed term loan at 'BB+/RR4'.