Sabra Health Care REIT Inc. Upgraded To 'BB+' From 'BB-' Following Merger With Care Capital Properties; Outlook Stable

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1 Research Update: Sabra Health Care REIT Inc. Upgraded To 'BB+' From 'BB-' Following Merger With Care Capital Properties; Outlook Stable Primary Credit Analyst: Michael H Souers, New York (1) ; michael.souers@spglobal.com Secondary Contact: Kristina Koltunicki, New York (1) ; kristina.koltunicki@spglobal.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Recovery Analysis Related Criteria Related Research Ratings List AUGUST 17,

2 Research Update: Sabra Health Care REIT Inc. Upgraded To 'BB+' From 'BB-' Following Merger With Care Capital Properties; Outlook Stable Overview Sabra Health Care REIT Inc. (Sabra) merged with Care Capital Properties Inc. in an all-stock transaction that combined two skilled nursing-focused health care REITs. We are raising our corporate credit rating on Sabra to 'BB+' from 'BB-' based on our view of the company's improved scale, tenant diversification, and credit protection measures following the merger with Care Capital. The stable outlook reflects our expectations that the integration of the merged companies will be relatively smooth, with modest cost synergies achieved, and that Sabra will continue to generate relatively stable cash flows from its existing tenant base over the near term. Rating Action On Aug. 17, 2017, S&P Global Ratings raised its corporate credit rating on Sabra Health Care REIT Inc. and its operating partnership, Sabra Health Care L.P. (collectively, Sabra), to 'BB+' from 'BB-'. The outlook is stable. We also raised the issue-level rating on the company's senior unsecured notes to 'BBB-' from 'BB'. The recovery rating remains '2', reflecting our expectation for substantial recovery (70% to 90%; rounded estimate: 70%) in the event of default. We raised the issue-level rating on the preferred shares to 'B+' from 'B-'. We removed the ratings from CreditWatch positive, where we placed them on May 8, Rationale The upgrade acknowledges our favorable view of the transaction, which boosts Sabra's scale, greatly improves its tenant diversification, and strengthens its key credit protection measures. We also expect the company will be able to achieve approximately $20 million in cost savings with an improved and sustainable cost structure. Despite the continued headwinds facing skilled nursing facilities (SNFs), we believe this transaction increases economies of scale to a level that will better insulate the combined entity from additional macroeconomic pressures. AUGUST 17,

3 Following the close of the merger, Sabra achieved significantly greater scale, with a total market capitalization of approximately $6.5 billion and undepreciated real estate investments of $6.0 billion (up from $2.9 billion and $2.3 billion as of June 30, 2017). The company will operate 514 properties (70 tenant relationships) across 43 states and Canada, primarily under triple-net lease agreements. Tenant concentration risk is also greatly diminished as a result of the merger, with exposure to Genesis Healthcare Inc. (not rated) falling to 13.9% of annualized net operating income (NOI), from 33.1% at June 30, Sabra plans to reduce its Genesis exposure further, as it is currently marketing 33 properties for sale. Other large tenant relationships include Senior Care Centers (10.1%) and Signature Healthcare (8.8%). We note that health care REITs tend to have larger tenant concentrations compared with other REIT asset classes, as the REITs tend to grow their existing relationships with favored operators. Aside from a relatively large exposure to Texas (approximately 17% of investments), Sabra is well diversified from a geographic perspective. SNFs generate approximately 73% of NOI at the time of the merger, with senior housing (19%) and hospitals (8%) accounting for the remainder. We expect Sabra's SNF exposure will decline over time as Sabra pursues more senior housing acquisitions. However, in the meantime, we note that both SNFs and hospitals are heavily reliant on potentially volatile government reimbursement programs, and that SNFs have been further burdened by industry headwinds such as the expansion in Medicare Advantage enrollees, Department of Justice lawsuits, and the adoption of bundled payments (which is still very early in what could be a long transition). Furthermore, we think a repeal or replacement of the Affordable Care Act could be harmful to SNF operators, as they are heavily reliant on Medicaid for reimbursement. In terms of tenant-level coverage, the combined company had EBITDAR coverage of 1.31x at June 30, In spite of the industry headwinds, Sabra's portfolio showed year-over-year improvement, rising to 1.56x at June 30, 2017 (from 1.45x). However, Care Capital saw coverage slip slightly to 1.19x (from 1.2x). We note that these coverage figures exclude Genesis Healthcare, which has a corporate guarantee. Genesis' fixed-charge coverage (FCC) declined to 1.18x at June 30, 2017 (from 1.27x). We believe Sabra is likely to restructure some of Care Capital's leases, which would reposition its operators to sustainable coverage levels. An additional benefit of the merger from Sabra's perspective is improved credit metrics. We expect Sabra to operate with debt to EBITDA in the high-5x area, FCC in the low-3x range, and debt to undepreciated capital in the high-40% area at year-end 2018 (our metrics incorporate trailing-12 month EBITDA, so 2017 figures are greatly distorted by the merger). We expect the company to grow in a leverage-neutral manner, with metrics gradually improving over time. Floating-rate bank debt (term loans and revolver borrowings) is expected to AUGUST 17,

4 represent approximately 49% of total debt at the time of the merger, which results in coverage measures being subsidized due to the low interest rate environment. We expect Sabra will issue unsecured notes over the next few years to gradually term out much of this exposure. Our base-case forecast incorporates the following assumptions: Real GDP growth of 2.2% in 2017 and 2.3% in 2018; Same-store revenues of 1.5% to 2.0% per year, reflecting contractual rent escalators; Significant widening of EBITDA margins in 2018; Investments of $400 million to $600 million in both years at initial yields of 7.5% to 8.0% (reflecting a mix of senior housing properties and SNFs); Dispositions of $200 million to $300 million each year at a cap rate of 9.0% to 9.5% (largely reflecting expected sales of Genesis properties); and Growth to be funded in a leverage-neutral manner. Based on these assumptions, we project: Debt to EBITDA declines to the high-5x area at year-end 2018 (from 6.4x in 2016); FCC rises to the low-3x area in 2018 (from 2.7x); and Debt to undepreciated capital declines to the high-40% area (from 54.5%). Liquidity Sabra has adequate sources of liquidity to cover its cash needs over the next 12 months, in our view. Our assessment of the company's liquidity profile incorporates the following expectations and assumptions: Liquidity sources will exceed uses by at least 1.2x over the next 12 months; Liquidity sources will be positive, even if forecasted EBITDA declines by 10% (a REIT specific threshold for adequate liquidity); Sufficient covenant headroom for forecasted EBITDA to decline by 10% without the company breaching covenant tests, and debt is at least 10% below covenant levels; The likely ability to absorb high-impact, low-probability events with limited need for refinancing; and Sound relationships with banks. Principal Liquidity Sources: Unrestricted cash of approximately $13 million at June 30, 2017; At June 30, 2017, approximately $468 million of availability under the company's $500 million revolving credit facility that matures January 2020 (Sabra announced an amended and restated credit facility that increases the capacity to $1 billion and matures August 2021, which goes into effect with the merger closing); and Projected funds from operations (FFO) of between $130 million and $150 million in 2017, and between 400 million and $450 million in AUGUST 17,

5 Principal Liquidity Uses: Regularly scheduled principal amortization payments on mortgage debt of approximately $4 million per year; Forecasted common share dividend distributions of approximately $170 million in 2017 and $350 million in 2018; and Preferred share dividend distributions of approximately $10 million in both 2017 and Outlook The outlook on Sabra is stable. We expect a relatively smooth integration of the merger with Care Capital Properties, with modest cost synergies achieved. We also project relatively steady tenant-level rent coverage and negligible lease expirations to support Sabra's near-term core cash flow and credit metrics. We believe leverage-neutral investments, along with select dispositions, will continue to gradually strengthen Sabra's scale and portfolio diversification. Downside scenario We could consider lowering the ratings by one notch if operating results deteriorate significantly, potentially driven by reimbursement pressure that cause rent coverage levels to drop meaningfully. Moreover, we would also consider lowering the rating if the company pursues large debt-financed acquisitions that cause debt to EBITDA to rise above 6.5x for a sustained period, given the potential volatility associated with government reimbursement programs. Upside scenario While unlikely over the near-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 strengthening its scale and asset mix, with a greater proportion of lower-risk senior housing assets. We could also consider raising the rating if Sabra's changes its financial policy to operate with significantly lower leverage, such that debt to EBITDA falls to and is sustained below 4.5x, with debt to undepreciated capital below 40%. Ratings Score Snapshot Corporate Credit Rating: BB+/Stable/-- Business risk: Fair Country risk: Very low Industry risk: Low Competitive position: Fair Financial risk: Intermediate AUGUST 17,

6 Cash flow/leverage: Intermediate Anchor: bb+ Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Liquidity: Adequate (no impact) Financial policy: Neutral (no impact) Management and governance: Fair (no impact) Comparable rating analysis: Neutral (no impact) Recovery Analysis The issue-level rating on the company's senior unsecured notes is 'BBB-', with a recovery rating of '2', indicating expectations of substantial recovery (70 to 90%; rounded estimate: 70%) in the event of a payment default. Key analytical factors We have completed a review of the recovery analysis for Sabra. The recovery rating remains unchanged, and we rate the unsecured notes one notch higher than the corporate credit rating. We estimate a gross recovery of $2.8 billion assuming a blended capitalization rate of 12.4% and a NOI value of $342 million at default. We assume the revolving credit facility is 65% drawn at the time of default, with the company acquiring $430 million of new investments at an 8.0% cap rate. Our simulated default scenario contemplates a payment default in 2022, assuming a deep economic recession coupled with material government regulatory and reimbursement changes. These changes are assumed to result in financial difficulty for the company's tenants and could ultimately cause tenant defaults and vacancies. A significant loss in rental revenues would compromise the company's ability to generate adequate cash flow to service its debt and other fixed charge obligations, such as maintenance costs. Simulated default assumptions Simulated year of default: 2022 Blended stress on NOI: 40% NOI at emergence: $342 million Blended capitalization rate: 12.4% Simplified waterfall Gross recovery value: $2.8 billion Property level costs (5%): $138 million Aggregate property level debt: $261 million Aggregate residual value: $2.4 billion 5% in administrative expenses: $122 million Net recovery value: $2.3 billion AUGUST 17,

7 Total unsecured claims: $3.2 billion --Recovery expectations*: 70% to 90% (rounded estimate: 70%) Note: All debt amounts include six months of prepetition interest, principal amortization payments made up to the default year, and debt obligations that mature prior to the default year are assumed to have been refinanced at similar terms with its maturity date extended to the default year or later. *The '2' recovery rating reflects a substantial recovery (70% to 90%) recovery for senior unsecured noteholders in the event of a payment default. As a result, our 'BBB-' issue-level rating on the senior unsecured notes is one notch above our 'BB+' corporate credit rating on the company. Related Criteria General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 Criteria - Corporates - General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016 Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 General Criteria: Methodology: Industry Risk, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013 Criteria - Corporates - Industrials: Key Credit Factors For The Real Estate Industry, Nov. 19, 2013 General Criteria: Group Rating Methodology, Nov. 19, 2013 General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Criteria - Insurance - General: Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 Criteria - Corporates - General: 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 Related Research REITrends: Retail REITs Stubbed Their Toe In The First Quarter Other Sectors Kept Their Stride, June 19, 2017 Ratings List Upgraded; CreditWatch/Outlook Action To From AUGUST 17,

8 Sabra Health Care REIT Inc. Sabra Health Care L.P. Sabra Capital Corp. Corporate Credit Rating BB+/Stable/-- BB-/Watch Pos/-- Sabra Health Care REIT Inc. Sabra Capital Corp. Sabra Health Care LP Senior Unsecured BBB- BB/Watch Pos Recovery Rating 2(70%) 2(75%) Sabra Health Care REIT Inc. Preferred Stock B+ B-/Watch Pos Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at for further information. Complete ratings information is available to subscribers of RatingsDirect at and at All ratings affected by this rating action can be found on the S&P Global Ratings' public website at Use the Ratings search box located in the left column. AUGUST 17,

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