Genesis, Signature Raise ‘Going Concern’ Doubts with Omega, Prompting $140M Write-Down

Omega Healthcare Investors (NYSE: OHI) on Thursday announced that it will begin recording revenues associated with tenants Genesis HealthCare (NYSE: GEN) and Agemo Holdings LLC — the legal name for its portfolio of buildings operated by Signature HealthCARE — on a cash basis, citing concerns about the nursing home operators’ future.

As a result, the real estate investment trust (REIT) expects a write-down of $140 million in straight-line receivables and lease inducements during the fourth quarter of 2020, or $65 million for Genesis and $75 million for Agemo, respectively. Omega intends to also record an impairment of $28 million, which represents an non-collateralized portion of a loan to Agemo.

The two companies in August and September “informed the Company of doubt regarding their ability to continue as a going concern,” according to the REIT.

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As part of a 2018 restructuring, Signature consolidated its leases with Omega into Agemo, a holding company, alongside separate entities for facilities owned by its two other primary landlords.

“Throughout this pandemic, we have continued to collect all contractual rents due from both Genesis and Agemo,” Omega CEO Taylor Pickett said in a statement. “Our conservative accounting treatment going forward for these operators is triggered by their pandemic-influenced accounting disclosures. Based on our continuing dialogue with both companies, we are hopeful that ongoing government support and a return to pre-pandemic resident occupancies will provide them with the liquidity needed to meet all of their future Omega financial obligations.”

The Hunt Valley, Md-based REIT framed the move as advance warning of a significant revenue hit ahead of public earnings disclosures.

“We expect our reported revenues during the third quarter will be meaningfully lower than in the second quarter, even though our cash rents, funds available for distribution and cash flows will not be impacted by this change,” chief financial officer Bob Stephenson said. “We are disclosing this revenue recognition change today so investors can better understand the accounting impact of this change prior to the release of our third quarter earnings next month.”

Executives from both Genesis and Signature have sounded alarms about their futures in the wake of the COVID-19 pandemic, which has brought significant expense increases and revenue reductions to operators across the sector.

Genesis in August announced “substantial doubt” about its ability to survive the subsequent 12 months, even if the federal government provides more than the $228 million in aid that Genesis had received through various stimulus programs.

“Without giving effect to the prospect, timing and adequacy of future governmental funding support and other mitigating plans, many of which are beyond the Company’s control, it is unlikely that the Company will be able to generate sufficient cash flows to meet its required financial obligations, including its rent obligations, its debt service obligations and other obligations due to third parties,” the Kennett Square, Pa.-based operator announced in its second-quarter earnings release.

Genesis CEO George Hager specifically pointed to the dual effects of occupancy drops and expense spikes associated with early COVID-19 outbreaks in the company’s home territory of the Northeast.

“Financially speaking, the key performance drivers in this business have always been and will continue to be overall occupancy levels and the ability to effectively control labor costs,” Hager said on the company’s second-quarter earnings call. “Even a 1% change in occupancy or labor costs in this business is a big deal. All other drivers, quite frankly, pale in comparison.”

The Louisville, Ky.-based Signature laid off 100 corporate employees in June, citing a lack of Medicaid assistance.

“We are at a point where difficult decisions have to be made on how to survive,” CEO Joseph Steier said in a statement provided to SNN. “We know that COVID-19 will not be over in our business any time soon, and even as it may be overcome in the future, our sector and how we do business will never be the same again.”

Later that month, Steier told Louisville Business First that the company was spending $5 million per week on testing, personal protective equipment, and hazard pay, indicating that operators across the sector would need to undergo “restructuring” in order to weather the storm.

“We think we did it right, that we cut deep enough to withstand the next 12 to 18 months as we rebuild,” Steier told the publication. “We feel good, but there’s no guarantee. We all think we will survive long-term. But it’s our going to be our toughest period in our company history.”

Omega COO Dan Booth expressed optimism that both operators could pull out of the COVID-related stress, as well as hope that the government will continue to financially support the space.

“Our portfolios with both Genesis and Agemo were performing well prior to the pandemic as both operators were benefitting from a favorable rate environment and moderately increased occupancy, and we anticipate they will perform well once the pandemic is behind us,” Booth said in a statement. “To date, we believe the financial support provided by the federal and state governments has meaningfully assisted these two operators, as well as all of our operators, in offsetting lost revenues and incremental costs related to COVID-19.”

OHI shares closed Thursday’s trading at $30 even, for a gain of $0.46 or 1.6%. GEN slid about three cents, a loss of 5%, to end the day at $0.59 per share.

This is a developing story. Please check back for updates.

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