Sabra Mulls $14M Write-Off for Signature, Genesis After ‘Going Concern’ Warnings

Concerns about the future of skilled nursing operators Genesis HealthCare (NYSE: GEN) and Signature HealthCARE have spread to a second public landlord, though in this case, Sabra Health Care REIT (Nasdaq: SBRA) stopped short of taking definitive action just yet.

Sabra late last week disclosed that the real estate investment trust (REIT) and its auditors are assessing its accounting practices related to Genesis and Signature amid reports of significant coronavirus-related financial struggles at the two companies.

Sometime during the third-quarter reporting cycle, the Irvine, Calif.-based Sabra will determine whether to shift the companies to cash-based accounting, a move that will come with a $14.4 million write-off recorded as a cut to rental revenue. The decision would not have an effect on the company’s distributable cash flow, and actually result in an “immaterial” increase in rental revenue, according to Sabra.

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The announcement came shortly after fellow REIT Omega Healthcare Investors (NYSE: OHI) disclosed its decision to shift Genesis and Agemo Holdings LLC — a holding company for Signature’s Omega-owned assets — to cash-basis revenue recording, accompanied with a $140 million write-down of straight-line receivables and lease inducements.

Genesis has been public about the deleterious effect of COVID-19 on its finances; the Kennett Square, Pa.-based skilled nursing giant in August revealed “substantial doubt about the Company’s ability to continue as a going concern” over the coming 12 months.

Genesis reported $67 million in lost revenue associated with COVID-19 during the second quarter of 2020, and $74 million for the first six months of the year total, with census declines stemming from the delay of elective surgeries in spring and self-imposed admission holds driving the steep revenue losses.

“Because of our geographic density in hard-hit markets early in the pandemic, and the resulting disproportionate impact to our occupancy and operating costs, coupled with what appears to be a slower and more complex recovery than initially hoped for, Genesis and many others in the industry need timely and government-sponsored financial support, which is essential to meeting our responsibilities to residents, patients, employees and all other stakeholders,” CEO George Hager said last month.

On September 11, Sabra learned that subsidiaries of Signature that lease facilities from the REIT “will be issued an audit report containing a qualified opinion due to substantial doubt about their ability to continue as a going concern in relation to the uncertainty around future cashflows caused by the COVID-19 pandemic.”

The Louisville, Ky.-based Signature had to lay off 100 corporate employees in June, citing a lack of support from the state of Kentucky in terms of Medicaid rates. Louisville Business First also reported in June that the operator was spending $5 million a week on increased testing, personal protective equipment (PPE), and hazard pay for staff.

“We are at a point where difficult decisions have to be made on how to survive,” Signature CEO Joseph Steier said in a statement at the time of the layoffs. “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.”

Sabra has not received any requests for rent relief from either operator, and both are current on their rental obligations, according to the update from the REIT; Genesis and Signature are also up to date on their payments to Omega.

Sabra’s exposure to Signature was 7.2% of annualized cash net operating income as of June 30, while the exposure to Genesis sat at 2.5%, exclusive of residual rents from previously completed sales.

“We’re confident in Signature Health going forward and have reduced Genesis exposure to 2.5%, so we’ve done what we had to do there,” Sabra CEO Rick Matros told SNN in an e-mail on September 28. “We understand the audit firm being conservative and simply view it as that.”

Matros’s comments mirror Omega CEO Taylor Pickett’s optimism about the operators’ ability to survive the coronavirus-induced struggles.

“Our conservative accounting treatment going forward for these operators is triggered by their pandemic-influenced accounting disclosures,” Pickett said in a statement last week. “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.”

Sabra shares closed Monday’s trading at $14.20, for a gain of $0.34 or about 2.5%. Genesis stock fell about four cents, or nearly 6%, to close at $0.55 per share.

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