Sabra Health Care REIT (Nasdaq: SBRA) this week became the latest landlord to change its accounting for nursing home tenants Genesis HealthCare (NYSE: GEN) and Signature HealthCARE, writing off $14.3 million of non-cash rent receivables associated with the operators.
The real estate investment trust (REIT) cited concerns about Genesis and Signature’s operational futures in the wake of COVID-19 strains in announcing the write-off as part of its third quarter 2020 earnings release.
Sabra had previously telegraphed the move back in September, after Genesis had publicly declared doubts about its ability to continue as a going concern the month before; the REIT had also learned of an audit report about Signature that would reveal “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 Irvine, Calif.-based Sabra joins several other REITs that have implemented similar write-downs associated with Genesis and Signature properties in recent months.
Omega Healthcare Investors (NYSE: OHI) kicked things off in late September with a $140 million write-off of rent related to Genesis and Agemo Holdings, a Signature entity; Welltower Inc. (NYSE: WELL) took a $97 million hit on Genesis rent, and LTC Properties (NYSE: LTC) recorded $5.5 million in write-offs for Genesis and a second, unnamed operator.
Despite the accounting shift, the REIT has collected all of the rent due through October, with normal collections continuing into the early days of November. Neither Genesis nor Signature has requested rent relief, chief financial officer Harold Andrews said on the company’s Friday earnings call with investors and analysts.
Andrews described Sabra’s position on Genesis and Signature as “wait-and-see,” indicating that neither company was in immediate cash-flow danger, particularly given short-term CARES Act support doled out over the past nine months.
CEO Rick Matros noted that the REIT does not include additional federal relief dollars in its ongoing projections, while Sabra does expect elevated coronavirus expenses to continue well into the future.
“If you apply that kind of analysis to any operator, you may come to the same conclusion,” Matros said of the revenue-expense math facing nursing home chains.
Andrews also pointed to Sabra’s push to substantially reduce its exposure to Genesis assets — a plan that Matros had dubbed the Genesis Exodus — over the last several years. The Kennett Square, Pa.-based operator contributes $10 million in annual rent to Sabra’s coffers.
“It’s not going to be a significant impact for us if something negative happens,” Andrews said. “Hopefully, that won’t be the case. But I think the fact that we’ve gotten them down so dramatically — this just really is an indication that it was the right move for us to do.”
Sabra already has a contingency plan for transferring the Genesis assets should a further restructuring be necessary, Matros said.
“We’ve had internal conversations relative to who we can move those facilities to,” he said. “They’re all in one region, so it would be not a difficult move, and it’s in a state that we really like, New Hampshire.”
Excluding the Genesis-Signature write-down, Sabra saw a $3.4 million increase in rental revenue from the third quarter of 2019, or a gain of 3%.
Average monthly occupancy at Sabra’s skilled nursing facilities dipped 210 basis points to 80% between the second and third quarters, though skilled mix increased 134 basis points from September to October — and remains 132 basis points above pre-pandemic levels.
Much of the financial focus around the long-term stability of skilled nursing facilities has been around flagging occupancy, which has remained low amid decreases in elective surgeries, consumer reluctance to pursue institutional care, and resident deaths.
Even with the effective rollout of a COVID-19 vaccine in long-term care — a prospect that remains speculative — broad returns to pre-pandemic census levels could take years, American Health Care Association CEO Mark Parkinson indicated earlier this week.
But Matros described the occupancy question as one part of the overall recovery picture.
“It’s important to note that we’ll start having margin recovery ahead of occupancy recovery — and, in fact, are already seeing that in different areas of the country, as certain areas of the country have been clearer than others with COVID,” Matros said.