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Sabra Health Care REIT, Inc. ("Sabra," the "Company" or "we") (Nasdaq: SBRA) provided an update regarding its recognition of rental revenues under leases with Genesis Healthcare, Inc. ("Genesis") and Signature Healthcare ("Signature") in light of recent events.
In the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 that Genesis filed with the Securities and Exchange Commission on August 10, 2020, Genesis stated that the impact of COVID-19 on its future results of operations, its current financial condition and liquidity sources, and uncertainty regarding future governmental funding support raises substantial doubt about its ability to continue as a going concern.
On September 11, 2020, we learned that subsidiaries of Signature that lease facilities from the Company 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.
To date, Sabra has received no rent relief requests from either Genesis or Signature and both tenants remain current on their rental obligations. As of June 30, 2020, our exposure to Signature was 7.2% of Sabra’s annualized cash NOI and our exposure to Genesis was 2.5% of Sabra’s annualized cash NOI exclusive of residual rents from previously completed sales representing 2.0% of Sabra’s annualized cash NOI.
Sabra and its auditors are evaluating the circumstances giving rise to the going concern issues for these tenants as it relates to the proper accounting under GAAP, including the potential need to transition the method of recognizing rental revenue generated by leases with these two tenants from accrual basis accounting, with straight-line rental receivable, to cash-basis accounting. In the event we transition the leases with these tenants to cash-basis accounting, we would write-off approximately $14.4 million of straight-line rental receivables and lease-related intangible assets, which would be recorded as a reduction to rental revenues but would have no impact on Normalized FFO, AFFO, Normalized AFFO and distributable cash flow; if this change were to occur, we expect rental revenues to initially increase by an immaterial amount. We expect to complete this evaluation during our third quarter reporting cycle.
Commenting on these developments, Rick Matros, CEO and Chairman, said, "Our tenants have done a remarkable job navigating an unprecedented operating environment while continuing to meet their rent obligations to us. While we understand the reasoning for the going concern disclosures for Genesis and Signature given the uncertainty of the operating environment, we are encouraged by the recent positive occupancy trends we see in our Skilled Nursing/Transitional Care portfolio and the continued government support for this vitally important component of healthcare delivery."
Sabra Health Care REIT, Inc., a Maryland corporation, operates as a self-administered, self-managed real estate investment trust (a "REIT") that, through its subsidiaries, owns and invests in real estate serving the healthcare industry throughout the United States and Canada.
Forward-Looking Statements Safe Harbor
This release contains "forward-looking" statements as defined in the Private Securities Litigation Reform Act of 1995. These statements may be identified, without limitation, by the use of "expects," "believes," "intends," "should" or comparable terms or the negative thereof. Examples of forward-looking statements include all statements regarding our expectations regarding the timing and impact of any determination to transition the recognition of rental revenues from Genesis and/or Signature to a cash-basis method of accounting, occupancy trends in our Skilled Nursing/Transitional Care portfolio, and government support for our operators.
Our actual results may differ materially from those projected or contemplated by our forward-looking statements as a result of various factors, including among others, the following: the ongoing COVID-19 pandemic and measures intended to prevent its spread, including the impact on our tenants, operators and Senior Housing - Managed communities; our dependence on the operating success of our tenants; the potential variability of our reported rental and related revenues following the adoption of Accounting Standards Update ("ASU") 2016-02, Leases, as amended by subsequent ASUs ("Topic 842") on January 1, 2019; operational risks with respect to our Senior Housing - Managed communities; the effect of our tenants declaring bankruptcy or becoming insolvent; our ability to find replacement tenants and the impact of unforeseen costs in acquiring new properties; the impact of litigation and rising insurance costs on the business of our tenants; the possibility that Sabra may not acquire the remaining majority interest in the Enlivant joint venture; risks associated with our investments in joint ventures; changes in healthcare regulation and political or economic conditions; the impact of required regulatory approvals of transfers of healthcare properties; competitive conditions in our industry; our concentration in the healthcare property sector, particularly in skilled nursing/transitional care facilities and senior housing communities, which makes our profitability more vulnerable to a downturn in a specific sector than if we were investing in multiple industries; the significant amount of and our ability to service our indebtedness; covenants in our debt agreements that may restrict our ability to pay dividends, make investments, incur additional indebtedness and refinance indebtedness on favorable terms; increases in market interest rates; the potential phasing out of the London Interbank Offered Rate ("LIBOR") benchmark after 2021; our ability to raise capital through equity and debt financings; changes in foreign currency exchange rates; the relatively illiquid nature of real estate investments; the loss of key management personnel; uninsured or underinsured losses affecting our properties and the possibility of environmental compliance costs and liabilities; the impact of a failure or security breach of information technology in our operations; our ability to maintain our status as a real estate investment trust ("REIT") under the federal tax laws; changes in tax laws and regulations affecting REITs (including the potential effects of the Tax Cuts and Jobs Act); compliance with REIT requirements and certain tax and tax regulatory matters related to our status as a REIT; and the ownership limits and takeover defenses in our governing documents and under Maryland law, which may restrict change of control or business combination opportunities.
Additional information concerning risks and uncertainties that could affect our business can be found in our filings with the Securities and Exchange Commission (the "SEC"), including in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 as well as in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. We do not intend, and we undertake no obligation, to update any forward-looking information to reflect events or circumstances after the date of this release or to reflect the occurrence of unanticipated events, unless required by law to do so.
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