On back-to-back days last week, both Omega Healthcare Investors and Sabra Health Care REIT provided investors with updates on their revenue recognition accounting policies for the same two tenants, Genesis Healthcare and Agemo Holdings (dba Signature Healthcare). While the news sounded ominous, it was not entirely unexpected. 

Both operators have announced that there is a question as to whether they can make it past the next 12 months without significant relief and increases in census and cash flow. This is the dreaded “going concern” letter. When that happens, lenders and landlords have to make adjustments to their accounting policies for these customers.  

For Omega, they changed their revenue recognition from straight-line rental to a cash basis, which means they will write down a total of $65 million of lease receivables for Genesis and $75 million for Agemo. In addition, Omega will be reporting an impairment estimated at $28 million, related to the uncollateralized portion of a loan to Agemo. 

Omega owns 52 Genesis properties representing $62.0 million of annualized revenue, or 6.6% of total revenue. Omega owns 54 Agemo/Signature properties representing $50.1 million of annualized revenue, or 5.4% of the total. Both operators have been current on their contractual rents, so this will not impact cash flow or funds from operations; but it will result in a significant cut in stated revenues for the third quarter. Investors shrugged off the news, with Omega’s shares dropping by just eight cents per share. 

Sabra owns 45 Signature properties which represent 7.2% of annualized cash NOI and had a 1.69x EBITDARM coverage in the second quarter. The REIT has whittled its Genesis exposure down to just nine nursing facilities, representing 2.5% of annualized cash NOI with a 1.55x EBITDARM coverage.  

While no decision has been made yet, if Sabra does transition the leases with these two operators from a straight-line rental to a cash basis, the REIT would write off approximately $14.4 million in straight-line rental receivables and lease-related intangible assets. Just like with Omega, this would have no impact on funds from operations and cash flow. Neither company has asked for rent relief from Sabra and both companies are current on their rents. Investors also shrugged, with Genesis shares increasing by six cents a share. 

The financial performance of both companies has been enhanced in the second quarter by both federal relief as well as advanced funding of Medicare payments. The latter will have to be paid back, as well as any payroll tax deferrals that either operator may have taken advantage of. That may be difficult if the operating environment does not improve. As the impact of the pandemic drags on, we expect to see more announcements from other REITs, lenders and HUD