The healthcare REITs and their triple net lease tenants, as well as their RIDEA managers, have had a tough two years. Some companies have been forced out of business completely, others have lost a portion of their portfolio, but many others have been able to work things out with their landlords. Such appears to be the case with Sabra Health Care REIT and Avamere Group. Our feeling has always been if you like your provider and do not think someone else could have done a better job, especially during this pandemic, then stick with them and work out a plan.
Avamere is a substantial company, with 62 properties in eight states and a combination of skilled nursing facilities and assisted living/memory care communities. However, of those 62 locations, 39 are in Oregon and 15 in Washington. The remaining eight are scattered in Nevada (1), Utah (1), Arizona (1), New Mexico (2), Colorado (2) and Nebraska (1).
Avamere leases 27 of its SNFs from Sabra, and especially because of admissions restrictions in their primary states during the pandemic, census has definitely dropped. From late 2020 to September 2021, the census at Sabra’s 27 properties fell by 274 basis points, and then hit a low of 67% in the first half of October 2021. By early November it had recovered to 71%. As of September 30, 2021, Avamere had the lowest lease coverage ratio of Sabra’s SNF tenants (other than Genesis HealthCare), standing at 1.40x before management fee, down from 1.54x as of June 30.
Through early November, Sabra had already drawn down $7.9 million from Avamere’s letter of credit to fund rental obligations for September and October, and expected to use most of the remaining balance to fund November’s rent. Between November and the end of January, a lot of discussions must have taken place, because they appear to have come up with workable plan to give Avamere some breathing room as it emerges from the pandemic and Sabra a chance to be made whole, or almost whole.
According to the amendment to the Master Lease, Avamere’s annual rent has been reduced by about 30% to $30.7 million from $44.1million. The trailing 12-months EBITDARM coverage, using this reduced rent, would have been 1.99x, which is quite healthy. It is healthy even after deducting a management fee, so there appears to be more than enough breathing room to deal with recovery over the next few years. But, it would have been 1.60x based on pre-pandemic performance, which would be very tight after an applied management fee.
Our assumption is that census had been declining before the pandemic, as it had for many skilled nursing operators. The one uncertainty is what happens to the government subsidies under the CARES Act Provider Relief Fund, and how much in that coverage is from those subsidies, the continuation of which is unknown at this time. Perhaps that is why this initial coverage of 1.99x appears so generous. The lease expiration remains in place for May 2031, as does the annual escalator of 2.75%.
The creative part to help make Sabra whole over time is that starting in year two of the new lease, Sabra gets to participate in the year-over-year improvement in the portfolio’s operating revenues. Then, beginning in the fourth year and through the sixth year, Sabra has a one-time option to reset Avamere’s annual rent to a fixed amount tied to its recent historical performance, which all assume will be better. To get this agreement, Avamere has paid December’s past due rent of $3.6 million and has agreed to pay January’s $3.7 million rent by March 25, 2022. We suspect we will see some other negotiations like this with other REITs.
