SABRA HEALTH CARE REIT, INC. The discussion below contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those which are discussed in the "Risk Factors" section in Part I, Item 1A of our 2021 Annual Report on Form 10-K. Also see "Statement Regarding Forward-Looking Statements" preceding Part I.
The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and the notes thereto.
Our Management's Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:
•Overview
•Critical Accounting Policies and Estimates
•Recently Issued Accounting Standards Update
•Results of Operations
•Liquidity and Capital Resources
•Concentration of Credit Risk
•Skilled Nursing Facility Reimbursement Rates
Overview
We operate as a self-administered, self-managed REIT that, through our subsidiaries, owns and invests in real estate serving the healthcare industry.
Our primary business consists of acquiring, financing and owning real estate
property to be leased to third party tenants in the healthcare sector. We
primarily generate revenues by leasing properties to tenants and owning
properties operated by third-party property managers throughout
Our investment portfolio is primarily comprised of skilled nursing/transitional
care facilities, senior housing communities ("Senior Housing - Leased"),
behavioral health facilities, and specialty hospitals and other facilities, in
each case leased to third-party operators; senior housing communities operated
by third-party property managers pursuant to property management agreements
("Senior Housing - Managed"); investments in joint ventures; investments in
loans receivable; and preferred equity investments.
We expect to grow our investment portfolio while diversifying our portfolio by
tenant, facility type and geography within the healthcare sector. We plan to
achieve these objectives primarily through making investments directly or
indirectly in healthcare real estate, including the development of purpose-built
healthcare facilities with select developers. We also intend to achieve our
objective of diversifying our portfolio by tenant and facility type through
select asset sales and other arrangements with our tenants.
We employ a disciplined approach in our healthcare real estate investment strategy by investing in assets that provide attractive opportunities for dividend growth and appreciation of asset values, while maintaining balance sheet strength and liquidity, thereby creating long-term stockholder value.
We elected to be treated as a REIT with the filing of ourU.S. federal income tax return for the taxable year beginningJanuary 1, 2011 . We believe that we have been organized and have operated, and we intend to continue to operate, in a manner to qualify as a REIT. We operate through an umbrella partnership, commonly referred to as an UPREIT structure, in which substantially all of our properties and assets are held bySabra Health Care Limited Partnership , aDelaware limited partnership (the "Operating Partnership"), of which we are the sole general partner and a wholly owned subsidiary of ours is currently the only limited partner, or by subsidiaries of theOperating Partnership .
COVID-19
The ongoing impact of COVID-19 and measures intended to prevent its spread have negatively impacted and are expected to continue to negatively impact us and our operations in a number of ways, including but not limited to:
•Decreased occupancy and increased operating costs for our tenants and borrowers, which have negatively impacted their operating results and may adversely impact their ability to make full and timely rental payments and debt service payments, respectively, to us. While our tenants and borrowers have experienced some recent increases in
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occupancy, those occupancy rates are still below pre-pandemic levels. In some cases, we may have to restructure tenants' long-term rent obligations and may not be able to do so on terms that are as favorable to us as those currently in place. Reduced or modified rental and debt service amounts could result in the determination that the full amounts of our investments are not recoverable, which could result in an impairment charge. To date, the impact of COVID-19 on our skilled nursing/transitional care facility and assisted living community tenants has been partially mitigated by assistance from state and federal assistance programs, including through the CARES Act (as defined and further described below under "-Skilled Nursing Facility Reimbursement Rates"), although these benefits on an individual operator basis vary and may not provide enough relief to meet their rental obligations to us, and, with respect to theProvider Relief Fund under the CARES Act, has effectively ended. From the beginning of the pandemic throughSeptember 30, 2022 , we have agreed to temporary pandemic-related rent deferrals for seven tenants of two to nine months of rent totaling$5.0 million , of which$1.0 million has been repaid. If our tenants and borrowers default on these obligations, such defaults could materially and adversely affect our results of operations and liquidity, in addition to resulting in potential impairment charges. •Decreased occupancy and increased operating costs within ourSenior Housing - Managed portfolio which have negatively impacted and are expected to continue to negatively impact the operating results of these investments. While ourSenior Housing - Managed portfolio has experienced some recent increases in occupancy, those occupancy rates are still below pre-pandemic levels. As noted above, assistance provided to eligible assisted living operators has partially mitigated the negative impact of COVID-19 on ourSenior Housing - Managed portfolio. Prolonged deterioration in the operating results for our investments in ourSenior Housing - Managed portfolio could result in the determination that the full amounts of our investments are not recoverable, which could result in an impairment charge.
Investment in
During the nine months endedSeptember 30, 2022 , we formed a joint venture with Sienna Senior Living (the "Sienna Joint Venture"), and the Sienna Joint Venture completed the acquisition of 12 senior housing communities that are being managed by Sienna Senior Living. The gross investment by the Sienna Joint Venture totaled CAD$379.0 million , excluding acquisition costs. In addition, the Sienna Joint Venture assumed CAD$53.4 million of debt.
Acquisitions
During the nine months endedSeptember 30, 2022 , we acquired threeSenior Housing - Managed communities for an aggregate$98.3 million , including acquisition costs. See Note 3, "Recent Real Estate Acquisitions," in the Notes to Consolidated Financial Statements for additional information regarding these acquisitions. Dispositions During the nine months endedSeptember 30, 2022 , we completed the sale of six skilled nursing/transitional care facilities and five senior housing communities for aggregate consideration, net of closing costs, of$62.8 million . The net carrying value of the assets and liabilities of these facilities was$67.4 million , which resulted in an aggregate$4.6 million net loss on sale. We continue to evaluate additional assets for sale as part of our initiative to recycle capital and further improve our portfolio quality.
Critical Accounting Policies and Estimates
Our consolidated interim financial statements have been prepared in accordance withU.S. generally accepted accounting principles ("GAAP") and in conjunction with the rules and regulations of theSEC . The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results is included in Part II, Item 7 of our 2021 Annual Report on Form 10-K filed with theSEC . There have been no significant changes to our critical accounting policies during the nine months endedSeptember 30, 2022 . 29
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Recently Issued Accounting Standards Update
See Note 2, "Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements for information concerning recently issued accounting standards updates.
Results of Operations
As ofSeptember 30, 2022 , our investment portfolio consisted of 407 real estate properties held for investment, one asset held for sale, one investment in a sales-type lease, 15 investments in loans receivable, seven preferred equity investments and two investments in unconsolidated joint ventures. As ofSeptember 30, 2021 , our investment portfolio consisted of 421 real estate properties held for investment, one asset held for sale, one investment in a sales-type lease, 17 investments in loans receivable, eight preferred equity investments and one investment in an unconsolidated joint venture. In general, we expect that income and expenses related to our portfolio will fluctuate in future periods in comparison to the corresponding prior periods as a result of investment and disposition activity and anticipated future changes in our portfolio. The results of operations presented are not directly comparable due to ongoing acquisition and disposition activity. Comparison of results of operations for the three months endedSeptember 30, 2022 versus the three months endedSeptember 30, 2021 (dollars in thousands): Variance due to Three Months Ended September Acquisitions, 30, Increase / Percentage Originations and Remaining 2022 2021 (Decrease) Difference Dispositions (1) Variance (2) Revenues: Rental and related revenues$ 84,214 $ 85,367 $ (1,153) (1) %$ (3,424) $ 2,271 Interest and other income 8,940 3,405 5,535 163 % 5,003
532
Resident fees and services 47,610 39,819 7,791 20 % 3,850
3,941
Expenses:
Depreciation and amortization 47,427 45,046 2,381 5 % 187 2,194 Interest 27,071 24,243 2,828 12 % (76) 2,904 Triple-net portfolio operating expenses 5,120 5,075 45 1 % (188)
233
Senior housing - managed portfolio operating expenses 36,705 30,761 5,944 19 % 2,968
2,976
General and administrative 9,676 8,683 993 11 % -
993
Recovery of loan losses and other reserves (217) (26) (191) 735 % -
(191)
Impairment of real estate 60,857 495 60,362 12,194 % (495)
60,857
Other income (expense): Loss on extinguishment of debt (140) (913) 773 (85) % - 773 Other income 994 277 717 259 % - 717 Net (loss) gain on sales of real estate (80) 655 (735) (112) % (735) - Loss from unconsolidated joint ventures (4,384) (4,018) (366) 9 % (171) (195) Income tax expense (579) (92) (487) 529 % - (487) (1) Represents the dollar amount increase (decrease) for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 as a result of investments/dispositions made afterJuly 1, 2021 . (2) Represents the dollar amount increase (decrease) for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 that is not a direct result of investments/dispositions made afterJuly 1, 2021 .
Rental and Related Revenues
During the three months endedSeptember 30, 2022 , we recognized$84.2 million of rental income compared to$85.4 million for the three months endedSeptember 30, 2021 . The$1.2 million net decrease in rental income is related to a$4.0 million decrease from properties disposed of afterJuly 1, 2021 and a$0.2 million net decrease related to leases that are no longer accounted for on an accrual basis. The$0.2 million net decrease related to leases that are not accounted for on an accrual basis includes a$7.8 million decrease in earned cash rents primarily due to the Avamere Family of Companies ("Avamere" lease amendment effectiveFebruary 1, 2022 and a$1.1 million decrease in non-cash rental revenue, partially offset by an$8.6 30
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million net decrease in write-offs of straight-line rental income receivable. During the three months endedSeptember 30, 2022 , we wrote off$16.6 million in straight-line rental income receivables primarily due to the termination of theNorth American Health Care, Inc. ("North American")leases compared to$25.2 million in straight-line rental income receivable write-offs during the three months endedSeptember 30, 2021 related to the Avamere leases. These decreases are partially offset by (i) a$1.4 million increase due to lease amendments and annual increases associated with a consumer price index component, (ii) a$0.5 million increase from properties acquired afterJuly 1, 2021 and (iii) a$1.1 million increase related to facilities transferred to new operators. Our reported rental and related revenues may be subject to increased variability in the future as a result of lease accounting standards. If at any time we cannot determine that it is probable that substantially all rents over the life of a lease are collectible, rental revenue will be recognized only to the extent of payments received and all receivables associated with the lease will be written off, irrespective of amounts expected to be collectible. However, there can be no assurances regarding the timing and amount of these revenues. Amounts due under the terms of all of our lease agreements are subject to contractual increases, and contingent rental income may be derived from certain lease agreements. No material contingent rental income was derived during the three months endedSeptember 30, 2022 and 2021.
Interest and Other Income
Interest and other income primarily consists of income earned on our loans receivable investments, preferred returns earned on our preferred equity investments and income on the sales-type lease. During the three months endedSeptember 30, 2022 , we recognized$8.9 million of interest and other income compared to$3.4 million for the three months endedSeptember 30, 2021 . The net increase of$5.5 million is due to (i) a$5.6 million increase in income from investments made afterJuly 1, 2021 , primarily related to the$290.0 million Recovery Centers of America mortgage loan funded inOctober 2021 ("RCA Loan") and (ii)$0.4 million in late fee income, partially offset by a$0.6 million decrease in income from investments repaid afterJuly 1, 2021 .
Resident Fees and Services
During the three months endedSeptember 30, 2022 , we recognized$47.6 million of resident fees and services compared to$39.8 million for the three months endedSeptember 30, 2021 . The$7.8 million increase is due to (i) a$3.9 million increase from threeSenior Housing - Managed communities acquired afterJuly 1, 2021 , (ii) a$3.5 million increase related to increased occupancy and an increase in rates and (iii)$0.4 million related to two facilities that were transitioned toSenior Housing - Managed communities afterJuly 1, 2021 .
Depreciation and Amortization
During the three months endedSeptember 30, 2022 , we incurred$47.4 million of depreciation and amortization expense compared to$45.0 million for the three months endedSeptember 30, 2021 . The net increase of$2.4 million is due to (i) a$1.7 million increase due to the acceleration of lease intangible amortization related to facilities transitioned to new operators and lease terminations, (ii) a$1.5 million increase from properties acquired afterJuly 1, 2021 and (iii) a$0.6 million increase from additions to real estate, partially offset by a$1.3 million decrease from properties disposed of afterJuly 1, 2021 .
Interest Expense
We incur interest expense comprised of costs of borrowings plus the amortization of deferred financing costs related to our indebtedness. During the three months endedSeptember 30, 2022 , we incurred$27.1 million of interest expense compared to$24.2 million for the three months endedSeptember 30, 2021 . The$2.8 million net increase is related to a$6.7 million increase in interest expense related to the issuance of the 2031 Notes (as defined below) and a$1.1 million increase in non-cash interest expense related to our interest rate hedges. The increases are partially offset by (i) a$3.8 million decrease in interest expense related to the redemption of all$300.0 million of 4.80% senior unsecured notes due 2024 inOctober 2021 , (ii) a$0.8 million decrease in interest expense related to a reduction in the borrowings outstanding under the Credit Agreement (as defined below) and (iii) a$0.3 million decrease in interest expense related to a decrease in our mortgage debt as a result of the repayment of debt secured by three facilities during 2022 and the sales of two facilities securing the mortgage debt during 2021.
Triple-Net Portfolio Operating Expenses
During each of the three months endedSeptember 30, 2022 and 2021, we recognized$5.1 million of triple-net portfolio operating expenses. Triple-net portfolio operating expenses decreased$0.2 million due to properties disposed of afterJuly 1, 2021 , offset by a$0.2 million adjustment to our estimates related to property taxes. 31
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During the three months endedSeptember 30, 2022 , we recognized$36.7 million ofSenior Housing - Managed portfolio operating expenses compared to$30.8 million for the three months endedSeptember 30, 2021 . The$5.9 million net increase is due to (i) a$3.0 million increase related to threeSenior Housing - Managed communities acquired afterJuly 1, 2021 , (ii) a$1.6 million increase in employee compensation primarily due to increased labor rates and staffing, (iii) a$0.4 million increase in utility expense, (iv) a$0.3 million increase related to two facilities that were transitioned toSenior Housing - Managed communities afterJuly 1, 2021 and (v) a$0.5 million increase in management fees and dining expenses due to increased occupancy.
General and Administrative Expenses
General and administrative expenses include compensation-related expenses as well as professional services, office costs, other costs associated with asset management, and merger and acquisition costs. During the three months endedSeptember 30, 2022 , general and administrative expenses were$9.7 million compared to$8.7 million during the three months endedSeptember 30, 2021 . The$1.0 million net increase is related to a$0.5 million increase in compensation for our team members as a result of increased staffing and annual salary adjustments and a$0.5 million increase in professional, consulting and legal fees primarily related to environmental, social and governance ("ESG") initiatives and a consulting arrangement with our former Chief Financial Officer.
Recovery of Loan Losses and Other Reserves
During the three months endedSeptember 30, 2022 and 2021, we recognized a$0.2 million and$26,000 recovery of loan losses and other reserves, respectively, associated with our loans receivable investments and sales-type lease.
Impairment of Real Estate
During the three months endedSeptember 30, 2022 , we recognized$60.9 million of impairment of real estate related to six skilled nursing/transitional care facilities that are under contract to sell. During the three months endedSeptember 30, 2021 , we recognized$0.5 million of impairment of real estate related to one skilled nursing/transitional care facility and one senior housing community that were subsequently sold.
Loss on Extinguishment of Debt
During the three months endedSeptember 30, 2022 and 2021, we recognized a$0.1 million and$0.9 million loss on extinguishment of debt, respectively, related to write-offs of deferred financing costs in connection with the partial pay downs of theU.S. dollar Term Loan (as defined below).
Other Income
During the three months endedSeptember 30, 2022 and 2021, we recognized$1.0 million and$0.3 million of other income, respectively, primarily related to settlement payments received related to legacyCare Capital Properties ("CCP") investments.
Net (Loss) Gain on Sales of Real Estate
During the three months endedSeptember 30, 2022 , we recognized an aggregate net loss on the sales of real estate of$0.1 million related to the disposition of three skilled nursing/transitional care facilities. During the three months endedSeptember 30, 2021 , we recognized an aggregate net gain on the sales of real estate of$0.7 million related to the disposition of four senior housing communities.
Loss from
During the three months endedSeptember 30, 2022 , we recognized$4.4 million of loss from our unconsolidated joint ventures compared to$4.0 million of loss for the three months endedSeptember 30, 2021 . The$0.4 million net increase in loss is related to a$0.2 million increase in loss from our joint venture with affiliates ofTPG Real Estate , the real estate platform of TPG (the "Enlivant Joint Venture") and$0.2 million of net loss, including$1.5 million of depreciation expense, from 12 senior housing communities acquired by the Sienna Joint Venture afterJuly 1, 2021 . The$0.2 million increase in loss from the Enlivant Joint Venture is due to a$5.7 million increase in operating expenses from the facilities owned by the Enlivant Joint Venture as ofSeptember 30, 2022 consisting primarily of (i) a$3.5 million increase in employee related expenses primarily due to increased labor rates and staffing, (ii) a$2.3 million increase in support payments paid to the manager of the Enlivant Joint Venture with proceeds received from the issuance of senior preferred 32
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interests to TPG in 2022 and (iii) a$0.3 million increase in dining expenses primarily due to increased occupancy, partially offset by a$0.4 million decrease in property taxes primarily due to a change in estimates. These decreases are offset by a$4.8 million increase in revenue from the facilities owned by the Enlivant Joint Venture as ofSeptember 30, 2022 primarily due to increased occupancy and an increase in rates.
Income Tax Expense
During the three months endedSeptember 30, 2022 , we recognized$0.6 million of income tax expense compared to$0.1 million for the three months endedSeptember 30, 2021 . The$0.5 million increase is due to higher taxable income from ourSenior Housing - Managed portfolio.
Comparison of results of operations for the nine months ended
Variance due to
Nine Months Ended September 30, Acquisitions,
Increase / Percentage Originations and Remaining
2022 2021 (Decrease) Difference Dispositions (1) Variance (2)
Revenues:
Rental and related revenues $ 297,268 $ 309,533 $ (12,265) (4) % $ (7,163) $ (5,102)
Interest and other income 28,585 9,377 19,208 205 % 16,441 2,767
Resident fees and services 133,973 114,978 18,995 17 % 8,341 10,654
Expenses:
Depreciation and amortization 137,855 133,912 3,943 3 % 769 3,174 Interest 77,573 72,956 4,617 6 % (231) 4,848 Triple-net portfolio operating expenses 14,983 15,210 (227) (1) % (621) 394 Senior housing - managed portfolio operating expenses 103,835 88,607 15,228 17 % 7,058 8,170 General and administrative 28,721 26,432 2,289 9 % - 2,289 (Recovery of ) provision for loan losses and other reserves (12) 1,890 (1,902) (101) % -
(1,902)
Impairment of real estate 72,602 495 72,107 14,567 % 7,553
64,554
Other income (expense): Loss on extinguishment of debt (411) (1,760) 1,349 (77) % - 1,349 Other (expense) income (1,101) 386 (1,487) (385) % - (1,487) Net loss on sales of real estate (4,581) (1,784) (2,797) 157 % (2,797) - Loss from unconsolidated joint ventures (9,715) (178,817) 169,102 (95) % (146) 169,248 Income tax expense (1,118) (1,314) 196 (15) % - 196 (1) Represents the dollar amount increase (decrease) for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 as a result of investments/dispositions made afterJanuary 1, 2021 . (2) Represents the dollar amount increase (decrease) for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 that is not a direct result of investments/dispositions made afterJanuary 1, 2021 .
Rental and Related Revenues
During the nine months endedSeptember 30, 2022 , we recognized$297.3 million of rental income compared to$309.5 million for the nine months endedSeptember 30, 2021 . The$12.3 million net decrease in rental income is related to (i) an$8.8 million decrease from properties disposed of afterJanuary 1, 2021 , (ii) an$8.5 million net decrease related to leases that are no longer accounted for on an accrual basis and (iii) a$0.7 million decrease related to lease intangibles that have been fully amortized. The$8.5 million net decrease related to leases that are not accounted for on an accrual basis includes a$14.2 million decrease in earned cash rents primarily due to the Avamere lease amendment effectiveFebruary 1, 2022 and a$2.6 million decrease in non-cash rental revenue, partially offset by an$8.2 million net decrease in write-offs of straight-line rental income receivable. During the nine months endedSeptember 30, 2022 , we wrote off$17.1 million in straight-line rental income receivables primarily due to the termination of the North American leases compared to$25.2 million in straight-line rental income receivable write-offs during the nine months endedSeptember 30, 2021 related to the Avamere leases. These decreases 33
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are partially offset by a
Our reported rental and related revenues may be subject to increased variability in the future as a result of lease accounting standards. If at any time we cannot determine that it is probable that substantially all rents over the life of a lease are collectible, rental revenue will be recognized only to the extent of payments received and all receivables associated with the lease will be written off, irrespective of amounts expected to be collectible. However, there can be no assurances regarding the timing and amount of these revenues. Amounts due under the terms of all of our lease agreements are subject to contractual increases, and contingent rental income may be derived from certain lease agreements. No material contingent rental income was derived during the nine months endedSeptember 30, 2022 and 2021.
Interest and Other Income
Interest and other income primarily consists of income earned on our loans receivable investments, preferred returns earned on our preferred equity investments and income on the sales-type lease. During the nine months endedSeptember 30, 2022 , we recognized$28.6 million of interest and other income compared to$9.4 million for the nine months endedSeptember 30, 2021 . The net increase of$19.2 million is due to (i) a$17.3 million increase in income from investments made afterJanuary 1, 2021 , primarily related to the RCA Loan, (ii) a$2.3 million lease termination payment related to one skilled nursing/transitional care facility during the nine months endedSeptember 30, 2022 and (iii)$0.4 million in late fee income, partially offset by a$0.9 million decrease in income from investments repaid afterJanuary 1, 2021 .
Resident Fees and Services
During the nine months endedSeptember 30, 2022 , we recognized$134.0 million of resident fees and services compared to$115.0 million for the nine months endedSeptember 30, 2021 . The$19.0 million increase is due to (i) a$10.7 million increase related to increased occupancy and an increase in rates, (ii) an$8.3 million increase from fiveSenior Housing - Managed communities acquired afterJanuary 1, 2021 and (iii)$0.4 million related to two facilities that were transitioned toSenior Housing - Managed communities afterJanuary 1, 2021 , partially offset by a$0.4 million decrease in government grant income.
Depreciation and Amortization
During the nine months endedSeptember 30, 2022 , we incurred$137.9 million of depreciation and amortization expense compared to$133.9 million for the nine months endedSeptember 30, 2021 . The$3.9 million net increase is due to (i) a$3.8 million increase from properties acquired afterJanuary 1, 2021 , (ii) a$1.7 million increase due to the acceleration of lease intangible amortization related to facilities transitioned to new operators and lease terminations and (iii) a$1.5 million increase from additions to real estate. The increases are partially offset by a$3.0 million decrease from properties disposed of afterJanuary 1, 2021 and a$0.1 million decrease related to assets that have been fully depreciated. Interest Expense We incur interest expense comprised of costs of borrowings plus the amortization of deferred financing costs related to our indebtedness. During the nine months endedSeptember 30, 2022 , we incurred$77.6 million of interest expense compared to$73.0 million for the nine months endedSeptember 30, 2021 . The$4.6 million net increase is related to a$20.3 million increase in interest expense related to the issuance of the 2031 Notes and a$3.1 million increase in non-cash interest expense related to our interest rate hedges. The increases are partially offset by (i) an$11.5 million decrease in interest expense related to the redemption of all$300.0 million of 4.80% senior unsecured notes due 2024 inOctober 2021 , (ii) a$6.6 million decrease in interest expense related to a reduction in the borrowings outstanding under the Credit Agreement and (iii) a$0.6 million decrease in interest expense related to a decrease in our mortgage debt as a result of the repayment of debt secured by three facilities during 2022 and the sales of two facilities securing the mortgage debt during 2021.
Triple-Net Portfolio Operating Expenses
During the nine months endedSeptember 30, 2022 , we recognized$15.0 million of triple-net portfolio operating expenses compared to$15.2 million for the nine months endedSeptember 30, 2021 . The$0.2 million net decrease is primarily due to properties disposed of afterJanuary 1, 2021 and an adjustment to our estimates related to property taxes.
During the nine months endedSeptember 30, 2022 , we recognized$103.8 million of operating expenses compared to$88.6 million for the nine months endedSeptember 30, 2021 . The$15.2 million net increase is due to (i) a$7.1 million increase related to fiveSenior Housing - Managed communities acquired afterJanuary 1, 2021 , (ii) a$5.1 million increase in 34
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employee compensation primarily due to increased labor rates and staffing, (iii) a$1.2 million increase in utility expense, (iv) a$1.2 million increase in management fees and dining expenses due to increased occupancy, (v) a$0.6 million increase due to the resumption of repairs and maintenance projects as pandemic-related restrictions have been eased, (vi) a$0.4 million increase in expenses due to increased marketing activity and (v)$0.3 million related to two facilities that were transitioned toSenior Housing - Managed communities afterJanuary 1, 2021 , partially offset by a$0.8 million decrease in supplies and labor needs related to the COVID-19 pandemic.
General and Administrative Expenses
General and administrative expenses include compensation-related expenses as well as professional services, office costs, other costs associated with asset management, and merger and acquisition costs. During the nine months endedSeptember 30, 2022 , general and administrative expenses were$28.7 million compared to$26.4 million during the nine months endedSeptember 30, 2021 . The$2.3 million net increase is related to (i) a$1.7 million increase in compensation for our team members as a result of increased staffing and annual salary adjustments, (ii) a$1.5 million increase in professional, consulting and legal fees primarily related to ESG initiatives and a consulting arrangement with our former Chief Financial Officer and (iii) a$0.2 million severance payment made to our former Executive Vice President of Portfolio Management. The increases are partially offset by a$1.6 million net decrease in stock-based compensation primarily due to changes in performance-based vesting assumptions on management's equity compensation.
(Recovery of) Provision for Loan Losses and Other Reserves
During the nine months endedSeptember 30, 2022 and 2021, we recognized a$12,000 recovery of and$1.9 million provision for loan losses and other reserves, respectively, associated with our loans receivable investments and sales-type lease. The$1.9 million provision recognized in 2021 was primarily due to one loan deemed uncollectible during the nine months endedSeptember 30, 2021 . Impairment of Real Estate During the nine months endedSeptember 30, 2022 , we recognized$72.6 million of impairment of real estate related to 10 skilled nursing/transitional care facilities that have either sold or are under contract to sell. During the nine months endedSeptember 30, 2021 , we recognized$0.5 million of impairment of real estate related to one skilled nursing/transitional care facility and one senior housing community that were subsequently sold.
Loss on Extinguishment of Debt
During the nine months endedSeptember 30, 2022 and 2021, we recognized a$0.4 million and$1.8 million loss on extinguishment of debt, respectively, related to write-offs of deferred financing costs in connection with the partial pay down of theU.S. dollar Term Loan.
Other (Expense) Income
During the nine months endedSeptember 30, 2022 , we recognized$1.1 million of other expense primarily related to a$2.2 million foreign currency transaction loss related to our Canadian borrowings, partially offset by$1.0 million of other income related to settlement payments received related to legacy CCP investments. During the nine months endedSeptember 30, 2021 , we recognized$0.4 million of other income primarily related to settlement payments received related to legacy CCP investments.
Net Loss on Sales of Real Estate
During the nine months endedSeptember 30, 2022 , we recognized an aggregate net loss on the sales of real estate of$4.6 million related to the disposition of six skilled nursing/transitional care facilities and five senior housing communities. During the nine months endedSeptember 30, 2021 , we recognized an aggregate net loss on the sales of real estate of$1.8 million that includes a$2.6 million loss related to the disposition of four skilled nursing/transitional care facilities and four senior housing communities, partially offset by a$1.0 million gain due to reassessing the classification of a lease and determining the lease, which requires the tenant to purchase the property at the maturity of the lease, should be accounted for as a sales-type lease, and this reassessment required the recognition of the gain on sale prior to the actual sale to our tenant.
Loss from
During the nine months endedSeptember 30, 2022 , we recognized$9.7 million of loss from our unconsolidated joint ventures compared to$178.8 million of loss for the nine months endedSeptember 30, 2021 . The$169.1 million net decrease in loss is related to a$169.5 million decrease in loss from the Enlivant Joint Venture, partially offset by$0.4 million of net loss, 35
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including$2.0 million of depreciation expense and$0.3 million of transaction costs, from 12 senior housing communities acquired by the Sienna Joint Venture during the nine months endedSeptember 30, 2022 . The$169.5 million decrease in loss from the Enlivant Joint Venture is due to (i) a$164.1 million other-than-temporary impairment recorded during the nine months endedSeptember 30, 2021 (see Note 4, "Investment inReal Estate Properties " in the Notes to Consolidated Financial Statements for additional information regarding the impairment), (ii) a$14.2 million increase in revenue from the facilities owned by the Enlivant Joint Venture as ofSeptember 30, 2022 , primarily due to increased occupancy and an increase in rates, (iii)$3.5 million of government grant income recognized during the nine months endedSeptember 30, 2022 , (iv) a$2.6 million decrease in depreciation primarily related to the other-than-temporary impairment recorded during the nine months endedSeptember 30, 2021 , (v) a$1.4 million decrease in interest expense primarily due to a favorable valuation adjustment on the interest rate caps and (vi) a$0.2 million gain on sale related to one senior housing community sold by the Enlivant Joint Venture during the nine months endedSeptember 30, 2022 . These decreases in loss are partially offset by a$16.0 million increase in operating expenses from the facilities owned by the Enlivant Joint Venture as ofSeptember 30, 2022 and a$0.8 million decrease in deferred tax benefit due to higher taxable income. The$16.0 million increase in operating expenses consists primarily of (i) a$11.2 million increase in employee compensation primarily due to increased labor rates and staffing, (ii) a$3.4 million increase in support payments paid to the manager of the Enlivant Joint Venture with proceeds received from the issuance of senior preferred interests to TPG in 2022 and cash on hand at the Enlivant Joint Venture in 2021, (iii) a$1.2 million increase in management fees and dining expenses primarily due to increased occupancy, (iv) a$0.6 million increase in utility expense and (v) a$0.5 million increase in marketing expense due to increased activity, partially offset by a$1.4 million decrease in supply needs related to the COVID-19 pandemic.
Income Tax Expense
During the nine months endedSeptember 30, 2022 , we recognized$1.1 million of income tax expense compared to$1.3 million for the nine months endedSeptember 30, 2021 . The$0.2 million decrease is due to lower taxable income from ourSenior Housing - Managed portfolio.
Funds from Operations and Adjusted Funds from Operations
We believe that net income as defined by GAAP is the most appropriate earnings
measure. We also believe that funds from operations ("FFO"), as defined in
accordance with the definition used by the National Association of Real Estate
Investment Trusts ("Nareit"), and adjusted funds from operations ("AFFO") (and
related per share amounts) are important non-GAAP supplemental measures of our
operating performance. Because the historical cost accounting convention used
for real estate assets requires straight-line depreciation (except on land),
such accounting presentation implies that the value of real estate assets
diminishes predictably over time. However, since real estate values have
historically risen or fallen with market and other conditions, presentations of
operating results for a REIT that use historical cost accounting for
depreciation could be less informative. Thus, Nareit created FFO as a
supplemental measure of operating performance for REITs that excludes historical
cost depreciation and amortization, among other items, from net income, as
defined by GAAP. FFO is defined as net income, computed in accordance with GAAP,
excluding gains or losses from real estate dispositions and our share of gains
or losses from real estate dispositions related to our unconsolidated joint
ventures, plus real estate depreciation and amortization, net of amounts related
to noncontrolling interests, plus our share of depreciation and amortization
related to our unconsolidated joint ventures, and real estate impairment charges
of both consolidated and unconsolidated entities when the impairment is directly
attributable to decreases in the value of the depreciable real estate held by
the entity. AFFO is defined as FFO excluding merger and acquisition costs,
stock-based compensation expense, non-cash rental and related revenues, non-cash
interest income, non-cash interest expense, non-cash portion of loss on
extinguishment of debt, provision for loan losses and other reserves, non-cash
lease termination income and deferred income taxes, as well as other non-cash
revenue and expense items (including ineffectiveness gain/loss on derivative
instruments, and non-cash revenue and expense amounts related to noncontrolling
interests) and our share of non-cash adjustments related to our unconsolidated
joint ventures. We believe that the use of FFO and AFFO (and the related per
share amounts), combined with the required GAAP presentations, improves the
understanding of our operating results among investors and makes comparisons of
operating results among REITs more meaningful. We consider FFO and AFFO to be
useful measures for reviewing comparative operating and financial performance
because, by excluding the applicable items listed above, FFO and AFFO can help
investors compare our operating performance between periods or as compared to
other companies. While FFO and AFFO are relevant and widely used measures of
operating performance of REITs, they do not represent cash flows from operations
or net income as defined by GAAP and should not be considered an alternative to
those measures in evaluating our liquidity or operating performance. FFO and
AFFO also do not consider the costs associated with capital expenditures related
to our real estate assets nor do they purport to be indicative of cash available
to fund our future cash requirements. Further, our computation of FFO and AFFO
may not be comparable to FFO and AFFO reported by other REITs that do not define
FFO in accordance with the current Nareit definition or that interpret the
current Nareit definition or define AFFO differently than we do.
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The following table reconciles our calculations of FFO and AFFO for the three and nine months endedSeptember 30, 2022 and 2021, to net income, the most directly comparable GAAP financial measure, for the same periods (in thousands, except share and per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net (loss) income $ (50,064)
47,427 45,046 137,855 133,912
Depreciation, amortization and impairment of real
estate assets related to unconsolidated joint
ventures 6,090 4,806 15,856 16,529
Net loss (gain) on sales of real estate 80 (655) 4,581 1,784
Net loss (gain) on sales of real estate related
to unconsolidated joint ventures - 15 (220) 30
Impairment of real estate 60,857 495 72,602 495
Other-than-temporary impairment of unconsolidated
joint ventures - - - 164,126
FFO 64,390 59,930 238,017 227,973
Stock-based compensation expense 2,117 2,428 5,367 6,987
Non-cash rental and related revenues 13,031 20,740 4,970 10,113
Non-cash interest income (589) (530) (1,683) (1,444)
Non-cash interest expense 2,798 1,744 8,300 5,389
Non-cash portion of loss on extinguishment of
debt 140 913 411 1,760
(Recovery of) provision for loan losses and other
reserves (217) (26) (12) 1,890
Other adjustments related to unconsolidated joint
ventures (2,378) (150) (4,056) (1,364)
Other adjustments 36 (213) 2,430 320
AFFO $ 79,328 $ 84,836 $ 253,744 $ 251,624
FFO per diluted common share $ 0.28 $ 0.27 $ 1.03 $ 1.05
AFFO per diluted common share $ 0.34 $ 0.38 $ 1.09 $ 1.15
Weighted average number of common shares
outstanding, diluted:
FFO 231,993,295 222,063,910 231,779,750 217,385,804
AFFO 232,858,600 222,542,049 232,810,528 217,906,904
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The following table sets forth additional information related to certain other
items included in net income above, and the portions of each that are included
in FFO and AFFO, which may be helpful in assessing our operating results. Please
refer to "-Results of Operations" above for additional information regarding
these items (in millions):
Three Months Ended September 30 ,
Nine Months Ended
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
Net Income (Loss) FFO AFFO Net Income (Loss) FFO AFFO
Rental and related revenues:
Non-cash rental and related
revenue write-offs $ 16.6 $ 25.2 $
16.6
$ 25.2 $ 16.7 $ 25.2 $ - $ - Resident fees and services: Grant income under government programs (1) - - - - - - 0.1 0.5 0.1 0.5 0.1 0.5 Interest and other income: Lease termination income - - - - - - 2.3 - 2.3 - 2.3 - (Recovery of) provision for loan losses and other reserves (0.2) - (0.2) - - - - 1.9 - 1.9 - - Loss on extinguishment of debt 0.1 0.9 0.1 0.9 - - 0.4 1.8 0.4 1.8 - - Other income (expense) 1.0 0.3 1.0 0.3 1.0 0.2 (1.1) 0.4 (1.1) 0.4 1.2 0.4 Loss from unconsolidated joint ventures: Grant income under government programs (1) 0.1 - 0.1 - 0.1 - 3.5 - 3.5 - 3.5 - Deferred income tax benefit 0.8 0.4 0.8 0.4 - - 1.2 2.0 1.2 2.0 - - Support payment paid to joint venture manager (2) 2.3 - 2.3 - 2.3 - 5.9 2.5 5.9 2.5 5.9 2.5 Other-than-temporary impairment of unconsolidated joint ventures - - - - - - - 164.1 - - - - (1) Consists of funds specifically paid to communities in ourSenior Housing - Managed portfolio from state or federal governments related to the pandemic and were incremental to the amounts that would have otherwise been received for providing care to residents. (2) Funding for support payments did not require capital contributions from Sabra but rather were funded with proceeds received by the Enlivant Joint Venture from TPG for the issuance of senior preferred interests or with cash on hand at the Enlivant Joint Venture.
Liquidity and Capital Resources
As ofSeptember 30, 2022 , we had approximately$887.7 million in liquidity, consisting of unrestricted cash and cash equivalents of$26.3 million and available borrowings under our Revolving Credit Facility (as defined below) of$861.4 million . The Credit Agreement also contains an accordion feature that can increase the total available borrowings to$2.75 billion (fromU.S. $2.0 billion plus CAD$125.0 million ), subject to terms and conditions. We have filed a shelf registration statement with theSEC that expires inDecember 2022 , and at or prior to such time we expect to file a new shelf registration statement. Our shelf registration statement allows us to offer and sell shares of common stock, preferred stock, warrants, rights, units, and certain of our subsidiaries to offer and sell debt securities, through underwriters, dealers or agents or directly to purchasers, on a continuous or delayed basis, in amounts, at prices and on terms we determine at the time of the offering, subject to market conditions. OnAugust 6, 2021 , we established an at-the-market equity offering program (the "ATM Program") pursuant to which shares of our common stock having an aggregate gross sales price of up to$500.0 million may be sold from time to time (i) by us through a consortium of banks acting as sales agents or directly to the banks acting as principals or (ii) by a consortium of banks acting as forward sellers on behalf of any forward purchasers pursuant to a forward sale agreement. During the three and nine months endedSeptember 30, 2022 , no shares were sold under the ATM Program and we did not utilize the forward feature of the ATM Program. As ofSeptember 30, 2022 , we had$475.0 million available under the ATM Program. Our short-term liquidity requirements consist primarily of operating expenses, including our planned capital expenditures and funding commitments, interest expense, scheduled debt service payments under our loan agreements, dividend requirements, general and administrative expenses and other requirements described under "Material Cash Requirements" below. Based on our current assessment, we believe that our available cash, operating cash flows and borrowings available to us under our Revolving Credit Facility provide sufficient funds for such requirements for the next twelve months. In addition, we 38
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do not believe that the restrictions under our Senior Notes Indentures (as defined below) or Credit Agreement significantly limit our ability to use our available liquidity for these purposes.
Our long-term liquidity requirements consist primarily of future investments in properties, including any improvements or renovations of current or newly-acquired properties, as well as scheduled debt maturities. We expect to meet these liquidity needs using the sources above as well as the proceeds from issuances of common stock, preferred stock, debt or other securities, additional borrowings, including mortgage debt or a new or refinanced credit facility, and proceeds from the sale of properties. In addition, we may seek financing fromU.S. government agencies, including through Fannie Mae, Freddie Mac and theU.S. Department of Housing and Urban Development , in appropriate circumstances in connection with acquisitions.
Cash Flows from Operating Activities
Net cash provided by operating activities was$248.1 million for the nine months endedSeptember 30, 2022 . Operating cash inflows were derived primarily from the rental payments received under our lease agreements, resident fees and services net of the corresponding operating expenses and payments from borrowers under our loan and preferred equity investments. Operating cash outflows consisted primarily of interest payments on borrowings and payment of general and administrative expenses, including corporate overhead. Increases to operating cash flows primarily relate to completed investment activity, and decreases to operating cash flows primarily relate to disposition activity and interest expense from increased borrowing activity. In addition, the change in operating cash flows was impacted by the timing of collections from our tenants and borrowers and fluctuations in the operating results of ourSenior Housing - Managed communities. We expect our annualized cash flows provided by operating activities to fluctuate as a result of such activity.
Cash Flows from Investing Activities
During the nine months endedSeptember 30, 2022 , net cash used in investing activities was$185.1 million and included$128.0 million used for the investment in an unconsolidated joint venture,$84.0 million used for the acquisition of three facilities,$33.8 million used for additions to real estate,$5.8 million used to provide funding for preferred equity investments,$4.5 million used to provide funding for a loan receivable and$0.8 million used for escrow deposits for potential investments, partially offset by$62.8 million of net proceeds from the sales of real estate,$4.9 million in repayments of loans receivable and$4.2 million in repayments of preferred equity investments.
Cash Flows from Financing Activities
During the nine months endedSeptember 30, 2022 , net cash used in financing activities was$148.2 million and included$207.9 million of dividends paid to stockholders,$63.8 million of principal repayments on term loans,$17.0 million of principal repayments on secured debt,$4.4 million of net costs related to payroll tax payments related to the issuance of common stock pursuant to equity compensation arrangements and our ATM Program, and a$2.5 million payment of contingent consideration, partially offset by$147.4 million of net borrowings from our Revolving Credit Facility.
Please see the accompanying consolidated statements of cash flows for details of our operating, investing and financing cash activities.
Material Cash Requirements
Our material cash requirements include the following contractual and other obligations.
Senior Unsecured Notes. Our senior unsecured notes consisted of the following
(collectively, the "Senior Notes") as of
Title Maturity Date Principal Balance (1)
5.125% senior unsecured notes due 2026 (the
"2026 Notes") August 15, 2026 $ 500,000
5.88% senior unsecured notes due 2027 (the "2027
Notes") May 17, 2027 100,000
3.90% senior unsecured notes due 2029 (the "2029
Notes") October 15, 2029 350,000
3.20% senior unsecured notes due 2031 (the "2031
Notes") December 1, 2031 800,000
$ 1,750,000
(1) Principal balance does not include discount, net of
See Note 7, "Debt," in the Notes to Consolidated Financial Statements and
"Subsidiary Issuer and Guarantor Financial Information" below for additional
information concerning the Senior Notes, including information regarding the
indentures and
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agreements governing the Senior Notes (the "Senior Notes Indentures"). As ofSeptember 30, 2022 , we were in compliance with all applicable covenants under the Senior Notes Indentures. Credit Agreement. Pursuant to a fifth amended and restated credit agreement entered into by theOperating Partnership andSabra Canadian Holdings, LLC (together, the "Borrowers"), Sabra and the other parties thereto effective onSeptember 9, 2019 (the "Credit Agreement"), we have a$1.0 billion revolving credit facility (the "Revolving Credit Facility"), a$436.3 million U.S. dollar term loan, a CAD$125.0 million Canadian dollar term loan (collectively, the "Term Loans") and an accordion feature that can increase the total available borrowings to$2.75 billion , subject to terms and conditions.
The Revolving Credit Facility has a maturity date of
The obligations of the Borrowers under the Credit Agreement are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by us and one of our non-operating subsidiaries, subject to release under certain customary circumstances.
See Note 7, "Debt," in the Notes to Consolidated Financial Statements for additional information concerning the Credit Agreement, including information regarding covenants contained in the Credit Agreement. As ofSeptember 30, 2022 , we were in compliance with all applicable covenants under the Credit Agreement.
Secured Indebtedness. As of
Weighted Average
Interest Rate Type Principal Balance (1) Interest Rate Maturity Date
May 2031 -
Fixed Rate $ 50,609 2.84 % August 2051
(1) Principal balance does not include deferred financing costs, net of
Interest. Our estimated interest and facility fee payments based on principal amounts of debt outstanding as ofSeptember 30, 2022 , LIBOR (as defined below) and CDOR (as defined below) rates as ofSeptember 30, 2022 , and including the impact of interest rate swaps and collars are$29.4 million for the remainder of 2022,$97.5 million in 2023,$85.4 million in 2024,$72.0 million in 2025,$72.0 million in 2026 and$184.7 million thereafter. Capital and Other Expenditures and Funding Commitments. For the nine months endedSeptember 30, 2022 and 2021, our aggregate capital expenditures were$33.8 million and$29.3 million , respectively. As ofSeptember 30, 2022 , our aggregate commitment for future capital and other expenditures related to facilities leased under triple-net operating leases was approximately$81 million , of which$73 million will directly result in incremental rental income, and approximately$63 million will be spent over the next 12 months. Additionally, as ofSeptember 30, 2022 , anticipated capital expenditures related to ourSenior Housing - Managed communities was approximately$40 million , of which we expect to spend approximately$27 million over the next 12 months. In addition, as ofSeptember 30, 2022 , we have committed to provide up to$72.3 million of future funding related to three preferred equity investments and two loans receivable investments with maturity dates ranging fromDecember 2022 toNovember 2026 . Dividends. To maintain REIT status, we are required each year to distribute to stockholders at least 90% of our annual REIT taxable income after certain adjustments. All distributions will be made by us at the discretion of our board of directors and will depend on our financial position, results of operations, cash flows, capital requirements, debt covenants (which include limits on distributions by us), applicable law, and other factors as our board of directors deems relevant. We paid dividends of$207.9 million on our common stock during the nine months endedSeptember 30, 2022 . OnNovember 7, 2022 , our board of directors declared a quarterly cash dividend of$0.30 per share of common stock. The dividend will be paid onNovember 30, 2022 to common stockholders of record as ofNovember 17, 2022 . Subsidiary Issuer and Guarantor Financial Information. In connection with theOperating Partnership's assumption of the 2026 Notes, we have fully and unconditionally guaranteed the 2026 Notes, subject to release under certain circumstances as described below. The 2029 Notes and 2031 Notes are issued by theOperating Partnership and guaranteed, fully and unconditionally, by us. These guarantees are subordinated to all existing and future senior debt and senior guarantees of the applicable guarantors and are unsecured. We conduct all of our business through and derive virtually all of our income from our subsidiaries. 40
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Therefore, our ability to make required payments with respect to our indebtedness (including the Senior Notes) and other obligations depends on the financial results and condition of our subsidiaries and our ability to receive funds from our subsidiaries.
We will be automatically and unconditionally released from our obligations under the guarantee with respect to the 2026 Notes in the event of:
•A liquidation or dissolution, to the extent permitted under the indenture governing the 2026 Notes;
•A merger or consolidation, provided that the surviving entity remains a guarantor; or
•The requirements for legal defeasance or covenant defeasance or to discharge the indenture governing the 2026 Notes have been satisfied.
In accordance with Regulation S-X, the following aggregate summarized financial information is provided for Sabra and theOperating Partnership . This aggregate summarized financial information has been prepared from the books and records maintained by us and theOperating Partnership . The aggregate summarized financial information does not include the investments in non-guarantor subsidiaries nor the earnings from non-guarantor subsidiaries and therefore is not necessarily indicative of the results of operations or financial position had theOperating Partnership operated as an independent entity. Intercompany transactions have been eliminated. The aggregate summarized balance sheet information as ofSeptember 30, 2022 andDecember 31, 2021 and aggregate summarized statement of loss information for the nine months endedSeptember 30, 2022 is as follows (in thousands): September 30, 2022 December 31, 2021 Total assets $ 52,353 $ 117,755 Total liabilities 2,227,191 2,287,485 Nine Months Ended September 30, 2022 Total revenues $ 2,412 Total expenses 93,204 Net loss (91,959)
Concentration of Credit Risk
Concentrations of credit risk arise when a number of operators, tenants or obligors related to our investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to us, to be similarly affected by changes in economic conditions. We regularly monitor our portfolio to assess potential concentrations of risks. Management believes our current portfolio is reasonably diversified across healthcare related real estate and geographical location and does not contain any other significant concentration of credit risks. Our portfolio of 407 real estate properties held for investment as ofSeptember 30, 2022 is diversified by location across theU.S. andCanada .
For the three and nine months ended
Skilled Nursing Facility Reimbursement Rates
For the nine months endedSeptember 30, 2022 (excluding lease termination income of$2.3 million ), 47.8% of our revenues was derived directly or indirectly from skilled nursing/transitional care facilities. Medicare reimburses skilled nursing facilities for Medicare Part A services under the Prospective Payment System ("PPS"), as implemented pursuant to the Balanced Budget Act of 1997 and modified pursuant to subsequent laws, most recently the Patient Protection and Affordable Care Act of 2010. PPS regulations predetermine a payment amount per patient, per day, based on a market basket index calculated for all covered costs. Prior toOctober 1, 2019 , the amount to be paid was determined by classifying each patient into one of 66Resource Utilization Group ("RUG") categories that represented the level of services required to treat different conditions and levels of acuity. The system of 66 RUG categories, orResource Utilization Group , version IV ("RUG IV"), became effective as ofOctober 1, 2010 . RUG IV resulted from research performed by theCenters for Medicare & Medicaid Services ("CMS") and was part of CMS's continuing effort to increase the correlation of the cost of services to the condition of individual patients. 41
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On
CMS-1696-F includes a new case-mix classification system called the skilled
nursing facility Patient-Driven Payment Model ("PDPM") that became effective on
October 1, 2019 . PDPM reflects significant changes to the Resident
Classification System, Version I ("RCS-I") that was being considered to replace
RUG IV as outlined in an Advanced Notice of Proposed Rulemaking released by CMS
in May 2017 .
PDPM focuses on clinically relevant factors, rather than volume-based service,
for determining Medicare payment. PDPM adjusts Medicare payments based on each
aspect of a resident's care, most notably for non-therapy ancillaries, which are
items and services not related to the provision of therapy such as drugs and
medical supplies, thereby more accurately addressing costs associated with
medically complex patients. It further adjusts the skilled nursing facility per
diem payments to reflect varying costs throughout the stay and incorporates
safeguards against potential financial incentives to ensure that beneficiaries
receive care consistent with their unique needs and goals.
On July 29, 2021 , CMS released a final rule updating fiscal year 2022 Medicare
rates for skilled nursing facilities providing an estimated net increase of 1.2%
over fiscal year 2021 (comprised of a market basket increase of 2.7% less a
forecast error adjustment of 0.8% and a productivity adjustment of 0.7%). These
figures do not incorporate any of the estimated value-based purchasing
reductions for skilled nursing facilities. No adjustments were made to the PDPM
rate methodology in the final rule. The new payment rates became effective on
October 1, 2021 .
On July 29, 2022 , CMS issued a final rule regarding fiscal year 2023 Medicare
rates for skilled nursing facilities providing an estimated net increase of 2.7%
compared to fiscal year 2022 comprised of an increase as a result of an update
to the payment rates of 5.1% (which is based on (i) a market basket increase of
3.9% plus (ii) a market basket forecast error adjustment of 1.5% and less (iii)
a productivity adjustment of 0.3%), partially offset by the recalibrated PDPM
parity adjustment of 2.3% (the total PDPM parity adjustment is 4.6%, and it is
being phased in over a two-year period). These figures do not incorporate any of
the estimated value-based purchasing reductions for skilled nursing facilities.
The new payment rates became effective on October 1, 2022 .
In response to the COVID-19 pandemic, several federal relief packages were approved that have benefited and may continue to benefit our tenants, especially our tenants that operate skilled nursing/transitional care facilities.
OnMarch 18, 2020 ,President Trump signed into law the Families First Coronavirus Response Act ("Families First Act"). Under the Families First Act, a temporary 6.2% increase in Federal Medical Assistance Percentages ("FMAP") was approved retroactive toJanuary 1, 2020 , and several states have directed FMAP funds to skilled nursing/transitional care facilities. OnMarch 27, 2020 ,President Trump signed into law The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act provides for a$178 billion Provider Relief Fund ("PRF") for eligible health care providers, which includes skilled nursing/transitional care operators, and as ofSeptember 1, 2020 also includes assisted living facility operators. Approximately$168 billion of such appropriated amount has been funded through four phases of general distributions, various targeted distributions and certain performance-based incentive payments, and such distributions have effectively ended. The CARES Act also included (i) a temporary suspension of the 2% Medicare sequestration cut beginningMay 1, 2020 throughDecember 31, 2020 , which was extended as discussed below, (ii) a deferral of the employer'sSocial Security remittances throughDecember 31, 2020 , (iii) the establishment of the Paycheck Protection Program, aSmall Business Administration loan to businesses with fewer than 500 employees that may be partially forgivable, and (iv) accelerated and advance Medicare payments for certain providers, with deferred repayment obligations that are interest-free for up to 29 months. In addition to the above, there have been other actions taken that benefit skilled nursing/transitional care operators, including the waiver of the requirement for skilled nursing/transitional care patients to have stayed in a hospital for three days in order for services rendered in a skilled nursing/transitional care facility to qualify for Medicare Part A and relaxation of certification requirements for employees performing non-clinical services in these facilities.The Department of Health and Human Services ("HHS") most recently extended the COVID-19 Public Health Emergency for another 90 days, effectiveOctober 13, 2022 , which allows HHS to continue providing some temporary regulatory waivers, including the waiver of the three-day hospital stay requirement, and new rules to equip skilled nursing facilities and some assisted living operators with flexibility to respond to the COVID-19 pandemic. In addition, the FMAP funding increase will remain in effect throughMarch 31, 2023 . Lastly, suspension of the Medicare sequestration was effective throughMarch 31, 2022 after which a 1% payment adjustment was in effect from April throughJune 2022 , and a further 1% payment adjustment became effectiveJuly 1, 2022 . 42
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With distributions from the PRF effectively completed, many states have increased their support to skilled nursing/transitional care operators. States have discretion regarding the distribution of the FMAP funds to healthcare providers, and several states have continued, and in some cases extended, these benefits to providers and/or increased their base Medicaid reimbursement rates outside of the continuation or extension of FMAP.
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