Amid Turmoil, Does Skilled Nursing Have a Future in REITs?

Conflicts between major real estate investment trusts (REITs) and their skilled nursing tenants have dominated industry headlines in recent weeks. Quality Care Properties (NYSE: QCP) continues to seek relief amid its primary tenant HCR ManorCare’s failure to pay rent, while shareholders of Sabra Healthcare REIT, Inc. (NASDAQ: SBRA) attempted to derail its acquisition of the SNF-heavy Care Capital Properties REIT.

That led Skilled Nursing News to explore the future of SNFs in REITs: Do operators have a future in the space, given the REIT industry’s skittishness over shifting payment models, workforce shortages, and regulatory issues?

Portfolio pruning 

These shifts in the industry have left REITs more deliberate and careful in the management of their assets.

“I think REITs are starting to think about what their ideal operator looks like a little more critically, given some of the recent developments in the industry,” said Isaac Dole, founder and managing partner of Chicago-based real estate investment firm Birchwood Real Estate Properties. “REITs have a difficult time getting comfortable with the collateral a one-to-five-facility operator has to offer, but I think they are starting to think a little more critically about the really big operators as well.”

In the past, REITs have favored larger operators with greater security to support their lease agreements, but as the skilled nursing landscape changes, mid-sized, regional SNFs are in a better position to adapt, Dole said, echoing a sentiment that many operators in the mergers-and-acquisitions world have expressed about the landscape.

Large SNF operators, such as HCR ManorCare and Signature Healthcare, have had issues with paying landlords Quality Care Properties and Omega Healthcare Investors, Inc. (NYSE: OHI), respectively. As the skilled nursing industry changes, it is these large operators that face the greatest challenges in adapting, Dole suggests.

“I think REITs are looking more critically into financial performance, specifically lease coverage, on a portfolio-wide basis as well as single assets, and determining how to best improve an operator’s coverage,” Dole said. “Many of the REITs are selling the one-offs that are dragging down an operator’s performance, and some of the operators are pitching the REITs on selling non-core facilities. I also think REITs are getting much smarter about operations, starting to look into more operationally-focused performance metrics.”

“I definitely think some of the recent events with the larger operators have REITs questioning the current trajectory of the rest of their operators,” he said.

But this doesn’t mean that REITs are abandoning the space — or the larger senior living ecosystem — entirely. And not all REITs are responding to market headwinds in the same way.

“REITs such as Omega, Sabra, CCP and Quality Care Properties are seeking to expand their SNF base,” said Mark Myers, executive managing director of Institutional Property Advisors, a mergers-and-acquisitions advisory firm in Calabasas, Calif. “Other REITs such as HCP and Welltower are net sellers of SNFs at this time. However, REITs that are selling SNFs are also desirous to grow their non-SNF portfolios, including acquisitions in ILFs [independent living facilities], ALFs [assisted living facilities], memory care, life sciences and, in some cases, hospitals.”

Diversity dominates

He also agreed with Dole’s assertion that REITs could indeed move toward smaller operators should they elect to remain married to the SNF industry.

“Mid-sized operators are likely in the best position to address managed Medicare and Medicaid, because they have regional contacts and possess a sufficiently large platform including ancillary companies to service the facilities,” said Myers.

Stable SNF portfolios are those with operators that are connected to their communities, Dole suggested.

“Senior management and owners of the regional operators have the ability to form direct impactful relationships with important people in their local markets, which are critical to long term success,” Dole said. “This may be more difficult for large regional or national groups, who have many layers between the building and ownership, to establish those relationships.”

Written by Elizabeth Jakaitis