CareTrust Builds Strong Skilled Nursing Pipeline as ‘Logjam’ Starts to Break

CareTrust REIT (Nasdaq: CTRE) had a relatively light second quarter for transactions, but the San Clemente, Calif.-based real estate investment trust (REIT) expects to be off the sidelines soon, according to executives on its quarterly earnings call.

“Although it was an uncharacteristically quiet quarter for us on the acquisition front, Q2 was one of our best quarters ever in terms of meaningful long-term accomplishments,” Greg Stapley, CareTrust’s chairman, president, and CEO, said on the call. “With a couple of difficult retenantings behind us and solid operating reports starting to come out of those operators, we’ve been able to pivot and settle back into the business of growing CareTrust.”

The company’s pipeline has rebounded to a range of $125 million-$150 million, more in line with CareTrust’s usual expectations, chief investment officer Mark Lamb said on the call. Most of the current pipeline consists of skilled nursing and post-acute facilities.

“Sellers are appearing again and seem to have become more realistic, even as a solid Medicare rate increase and the proposed shift from RUG-IV to PDPM appear on the horizon,” Lamb said, referring to the recently finalized therapy reimbursement rules from the Centers for Medicare & Medicaid Services. “Whatever their thinking, we believe the logjam of the past nine months is finally breaking.”

Chief operating officer Dave Sedgwick noted that much of the efforts of the second quarter were focused on the ongoing transition of properties in Ohio from Pristine Senior Living to Trio Healthcare, Hillstone Healthcare, and Trillium Healthcare.

The need to make the operator swap led Stapley to note in the first quarter that the REIT has done “some serious self-examination around our vetting process for new operators.”

“We have used the opportunity to find some new operator prospects and to further strengthen existing operator relationships, all of which are key to our continued growth and success,” Sedgwick said in the second-quarter call. “Even though our tenants are now generally performing as expected, we take nothing for granted.”

Midwest moves

One of the deals CareTrust closed on in the quarter was the acquisition of a 99-bed SNF in Aberdeen, S.D., which was added to its existing master lease with Salt Lake City-based Eduro Healthcare, LLC.

“Early signs indicate the transition is going very well,” Lamb said on the call. “This is the third near-seamless transition that Eduro has executed with us this year, and brings our total investment year-to-date to approximately $57 million.”

As far as the improvement in the market, Lamb noted that the Midwest region in particular has seen some changes, with money coming into states like Ohio, Indiana, and — to a certain extent — Illinois.

“We’re seeing players that we hadn’t really seen come into the Midwest market,” he said in the question-and-answer session of the call.

Lamb and Stapley both stressed that CareTrust will be in a good position to take advantage as transactions spring up throughout the rest of the year. The REIT continues to hear about opportunities coming to the market, Lamb noted, while brokers are “looking for someone that can actually close” a deal, Stapley said.

“Sitting on the sidelines is not our favorite place to be, but we’ll go there when necessary to hold out for fair assets, good pricing, and especially the right operators,” Stapley said in the call. “Today I am pleased to report that the pipeline is on the upswing.”

PDPM sparks dealmaking?

Part of that growth in deals in the works could be attributed to the changes looming in the skilled nursing sector, including the finalization of the Patient-Driven Payment Model (PDPM).

The skilled nursing payment update, which was announced in April, will replace the Resource Utilization Group, Version IV (RUG-IV) on October 1, 2019, shifting incentives away from therapy volume and towards the complexity of care.

“I think the shift from RUG-IV to PDPM is a little bit of a game changer for mom-and-pops, and not knowing how to navigate that … a lot of them don’t want to go through another transition,” Lamb explained. “And so they’re choosing to sell at this point.”

CareTrust as a whole was optimistic about the skilled nursing field, with Stapley noting that the 2.4% increase to Medicare rates for this October and the advent of PDPM “have actually brought a welcome tailwind to the skilled nursing sector.”

The REIT, which has 136 SNFs, 39 assisted living facilities, and three independent living facilities, reported second-quarter net income of $13.27 million, compared with net income of $2.03 million in the second quarter last year.

Written by Maggie Flynn