MedEquities Realty Trust, Inc. (NYSE: MRT) has signed an agreement to re-tenant 10 Texas skilled nursing facilities currently leased to affiliates of OnPointe.
The Nashville, Tenn.-based real estate investment trust (REIT) owns 34 acute and post-acute facilities in seven states; it has about 20 SNFs in its portfolio, according to its website.
The new 15-year triple net lease is with the skilled nursing and assisted living facility operator Creative Solutions in Healthcare, which is based in Fort Worth, Texas.
Creative Solutions will start operating the facilities when it receives all outstanding regulatory approvals, which is expected to be on or near Jan. 1, 2019. Under the lease, the initial annual base rent will be $7.7 million, with annual lease escalators of 2%. There are two five-year tenant renewal options. Creative Solutions’ management company guaranteed the lease, along with personal guarantees from its two co-founders, Gary Blake and Malisa Blake-Deane.
The new lease will restore cash flow from the Texas SNF assets, and it positions the portfolio for long-term success in the industry according to a presentation on the Texas SNF portfolio available on MedEquities’ website.
The facilities are generating about a 1:1 earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) — in other words, enough to break even. But that’s before factoring the management fee, MedEquities chairman and CEO John McRoberts told Skilled Nursing News, and as he noted, “you’ve got to pay the management fee.”
“We’re taking a bit of a rent cut to restore the cushion so the new operator, even with the management fee, is going to be generating enough to pay the rent and pay the management fee,” he said.
By adding Creative Solutions as a tenant, MedEquities establishes solid lease coverage, with pro-forma, facility-level EBITDAR lease coverage of 1.32x, based on the trailing 12-month results as of June 30, according to the company. For MedEquities’ aggregate SNF portfolio, the deal will establish pro-forma, facility-level EBITDAR lease coverage of 1.16x, based on trailing 12-month results as of June 30.
With the transaction, Creative Solutions will be the second-largest SNF operator in the state of Texas; it currently does not operate in other states and is currently exclusively focused on the Lone Star State, the presentation noted. Creative Solutions currently has 6,448 licensed beds in 62 facilities, with revenue of $282 million.
Texas poses some challenges for operators, among them notably low Medicaid reimbursement rates and a high quantity of managed Medicare and Medicaid companies that are very aggressive about managing length-of-stay while maintaining care quality, McRoberts said. This is on top of the changes in reimbursement that are becoming par for the course in the SNF industry, he added.
In this challenging environment, MedEquities liked what it saw from Creative.
“We think they’re a very good operator,” McRoberts told SNN. “And having the scale they have in Texas gives them, I think, an ability to manage the referral sources and the payers more effectively than if they were a smaller company.”
It’s hard to predict how long it will take Creative to start improving on the cash flow of the properties, given how complicated transitions can be, he told SNN. But he believes they are well positioned to do better with the assets than what they are starting with.
“I think the first few months will be just making sure things they didn’t expect get addressed,” he said. “Then the rest of the year they’ll be looking to add to what they bought.”
Written by Maggie Flynn