Wave of PDPM Sell-Offs Has Already Begun in Skilled Nursing

With the Patient-Driven Payment Model (PDPM) looming in 2019, some skilled nursing facilities have already decided to make their exit rather than deal with the challenges of the new Medicare payment system.

“I know of a number of buildings in northern California that have already started to transition,” Mark Lamb, the chief investment officer at San Clemente, Calif.-based CareTrust REIT (Nasdaq: CTRE), said on Skilled Nursing News’ 2019 Outlook Webinar, held earlier this week. “They transitioned on December 1, because the operator saw what was coming down the pike and just wanted out.”

He joined Ben Firestone, senior managing director and founding partner at Blueprint Healthcare Real Estate Advisors, and Bill Kauffman, senior principal at the National Investment Center for Seniors Housing & Care (NIC), to talk about what 2019 holds for the skilled nursing space for operators and investors.

PDPM causing deals

Lamb made similar comments during the real estate investment trust’s (REIT) second-quarter earnings call, noting in August that mom-and-pop SNFs were likely to exit as a result of PDPM. Lamb wasn’t alone in predicting a wave: Taylor Pickett, CEO of fellow REIT Omega Healthcare Investors (NYSE: OHI), also projected a rise in deal volume as operators choose not to deal with the sea change that PDPM will bring.

“Each iteration of more sophistication in this business has driven the consolidation. It’s been the model that we’ve run forever,” Pickett said on his company’s second-quarter earnings call in August.  “It’s just another iteration of what has caused the consolidation of this industry over the last decade. If history holds true, we’ll see some of these local operators just say: ‘Okay, I’ve had enough. I’m not going to go through this next change.’”

But it hasn’t just been mom-and-pops making adjustments, Lamb noted on SNN’s webinar. Regional operators are also moving to cut SNF assets that aren’t working out for them.

“They’ve just decided to kind of slim down their organization as they get ready for the broader rollout of PDPM,” Lamb said. “So it’s happening, and after the first of the year,  I would expect the opportunities to increase, from a buyer perspective. Just because I think once you get into 2019, and you start to consider the changes that need to be made, the clinical capabilities of taking on complex patients, I think in Q1, Q2 we will start to see a lot of facilities on the market.”

As of their most recent quarterly report filed with the Securities and Exchange Commission (SEC), CareTrust has 190 skilled nursing and senior housing properties in 25 states, with 19 operators.

Larger operators will also likely start to trade facilities as PDPM’s October 1, 2019 implementation date draws nearer, Firestone said on the webinar. This is not necessarily directly because of PDPM, he acknowledged, but the new payment model is still lurking in the background.

“The folks that are buying right now, they’re really looking at this concurrent therapy model as a way to reduce expenses in light of some of the pressures to revenue that the program’s going to bring,” he explained. “So I think if you can align yourself with the right operating partner who sees value and understands how to navigate the changes, I think you’re going to see a lot of deals — big and small — transact moving forward.”

Supply and demand

The supply of operational skilled nursing beds has been decreasing over time, Kauffman noted, citing NIC data. This lack of development and growth could prove important to demand as the population ages, he said.

It also seems to be impacting, albeit indirectly, how REITs and real estate owners approach leases to operating tenants. Because of the lack of new construction — due to high costs and Certificate of Need (CON) restrictions in many states — the average age of SNF buildings can be anywhere from 20 to 40 years old, and owners have become far less aggressive on their projections for these older buildings, Firestone said.

“I think coverages are being a lot more carefully and thoughtfully evaluated, and you’re seeing less aggressive bumps [in rent], particularly on the older properties that may need some capex dollars as time goes forward,” he said.

CareTrust has tried to stay aware of the pressures on operators in terms of its leases, Lamb said. But the industry at large seems to be awakening to that need as well.

“You don’t necessarily see the 3%, 3.5%, the 4% bumps that you saw maybe 10 years ago,” he explained. “I know ManorCare — I think they had maybe six bumps at 3.5%, and that didn’t work out so well … There’s labor pressure as well, so I think more landlords are being sensitive to what that escalator looks like.”

Changing population

In terms of forecasting, there have been wildly varying opinions on when the so-called “silver tsunami” will start to affect the skilled nursing industry. At least in the case of the Baby Boomer generation, it’s not likely to affect skilled nursing for some time, Kauffman said, as usage doesn’t really spike until people reach around age 85 and above.

But as Firestone noted, there is an upward demographic trend, with Blueprint’s team predicting spikes in the 80-and-over age bracket in the coming decade. That said, SNF patients are trending sicker and sicker, with secondary diagnoses like depression or schizophrenia, Lamb said. As a result, the patient population for SNFs has gradually skewed younger and younger, which will only help occupancy, he argued.

And demand for skilled nursing is determined by more than just age, as Firestone observed.

“There are two things: One is a lifespan, but there’s also what’s called the health span, which is how long people are living good quality lives,” he said. “The growth rate of health span is outpacing lifespan, so before we all go penciling out our deals based on pure age demographics, we ought to really dive into what demand means for our industry.”

Written by Maggie Flynn

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