Survey after survey finds that investors remain skittish about skilled nursing, but a top executive at CareTrust REIT (Nasdaq: CTRE) says his firm has the opposite problem: There just aren’t enough solid properties available to satiate its appetite.
Skilled Nursing News caught up with Mark Lamb, the real estate investment trust’s (REIT) chief investment officer, at the National Investment Center for Seniors Housing & Care’s (NIC) annual spring conference in San Diego late last month.
In our conversation, I asked Lamb to expand on recent comments he made about a lack of operator exits in advance of the Patient-Driven Payment Model. He also shared his thoughts on a recent Lancaster Pollard survey showing SNFs at the bottom of many investors’ 2019 investment outlooks, as well as why key tenant The Ensign Group (Nasdaq: ENSG) makes it look easy with quarter after quarter of solid earnings.
You noted on CareTrust’s most recent earnings call that the predicted wave of small buyers selling ahead of PDPM hasn’t happened yet. Why is that?
I think it still does happen. I don’t think there’s enough information out there for mom-and-pops to say definitively, one way or the other: We’re going to stay in, or we’re going to exit. I think once more information comes out, and they start to realize from an information technology investment perspective, and then from a staffing perspective, and then the changes with ICD-10, and then the changes that take place on the therapy front — when you’re in a RUGs-based system, it’s pretty straightforward. We’ve had this since the late ’90s, where you hit 500 minutes or 720 minutes, and you have your MDS folks code, and that’s that. It’s pretty straightforward.
What we’ve seen with PDPM: The initial assessment is really crucial. My guess is what’s going to happen is, you’re going to have mom and pops that don’t prepare for it. Their reimbursements will take a significant hit right out of the gate, assuming a 10/1 start.
I do believe [the departures are] going to happen at some point. The question is: How much happens leading up to it? And then how much happens just after?
What’s the length of that runway?
I could see getting two or three months of reduced revenue and then [operators] say: “Okay, I can’t do this. I don’t have what it takes, and so let’s go ahead and sell.”
The brokers are out there hitting them pretty hard with: “Hey, you should sell because of PDPM. And you should sell because cap rates are still relatively low.”
It’s not like we have people that are just saying: “Hey, look, I want to exit because PDPM’s coming.” A lot of the mom-and-pops, whether it’s labor pressure — I think it’s a confluence of things … I think PDPM probably weighs a little bit more as you have folks factoring what they want to do. I think labor pressure, PDPM — that could be the straw that breaks the camel’s back if somebody’s on the fence.
What do you say to the Lancaster Pollard survey ranking SNFs as having the worst outlook in 2019?
We can’t get enough. If you asked us what impedes us from putting up a big investment number, it’s not enough deal flow in states that we like. If we wanted to buy $500 million worth tomorrow, we could do that. But those aren’t necessarily in states that we like, or maybe the buildings aren’t in the condition that we like. I would say the lack of actionable skilled nursing transactions — there just aren’t enough of them out there today.
What are the states that you like? We all know the ones that operators and investors identify as “bad” — including Illinois.
Well, we’ve had great success in Illinois. Our lease coverage with our operator there is two times. And we just transacted a $9 million deal there four weeks ago. We actually like Illinois. We love California, Oregon, even Washington, despite Washington’s regulatory issues. Not a lot trade in Oregon.
Yeah, that’s a big assisted living state.
It is. I come from the West Coast, so that’s my wheelhouse. California is far and away the best state out west, just from an acquisition perspective. It’s also more appealing to us because, based on our operating backgrounds being here in California, that’s where all our operators are. They know California. They have management teams here. And so it’s easier for me to buy a building in Northern California, because I can plug in an operator who has a team that’s ready to go. You can get the band back together.
When you’re looking at a pro forma, or looking at a budget, based on our operating history, we can look at the PPDs and say — that’s believable, that’s believable, that’s believable, that’s light. You know deep down: Okay, that’s achievable or that’s not.
If I saw something in, say, Missouri, it would take me a longer time to underwrite it. I’d have to aggregate data, talk to people, educate myself on the state, understand what nursing labor PPDs are.
Lancaster’s perspective, I’m not seeing it. Seventy-five percent of the people at this NIC are skilled nursing [players].
Is the industry really as simple to navigate as Ensign makes it seem?
I think what makes Ensign different is they fully empower the field — the EDs, the DONs — and they basically say, “Hey, we’re going to give you the resources. You just go out and make it happen.” I think a lot of it — they’re very disciplined in terms of what they’re buying. The stuff that they did in Texas a couple years back, I think they’re now kind of back to what they’ve historically bought: 50% occupied buildings, not-for-profit buildings. They can come in and make some changes pretty quickly from a cost-structure perspective. And if they have a low basis, that’s a much better spot to be in.
The corporate office services the field. Ninety-nine percent of the nursing homes out there, the corporate office is the ivory tower. And what they’ve done, and what they’ve stayed true to, is continuing to bring in EDs and supporting them and giving them the resources that they need. They’ve not steered from their culture, and they have a cluster model of accountability that they hang onto.
They’re kind of an open book. Other people have said: “Hey, we’d love to come understand how you do it.” They’ve said: “Come take a look.”
You think about the nursing home business, you as an ED have to keep your arms around all 99 of your beds, whether it’s your staff, whether it’s your residents, whether it’s your residents’ families. You go from being super focused on, as an ED, keeping your arms around everything and having your finger on the pulse of all aspects of it, and all of a sudden, you go from ED in the building to a regional vice president … to where you’re hands-off, and your job there is to support, hold accountable.
And your job is not to jump in and do it for that ED, even though that’s what you want to do. But they’re disciplined enough to hold back and empower and hold accountable.
They’re willing to have the tough conversations over and over and over.
This interview was condensed and edited for clarity.