CareTrust REIT (Nasdaq: CTRE) on Friday announced a pending $37 million deal to sell six skilled nursing facilities in Michigan after the associated operator indicated its intention to leave the buildings — and also stop paying rent during the transition.
The San Clemente, Calif.-based real estate investment trust (REIT) discovered this past quarter that Metron Integrated Health Services would soon be forced to pay back millions of improper Medicaid payments, according to to CareTrust chief operating officer Dave Sedgwick.
“Shockingly, in the next breath, they told us of their intent to exit operations, and after initially assuring us that they would intend to pay the rent through the transition, they later said they would no longer be paying Metron’s contractual rent of roughly $350,000 a month until we replaced them,” Sedgwick said during the company’s third quarter earnings call.
CareTrust quickly sought to remedy the situation by either finding new tenants or selling the properties, eventually settling on the latter option in a process that Sedgwick predicted would take several months due to stringent change-of-ownership regulations in Michigan.
“If you can feel good about that situation at all — which we really don’t — but what we can feel good about is acting on it as quickly as we did,” he said. “That could have been an issue that would linger for a long time, but we were able to get it under contract to sell within the quarter, and it’s fairly well along the path of closing.”
An e-mail to Metron CEO Mark Piersma for comment was not returned as of press time.
In response to an analyst question about how Metron — which first took over the properties in 2018 — could walk away from their leases without incurring penalties, CareTrust CEO Greg Stapley emphasized that the matter isn’t finished.
“That’s still an ongoing matter, but you shouldn’t assume that anything’s concluded there yet — other than our entry into that contract to sell the assets,” Stapley said.
CareTrust’s Metron transaction was just one part of an overarching move to strategically prune the company’s portfolio during the third quarter of the year, which saw the REIT post a net loss of $10.1 million, as compared to net income of $14.5 million this time last year.
Management also pulled off the planned sale of three skilled nursing facilities previously operated by Trillium Healthcare Group in Ohio for $28 million, along with the installation of the Providence Group as the new operator of four additional former Trillium properties.
Before Trillium, that group of buildings had been under the control of Pristine Senior Living and Post-Acute Care, an operator that ran into problems paying its rent and caused persisted headaches for the REIT.
“Believe me, we’ve beaten ourselves up pretty hard over that one, and it hasn’t been fun, because the problems we had largely are that one investment that we made four years ago, when we were barely a year old,” Stapley said of the Pristine deal, which came shortly after CareTrust’s spin-off from operator The Ensign Group (Nasdaq: ENSG) in 2014.
As he had previously, Sedgwick blamed problems with Pristine and Trillium on their general unfamiliarity with the Ohio marketplace.
“One of the things that we’ve learned from the Pristine situation is that we give much more weight to local operators,” he said. “It’s not so much the size of the operator that matters, it’s: How successful have they been in that market? How well do they know the market? And what are the relationships like?”
Pristine’s issues with the facilities also trickled down to Trio Healthcare, which had taken over seven other former Pristine properties in the metropolitan Dayton market in 2018. That operator was forced to contend with a property that received a Special Focus Facility designation immediately prior to taking over, as well as the ejection of several buildings from a preferred provider network.
As a result, CareTrust reduced Trio’s rent on the properties by $4.2 million per year.
“They have fought back from these challenges and others, but this quarter, it became apparent that we could no longer view this portfolio’s performance as only a runway or timing issue,” Sedgwick said.
All that said, Sedgwick and Stapley framed the third-quarter portfolio cleanup as an overall positive, with the proceeds from the Metron and Trillium sales set to be deployed back into the REIT; the company also gained a deep “bench of backup operators” ready to step into any future distress.
“We’re pleased to say that we have significantly de-risked our portfolio in a relatively short period of time, and these issues are or very soon will be all behind us,” Sedgwick said. “The long-term benefits of these changes can’t be over-emphasized.”
Shares of CareTrust fell $0.96, or 4.5%, in Friday’s trading to close the week at $20.51.