Moody’s: PDPM Has Potential to Stabilize Rents for Skilled Nursing REITs

Skilled nursing facilities will become more financially stable under the new system for Medicare reimbursement – which is a good sign for their landlords, according to Moody’s.

Specifically, the stabilized cash flows under the Patient-Driven Payment Model (PDPM) are set to improve real estate investment trusts’ (REIT) credit standing, allowing more investments in this sector, Senior Credit Officer Lori Marks wrote for Moody’s Investors Service  in Commercial Property Executive.

The New York City-based rating agency has rated Sabra Health Care REIT (Nasdaq: SBRA) as Ba1 stable, CareTrust REIT Inc. (Nasdaq: CTRE) at Ba2 stable, and Omega Healthcare Investors Inc. (NYSE: OHI) as Baa3 stable, with the Baa category “judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics,” according to Moody’s rating definitions. These three REIT’s have invested in nursing facilities in predominantly triple-net and long-term leases, and the boost from PDPM should facilitate stable rent collection on an ongoing basis, Marks said.

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Moody’s hasn’t been as optimistic for every skilled nursing entity. Non-profit health system ProMedica, for example, was downgraded recently by the agency, while the ratings agency Standard & Poor’s dropped its rating after the Toledo, Ohio-based health system and hospital acquired the operations of HCR ManorCare, a massive deal completed in July of 2018. But for the industry overall, Marks anticipates that PDPM will be a win for both REIT landlords and SNF operators, and that the model presents potential for savings if implemented correctly.

Even with the trending challenges of an ongoing labor squeeze and pressure to decrease resident lengths of stay in SNFs, Moody’s still affirms better reimbursements under PDPM, and estimates that margins will improve as time goes on.

The Centers for Medicare & Medicaid Services (CMS) finalizing the highest rate increase for SNF operators in the past three years is another reason to be optimistic, according to Marks. And while the 2.4% increase remains modest, this increase will enhance prospects for stable cash flow.

Overall, Moody’s believes that PDPM will only affect revenues neutrally, but ultimately allow operators to ensure more efficient care as therapy spending is decreased. With group and concurrent therapy capped at 25% of patient’s treatments, more opportunities for flexibility in therapy can increase efficiency, Marks said, while fewer assessment requirements will also allow for better margins.

Although touting PDPM as beneficial for the financial and clinical health of these facilities, risks do remain, Marks wrote. Mistakes among less stable operators could negatively affect rents for their REIT landlords.

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