CareTrust Pulls Off $36M Metron Sale, Doesn’t See PDPM Upheaval Ahead

CareTrust REIT (Nasdaq: CTRE) on Friday announced the successful sale of six skilled nursing facilities operated by Metron Integrated Health for $36 million, observed a slight uptick in skilled nursing pipeline M&A after a slowdown in the wake of the Patient Driven Payment model (PDPM), and pointed to reducing worry about a controversial plan to crack down on supplemental Medicaid payments.

The San Clemente, Calif-based real investment trust (REIT) announced that it had pulled off the Metron deal just about a quarter after CareTrust reported that the operator was about to return millions of Medicaid dollars that were improperly handled.

Back in November, CareTrust chief operating officer Dave Sedgwick admitted shock when Metron informed that they were looking to exit the operations of the properties.


”They later said they would no longer be paying Metron’s contractual rent of roughly $350,000 a month until we replaced them,” the CareTrust COO said during the company’s third quarter earnings call.

The REIT announced being pleased that the company closed on the $36 million sale of Metron’s six facilities on February 14, though the deal comes with a delayed payment: CareTrust received $3.5 million in cash, while offering short-term financing for the remaining $32.4 million at 7.5% interest. The REIT plans for the loan to be paid by March 31. 

MFAR: “Allaying Fears”

In response to concerns about the proposed Medicaid Fiscal Accountability Regulation (MFAR), which would bring tighter rules to state-based Medicaid supplemental payment programs, Sedgwick on Friday emphasized taking the Centers for Medicare & Medicaid Services (CMS) at its word in that they did not plan to decrease Medicaid reimbursements.


But when responding to a question about whether its existing portfolio could be impacted by the rule, Sedgwick pointed to an critical mass of resistance to the proposal, and named insurers, hospitals, and “even bipartisan opposition from governors to senators.”

“The public comment period closed on January 31, and CMS now has about 4,000 comments to go through before they decide whether to finalize the rule or change it,” he said, adding that states will have enough time to update their criteria and “change how they do things to show that there’s quality outcomes as part of the measurement, or whatever CMS was looking for.”

While the industry has rallied against the proposed rule, CMS administrator Seema Verma strongly defended the plan, emphasizing that it was not attempting to gut Medicaid funding in a blog post earlier this month.

Speaking Friday, Sedgwick noted that the program simply can’t take more spending reductions.

“Medicaid revenue, as you know, in skilled nursing is just not rich enough to cut. Medicaid knows that; it’s signaled that their intention is not to cut the Medicaid funding from this. And so we think it’s really an attempt for transparency and accountability that CMS wants to see,” he said.

CIO Mark Lamb also emphasized that the company does not factor in supplemental payments in its underwriting process.

PDPM: A Mixed Bag

CareTrust was hesitant to make hard and fast conclusions about how PDPM is impacting the industry, and suggested that there are winners and losers surrounding the change.

“There’s certainly anecdotal evidence that some providers have benefitted from PDPM as expected, with improved daily Medicare rates and lower therapy costs. We’ve also heard others have been hurt by it,” Sedgwick said.

He added that he doubts CMS will make major changes to ensure budget neutrality in the next several months, pointing to recent comments from American Health Care Association CEO Mark Parkinson — who asserted that there simply isn’t enough time for regulators to make a change before the next fiscal year begins October 1.

But he then added a caveat.

”We would be surprised if they [CMS] made a major change … this late summer [or] early fall. However, there’s precedent for being surprised by CMS. And so you can’t sleep on it. But … we agree that it would be surprising, based on limited information that they have so far, to make big changes,” he said.

As for the new model’s effect on deal flow, CareTrust indicated that the wave of sales many analysts had predicted — spurred mostly by operators looking to exit the industry rather than deal with the changes — has yet to arrive, with PDPM instead having a mostly chilling effect on dealmaking until operators see firm evidence of gains or losses.

After seeing a lag in nursing home sales, CareTrust executives observed slightly increased activity in the past few weeks, which may be attributed to owners beginning to feel the weight of PDPM.

“As Dave mentioned, we suspect that some SNF operators who might otherwise be sellers have been on the sidelines waiting to see how PDPM might shake out. We believe this is a temporary phenomenon that might be making deal flow a bit lighter at present,” Lamb said. “It certainly makes evaluation of the deals seem a bit more complicated in the short run. We’re working through that, and we have no reason not to expect to get our fair share of acquisitions this year.”

The REIT reported net income of $20.7 million in the fourth quarter of 2019, compared to $15.5 million in the year prior; for the entire year, CareTrust logged $46.3 million in net income, down from $57.9 million in 2018.

CareTrust stock was mostly flat in Friday’s trading, closing up $0.09 to $23.27, a gain of less than a percent.

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