CareTrust REIT (Nasdaq: CTRE) has a new CEO and is embarking on what leadership is calling a pivotal year as the company takes steps to mitigate the risk in its portfolio and pursue new avenues, while remaining active in its core business markets.
It’s been a busy few months for new CEO David Sedgwick. The company announced in its latest earning call last month that it would not only be selling, re-tenanting or repurposing 32 of its assets, approximately 10% of the real estate investment trust’s contractual cash rent, but it would be doing so – at least in part – by diving into the behavioral health space.
Sedgwick told Skilled Nursing News that its investment into the behavioral health sector is not a pivot away from the skilled nursing or seniors housing space.
“Those asset classes will continue to be core to who CareTrust is, but the only pivot is that we’re expanding our box to include behavioral health which also makes 2022 an important year for us,” he said.
The San Clemente, Calif.-based REIT also has plans to partner with a “top lender” in the space to help fund the growth outside of the normal REIT lease relationship. Sedgwick declined to disclose further details on that during its conversation with SNN.
Sedgwick, who joined the CareTrust team in 2014, previously served as its president and chief operating officer before being named CEO back in December. He succeeds Greg Stapley, who currently serves as executive chairman for the next few months during the transition.
CareTrust is now also contending with the Biden administration’s recently unveiled nursing home reform proposals, and what those might mean not only for their tenants but themselves as a financial backer in the industry.
Part of Biden’s proposed reform calls on federal agencies to examine the role private equity, real estate investment trusts and other investment ownership plays in nursing homes.
Despite this specific mention of REITs among the White House’s desire to dig deeper into the role investment plays in the skilled nursing space, it did not give Sedgwick pause.
That the triple net lease REITs and nursing homes operate under creates an “impenetrable wall” between the two, Sedgwick told SNN.
Sedgwick likened the relationship between a REIT owning a skilled nursing facility to an operator who owned a property themselves but had a mortgage with a bank.
“The bank’s control over operations is zero, a REITs control is zero – it’s just a way to finance the real estate. So if you have a problem with a REIT then you have a problem with an operator that owns the building themselves with a mortgage,” he said.
Overall Sedgwick called the White House’s nursing home reform “misplaced” and “completely impractical”, especially when the skilled nursing industry is facing what he considers to be the toughest labor environment in his 20 years in the business.
Nursing home industry leaders alike have objected to several elements of the proposal, as the call for CMS to set nationwide minimum staffing requirements is being roundly criticized by voices in the industry.
“At a time where labor costs are as high as they are and great staff is in as short supply as it is, to then try to pound the sector with the hammer of minimum staffing ratios and things like that just seems completely out of touch with realities on the ground,” he said.
A solution to the staffing crisis
While there’s no switch to flip or magic wand to find 500,000 nurses overnight, Sedgwick sees a meaningful solution to stem the tide of the ongoing industry-wide staffing shortage – and it’s not requiring minimum staffing hours.
Biden’s nursing home reform proposal currently includes a measure that would establish a federal minimum staffing standard – something that does not currently exist. The Centers for Medicare & Medicaid Services has said that it would propose a new minimum staffing standard within one year.
Instead the industry could turn to bringing in nursing staff from overseas, if the federal government can remove already existing “limits and roadblocks” to getting them to the United States.
Nursing homes have lost nearly 238,000 nursing home employees – amounting to 15 percent of its total workforce – since the start of the COVID-19 pandemic, according to Bureau of Labor Statistics data.
Sedgwick said when he worked at The Ensign Group, he went to the Philippines and in the course of one week he interviewed 190 nurses and extended offers to around 95 of them.
But their paperwork sat in the immigration process for more than two years, he said.
“The process is faster now, the situation is better now but it still takes too much time. There should be no limits for healthcare, for nursing given the crisis that we’re experiencing, and that shouldn’t just be for the Covid era,” he told SNN.
The year of the turnaround
The most active players in the market in the next year will be those who are not afraid to do some turnaround or value-add type of work, according to Sedgwick.
He said while that has not historically been something CareTrust has spent a lot of time on, they may be more open to taking advantage of the seller’s market in that regard.
“We can provide them a ramp for their lease payments so that they have plenty of time to execute on their plan [to turnaround a facility], and playing in that space will allow us to get in at the right price and basis for our operators to have long-term success with,” Sedgwick said.
CareTrust’s pipeline sits at $75 million to $100 million, Chief Investment Officer Mark Lamb said during the REIT’s fourth-quarter 2021 earnings call, made up mostly of skilled nursing facilities and a few seniors housing assets.
Overall, Sedgwick believes CareTrust is poised to reinforce its foundation going into the next year and beyond, touting its portfolio strength as evidenced by rent collection throughout the COVID-19 pandemic.
CareTrust collected 100% of contractual rents during Q4, and 93% of rent for January of this year, according to its earnings call.
“I think as we shore up some of the vulnerability in the portfolio, our foundation will be so strong to grow from that it’ll be a really exciting growth opportunity for the many years to come,” Sedgwick said.
Companies featured in this article:
CareTrust REIT, Centers for Medicare & Medicaid Services, The Ensign Group
