The skilled nursing bump in Medicare rates was a “positive surprise” for leadership at Invesque (TSE: IVQ.U), as most in the industry expected payment rates to decrease heading into next year.
Bryan Hickman, senior vice president of investments at Invesque, said the change – in the form of a 2.7% increase to Medicare payment rates, effective Oct. 1 – was federal acknowledgement of inflationary pressures on the industry.
“Medicare [is] recognizing that there is inflationary pressure associated with patient care,” Hickman said during the company’s second quarter earnings call Wednesday. “Medicare would prefer to hold rates than reduce them. They do need to pay the providers to make sure they’re able to care for the residents.”
The Centers for Medicare & Medicaid Services (CMS) also spread expected cuts to the Patient-Driven Payment Model (PDPM) over two years as part of the final rule.
Currently, skilled nursing represents roughly 34% of Invesque’s net operating income, while seniors housing makes up 58% and medical office buildings only 2% with recent dispositions. Portfolio assets total 79 properties across 18 states and two Canadian provinces; in December 2021, Invesque reported 102 properties.
When Invesque went public in June 2016, skilled nursing made up 75% of its portfolio; the change is a reflection of the company’s continued move toward private-pay seniors housing.
Invesque is a Canadian-listed company with U.S. headquarters in Carmel, Indiana, focused on seniors housing, skilled nursing and medical office building investments. Most of its properties are leased to third-party operators on a long-term basis.
State reimbursement and occupancy
Movement to bump up Medicaid rates, Hickman said, is being seen in some states as well. An example is Illinois, with its $700 million overhaul to its program, with an estimated 10% to 11% increase in rates.
“All of that, again, is to say that the states would probably rather have flat or no increases, but they recognize that they need to pay the operators to ensure quality patient care,” added Hickman. “Those rate increases are effective either July 1 or Sept. 1, so we haven’t seen those roll through our results yet.”
Other states such as Texas, Kentucky and North Carolina mark some of the highest Medicaid percentage increases at 12%, 12% and 15%, respectively. The increases are slated to last at least through the end of the year.
In an earnings call for Sabra Health Care REIT (Nasdaq: SBRA) last week, CEO Rick Matros said he expects SNF occupancy issues to continue driving state Medicaid movement this year and into 2023.
Overall occupancy for the sector has stagnated as labor issues force facilities to limit referrals. In the last six months, about 10% of Montana’s nursing home beds were taken offline with the closure of seven SNFs, while Iowa saw 11 nursing homes close in the past year.
Invesque’s skilled nursing portfolio has experienced much slower occupancy recovery compared to its other asset classes, Invesque CEO Scott White said, noting that the industry continues to grapple with the same increased expenses seniors housing has but with less control over rent.
“A lot of the skilled nursing side of the business … is government reimbursement, or Medicare and Medicaid, which doesn’t give the operator as much control to raise rents,” White said.
Company SNF assets remained flat at 74% through March, while its seniors housing operating portfolio, or SHOP, stayed at 76% for the same time period. Invesque reports its triple net leases, which are primarily made up of its SNF assets, one quarter in arrears, according to CIO Adlai Chester.
“The operating results of our triple net portfolio continue to struggle as operators attempt to rebuild census and manage costs during what is one of the most challenging staffing environments our industry has ever seen,” added Chester.
By contrast, the company’s captive seniors housing operating and management company Commonwealth Senior Living continued to see positive occupancy momentum in the second quarter, hitting pre-pandemic levels a couple weeks ago, White added.
The 28 Commonwealth properties saw a 500-basis-point increase from January to June.
Invesque’s funds from operations (FFO) missed BMO Capital Markets expectations but fell in line with general consensus, the firm said in a preliminary note on Wednesday. FFO dropped to 11 cents per common share compared to 18 cents during 2Q of 2021. Revenue during the quarter was $49,732 with a net income loss of $7,681.
Second quarter numbers were driven by higher-than-expected finance costs, partially offset by lower net operating income and administrative expenses overall, according to BMO analysts.
Moving toward private pay
Invesque continued to shift its focus toward private-pay seniors housing during the second quarter, divesting skilled nursing properties and medical office buildings in the process.
As part of that strategy, Invesque in April sold its Bridgemoor Transitional Care portfolio for $52 million. The four Texas facilities totaling 339 beds were owned through a joint venture, with Invesque holding 66% ownership interest.
“This, coupled with the sale of our Ensign portfolio last fall, represents a large step in the reduction of our skilled nursing exposure,” White said.
Invesque sold a five-property portfolio to The Ensign Group for $93 million, marking an end to the owner-operator relationship between the two companies.
Keeping in line with its measured move toward private-pay seniors housing, the company at the end of July closed on the sale of substantially all of its medical office buildings in Canada for $94.3 million CAD. The company also sold a medical office building in Orlando, Florida for $9.85 million, leaving only four such assets in the company’s inventory.
Invesque looks to be completely out of the medical office sector by the end of next year, according to White.
“This proportion will continue to increase as we look to complete the disposition of our medical office assets and identify skilled nursing facilities that would achieve attractive valuations,” added Chester.
Other dispositions during the quarter include the sale of two New York seniors housing communities with 99 units total for $19.2 million and two 55-plus communities, also in New York, for $10 million.
Invesque has sold $292 million of its assets over the last 12 months, and $193 million since the beginning of the year.
Companies featured in this article:
BMO Capital Markets, Bridgemoor Transitional Care, Invesque, Sabra Health Care REIT, The Ensign Group
