Skilled nursing operators should anticipate further distress in the coming months and into 2023, which will likely result in even greater divides among providers.
The winners and losers already are being sorted, as the latest round of real estate investment trust (REIT) earnings made clear. And unsurprisingly, strong regional operators are leading the pack.
Welltower (NYSE: WELL) and Sabra Health Care REIT (Nasdaq:SBRA) both transitioned and/or sold large portfolios to operators they believed were stronger partners.
LTC Properties (NYSE: LTC) has taken somewhat of a similar approach as it works to de-age its portfolio and redeploy capital into more strategic assets.
National Health Investors Inc. (NYSE: NHI) is also taking advantage of a normalizing seller’s market and pruning its portfolio of underperforming assets as it looks to be buyers in the coming years.
Some like Invesque (TSE: IVQ.U) have shrunk their involvement in nursing homes all together in favor of a primarily private-pay, seniors housing portfolio.
Looking ahead, the end of the public health emergency (PHE) sometime in 2023 should only accelerate the big sort that is happening.
I believe CareTrust REIT (NYSE: CTRE) Chief Investment Officer Mark Lamb said it best: “I think the end of the public health emergency … will be the end of the line for a lot of operators.”
While the industry may see further constriction, I also believe the best in class operators will only get stronger and that in turn will make the industry as a whole better able to weather any future storms.
Below are my takeaways from Skilled Nursing News’ coverage of 3Q REIT earnings calls.
The end of the road for some
As larger providers downsize and reframe their portfolios to focus more on market-based strategies, REITs will continue to look to partner with the best operators to make those transitions possible.
Sabra, for example, divided up a 24-SNF portfolio previously leased to operator North American Health Care Inc. to the Ensign Group (Nasdaq: ENSG) and Avamere Family of Companies.
Avamere, while operating across eight states, has a stronghold in the Pacific Northwest and has a portfolio entirely west of the Mississippi. And while Ensign is an industry giant, the company is well known for its locally-focused operations and region-specific structure.
The REIT considered other options for the transitioning SNFs, such as rent reduction, but Sabra leadership felt the option wasn’t in line with the portfolio’s performance.
In terms of the Sabra deal, Chief Investment Officer Chad Keetch said during the Stephens Annual Investment Conference that the team is excited to build that relationship in a market where Ensign’s foundation is strong.
“All of those are fantastic opportunities, with prices that we’re excited about and spread out [between] South Carolina, Texas, Arizona … backfilling within the geographies that we have, which is always our first priority,” Keetch said. “We love to grow where we exist, and there’s lots of room to continue to do that.”
Welltower CEO Shankh Mitra called the decision to transition and sell 147 ProMedica Senior Care skilled nursing assets to Integra Health a “win” for all parties involved.
“ProMedica wants to focus on its core business, and wants to be in the higher margin business … It’s a very significant improvement in their credit. For Welltower it’s obviously a great day for some value realization as well as obviously taking this portfolio to the hands where we can create another round of very significant upstep of values. For Integra, they’re coming in at a very attractive basis and obviously they’re creating the value that they will share the upside with us,” he said during the company’s Q3 earnings call.
ProMedica agreed to surrender its 15% interest in the SNF assets involved in their existing 85/15 joint venture with the real estate investment trust (REIT) and is contributing nearly $500 million in a working capital consideration.
The transaction will also bring ProMedica Senior Care’s remaining portfolio, which includes 10 non-Welltower SNFs, back to profitability.
Mitra also specifically noted during the earnings call that unlike senior living and other businesses where Welltower is more familiar, the REIT has no issue relying on Integra and its regional affiliates to execute on the necessary operational improvements to drive margins.
LTC Properties recently announced a $62 million joint venture with PruittHealth to purchase three nursing homes in Florida, making the first time the REIT and operator are working together.
The three facilities were constructed between 2018 and 2021 with a combined licensed bed count of 299 – primarily offering private rooms.
This deal, and LTC’s $52 million purchase of four newly built Texas facilities in 2Q, to be operated by Ignite Medical Resorts, align nicely with the REIT’s plans to shift its portfolio.
The common theme in these moves across different REITs is a deepening reliance on strong regional operators, while the ProMedica deal sees another industry giant radically shrink. Golden Living’s transition to Brickyard and Consulate’s pivot to a regional focus are other recent examples of this trend.
2023 could be ‘the best year of growth’ for skilled nursing
Industry headwinds are real, with labor shortages and inflation among the challenges cited across the REIT earnings calls.
But the messages were not entirely dire, with payment rates being one positive.
Some providers operate in states that have already increased Medicaid payments permanently, or extended Covid-related bumps into the next year, and will benefit compared to those that do not.
For the industry as a whole, operators were granted a reprieve as the 2.7% Medicare rate increase that went into effect in October was better than initially feared.
While recognizing the expected challenges ahead, Stifel analysts noted that 2023 could be a strong year for growth in skilled nursing.
Ensign has long been seen as a very strong operator that only continues to grow. The San Juan Capistrano, Calif.-based company is now likely the largest nursing home provider in the country and Keetch calls its current acquisition strategy “opportunistic.”
During Q3 2022 alone, Ensign acquired 17 new SNFs with 12 in Texas, two in South Carolina, two in Arizona and one in Nevada, marking one of the biggest acquisition quarters in years.
“At a time when economic uncertainties are high, we expect continued outperformance from Ensign’s experienced management team, localized operating model, strong balance sheet and disciplined capital allocation,” Stifel analysts wrote in a note published Oct. 26.
And Ensign is not the only one expected to flourish in 2023.
Like CareTrust, LTC Properties also expects valuations to come down further in the coming months, as operators exit the space voluntarily or are forced to make difficult decisions and make deals at prices that are more reflective of historical cap rates and price per bed valuations.
“We’re seeing more actual acquisition opportunities in markets that we and our operators are looking to grow in. Unfortunately yet predictably, sellers still believe they’re going to achieve peak pricing that they could have received in 2021, in early 2022. It remains to be seen how long this period of price discovery lasts,” CareTrust’s Lamb said during the company’s earnings call.
By the middle of next year, REITs should be in a good position to make more investments and contribute to the growth of strong operators, further establishing a new pecking order in terms of operating companies that boast both scale and quality.
Companies featured in this article:
Brickyard Healthcare, CareTrust REIT, Consulate Health Care, Ignite Medical Resorts, Invesque, LTC Properties, ProMedica, Sabra Health Care REIT, The Ensign Group, Welltower