Medicaid rebasing efforts are driving dealmaking activity for the skilled nursing sector at the moment, as enhanced federal funding dries up and operators scramble to account for rising costs of care and a floundering workforce.
That’s according to executives with CareTrust REIT (NYSE: CTRE). James Callister, chief investment officer , said during the company’s latest earnings call that larger portfolios have been up for grabs in states where the Medicaid rate remains very low, with other REITs and private equity owners disposing of assets.
The San Clemente, Calif.-based REIT appears to be in the thick of such decision making, with one of its skilled nursing operators – outside of its top 10 operators – struggling in part due to Iowa’s lack of enhanced Medicaid funding.
CareTrust assets consist of 154 skilled nursing facilities, 24 multi-service campuses, and 26 seniors housing buildings. Properties are managed by 19 operators across 23 states.
“Iowa has so far has really proven to be one of the least supportive states in the country for nursing home providers. Unlike other states, they’ve refused to pass on any of the FMAP federal funds,” said CareTrust CEO David Sedgwick. “However, there’s reason for hope. There’s a Medicaid rate increase going into effect this July [for Iowa], but for some, it’s just going to be too little too late.”
For context, 13% of U.S. nursing homes that closed in 2022 were in Iowa, according to an article published by RadioIowa.
M&A activity has always been strongly influenced by state-specific factors like reimbursement, labor availability and regulatory tone, and the current situation reflects these same dynamics, Sedgwick said in an email to Skilled Nursing News.
“Historically, states fall in and out of favor for investors depending on a host of factors,” he wrote.
Medicaid uncertainty and working with operators
The Iowa operator — which CareTrust execs did not name, but is managing the former Trillium portfolio — accounted for 2.8% of rent as of Dec. 31. Due to partial payments, CareTrust applied and exhausted the operator’s $1.2 million security deposit; no rent was paid in January or February of this year.
Just a week ago, the Iowa operator announced a change in CEO, asking CareTrust to work with them on a plan for the future.
“We’ve just started active discussions with them about the best path forward, and we expect to have a concrete plan to share with you next quarter,” Sedgwick said during the call.
He did not comment on whether the CEO change could create an opportunity to sell these assets, but the company has backed off on disposition plans announced last year.
The company’s original 2022 disposition plan involved 32 assets selected for sale or restructure. CareTrust decided to sell 13 properties and retain 14, leaving 5 facilities on the market. Two of those five are under contract to sell, the company said in a statement prior to the Q4 earnings call. The properties being retained are all senior living communities.
CareTrust’s leaders generally were upbeat on M&A trends.
“The good news is that even with the elevated cost of capital, we can still make accretive investments and intend to do so and positively, as we mentioned last quarter, the flip side of the tighter credit market continues to be a tipping of the scales in our direction for brokers and sellers who are looking for certainty to close,” Sedgwick said.
Current deals revolve around assets that are deemed nonstrategic to the seller or are at some stage of operational distress, Callister said. Other smaller operators are simply looking to sell and exit the business after the pandemic.
Distress in the sector could accelerate with the end of the public health emergency (PHE) on May 11.
“We expect the upsurge in deal flow to continue, with sellers placing an emphasis on certainty to close and low execution risk,” said Callister. “We are poised to pursue actionable acquisition opportunities with a focus on those states with favorable Medicaid rates and access to labor.”
CareTrust is also looking for markets with a “strong bench” of existing operators while also pursuing new relationships with operators the team has “long admired.”
The REIT’s pipeline currently sits in the $100 million to $125 million range, and is made up primarily of skilled nursing opportunities.
CareTrust is looking at one- and two-facility deals, along with small and medium-size portfolios that allow the team to break into new states, or expand in states where they have a limited presence.
Macro winds and quarterly performance
For Q4, FFO per share fell in line with expectations from BMO Capital Markets, the firm said in an investor note, but “questions persist” amid the ongoing labor shortage and PHE sunsetting.
In terms of staffing challenges, Sedgwick expects a recession – if and when it happens – to drive people back to work.
Occupancy numbers have inched back for its skilled nursing assets, currently sitting at 74% in Q4 and still below the 78% pre-pandemic mark.
Sedgwick spoke briefly about the link between earnings before interest, taxes, depreciation, and amortization (EBITDA) and the end of the PHE. This could be a “nonevent” if providers are already operating at the “historical skilled mix numbers.”
It’s hard to answer for the industry, or on an average, with funding and policy being so state-specific.
“On the whole, it should have a negative effect on lease coverage,” Sedgwick said of the PHE ending. “There are going to be those who, theoretically, their skilled mix will come down a little bit. If occupancy stays flat, then by definition, their margin is going to be eaten away a little bit.”
CareTrust beat the Street’s expectations for normalized funds from operations (FFO) per share and normalized funds available for distribution (FAD) by one cent each for the fourth quarter.
Still, no annual guidance was provided given uncertainty around when rent will be received for retained facilities, and the outcome of the Midwest SNF operator.
Sedgwick said he’s hopeful they will be able to issue guidance in the second quarter.
CareTrust reported 95.5% if contractual rent collected for the quarter, with net income of $14.4 million and normalized FFO at $37 million, or 38 cents per share. Normalized FAD was $39 million for the quarter, or 40 cents per share.
Shares of CareTrust were up 1.12% at the close of regular trading on Friday, at $19.91 per share.
Companies featured in this article:
BMO Capital Markets, CareTrust REIT, RadioIowa, Trillium Healthcare
