‘A Busy, Busy Year’: NHI and CareTrust Execs Share REIT Outlook on Nursing Home Investment and Operations

The nursing home sector is on a positive trajectory, and real estate investment trusts (REITs) at the forefront of investments say that stability is favoring greater deal activity in the sector.

Despite challenges in staffing, rising operational expenses, and increasing regulatory burdens, particularly in certain states, executives from National Healthcare Investors (NYSE: NHI) and CareTrust REIT (NYSE: CTRE) expressed optimism about the sector’s future. They pointed out that as occupancy has steadily improved, agency labor use has decreased, and there are more opportunities for stable deals in regions with increasing Medicaid reimbursement rates.

As a result, both CareTrust and NHI have seen steady expansion in 2024.

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For NHI, its aggressive growth is underlined by its acquisition this week of a portfolio of 10 assisted living and memory care facilities in North Carolina for $121.3 million, marking the largest transaction for the Tennessee-based REIT since 2020.

Amid this growth, NHI intends to keep adding SNFs to ensure that skilled nursing continues to account for at least a third of its total assets, Kevin Pascoe, NHI’s chief investment officer, told Skilled Nursing News.

A rosy investment outlook favors NHI’s longer game plan for skilled nursing holdings, he said.

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“There are some headwinds that we’re mindful of, but we believe that there’s going to be skilled nursing into the future,” said Pascoe. “We’ve seen the number of beds decline over a number of years, but it is a needed venue for seniors in the health care continuum. So it’s going to continue to be a focus for us.”

Today, skilled nursing comprises 30% of NHI’s assets, a much smaller component of its business since its origins in 1991 when its entire investment exposure consisted of SNFs. NHI’s portfolio is made up of independent, assisted and memory care communities, entrance-fee retirement communities, skilled nursing facilities, medical office buildings and specialty hospitals.

Meanwhile, for CareTrust, SNFs have been and remain a primary focus, with its investments being predominantly centered on skilled nursing and accounting for more than 80% of CareTrust’s current holdings.

During SNN’s RETHINK conference in Chicago last month, Pascoe and Eric Gillis, senior vice president of investments at CareTrust, discussed their outlooks for skilled nursing facilities, sharing strategies for investment and insights into deal trends amid challenges facing skilled nursing.

Investment strategies

Both executives revealed that their investment strategies are evolving to incorporate more creative and relationship-based approaches.

“We’ve continued to invest in the [skilled nursing] sector – we like it,” said Pascoe. “So as we continue to grow, we want to make sure we’re adding additional (SNF) operating partners, continuing to invest in the space, and adding to the customer relationships we have now. But I think a big piece of business is to continue to attract customers who want to do business with you, invest in the space and grow those relationships over time,” Pascoe said.

NHI remains committed to strict underwriting criteria, focusing on properties that offer robust rent coverage, Pascoe said. However, he acknowledged that the increasing volume of investment activity, especially in stable skilled nursing facilities, is promising. He noted that NHI is actively exploring a diverse array of opportunities, including joint ventures and development lending.

“There’s a lot of big deals floating around,” said Pascoe. “Our pipeline of all the stuff we were looking at was $1.8 billion – not all of that’s going to be actionable. Anything that’s distressed on the skilled side, that’s not our cup of tea. But still, there’s a pretty good opportunity for what I’d consider stable skilled nursing investment.”

The federal staffing mandate and expenses related to it are a factor in finalizing a deal, Pascoe said. “We’re waiting to see where that shakes out,” he said.

And as for CareTrust, the REIT is also focused on building strong relationships and adhering to a rigorous vetting process. Gillis also emphasized the importance of building long-term partnerships with operators to capitalize on off-market opportunities and apply a more collaborative investment model.

“We are actively looking for more operators to grow and when we find them, we go through a pretty substantial vetting process with each other,” Gillis said. 

But in the last few years, CareTrust’s investment approach has seen some changes, Gillis said.

”We’re a different organization today than we were, say two to three years ago. We’ve become more creative in the way that we do our investments,” Gillis said. “You’re seeing us do a little bit more lending, and we call it lending with a purpose. We can typically track back to every loan that we’ve done that leads to real estate acquired afterwards. We do it so that we can gain relationships with operators or other investment organizations.”

At CareTrust, the last year has been the busiest for investments, Gillis said.

“We’re seeing some big portfolios, and we’ve participated in some of those big portfolios, and so that has been a little bit more than we have in the past,” Gillis said.

In contrast to NHI, CareTrust does consider adding mom-and-pops operators to the portfolio if an existing operating partner recommends them, but generally also looks for more stable operators. The trend has been favoring more stable investments as operators begin to benefit from higher Medicaid reimbursements rates in certain markets, he said.

“I would say that we’re seeing more opportunities that are close to stabilization, if not already stabilized, which is exciting, because in the last two years, it seemed like everything was just distressed,” he said. “When you look at some of the states that are increasing their Medicaid rates, we’re seeing a lot of deal flow [there], like in the mid-Atlantic and the Pacific Northwest … we still remain very active in the state of California. So, it’s been a busy, busy year.”

Based in California, CareTrust owns, acquires, and leases senior health care properties. CareTrust has expanded its tenant roster to 24 operators and has grown its real estate portfolio to 213 net-leased health care properties across 27 states, consisting of over 23,000 operating beds/units.

Operational expenses still suppressing margins

The NHI and CareTrust executives also shared several metrics that point to a recovery in progress.

For CareTrust, occupancy rates have completely recovered within its portfolio.

“In our SNF portfolio, our occupancy is higher than it was pre-pandemic, which is exciting to see. And so we’re seeing that it is now past recovery, and it continues to grow,” said Gillis.

As for NHI, Pascoe said: “Occupancy has rebounded. I wouldn’t say we’re quite back to where we were pre-pandemic, but it’s pretty close.”

Rent coverage ratios have also improved, averaging above 2.0 coverage, for CareTrust.

“That’s exciting to see that our operators are flourishing. They’re not worrying about having to pay their rent. They’re doing well with their facilities,” Gillis noted.

But the executives also indicated that while occupancy is improving, operators are still navigating challenges related to Medicare reimbursements in many states and overall margin compression.

And even though agency staffing is on the decline – with Gillis noting that use of agency staff seeing a 35% reduction – the overall operational costs are still a pressing issue that operators must address to maintain profitability.

Both executives remained concerned over rising operational expenses, which they noted are outpacing revenue growth.

“Historically, we were targeting maybe a mid-teens type margin [but] we’ve seen that come down probably a few hundred basis points at this point,” Pascoe said.

This, even as agency labor and overtime expenses have come down in NHI’s entire portfolio. At the peak of agency and overtime usage, these expenses represented 3% to 5% of revenue but have now come down to being below the 3% mark, Pascoe said. 

“A couple percentage points makes a huge difference. So that’s been a good gain to see in the portfolio, but there’s still a little bit of work to be done,” he said.