While much of the real estate investment trust’s third quarter activity was in its much larger senior living portfolio, company officials outlined several positive developments affecting nursing home holdings.

“I’m pleased to report another strong [quarter of] operating results, which continue to exceed our expectations,” CEO Shank Mitra said during a call with investors Tuesday morning. “Our senior housing portfolio posted another quarter of exceptional revenue growth, which continues to approximate double-digit levels, driven by both strong pricing power and occupancy build.”

On the senior housing side, occupancy acceleration brought Welltower-affiliated properties to their highest level over the last two years: 81.8% for facilities the REIT operates and 80.9% for facilities the REIT leases. In skilled nursing, average occupancy hit 80.3% in the third quarter.

Ohio-based Welltower now has 258 long-term care and post-acute facilities with a combined 32,265 beds, according to supplementary information shared along with third-quarter earnings information this week.

So far in 2023, the company has purchased 24 LTC/PAC facilities, representing nearly 2,900 beds, at an average price of $140,000 per bed. Of the $2.05 billion it has spent so far this year overall, Welltower has invested $405 million in LTC/PAC.

The company is focused on buying assets with occupancy rates in the 70% to 80% range, giving those places room to build, Mitra said.

“From a capital allocation standpoint, we have never been busier,” he added. “Last quarter we spoke about a pipeline of $2.3 billion. We closed $1.4 billion in Q3, and roughly another $900 million in October. Additionally, we have another $1 billion of deals just about to cross the finish line. Beyond these billion dollars of investments under contract, our pipeline remains large and near-term actionable. But the execution of these deals will depend on our access to capital.”

Mitra said about 80% of the pipeline deals are in the senior living sector, with some “creative opportunities on the skilled side” too.

Welltower has reduced its expenses too, company leaders said. Much of that has to do with staffing, with the provider moving to eliminate agency where possible.

“Our focus on materially reducing agency labor improves both the customer and employee experience, as both are benefited by permanent high-quality employees, compared to the random agency employees lacking relationships with our customers and knowledge of the community systems and processes,” said COO John Burkart.

“Additionally, eliminating the agency or middlemen enables us to ensure the hard working people at our communities receive a fair compensation package with vacation and benefits as well as competitive pay, and our shareholders benefit from the reduced leakage to the agency company owners,” Burkhart added.

Mitra added that employee turnover is coming down “significantly.”

“We are seeing that overall availability of employees who want to be part of our business and part of the communities is increasing significantly,” he said. “And we are seeing that our operating partners are getting better using technology and other resources to attract talent and keep them in the business. … Whenever you get hit by a crisis, people figure out ways to do things better. Every crisis makes the business better if it survives, right? And that’s what we are seeing.”

One area the company has little interest in? That would be starting new developments on either its skilled or senior living sides. Mitra called any such moves too risky to consider, especially given the current price of construction.

Average monthly occupancy among skilled nursing properties in the company’s portfolio was 73% in September, compared to 72% in June, and 73% in March, said Clint Malin, co-president and chief investment officer, on Friday. By comparison, it was 71% in September 2022.

The REIT’s average skilled nursing occupancy in 2019, before the pandemic hit, was approximately 80%.

“Recent industry reports have … shown that current indicators point to a return to pre-pandemic occupancy levels by the end of 2024,” explained LTC Properties Chairman and CEO Wendy Simpson (pictured) during the company’s third-quarter earnings conference call Friday.

“While we cannot predict specific timing, we agree that the industry is making progress towards that goal,” she added. “Additionally, [temporary employment] agency usage is trending down in certain cases and the labor market is strengthening for operators in many areas.”

She tempered those comments by acknowledging that operators can still expect “some challenges” connected to “inflation, insurance premiums, litigation and SNF minimum staffing requirements, which pending the release of the final rule, will take several years to implement.”

Other positive market influences, she said, include the higher-than-originally-anticipated net 4% Medicare pay hike that kicked in on Oct. 1 and Medicaid increases at the state level that are putting some skilled nursing operators in a better position “to begin the improving margins.”

Simpson noted the company has been studiously working to reduce the average age of the properties in its portfolio while creating operator diversity and maintaining a balance of private pay and skilled nursing. Private pay occupancy also has continued to increase, rising to 85% in September, notably higher than the 82% and 81% rates registered at the end of the previous two quarters. The current rate sits within grasping range of the 2019 pre-pandemic rate of 87%.

Reasons for optimism

Overall, Simpson expressed an upbeat outlook.

“Bank lending is in flux, maturities are coming due for operators at a brisk pace and interest rate increases are causing anxiety,” she explained. “We think this environment favors REITs, especially those like LTC who maintain a conservative investment strategy and provide customized solutions geared toward the needs of operators.”

“We remain a patient investor,” added Malin, referring to LTC’s merger and acquisition strategy. “We are watching to see what happens with respect to pricing as current loans come due and owners don’t have the resources to refinance. Broadly speaking, we are hearing that banks are being more selective about seniors housing and skilled nursing investments potentially leading to more opportunities for LTC.”

He explained that goals for its Prestige Healthcare properties, a Michigan-based skilled-nursing heavy portion of the portfolio, remain on track. LTC Properties deferred $900,000 in interest payments owed by Prestige during the third quarter.

“The real story for Prestige is building back census and improving operations,” Malin said. “We’ve afforded them the ability to have a lower current pay while they’re doing that. And in addition to our participation in the retroactive Medicaid payments in exchange for implementing the current rate, LTC will be participating in 50% of the excess cash flow beginning January 1, 2025.”

He said any of that will be added into the letter of credit to provide “more security” and that it would be used to pay down accrued interest.

“We’re giving them a 2.5-year runway to make improvement in operations and improve margins,” he explained. “We fully expect to receive the contractual interest payment, not only in ’23, but in ’24 [and] 2025 as well.”

In other skilled nursing related-news, Pam Kessler, the company’s co-president and chief financial officer, said it expects to receive $30 million in the first quarter of 2024 connected to the payoff of a mortgage loan secured by a 189-bed skilled nursing facility in Louisiana.

More highlights and figures about LTC Properties’ third quarter can be found in this information sheet.

McKnight’s Senior Living’s coverage of the earning call also is available.

The move appears to be paying off with the second-quarter acquisition of 12 new facilities, including seven nursing homes and one skilled nursing/assisted living campus; six of those properties are being run by operators new to CareTrust.

“For CareTrust, the choice of operator has always been the most important consideration for new investments,” President and CEO Dave Sedgwick (pictured) said during an earnings call. “We are thrilled to welcome six new operators in the quarter. That deeper bench opens up new markets, new opportunities for investment. We are eager to help grow these relationships and continue to expand our existing operator relationships as well.”

Among the new operators is Links Healthcare Group, which is managing a four-property Southern California portfolio that CareTrust picked up in June. It includes 450 skilled nursing beds and 20 assisted living units.

Links, which operates 16 skilled nursing and senior housing communities, signed a 15-year master lease with two, five-year extension options. CareTrust said it expects to collect $6.8 million in rent from the operator in year one, $7.6 million in year two, and $8.9 million in year three.

More new operators could likely be called into deals, Sedgwick added later, noting that staff had been tasked with looking for off-market deals and additional “best-of-breed” operators.

Overall revenue was up $1.6 million to $47.7 million in the second quarter, and the REIT made about $200 million across seven property packages and a mortgage loan.

“Investing roughly $200 million at our historic yield across eight transactions with six new operators in one quarter represents some of the best work done in that short amount of time in our history,” Sedgwick said.

Sedgwick said the latest best of investments were strongly influenced by lending activity the REIT took last year, when there were fewer desirable acquisition opportunities. Of the roughly $200 million invested in the quarter, Sedgwick said $128 million was an indirect result of last year’s lending activity.

“The first half of the year was extremely busy,” Sedgwick said. “We are going into the second half of the year with ample dry powder to continue to grow the business and set up the company for a return to growth in 2024.”

Chief Investment Officer James Callister said the REIT had planned to put $215 million out this year, but leaders “don’t feel like we are done.”

“Overall deal flow remains strong, with a pace relatively unchanged from last quarter,” he said. ”We continue to opportunistically pursue deals where we feel our access to capital, low execution risk and reputation as a quality transaction partner make us a particularly attractive buyer.”

The investment pipeline includes about $150 million in additional skilled nursing options, CareTrust said in a statement announcing its financials.

Sedgwick also said the REIT had internally listed a delinquent operator that accounts for approximately $5 million in annual rent as “held-for-sale,” and is currently negotiating a sale of the properties.

For additional coverage of this earnings call, see McKnight’s Senior Living and the McKnight’s Business Daily.

“The year-over-year increase is primarily the result of timing related to operator restructurings, revenue from new investments completed in 2022 and 2023, partially offset by asset sales completed through that same time frame,” said Chief Financial Officer Robert O. Stephenson.

Some of the surprise strength came from skilled nursing provider LaVie Care Centers, which paid $16.9 million in rent ($2.5 million for April and full rent of $7.2 million for both May and June) in accordance with restructuring agreement terms disclosed in the first quarter. 

“Restructuring discussions, including the sale and release of additional facilities, are still ongoing, and the company anticipates the additional restructuring activity to be completed in the next several months,” the REIT noted. “The company expects LaVie will continue to pay $2.5 million per month until the additional restructuring activities are completed.”

To date, 13 facilities have been divested. Another 23 are in the process of being sold or released, most of them expected to be transferred in the fourth quarter of 2023, Chief Operating Officer Dan Booth said.

“The expectation is that their cash and their liquidity is going to go down until those transitions occur,” he added. “Like with any transition that involves a sale, they take a while and there is a lot of lead time running up to that. There are a lot of third parties that we have no control over. So, the expectation, at least for right now, is that in the third quarter, we will see that reduced rent amount.” 

Omega agreed to allow LaVie to short-pay rent by approximately 66% during the third quarter. But when the restructuring is completed, Pickett said, he expects “a significant increase in cash rents from the current agreed upon partial rent payments.”

Booth said that many of the facilities Omega and LaVie are in the process of transitioning are in Florida. 

Megan Krull, senior vice president of operations, told analysts that operators in the state were facing mixed conditions, given its continued “severe” staffing shortage and operators’ reliance on agency. But she also noted that Florida provided for up to a 5% rate increase starting Oct. 1.

“While much of the Florida rate is based on quality indicators, meaning that not all operators will see this large of an increase, it does represent somewhat of a trend in rate settings where more and more states are tying reimbursement increases to quality measures,” she said. “Assuming this is done in a thoughtful manner, this is something that we welcome, however, it should never fully replace increases tied to the inflationary environment.”

For additional coverage of this earnings call, see the McKnight’s Business Daily.

The US’s largest nursing home company, the Ensign Group, is riding high on second-quarter 2023 results, with continued improvement in occupancy, skilled revenue, skilled days and managed care, despite ongoing labor market challenges, company executives reported in a Friday conference call.

The San Juan Capistrano, CA-based holding company is having yet another busy acquisition year and is currently transitioning 45 recently acquired operations. Those include 20 skilled nursing properties acquired from Sabra Health Care REIT, and formerly leased to North American Health Services, a transaction that was completed in February.

Its second-quarter share values were up over the same quarter of 2022, with diluted earnings per share for the quarter at $1.12 and adjusted diluted earnings per share $1.16, increases of 10.9% and 14.9%, respectively. Net income for the period was $64.0 million and adjusted net income was $66.3 million, increases of 10.9% and 15.4%, respectively, compared to the second quarter 2022.

Now, the company is training its sights on continued growth opportunities. The company expects to announce a “handful of new acquisitions” in the very near future, according to CIO Chad Keetch, with a focus on same store and transitioning operations within its existing markets, and that more opportunities will arise near the end of the year.

“[W]e may never have seen as much potential to drive organic growth across our portfolio than we do right now,” CEO Barry Port said during the call. He said he foresees numerous opportunities to improve labor and drive the company’s occupancy and skilled services mix as the company transitions its newly acquired operations.

Skilled mix 

In the second quarter, skilled mix for both revenue and census remained elevated compared to pre-COVID levels, “showing just how important high quality post-acute services are within the continuum of care,” Port told investors.

Skilled mix revenue and skilled mix days for same store operations grew by 8.8% and 5.6% in second quarter 2023, respectively, over the same quarter 2022. Better care coordination, increased capabilities and strong clinical outcomes has factored into increased managed care census and revenue increases as well, Port reported.

The company’s operators are becoming more adept at ensuring that they have the level of services that attract high-acuity patients, and Port said that he foresees more growth in skilled mix and an increase in sicker patients leading toward slightly higher 2023 year-end margins.

Lower turnover, sustainable demand

Ensign’s operators had fewer admissions in the second quarter, which Port attributed to summer seasonal factors that impact patient flow. But occupancy has remained strong, he added, with a same store rate of 78.5% as of the end of the quarter, an increase of 3.97% over the same quarter a year previous.

The company is on a path “to reach and eventually exceed our pre-COVID same store occupancy of 80.1% as we move into the higher admission months of fall and winter,” Port said.

It also is upbeat about undeniable labor shortages, with Port forecasting continued improvements as new operators absorb Ensign’s culture. He noted lower turnover rates and said that the use of third-party nurse staffing agencies had decreased for the sixth month in a row as of June 30. 

The company has had an “intense focus” on staff retention efforts since the beginning of 2022, with shared best practices behind its strategy to remain an employer of choice, Port noted.

“This continued growth in skilled mix demonstrates the increasing and sustainable demand for skilled post-acute services, including within the context of our managed care patients,” he said.

Total skilled services revenue for the quarter increased 25.9% to $884 million from the prior year, and total skilled services segment income was $117 million, or an increase of 14.4% over the prior year quarter.

Medicare rates

Although providers have had no news on the anticipated federal minimum staffing rule, a positive reimbursement rate environment has provided some “extra clarity” for the second half of the year, CFO Suzanne Snapper added. The company expects the federal net Medicare rate to increase by 3.5% starting in October, and most states it operates in have adjusted their rates to offset the end of the COVID public health emergency that ended in May, she said.

“The combination of a positive rate environment and a slowing of inflation in some of our biggest costs, including labor, will add to the operational momentum we continue to generate as we focus relentlessly on fundamentals,” she explained.

That includes Kentucky-based Signature Healthcare, which sold off 24 non-Sabra facilities, closed two others and significantly reduced its corporate footprint last year, Matros revealed during a quarterly earnings call.

As of Dec. 31, 2022, Sabra supplemental data showed the coverage ratio for the 45 buildings Signature operates for Sabra had dipped to 1.1 times, down from 1.4 times on Sept. 30, 2022. Coverage is typically used to show how easily a company could pay its debts; a higher ratio is a sign of financial stability, while a ratio below 1.0 means a company is financially strapped.

“Signature Health had a tough second half [of 2022],” Matros told investors on the earnings call. “They sold 24 facilities, closed two and right-sized their corporate infrastructure to accommodate a leaner company. And so that was quite distracting for them. However, their first quarter rebounded dramatically.”

Matros said he had reviewed previous quarterly reports for Signature dating back at least a year and a half and couldn’t find anything with better performance results.

While he declined to share more details about the deal except to say none of the buildings were connected to Sabra, Matros did tell McKnight’s the sell-off “got [Signature] out of some tough markets and did leave them stronger overall.”

Calls and emails to Signature Thursday afternoon seeking comment were not immediately returned.

Supplemental data is reported a quarter behind. The actual first quarter coverage rate for Signature won’t be available publicly until second-quarter results are released. But Matros added that “we feel really good about where Sig Health is on a current basis.”

Matros also reported strong first-quarter results from skilled operators Avamere and Ensign, the latter of which reported on its own earnings call last week that it is “ahead of schedule” on transitioning in as the new operator of former North American facilities.

“We’re continuing to see traction in operational recovery. Occupancy in our skilled nursing portfolio has now improved every month in the fourth quarter and continuing into and through January.”

Occupancy in the skilled nursing portfolio October through January increased 130 basis points, and skilled mix jumped up “dramatically” in the first quarter as well, Matros said.

And while labor costs are stabilizing, Matros said he isn’t necessarily eager ro get back into major skilled nursing investments yet. He characterized activity as “light” and remaining that way in the near term.

“Pricing uncertainty exists,” he explained.

Chief Investment Officer and Executive Vice President Talya Nevo-Hacohen echoed that concern. 

“We’ve seen a reasonable flow of assets coming to us. A few of them are interesting to us, but we look at our cost of capital and we think about ways to invest and that leads us to focus more on preferred equity or higher yield or mezzanine debt, a greater opportunity in the longer term,” she said.

“Right now, what we are seeing remains to be underperforming assets that want full pricing. It is unclear what is full pricing today. I think that’s a bit of the challenge and why we are continuing to look at things because we are interested in price discovery.”

On the sales side, Sabra reported $190 million in first-quarter proceeds from the sale of seven skilled nursing facilities, including one leased to a tenant under a sales-type lease, and two senior housing communities.

For more coverage of Thursday’s earning calls, see the McKnight’s Business Daily and McKnight’s Senior Living.

Portfolio-wide, one-third of the REIT’s facilities are now recovered to a pre-pandemic occupancy level; one-quarter of core facilities that have not yet recovered are at or above 84% occupancy, Senior Vice President of Operations Megan Krull said during an earnings call.

She also noted that operators continued to report positive momentum on staffing, with per-patient agency costs dropping to five times 2019 levels, down from six times last quarter.

But the “elephant in the room” remains the pending nursing home staffing mandate, Krull said.

She took the Centers for Medicare & Medicaid Services’ delay in issuing its promised minimum staffing proposal as a sign that the agency was moving away from the widely touted standard of 4.1 hours per patient per day.

“There are many levers available to CMS. For instance, a tier system could be set with a level for basic care, and one for exceptional care, or similar to what Florida did last year, the requirement could be set to include staff outside of just RNs, LPNs and CNAs,” Krull said. “Or whatever gets implemented could also be delayed until the industry has fully recovered from a staffing perspective or could be rolled out over several years …”

“We implore CMS to recognize that imposing any sort of draconian, unfunded mandate at the height of a post-pandemic recovery, where the staffing doesn’t even exist and the majority of facilities not only don’t meet but can’t meet such requirements under the circumstances, is far from a solution but rather a problem in and of itself,” she added.

Asked whether Omega was seeing an increase in its Medicare-covered skilled patient base as other owners have reported, Krull said staffing problems continue to limit capacity in some buildings. Therefore, it’s not seen improvements in the quality mix.

Growing in West Virginia

Despite the concerns about staffing challenges and the mandate, Omega is still seeing good deals in the skilled sector.

The REIT has already made $233 million in investments this quarter. In mid-April, the company acquired four SNFs in West Virginia for $114.8 million and leased them to an existing operator at an initial annual cash yield of 9.5%, with 2.5% annual rent escalators. The company also loaned that same operator another $104.6 million so it could purchase an additional 13 West Virginia facilities. The loans have a 12% yield.

On Monday, Omega also closed a $14 million deal for purchase of a fifth West Virginia facility.

CEO C. Taylor Pickett (pictured) said that while Omega has been mindful of lagging reimbursement in some states where it operates — especially Texas, where a federal matching program (FMAP) is set to expire — reimbursement has been strong in West Virginia. Supply is also relatively low, he noted.

“So the supply and demand economics are strong, and it’s with an operator that we have a great relationship with and excellent coverage today,” Pickett said in describing the latest deals. “You throw those three factors together and it’s a pretty good underwriting and asset deal for us.”

He also expects that as cap rates increase and more regional banks struggle, loan deals like the one to the West Virginia operator could become more common for Omega.

“It’s really driven a little bit by just return, yields,” Pickett said. “We’re quoting north of 9[%] on all of our deals. We’re seeing SNF deals at 10…. At those levels, we can make the math work so we’ve opened the pipeline up. I think we’ll see more opportunities as it becomes clearer in the marketplace that a lot of traditional financing sources just aren’t available.”

Omega also noted that in the first and second quarters, the company transitioned the portfolios of four operators who had been paying cash rents to five different operators (three of them existing Omega partners). In all, the moves affected 48 skilled nursing facilities.

Additionally, in the first and second quarters of 2023, Omega transitioned the portfolios of two smaller, unidentified tenants, representing 14 facilities to one new and one existing operator.
See more earnings call coverage from Wednesday in the McKnight’s Business Daily.

“We anticipate much of the same for 2023,” Simpson said in kicking off a fourth-quarter earnings call.

The seniors care and housing-focused real estate trust also reported higher rent and interest income for the final quarter of 2022, with momentum carrying over into 2023. LTC Properties has committed to more than $172 million in deals so far this year, already eclipsing its 2022 total.

On the skilled side, leaders said their confidence had been buoyed by operators’ improving performance and the ability to bring average SNF occupancy closer to 80%.

“Census in long-term care has been more challenged than it has been in shorter stays,” said Clint Malin, co-president and chief investment officer. “In skilled nursing, taking on higher acuity patients, especially now with the implementation of PDPM. That’s been beneficial to the industry through the pandemic. I think you see reaching up into higher acuity is where a lot of operators are going.

“That’s reflective of the investments we made last year, both with Ignite Medical Resorts, as well as Pruitt in Florida. Operators are focusing on that higher acuity model and being able to take on patients that are in hospitals and other higher-acuity settings. We think that has traction,” he added.

As the REIT braces for potential impacts of the May 11 end of the public health emergency, Malin said Medicaid increases in Texas and Michigan, where LTC has core skilled nursing assets, would be a critical offset.

“We’ll have to see if that rate increase comes about,” Malin said. “Everyone is hopeful that will happen in Texas, but we won’t know for certain until the legislative session ends.”

Michigan lawmakers are pursuing a rebasing effort, and Malin said LTC’s local operators are expecting about a 9% rate increase in October, with retroactive payments. 

He and Simpson noted that the REIT also renewed a lease with two skilled nursing facilities in Florida, which saw a large rate increase last year.

New Welltower developments

Welltower also held its fourth-quarter earnings call on Thursday. 

The real estate investment trust announced it had $412 million of gross investments late last year, including $223 million in acquisitions and loan funding, as well as $188 million in development funding. 

It opened several new development projects, mainly in the senior living sector.

Welltower also began transitioning skilled nursing properties that were formerly part of its ProMedica joint venture to new operators. Overseeing the transition is Integra, a little-known management firm that has also begun acquiring a stake in the properties.

In December, Welltower sold Integra a 15% stake in 54 skilled nursing assets for approximately $73 million. Last month, Integra paid about $74 million for a 15% stake in 31 additional skilled nursing assets. The transactions, Welltower said, represent the first two tranches in the formation of an 85/15 joint venture. The stake in the remaining facilities is expected to be sold in the second half of 2023.

Integra entered into master leases for the entire portfolio and will bear financial responsibility for all assets, including assets where it has not yet acquired an ownership stake, according to a press release detailing fourth-quarter results.

“Integra’s business plan entails entering into sub-leases with approximately 15 regional operators with strong performance track records in their respective markets,” the release noted. McKnight’s Long-Term Care News previously reported that a sizeable share of those properties in Pennsylvania and Colorado had been assigned to Genesis.

But on Thursday’s call, Tim McHugh, Welltower executive vice president and chief financial officer, said that about a quarter of the portfolio remains in limbo.

“As for the underlying operations, the subleasing of the portfolio is progressing,” McHugh said. “Seventy-five percent of the beds have already transitioned management, with the remainder of the portfolio waiting state-specific approvals.”

For more earnings call coverage, see the McKnight’s Business Daily.

Fresh off a $52 million deal for six skilled nursing facilities and one multi-service campus in Ohio that closed at the end of the quarter, CareTrust is expecting to be a big player in the year ahead. 

“Prices are coming down almost daily,” chief investment officer Mark Lamb said. “The end of the public health emergency will be the end of the line for a lot of operators, so I would expect mid-next year to see more distress. We’re seeing quite a few portfolios on the market losing significant dollars.

“REITs are in pretty good position to pick and choose what works for us and our operators. We’re six to 12 months from pricing coming down significantly. That doesn’t mean we won’t be acquisitive and look for specific assets that fit out operators and their geographies where they have the best human capital and leadership to turn those assets.”

Sedgwick said CareTrust will be aggressive, confident from a five-year year total shareholder return of 22% through the third quarter. It had average quarterly occupancy for skilled nursing operators growth of  0.7%, or 53 basis points, over the second quarter of a busy year.

“There’s going to be so many opportunities in the coming months with facilities that have lost their way and just need a new operator, and fresh leadership can really move the needle,” he said. “We can either watch that or participate in it, and I think we have enough really capable operators who have a history of adding value and pulling the appropriate levers to both quality care and the employees and the culture that translates down to financial performance that you could see us doing deals next year.”

Sedgwick was asked what data he’ll be looking at when considering the health of facilities specifically, and the sector in general.

“We really want to see agency usage come down in a meaningful way,” he said. “The best sign of stability is for an operator to have essentially no third-party temporary agency staffing. Not only is it expensive but it’s a detriment to quality care and culture within any facility. While those remain high, it’s going to be a bit of a restraint on occupancy growth.”

To read additional coverage of this earnings call, see McKnight’s Senior Living and the McKnight’s Business Daily.

Leaders of the Hunt Valley, MD-based real estate investment trust on Thursday outlined their shifting strategy, offering insights into its management relationships with several operators facing staffing or liquidity challenges.

“We continue to successfully work through operator restructurings, generally resulting in little to no diminution in value of our assets and our long-term cash flows,” CEO C. Taylor Pickett said during a third-quarter earnings call. “Unfortunately, we expect that we will have ongoing restructuring discussions with certain operators due to inflationary costs, including dramatic increases in UK utility costs, and Medicaid reimbursement and occupancy challenges.”

About 24% of Omega’s operators were on a cash basis at the close of the third quarter, but most of those were making partial rent and interest payments. The biggest outlier was skilled nursing operator Agemo.

Since September, Omega has sold off 21 Agemo properties for $359 million in proceeds. In separate transactions, Omega divested 17 properties in Florida, two in Georgia and two in Maryland. In total, that reduced Agemo’s share of the Omega portfolio by about 2,500 beds. Chief Operating Officer Dan Booth said an additional Florida sale was expected to be finalized in coming weeks.

“The remaining Agemo portfolio will consist of 18 facilities in Tennessee and 11 facilities in Kentucky, with a restated annual rent of approximately $23 million and annual interest of approximately $4.7 million beginning in the second quarter of 2023,” Booth added.

Pickett estimated that would add 3 cents per share to quarterly FAD and the redeployment of proceeds from those sales would add an additional 3 cents per share.

At the end of the third quarter, the REIT’s operating assets included 916 facilities with about 92,000 beds in 42 states and the United Kingdom. Omega had winnowed its operators to 63, down from 70 in early 2020, before the pandemic started in the US.

In trying to support some challenged operators while also meeting income expectations. Omega has balanced partial payments by tapping operators’ security deposits or lines of credit, said Chief Financial Officer Robert Stephenson. But he noted that ongoing reliance on such lines would be short lived as funds dwindled, and that could cut into returns in future quarters.

At least five operators continue to struggle to pay monthly rent obligations to Omega. Pickett said the future response could be more asset sales, operator transitions or rent deferrals. 

But in response to investor questioning, he leaned away from deferrals, which were a key flexibility for operators across the country early in the pandemic.

“I think we’ve had a little conversation around rent deferrals, but it’s more around moving assets to new operators, so transitions, and to some extent, incremental sales,” Pickett said. “I think in both those scenarios, you’re talking about lease-enhancing transitions or sales. That’s the expectation from my perspective.”

In deals it has conducted this year, Omega has found plenty of competition for its listed properties. That was the case in the latest Agemo deals, as well, Pickett noted.

He also said Omega’s ability to manage risk and sell assets, then reinvest, has led to a clear “pathway to exit the pandemic with limited financial damage.”  

That said, he added that the REIT is watching the next 12 to 16 months closely for the combined effects of COVID-19 surges, inflation and states’ willingness  — or reluctance — to make Medicaid increases permanent.

Megan M. Krull, Omega’s senior vice president of operations, said skilled operators in the portfolio “continue to be diligent about” managing COVID in facilities. But many are still enacting self-imposed admission limits due to staffing shortages or an intentional strategy to reduce costs associated with agency. She said 29% of the core facilities had returned to pre-pandemic occupancy levels, with another 25% within five points.

A difference maker for many, in terms of financial sustainability, has been the willingness of state officials in areas where they operate to provide adequate Medicaid funding.

Krull noted that in Florida, where most of the troubled Agemo facilities were located, state officials recently passed a 7.8% increase, but limited FMAP funding only rolled out there in late 2021 — too late for some.

“We can only hope that the states, even if on a lag basis, will rate set commensurate with increased costs and that the federal government will see fit not to impose costly mandates without funding mechanisms to help support such mandates,” Krull said.

Read more coverage of the earnings call in the McKnight’s Senior Living Daily Briefing and the McKnight’s Business Daily.