When REITS Come to Buy SNFs, the Standard Is Quality

What does it take for REITS to decide on which SNFs to pull the trigger on and add to their portfolios? Three leading REITS came to the NIC Conference in Chicago to describe just that, giving details on the many measurements they do before taking on a purchase with a big focus on Quality Measures, facility turnover, and onsite inspections where a facility must pass a literal and figurative “smell” test.

The trio were: Matthew Gourmand, CEO, Omega Healthcare Investors, Inc.; Dave Sedgwick, president and CEO, CareTrust; and, Ben Shibe, EVP/Chief Investment Officer, Cascade Capital Group. Park Place CEO Mark Parkinson moderated the Oct. 22 session. Together, the three REITs account for close to 2,300 properties.

First off, the group agreed on many of the same protocols they have in place to gauge the viability of a SNF purchase, be it a smaller regional or a larger grouping of properties. QMs matter a lot as does turnover at all levels of a SNF. Star ratings play a role, as does the overall track record of SNF owners and operators, real estate, and a commitment to mission.

Finding Balance

But for Sedgwick, he said there is balance to how his organization looks at SNFs, it’s not all clinical and certainly not all financial. There is also the matter of the commitment from the leadership of the company and its top-line facility staff to a core mission. Being mission-driven helps a lot, he noted, but again that alone is not the deciding factor.

To prove that last point, Sedgwick related a story about a CEO of a Catholic healthcare entity, who happened to be a nun, who offered advice on the matter, she said, “If there is no margin, there is no mission.”

“But if all they are focused on is the business side of things, we see that as an easy pass,” he said.

There are also nuances to all of the CMS data on SNFs that form the foundation for assessing properties, such as say a very weak Five-Star. The REITs said they would certainly take note of a low score, but factor in when was the last time a survey occurred, what jurisdiction did the survey take place, what is the track record of the overall organization across all of its properties, and what leadership was in charge at the time of the weak result.

Shibe said Cascade specifically looks at possible SFF notices, staff turnover, and hospital readmission rates when weighing doing a deal for a property.

He likened the outcomes seen in QMs to that of a scoreboard for a SNF, showing performance to one and all, making it a significant factor.

Even though Cascade does not operate the SNFs in its portfolio, Shibe did describe a program that has been in place to encourage the operators to use a bonus system to pass on those buildings showing quality improvement and other educational and feedback opportunities for staff through outreach efforts.

What’s Next?

Parkinson posed to the group the question of political change, what with the possibility for Democratic success on Nov. 3 and that party taking over the House and the Senate. All of the REITs expressed concern that legislative language in some Democratic-led bills seeking to limit REIT activity in healthcare is possibly confusing aspects of what REITs do with what private equality does.

In the end, the SNF marketplace is doing well, but the question was asked if the pricing in deals is getting “frothy” as Parkinson called it. Gourmand answered that the sector needs to be careful, but that valuations seem correct.

“We're all announcing deals, very frequently, and when I look at those deals, they tend to make sense,” he said.  “I think we just need discipline to make sure that we cast a wide net for the opportunities and aligning messages” for the operator and the landlord alike.

Certainly, Sedgwick said things are going well now for investors in SNFs, but there will always be headwinds and crosswinds with change, and each stakeholder needs to be ready.

Comments or questions? Contact Patrick Connole at pconnole@parkplacelive.com.