Shares of several skilled nursing facilities-exposed REITs are in the spotlight on Monday following Friday’s final reimbursement ruling issued by the Center for Medicare & Medicaid Services. The government organization announced the payment rate will increase 2.7% over last year, which Credit Suisse analyst Tayo Okusanya says is “the best reimbursement rate in the last 10 years.”
REIMBURSEMENT RULING: On Friday, the Centers for Medicare & Medicaid Services issued the final ruling to update the Medicare payment policies and rates for skilled nursing facilities, or SNFs, for fiscal year 2023, which is set to begin October 1, 2022. Credit Suisse analyst Tayo Okusanya noted that after initially proposing a 0.7% reduction in Medicare reimbursement back in April - which would have been the worst reimbursement rate in the last 10 years - the final ruling will result in a 2.7% increase in SNF Medicare payments, which is the best reimbursement rate bump in the last 10 years. Okusanya anticipates the SNF-exposed Healthcare REITs, including CareTrust REIT (CTRE), Omega Healthcare (OHI), Sabra Health Care (SBRA), LTC Properties (LTC), and National Health Investors (NHI), will react positively in response to the news during market hours on August 1.
Better Medicare reimbursement rates in fiscal 2023, coupled with SNFs continuing to get other favorable reimbursement under the increasingly likely scenario that the COVID-19 public health emergency is extended until year-end, will give SNFs breathing room to address still weak fundamentals driven by slow occupancy gains, staffing issues and elevated labor and other operating costs, the analyst argued.
BETTER OUTLOOK: Also commenting on the news, Stifel analyst Stephen Manaker noted that the 2.7% increase, inclusive of the PDPM clawback, is much better than the down 0.7% preliminary announcement, which should help some marginal SNF operators get through the fiscal year without having to request rent relief. This could help some marginal tenants within the REITs' portfolios, he added. While there are still headwinds, including higher labor and material costs, Manaker believes the rate increase, along with continued occupancy gains as the country moves to a post-COVID normal, should improve the SNF operator environment. Or at worst, the operating environment will be better than if the preliminary rate decrease became final, he argued, adding that this makes the outlook for REIT rent collections for some marginal tenants that much better. With the SNF REITs trading between 9- to 13-times, Manaker thinks the multiples more than incorporate the current environment. He remains Buy-rated on CareTrust REIT, Omega Healthcare, and Sabra Health Care.
PRICE ACTION: In Monday morning trading, shares of CareTrust REIT, Omega Healthcare and Sabra Health have gained about 1% to $20.84, $31.19 and $15.48, respectively. Also higher, LTC Properties' stock has advanced almost 2% to $42.63.
