Omega Healthcare Investors has stocked its pipeline with skilled nursing deals and already executed the purchase of five West Virginia facilities this quarter. But leaders with the real estate investment trust said Wednesday they remain concerned about a potential federal staffing mandate’s effect on the sector.

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.