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 CMS Rocks Stock Market, But Analysts Remain Upbeat

The good news is that occupancy rates should hold, experts say.

 

Occupancy rates and rents are on the upswing for the seniors housing sectors, according to the National Investment Center for the Seniors Housing & Care Industry (NIC). The group recently reported that second quarter 2011 occupancy rates for seniors housing held steady at 88 percent from the first quarter—up 0.5 percentage points from the second quarter of 2010 and 0.7 percentage points in the first quarter of 2010.
 
Although occupancy rates are trending sideways, they have moved from beyond their recent cyclical lows, Charles Harry, NIC director of research and analysis, said.
 
In addition, year-over-year rent growth rose to 1.4 percent, from 0.9 percent in first quarter 2011 and 1.2 percent in second quarter 2010.
 
The skilled nursing facility (SNF) sector in particular was given a relatively healthy prognosis. In its seniors housing research report for the first half of 2011, San Francisco-based Marcus & Millchap hinted that SNFs were turning the corner at a faster pace than other sectors, with occupancy rates expected to jump 50 basis points to 88.9 percent by the end of the year.
 
Also reflecting positively on the sector is the fact that SNF occupancies rose 10 basis points during the first quarter of this year to 88.5 percent, according to NIC.
 
Contributing to this rosy outlook, the report notes, is subdued construction activity. According to NIC data, nursing care annual inventory growth was -0.1 percent the second quarter, “illustrating the established trend of slightly declining inventory growth.”

Reductions Shake Stock Prices

Although the report noted that SNF buyers are likely to target strong facilities that can hold up to potential reimbursement cuts, sellers or owners looking for financing may need to work a little harder come October when dramatic cuts to Medicare payments go into effect.

In a final rule dated July 29, the Centers for Medicare & Medicaid Services (CMS) announced that SNF Medicare reimbursements would be reduced by 11.1 percent, or $3.8 billion. The agency justified the fiscal year 2012 reduction as an effort to return the Medicare system back to budget neutrality after implementing the new resource utilization group (RUG-IV) system and minimum data set 3.0.
 
In the face of these cuts, providers will have to show what they’re doing to compensate for them, says Jeffrey Davis, chairman and chief executive officer (CEO) of Cambridge Capital Companies. “Loan seekers may have to create supplements that show how the facility’s cash flow will be impacted by the cuts. It’s going to create a whole different element for discussion.”
 
What does this mean for the seniors housing market? “Let’s face it, it’s not going to help,” says Davis. “In a world where historic cuts tend to be 1, 2, 3, or maybe 4 percent, and now it’s more than double what providers are used to, it could throw them off kilter.”
 
Looking forward, Davis adds, providers will have to delve into their businesses to figure out how to deal with it.
 
The most immediate fallout from the announcement came in the form of plummeting stock prices of skilled nursing companies and real estate investment trusts. On Aug. 1, the Monday following the rule’s release, stock in Louisville, Ky.-based Kindred Healthcare took a 26 percent dive, to $13.85 per share. Kindred is the fourth-largest skilled nursing provider in the United States, according to Provider’s annual list of the Top 50 largest nursing facility companies.
 
Stock prices for No. 6-ranked Sun Healthcare Group, Irvine, Calif., plunged by 56 percent of its value, to $3.06 per share. Not far behind was Skilled Healthcare Group, Foothill Ranch, Calif., which tumbled 43.1 percent and lost 38 percent of its value. Ranked No. 10 in the Top 50 this year, Skilled Healthcare’s stock was at $5.41 per share as of Aug. 1.
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Providers Remain Positive

“While we are extremely disappointed with the announcement by [CMS] on Friday, we believe we are well positioned for the future with our conservative model for managing our [SNF] business and diversification of our operations to reduce the exposure to such radical changes in Medicare and Medicaid rates,” said Skilled Healthcare Chairman and CEO Boyd Hendrickson.
 
Ensign Group lost 23 percent of its value, landing at $21.79 per share, while Health Care REIT slid down by 7.96 percent, to $48.96 per share, and HCP dropped 5.36 percent, to $34.82 per share.
By Aug. 16, only Kindred’s stock had jumped back up.
 
Sunrise Senior Living, based in McLean, Va., released a statement in response to the announcement, acknowledging that the pay cut will affect operating results.
 
“Based on a preliminary analysis of the limited information contained in the CMS announcement and assuming that the payment reduction had been in place for the first quarter of 2011, [Sunrise] estimates that reported first quarter 2011 consolidated net income and adjusted [earnings] would have each been reduced by approximately $1 million.”
 
Despite reactions in the stock markets, SNFs may be able to fall back on the fact that the sector has performed well over the past four to five years.
 
“Owners are more comfortable with Medicare and Medicaid reimbursements that were boosted through the TARP [Troubled Asset Relief Program] legislation,” Davis says, adding that the future of the SNF business is still positive given the impending baby boomer tsunami, which means that occupancy levels should remain steady.
 
When asked to respond to the 11.1 percent Medicare reduction announcement, which came just a few weeks after his company’s report, Gary Lucas, managing director of Marcus & Millchap’s seniors housing group, noted that as long as the impact is budget neutral, the overall state of the SNF sector may not be adversely affected.

Bucking Up

Hurdles like this one are not an anomaly for the industry, and some experts remain positive despite the gloomy news. Davis says he remains upbeat about the SNF sector, as well as assisted living (AL) and independent living (IL).
 
“Assisted living has been performing well, and states are generally supportive of Medicaid waiver programs because it’s cheaper than skilled nursing,” he says. “I see that expanding.”
 
Driven by two consecutive quarters of occupancy gains this year, IL appears to be the biggest winner, with occupancy rates predicted to rise by 80 basis points, to 88.1 percent, triggering a rent increase of 1.1 percent, to $2,678 per month.
 
With a slightly less optimistic forecast for AL, the report predicts that operations will remain steady, but the “modest rise in completions will lower the occupancy rate 40 basis points, to 88 percent this year.”
 
Rent growth for AL is expected to ease up 0.8 percent, to $3,543 per month, with demand for single modernized facilities to remain high, according to Marcus & Millchap’s analysis.
 
“Quality assets brought to market will receive multiple offers,” the report says. “These trends could squeeze private-equity buyers out of the top tier, but overall closings should gain steam in 2011 as more investors, betting on a strong recovery, buy discounted properties ahead of further operations improvements.” 
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More Cuts To Medicare Likely

As of early August, SNF providers were facing the possibility of yet another hit in Medicare pay. The debt-limit deal that snarled Capitol Hill for weeks this summer contains a triggered Medicare cut that goes into effect if a congressional panel does not come to agreement on further deficit reductions.
The cut is another 2 percent, which would  take effect in 2013.
 
Providers are certain to be watching how the committee works together to further reduce Medicare spending. 


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