Leaders with Colony Capital (NYSE: CLNY) expect continued headwinds to affect the company’s senior housing portfolio but believe that conditions are improving for skilled nursing facilities. Meanwhile, the Los Angeles-based real estate investment trust (REIT) is continuing to restructure its health care portfolio, most recently converting a RIDEA arrangement to a triple-net lease.

Overall, the the REIT—which also has an institutional and retail investment management business—has more than $43 billion in assets under management. As of June 30, 2018, its health care portfolio comprised 192 senior housing properties, 108 medical office buildings, 99 skilled nursing facilities (SNFs) and 14 hospitals. Colony Capital has about a 71% equity interest in the consolidated portfolio.

“The rate of deterioration in skilled nursing facility fundamentals appears to be decelerating,” Colony Capital President and CEO Richard Saltzman said Wednesday, on a Q2 2018 earnings call. “… Our [senior housing operating portfolio] performance was largely flat quarter-over-quarter, but new supply and rising labor costs—consistent with the operating results of other health care REITs—are expected to put downward pressure on future results.”

In the second quarter of 2018, Colony Capital converted one senior housing operator from a RIDEA partner to a triple-net lease tenant. This was the primary driver of a 3.8% year-over-year decrease in same-store revenue for the health care portfolio in the second quarter of 2018, according to the earnings release. Overall, the health care portfolio posted a Q2 net operating income of $73.9 million, with a net loss attributable to stockholders of $14.4 million.

“As a result [of the triple-net lease conversion], the company no longer records gross revenues and certain expenses for such properties and now records net rental revenue which is lower than the gross revenues under a RIDEA structure, but similar to the net profits of the RIDEA structure,” Colony Capital stated in its Q2 2018 earnings announcement, released Wednesday.

Colony Capital declined to comment for this article, and did not disclose which tenant converted from the RIDEA to triple-net lease structure.

Chicago-based Senior Lifestyle is the REIT’s largest senior housing operator, with 82 buildings in a RIDEA arrangement, according to the company’s 8-K. Frontier Management is another large operator, with 20 buildings in a mixed RIDEA and triple-net lease structure, the filing shows.

Occupancy ticked up for the Senior Lifestyle portfolio, going from 86.5% in the first quarter of 2018 to 87% in the second quarter. Frontier’s occupancy slid from 83.8% in Q1 to 82.9% in Q2.

For Colony’s senior housing operating portfolio as a whole, occupancy went up on a quarterly basis from 86.4% to 86.8%. But occupancy in the triple-net portfolio decreased from 83.2% to 82.3%.

This mixed picture might be related to oversupply issues in particular geographies; despite these issues, Colony Capital is bullish on senior housing, Saltzman said.

“Senior housing is part of the multifamily spectrum and will be a good business longer-term, it’s just going through pockets of oversupply in certain markets,” he said. “That’s how we look at the [commercial real estate] business. You have to analyze it sector by sector, by geography, and understand what’s going on from a new product standpoint.”

Other REITs, such as Welltower (NYSE: WELL), have also been re-structuring their senior housing portfolios with strategic and financial considerations in mind. Welltower most recently converted Brandywine Living from a triple-net lease to a RIDEA operating partner.

In Colony Capital’s skilled nursing portfolio, occupancy fell from 82.7% to 82.2% on a quarterly basis, and NOI decreased 3.4%. Still, “headwinds appear to be abating,” Saltzman told investors and analysts on the earnings call. The SNF industry has been besieged on a variety of fronts, seeing census decrease due to changes in referral patterns, while also contending with tight labor markets and regulatory burdens.

Colony Capital is in the midst of shifting to more in-house asset management of the whole health care portfolio, under the leadership of Richard Welch, who was named managing director, head of health care in June. The former Goldman Sachs investment banking vice president is responsible for managing certain financial and operational aspects of the health care portfolio and the operating businesses.

Saltzman is pleased with the progress on this front, saying that the effort is ahead of schedule but will continue at least through the end of next year.

“There’s not going to be instant gratification there,” he said.

Formed through the merger of Colony Capital and two NorthStar entities in 2016, the REIT has struggled as a larger, combined entity. Its share price slid from about $13.60 in early 2017 to about $5.70 this past spring. Earlier this year, Saltzman pointed to skilled nursing performance as one significant drag on the company.

Shares were down slightly on Wednesday, trading at $6.10 as of market close.

Written by Tim Mullaney