National Health Investors, Inc. (NYSE: NHI), a senior housing real estate investment trust (REIT), is converting a 32-property portfolio with Bickford Senior Living from a RIDEA structure to triple net lease, the company announced on Thursday ahead of the release of its 2nd quarter earnings results.
Under the agreement, NHI will purchase Bickford’s 15% interest in the real estate underlying the joint venture (JV) for $25.1 million. Bickford will pay NHI $8.1 million to purchase its non-controlling 85% interest in the senior housing operations in the JV. The deal will improve predictable cash flow for NHI, boost Bickford’s balance sheet and offer a simplified relationship between NHI and its partner going forward, executives said during an earnings call with analysts Friday.
Based in Olathe, Kansas, Bickford operates more than 50 senior living communities offering independent living, assisted living and memory care services.
“We’re buying out their real estate interest, and they are buying out our interest in the operating company,” NHI CEO Eric Mendelsohn told Senior Housing News. “They go from being a joint venture partner to a tenant.”
From JV Partner to Tenant
NHI recently exercised a purchase option with Bickford when it acquired five assisted living and memory care facilities that were owned and operated by Bickford for $87.5 million. The five properties were not a part of the existing JV. Occupancy at the communities averaged 92%. Bickford accounts for 15% of NHI’s cash revenues. RIDEA investments accounted for 14% of NHI’s total portfolio makeup, according to its second quarter supplemental.
“Converting the RIDEA to triple net helps Bickford clean up its balance sheet, solidify NHI’s returns and still provides growth for construction opportunities,” said Kevin Pascoe, executive vice president of investments. “This change will better position the company for predictable cash flows.”
The conversion will also provide growth between the partners, Pascoe said Friday.
The conversion will not impact NHI’s current development plans with Bickford, executives said. NHI and Bickford are currently underway with five new developments.
“We’re still full speed ahead with Bickford,” Pascoe said. “We are happy with them as a partners and will continue to grow with them.”
NHI plans to complete three to five developments with Bickford on an annual basis, according to Mendelsohn.
“We notice that the big returns are really in the developments,” Mendelsohn told SHN. “We’ve restructured the developments in that we participate in the financing, and then buy them when they are stabilized.”
Certainty and Stability
While executives maintained the conversion would increase cash flow predictability, they also noted that the returns would be similar.
“When you look at the history of our RIDEA, the returns that we are getting are very similar to a traditional lease,” Mendelsohn said on the call.
The conversion comes at a time when other major senior housing REITs, including Ventas Inc. (NYSE: VTR) and Welltower Inc. (NYSE: HCN), are raising their RIDEA exposure across their portfolio. A recent $1.15 billion senior housing portfolio on the West Coast bumped Welltower’s RIDEA share above 40%, executives said.
“No doubt about it, [RIDEA] exposes you to more fluctuation in revenue, and that’s a higher risk,” Mendelsohn told SHN. “Sometimes you win, and some quarters you lose. As a REIT, our investor base is more interested in certainty and steady revenues. So, we’re trading some of that upside for some certainty.”
NHI’s conversion to a triple net lease structure reduces some of the risk exposure as an operating partner in the properties, while also benefiting Bickford, which will become a stronger joint venture partner, NHI executives told analysts Friday.
As part of the original JV, NHI distributed $2.3 million to Bickford in 2015.
“Revenue from the operations is lumpy and episodic. As a REIT, what we’ve done is trade some of that upside [of RIDEA] for stability and certainty,” Mendelsohn said. “Frankly, we’ve also helped our partner, the Bickfords, by strengthening their balance sheet. With this transaction they will be able to pay off legacy debt and invest in some of the developments we are doing.”
However, the conversion does not mean that the REIT will be looking to convert other RIDEA structures just yet or avoid RIDEA in the future.
“I wouldn’t read too much into this,” Mendelsohn said of the company becoming more cautious by lowering its RIDEA risk exposure. “RIDEA is a very case-by-case structure. We would be open to future RIDEAs under the right circumstances with the right partner.”
Beyond its conversion announcement, NHI reported strong quarterly results, with normalized AFFO growth of 8.9% in the second quarter compared to the first three months of the year. Year over year, AFFO was up 7.%%. Occupancy remained strong across its Holiday Retirement communities, averaging 91.4%. Year to date, the REIT has announced $337 million in acquisitions and loans and $27.6 million in dispositions.
In May, NHI sold the real estate of two skilled nursing facilities (SNFs) operated by Legend Healthcare to The Ensign Group. As part of the deal, which included 18 SNFs in total, Ensign’s operating subsidiaries entered into a new 15-year lease with NHI for 15 of the operations for $17.75 million.
Investors appeared to be bullish on NHI’s strong quarterly results; its stock price saw a slight bump, reaching $78.58 per share by end of Friday trading.
Written by Amy Baxter
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