National Health Investors (NYSE: NHI) is staking its claim as a preferred real estate investment trust (REIT) for regional senior housing providers, content to do smaller deals until the right opportunity comes along to make a bigger splash.
“I’d like to take this opportunity to suggest that NHI is becoming a REIT of choice among many regional operators,” CEO Eric Mendelsohn said Tuesday on a first quarter 2017 earnings call. “We have cultivated many relationships with new and potential clients over the past few years, and these relationships are starting to bear fruit.”
Regional operators in particular appreciate Murfreesboro, Tennessee-based NHI as an “accessible, reliable, responsive, nimble, and cost effective” financial partner, he elaborated.
Some might contrast NHI’s comfort with staying in its well-established lane with its competitor Sabra Health Care REIT (NYSE: SBRA). That Irvine, California-based REIT has just made a big move to punch above its weight.
Earlier this week, Sabra and Care Capital Properties (NYSE: CCP) announced they are merging to create a $7.4 billion REIT. Part of the thinking behind this combination is to give the newly enlarged Sabra a greater cost of capital advantage, to help it compete for senior housing deals against private equity and large REIT players.
NHI did not have a look at purchasing CCP, Mendelsohn said Tuesday.
“We were not invited,” he said.
Although he intends to follow up with the investment banks involved to get more of the backstory, Mendelsohn does not believe acquiring CCP would have been a fit for NHI, given how much skilled nursing exposure it would have added.
A merger with another REIT is not out of the question—like its competition, NHI company is always on the lookout for a combination that makes sense, Mendelsohn said.
However, he implied that his mindset on doing a merger might be different than that of Sabra CEO Rick Matros, who used the word “transformational” to describe the CCP deal.
Mendelsohn is leery of “transformational” transactions.
“… As long as we’re competitive on our capital costs and our ability to find new business and to grow, you probably won’t see any transformational deals from us because transformational is often times is a code word for not very accretive,” Mendelsohn said. “And we’re only interested in the deal if it can be accretive and shareholder-friendly.”
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The merger of CCP and Sabra is expected to be immediately accretive, according to the companies. Investors have not immediately embraced the move, though, with Sabra shares down about 5% since the deal was announced.
At its current size, NHI is content with its pipeline of potential senior housing acquisitions and with doing smaller transactions rather than grabbing large portfolios; this approach can add up to $300 million to $500 million in acquisitions in any single year, which is “not a bad way to grow,” Mendelsohn said.
For the first quarter of 2017, NHI completed $133 million in real estate acquisitions and loans. Its revenue of $66.39 million was up 12.5% year-over-year and beat analysts’ expectations by $0.47 million.
NHI shares were up 0.40% at the end of trading Tuesday.
Not all of NHI’s tenants are regional players. It also derives 15% of its cash revenue from Holiday Retirement, the nation’s largest independent living provider.
Holiday is in a state of flux, with its corporate headquarters set to move this year from Lake Oswego, Oregon, to Winter Park, Florida. In addition, Holiday has been transitioning from its long-held management model, which involved having live-in managers at each community, to a more traditional arrangement.
The changes have caused some loss in occupancy, which had been around 90% to end 2016, said NHI Chief Investment Officer Kevin Pascoe.
One nuance to note is that live-in managers moving out of units at each community caused an immediate occupancy hit, but also created an opportunity to glean rents from those units.
For the NHI portfolio, all the Holiday live-in managers now have moved out and about 60% of those units have been rented.
“There’s still some transition to happen but they are making progress there,” Pascoe said.
Written by Tim Mullaney