National Health Investors (NYSE: NHI) will not be “changing its stripes,” but its new CEO is aiming for growth by putting boots on the ground in new regions and being more proactive about opportunities in the real estate investment trust’s own backyard. Portfolio diversification is another goal, as the new leader is exploring what he terms “new food groups” to add to the asset mix.
That new leader is Eric Mendelsohn, who earlier this week was unanimously chosen by the board to be president and CEO of the company based in the Nashville area. Mendelsohn has served in this role on an interim basis since August, when his predecessor, Justin Hutchens, left to join to HCP Inc. (NYSE: HCP).
Hutchens and Mendelsohn previously were colleagues at Emeritus Senior Living. In fact, Hutchens recruited Mendelsohn, who joined NHI in January 2015 as executive vice president of corporate finance.
But if Mendelsohn can in a sense be considered Hutchens’ hand-picked successor, the new CEO brings a different management style and focus to NHI. Mendelsohn recently sat down with Senior Housing News to discuss his approach, agenda and take on the senior housing industry as a whole.
SHN: You joined NHI less than a year ago and now are CEO. What strengths have you brought to the table?
EM: Justin recruited me because he wanted a strong lieutenant. I brought nine years of experience at Emeritus, working with [co-founder] Dan Baty and [CEO] Granger Cobb, so I was a known quantity.
I brought my own Rolodex of contacts and my own ability to connect with capital partners. NHI has grown to the point where our investment banking and lender relationships are very important, so that warranted a full-time job.
SHN: What are your first priorities as CEO? Do you have an agenda for your first 100 days?
EM: Those are the exact words I’m using to my team. I want to put together a 100-day plan. Among those items, I want to raise the profile of NHI in the Nashville health care community. I think that up until now, we haven’t been as visible as we could be in Nashville, and there’s a lot of organic growth in our own backyard. [Editor’s Note: Nashville touts itself as a health care capital, and the Nashville Health Care Council includes more than 270 member organizations.]
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The next thing I want is a West Coast presence. A lot of REITs we’re competing against have West Coast people and offices.
And, finally, backfill my own position. Right now, I’m wearing two hats, with capital markets and CEO, and I’d like to concentrate on my new job.
SHN: Tell me more about the thinking behind a West Coast presence?
EM: NHI has a history of uncovering off-the-market deals, or direct referral. We have 33 operating partners that we work with, and a lot of those partners produce organic growth through deals that they’ve uncovered. And then, we send people like [National Marketing Director] Mandi Hogan, [Executive Vice President of Investment] Kevin Pascoe, myself, to the meetings and conferences, and we’re connecting on a personal level with building owners and operators who need a capital partner like us.
But we focus on the smaller, regional operators, so those folks aren’t always going to NIC or ASHA, so you’ve got to get on a plane to see them. Currently, our Nashville location gives us a lot of direct flights to Kansas City, Oklahoma, the places where we’re finding our next deal.
SHN: In addition to ramping up on the West Coast, are you looking at diversifying the portfolio in other ways? Different types of assets?
EM: I think there’s opportunities in other food groups.
We’re known lately for a focus on senior housing, assisted living. I think we’ve succeeded in diversifying our portfolio away from skilled nursing. Now that we have that diversity, are there any of those other food groups we want to revisit? New SNF portfolios, MOB [medical office building] portfolios of interest? I’m curious, and mindful that we have capacity for other food groups besides straight senior housing.
SHN: Would that include hospitals? Ventas of course has made a big play into that space with the Ardent acquisition.
EM: We have two hospitals, and they’re what I would term specialty hospitals, so no major surgeries. One’s a psych hospital and the other’s a lower-level of care hospital with fewer beds. So, for us to do a hospital deal would mean staffing up and probably buying a platform, so I don’t know we have an appetite for that.
Where you may see more of us is in the world between SNF and hospital. What I call — I need to trademark this term — short-TAC. Short-term acute care. That’s a health product that will treat people at a higher level of care and acuity than skilled nursing, but lower-level and more cost-effective than hospitals. Partially because of fewer regulatory burdens, partially because patients are seen more by registered nurses, nurse practitioners than doctors.
We’re talking to some of our operators now about their ability to execute on that and what it would look like.
SHN: This is more than post-acute care?
EM: It would be short-term rehab, short-term therapy, but also, someone needs nebulizer therapy and they’re not able to do that at home, or they have a restricted diet. A heavier medical use, but they don’t necessarily have to be in a hospital.
SHN: The operators executing on this, would that be primarily repositioning existing properties or new developments designed for this type of care?
EM: Could do both repositioning and new development.
SHN: We’ve reported on operators getting into the Medicare-reimbursed, post-acute side and not being fully prepared or executing well, resulting in inadequate care. Is that a concern in investing in these types of properties?
EM: Those are all valid concerns that would be considered. I haven’t seen schematics or budgets, but that’s all going into the mix.
SHN: What’s your position on new development right now more generally, considering the concern in the industry about oversupply?
EM: The percentage of our portfolio that’s devoted to new development, I can count on one hand. It’s three Bickford buildings and one in Issaquah, near Seattle, which is an extension of an existing building, with life-care services (pictured). We’re very mindful of new development.
At NIC, every single operator we met with or that we’re close to, we asked about new development near their building. In some cases there was, some not. I would attribute that to our Midwest, Heartland markets. We’re in tertiary markets that are under the radar and right now we seem to be in good shape. It is a concern and we’re monitoring it closely.
SHN: So if you’re growing primarily through acquisitions, what’s the market like? We’ve heard it’s very competitive now, with lots of bidders in the tent for deals.
EM: I would agree with that statement that it’s very competitive. We’re not really competing on any of the shopped deals, as we’re focused on direct referral or organic growth through our client base.
SHN: For the deals that are competitive, who’s in the best position these days? The Big 3 REITs seem to have lost some cost of capital advantage.
EM: Given our low-leverage balance sheet—and, by the way, we intend to stay that way, it’s a board mandate—we have a similar cost of capital to the Big 3 REITs. The private REITs, even though their cost of capital may be higher, they’re still bidding at lower cap rates and winning these contests with the idea that cap rates will compress more, or they’ll be able to sell later at a better price. So, until that business model proves unviable, we’re still going to have this kind of competitive environment.
SHN: There’s been some chatter that the REIT playing field is too crowded and some consolidation will happen. Do you agree, do you foresee REITs buying other REITs?
EM: That’s a touchy subject surrounded by a host of securities laws, but I would agree that there does seem to be some trend, Darden being the latest example, of spinning out real estate into a REIT. We’ll see how long the investing community has an appetite for all these REITs being born. I’ll be as interested as you in seeing what happens to them.
SHN: How would you compare your leadership style and approach to Justin’s?
EM: I’ll have more of a focus on financial engineering, whereas he’s more of a focus on operations. I also think my focus is on developing some deal flow in our backyard, and I know that wasn’t a priority of Justin’s.
Finally, I have probably a more collaborative management style. I think the way Justin managed was entirely appropriate for where NHI was when he got here and what he needed to do and what the board wanted. He left me a very stable, well-run machine.
We’re not changing our stripes. The reason I came to NHI is that I was attracted to the company’s culture and business strategy and upside opportunity, so I’m excited to be able to play a larger role in that than originally anticipated.
Written by Tim Mullaney