NHI on the Hunt for Skilled Nursing As Other REITs Flee

With some of the major real estate players making moves and taking shots at one another’s skilled nursing assets, one real estate investment trust (REIT) is standing its ground with its own skilled operators and continuing to increase its exposure in the space. 

Tennessee-based National Health Investors Inc. (NYSE: NHI) is distinguishing itself among its industry peers by underscoring its best-in-class skilled nursing operators. The company recently emphasized its skilled nursing tenants were unlike that of HCP Inc. (NYSE: HCP), which recently announced its plans to spinoff of its skilled nursing assets into an independent, publicly-traded REIT. HCP has struggled with its skilled nursing tenant HCR ManorCare for some time.

“Our two skilled nursing tenants, Ensign and NHC… I would characterize them as the exact opposites of ManorCare,” NHI President and CEO Eric Mendelsohn said during a presentation at National Association of Real Estate Investment Trust’s (NAREIT) REITWeek.

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Ventas Inc. (NYSE: VTR) also spun out its skilled assets into an independent REIT, Care Capital Properties (NYSE: CCP) last year. Welltower Inc. (NYSE: HCN) has been fielding questions about the performance of its portfolio of skilled nursing assets operated by Genesis, though its CEO is quick to dismiss a spin out possibility. 

Characterized by its low leverage and optimism toward new development, NHI isn’t feeling the same sting as other industry REITs with regard to skilled nursing. 

“Right now the food group that is out of favor is skilled nursing,” Mendelsohn said during the presentation. “There’s a lot of noise around ManorCare [and] Genesis. Some of that noise is self-inflicted. Other parts of it are a result of higher leverage. I sleep well at night knowing our operators Ensign and NHC have very high coverage. …We’re very comfortable with our skilled nursing portfolio.” 

The company recently expanded its skilled nursing exposure after it entered into a leasing agreement with The Ensign Group, Inc. (NASDAQ: ENSG), a publicly-traded skilled nursing operator, for 18 facilities in Texas in a deal worth $118.5 million. The deal replaces NHI’s current skilled nursing tenant, Legend Healthcare, with Ensign.  

“Ensign is a best-in-class skilled nursing operator,” Mendelsohn said of the transaction. “Ensign wanted to grow in Texas, needed a platform in Texas. Legend, as  a high quality operator, fit that bill perfectly. We were able to introduce the two parties. …We were able to strike a deal where we bought out [Legend’s] purchase options, bought their new properties, turned around, and leased the [portfolio] to Ensign.” 

A Tale of Two Businesses

NHI’s portfolio is made up of about 30% skilled nursing assets and 70% senior housing, according to Mendelsohn. The REIT has seen substantial growth over the last few years, and plans to continue to look for opportunities to grow its pipeline in both sectors, particularly as other REITs continue to clean up their portfolios and divest non-core assets.

Looking forward, NHI is quick to say “no” to skilled nursing assets that don’t meet its criteria, but is still on the lookout for ripe assets. With a small team, NHI doesn’t like to waste time “unnecessarily underwriting things,” according to Mendelsohn.

“The pipeline is lopsided,” Mendelsohn said. “Everybody wants to sell skilled nursing. …The skilled nursing pipeline is the most robust I’ve ever seen it. I think it’s still in a place of price discovery. When it gets to that criteria we look for, we make make an acquisition.”

On the senior housing side of the portfolio, NHI is likely to stick with its secondary markets in the heartland and southern regions of the United States. The company is seeing better deals inland compared to Mid-Atlantic and West Coast properties in terms of pricing, Mendelsohn said. 

NHI executives are also optimistic when it comes to new supply, and the company has stateD in the past that some of its developments are part of the new supply

“There’s a lot of noise around oversupply [in senior housing],” Mendelsohn said. “In some instances, we are the oversupply. There are things you can do to a building to protect yourself against new product.”

Mendelsohn often relies on his deep industry knowledge when it comes to new supply, noting that during his time at Emeritus, the company’s large scale meant there was always competition nearby. Differentiating with design and programming can make a difference and it can be worth it for the business to wait out any initial stabilization issues as new product comes on line. 

“If you put your head in the sand and ignore it and hope for the best, that’s when you have a problem,” he said. “Usually people building know if they can absorb that market share. It takes time and creates a ripple effect—lower pricing and a slowing down of new residents—but you can get through it in about 18 months.”

Mendelsohn also sees opportunity in the buildings that can’t necessarily weather the oversupply storm, characterizing them as potential acquisition targets in the future. 

Written by Amy Baxter

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