After a week in which senior living providers intensified fears of oversupply, real estate investment trust (REIT) National Health Investors, Inc. (NYSE: NHI) is not concerned. With increasing pressures on operators, though, NHI indicated it wouldn’t be surprised to see lower rent escalators across the industry.
Despite the nation’s largest senior living provider, Brookdale Senior Living (NYSE: BKD), reporting one of its worst earnings quarters in recent memory as a result of competition in midsize markets, and provider Five Star Senior Living (Nasdaq: FVE) and owner New Senior Investment Group, Inc. (NYSE: SNR) detailing their own struggles, NHI executives told analysts Monday they’re not seeing the adverse impact of oversupply.
Additionally, NHI is “very sensitive” about the impact of rent escalators on its operating partners moving forward, CEO Eric Mendelsohn said.
“I wouldn’t be surprised if we came across a property that was fully valued, highly occupied and in a competitive market, and we would agree to [escalators] between 2% and 3%, rather than 3% to 4%, just so that going forward the operator has enough breathing room to make the cash flow they should get from taking the risk as an operator,” Mendelsohn said during the REIT’s third-quarter earnings call.
Lowering rent escalators isn’t limited only to NHI. This trend could take place across the sector, Mendolsohn said.
His comment comes after other REITs mentioned their own lease coverage and how they’re taking action for improvement. HCP Inc. (NYSE: HCP), for example, sold a 64-property Brookdale portfolio to affiliates of Blackstone Real Estate Partners VIII L.P. and Columbia Pacific Advisors early this month for $1.125 billion in an effort to improve lease coverage. In fact, the deals are set to improve lease coverage on the Brookdale portfolio by 19 basis points to 1.21x on a trailing 12-month basis, according to HCP.
Meanwhile, Senior Housing Properties Trust (Nasdaq: SNH) suggested that Five Star could sell or shut down some troubled properties to improve its lease coverage, as well.
For at least one of NHI’s operators, rent delinquency has been an issue, causing the REIT to work to transition to a new operator. NHI didn’t cite this as an instance of problems related to rent escalators, however.
M&A from the Hot Seat
The REIT also recently acquired two properties in Oregon, and executives provided some color on that transaction on Monday’s call, as well as the overall mergers and acquisitions climate.
In September, NHI announced the purchase of the pair of senior living communities in McMinnville, Oregon for $36.6 million, leasing the facilities to Chancellor Health Care, LLC. The first was opened in 2008 and expanded in 2015 and consists of 16 independent living units, 29 assisted living units and 54 memory care units, and the second was opened in 2015 and has 35 memory care units.
Occupancy levels for these communities were in the low 80s, showing there was “some meat left on the bone” to install a new operator and lease up units over time, particularly on the independent living side.
“There’s revenue to be had at these communities through marketing,” said Kevin Pascoe, executive vice president of investments at NHI.
What’s more, the REIT has seen cap rate expansion in smaller markets, which plays to its advantage, as opposed to very low cap rates observed in the top metropolitan statistical areas.
“Sellers are being a little more realistic about what their asset is, and not necessarily pointing to larger markets and saying, ‘I want that cap rate, as well,’” Pascoe said. “They’re a little more realistic on their price expectations and looking for more certainty of close, which we can deliver.”
Overall, NHI’s normalized funds from operations (FFO) fell short of analyst expectations on earnings at $1.23 per diluted common share for the three months that ended Sept. 30, but this represented a 1.7% increase over the same period in 2015. Still, NHI beat expectations in terms of revenue by $860,000, coming in at $63.25 million for the third quarter of 2016.
NHI was trading up 1.25% as of mid afternoon Monday.
Written by Kourtney Liepelt