NHI Puts Troubled Tenants on Notice, Posts Strong Earnings

National Health Investors (NYSE: NHI) put up strong numbers for the third quarter, but it has some troubled tenants to deal with in its senior living portfolio.

Overall, the Murfreesboro, Tennessee-based real estate investment trust (REIT) posted earnings that beat analysts’ expectations for the third quarter of 2017. Revenue for the period was about $71.3 million, a 12.8% increase over its 2016 third-quarter total of $63.2 million.

With a portfolio of 139 properties throughout the U.S., NHI is one of the largest private-pay senior housing owners in the nation. While some of its tenants are outperforming even in the face of industry headwinds, NHI has had to intervene with a few under-performers, executives said during an earnings call Wednesday.


Sore spots

Despite the healthy earnings, there were some sore spots, including one four-property portfolio that recently transitioned to a new operator, and another senior living portfolio that is in technical default due to noncompliance with certain of its lease conditions.

The underperforming four-property portfolio of senior living communities in Minnesota transitioned to Olathe, Kansas-based operator Bickford Senior Living, an existing NHI tenant, on Oct. 1, according to Kevin Pascoe, NHI’s chief investment officer.


“After trying to work through some issues of noncompliance with the operator, it became clear the portfolio needed to have a new operator,” Pascoe said. “We worked with the tenant and the guarantors to transition the properties to Bickford, and NHI was paid in full on the rent it was due.”

NHI also reduced the portfolio’s annual rent from $2.1 million to a lower bill of $1.5 million.

NHI did not divulge the operator of the other troubled portfolio, but did say that the properties account for less than 4% of rental income. The REIT sent a letter of forbearance to the tenant in October due to the noncompliance issues related to lease coverage and being in arrears to some vendors. However, the company was current on its rent to NHI as of the end of the September, said President and CEO Eric Mendelsohn.

Mendelsohn characterized the portfolio’s problems as a “management issue” among a small number of communities.

“There are some levers that can be pulled… like managing overtime, less reliance on referrals like A Place for Mom that can give you residents, but charge too high a price to do that,” Mendelsohn said. “And then just some basic blocking and tackling of marketing and customer service and other types of hospitality issues.”

Despite a flurry of questions from equity analysts, Mendelsohn didn’t identify the specific portfolio. Doing so could generate negative attention that would only compound the operator’s challenges, he said. He did specify that it is a privately owned company and that NHI is not the sole owner of its real estate.

“I consider the gold standard of disclosures on defaulted tenants to be LTC and Wendy Simpson’s disclosure last quarter about her tenant, Anthem,” Mendelsohn said. “When and if this tenant is in default on a monetary issue, and when and if it’s going to affect our earnings, you will get that level of information.”

At the moment, he believes that a turnaround is possible for the tenant, and NHI will assist with its asset management capabilities. The whole process should take between six months to a year, and NHI will be providing updates on progress during that time, he said.

Worry list, bragging list

Speaking of the performance of NHI’s senior living tenants, Mendelsohn also laid out his “worry list” and “bragging list” during the call. First on the worry list: Brookdale Senior Living (NYSE: BKD).

“We’re watching Brookdale very closely. We do have nine buildings with them and they’re performing reasonably well,” Mendelsohn said. “[But] they’re not killing it, so that’s enough buildings for us to pay attention and wring our hands about as we watch all that’s happening with them and the turnover in the COO suite.”

Holiday Retirement, which experienced a drop in occupancy in the first quarter of the year, will also warrant some vigilance in future quarters.

“I’m concerned whenever a company like that has as much turnover as they did last year and then moves their corporate headquarters across the country and turns over much of their back-office personnel,” Mendelsohn said. “And then of course changes their management model in the buildings from live-in managers to external professional management.”

Bright spots for the REIT included Bickford and Senior Living Communities (SLC).

“We have some tenants that are truly excelling and doing much much better than their competitors than the market would expect,” Mendelsohn added.

NHI’s share price dipped by about 2.6%, to $76.68, by the time the markets closed Wednesday.

Written by Tim Regan

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