NHI Focused on Tenant Turnarounds, Robust Acquisition Pipeline

On the heels of ironing out issues with tenants such as independent living giant Holiday Retirement, three more operators are causing consternation at National Health Investors (NYSE: NHI). But these operator woes are not cause for undue alarm, and the company is bullish on opportunities to expand its senior housing portfolio in 2019, President and CEO Eric Mendelsohn said Tuesday, on a Q4 2018 earnings call.

The sore spots related to five memory care communities managed by Autumn Leaves, a brand from senior living development and management company The LaSalle Group; three communities previously managed by affiliates of East Lake Capital Management; and an as-of-now unnamed one-property operator in Wisconsin. While these operators have leases that account for just 3.6% of NHI’s total revenues in 2018, they put a damper on the company’s quarterly earnings and full-year guidance for 2019.

On the whole, NHI reported a normalized FFO per diluted common share of $1.35 in the fourth quarter of 2018, which represents no change from the company’s prior-year totals but trailed analysts’ expectations by four cents. It also pulled in total revenue of roughly $74 million for the quarter, an increase over the roughly $71 million it logged in the fourth quarter of 2017.

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NHI is a sizable owner of senior housing properties, with 151 senior housing and 76 skilled nursing assets spread across 33 states as of Feb. 19.

More tenant troubles

Management of the Murfreesboro, Tennessee-based real estate investment trust (REIT) have previously said that, at any given time, roughly 5% of its senior housing portfolio is in need of a course correction. This past quarter was no different, according to Mendelsohn.

“Our challenges this year come from the 5% of troubled operators that you’ve heard me speak about in the past,” Mendelsohn said during the company’s fourth quarter earnings call Tuesday.

Eric Mendelsohn

Included in the list of troubled operators was Autumn Leaves, which manages five buildings for NHI in Illinois and Texas. Specifically, those communities have been in material non-compliance with provisions of their lease regarding mandated coverage ratios, working capital requirements and rent payments. As of Dec. 31, 2018, Autumn Leaves was two months in arrears on its rent payments to NHI — and that may spell trouble for the two companies’ long-term relationship.

“We are in talks to forebear their defaults, which include failure to pay rent, but their continued ability to operate those communities is not certain,” Mendelsohn said. “We’re giving them some time, during which they will either perform or we will move on to plan B.”

A representative for Autumn Leaves didn’t elaborate on the issue at hand, but told Senior Housing News that the company is currently in negotiations with NHI to get back in good standing.

Another tenant weighing down NHI’s bottom line in the fourth quarter was SH Regency Leasing, an affiliate of Dallas-based East Lake Capital Management that, up until last December, managed three assisted living communities for the REIT in Tennessee, Indiana and North Carolina.

The two companies have been locked in litigation with one another since June 2018, and have sparred in court filings ever since. The state of Vermont also recently appointed a permanent receiver to manage three residential care properties previously run by East Lake — and not owned by NHI —  after the state said the company failed to stock enough food for residents, among other complaints.

“During Q4, we took possession of the three communities that were part of the litigation we continue to have with the affiliates of East Lake Capital. We’ve entered into transition and management agreements on two of the communities, and an interim manager is in place on the third,” Mendelsohn explained. “The trauma inflicted by the previous operator was severe, and we cannot give you a firm assessment on how quickly these properties will return to the former cash flow.”

East Lake continues to sublet two continuing care retirement communities (CCRCs) to another operator, Watermark Retirement Communities, under the moniker EL FW Intermediary I — an arrangement sometimes known as a “sandwich lease.” That arrangement will continue, as Watermark is a “high-quality operator that is doing a good job,” according to Kevin Pascoe, NHI’s chief investment officer.

Additionally, NHI is also having difficulties with a one-property operator in Wisconsin, which is two months in arrears on its rent payments. The REIT could transition the property to a new operator during the first quarter of this year.

Despite the recent tenant troubles, the company’s history working with under- or non-performing operators in its portfolio gave some market-watchers confidence the company would right the ship in a short time.

“NHI had a strong quarter of investments demonstrating its ability to source accretive investments and drive external growth faster than peers,” wrote Stifel Analyst Chad Vanacore in a note to investors. “We believe management will work quickly to mitigate any impact, as it has in the past, and restructure/re-tenant leases.”

Opportunities identified

NHI also identified areas of opportunity for the company during its earnings call Tuesday.

NHI continues to make strategic acquisitions across the U.S., and has announced $90.2 million of acquisitions to its lease portfolio since the beginning of this year. That includes the purchase of a 267-unit senior living campus in Massachusetts for $50.3 million which will be leased to Wingate Healthcare for a one-decade term.

“Our pipeline is as active as I’ve ever seen it with some distressed product as well as a stabilized,” Mendelsohn said. “Our focus on operator relationships and our low cost of capital are significant contributors to our activity.”

In addition to seeing more distressed properties on the market, particularly new developments that have failed to lease up, Mendelsohn noted an increase in “retreads.”

“[These] are deals that were marketed widely that are stabilized, but the pricing was so outrageous that nobody took them up on it,” he said. “So they go back and regroup and come back 6 or 10 months later with new pictures and a new broker and a new pro forma and see if they can get anyone interested.”

The current level of “retread” activity reminds him of market conditions back in 2007.

NHI is also active on the lending side. Specifically, last December the company entered into an agreement to lend an affiliate of Life Care Services up to $180 million to facilitate a second-phase construction construction project at Sagewood, a type-A CCRC in Scottsdale, Arizona.

“We’re extremely excited to enter into a new investment with LCS on a project very similar to our Timber Ridge project in Issaquah, Washington,” Mendelsohn said Tuesday. “LCS and their entrance-fee product continues to experience very robust demand. The new LCS Sagewood phase 2 development is substantially presold.”

NHI’s share prices were down almost 5% to rest at $80.38 by the time the markets closed Tuesday.

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