National Health Investors (NYSE: NHI) is starting off this year on better footing than it did in 2019, and conditions are steadily improving with its largest operator tenant. But the REIT isn’t out of the woods just yet, as the senior living industry continues to feel the effects of headwinds such as the cost of labor and new deliveries.
The Murfreesboro, Tennessee-based health care real estate trust (REIT) is encouraged by slowing inventory growth and strong net absorption in many markets across the U.S., according to NHI President and CEO Eric Mendelsohn.
“We started 2019 in a much more defensive posture than is usual for NHI, and we experienced good momentum throughout the year,” Mendelsohn said during a fourth-quarter earnings call with investors and analysts Wednesday. “We are in much better shape as we enter 2020.”
Last year, NHI announced or completed $329 million worth of acquisitions, mostly with existing operating partners. And the company has already announced $150 million in acquisitions on tap for this year, including a $135 million joint-venture deal with Des Moines, Iowa-based LCS to purchase a 401-unit continuing care retirement community (CCRC) near Seattle called Timber Ridge.
Despite the rosier outlook for 2020, the company doesn’t expect the aforementioned headwinds to lift in the next several quarters, tempering its optimism.
“The challenges in this industry cannot simply be lumped into general categories like AL versus IL, or primary versus secondary,” Mendelsohn said.
NHI is also working to stem its rising general and administrative expenses, which increased a whopping 28% to hit $3.6 million in the fourth quarter of 2019. But about $716,000 of that was related to severance, according to CFO John Spaid.
Still, the company reduced its executive compensation this year as a show of good faith to its shareholders, Mendelsohn said.
NHI reported normalized funds from operations (FFO) of $1.41 per share for the fourth quarter of 2019, which represents an increase of 4.4% from the same period in 2018. The company’s normalized adjusted funds from operations (AFFO) was $1.30 in the fourth quarter, an increase of 2.4% compared to 4Q18.
As of Feb. 18, NHI owned 157 senior housing communities, 76 skilled nursing facilities, three hospitals and two medical office buildings with 36 operating partners in 34 states.
The company is on the right track this year thanks in part to its willingness to be creative in how it works with its operating partners, Mendelsohn said. That is evidenced in the lease structure NHI helped put in place for its new Timber Ridge property.
The JV for Timber Ridge consists of one company which owns the property and another that owns the operations, an arrangement also known as an PropCo/OpCo split. NHI owns an 80% stake in the Timber Ridge PropCo, while LCS owns the remaining 20%. And LCS has a 75% ownership interest in the OpCo, with NHI owning 25%. The OpCo is a tenant of the PropCo under a triple-net lease.
“With the Timber Ridge acquisition, we are dipping our toes back into RIDEA,” Mendelsohn said. “But unlike other RIDEA structures more common with health care REITs, we’ve done so with an embedded triple-net lease that mitigates the volatility of the underlying operation.”
Though triple-net leases will be NHI’s focus looking ahead, the company is open to forging more creative financing solutions with its operating partners, such as what it did with LCS.
“That’s a structure that we have spent a lot of time and energy vetting with our legal advisors and tax advisors to make sure it works,” Mendelsohn said. “We think it’s a winning combination of exposing us to RIDEA in a limited sense so that the operating performance, which is generally lumpy, will not interfere with our guidance.”
Another factor causing NHI to take a more optimistic view for 2020 is the ongoing improvement of its largest operator tenant, Bickford Senior Living, which represents 18% of the REIT’s cash revenue.
As Mendelsohn said many times in the past, Bickford has previously represented a sore spot in NHI’s senior housing portfolio. But in recent quarters, the operator’s outlook has improved as a result of several measures from NHI, including adjusting the operator’s rent and selling or transitioning its underperforming buildings.
As a result, occupancy at Bickford’s 45 properties with NHI has steadily trended upward. The company’s occupancy rate hit 86.1% in the fourth quarter of 2019, a marked gain from the 84.5% rate it logged for the same period in the prior year — while maintaining price discipline all the while, according to NHI Chief Investment Officer Kevin Pascoe.
“Developing new assets with Bickford will help us to continue to evaluate additional asset sales while maintaining our relationship … and upgrading the portfolio,” Pascoe said.
NHI shares were trading up a slight 0.24% late in the afternoon on Wednesday.