Murfreesboro, Tennessee-based National Health Investors (NYSE: NHI) collected approximately 100% of rent in Q2 2020 and posted solid quarterly earnings; looking ahead, the real estate investment trust (REIT) is taking steps to support its tenants in light of ongoing pandemic-related challenges.
That is the backdrop for an agreement to defer $2.1 million in third-quarter 2020 rent for Olathe, Kansas-based Bickford Senior Living, NHI’s largest tenant. As part of the arrangement, which is also designed to strengthen the operator’s relationship with NHI, the REIT intends to sell nine Bickford communities.
NHI executives are heartened by trends across the portfolio, and welcomed Senior Living Communities (SLC) Founder and CEO Donald Thompson to the earnings call to present an operator’s perspective. Thompson emphasized that after the initial crisis in March and April, SLC and the senior living industry as a whole have responded effectively to the pandemic and are seeing results trend positively in terms of resident health and safety as well as on business metrics.
“Our entire industry, in my opinion — whether they’re my competitors who I like or dislike — has stepped up and is doing a great job,” Thompson said. “That story is not getting enough attention in the media.”
Still, Thompson and NHI’s leadership are cognizant of the unpredictable nature of Covid-19. After hitting coastal markets hard in the spring, the pandemic more recently spiked in the Midwest, South and other areas where NHI has more exposure.
As a result, the REIT logged 450 active resident cases of Covid-19 in 85 buildings as of Aug. 4, marking the second-highest weekly number since the company began reporting this data in mid-March, CEO Eric Mendelsohn said on Tuesday’s call.
However, the statistic is attributable in part to the fact that some of NHI’s skilled nursing facility tenants are voluntarily taking Covid-19 patients who are being discharged from hospitals. Testing has also ramped up since the early days of the pandemic.
“Our operators have done an admirable job of limiting the spread of Covid if it does get into the community,” Mendelsohn said. “More extensive testing is leading to earlier detection, particularly of asymptomatic residents, which we believe translates to better clinical outcomes and fewer deaths.”
In terms of its quarterly financial results, cash net operating income (NOI) of $77.4 million represented an 8.5% year-over-year increase and a 1.5% quarterly increase. The company posted GAAP net income attributable to common stockholders of $0.99 and adjusted funds from operations (FFO) of $1.35 per diluted common share.
“We had a very solid second quarter,” CFO John Spaid said. “And if it were not for the ongoing Covid uncertainty, then today we would have been reporting to you that our six-month performance was tracking at the high end of our suspended 2020 guidance.”
Bickford accounts for 17% of NHI’s revenue. On a same-store basis, occupancy for Bickford was 84.2% for Q2 2020, which was a 300 basis point sequential decline. For June and July, same-store occupancy was at 83.5%, indicating that occupancy erosion is slowing compared to earlier in the pandemic.
“Bickford had monthly occupancy declines of over 100 basis points in April and May, so we are cautiously optimistic by the slowing trends,” NHI Chief Investment Officer Kevin Pascoe said Tuesday on the REIT’s Q2 2020 earnings call.
NHI collected approximately 100% of contractual rent in the second quarter and 96.9% of contractual rents due in July. The REIT is in active discussions with tenants about ways to maintain their financial strength and flexibility during Covid-19, with the Bickford rent deferral being one notable example.
In conjunction with the rent deferral, NHI has a non-binding letter of intent with Bickford to negotiate the sale of nine communities, with Bickford itself or third parties as potential buyers. Half of the deferred $2.1 million is being held in escrow; those funds will be returned, and Bickford will be forgiven from repaying the deferred rent, if the nine communities are sold by the end of the year.
NHI intends to sell the nine properties at or above their book value, which was approximately $76.7 million as of June 30.
Executives with NHI declined to identify the nine communities, but said they vary in terms of location and their age. Some are located in competitive markets with excess supply; some are in secondary markets where their pricing power has been outpaced; and some are in need of closer attention and a more suitable capital structure.
Overall, this arrangement should strengthen Bickford and NHI individually and pave the way for their continued longer-term partnership, said Pascoe. He believes that having real estate on the balance sheet will benefit Bickford, if the company buys the buildings, and that Bickford will be in a better position should it have bank debt on the properties rather than escalating leases.
Pascoe and other NHI leaders also believe that Bickford is skilled in new development, and want to position the REIT to have more exposure to these projects and less investment in older and underperforming Bickford communities.
“They’ve done a tremendous job picking sites, developing, filling buildings, and we want to support that portion of the relationship,” Pascoe said.
The Bickford rent deferral addresses NHI’s “elephant in the room,” given that rent coverage for Bickford has been at or below 1.0x on an EBITDAR basis for the past few quarters, BMO Capital Markets Analyst John Kim wrote in a note to investors.
NHI is in discussions with another tenant on potential Q3 rent deferral. Executives did not disclose the operator’s identity but said the deferred amount would be less than the Bickford deferral. And, rent deferral is only one option on the table, in terms of steps NHI can take to give operators more financial breathing room as they face higher expenses and reduced revenue due to the pandemic. Other possibilities include temporarily releasing security deposits or escrows back to providers, for example.
Having these “tools in our toolbox” is another benefit of sticking with triple-net leases rather than shifting to RIDEA, as many other REITs have in recent years, Mendelsohn argued.
“I also want to point out that when we use the word deferral, that means there is an expectation that flows through accounting that those revenues will be received in the future,” he said. “Whereas in a SHOP portfolio [senior housing operating portfolio], when you don’t get the revenue, you’re out of luck. It’s gone forever.”
The right direction
Charlotte, North Carolina-based SLC is NHI’s second-largest tenant, accounting for 15% of revenue. SLC operates 15 senior living communities across six states, with the majority being continuing care retirement communities (CCRCs). Eleven properties are owned by NHI.
Several data points demonstrate that Covid-19 hit senior housing hard in March and April, but providers have been on firmer footing in more recent months, SLC CEO Thompson said on Tuesday’s call.
Covid-19 is more fatal for older adults than other demographics, and 11 SLC residents did die due to the virus; however, only one death has occurred since early May, Thompson said. SLC’s total resident population numbers about 2,900, and statistically about 140 residents would have died over the last five-month period in any given year, putting the Covid fatality rate at about 8% for SLC.*
More SLC employees have been diagnosed with Covid-19 than residents, and team member infections did spike in June and July. Currently, SLC averages 0.8 residents and 1.5 team members infected per community.
In terms of expenses, costs related to Covid-19 averaged $44 per resident as of the end of July, Thompson said. That increases to between $150 and $200 per resident if there is an active Covid-19 infection at a community, with almost that entire differential due to elevated labor expenses such as for hero pay, overtime, or agency workers.
SLC’s occupancy has declined 130 basis points since Jan. 1, 2020, but increased in May and June, and increased across the NHI portfolio in July.
Independent living occupancy for SLC has declined 50 basis points in 2020; assisted living occupancy has held steady; memory care occupancy increased 900 basis points; and skilled nursing occupancy declined 630 basis points.
These trends point to the needs-based nature of AL and memory care, and the big hit that skilled nursing sustained as hospitals suspended elective procedures, Thompson said.
“If it were not for our drop from skilled nursing, our occupancy would be up overall year to date,” he said.
He also is optimistic that a Covid-19 vaccine will be available by December and that a “new normal” will have largely taken hold by next April. However, two concerns loom large in his mind, given that the pandemic will persist at least until then.
One concern is how to address the lack of interaction between residents and their loved ones, due to visitation bans.
“In our communities, we think this is the No. 1 issue affecting revenue, new resident move-ins and occupancy in the entire industry,” Thompson said.
The other concern is the “overwhelming” negative media coverage of skilled nursing, depicting these facilities as “hotbeds of Covid deaths.” This is an unfair characterization of SNFs, and creates a larger issue due to consumer confusion between SNFs and senior living, Thompson said.
Despite these challenges, there are positive signs of ongoing consumer demand for senior living. Though down compared to 2019 levels, leads are up almost 100% over the last two months, according to Thompson. And 23.5% of tours converted to move-ins in 2019, while that number has been 26.2% for SLC since March 1.
“So, the good news is that things are going in the right direction,” Thompson said. “We just need to keep it that way.”
*Editor’s Note: A previous version of this article stated that SLC serves 209,000 residents. That figure has been corrected to 2,900. SHN regrets the error.