National Health Investors (NYSE: NHI) has extended additional rent deferrals to Bickford Senior Living, and executives with the real estate investment trust (REIT) are keeping their options open in terms of further tenant support given the unpredictable nature of Covid-19.
“We’re unwilling — so to speak — to make long-term decisions at what we hope is a low point in performance and operations,” Chief Investment Officer Kevin Pascoe said Tuesday on the company’s Q3 2020 earnings call.
Highlighting the uncertain nature of how the pandemic will play out over the next several months, the earnings call took place against a backdrop of rising case numbers across the United States but also promising vaccine news that broke on Monday. On that news, share prices spiked for publicly traded senior housing owners and operators, including NHI.
The “market spoke,” sending a message of confidence in senior housing’s ability to bounce back once a vaccine is available, NHI CEO Eric Mendelsohn said.
“We’re modeling an April, May  integration of vaccination and starting to return to normal,” he said.
Meanwhile, NHI is preparing to move opportunistically on acquisitions as the pandemic is pressuring some operators and developers to sell.
Bridging the gap
In August, NHI announced an agreement to defer $2.1 million in third-quarter rent for Olathe, Kansas-based Bickford. Bickford accounts for 15% of NHI’s annualized cash revenue of about $300 million.
Third-quarter occupancy across the 47-property Bickford portfolio was 81.7%, down from 82.5% in the second quarter. Occupancy did tick up slightly, to 81.8%, in September.
Given the ongoing pandemic-related pressure, Bickford may defer up to $3 million in rent for November, with optional deferrals of up to $750,000 for December 2020 and January 2021, NHI announced Tuesday. These additional deferrals would bear interest at an expected 8% per year, with a 12-month repayment period beginning in June 2021.
NHI is also making progress on a previously announced plan to sell nine properties to Bickford; the previously deferred rent will be forgiven upon closure of this transaction.
The 8% interest represents a nice fee for NHI if paid in full, BMO Capital Markets analysts John Kim and Juan Sanabria wrote in a “Flash” memo on the earnings results. They described NHI as “kicking the can, creatively.”
Kicking the can a short distance is the preferred approach given the fluid nature of Covid-19, the REIT executives repeatedly emphasized. Further deferrals or other actions to give tenants more liquidity and room to operate can always be pursued if necessary to “bridge the gap” between now and a more stable operating environment.
“What we’ve tried to put in place is something that gets us the flexibility and gives them cash to be able to manage through the next few months, and get us to a point where we have additional clarity,” Pascoe said.
In addition to the Bickford deferrals, NHI reached an agreement with another tenant to defer and abate rent. The deferral and abatement were $534,000 and $20,000, respectively, for the third quarter and $538,000 and $30,000, respectively, for the fourth quarter. The tenant has an option to defer $447,000 in Q1 2021.
Overall, NHI collected nearly 97% of third-quarter rent and 98% of October rent.
The REIT’s executives credited their commitment to a triple-net lease strategy, as well as their operator diversity and quality, with being able to maintain consistent performance even in the midst of Covid-19.
In the third quarter and for the year-to-date, NHI reported AFFO (adjusted funds from operations) per share growth of 1.5% and 4.5%, respectively, and the company is tracking toward the lower range of the guidance previously issued for 2020 but formally withdrawn due to Covid-10 uncertainties, Mendelsohn noted.
CCRCs resilient, independent living more troubled
Entrance-fee continuing care retirement communities (CCRCs), which account for about a quarter of NHI’s annualized cash revenue, have proven resilient, Pascoe said. This is attributable in part to the longer length of stay at CCRCs, and the younger age of residents.
In particular, CCRC operator Senior Living Communities (SLC) — accounting for 16% of NHI’s cash revenue — saw its occupancy decline just 10 basis points through Q3, to 79%. And although entrance fee sales are down overall compared with 2019, sales were up on a year-over-year basis in September and October.
Rental independent living communities in NHI’s portfolio have had a harder go of it, with the Holiday Retirement portfolio occupancy dropping 390 basis points sequentially, to 79.6%. Holiday represents about 11% of NHI’s annualized cash revenue.
The IL challenges are due to several factors. One issue is that many of these buildings are located on the West Coast, where government restrictions on visitation and residents’ ability to leave the communities have been stricter than in some other parts of the country.
Independent living buildings also tend to be larger than assisted living and memory care communities, making it more challenging to maintain the lead funnel to compensate for move-outs, Pascoe noted. That’s particularly true in the pandemic environment, when independent older adults may be less inclined to move.
Holiday is current on rent and is managing through the occupancy declines, Mendelsohn noted.
Opportunities for growth
Echoing some other REIT leaders who recently reported their quarterly earnings, NHI’s executives said they anticipate attractive acquisitions in the near future.
“We’re starting to see a lot of owners of destabilized buildings, or even new buildings that haven’t opened, throw in the towel, and we’re getting some really interesting chatter from the brokers that we work with about the opportunities out there,” Mendelsohn said.
Although cap rates for the moment appear to be staying low, the REIT also has creative ways to structure transactions in order to get deals done, he emphasized. For example, on a distressed property, the REIT might provide a loan with a purchase option contingent on stabilization.
This is not to say that NHI is about to go on a buying spree to add lease-up buildings to its portfolio. Moving on this type of deal requires the right quality of building and a trusted operating partner with sufficient liquidity to get through the lease-up period, and clarity is currently lacking on lease-up timelines, Pascoe said.
And, while senior housing opportunities likely will appear in the next 6 to 12 months, the company is interested in further diversifying its portfolio with additional skilled nursing, behavioral health and other asset types.
“The diversification we have right now is good,” Pascoe said. “If we continue to expand that pie, we’re in good shape.”