National Health Investors (NYSE: NHI) is seeking to sell nine properties operated by Holiday Retirement, with plans to potentially sell even more properties this quarter.
The Murfreesboro, Tennessee-based real estate investment trust (REIT) has inked a non-binding letter of intent to sell the nine-property portfolio to an institutional buyer that is leased to Holiday with an aggregate net book value of $133.5 million. NHI expects to close the transaction in August for $129.8 million and recognize an impairment of about $3.7 million in the third quarter of 2021 in relation to the deal.
With the timing of the industry’s Covid-19 recovery still uncertain, NHI President and CEO Eric Mendelsohn cautioned the company is “not out of the woods yet.” In the meantime, he is evaluating other properties in the company’s senior housing portfolio, with potential plans to further prune it this year.
Already, NHI announced or completed more than $218 million in dispositions this year, with “concrete plans” for additional sales. And if current trends continue, the company will end up on the higher end of its previously announced goal to sell $250 million to $400 million worth of assets by year’s end, leaders with NHI said during the company’s second-quarter earnings call Tuesday.
NHI is evaluating the future of the other 17 Holiday properties in its senior housing portfolio. The effort could result in a range of outcomes, from selling the communities or swapping operators for them to even converting them to a RIDEA structure — a notable possibility given Mendelsohn’s previous RIDEA concerns.
Holiday is not the only operator the REIT has its collective eye on. NHI is also working to optimize its relationship with another longtime tenant, Bickford Senior Living, which could result in a range of similar outcomes, according to Mendelsohn.
The new sales and evaluations are part of the company’s larger effort to optimize its senior housing portfolio through sales or potential restructurings.
“We’ll have plenty of capital to redeploy as we start to build back our NOI,” Mendelsohn said during the earnings call. “Considering that lease coverage for many of the senior housing assets sales we are contemplating is significantly below 1x, we are seeing a nice arbitrage opportunity in selling assets with an effective yield in the low-single digits, and replacing them with investments at yields in the mid- to high-single digits.”
NHI logged funds from operations (FFO) of $1.16 per share for the second quarter of 2021, missing analysts’ expectations by about 10 cents.
The REIT collected about 87.3% of expected lease payments from tenants as rent deferrals crept up to $9.9 million in the second quarter of 2021.
Three of the company’s larger tenants — Senior Living Communities (SLC) Bickford and Holiday — also posted occupancy gains during the quarter. As of July, SLC’s occupancy rate had ticked up to 79.9%; Bickford’s grew to 79.6%; and Holiday’s increased to 74.9%.
The REIT’s latest earnings report was underscored by the “meaningful upturn in occupancy through July,” according to Jordan Sadler, equity research analyst at KeyBanc Capital Markets. But he also noted that it might take some time before the company’s senior housing tenants return to more normal conditions with regard to rent collections.
“While the Company appears to be turning the corner fundamentally and management remains focused on improving the portfolio’s position, it seems like it could take at least another six months before NHI’s tenants are in a position to fully cover their rents and until run-rate FFO/sh bottoms,” Sadler wrote in an Aug. 9 note to investors.
Although the REIT has balanced potential risk with reward in its recent moves, BMO Capital Markets analysts John Kim and Juan Sanabria echoed Mendelsohn’s sentiment that NHI is “not out of the woods yet.”
“Positively, the dividend has been reset, the balance sheet remains strong & occupancy is improving,” the Aug. 9 note to investors reads. “Despite Delta variant uncertainty, we continue to see the risk/reward balanced.”
NHI’s share price dipped almost 4.5%, landing at $62.49 by the time financial markets closed Tuesday.
Portfolio in flux
Leaders with NHI have spent the better part of 2021 searching for opportunities to strengthen the REIT’s senior housing portfolio, and the move to sell the nine Holiday properties falls in line with that effort.
“We felt that those buildings would be better off in other hands, whether because they need extraordinary capital expenditure, whether they need a different operator, whether the market … was not to our liking,” Mendelsohn said.
A little more than two years ago, the REIT restructured its lease with Holiday, and in doing so negotiated a subset of buildings to sell with the operator.
“We’ve had our eye on selling these buildings for a while,” Mendelsohn said. “[The Covid-19] crisis prompted us to take drastic measures that otherwise may not have been taken, so that’s that’s the genesis of this transaction. “
NHI is currently in negotiations for the 17 remaining Holiday properties in its portfolio. Possible outcomes for the communities include NHI initiating further asset sales; changing operators; restructuring leases; or adopting a RIDEA structure — “which is not a term that we usually bandy about here,” Mendelsohn said.
In June, it was revealed that Atria Senior Living was acquiring Holiday Retirement, with Welltower (NYSE: WELL) buying the 86 properties that Holiday owned and self-managed for $1.58 billion in conjunction with the acquisition. That development came in the middle of NHI’s portfolio review with Holiday, and added “a couple more complexities to that decision,” Mendelsohn said.
“Previously, the org chart was NHI; the landlord, Fortress — what we call in our business the operator — and then below that, the operator hires the manager, which is Holiday,” he explained. “So now on that org chart, Holiday becomes Holiday/Atria, but … technically Welltower is our tenant, and so that complicates things.”
NHI is also working to optimize its relationship with Olathe, Kansas-based Bickford. But because NHI is its majority capital partner, “the number of tools in the toolbox is different,” Mendelsohn said.
“As we think about their portfolio, we consider selling buildings back to them, we consider selling buildings to third parties with them staying on as manager and we consider selling to third parties with them not staying on as manager … as well as restructuring the lease,” he explained.
NHI previously announced the sale of six Bickford communities in the first quarter of 2021.
Looking ahead, NHI expects to start receiving payments from its tenants’ rent deferrals largely starting in the first part of 2022, and the company’s leaders believe it will likely take about 18 to 24 months for those deferrals to be paid back.
As is the case with other senior housing REITs, NHI held off from providing guidance for the year, citing uncertainty surrounding the Covid-19 pandemic. But, the picture might be coming into clearer view now that the year is more than halfway through.
“Our visibility is improving now, and we remain optimistic on the longer-term fundamentals that drive our growth for years to come,” Mendelsohn said.
Companies featured in this article:
Bickford Senior Living, Holiday Retirement, National Health Investors, NHI
