NHI Forges Merrill Gardens, Discovery JVs as Part of ‘Jewel Box’ Transformation

National Health Investors (NYSE: NHI) is in the midst of a transformation that company leaders believe will position the real estate investment trust for success in 2022.

The Murfreesboro, Tennessee-based REIT is planning to pare down its portfolio managed by Bickford Senior Living, going from 42 communities as of Sept. 30 to 35 or 36. NHI also is “resetting” Bickford’s annual cash rent to a lease coverage level that “makes them a much healthier tenant financially,” NHI CEO and President Eric Mendelsohn said.

At the same time, the REIT in August sold a portfolio of nine underperforming Holiday-managed properties, and has plans to sell two more.


For its remaining 15 Holiday properties, NHI is forming two joint-venture agreements and “RIDEA-like” management structures with two operators: Merrill Gardens, a newcomer the REIT’s portfolio on board to manage six former Holiday properties as Truewood by Merrill communities in California and Washington; and Discovery Senior Living, an existing NHI partner that is set to operate eight or nine Holiday communities in six states on the East Coast.

All told, the REIT has completed sales of 19 properties — including 16 underperforming senior housing assets — for approximately $216 million since the beginning of 2021. The moves are aimed at transforming NHI into a “high-coverage, high-quality portfolio” that is ready to realize “unprecedented rate growth,” when industry fundamentals improve, according Mendelsohn.

“In other words, a jewel box,” he said. “We’re making steady headway and expect that our portfolio optimization activities will be complete by the end of the first quarter of 2022.”


For the third quarter of 2021, NHI reported normalized funds from operations (FFO) of $1.15 per share, missing analysts’ expectations by three cents. The REIT collected about 85.6% of its contractual cash due for the third quarter while granting rent deferrals totaling approximately $5.8 million, with all of it going to Bickford, Holiday and three other senior living tenants.

Jewels in the box

In remaking its Bickford portfolio, NHI is reducing the Olathe, Kansas-based operator’s annual cash rent, going from a current annual rent north of $46 million to about $28 million at the start of 2022. The agreement calls for a rent reset after 24 months, with a minimum floor set at 8% of the portfolio’s gross asset value, which NHI equates to approximately $32 million to $33 million in annual rent.

NHI is also deferring $4.5 million in 4Q21 rent and up to $4 million in 1Q22 rent for Bickford.

The rent cut doesn’t reflect waning optimism about Bickford. In fact, Mendelsohn is encouraged by the operator’s sequential occupancy rebound of 280 basis points in the third quarter of 2021. Although Bickford — like many other operators — is grappling with the cost of labor, Mendelsohn believes these are temporary challenges that will give way to margin expansion in the years ahead.

“That is why our agreement includes resetting the lease to fair market value after two years with a minimum floor [based on 8% yield on the portfolio’s original purchase price],” Mendelsohn said.

Regarding NHI’s legacy Holiday assets, Mendelsohn is optimistic that the JVs forged with Merrill Gardens and Discovery will help the Holiday portfolios get back to pre-pandemic margins, which were significantly higher at 47.5% and 45.5%, respectively.

“In addition to participating in the operating recovery of these independent living communities, we believe that by entering into these operating joint ventures, we are better positioned strategically to grow our senior housing business,” Mendelsohn said.

He added that the JVs could serve as new platforms for growth and acquisitions in the future, and that “we’re hopeful that will be the case.”

Regarding rate growth, most of NHI’s operating partners are increasing annual resident rates by about 5% to 6% in 2022, according to Chief Investment Officer Kevin Pascoe. Some are also exploring a surcharge aimed at cutting down on labor expenses.

“We think there’s a good possibility that there will be good rate growth for the year — it’s an effort to mitigate expenses,” Pascoe said.

Rate growth has been a hot topic among other public senior living companies in the third quarter, with executives at Welltower (NYSE: WELL) and Ventas (NYSE: VTR) noting aggressive rate increases among their operating partners during their recent earnings calls. Publicly traded senior living operator Brookdale Senior Living (NYSE: BKD) CEO Cindy Baier also believes the company will be in a position to drive rate growth and expand the company’s margin in 2022.

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