NHI Nears End of Portfolio Optimization, Plans Return to Growth

With National Healthcare Investors’ (NYSE: NHI) year-long effort to optimize its portfolio nearly complete, the company is once again renewing its focus on growth in the future.

The Murfreesboro, Tennessee-based real estate investment trust (REIT) made more progress pruning its portfolio in the second quarter of 2022 and bringing new operators into the fold, and in the meantime, management will continue to prioritize optimizing the company’s portfolio.

But with those efforts now bearing fruit, CEO Mendelsohn believes the company is in a good position from which to expand its senior housing platform in the not-too-distant future, and already he is seeing opportunities to do so.

“With the portfolio optimization efforts largely concluded, our focus now is very much on returning to growth,” NHI CEO Eric Mendelsohn said Tuesday during the company’s Q2 earnings call with analysts and investors.

As of Aug. 8, NHI counted in its overall holdings 127 senior housing properties, 68 skilled nursing facilities and one specialty hospital.

NHI reported normalized funds from operations (FFO) of $1.26 in 2Q22, compared with $1.10 in 1Q and $1.16 in the second quarter of 2021.Net income attributable to common stockholders per diluted share was $0.47 in 2Q2022, a $0.39 drop from the same quarter in 2021.

NHI’s shared value rose 1.14% to land at $$64.72 by the time the markets closed Tuesday.

Portfolio optimization nears completion

For the past year and change, NHI management has sought to transform the company’s senior housing portfolio into a “jewel box.” Those efforts are now largely complete.

In the second quarter of 2022, NHI disposed of 10 communities, advancing management’s stated objective of tightening the company’s senior living portfolio. The net proceeds for these 10 communities come in at $73.3 million.

Since the second quarter of 2021, NHI has sold a total of 31 senior living properties for more than $288 million, with an implied property cash NOI yield of 3.1%.

Included in the 2Q2022 dispositions were the sales of three underperforming communities operated by Bickford Senior Living that had struggled with occupancy lost during the pandemic and were weighing down the balance sheet, according to NHI Chief Investment Officer, Kevin Pascoe.

Following the sale, Bickford portfolio saw average occupancy increase 190 basis points to 84.5%.

“We’re still working on the sale of a few more Bickford properties,” Pascoe said on the call. “[This] should also improve the portfolio’s health and has no impact on in-place rent.”

Early in the second quarter, NHI reached a settlement agreement with Welltower (NYSE: WELL) to resolve allegations that Toledo, Ohio-based Welltower failed to honor certain legal obligations after acquiring a portfolio of communities that Holiday leased from NHI.

Under the agreement, NHI transferred operations of six independent living communities from Holiday Retirement to a joint-venture partnership with Merrill Gardens. The company also transferred operations of nine other independent living communities from Holiday to a joint-venture partnership with Discovery Senior Living.

In the time since those transitions, NHI has created a new senior housing operating portfolio (SHOP) segment that is made up solely of the 15 legacy Holiday communities, which management said added $2.9 million to the company’s second-quarter NOI.

The communities previously carried far higher margins in the past, and now management is focused on improving leasing volume, rebuilding the communities’ sales funnels and improving their occupancy.

“The goalposts have shifted a bit and we don’t expect to get back to a 45% margin,” Pascoe said. “But we do expect margins to improve over time.”

Even with a leaner, more optimized portfolio, NHI still granted rent deferrals totaling approximately $3.9 million to five senior housing operators. All told, the REIT collected about 94% of contractual cash due during the second quarter of 2022.

As of the end of Q2, NHI was still listing 13 properties for sale.

Return to growth ahead

With continued efforts to make the most of the company’s senior housing portfolios, NHI has in recent quarters tempered its appetite for growth. In April, NHI made its lone second-quarter acquisition, buying a 53-unit assisted living community in Oshkosh, Wisconsin for $13.3 million.

With a right-sized balance sheet and an improving senior housing portfolio, company leadership is now looking to once again pivot to growth.

“We’re in excellent financial health with leverage at the lower end of our targeted range, which gives us significant capital to deploy without the need to issue equity in the immediate future,” Mendelsohn said.

Regarding acquisition opportunities, Pascoe noted that the pipeline is definitely more active than it had been in recent quarters, which is encouraging.”

And there are signs the market is tipping back toward buyers, as the company has seen “several deals that we have previously passed on come back to the market.”

“We continue to prioritize deals with immediate real estate ownership or short-term financing structures with a path to ownership,” Pascoe said. “As I noted in our last conference call, we are seeing more RIDEA-type opportunities in the pipeline, and believe this is a tool for longer-term external growth.”

“But,” he added, “Our focus is now on driving operational improvements in the current ventures before looking to expand the platform.”