National Health Investors (NYSE: NHI) reported “disappointing” results for its newly formed senior housing operating portfolio in the fourth quarter of last year, but CEO Eric Mendelsohn is still optimistic about the company’s next chapter.
Giving him confidence is the fact that the company has assembled its ideal portfolio of senior living communities, setting the stage for future growth. And while there is much work left to do in the company’s SHOP segment, NHI management also sees it as the biggest opportunity for future internal growth and likes where the trends are headed.
“We’re not satisfied with the fourth-quarter results, but continue to see a path towards significant margin improvements as we get the right personnel in place and invest more substantially in the properties,” Mendelsohn said during an earnings call Thursday.
The Murfreesboro, Tennessee-based real estate investment trust (REIT) reported a mixed bag of occupancy among its Senior Living Communities (SLC) Bickford Senior Living portfolios and SHOP segment. Occupancy for the nine properties SLC managed ticked up to 84% in January, while occupancy for NHI’s 39-property Bickford segment dropped to 81.7% last month from 83.6% a year prior.
January occupancy for the company’s SHOP segment registered at 74.5% in January, representing a decline versus the 78.6% occupancy rate the segment saw in the same month one year prior..
NHI initially formed the SHOP segment last year with 15 underperforming former Holiday Retirement communities, and that is largely the reason for the occupancy decline, according to Mendelsohn. In the long-term, he is more confident the communities will rebound thanks to Merrill Gardens and Discovery Senior Living, who are now operating them.
“We’re putting a lot of new CapEx in the buildings, we’ve hired some new salespeople, and we have a lot of confidence in Discovery and Merrill Gardens, our two operating partners,” Mendelsohn said. “But it’s going to take some time.”
Total net operating income (NOI) for NHI registered at nearly $59 million in the fourth quarter, while the company’s normalized funds from operations (FFO) in 4Q22 was $0.85, compared to $1.06 during the same period last year.
NHI’s stock price fell 6.67% on Wednesday to rest at $54 per share.
‘Increasingly becoming a buyers’ market’
In previous quarters, Mendelsohn has said he aimed to build a “jewel box” of senior living communities. While there is still more work left to do optimizing certain aspects of the company’s senior housing holdings, he said NHI in 2023 is honing in on a larger growth strategy.
Since mid-2021, NHI sold 39 underperforming senior living properties for net proceeds of $340 million, with 13 senior living properties still listed as held for sale with a value of $43.3 million. Now, Mendelsohn said the company is more or less where he wants it to be.
“While we will continue to make dispositions and provide limited financial assistance to certain operators, the execution of our portfolio optimization is largely complete,” Mendelsohn said.
NHI also has much more visibility in the year ahead, with Mendelsohn noting there was “less noise” in the market overall. That was reflected by the fact that the company returned to providing annual guidance during the earnings call Wednesday.
The “largest internal growth opportunity,” Mendelsohn noted, was in NHI’s recently-formed SHOP portfolio and transitioned to new operators after “several years of neglect.” But that has changed thanks to Discovery and Merrill Gardens, Mendelsohn said; and NHI is expecting SHOP NOI of $6 million to $8 million in the “next couple of years.”
“We’re seeing the funnel rebuild in terms of lead volume and move-ins,” NHI Chief Investment Officer Kevin Pascoe said.
Looking ahead, Mendelsohn said NHI’s greatest growth opportunity comes in the form of acquisitions and new loan originations.
“We believe that we’ve reached that point and we’re well positioned to take advantage of what is increasingly becoming a buyers’ market,” Mendelsohn said.
In 2022, NHI invested $101.5 million across its portfolio and announced further investments of $54.8 million in 1Q23. Recent investments in 2023 include two memory care communities operated by Silverado Senior Living for $37.5 million and a 60-unit AL and memory care community from Bickford Senior Living for $17.3 million.
The company currently has $135 million in available capacity to deploy without the need for seeking new equity. Those available funds, Mendelsohn said, provide “a good baseline from which we can start growing again,” with anticipated growth of between 3.5% and 5%.
“The outlook for 2023 is more promising in our view and we look forward to demonstrating our progress as we return to growth,” Mendelsohn said.
In April, NHI restructured the Bickford lease to $28.3 million in annual cash rent, and the operator will begin repayments of $20.5 million in cumulative deferrals over the next several years.
Around $53 million in deferrals and notes receivable outstanding also play into the company’s growth as senior living industry indicators improve and tenants repay balances stemming from the Covid-19 pandemic. NHI granted deferrals of $35.8 million including $20.5 million to Bickford and $15.3 million to other operators.
Rental rate resets could also help spur future growth, Mendelsohn noted.
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