National Health Investors (NYSE: NHI) is continuing to tweak its relationships with operating partners to better maximize its senior housing results, and the company’s top leader said he is “gaining confidence” that a runway for new growth is within reach.
The senior living operators in Murfreesboro, Tennessee-based NHI’s senior housing operating portfolio (SHOP) have had their “fair share of challenges” this year, and are not performing as well as NHI expected they would by now, according to President and CEO Eric Mendelsohn.
That said, the company is seeing consistency in operational patterns “with three straight quarters of operating and financial gains,” he added.
“SHOP is an important vehicle for organic growth and serves as a platform for external opportunities, so we’re committed to dedicating the resources necessary to make these communities best-in-class,” Mendelson said during the Nov. 8 call with investors and analysts.
In general, NHI has undertaken a years-long process to maximize the returns of NHI’s senior housing holdings, both in its triple-net and SHOP segments. That process continued into the third quarter of this year, with NHI and Discovery Senior Living agreeing to delay rent escalation under a master lease for six communities and temporarily reduce rents due under two single-property leases. The eight properties make up about 4% of NHI’s revenues.
Like the leaders of other public senior housing REITs, Mendelsohn said the current environment of high interest rates and looming debt maturities will favor the company in the new year as it seeks to work with new and existing partners.
“We think there is an ungrounded optimism that the cost of capital increases are temporary, and we’re regularly advising customers to make sure they live to fight another day,” Mendelson said. “They should be realistic about the higher for longer cost of capital and the growing illiquidity in senior housing, and carefully choose a partner that will work with them towards their success in the long-run.”
Analysts at BMO Capital Markets positively noted that NHI’s “rent coverage increased across the board with occupancy also up.”
NHI’s normalized funds from operations (FFO) totaled $1.08 per share during the quarter, and a quarterly net operating income from the SHOP portfolio of $2.3 million, up from $2.1 million in 2Q23.
NHI’s stock price closed at $51.47 per share, an increase of 2.18%. NHI’s senior housing holdings include 44 properties and 3,468 units.
‘Great strides to enhance our portfolio’
NHI has worked over the last few years to fine-tune its senior housing portfolio, with Mendelsohn previously likening it to a “jewel box.” That culminated in the creation of a new SHOP segment in 2022 with Discovery and Merrill Gardens as operating partners.
“We’ve made great strides to enhance the quality of our portfolio while maintaining our strong financial discipline,” Mendelsohn said during the call Wednesday.
The journey to building a senior housing “jewel box” has been fraught with challenges, and there have been some “head fakes” along the way, Mendelsohn said. But recent trends have given him more confidence that progress and improvement is around the corner.
“Last December, when we were talking to our operators, they were sure that there would be a steady drumbeat of increased occupancy all year. And if you recall, there was another variant, more flu and the occupancy kind of lost steam,” he said. “However, this past quarter has made me a believer that there is pent-up demand.”
Mendelsohn added: “If you would have told me that we would have over 300 basis points of improvement in our SHOP portfolio and four or five points of improvement in Bickford in one quarter, I would have bet against that.”
NHI’s portfolio within needs-driven senior housing, with the exception of its communities managed by longtime NHI operator Bickford Senior Living “continued to bear fruit” in the third quarter of the year.
Among the “fruit” Mendelsohn had in mind were growing occupancy rates. The company’s SHOP segment, which includes 15 properties, carried an occupancy rate of 81.2% as of September, a significant gain over the 75.1% occupancy low seen in February.
Looking ahead, NHI is “working closely with other tenants” to optimize cash flow.
Kevin Pascoe, NHI chief financial officer said the Discovery Senior Living portfolio is seeing momentum on both its SHOP and triple net real estate sides. An earlier amendment to the lease was made during the Covid pandemic, which allowed for a reset. By amending the lease, it allows for a rent “step up” to be pushed out and let the occupancy trend to build.
NHI also in the quarter closed on the sales of four properties with proceeds of $8.3 million and $1.6 million in seller financing. One property is still held for sale and is expected to be sold by early 2024 at the latest.
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