NHI continues to offload underperforming assets and focus on returning to growth

By Amy Stulick

National Health Investors Inc. (NYSE: NHI) teased more investment activity ahead of the end of the year as the company seeks to take advantage of a normalizing seller’s market.

NHI CEO Eric Mendelsohn said the Murfreesboro, Tennessee-based real estate investment trust (REIT) is targeting an additional $50-60 million in additional asset sales, including 10 properties currently held for sale . Others, mostly seniors’ residences, are expected to be sold or transferred to held-for-sale status, Mendelsohn said during the REIT’s third-quarter earnings call on Wednesday.

“We are focused on wrapping up our optimization efforts and returning to growth,” Mendelsohn said. “We continue to be optimistic about the long-term fundamentals of the senior housing industry.”

Underperforming assets are often a loser for both tenant and landlord based on factors beyond their control – market location and labor issues, to name a few.

These particular layout properties are not working for the operator, they are not earning contractual rent, and NHI does not expect them to recover any time soon, added NHI Chief Investment Officer Kevin Pascoe.

These properties are in smaller geographic markets where labor will be more difficult, he added, noting that it is best for NHI to move on given the time they will need to recover. .

The divestments are also in line with NHI’s plan to be conservative with its balance sheet while using the seller’s market to its advantage over the past year, according to Mendelsohn.

“Fortunately, our conservative financial policies and our early and decisive actions to dispose of underperforming assets in a selling market have served us well and kept our balance sheet in excellent health,” Mendelsohn said.

NHI’s offloading of underperforming properties in the third quarter included the sale of seven skilled nursing properties for $43.7 million and two senior residences for $16.4 million.

Since the second quarter of 2021, NHI has completed the divestment of 32 underperforming retirement homes for net proceeds of $296.4 million, with a cumulative EBITARM coverage of 0.47x.

Net income attributable to common shareholders per diluted common share was 78 cents for the third quarter, an increase from 67 cents for the same statistic in the third quarter of 2021.

Normalized funds from operations (FFO) per diluted common share was $1.06 for Q3, down from $1.15 in Q3 in 2021. Normalized funds available for distribution (FAD), meanwhile, , were $47.4 million for 3Q versus $51.2 million for 3Q in 2021.

NHI attributed the third quarter results to approximately $5.5 million less in rental income due to the completed asset disposal, lower interest income due to loan repayments, as well as fees general and administrative up approximately $1.1 million, among other factors.

Loan for investment

In terms of future investments, Mendelsohn said he still sees the acquisition market as “dislocated,” but pipeline talks have been more concrete lately. NHI is optimistic that outstanding carryover balances, rent restructuring and tenant transitions will contribute to better organic growth in the years to come.

Senior housing coverage was largely driven by Bickford’s improvement, Pascoe said, with the needs side at 0.96x, up 7 basis points from the first quarter of 2022, while the discretionary coverage of the senior housing portfolio was 1.38x, down 1 basis point sequentially, but improved from 1.16x in Q4 2021.

The needs-based and discretionary senior housing portfolios account for 28% and 29% of the annualized adjusted NOI.

“[We’re] fortunate to be in a position of considerable financial strength to navigate through near-term macroeconomic headwinds and capitalize as these industries recover,” Mendelsohn.

Since the end of 2020, NHI has successfully reduced its debt by $377 million, according to chief financial officer John Spaid. Debt repayment has proven to be “very accretive,” Spaid said, and in turn, NHI plans to complete transactions to return to growth.

“What we’ve done is manage the deferrals, we keep talking about the concessions we keep talking about, and we’re getting there,” Spapaid said. “At the same time, we’re thinking about those trapped investment dollars.”

While the third quarter was quiet from an investment perspective, Pascoe said the pipeline is “definitely more active” than in recent quarters — an encouraging trend for future investments.

This is despite the absence of significant price changes as funding costs continue to rise, he said.

Private equity firms investing their own capital continue to be the biggest competition as NHI continues to sell underperforming assets, according to Pascoe. It has also been difficult to secure financing for many turnaround properties, but buyers also need to bring more equity to the table to close the deal, he said.

“There’s going to be a slower pace to get those [turnaround assets] out of the portfolio, but… we see offers coming in, and we see groups that have capital coming to the table; it takes a little longer to get them out,” Pascoe said.

NHI plans to position itself opportunistically as labor and other inflationary pressures continue to weigh on the margins of senior housing and skilled nursing operators. Rent concessions and interest charges are expected to be higher in the fourth quarter of this year than in the third quarter.

Dramatic macroeconomic changes, Spaid said, are unfolding in real time, and the NHI must be responsive to the rising cost of capital, deploying FAD accretive investments where necessary.

“If in 2023 the economy cools, inflation goes down and interest rates go back up and cap rates don’t rise or even compress, then we’re also well positioned,” Spaid added. “The theme for us this year is to be well positioned anyway.”