The fourth quarter of 2020 brought more disruptions for National Health Investors’ (NYSE: NHI) senior housing tenants, but the company’s leaders are cautiously optimistic that better months are ahead.
Recent positive trends in sales leads and vaccination rates, coupled with the prospect of more federal support for senior living providers this year, have given the company’s executives hope that a wider senior housing recovery could happen later in 2021. Active cases of Covid-19 in the company’s 162 senior housing and 75 skilled nursing properties have fallen sharply amid its ongoing vaccination efforts, signaling that the pandemic is slowing down after a turbulent and deadly winter.
And while the REIT collected 93.9% of its contractual rent during the fourth quarter of 2020, rent collection was stronger in early 2021, hitting 99.4% in February.
Average occupancy for the company’s top three operator tenants by revenue share — Senior Living Communities (SLC), Bickford Senior Living and Holiday Retirement — is below pre-pandemic levels. Performance varied among NHI’s operators and product types, according to NHI President and CEO Eric Mendelsohn.
“The impact of the pandemic has been uneven across our portfolio, as the entrance fee and skilled nursing communities — which generate more than 50% of our cash revenue — have been more resilient than our freestanding assisted living, memory care and independent living tenants,” Mendelsohn said Tuesday during the company’s 4Q20 earnings call with investors and analysts. “But the pandemic has obviously placed a considerable burden on our tenants, which clouds visibility in the weeks and months ahead, and will make 2021 a more challenging year.”
NHI reported funds from operations (FFO) of $1.37 per share in the fourth quarter of 2020, falling behind analysts’ expectations by four cents. The REIT did not share guidance for the full year of 2021, citing uncertainty related to the Covid-19 pandemic and the timing of a possible recovery.
“NHI continues to face industry headwinds, with 4Q20 FFO per share down 2.8%, year-over-year, and missing consensus, as rent deferral options were exercised,” wrote BMO Capital Markets Analyst John Kim in a Feb. 22 note to investors. “On a positive note, NHI’s balance sheet remains strong.”
For Jordan Sadler, equity research analyst at KeyBanc Capital Markets, the latest earnings report held no surprises, as the company had disclosed its rent deferrals and occupancy rates in previous bi-weekly updates.
“Importantly, NHI reported few new rent deferrals under existing leases in 4Q or since quarter end, demonstrating the resilience of the portfolio, likely partly reflecting government support; management refrained from providing 2021 guidance,” Sadler wrote in a note to investors. “But [the REIT] suggested that it does expect ‘occupancy will inflect … in 2021.’”
And Daniel Bernstein, director and senior REIT analyst at Capital One, believes NHI had a better-than-expected quarter, and noted the fact that the REIT is making decent progress on its rent collections this year.
NHI’s stock price had fallen by 2.8% to land at $67.80 by the time the markets closed Tuesday.
As was the case in previous quarters, NHI provided some of its operators rent deferrals as they faced headwinds in the fourth quarter of 2020.
Occupancy for Senior Living Communities, Bickford Senior Living and Holiday Retirement — representing 15%, 15% and 11% of the company’s annualized cash revenue — was 77.3%, 75.6% and 75.3%, respectively, in January. Not all of NHI’s operators shed occupancy in the time between December and January, however. For example, Charlotte, North Carolina-based Senior Living Communities added 110 basis points of occupancy at the nine NHI properties it operates between December and January.
Olathe, Kansas-based Bickford Senior Living received a rent deferral of $3.75 million in the fourth quarter of 2020, totaling $5.85 million for the year. NHI also agreed to grant the operator a $750,000 rent deferral for the month of January in 2021. Bickford’s December and January deferred rent is slated to bear interest at 8%, with repayments scheduled over twelve months beginning in June.
The REIT is also working to sell nine of its 47 properties managed by Bickford, which Mendelsohn says would improve the operator’s annual cash flow by about $3 million.
“We’re still moving forward with a closing currently targeted in March,” Mendelsohn said during Tuesday’s earnings call. “However, the rapidly changing underwriting process for these buildings makes valuation for the lenders more difficult, so we’re working along multiple paths with our Bickford partners to create a long-term solution that makes them a stronger company.”
NHI also provided rent concessions with another tenant it did not name, totaling more than $1 million in deferrals and $50,000 in abatements for the full year of 2020. The REIT also doled out $447,000 in deferrals in the first quarter of 2021.
And NHI provided financing of up to $22.2 million for 41 Management to construct a 110-unit independent living, assisted living and memory care community in Sussex, Wisconsin. All told, the company completed $176.5 million in health care real estate investments, and $50.4 million in note investments, for a total of $226.9 million last year.
Overall, Mendelsohn believes that NHI’s operating partners still have a tough road ahead of them. But there are signs that occupancy has hit or will soon hit its trough, and that the senior living industry is “much closer to finding the bottom than when we were just weeks ago,” Mendelsohn said.
And in the meantime, NHI will continue to analyse how its different operators are performing in the tough environment
“We’re trying to help all of our clients as best we can and help them get through this crisis,” Mendelsohn said. “But we’re definitely taking notes on people’s behavior, and ability to live up to the spirit of the agreements.”
Despite the pandemic headwinds in Q4, the REIT is seeing signs of improvement in 2021, giving executives optimism that this year could be an inflection point in a wider recovery for the industry.
One bright spot is the fact that 87% of NHI’s senior housing communities had completed at least their first round of Covid-19 vaccinations as of Feb. 9, while 4% have scheduled the first round. That includes 26 communities operated by Winter Park, Florida-based Holiday Retirement, which worked to build its own vaccine network after independent living was left out of the Pharmacy Partnership for Long-Term Care Program, which only prioritizes nursing homes and assisted living communities for vaccine distribution.
Meanwhile, active cases of Covid-19 have fallen sharply. As of Feb. 9, NHI reported 244 confirmed active resident cases, representing less than 1% of its total unit capacity in skilled nursing and senior housing and the lowest level of cases since October of last year.
New sales leads are also trending upward, which could push occupancy higher in the months to come despite new sale conversion rates that have dipped below historical levels, according to Chief Investment Officer Kevin Pascoe.
Looking ahead, NHI is planning to have an active year of investments in 2021. That may include bolstering relationships with existing tenants, or forging relationships with new ones.
“The pipeline includes triple net opportunities and shorter term higher yielding products like mezzanine debt and development financing,” Pascoe said. “Currently, we have approximately 200 million board-approved investments subject to further due diligence and underwriting.”
The fact that SLC gained occupancy between December and January gives the REIT’s leaders hope that an industry-wide recovery is in the cards for 2021. The company also has some communities in its portfolio with occupancy above the industry average, such as Timber Ridge at Talus, a CCRC in Issaquah, Washington with occupancy above 90%.
And while the forecast is still hazy, Pascoe is viewing SLC’s occupancy improvement as an indicator of what might come.
“We think that will trickle through or flow through to the rest of the operating partners based on what we’re seeing so far,” Pascoe said. “But … the trend needs to still formalize.”
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