NHI Continues to Unload Underperforming Assets, Focus on Return to Growth

By Amy Stulick

National Health Investors Inc. (NYSE: NHI) teased more investment activity before 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, Tenn.-based real estate investment trust (REIT) is targeting another $50 million to $60 million in additional asset sales, including 10 properties currently being held for sale. Others, mostly senior living communities, are expected to be sold or moved into a held-for-sale status, Mendelsohn said during the REIT’s third quarter earnings call on Wednesday.

“We are focused on concluding our optimization efforts and returning to growth,” Mendelsohn said. “We continue to be bullish on the long-term industry fundamentals for senior housing.”

Underperforming assets are often a lose-lose for both tenant and landlord depending on factors outside of their control – market location and labor challenges, to name a few.

These particular disposition properties aren’t working for the operator, they’re not yielding what the contractual rent is, and NHI doesn’t expect them to recover any time soon, added NHI Chief Investment Officer Kevin Pascoe.

Such properties are in smaller market geographies where labor is going to be more of a challenge, he added, noting that it’s best for NHI to move on given the time they’ll need to recover.

Dispositions also fall in line with NHI’s plan to be conservative with its balance sheet while using the seller’s market to its advantage in the last year, according to Mendelsohn.

“Fortunately, our conservative financial policies and early and decisive actions to dispose of underperforming assets in a seller’s market benefited us and has kept our balance sheet in excellent health,” Mendelsohn said.

NHI’s offloading of underperforming properties in Q3 included the sale of seven skilled nursing properties for $43.7 million and two senior living communities for $16.4 million.

Since Q2 of 2021, NHI has completed the disposition of 32 underperforming senior housing properties for net proceeds of $296.4 million, with cumulative EBITARM coverage of 0.47x.

Net income attributable to common stockholders per diluted common share was 78 cents for the third quarter, an increase compared to 67 cents for the same statistic during Q3 2021.

Normalized funds from operations (FFO) per diluted common share was $1.06 for Q3, a decrease compared to $1.15 Q3 in 2021. Normalized funds available for distribution (FAD), meanwhile, was $47.4 million for 3Q compared to $51.2 million during 3Q in 2021.

NHI attributed Q3 results to about $5.5 million less in rental income due to completed asset dispositions, interest income being lower due to loan paydowns, along with general and administrative expenses being about $1.1 million higher, among other factors.

Primed for investment

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

Senior housing coverage was driven largely by improvement from Bickford, Pascoe said, with the needs-driven side at 0.96x, up 7 basis points from Q1 2022 while the discretionary senior housing portfolio coverage was 1.38x, down 1 basis points sequentially, but improved compared to 1.16x in Q4 2021.

Needs-driven and discretionary senior housing portfolios represent 28% and 29% of annualized adjusted NOI.

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

Since year-end 2020, NHI has managed to reduce debt by $377 million, according to CFO John Spaid. Paying off debt has turned out to be “very accretive,” Spaid said, and in turn NHI plans to enter transactions to get its growth back.

“What we’ve been doing is managing down the deferrals, we keep having to talk about the concessions we keep bringing up, and we’re succeeding at that,” said Spaid. “At the same time, we’re thinking about these trapped investment dollars.”

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

This is despite no material pricing changes as financing costs continue to rise, he said.

Private equity firms investing their own capital continue to be the biggest competition out there as NHI continues selling underperforming assets, according to Pascoe. A lot of the turnaround buildings have been challenging to get financing in place, too, but buyers are also having to bring more equity to the table to close the deal, he said.

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

NHI plans to position itself to be opportunistic as labor and other inflationary pressures continue to weigh on senior housing and skilled nursing operator margins alike. Rent concessions and interest expense is expected to be higher in Q4 of this year than Q3.

Dramatic macro changes, Spaid said, are unfolding in real time, and NHI must be responsive to a rising cost of capital, deploying FAD accretive investment if needed.

“If during 2023 the economy cools, inflation subsides and interest rates roll over and cap rates don’t rise or even compress, then we are equally well positioned,” added Spaid. “The theme for us this year is to be well positioned either way.”

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