National Health Investors executives said Tuesday that they are pleased with the real estate investment trust’s financial performance and are seeking new types of deals with operators outside of the current portfolio, including deals related to skilled nursing facilities.
Normalized funds from operations increased 4.5% over the second quarter 2017 and were up 5.8% year-to-date, and normalized adjusted funds from operations increased 6.8% over second quarter 2017 and were up 6.9% year-to-date. The Murfreesboro, TN-based REIT invested more than $115 million in the second quarter, bringing the year-to-date total to $159 million, President and CEO Eric Mendelsohn said during the REIT’s second-quarter earnings call.
“NHI continues to grow at a measured pace with new acquisitions and investments,” he said. “We are exploring all avenues of growth, not just triple-net leases. While we know it’s a tough environment in the senior housing space right now, with supply and occupancy concerns on the top of everyone’s mind, we continue to view these conditions as an opportunity.”
NHI, which the CEO described as “a triple-net REIT,” is open to joint ventures and RIDEA deals that he said would mean “new business, different operators, different structures.”
“We’re interested in those structures where it’s the right operator, where the operator has a good history and where the operator has a sufficient balance sheet to participate in the real estate and not just use us as a checkbook,” the CEO said.
Mendelsohn said one of his favorite structures is a real estate joint venture “where an operator has worked with private equity or some other investor and has a promote structure that would give them equity in the property. They could roll that over in a tax-efficient basis into a joint venture and participate in the ownership of the real estate, and NHI may or may not participate in the ownership of operations.”
Such a deal would need to be large enough to make it worth the extra overhead needed for “very labor-intensive” legal and accounting work on the front end and auditing and tax code compliance costs on the back end, after the transaction closes, he said.
Skilled nursing “a bright spot in our portfolio”
In the second quarter, “skilled nursing continued to be a bright spot in our portfolio,” Mendelsohn said. “What a difference a year makes in sentiment for this sector.”
Skilled nursing represents 28% of the REIT’s assets, compared with 29% for assisted living, 16% for independent living, 18% for entrance-free retirement communities, 5% for senior living campuses, and 3% for hospitals and medical office buildings.
NHI has been underwriting SNF deals on a “very selective” basis, Chief Investment Officer Kevin Pascoe said.
“We’ve been open for business the whole time. It’s just the market has been much more aggressive than we have,” he said. “I feel like there’s the opportunity for us to do deals, but at the same time, we’re going to make sure they are good buildings, have good coverage and have an operator that has a bench and the size to be able to accommodate the changes that are coming in the industry.”
Other highlights from the second quarter:
- NHI gained a new operating partner, Saginaw, MI-based Comfort Care Senior Living. In May, NHI acquired two Michigan assisted and memory care communities, totaling 106 units, for $17.1 million. The communities were acquired from and will be leased to affiliates of Comfort Care. NHI also has a purchase option on two additional communities in Michigan.
- Also in May, NHI acquired two 132-bed skilled nursing facilities in the Dallas-Fort Worth area of Texas for $29 million. The facilities were leased to affiliates of the Ensign Group, Pascoe said, bringing NHI’s total relationship with the Ensign Group to 19 buildings. “This acquisition completes NHI’s commitment to acquire four skilled nursing facilities in development,” he said.
- Holiday Retirement continues to work to build occupancy, Pascoe said. “Frankly, it’s going to take them a little bit of time to build coverage, but we’re starting to kind of see that a little bit in the numbers,” he said. “They have had net positive move-ins, so we’re very pleased to see that, and it’s something we’ll continue to watch closely.”
- Bickford Senior Living continues to stabilize the five assisted living and memory care communities it leases as part of a deal announced May 1. NHI acquired the former Sunrise Senior Living communities from LTC Properties. All of the communities are in upscale areas — in the Cleveland suburb of Rocky River; the Columbus, OH, suburbs of Bexley, Upper Arlington and Worthington; and in Erie, PA — and they have a combined total of 320 units. “Additionally, NHI closed on another site in Michigan with Bickford in July that is expected to break ground later this quarter,” Pascoe said.
The REIT’s pipeline, Pascoe said, “remains strong, with a healthy level of opportunities under review.”