Brookdale, Holiday on NHI CEO's 'worry list'
National Health Investors is watching the performance of Brookdale Senior Living and Holiday Retirement very closely, the real estate investment trust's president and CEO, Eric Mendelsohn, said Wednesday on a third-quarter earnings call.
“Holiday and Brookdale are on my ‘worry list,' and Senior Living Communities and Bickford are on my ‘bragging list,' ” he told shareholders and analysts.
The nine Brookdale communities in the Murfreesboro, TN-based REIT's portfolio are performing “reasonably well,” Mendelsohn said, adding: “They are not killing it. That's enough buildings for us to pay attention and to our wring our hands about as we watch all that's happening with them and turnover in the COO suite. That's a concern to us.”
Regarding Holiday, he said, “I'm concerned whenever a company like that has as much turnover as they did last year and then moves their corporate headquarters across the country and turns over much of their back office personnel and then of course change their management model in the buildings from live-in managers to external professional management.”
As of Sept. 30, Holiday accounted for 14% of NHI's annualized cash revenue, and Brookdale accounted for 2%, Chief Investment Officer Kevin Pascoe said. The REIT leases 25 independent living communities from a Holiday affiliate, and derived almost $11 million from the company in the quarter, according to supplemental information the REIT released for the quarter.
Mendelsohn referred to Senior Living Communities and Bickford as “bright spots.”
“We have some tenants that are just truly excelling and doing much, much better than their competitors and [better] than the market would expect,” he said.
Charlotte, NC-based Senior Living Communities accounts for 16% of NHI's annualized cash revenue, and Olathe, KS-based Bickford accounts for 15%, Pascoe said. That makes the two companies, along with National HealthCare Corp., the largest contributors in NHI's portfolio, according to supplemental information from the REIT.
As of Sept. 30, the Bickford leased portfolio included 43 communities, and the REIT recognized total revenues of almost $11 million as rental income from the company.
NHI said it recently transitioned a portfolio of four assisted living buildings with a total of 126 units in Minnesota to Bickford after the existing tenant did not comply with its lease terms.
“After trying to work through some issues of noncompliance with the operator, it became clear the portfolio needed to have a new operator,” Pascoe said.
The 10-year lease began Oct. 1, the REIT said. Mendelsohn said the annual rent for the first year was “right-sized” and reduced to $1.5 million from the $2.1 million paid by the former operator. Bickford has an option to purchase the portfolio, which NHI said it ultimately would like to sell due to historic occupancy challenges.
Executives also discussed another tenant in technical noncompliance with the terms of its lease to which it has issued a default letter. Issues relate to lease coverage, vendor payments and management, they said, stressing that the company is up to date on its rent payments.
“The good news is that we believe the situation is salvageable,” Mendelsohn said, adding, however, that the process underway could take six months to a year.
“I think that there are some levers that can be pulled,” he said. “Not to get too granular, but managing overtime, less reliance on referrals like A Place for Mom that can give you residents but charge too high a price to do that, and then just some basic blocking and tackling of marketing and customer service and other types of hospitality issues.”
Despite numerous questions from analysts, executives did not identify the operator beyond saying that it is a privately owned company that also has assets outside of the NHI portfolio.
“Right now, we are being a little cautious about how much we say because, frankly, this is a private company with a brand name that if we start talking about them, the internet will light up in their markets and they could lose business,” Mendelsohn said. “It kind of becomes a self-fulfilling prophecy; when a competitor is having issues, their competitors pull that out to all new leads and say, ‘You don't want to put your family there because of this.' ”
Mendelsohn said he views LTC Properties Chairman, CEO and President Wendy Simpson's disclosure of issues with tenant Anthem Memory Care, made in her second-quarter earnings call, as “the gold standard of disclosures on defaulted tenants.” She named the tenant only when it had defaulted.
The CEO said NHI will disclose the name and additional information “if this tenant is in default on a monetary issue and when and if it's going to affect our earnings.”
Chief Accounting Officer Roger Hopkins said that the REIT has approximately $42 million of new investments that it expects to close on by the end of the year. They include a $34 million independent living community and an $8 million memory care community.
“The marketplace is competitive, but our pipeline remains very active and largely comprised of private-pay senior housing opportunities,” Pascoe said. “We continue to focus on growing selectively with high-quality operating partners and communities.”