National Health Investors leaders explain the allure of 'B' markets

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Eric Mendelsohn
Eric Mendelsohn

National Health Investors executives are counting on markets outside of major urban areas to drive success in the portfolio, they told an audience Tuesday at the Nareit REITweek: 2018 Investor Conference in New York City.

“We focus on the Midwest and the South,” said the real estate investment trust's president and CEO, Eric Mendelsohn. “We find that a lot of value can be found in the Heartland, where people want to stay close to their church, close to their family, close to their doctor. They're very ‘sticky' when they move into our buildings.”

Mendelsohn described NHI's portfolio as “the ‘A' buildings in the ‘B' markets.”

“We do have a national footprint,” Chief Investment Officer Kevin Pascoe said, “but in the markets we're in, which kind of look like college towns in terms of size — bigger towns, but not your top-30 [metropolitan statistical areas] — there, we're able to find good pricing on some very good assets.”

The strategy is somewhat evidenced in the REIT's growing relationship with Olathe, KS-based Bickford Senior Living, which accounts for 15% of NHI's portfolio, according to a May 4 presentation prepared for a meeting of shareholders. Pascoe said Bickford is managing approximately 60 buildings and about 50 of them are via NHI.

“I call them a regional-sized company,” he said. “They know their people, they know their residents, they know their employees. They're able to get out to the buildings and really be more hands-on, and I think as we look at operator profiles, those types of operators have more success, just because they are able to … create culture. They are able to know the families, which is very important in this business. It's a very high-touch business.”

In a deal announced May 1, Bickford will lease five former Sunrise Senior Living assisted living and memory care communities that NHI acquired from LTC Properties. All of the communities are in upscale areas — one in the Cleveland suburb of Rocky River; three in the Columbus, OH, suburbs of Bexley, Upper Arlington and Worthington; and one in Erie, PA — and they have a combined total of 320 units.

“We already had two buildings in Ohio with them that had performed very well, and so we knew what they were able to do in the state, with the regulatory set that was there, and how they are able to operate,” Pascoe said.

The communities, he added, “fit the Bickford mold exactly. They're roughly 60-unit buildings, which is about what we're building in the new vintage that we're developing with them. … And then the look and feel of the buildings are just like buildings within their portfolio. So we could look at the pro forma versus past performance and see exactly how these buildings were going to operate with Bickford in place.”

Holiday being monitored

Pascoe said NHI continues to monitor occupancy at Holiday Retirement communities a year after it announced an overhaul of its management model — transitioning from live-in managers to more traditional executive directors — and the move of its headquarters from the West Coast to the East Coast.

“Traumatic is a heavy word, but it definitely impacted the company as they were trying to reinvent themselves and figure out how they were going to sell their product,” he said of the management change.

Although occupancy was negatively affected and will take some time to recover, Holiday has continued to invest in its properties, Pascoe said.

“In terms of doing what they said they were going to do, telegraphing that to us, we've been pleased with the amount of communication and how they've been able to make the change, because frankly, we were a little skeptical on the front end,” he said. “And at the same time, we're not here to tell people how to do business.”

Holiday represents 14% of NHI's portfolio, according to its shareholder presentation.

Competition and a larger issue

Across the entire NHI portfolio, in competitive markets covered by NIC MAP, occupancy is at approximately 90%, Pascoe said. “The markets we're in? There's competition — don't get me wrong. But there's also a market there to absorb the competition, absorb those additional units,” he said. “Furthermore, when we've looked at it, it's been relegated to probably half a dozen to a dozen markets where there's been some new competition issues that we're monitoring.”

An issue bigger than competition, Pascoe said, has been wage pressure. “Some of that is new competition coming in, and part of it is just wages rising over time and competition for good people,” he said. “So as we've looked at it — again, not to dismiss new competition, but there are other headwinds that I think are more pertinent or at least equally as pertinent that we're monitoring but feel very good about where our operators are positioned.”

As far as what the future holds, Pascoe said the REIT is satisfied with the current portfolio mix of approximately two-thirds seniors housing and one-third skilled nursing.

“There's still going to be a decent amount of senior housing, most of it need-driven, so assisted living, memory care, some sort of combo product,” he said. “Independent living and other discretionary types like [continuing care retirement communities] are still on the table, although it's something we're mindful of just from a concentration standpoint.”

Skilled nursing and behavioral healthcare also will continue be part of the equation, Pascoe said.

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