National Health Investors (NYSE: NHI) is engaged in an effort to transform its portfolio into a “jewel box” — but a delay in an effort to readjust its relationship with one of its largest tenants and a pending lawsuit have clouded when that transformation might occur.
As part of those efforts, the Murfreesboro, Tennessee-based company revealed plans last year to pare down its portfolio managed by Bickford Senior Living and reset the company’s cash rent to a lease coverage level resulting in healthier finances for the operator.
But the impact from the omicron Covid-19 variant and labor pressures have delayed some of the restructuring effort’s progress, particularly with regard to the company’s Bickford Senior Living portfolio, CEO Eric Mendelsohn said Wednesday during the company’s fourth-quarter earnings call.
“We’re disappointed that the pace of restructuring has slowed since we last reported results,” Mendelsohn said on Wednesday’s call. “This has been driven primarily by headwinds caused by omicron that have weighed on Bickford’s enterprise cash flow and impaired progress.”
Through January, the real estate investment trust (REIT) completed the sale of 23 properties across its entire portfolio for $243.7 million, including 19 underperforming senior housing properties. The company also is targeting 16 more properties for sale, with expected net proceeds of $125 million.
Also making the future more uncertain for NHI’s executives is an ongoing lawsuit in the Delaware Court of Chancery against Welltower (NYSE: WELL) and certain subsidiaries, with NHI arguing ahead of a Friday court hearing that the Toledo, Ohio-based REIT failed to honor certain legal obligations following its acquisition of properties formerly leased to Holiday Retirement.
With a legal outcome pending, the company is seeking to transition those assets to a senior housing operating portfolio (SHOP) venture with Merrill Gardens and Discovery Senior Living.
NHI stopped short of offering guidance for the year ahead, citing uncertainty surrounding the outcome of that decision and the lingering effect of the omicron variant.
“We understand that there are many moving pieces which cloud visibility into our NOI growth,” Mendelsohn said. “Though the timing of our strategic actions has been elongated, the overall strategy to reposition NHI has not changed”
For the fourth quarter of 2021, the company logged funds from operations per diluted share of $1.07, a decrease of 16.4% from the same period in 2020.
NHI’s 4Q21 report “indicated a prolonged return to normalcy” for the company, according to Jordan Sadler, equity research analyst at KeyBanc Capital Markets.
“The delay in portfolio recalibration will likely continue to weigh on growth, as the company postpones its return to focusing efforts on external growth,” Sadler wrote in a Feb. 22 note to investors.
NHI’s share value dipped almost 1.3% to rest at $52.73 by the time the markets closed Wednesday.
Since the fourth quarter of 2021, NHI has collected 79% of its contractual rent due.
The remaining balance is made up of 2% in outstanding contractual rent that NHI expects to collect; 7.8% in deferrals related to Bickford; 2.8% in deferrals either agreed to or anticipated with three other tenants; and 8.4% in unpaid rent related to NHI’s legacy Holiday properties.
Despite feeling the impact of the pandemic in 4Q21, Bickford grew its average occupancy with NHI to 81.3% during the period, representing a gain of 90 basis points over 3Q.
As of Dec. 31, NHI leased 42 communities to Bickford Senior Living, which represents 13% of the REIT’s annualized cash revenue. But NHI aims to shrink that number even further, and is in the process of selling five underperforming Bickford properties and transitioning one other to a new operator.
NHI is also reducing the Olathe, Kansas-based operator’s annual cash rent, going from an annual rent of a little over $46 million at 42 properties to about $28 million at 35 properties. NHI is also on track to complete those efforts with Bickford in the second quarter of 2022, a little later than initially expected.
Regarding Bickford’s future with NHI, Mendelsohn said that although the REIT is looking to lessen its exposure and limit future business with the operator, it has not looked at selling off the entire portfolio.
“In my opinion, they’re good operators and they may have gotten in over their head in some markets,” Mendelsohn said. “We believe if we help them financially engineer a solution, that they can get back to being a good operator and a profitable company.”
Another sore spot in NHI’s portfolio is its 17-community legacy portfolio with Holiday, which again did not pay rent in the fourth quarter of 2021, according to NHI. The company is currently in the process of selling one additional Holiday property and transitioning the remaining ones to Merrill Gardens and Discovery.
The suit against Welltower represents one hurdle to getting that done, however. In the event of a favorable outcome for NHI in Friday’s hearing in Delaware, the company expects to transition the properties to new operators within the quarter.
“The nature of the ruling on Friday is our ability to foreclose on the membership interests of the tenant entity, and therefore control the transition of the buildings,” Mendelsohn said.
He added that NHI has “good dialogue” with current manager Atria Senior Living, and that the REIT will be able to move quickly on the transitions “as soon as allowable.”
And when that happens, the company’s leaders believe the communities are well-positioned to see NOI upside of about $6 million to $8 million with new operators over the next several years.
“The timing also looks optimal as industry fundamentals start turning in a more favorable direction, allowing us to capture meaningful NOI upside lost due to the pandemic,” Mendelsohn said.