Skilled nursing assets have performed well for National Health Investors (NYSE: NHI), providing stability while the real estate investment trust (REIT) works to switch out underperforming seniors housing assets, according to leadership.
SNFs and continuing care retirement communities (CCRCs) currently account for nearly two-thirds of the REIT’s cash revenue, CEO Eric Mendelsohn said during Wednesday’s 2021 Q4 earnings call.
The REIT’s skilled nursing portfolio is anchored by National Healthcare Corporation (NYSE: NHC) and The Ensign Group (Nasdaq: ENSG), who contributed 16% and 10% of annualized cash revenue respectively, NHI CIO Kevin Pascoe added. The SNF portfolio represents 35% of annualized cash revenue.
Despite overall positive performance, NHI is aware that nursing home operators are still experiencing financial strain due to labor issues.
“This may result in some form of financial assistance, though no decisions have been made at this point,” Pascoe said.
Out of 213 properties, Murfreesboro, Tenn.-based NHI has 75 skilled nursing facilities, 137 senior housing assets and one hospital in its portfolio.
NHI continues to prune underperforming assets
Less than a year after announcing plans to “fundamentally transform” its asset structure, Mendelsohn said NHI has sold 23 properties for net proceeds of approximately $244 million. More than half of the properties were underperforming seniors housing assets.
Mendelsohn aims to make NHI a stronger health care REIT by “pruning” lackluster assets, transitioning properties to new tenants and restructuring leases with growth partners.
“The balance sheet is in great shape as we reduce debt by over $250 million during 2021 and maintained leverage within our target range of four to five times net debt to adjusted EBITDARM,” Mendelsohn said. “This is despite granting over $28 million in rent concessions and $11.4 million in Holiday [Retirement] nonpayment.”
NHI decided to not provide guidance for the rest of the year, citing the timing of property transitions, its lawsuit against Welltower (NYSE: WELL), and lingering effects of the omicron variant.
Mendelsohn disclosed that NHI had filed a lawsuit against fellow REIT Welltower while discussing the ongoing effort to transition the Legacy Holiday Retirement portfolio into a joint venture with Merrill Gardens and Discovery Senior Living.
NHI alleges that the Welltower entities have failed to honor certain legal obligations, following Toledo, Ohio-based Welltower’s acquisition of properties formerly leased to Holiday Retirement.
“We’re disappointed with [a lack of guidance], but the largest reason for today’s decision continues to be the unknown around the Welltower litigation and Holiday portfolio [net operating income] commencement date,” NHI CFO John Spaid said.
The REIT missed analyst expectations by 69 cents on earnings per share (EPS), reporting 14 cents EPS for the quarter, while its $69.67 million in revenue exceeded expectations by $2.52 million, according to SeekingAlpha.
Revenue and EPS dropped from $81.24 million and 83 cents in Q4 2020, respectively. EPS for 2021 was $2.44, a 41% decrease from 2020.
The REIT attributed the 12-month decline to 10 properties either sold or held for sale totaling $51.8 million, a $5.4 million year-over-year increase in non-cash stock-based compensation and $28 million in rent concessions for the year.
“While near-term the restructuring of rents and continued deferrals will pressure earnings, recovery of deferrals should help (we assume starting in 2H22) along with the redeployment of capital (from asset sales),” Stifel analysts said in a Tuesday note on NHI earnings. “We think most of the earnings drama is behind us.”
Earnings recovery will most likely occur in 2023, according to Stifel analysts.
NHI reported 79% of contractual cash collected for the fourth financial quarter, with the remaining balance comprised of 7.8% in deferrals related to Bickford Senior Living, 8.4% in unpaid rent from Holiday Retirement, 2.8% from deferrals tied to four other tenants, and 2% to outstanding contractual cash due to be collected.
Declines were offset by gains in real estate sales of $11.2 million.
National Association of Real Estate Investment Trusts (NAREIT) funds from operations (FFO) per diluted common share for the fourth quarter was $1.07, a 16.4% decrease from Q4 in 2020. For the year, the figure was $4.62, a 16.2% decrease from 2020.
Done deals and pipeline sales
NHI in January transferred operations for an Avondale, Ariz. nursing home from Genesis Healthcare to an Ensign subsidiary – the property was added to the REIT’s existing master lease, bringing the NHI-Ensign relationship to include 20 properties.
The transfer also extends the lease maturity by five years, NHI said.
Property sales during the quarter include: a 98-unit Florida senior living community for $7.8 million, a 76-unit assisted living community in Ohio for $12 million, a 180-unit Idaho senior living community for $3.9 million and a Texas medical office building for $5.1 million.
NHI recorded $29.3 million in impairment charges for six properties, four of which were reclassified to assets held for sale, one already classified as such; the last property was deemed to have nonrecoverable net carrying value.
“Though the timing of our strategic actions has been elongated, the overall strategy to reposition NHI has not changed,” Menselsohn said. “We believe that we are at an earnings trough and look forward to better days ahead as the effects of the pandemic wane and our repositioning strategies are fully implemented.”