NHI’s Mendelsohn: Investors Who ‘Crinkle Their Nose’ at SNFs Should Take Second Look

Acknowledging the disconnect between investor sentiment and opportunity in the skilled nursing space, the CEO of National Health Investors (NYSE: NHI) invited skeptics to check out his company’s portfolio.

“I know a lot of people think about skilled nursing and crinkle their nose, but if you took a deep dive on our skilled nursing portfolio, I think you’d like what you saw,” Eric Mendelsohn said during a Thursday presentation at Nareit’s annual REITWeek event in New York City.

In particular, Mendelsohn pointed to the real estate investment trust’s (REIT) lease coverage on its 72 skilled nursing assets — which sat at 2.66 times as of the fourth quarter of 2018 — and its concentration of properties with publicly traded operators National HealthCare Corporation (NYSE American: NHC) and The Ensign Group (Nasdaq: ENSG).

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“You have good visibility on their performance, and we’re one of the few REITs that is still investing in newer skilled nursing,” Mendelsohn said, adding that the company typically picks up a handful of new SNF properties each year.

The REIT’s overall portfolio sits at about 29% skilled nursing assets, with 152 senior housing properties dominating its 233-building portfolio. Mendelsohn cited the company’s conservative acquisition strategy as part of its overall success, along with its emphasis on keeping leverage low.

“We buy things based on trailing performance, not future pro-forma ifs, ands, or maybes,” he said.

Mendelsohn isn’t the only REIT chief to observe the gulf between Wall Street perceptions of nursing homes and the vast quantities of private equity and family office cash chasing the buildings. Rick Matros, CEO of Sabra Health Care REIT (Nasdaq: SBRA), has frequently talked about the two sides of skilled nursing sentiment — the general investors who see warning signs, and the people in the know who see dollar signs with strong operators.

“You just don’t have the same angst on the street level as you do at the investor level,” Matros told SNN back in 2017. “This has been a remarkably stable business for 35, 40 years.”

Sabra chief investment officer Talya Nevo-Hacohen made a similar observation at an event last fall.

“The public market investor, and that’s our shareholders … find that with the choices they have to make as to where they place their dollars, the skilled nursing business is a complicated business, and they don’t necessarily have the patience to really figure it out,” Nevo-Hacohen said.

In fact, Ensign decided to spin off its non-skilled assets — which include home health and hospice business lines — into a completely separate company last month in order to attract investors who may have been spooked at the sight of SNFs.

“There are people that don’t really like our profession, that don’t like our industry, and they like our model and they like the results we achieve,” Ensign CEO Christopher Christensen said in May. “This gives them a chance to invest in Ensign and what we believe in and how we operate and the fundamentals and the way we acquire — the contrarian acquisition model we tend to follow. It gives them a chance to do that without necessarily coming into an industry that they’re uncomfortable with.”

Toward the end of NHI’s presentation, which primarily consisted of an overview of its recent moves on the senior housing front, Mendelsohn expressed interest in expanding into behavioral health care properties.

“We love behavioral health,” Mendelsohn said. “We have two behavioral health buildings. Behind the scenes, out of the eyes of investors, we’ve been chasing behavioral health assets very hard. They are priced to perfection, and they are the darling of private equity and family offices,” he said.

Mendelsohn compared the asset class favorably to SNFs.

“The cap rates and performance are much like skilled nursing, and I think that’s an emerging real estate class that you’ll see more of,” he said.

In particular, recent “angst” and restructuring efforts at behavioral health and substance abuse treatment chain Acadia Healthcare could open some new opportunities for acquisitions, he said.