Cost of capital, occupancy recovery across all assets and the minimum staffing proposal were top of mind for National Health Investors Inc. (NYSE: NHI) during its third quarter earnings call on Wednesday.
NHI CEO Eric Mendelsohn said there was a bit of a fakeout in terms of occupancy recovery last December, with operators saying there would be a “steady drumbeat” of increased occupancy all year. And this past quarter is the real deal, he said.
“If you recall, there was another variant, more flu, and the occupancy lost steam. However, this past quarter, has made me a believer that there is pent up demand,” said Mendelsohn.
Overall occupancy has been improving year over year and sequentially the Murfreesboro, Tenn.-based real estate investment trust, and operators expect resident rate growth to remain above average by 6% to 8%. Specific occupancy data was only published for the company’s senior living communities.
The National Healthcare Corporation (NYSE: NHC) has been driving the lift in occupancy for NHI’s skilled nursing assets, said NHI chief investment officer Kevin Pascoe. Occupancy improvements and labor leveling out is common among both skilled nursing and seniors housing properties.
“Those are the bright spots,” said Pascoe, adding that Medicaid rate increases in a few states where NHI operates offered some good news..
However, staffing concerns continued to be a source of consternation, the “overhang,” Pascoe continued, being tied to how the minimum staffing proposal would out. NHI’s SNF operators are devising plans to prepare for it, and have made their voices heard during the comment period hosted by the Centers for Medicare & Medicaid Services (CMS).
“We are communicating frequently with our SNF operators to better understand the potential impact of the proposed staffing mandate and action plan. The proposal, while still onerous, looks better especially with a multi-year timeframe to prepare,” said Pascoe.
Pascoe doesn’t expect much disruption, given the strong coverage and ability of SNF assets to constantly adjust to new regulations, with NHC and the Ensign Group (Nasdaq: ENSG) at the lead.
“We’re not overly concerned but we are staying in touch with them and making sure we understand what they’re seeing,” said Pascoe.
Cost of capital
Mendelsohn also spoke briefly on the rising cost of capital during the call, highlighting an “ungrounded optimism” that the increases were only temporary.
Operators should be realistic about the “higher for longer” cost of capital and growing illiquidity, especially on the seniors housing end, he said, and carefully choose a partner that will support their success in the long run. Given this, REITs should be regularly advising customers to make sure they “live to fight another day,” Mendelsohn said.
Skilled nursing and the speciality hospital portfolio, which represent 35% of annualized net operating income (NOI), reported solid coverage.
One unnamed SNF operator which had rent deferred has fully repaid, Pascoe noted.
In terms of acquisitions proceeding at a better pace, Pascoe said a lot of sellers are finally coming to grips with the new and tougher cap rate environment, and are finally looking past 2019’s numbers..
“We’re looking at some different ways to try and get in with some operating partners, both new and existing, working on different structures that might be appealing to them,” said Pascoe. “There is still that push-pull, but I think operators or sellers are starting to come around to what the new dynamics are.”
These dynamics, he said, may involve using more debt as a vehicle to get into the deal, and “let it season a little bit” so that NHI has their foot in the door once the seller is ready to close on a deal.
Moving ahead, Mendelsohn and Pascoe said NHI will continue to be cautious in underwriting and what the operating fundamentals are for prospective M&A.
NHI reported net income attributable to common stockholders per diluted common share at 68 cents in Q3 compared to 78 cents in Q3 of 2022. Normalized funds from operations came in at $1.08 for Q3 as opposed to $1.06 in Q3 of 2022.
Normalized funds available for distribution for Q3 was $48.2 million, compared to $47.4 million in Q3 of last year.
Earnings beat analyst estimates on funds available for distribution, thanks to one-time rent payments during the quarter and rent coverage increasing across the board which coincided with increased occupancy.
NHI revised its annual guidance to $4.28 to $4.31 for normalized funds from operations, down from $4.31 to $4.35. Normalized funds available for distribution were revised as well from $185 million to $186.8 million to $186 million to $187.6 million.
Portfolio activity during the quarter was tied up in assisted living and seniors housing assets. As of Sept. 30, NHI had $1.1 billion in net debt, including $205 million outstanding on its $700 million revolving credit facility.
Companies featured in this article:
National Health Investors Inc., National Healthcare Corporation, NHI
