An activist investor of National Health Investors (NYSE: NHI) issued an assessment Tuesday that one of NHI’s largest tenants – National HealthCare Corporation (NYSE: NHC) – could lose 19% to 38% of its earnings under any lease renewal scenario with NHI.

According to Land & Buildings Investment Management, which is a significant shareholder of NHI, the real estate investment trust (REIT) could have the upper hand due to some “recent developments.” The investor group believes that in renegotiation, NHI has the potential to see a 12% increase in annual funds from operations (FFO) per share, and it pushed for more rent from NHC.

The firms sees the outcome “when rents are marked to market with potentially more upside if released to a best-in-class operator,” the Land & Buildings statement read.

“We estimate the new rent, based on estimated lease coverage ratios and a recent comparable lease,” the activist investor noted in a press release.

In comparing rents, Land & Buildings pointed to CareTrust REIT’s (NYSE: CTRE) 2024 acquisition and lease of 31 skilled nursing facilities with 3,290 beds – mostly located in Tennessee – where the annual rent equated to approximately $13,678 per bed. The firm estimated that NHI could be charging more rent, noting that CareTrust’s rate is 64% higher than the 2024 disclosed NHI rent per bed for the NHC-operated assets, the majority of which are also in Tennessee.

In issuing this assessment, Land & Buildings sharply criticized the decades-old lease agreement between NHI and NHC, calling it “egregiously one-sided” and detrimental to NHI shareholders. The firm warned that NHC, which has long benefited from below-market rents, could see a significant earnings impact when the lease expires at the end of 2026.

The NHI-NHC master lease, which covers 28 skilled nursing facilities, five assisted living centers, and three independent living centers, was signed in 1991 and is set to expire in December of 2026.

NHC has benefited from paying below-market rents for decades, significantly boosting its profits, while NHI has seen minimal rent growth despite improving property economics, Land & Buildings said. The investor firm claims this arrangement was the result of a conflict of interest between brothers Andrew and Robert Adams, who led NHC and NHI respectively while serving on each other’s boards, along with board members closely tied to their Murfreesboro, Tennessee base.

Land & Buildings argued that this “cozy relationship” has come at the expense of NHI shareholders and believes it is coming to an end, highlighting the recent shareholder vote in which Robert Adams narrowly retained his board seat by just 1%.

Land & Buildings said that unless NHI negotiates a new, fair lease agreement, shareholders may choose to vote out remaining legacy board members, including Robert Adams, James Jobe, and Robert McCabe.

It also warned of various dire scenarios for NHC.

“The path forward, in our view, includes three options for NHC – bad, worse, and disastrous,” the activist investor firm stated.

The better of the three outcomes Land & Buildings envisions is that NHC and NHI renegotiate the lease at fair market rents well before the December 2026 lease end date.

“NHC risks overplaying its hand when negotiating with NHI, potentially threatening that a transition to another operator would be costly given some onerous provisions in the current lease,” Land & Buildings’ statement read.

Skilled Nursing News reached out to NHC and NHI for comment, but had not received one by the time of publication.