National Health Investors appears set to get off the M&A sidelines, “sidelines” being relative for the REIT which has engaged in a fraction of new investments compared with pre-pandemic years. So far in 2024, NHI has closed on $56.6 million of investments with an average initial yield of 8.4%, split between both existing and new relationships. In addition, NHI signed LOIs on another $155.4 million, also with an average yield of 8.4% and is evaluating around $270 million of potential investments, excluding portfolio transactions and mostly within seniors housing (which is where the opportunities mostly lie for value-add transactions). The signed LOIs include primarily sale/leaseback investments and a loan with a purchase option in senior housing properties.
By comparison, the REIT closed $74.5 million in investments in 2023, $101.5 million in 2022 and $120.5 million in 2021, so they are likely to surpass all of those totals. Historically, in the pre-pandemic years, NHI’s annual investments totaled between $214 million (2017) and $448 million (2016), but the 10-Year Treasury rate was lower then, too. So its activity could really grow if the rate falls below 3.5%, and stays there.
Most recently, in June, the REIT acquired a 110-unit assisted living community in Sussex, Wisconsin, from Encore Senior Living for $32.1 million, or $291,800 per unit. That price included around $100,000 in closing costs and the cancellation of an outstanding construction note receivable held by NHI of $22.2 million, including interest. NHI added the facility to an existing master lease with Encore Senior Living for a term of 15 years at an initial lease rate of 8.25%, and annual escalators of 2.21%.
Also in June, NHI funded $9.5 million on a mortgage note receivable secured by two facilities with Compass Senior Living. The five-year loan agreement has an annual interest rate of 8.5% with an option to purchase one or both facilities after July 2026. And on the sell side, NHI completed the sale of two assisted living communities in Louisiana, which were previously leased to one of the company’s tenants on a cash basis, for net cash proceeds of approximately $4.7 million, resulting in a gain of approximately $1.4 million.
Regarding its leases, the REIT transitioned a leased skilled nursing facility in Wisconsin to a new operator at the same annual cash rental amount but with a new tenant purchase option to acquire the property at the end of the initial lease term in 2031 or during the renewal period at a fixed minimum internal rate of return on our investment. Also in the second quarter, NHI extended the maturity of the master lease with Senior Living Communities (SLC) by two years to December 31, 2031. The extension was part of an agreement whereby NHI is investing $10 million in SLC communities as part of the previously announced board-approved total investment of $25 million for existing leased properties in the NHI portfolio. As a result of the extension, SLC’s straight-line revenue for the second quarter of 2024 increased to $0.2 million compared to ($0.7) million in the first quarter of 2024.
To evaluate its upcoming master lease renewal for the three independent living communities and 32 skilled nursing facilities leased to National HealthCare Corporation (which expires on December 31, 2026 and represents 16.3% of NHI’s total annualized cash rent), NHI hired Blueprint to assist with underwriting, diligence, and market analysis with respect to the renewal. There are already two additional five-year renewal options at a fair rental value as negotiated between the parties.
Occupancy across its various portfolios increased in July over June, but most are still clawing back census losses from this Spring. The SLC portfolio (10 properties), for example, stands at 82.9% occupancy in July 2024, down from 83.4% in May 2024 and just 10 basis points above its level in January 2024. It is also just 60 basis points above the average from April 2023. The same-store SLC portfolio, consisting of nine properties, was 84.0% occupied in July 2024, down from 84.1% in May 2024 but up 70 basis points from January 2024. Average occupancy for this portfolio in April 2023 was 83.0%.
The Bickford Senior Living portfolio (39 properties) was 85.8% occupied as of July 2024, which is 60 basis points higher than in June 2024 but falls below the 86.1% average of February 2024. The same goes for the same-store portfolio (38 properties), which reported occupancy at 85.4% in July but 85.6% in February. The Bickford portfolio is in much better shape compared with April 2023, however, when it averaged 81.2% for the full portfolio.
Meanwhile, NHI’s SHOP portfolio (15 properties) appears to have broken free of the mid-80s doldrums, shooting to 88.2% in July 2024 from 87.7% in June. The average monthly SHOP occupancy has also not experienced a sequential census decrease all year, starting from 84.7% in January and improving from 75.4% as recently as April 2023.
The company’s EBITDARM coverage has also improved across the board, rising to 2.97x for its skilled nursing assets in the 12 months ending at the first quarter of 2024 (from 2.72x in Q4:23 and from 2.47x in Q1:23) and to 1.49x for its seniors housing assets (from 1.36x in Q4:23 and from 1.26x in Q1:23). You cannot grow without a solid operating foundation, and NHI is demonstrating that. The company raised its 2024 annual guidance, as well, for its NAREIT FFO per diluted common share to a range of $4.50 to $4.54 from $4.36 to $4.41.
