June 23, 2020  //. Episode 3

Impact of the Pandemic Through the Eyes of a REIT with guest Michelle Kelly (NHI)

– Presented by Senwell Senior Investment Advisors

June 23, 2020  //  Episode 3

Impact of the Pandemic Through the Eyes of a REIT with guest Michelle Kelly (NHI)

– Presented by Senwell Senior Investment Advisors

Show Notes

Episode 03: Impact of the Pandemic Through the Eyes of a REIT – Presented by Senwell Senior Investment Advisors


On this episode of The Investment Opportunity Podcast, we welcome Michelle Kelly with National Health Investors, Inc. NHI is a real estate investment trust specializing in sale-leaseback, joint-venture, mortgage and mezzanine financing of need-driven and discretionary senior housing and medical investments. NHI’s portfolio consists of independent, assisted and memory care communities, entrance-fee communities, skilled nursing facilities, medical office buildings and specialty hospitals. 

In this episode, we cover the following topics: 

  1. Positive stories through COVID
  2. Current and ongoing operator struggles
  3. Underwriting uncertainty with new revenue through grants/stipends and increased expenses
  4. Allowing grace with operators?
  5. Physical layout of asset
  6. CAP rate vs. IRR 

You can learn more about, and contact NHI by visiting their website: www.nhireit.com

The Investment Opportunity Podcast is presented by Senwell Senior Investment Advisors, a mergers and acquisitions advisory firm specializing in skilled nursing and seniors housing. The show is hosted by Ben Bohland and Brandon Bohland. 

Want to watch the show? Visit our website: www.senwelladvisors.com/podcast 

If you have suggestions on topics or guests that to invite on the show, questions or comments, please contact us. You can get in touch with us the following ways:

Contact Senwell Senior Investment Advisors for mergers, acquisitions and dispositions. Senwell specializes in working with owners and operators of skilled nursing (short-term rehabilitation and long-term care) facilities, assisted living and memory care facilities, independent living facilities, continuing care retirement communities and owners of bed licenses in Certificate of Need (CON) states or states with a moratorium on bed licenses. 

Thank you for listening to The Investment Opportunity Podcast! 

Guest Bio

Michelle R. Kelly joined National Health Investors Inc. (“NHI”) in September 2017 and currently serves as Senior Vice President Investments. In this role, Michelle is focused in the western part of the U.S. and is responsible for identifying new business opportunities, managing existing client relationships and strengthening NHI’s brand throughout the industry.

Michelle has over 18 years of experience financing and investing in the senior housing and skilled nursing industries. Most recently, she spent over 6 years at Welltower Inc. beginning with a focus in asset management and transitioning to business development. Prior to joining Welltower, Michelle spent over 10 years at GE Capital in its Healthcare Financial Services business focused primarily on debt for seniors housing and skilled nursing. She held positions of increasing responsibility within underwriting, portfolio management and originations during her tenure at GE. Michelle began her career with Heller Financial as a member of its Associate Development Program, ultimately joining its healthcare real estate business.

Michelle was an inaugural member of the National Investment Center for Seniors Housing and Care Future Leaders Council and served as Chairperson of that organization from fall of 2011 to fall of 2012. Michelle earned her BS in Finance degree from the University of Illinois at Urbana-Champaign.


Episode 03: Impact of the Pandemic Through the Eyes of a REIT with guest Michelle Kelly (NHI)

Ben: [00:00:00] On this episode of the Investment Opportunity podcast, we discuss the impact of the pandemic through the eyes of a REIT. 

Intro/Outro: [00:00:08] Welcome to the Investment Opportunity podcast. We’ll educate you on the latest investment trends happening in one of the hottest real estate classes, skilled nursing and seniors housing. We will point out the risks so you can reap the rewards of investing in this growing and complex industry. And now your hosts, Ben Bohland and Brandon Bohland. 

Brandon: [00:00:32] Welcome to the Investment Opportunity podcast presented by Senwell Senior Investment Advisors, Senwell is a mergers and acquisitions advisory firm that specializes in the skilled nursing and senior care space. 

Brandon: [00:00:44] With us today, we have a very special guest, Michelle Kelly, the senior vice president of investments at National Health Investors. NHI is a real estate investment trust that specializes in sale leaseback, joint venture mortgage and mez financing, financing of need driven and discretionary seniors housing and medical investments. Their portfolio consists of independent assisted in memory care communities, entrance fee communities, skilled nursing facilities, medical office buildings and specialty hospitals. Michelle that’s a lot of things that you guys specialize in. Welcome to the show. 

Michelle Kelly: [00:01:21] Well, thank you very much, guys. I’m so happy to be here and looking forward to chatting with you here. 

Brandon: [00:01:25] Yeah, we’re excited to have you. 

Ben: [00:01:29] Joining us from Colorado, correct? Not Illinois. 

Michelle Kelly:  I’ve got my Chicago roots that I do live in Colorado. 

Brandon: [00:01:35] I should say this show is hosted by I am Brandon Bohland. And this is my co-host, Ben Bohland. So if you’re listening, we apologize ahead of time if our voices sound similar. But I do want to get into a little bit about what you’re doing over at NHI. So if you could for those of you who are listening who don’t know much about NHI. Michelle, could you give us maybe a little bit of a lead in on what you’re doing over there and some of the things that you guys are investing in today? 

Michelle Kelly: [00:02:06] Yeah, absolutely. So I myself have been in the senior living and skilled nursing spaces now for about 19 years always on the financing side of the equation. 

Michelle Kelly: [00:02:15] And then I’ve been with NHI now coming up on three years. We are based in Murfreesboro, Tennessee. And, find our roots. We spun out of a company called National Healthcare Corporation, which is a publicly traded skilled nursing company that is also still based in Murfreesboro. But these days, our portfolio is about two thirds senior housing and about One-Third skilled with a handful of other health care properties that you mentioned that we’ve invested in. So some behavioral health hospitals and MOBs are also in there as well. I think our sweet spot has tended to be to partner with regional operators who are looking to grow. And we’ve really been able to help them finance that growth, whether it be through acquisitions and or developments. And we do work with some large national players as well. But again, I think the bulk of our portfolio you’d find is kind of those really strong regional players. 

Brandon: [00:03:10] Great. 

Brandon: [00:03:11] I do want to take a little bit of a step back, I think maybe if we could talk a little bit, if we could focus on some positive things, a lot of what we look at these days, just if you turn on the TV, there’s just so many negative things going on in the industry if you turn on any TV channel. I think this is probably one of the first in our lifetime where we’re seeing the president of the United States talk about nursing homes almost on a daily basis. And so do you have any kind of positive stories that you’re hearing from either within your operator base or some really cool stories, with staff or employees that you can share with our listeners? 

Michelle Kelly: [00:03:55] Yeah, absolutely, and I couldn’t agree more. I’m thrilled to be able to share some positivity because the news has not portrayed the industry that well during this crisis, but it really is a testament to the caregivers and the companies, the lengths that they have gone to stay creative and innovative and really take care of all of these very frail seniors. In our portfolio, just a couple of quick highlights. There’s a ton of them, but senior living communities, as a large operator of ours, they focus predominately in the Southeast with large entry fee CCRC. So they do have the benefit of having beautiful campuses with lots of green space. But for example, there is one community where the gentlemen have a book club and they definitely wanted to still try and meet with their book club. And rather than doing a video chat, they were able to all ride their golf carts out into the lawn and just have a circle of golf carts. All, you know, there’s six to 10 feet apart and have their book club meetings. There’s been they’ve also been able to do a lot of lawn exercise classes where you see just the residents spaced out over the sidewalks everywhere and the person leading the classes in the middle. 

Michelle Kelly: [00:05:05] And everybody still gets to exercise in person together. So there’s been at least some connectivity there, which I think is really great. A different kind of scale holiday, very large independent living operator across the country. I should say predominately independent living for Memorial Day. A lot of their communities did a balloon release to honor the veterans and those that we’ve lost. And it was just a really cool way to still have that activity and have that engagement over the holiday weekend. And then finally, one that does kind of play into the quarantine is Bickford’s senior living, did a Seniors for Seniors program where basically the residents produced all these videos of them providing advice and words of encouragement and congratulations to all the graduating seniors in the local community. And we just thought that was such a cool way to keep everybody engaged. And it’s something they would have done in person, you know, had everything been open. But this is still their way to be able to give back, which was just outstanding. 

Brandon: [00:06:06] Great. Thank you for sharing some positive things. I think what will be really cool to see out of all of this is all of these stories, hopefully we’ll start to see come to light. And so I would encourage all of the operators or Prop-Cos or REITs out there to start to use your social media platforms to just share some of this good news. And hopefully some of the news outlets will start to pick up on some of these things. 

Michelle Kelly: [00:06:33] Yeah, for sure. And I think that’s the other thing I would say is just as an industry, you know, like I said, I’ve been doing this for a while now, and this is one of the first times they have really come together. 

Michelle Kelly: [00:06:45] So whether it’s the industry organizations lobbying together, creating some of those PR campaigns or just simply the best practice sharing that’s going on between operators has been really, really cool. And again, is just kind of, I think, why we all work in this industry. It’s just filled with really good people who are trying to do the right thing. 

Ben: [00:07:03] I agree. Yeah. So, I think everybody’s trying to take this one day at a time. And if you can make an impact, that’s great. So, hey, so the operators that you’re speaking with, I mean, obviously this is there was so much change that had to happen immediately and overnight, I guess. What are some of the struggles that you’re hearing that some of the operators are still going through? And can you highlight the most urgent? 

Michelle Kelly: [00:07:36] Well, I think, like you said initially, the crisis was just simply how do we shut down and make sure, to mitigate all the risk of getting the virus? Hopefully not in your community. But who are we kidding? It was everywhere. And then it was also the supply chain. And just how do I get PPE in here so that I can actually care for these residents? And I think fortunately now, that part of it is kind of behind us to a certain extent. Most people seem to have their supply chain in order. I do think there’s going to be continued challenges, though, around just staffing. I mean, the reality is, if you have an outbreak and or just even suspect outbreak, you all of a sudden lose a shift of employees. And, having to pay people over time, having to pay people that are here, OK. Which is very well deserved. But at some point, it just it becomes very challenging for the operators. I think that’s going to be an ongoing struggle. And then I think now much to what we were just talking about is everyone is starting to develop their plans for how do we reopen in some way, shape or form? How do we bring socialization back into these communities? Can we start to do some sort of communal dining again, some sort of activities, engagement? As you know, the reality is when you move in senior living, one of the big selling points is the socialization. 

Michelle Kelly: [00:09:00] And, I think we’re starting to see the effects or at least from our operators are starting to see the effects of some of their residents who live there now through these few months, but unfortunately have been fairly quarantined off. And so I think the good news is, though, that that’s where the focus is, is how do we reopen? How do we get back to living in this predicament? Because the virus isn’t going away anytime soon. And so how we can adapt to have some sense of normalcy I think is going to be a challenge. But actually it is a positive challenge. That’s at least a good thing to be working on and focusing on. 

Brandon: [00:09:36] Sure. If we could shift a little bit more towards the financial aspect of really what’s happening right now. And so you mentioned a lot of the struggles are related to labor. We’re seeing a lot of PPE increased cost. And then we’re also seeing on the flip side of that, we’re seeing reimbursement stipends both on the federal side as well as some state, some states that are participating on the Medicaid side. What are you looking at as we move forward? Are you seeing that as a net zero? Do you think that those stipends are covering their true expenses as of right now? And what do you think that that looks like going forward? I mean, I’m not asking you to predict what the federal government’s going to do by any means, but what’s your best assessment? Where that looks like going forward? 

Michelle Kelly: [00:10:31] Yeah, I mean, I think it’s unfortunately, it’s the crystal ball game, right? How long is this going to last. where people are basically very much limited in how many residents they’re moving in because they think that the cost piece of the equation. You know, again, I don’t think the staffing costs are going to change all that materially, at least not in the near term. And in terms of the government, you’re right. It’s anyone’s guess as to how long some of these programs are going to last and how much more money they might be able to subsidize or not. I think for now, it’s really been if you think about it, half of March, April, May. So it’s June 1st today. We haven’t got a lot of May results yet. Obviously, our expectation, though, is April was tough. A lot of folks did spend a lot initially to acquire that PPE that was at just outrageously high prices and other supplies that were at higher prices. Now that they kind of have a little bit of a stockpile, hopefully they can order further out and bring those costs a little bit back in line. But things like insurance have skyrocketed, and that’s probably not going to change in the near future. So there’s going to be continued pressure there. I would say it’s certainly through the balance of this year. But the real question starts to become, when do you get to open back up and start moving folks in? And I suspect on the need based side, the assisted living memory care side of the equation for senior housing. 

Michelle Kelly: [00:12:00] People are going to need to move in. And people are moving. And I think the NIC data last week released that there are operators are starting to see more folks move in. I think that’s a good thing. Sounds like there’s more elective procedures happening in the hospitals again, although we still have a little bit a ways to go that will help skilled nursing space. And then with independent living, that’s probably the toughest one to really know exactly how long it’s going to take to kind of come back for folks to move in. But you’re going to see continued pressure. I don’t know that it’s a net zero at this point. It certainly has helped. And I think, you know, the PPP loans have also definitely helped, although the rules on that kind of continue to change here and there around the forgiveness. I think, the one bill that passed last week on one side of the equation gives them some more flexibility. So we’ll see if that goes all the way through or not. But it it’s going to be challenging. There’s no doubt about it. 

Ben: [00:12:59] I guess when you’re evaluating an opportunity that comes up on your desk, for example, like you mentioned, I think you have a good grasp or somewhat of a good grasp on the expense side. Right. We know that PPE is going to drive up the expenses. You mentioned labor, but especially on the skilled side. Revenue is revenue a complete guess at this point because you have these grants that are coming in, you’re not sure what each state is going to do in terms of reimbursement. So how are you underwriting these deals when when you’re not sure what the government’s going to do.

Brandon: Similar to, you know, a UPL kind of scenario with Indiana? Is that maybe how you’re looking at it? 

Ben: Indiana. Utah. Yeah. So if you’re not sure what the government’s going to do here. 

Michelle Kelly: [00:13:46] Yeah, I think, unfortunately, you almost have to just set that aside because you really don’t know. And at the end of the day, you want to make sure that the underlying operation is secure. Right now, it’s just a really weird time. And so it’s very tough to underwrite today because you don’t know what the occupancy is going to be. You don’t know how quickly it’s going to bounce back. You pretty much almost have to assume that it’s going to continue to decline here for at least a period of time. And I don’t know that you can really give a lot of credit to the government aid unless they have actually received it in hand and or have some assurance that it is absolutely coming. And then I could see it becoming, you know, if I just kind of play that through, I could see that becoming almost a condition to close if they think they’re going to get some sort of money. And you really are underwriting based on that. You’d have to see that hit. I think in hand before you would actually close would be my guess. 

Brandon: [00:14:43] So let’s I guess let’s turn the conversation a little bit more towards the asset management side of things and really looking at your existing operator base. And so if some of these things. Don’t net out to zero, right? So we’re not seeing the subsidies net out from the expenses and we’re starting to see operators really struggle. And there is a reality that a lot of the operators today, both on the skilled and AL side, don’t have the strongest balance sheets. And so as we start to think through that, is there any kind of grace that you’re thinking about working with these operators, at least in the short term, and maybe helping them work to a better long term solution? 

Michelle Kelly: [00:15:34] Yeah, the way that we’re really approaching anything asset management related right now is is absolutely case by case. Because you’re right, every operator is going to have a different situation. And every lease that we have in our portfolio is kind of a different situation. 

Michelle Kelly: [00:15:49] I think one of the advantages, quite frankly, now of having the triple net lease is on the one hand, it actually helped a lot of operators get the PPP loans because they owned their operation still. So they weren’t third party manager. Nor was it J.V. where they were partnered with a big REIT. So that actually helps them a lot. I think also you’ve got a lot of other kind of credit support features in the lease. So whether it be security deposits or guarantees, there’s other things there that we can look to that help provide support for that rent payment. And then finally, I mean, we even have a lot of our deals, kind of like a CapEx allocation. And so we went ahead and we reminded several of our operators, hey, have you spent these dollars yet? Because if you have remember, you can get reimbursed for that. So there’s definitely lots of levers that we can pull, and that’s really the way that we’re approaching it. So there’s no uniform program, one size fits all kind of solution here. But the reality is, you know, the first couple of months have been OK for our portfolio. It’s going to continue to be challenging today. Again, today is the beginning of June. So we’ll see how this month goes. And we’re just having regular communication almost daily with some folks, certainly weekly with others, to try and get ahead of any issues that might pop up. 

Brandon: [00:17:10] You did mention CapEx reserve, and I do want to touch on that for a second, because if you look at the physical plant. Right. So. I guess the biggest question that a lot of architects are even looking at today and other potential real estate investors is are we looking at redesigning our industry as we know it? And that may boil down to semiprivate beds going away at some point. Are you looking at A your existing assets a little bit different or are you requiring a little bit more CapEx going forward? And then, B, what are you looking at for new investment? 

Michelle Kelly: [00:17:51] Yeah, I don’t think at this point we’re necessarily making a lot of changes yet. It’s certainly something that we’re thinking about as well. But I don’t at this point, we haven’t really decided to make any wholesale changes to how we’re underwriting or approaching that. I think certainly for any new builds already we were thinking about that. Right. So if you’re looking at a new build for a skilled nursing facility, for example, or a renovation or something, one of the key questions is always, how many privates versus privates? What is your target patient mix? What is your target payer mix? And what’s going to be the most applicable there? So I do think that was partially already coming into the conversation to begin with. 

Brandon: [00:18:37] So as you start to look through some deals that come across your desk, are you taking a look at I think obviously we’re starting to see some impact of the debt market, which flows down into your capital stack and definitely has a factor in your cost of capital, which could then in turn impact your cap rate. So are you looking at different cap rates going forward or should we be looking at that from an IRR, perspective? 

Michelle Kelly: [00:19:09] Well, the way that NHI underrates, because we are predominantly triple net lease are really focused on what is the lease coverage. And then what is the base yield that we need. So while that translates to a cap rate, that’s not necessarily what drives our investment decisions. I think if I look more holistically, just as the industry in general, what I continue to hear from various lenders and other investors is cap rate is kind of anyone’s guess today and there will likely be some expansion going forward just because of this risk that’s been identified. But I think it’s probably going to be more so in like the B properties in the secondary markets, which, quite frankly, is where we focus, I think, with your very high end class, A urban infill locations. The challenge is there’s still a lot of capital that’s out there that’s going to be looking for those types of deals. And so it remains to be seen just how much expansion there is going to be there. And so we’ll just have to see. But that does seem to be the thinking is right now to try and really pin down a cap rate is extremely tough. Cash flow, cash is king is always the saying. I think that’s proving itself very true right now. 

Brandon: [00:20:26] And in our day to day activities, certainly does agree with what you just said. I think we’re seeing a lot of the primary market’s come out and really not see much change on the bid ask than we did previously, especially if it’s in a facility that doesn’t have any COVID positive cases. We’re really not seeing too much of an impact. So I would certainly agree with that assessment for now. Where we stand today could be different tomorrow. 

Michelle Kelly: [00:20:55] Yeah, exactly. We’ll just have to keep watching. 

Ben: [00:21:00] Well, hey, Michelle, we really appreciate you coming on today and sharing your knowledge with us. 

Ben: [00:21:07] And if somebody wants to check out NHI and and see what you guys are all about, how can they go about that? 

Michelle Kelly: [00:21:16] Yeah. If you go to our Website, nhireit.com. There’s a feature on there where you can send in an inquiry and that shoots right to me and my colleague. And so we’re thrilled to meet new people and we’d love to chat with you or answer any questions they might have? 

Ben: [00:21:33] All right, great. Well, thank you, Michelle. 

Ben: [00:21:35] And joining us from Colorado, not Illinois, We really appreciate it so much. 

Michelle Kelly: [00:21:42] So it’s been great. And I appreciate the opportunity to talk with you. Thanks for coming on the show.

Ben and Brandon: Thanks. Absolutely. Thanks. 

Brandon: [00:00:00] This segment of the show is for you. Why do I say that? Because one of the most common questions that we get at Senwell is what you got? So we’ll address that right now. I actually want to take the time to present an opportunity that may be unique to most investors in our space. One of the most common transactions that you see is buying or selling the physical plant of either the senior care or senior living facility. One of the things that we work on at Senwell is bed license transactions. Bed licences are typically found under the Certificate of Need Law, which is state by state specific. Another unique factor is that there’s typically a moratorium in place on those bed licenses as well. And when we talk about bed licenses, we’re typically talking about skilled nursing beds, although some states do have assisted living and memory care bed licences that apply to their Certificate of Need Law law as well. 

Brandon: [00:01:02] Having said all of that, there’s an opportunity to acquire skilled nursing beds in Palm Beach County, Florida. This could be either an addition to an existing facility or a new development project. There should be enough beds for either situation. If you have any interest in developing skilled nursing beds in the Palm Beach County market, you can contact me directly at Brandon@senwelladvisors.com. 

Brandon: [00:01:31] That’s Brandon@senwelladvisors.com. Thanks for listening. 

Intro/Outro: [00:01:36] Thank you for listening to the Investment Opportunity podcast. If you want to hear more about investing in the skilled nursing and seniors housing industry, head to our Web site at www.senwelladvisors.com/podcast.


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