The sky has cleared up for Newport Beach-based Nationwide Health Properties Inc.
After years of financial turmoil at key tenants of the healthcare real estate investment trust, a stronger mix of holdings and a better Medicare picture are paying off for Nationwide, which counts one of Orange County’s larger market values at $1.4 billion as of last week.
Nationwide owns some or all of 409 nursing homes, assisted living facilities and retirement communities where care is required.
It leases the facilities to a number of healthcare operators, which pay rent to Nationwide.
“For the first time since 1998, we have no, nada, zip, operators involved in bankruptcy proceedings,” said Douglas Pasquale, Nationwide’s chief executive.
That’s a sea change from the late-1990s, when five of the seven largest public nursing home operators,pounded by Medicare reimbursement cuts from President Clinton’s Balanced Budget Act of 1997, sought refuge in bankruptcy.
Nursing homes derive a large part of their revenue from Medicare and Medicaid recipients. Assisted living facilities, on the other hand, largely draw rent from private payers. They also had a rough time of it during the late-1990s when overbuilding was rampant.
Nationwide had as much as 40% of its holdings operated by bankrupt tenants at any given time from 1998 and 2001, according to Mark Desmond, its chief financial officer.
The fallout hit Nationwide’s net income, which declined from $62 million in 1998 to $29 million in 2002.
The company has posted solid income and revenue gains this year.
Last week Nationwide reported third-quarter net income of $22 million, up from $15 million a year earlier. Revenue rose 21% to $49 million in the period. As a real estate investment trust, Nationwide pays out at least 90% of its net income to shareholders.
One driver of its results: a better mix of properties.
Four years ago, Nationwide drew 41% of its revenue from skilled nursing homes. Many residents at such homes rely on Medicare or Medicaid to pay their rent. When government reimbursement rates decline, the homes suffer.
Today, just 34% of its revenue comes from skilled nursing homes.
Independent and assisted living homes contribute about 60%.
Medicare Reform
Meanwhile, Medicare reform signed by President Bush in late 2003 has aided Nationwide by boosting reimbursement rates paid to nursing home operators.
“A combination of strengthening state budgets, improving economic prospects and modest increases in Medicare reimbursement will continue to benefit senior care operators and landlords,” said Chris Pike, an analyst with UBS Investment Research, in a report earlier this year.
Nationwide and its competitors got a gift in October when the Bush administration increased reimbursement for nursing home care.
“It’s no surprise that it went up. It would have been political suicide to cut it a month before the election,” said Rich Anderson, senior real estate investment trust analyst with Maxcor Financial in Brooklyn, N.Y.
Another factor in its favor: As wealthy baby boomers age, demand for private homes should improve.
“Private pay senior living, such as assisted and independent living, is benefiting from improved operating performance and increased consumer awareness,” said Philip Martin, an analyst with Stifel, Nicolaus & Co. in St. Louis.
Shares of the real estate investment trust have followed the income rebound.
After losing about half its value from 2002 to early 2003, Nation- wide’s stock has rebounded to $22 at recent check. The stock’s recent low came in 2000 when shares hit $10.
Nationwide and its peers could face pressure regardless of whether President Bush is re-elected or defeated by Sen. John Kerry. That’s because reimbursement could be a target of balanced-budget activity, albeit on a lesser scale than the Clinton act, Maxcor’s Anderson said.
“Changes in the reimbursement system do affect their profitability, so it’s important to us, but generally (tenants) are used to dealing with that, and so they can work through it,” counters Desmond, Nationwide’s chief financial officer.
Meanwhile, Nationwide’s been assertively investing in existing and new homes. This year it’s spent some $328 million on five existing and five new properties. It’s raised $250 million in a couple of stock sales, plus expanded borrowing by $250 million.
Standard & Poor’s rating service affirmed the company’s BBB- debt rating in summer.
A cautionary note on the investment front: The improving picture is luring increased competition from other real estate investment trusts, banks and other potential investors looking for health-related real estate, said Donald Bradley, Nationwide’s senior vice president and chief investment officer, during a recent investor conference call.
In fact, Nationwide has given up on some $180 million in board-approved investments because of pricing or due diligence issues this year.
“While we will continue to compete aggressively, we do not intend to make investments that do not provide appropriate risk-adjusted deals or are otherwise inconsistent with (our) underwriting criteria,” Bradley said.
Chief Executive Pasquale wouldn’t give a full-year investment goal when pressed by Jordan Sandler, a Citibank Smith Barney analyst, during the conference call.
“The pipeline’s quite large, (but) that doesn’t necessarily translate into a lot of fourth-quarter investments,” Pasquale said.
Nationwide plans to look at all types of healthcare real estate assets as potential acquisition targets, including nursing homes, independent living communities and assisted living facilities, he said.
“We have a great deal of financial flexibility at this point,” Desmond told analysts.
To watch and grow its portfolio, Nationwide named Abdo Khoury, former chief operating officer for Louisville, Ky.-based Atria Senior Living Group, to fill a newly created position,chief portfolio officer,in September.
“He is not your grandfather’s portfolio manager where he tic-tacs boxes. This is a businessman who’s involved in our acquisition front, in addition to finding ideas within our portfolio to improve it,” Nation-wide’s Bradley said.
One of Khoury’s goals is to preserve the value of Nationwide’s holdings by identifying potential problem properties as early as possible.
“With the portfolio the size that we have, there will always be potential problems and potential opportunities,” Pasquale said.
Nationwide’s facilities are leased to companies such as Beverly Enterprises Inc., a nursing home company from Fort Smith, Ark., and Complete Care Services, a privately held company from Horsham, Pa. Milwaukee-based Alterra Healthcare Corp., a long-term care operator, is Nationwide’s biggest operator in terms of facilities with 54.
Nationwide is rather petite when it comes to its workforce: It only counts 16 people total, 12 of whom work at its Newport Center Drive corporate office.
Nationwide was founded in 1985.
Tenants, through the lease setup, are responsible for maintenance and for running the homes.
Pasquale came to the REIT a year ago as chief operating officer.
He’s a former chief executive of Atria, which was created last year through a combination of Costa Mesa-based ARV Assisted Living and Atria Retirement and Assisted Living.
Atria, which moved to Kentucky, operates 17 Nationwide facilities.
He succeeded longtime Nationwide leader R. Bruce Andrews as chief executive in April. Andrews, who had been Nationwide’s top official since 1989, continues as a company director.
