Not only is NHP aggressively amassing an ever-larger portfolio, primarily through acquisitions, the company is posting decent returns along the way. Its strategy is essentially opportunistic, applying its acquisition budget across the spectrum of senior housing facilities as market conditions change.

In 2005, the company invested heavily, though not exclusively, in the skilled-nursing segment of the market—the “nursing home” segment. In October, for example, NHP bought 13 skilled-nursing facilities and one assisted-living facility in Massachusetts and New York from Senior Residential Care and Wingate Healthcare for about $171 million (equating to roughly $92,000 per bed). Earlier in the year, the company bought a portfolio of 10 skilled-nursing facilities in Missouri for about $39.3 million (or $49,000 per bed).

“Last year was something of a departure for us, in that we acquired primarily skilled-care assets,” says Doug Pasquale, president and chief executive officer of the Newport Beach, Calif.-based REIT. “Over time, as an investor, we’ve preferred assisted-living and independent-living facilities. Those still account for slightly more than half of our portfolio, but right now there are a lot of investors fishing in those ponds, driving prices up.”

On the other hand, Pasquale says, the field is a little less crowded in the hunt for skilled-care facilities. “Not as many investors are comfortable with investing in skilled-care facilities, in part because of the considerable layers of government regulation,” he says. “But we’ve long been comfortable with that segment. Also, we’re seeing better values there. For now, skilled-care assets have better risk-adjusted returns than other assets, ranging from 9 percent to 11 percent.”

In terms of returns for its assisted-living and independent-living portfolio, Abdo H. Khoury, NHP’s senior vice president and chief financial and portfolio officer, says that an 8.5 percent to 10 percent range has been consistent in the past, “and we expect that sort of return as well in the future.”

Pasquale cites a flexible investment strategy as key to the REIT’s growth into one of the top owners of senior housing in the country. Including its most recent acquisitions, NHP’s portfolio now stands at about 420 properties worth roughly $2 billion. Its portfolio puts it among the leading players in the industry.

Slightly more than 200 of NHP’s properties are either independent-living or assisted-living communities, which are essentially multifamily properties geared toward the elderly that feature a higher level of services for residents who need assistance with day-to-day tasks. A little less than 200 properties in the NHP portfolio are skilled-care facilities, and the rest are a scattering of continuing care retirement communities (a hybrid of the other three property types) and specialty hospitals.

Geographically, the company’s properties are, as its name implies, nationwide. However, there is greater concentration in retiree-laden states, as might be expected—88 properties in Texas, 34 in Florida and 28 in California.

“We’ll go into any major metro market or secondary market, though many deals tend to occur in Sunbelt states,” says Don Bradley, chief investment officer. “Transactions tend to come in portfolios with properties scattered around. So far, everything’s been within the United States, but we’re looking at deals beyond our borders. Nothing international yet, but that may happen at some point.”

The Ownership Role

Across the spectrum of senior housing facilities, NHP owns thousands of senior housing units and nursing beds, but it doesn’t operate a single one. Its role is ownership, with its properties leased to operators.

Currently, Alterra Healthcare Corp. is NHP’s largest operator, running about 100 facilities and accounting for 16 percent of its revenue. American Retirement Corp., Emeritus Corp., Atria Senior Living and the Laureta Group are the next largest operators, both in terms of facilities and revenues. Including Alterra, these top operators account for about 44 percent of the company’s revenue.

The bedrock of NHP’s corporate model is its relationship with the senior housing operators, however that can prove problematic from time to time. In 2003, for instance, the bankruptcy and reorganization of Alterra caused a period of uncertainty for the REIT, though by the end of that year Alterra had emerged from bankruptcy without significant changes in its leases with NHP or the rents it paid.

While NHP may not operate any of its units or beds, according to Pasquale, its management team is no stranger to the operations side of the senior housing business, and that knowledge is one of NHP’s strengths. “We’ve been on the other side of the table,” he says, referring to the presence in NHP management (including himself) of former senior housing operators.

Before joining NHP in the top slot in late 2003, Pasquale was president and CEO of ARV Assisted Living, which was acquired by Atria shortly after he left. Abdo joined NHP from Atria shortly there after.

“Our senior investment officers in Tacoma, Boston and Tennessee/Florida all have health care backgrounds,” Pasquale says. “So a lot of us have operations experience. We don’t get glassy-eyed when the operators talk about the problems they’re facing in financing or anything else.”

“It’s a key differentiator,” Bradley adds. “Our customers know that we’ve been down in the trenches as well. Not every owner can say that.”

According to Bradley, this familiarity with the operations side generates more than just a sympathetic ear from NHP. “It’s also made our relationships with our operators function more smoothly, sometimes in very concrete ways,” he says.

As a small but telling example, he cites the company’s lease agreements with operators, “which was something we wanted to make much simpler,” he recalls. “A lot of the leases used in the industry are lengthy and legalistic, mainly because they’ve always been that way. We wanted something different, something you don’t need a committee of lawyers to understand. Our typical agreement is only about 20 pages, in plain English, and we’ve been told by countless operators that they appreciate an agreement that they can read without hiring high-priced lawyers.”

Targets for Growth?

Looking ahead, Pasquale declines to estimate the company’s growth trajectory in 2006 or beyond, but he does say there are still plenty of opportunities to acquire, or possibly develop, senior housing facilities.

“We don’t want to lock ourselves into any projections of future growth,” he says. “But I expect demand for senior housing to be quite high for the next 20 or 25 years at least, so there will be a lot of room to grow. We’ve already grown in recent years in a market in which the penetration level into the senior population is actually quite small—3 or 4 percent.

Wingate at Andover

“But that penetration level is going to increase,” he continues, noting that the ballooning raw numbers of the elderly is only one of the factors at work. “It also involves a change in the perception of senior housing. Currently, older people often see independent and assisted living just as variations on nursing homes, which is a misconception. But people in their 50s are more familiar with the range of senior housing options and will be much more likely to consider these options as they grow older.”

As it has been in the past, Pasquale expects the long-term strategy for growth will be focused on independent and assisted living, with enough opportunistic flexibility to buy other properties if the market warrants.

In particular, Pasquale foresees an increasing interest in continuing care retirement communities (CCRCs) as those gain traction in the senior housing realm. “Though we don’t have a large exposure in them now, we like CCRCs, and we expect our interests in them to grow,” he says. “But unfortunately, their values are being bid up too, at least in the short run.”

Whatever kinds of properties it decides to buy, NHP has the wherewithal. “We don’t anticipate a change in financing for our activities, acquisition or development, which is a balance between debt and equity, about 50-50,” Khoury says. “We will continue to do the same. There are plenty of both available.”

In the fall of 2005, NHP closed on a $700 million senior unsecured credit facility, which includes a $600 million revolving line with a three-year maturity and a one-year option to extend. The facility deal also comes with a five-year, $100 million term loan. This credit facility replaced the company’s existing $400 million one, due to mature in 2007.

The transaction was oversubscribed by $240 million for a total of $840 million in commitments, “which demonstrated a high level of confidence in the company,” Khoury says. “We ultimately decided to size the facility at $700 million. The syndication effort also brought in nine new banks and resulted in expanded commitments from 12 of our 15 existing lenders.”

Pasquale stresses the opportunistic aspects of future acquisitions, as opposed to finding a place to park all that capital. “We could buy more in 2006 than in 2005 if the opportunities arise, but we could also buy nothing,” he says. “We won’t buy just for the sake of buying.”

The Development Option

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Though the REIT has been busy acquiring properties in recent years, Bradley says that the company “isn’t married to either acquisition or development as a model of expansion. There will be opportunities to do both in the long term.”

With the current abundance of capital looking for a home and (still) relatively low interest rates, however, further acquisition will probably be the route that NHP takes in the short to medium term. “In this interest-rate environment, acquisition is usually the way to go,” Pasquale says. “You get residents already in the buildings, and none of the risks associated with development.

“But when the cap rates get to the point at which you can’t make any money on it, then you look to development,” he says. “Development has its advantages too. You can identify areas in which facilities might fit better, and you can reflect current trends and tastes in seniors housing, which will encourage people to live in your properties. Baby boomers in particular will be interested in nicer facilities than in the past, and it’s usually easier to build those from scratch than trying to retrofit.”

Looking Ahead

NHP has been a REIT longer than many, formed originally in 1985, but will it remain so? There have been a number of noteworthy small and mid-sized REITs leaving the public markets recently. While Pasquale doesn’t absolutely rule out the option of going private, he also doesn’t find a reason to consider that option currently.

“Going private is always possible, but there has to be a strong reason,” he says. “If the market isn’t valuing the assets fairly, relative to the value of the underlying real estate, for instance, that could be a reason to make that move. But the REIT structure is solid. We have a handsome dividend and a low payout ratio, which signifies that the dividend is very secure, with opportunity for growth in the near future. That’s what our investors are looking for.”