The SHB Interview: Eric Mendelsohn, CEO, National Health Investors

After five years at the helm of the longstanding REIT, this seniors housing executive has helped the company carve out a niche in secondary and tertiary markets.

By Jeff Shaw

Despite all the challenges facing seniors housing, Eric Mendelsohn is a big believer in the product. 

He cut his teeth at Seattle-based Emeritus, serving as senior vice president of corporate development from 2006 to 2015. It was a period of tremendous growth for the company, culminating in giant operator Brookdale Senior Living buying Emeritus in 2014.

Emeritus’ portfolio totaled 1,100 communities in 46 states at the time of its acquisition, which made Brentwood, Tenn.-based Brookdale the largest owner and operator in the country for several years. The company is still the largest operator, but has since fallen to third-largest owner behind Welltower and Ventas.

Left without a job as a result of the acquisition, Mendelsohn received a call from a former colleague, Justin Hutchens at National Health Investors (NYSE: NHI), to join the team as executive vice president of corporate finance. Eight months later, Hutchens left for HCP — now known as Healthpeak Properties — and Mendelsohn took over as CEO.

Originally incorporated in 1991, NHI’s current portfolio features 148 seniors housing properties totaling 12,852 units, making it one of the largest owners of seniors housing in the country. The portfolio spans the continuum of care, and has a focus on secondary and tertiary markets in the Midwest and South.

The company’s stock, like all REITs, took a tumble when the COVID-19 pandemic broke out, falling from $90.79 per share on March 4 to $33.56 on March 18. The stock rallied in the ensuing months, however, closing at $63.79 per share on Sept. 17.

Seniors Housing Business spoke with Mendelsohn about his career path and strategy for managing the portfolio, as well as how the company is adjusting to the COVID-19 pandemic.

Seniors Housing Business: Walk us a bit through your career history and how you got here.

Eric Mendelsohn: Like a lot of leaders in this industry, I have a legal background and spent many years representing banks and REITs and investors in real estate transactions and financing. That gave me a good solid foundation in a lot of the disciplines that are on my desk as a REIT.

SHB: How did you end up at Emeritus?

Mendelsohn: I was doing transactions for the University of Washington — it has a large medical research and office portfolio because of the Gates Foundation. [The Bill & Melinda Gates Foundation is a large, Seattle-based charity organization that seeks to enhance healthcare and reduce poverty.]

This job was really the first time I got to switch from being a lawyer representing clients to actually being the client. As a major, grant-funded research university, we were leasing and constructing state-of-the-art labs, medical offices and clinic spaces for researchers. I got to interact with bonding agencies that financed these projects, the researchers that were going to use them, and the property owners and landlords that would provide the space. 

I had my first experience with REITs in this role. We were a big tenant of Alexandria REIT (NYSE: ARE), and my peer that I dealt with at Alexandria was Peter Moglia, who is now Co-CEO of Alexandria. We still keep in touch.

These were pretty high-profile deals in Seattle. Emeritus contacted me in 2005 with the opportunity to work for the company. In early 2006, I transitioned from heavy medical real estate to seniors housing. 

I worked directly with Dan Baty, who was the CEO of Emeritus, and Ray Brandstrom, the CFO. At the time Emeritus had 120 buildings. 

Shortly thereafter we merged with Summerville Senior Living, based in the East Bay area of Northern California. That was an 80-building transaction, and we were fortunate enough to combine our operations. Granger Cobb became our president and Justin Hutchens became our chief operating officer.

SHB: That’s an all-star lineup.

Mendelsohn: That was the golden age of seniors housing.

That Summerville transaction occurred in the summer of 2007. That changed the character of the company tremendously. Dan Baty felt that we had the right team and the right platform to grow the company. 

Of course, there was a recession right after that, so we went hunting for companies to buy. We bought several smaller companies, then ended up buying Sunwest Management, a 235-property company based in Oregon, out of bankruptcy. We did that in a joint venture with Blackstone.

Right before the Sunwest acquisition, Justin Hutchens left for NHI and we soldiered on without him. Then in 2014, after two years of marketing the company, we were purchased by Brookdale. That deal closed in December 2014 and I was out of a job.

SHB: Is that what led to the NHI opportunity?

Mendelsohn: I looked around at various opportunities. Justin Hutchens called me from NHI and made a very compelling case that we should work together again, that I could help grow the company, and I agreed. He also pointed out that as an amateur guitar player there would be plenty of music to listen to, which was compelling. So, in January 2015, I moved to Nashville.

Here’s where it gets interesting and where the conspiracy theories start. We went to a NAREIT conference and ran into Lauralee Martin, then the CEO of HCP, who said she wanted to talk to Justin. She and Justin had lunch, and I believe that’s where Justin first got the idea of working for HCP. 

Fast-forward five months later, Justin accepted a position as chief investment officer and later president at HCP. I became interim CEO at NHI. 

No one was more surprised than I was that Justin was leaving. I had mixed feelings about it — he’s a very dynamic leader. He built a great foundation for the company and I was looking forward to growing that with him. 

But as much as I missed him, I was excited about the opportunity to lead a REIT and put my own mark on NHI. And I’m very grateful that in October of that year, the board decided to make me the CEO, no longer interim. That was almost exactly five years ago.

SHB: What were the differences between your positions at Emeritus and NHI?

Mendelsohn: At Emeritus I ran corporate development, handling acquisitions, financing, joint ventures, development and management of legal teams that support those activities. Dan Baty liked the idea of getting a two-fer, meaning both a legal and finance function from one employee. 

When I got to NHI, I was tasked with corporate finance, which is generally limited to the financing and banking relationships related to NHI’s corporate debt. NHI has a large bank group that funds our revolving credit facility. We also use private-placement debt from insurance companies and term loans of longer duration provided by a subset of our bank group.

The thinking at the time was that I would also work on various other projects in addition to the corporate debt. 

Justin referred to me as his Swiss Army knife because of the multiple hats I previously wore at Emeritus.

An active role

SHB: With 148 properties totaling 12,852 units, NHI is one of the largest owners of seniors housing in the country. How do you manage a portfolio so large while ensuring each community provides quality care?

Mendelsohn: The name of the game is working closely with the operators.

Keep in mind that while we don’t operate the buildings, as a capital partner we are very motivated to ensure that the residents are receiving good care and are happy with their circumstances. We check on that often. 

How do we check? We visit the buildings on a regular basis. We have asset managers who travel to each building every year. We also have third-party vendors that we use to monitor licenses and surveys or inspections by state regulators. By reading and tabulating those surveys, we get a good indication of how all the operators are doing. 

Then we have monthly phone calls with the communities to review operational performance. Under normal circumstances before COVID-19, we would meet face-to-face with our operators three to four times a year at conferences, be it InterFace, NIC, Argentum or ASHA. Those face-to-face meetings are a great opportunity to catch up and discuss the state of operations.

SHB: What sort of metrics do you use to determine success?

Mendelsohn: Every jurisdiction has its own peculiar survey style. Some surveys are focused on physical plant; others are focused on resident health, procedures and policies, especially in skilled nursing. So, when we’re reviewing surveys, we’re looking for any indication of resident care needing attention — any flags, any caution signals.

SHB: What might raise a red flag?

Mendelsohn: Medications are sometimes administered incorrectly. That’s something that you have to watch out for in assisted living. 

Many people are relying on the nurses’ aides and the pharmacy to prepare the right amount of medication for the residents. If that isn’t done perfectly every time, harm could occur. So, we focus on that activity and make sure there’s no regulatory issue surrounding the building and the pharmacy and delivery of the medication.

A balanced approach

SHB: NHI spans the continuum of care, but the portfolio contains over twice as many communities in private-pay seniors housing than in skilled nursing. Do you have a preferred type of care, or is the portfolio breakdown opportunistic rather than strategic?

Mendelsohn: In the past 10 years, NHI has strived to get to the right mix of private-pay seniors housing versus government-funded skilled nursing. The mix we have now, which is roughly 30 percent skilled nursing to 70 percent private pay, is a ratio that we’re comfortable with. 

If I could choose right now what product to buy, I would probably lean more toward skilled nursing. That is a product that is in scarce supply. A lot of the buildings are older, and many of them are being shut down.

If you look at some of our recent deals, you’ll see a skilled nursing development that just opened with developer and operator Ignite Medical Resorts outside Milwaukee. The development is named Ignite Medical Resort Oak Creek. It’s a great example of newer skilled nursing — better design and a very aesthetically pleasing product. We love that.

The future of skilled nursing is exciting because the number of skilled beds keeps shrinking as the population of potential residents keeps growing. There will always be a need for skilled nursing services as hospital stays become more expensive and services offered by skilled providers become more sophisticated. Meanwhile, newer buildings provide a desirable atmosphere for residents.

Other than that, we’re opportunistic. We’re looking for deals that are in areas of the country that offer value and with operators that we believe are best in class. 

SHB: Tell me some more about your operators.

Mendelsohn: When deciding on an investment, it’s very important to us for the operator to have a great culture. We want an operator that’s in the business for the right reasons and takes care of their residents and their employees. We’ve noticed a great difference between operators that are in it for a buck, and operators that are in it because they care about people and like helping people.

We also want to be in business with people who are looking for a relationship, not just a capital partner. We try to be the first telephone call an operator would make if it needed funding for an acquisition or an expansion. We try and work with the operator to make it as painless as possible to achieve those goals.

SHB: What is a telltale sign that developers are only in seniors housing for a quick buck?

Mendelsohn: They have little or no experience in building seniors housing product. Usually they have had multifamily or commercial experience prior to seniors housing. They have no knowledge about the operational challenges that the space has, whether related to regulations or resident experience. They want to leverage our contacts and funding for their fees, and they want a profitable exit without any relationship to the project after it is complete.

SHB: Before the pandemic, you were active in the acquisitions market — selling eight
communities to Brookdale for $39 million and joining with LCS to buy the high-profile Timber Ridge community near Seattle for $133 million, both in January. What’s your general acquisitions and dispositions strategy? What do you look for in a community?

Mendelsohn: Dispositions are tricky. The communities we sold to Brookdale were part of a deal I negotiated with Justin Hutchens when I was at Emeritus and he was at NHI. The buildings that Brookdale bought were formerly Emeritus buildings and had a purchase option in the lease. 

We’re very hesitant to sell buildings as a REIT. We’re a dividend-paying organization, and buying properties that are accretive to the portfolio helps us pay that dividend year after year to the benefit of our investors.

What do we look for? We look for a good market; a good physical plant; a well-run operation; healthy, happy residents; and a market that isn’t overly competitive. 

NHI’s footprint is mostly in the Midwest and South. That is intentional. We believe there’s great value in underserved markets, and we’ve done well by investing in those markets.

SHB: A lot of investors target high-barrier-to-entry markets. It sounds like you choose to buck that strategy.

Mendelsohn: That’s exactly right. We tend to focus on tertiary and secondary markets. We believe that smaller towns where people want to stay near their church, near their family, near their university, near their doctor have a lot of value. We found over time that these buildings do as well and generate returns similar to more expensive properties in urban, coastal markets.

SHB: How much ground-up development does NHI do, and what’s your strategy?

Mendelsohn: We’re very picky about ground-up development. For example, last year we completed three buildings in total. Two were private pay, one was the Ignite deal I mentioned in Milwaukee.

We look for established organizations that have a long history of building and operating seniors housing. We’re not interested in journeyman developers that just want to build a building and move on to the next project after they receive their fee. We want a partner who will stick around, run the project and benefit from the design and the quality of the build.

SHB: It seems like NHI does a decent amount of lending, as well. Can you explain the level of volume and the strategy behind the financing business?

Mendelsohn: We loan to own. A good example of that is the Timber Ridge project near Seattle. We financed a mortgage on that to build Phase II. Once Phase II was complete, we had a purchase option to buy the property, which we did.

[Timber Ridge at Talus in Issaquah, Washington, features 401 units, including 330 independent living apartments, 14 assisted living apartments, 12 memory care apartments and 45 skilled nursing beds after the expansion project. NHI provided a $154.5 million loan in 2015 to recapitalize the property and fund the expansion, then joined with LCS to acquire the property for $133 million in January of this year.]

Oftentimes, providing a loan is a good way to get your foot in the door when the capital partners are ready to exit. It allows us to establish a relationship with the parties up front and have them get comfortable with us and see how well we can execute on transactions.

Pandemic takes Its toll

SHB: What has been the effect of COVID-19 on the NHI portfolio so far?

Mendelsohn: We’re trying to be as transparent as possible. As a public company, we understand everyone is very interested in the impact of COVID on our business. 

We publish a chart that shows the impact of COVID on our buildings. I’m sad to say that as the country has been reopening, that has taken its toll on our buildings. We were recovering in May and June. The trend was very favorable. Once the reopening started, the trend reversed itself dramatically and COVID came roaring back in many of our markets.

SHB: So, what do you do now?

Mendelsohn: It’s been a real challenge for us and our operators to make sure that residents are being cared for and that the business of running these buildings is maintained while ensuring the safety of employees and residents. 

It’s also been difficult for our operators to maintain employee morale. The funny thing about leadership is you really only see it when you’re in a time of crisis. When things are running great, it’s easy to be a leader. Things tend to run themselves. When you have a real crisis, that’s when you want people to make thoughtful plans and execute them.

So, we’ve been trying to do all of that while supporting our operators as they manage through this crisis.

SHB: What can you, from the owner position, do to help operators manage the pandemic?

Mendelsohn: NHI has been very hands-on with regard to helping operators source personal protective equipment (PPE). At the very beginning, there were a lot of untrustworthy companies selling masks, gowns and face shields. We were able to identify a legitimate supplier and connect our operators with that supplier.

We’ve also been a good resource for the confusing stimulus programs. Many of our operators qualified for stimulus money, but didn’t have the banking relationships they needed to get priority. We were able to help them by referring them to banks that we had relationships with. 

In addition, we were able to help with referrals to labs to do testing of employees and residents. These are labs that are affordable and efficient. This came about through normal communications between our operators and asset management team. We have 37 operating partners in 34 states, so we were able to act as a hub of information and best practices. But that’s normal course of business for NHI — we just ramped it up for COVID.

Lastly, we created a resource site for all of our clients that included best practices and other resources that we developed regarding policies, procedures, signage and anything else having to do with COVID. That includes testing and interactions with residents or families.

SHB: What’s something people in the industry would be surprised to find out about you?

Mendelsohn: I have a manual typewriter on my desk, and I use it to write thank-you notes to friends and business associates. It’s a Hermes I got on eBay. I think it’s from 1967.

SHB: Not the amateur guitar playing? 

Mendelsohn: I thought about that. The fact is at this point most people know that about me. I took a poll at the office and everyone agreed that wouldn’t be news to anybody.