Meet Eric Mendelsohn, president and CEO of National Health Investors, Inc., or “NHI.” Now at the helm of one of the industry’s major real estate holders, Mendelsohn got his start in senior living not in the REIT business, but working for Emeritus Corp. on its real estate portfolio and later on the company’s merger with Brookdale.
We sat down with Mendelsohn to learn about the growth trajectory of NHI, why there are still plenty of opportunities for senior housing REITs on the acquisition front, and why senior housing’s “cool” factor will help it draw new talent to the industry—but hasn’t quite taken hold yet.
Tell me a little bit about how you got into the industry.
I was working for the University of Washington as a Transaction Officer—a hybrid between attorney and business person. Someone I had worked with previously was at Emeritus and Bill Shorten, the Director of Real Estate at Emeritus, left. I still thank him every time I see him. They called me and said, ‘We’re looking for someone with a legal background and a transaction background and a health care background,’ of which I have all three. I went in for an informational interview with the recruiting person and the next thing I knew I was sitting in front of Dan Baty and Ray Brandstrom at Emeritus and talking about assisted living and health care, and thank goodness I had researched the public filings because they had just done a remarkable deal with Alterra and Brookdale. They bought the stock in the Alterra bankruptcy and flipped it for $40 or $50 million. I asked a couple of questions about that and they spent the rest of the interview talking about that deal. That’s how I got into assisted living. I got the offer and started at Emeritus when we had 120 buildings.
When you went in for that interview did you know what assisted living was?
I did, very much so. I’m an only child and an only grandchild so I had two grandmothers go into assisted living, and as the adult grandson I took care of all of that.
Tell me how you got to NHI then.
Shortly after I got to Emeritus, we did a transaction where we bought a company called Summerville. With Summerville came a bunch of excellent managers; Granger Cobb became our President, Justin Hutchens became our COO, Jayne Sallerson became our EVP of Marketing and Budgie Amparo became our Head of Care. We basically got a head transplant and took the head off of Summerville and put it on Emeritus. Things took off from there. About two years later Justin left to run NHI. He did his first deal at NHI with Emeritus so I got to know the NHI team. Later, when Brookdale and Emeritus decided to do the merger, Justin called me right away and said, ‘You should come work for me.’ We started having discussions and I was weighing my options and NHI just seemed like a unique opportunity. It had a lot of upside; if you go to work at Welltower or HCP, you can’t really move the needle there. I had worked with Justin before, I knew what I was getting into and I liked the team and the prospects a lot.
So how did he sell the dream to you?
The dream was having a seat at the table. At this point in my career that meant a lot to me. I was used to making big decisions at Emeritus and I wanted to continue that, and I wasn’t sure if I went with a Welltower or some other large REIT that that would continue.
You guys aren’t small.
Well we’re $2.5 billion; we’re about the same size Emeritus was when I left, so I’d like to do the same thing.
And then, seven months later, Justin decides to leave. When you were brought in did you have any hint of that happening?
There are some wonderful conspiracy theories about that and I spend a lot of time rewinding my memory tape to see if I can piece anything together. So far I haven’t. I think it was a normal desire for Justin to go to the next level and to fix something that needed fixing. He left NHI in wonderful shape; there wasn’t much for me to fix. But at HCP, he has a great opportunity to make his mark, to do something brilliant, and I think those wheels are in motion.
As you said, NHI was in a good spot, so what do you do from here?
I’d like to continue the growth trajectory that Justin started. There are some internal systems that I think will help us with that. At Emeritus we went from 120 to over 500 buildings and I watched all of the systems change along the way, and that’s very painful. It could be software, it could be accounting, it could be HR-related. There’s just lots of tweaking that needs to be done to take a company from $2.5 billion to $5 billion or $10 billion.
How long do you think it’s going to take you to get there?
Do you have it mapped out pretty well?
When you’re a company that relies on opportunistic transactions, that’s hard to say. At Emeritus we never predicted that Sunwest would present itself, and we went from a 200-building company to a 350-building company overnight. Those are the types of opportunities that the business cycle presents and all you can do is be ready for it. As a REIT we have a good balance sheet, so if we need to do a big transaction, we can. We need to have good relationships with lenders and equity markets so we can raise money when we need it. We keep doing all that and keeping ourselves limber for that type of opportunity. So far, the opportunities have been coming.
Are there still a lot of opportunities for you?
There are. I think the larger REITs are focused on coastal markets and larger operators and that leaves room for smaller regional operators, the kind that we focus on. For example, we have Chancellor, a smaller operator in Northern California, and then we have Bickford [Senior Living] in the Midwest with 32 buildings, so that’s kind of our sweet spot.
Was there a big learning curve coming from an operator to publicly traded REIT?
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Short answer, yes. The learning curve for me was being engaged with analysts and investors and understanding that capital markets were now the lifeblood of the REIT, and that leverage was not so important. You’d rather be low-levered.
You guys aren’t very leveraged.
We’re not very levered at all. Coming from Emeritus, where we were highly levered, I was used to doing a deal and not necessarily knowing where the money would come from. That was standard operating procedure.
Can you give me an example?
When we were buying the Sunwest portfolio we were building the airplane as it was going down the runway. We were talking to Blackstone, we were talking to HCP, we were talking to other capital partners. We weren’t sure who we’d end up with, but we knew there was a good deal there and it was financeable. It ended up being Blackstone and Columbia Pacific Advisors (which just bought a piece of the Brookdale RIDEA) [working with] Emeritus. It was an interesting group of investors that ended up doing that deal. It was risky. We were signing commitments and putting letters of intent out there without all the pieces in place.
Now things move more slowly at NHI just because it’s a different kind of company?
We have the resources in place, like our revolving credit facility. If we wanted to do a $500 million deal we could use that and figure it out later. So that’s the learning curve, it’s a different type of perspective and a different type of approach from being an operator.
As somebody who spent a lot of time at Emeritus, is it interesting for you to look at what Brookdale has now become?
It is. I don’t think it’s finished transforming. It’s still finding its footing. I think that the merger with Emeritus over time will bear fruit but that the integration is probably tougher than anyone imagined.
How long do you think it’ll take?
Probably another year.
There are a lot of people who don’t have as much confidence. I think it’s fair to say that everybody wants it to succeed, for the most part. There are definitely some people that left and feel a little cheated.
It’s hard work. You’re changing culture. You’re changing systems. You’re changing jobs. Some people have changed locations where they live. It’s hard work.
How’s NHI different now under your leadership? What do you want to change? What have you changed?
Some changes that we’ve done [include] internal systems; we’re upgrading some of those. We’re trying to be more high profile in Nashville. We’re also trying to get in front of customers more. We’re attending more conferences, we’re attending more events, we’re doing more sponsorships. We’re also more engaged in the community. I think that part of raising your profile is attending charity functions, being sponsors at the Walk to End Alzheimer’s, Red Cross events, things of that nature. We’re putting more emphasis on that type of thing.
Anything you’ve tried to implement that hasn’t gone as well as you would have thought?
Too soon to tell. Ask me in six months.
What’s your definition of leadership?
My definition has a couple of moving parts. One is, to be a leader, it’s a conscious choice. Don’t just back into leadership. You have to know what it means to be leader, you have to understand that you have to raise your game. You’re taking on an obligation to shareholders, to employees, to co-workers, to be a good example for them and to mentor them. Making a conscious decision to be a leader is the first part of the definition.
To be a leader, it’s a conscious choice. Don’t just back into leadership. You have to raise your hand. You have to know what it means to be leader, you have to understand that you have to raise your game.
The second part of the definition is being involved in the community. When you’re a leader you have an obligation to those around you, whether it be your church, a nonprofit, your coworkers. That’s something I’m trying to do with NHI. We’re more engaged in the community than we were before.
The other part of leadership that I still think about a lot is you have to make some tough choices. You’re the decider, as [President George W. Bush] used to say. We have to make tough decisions that aren’t always popular. You have to be the adult in the room. If you don’t know what’s coming, you can make a series of small decisions that will erode your ability to [lead], that will erode your credibility with people you’re dealing with, with customers, with your own team. I think all those things together make a leader.
During your career, what’s the biggest challenge you’ve faced and how did you overcome it?
The biggest challenge was selling Emeritus. It’s a process that took over two years and it was a very small group of people that knew about it [until] the transaction closed, and everything changed as soon as you had that knowledge. You couldn’t hire people anymore, you couldn’t spend for certain things anymore because the future was uncertain. You couldn’t tell anybody why you’re doing these things, you just had to be perceived as a jerk, or difficult, and live with it. There was also a bittersweet feeling that you carry around with you as you go to a Christmas party and you know it’s the last Christmas party. That was a very difficult process.
You almost seem a little sad when talking about it.
It was sad. Sure, it was a tough decision to end the life of a company and merge it with another company. I knew that that was the best choice for shareholders at the time, but that still doesn’t make it fun.
So how did you get brought into the inner circle? Tell me about that. Did Granger pull you aside?
In my view, it wasn’t a surprise and the transaction took several twists and turns. For example, we thought about buying Sunrise. When that didn’t work out, we thought about buying other companies and then [the Frontline report] happened. A part of the calculus of whether to be a buyer of other companies, or a seller to other companies, is your brand and your reputation, and at least at that point in time our reputation took a hit.
Was it that big of a deal?
It was part of the equation. Economically it wasn’t a big deal, it wasn’t material; the lawsuit that was featured on the Frontline show was not material and the erosion of our market share was not material, but it just changed the gravity for us from becoming a buyer to a seller.
I thought Granger handled it very well.
He did. I learned a lot watching how that company dealt with some bad cards that they were handed and there was a lot of learning that went on because business is easy when everything’s going great. It’s when things aren’t going great that you really see how people behave, how people make decisions, and I’m grateful that I was there and I was able to watch that.
Anything that you think you guys could have done better?
Perhaps. We had an opportunity to settle the case that was on Frontline early on, and we didn’t. In retrospect I wish we had.
Do you think it could’ve changed the trajectory of the company?
I’ll never know, but it would’ve removed that part of the equation.
It took two years?
It took two years. The other tell was that Dan Baty, our chairman and founder, has sold almost every company that he’s started around the 400-500 building level. So I knew when we got that large it was going to be time.
Do you think you can get bigger than that and still be successful?
We’ll find out with Brookdale, won’t we? We’ll find out together.
Back to leadership. What’s the biggest risk you’ve taken in your career?
Leaving the practice of law and becoming a transaction guy. That was a conversation with Granger Cobb after the Summerville merger. He came into my office and said, ‘We’re big enough now that this is a job for two people. You can either be the lawyer or the transaction person.’ I said ‘Well, what do you think I should do?’ And he said, ‘Well, I’m hoping you’ll be the transaction person.’
Why did he want you to be the transaction person?
Because of my ability to get transactions closed. He had just been on the other side of me, on a transaction. I actually got to sell his personal residence as part of the merger, so I dealt with him twice on that transaction. I knew he was going to be my new boss so I was on my best behavior.
So do you like deals?
Why? What do you like about them?
You know, as a lawyer, sometimes cases can go on for years. What I like about transactions is that there is a definite beginning, middle and end. When it’s done, you close the file and move on to the next one. As someone who doesn’t want to live with a case for years and years, that’s a wonderful process.
Do you think you’ve gotten better at deals over the years?
I’d like to think so. Part of structuring a deal and conducting a closing is being patient and not being surprised by all of the twists and turns that a deal can take, and just thinking about it and being thoughtful and not reacting to the other side. Sometimes you’re going to deal with difficult people, or people in difficult situations, and you just need to be fair and empathetic to their side of the equation.
What’s the toughest deal you’ve worked on?
Sunwest. It was a bankrupt company. The owner is in jail now, [although he] wasn’t at the time [of the deal]. There were tenant-in-common investors (TICS) that were very local, very disillusioned investors, and nervous that Emeritus and Blackstone were going to somehow do them a disservice. In the end they actually made out fairly well. The ones that stayed with us, they had a portion of the deal. It was a lot of moving parts. You had the TICs, the bankruptcy court judge, and you had some interference from Jon Harder [the former Sunwest CEO] and others in the background. Then you had Blackstone and Emeritus on the other side trying to keep it all together.
Is there a lesson you learned from that deal?
Perseverance. Dan Baty was pursuing that deal for four to five years; he knew they were in trouble. My office used to be next to his and I would hear him on the phone talking to Jon Harder, telling him he should sell the company. He got it the hard way.
What’s the best piece of advice you’ve received in your career?
Slow down. Dan Baty used to tell me that.
I don’t know Dan Baty very well, but “slowing down” doesn’t seem like something he’d do.
Just be more methodical about how to analyze a deal, how to look at it, how to structure it, how to finance it. I also learned a lot from Ray Brandstrom, our CFO at Emeritus. He would do an analysis of each deal and he would want to see what the worst that could happen would look like. Those were tough meetings to come in and look at a deal, because as a deal guy, you’re very optimistic. You’re glass half full, and if you’re CFO, your class is half empty, especially if you’re a CFO that lived through the downturn of the 90s and the bankruptcies and so forth. So slowing down, taking a look at the worst that could happen, and considering all of the angles is important. Senior housing is interesting because it’s hospitality, healthcare, real estate, all together. There’s a lot of moving parts.
Who would you consider to be your mentor and how has that person helped your career?
Granger Cobb was a mentor. He was a wonder to watch in action. He was the king of taking it slow. People would come to him and want him to make a decision for them, and he would ask them questions and make it apparent that they hadn’t thought of all the angles. They would have to go back and do the homework. By the time the homework was done, the answer to the question was obvious. I watched him do that time and time again and knew that I shouldn’t come to see him unprepared.
Was he pretty tough about being prepared?
He didn’t appear tough. We used to call him “the velvet hammer.” He would smile a lot, and always had a friendly tone and was sometimes even a bit jokey to keep conversations light. But he would ask you tough questions, and if you hadn’t done your homework then he would say, ‘Well maybe you should go back and look at this again and let’s talk about it in two weeks,’ and that was his way of slowing it down.
What would you say some of your greatest strengths are as a leader?
Keeping a cool head. Being optimistic. Considering other people’s perspective.
What are your weaknesses?
Impatience. I’m constantly fighting that. Wanting to move faster. And over analyzing, I don’t want to have analysis paralysis.
Do you find that happens sometimes?
Sometimes. Some of these decisions are significant, they’re material, they’re impacting shareholders, and you have to consider all of that. It can weigh on you.
Attracting the next generation of leaders
Say I’m about to graduate college, what would your pitch be to me as to why I should look to senior living as a career?
You should absolutely consider senior living because it still is like a neighborhood that’s going to be cool, but isn’t cool yet. You should get in now.
…as I progressed through the senior housing industry and met a lot of the leaders, I learned that it’s filled with great people, it’s filled with people who care, and it’s filled with opportunity. It’s amazing how much opportunity there is in this business.
Why isn’t it cool?
That, I don’t know. I think it’s cool, but if you’re a college kid, it’s not cool. I can tell you, as I progressed through the senior housing industry and met a lot of the leaders, I learned that it’s filled with great people, it’s filled with people who care, and it’s filled with opportunity. It’s amazing how much opportunity there is in this business. That’s why we’re still recruiting. I really got to see that part of the business because my office used to be near the human resources and recruiting portion at Emeritus, and those people were constantly on the phones wooing employees away from restaurants, away from hotels, away from accounting firms, and you could either be an accountant for the rest of your life, or you could become a director of accounting and a CFO if you wanted. It was just wonderful to see, and still see. I see people that started at Emeritus as entry level, and now they’re attending conferences and they’re in leadership positions themselves.
Do you think the industry does a good job telling those stories?
It’s getting better. I still think it’s got room to grow, and I hear the physical therapy analogy a lot. If you talk to Bob Kramer at NIC, he’ll say 10 years ago the physical therapy industry made a conscious decision to pitch guidance counselors at high schools and colleges that physical therapy was a career worth pursuing. They needed physical therapists, so now that’s a real profession and it’s a real vocation and we have enough physical therapists as a result. We need to do the same for senior housing.
Do you think the industry does a good job of taking people from the front lines and giving them a path to succeed?
I think so. I’ve seen executive directors move up to regional positions, to VP positions. Look at Chris Hyatt, our old COO at Emeritus. He started in a building as a caregiver. Justin [Hutchens], my previous boss at NHI, started in a building as a caregiver. Those are two great examples.