NHI - National Health Investors: 7% Yielding REIT Has Improved On Most Metrics

2023-11-12 23:20:28 ET

Summary

• National Health Investors released its Q3-2023 results, showing improved funds from operations and funds available for distribution.
• We look at the journey NHI has made so far since 2020 in improving its portfolio.
• We examine the balance sheet and the valuation metrics and give you our verdict.

National Health Investors Inc. (NHI) is a senior housing and skilled nursing REIT. This sector, which was the rage pre-COVID-19, got into a lot of difficulties after March 2020. The sector faced challenges from the high levels of mortality inflicted by COVID-19 on its primary users. It also faced increased costs from maintaining a safe environment. Labor costs then exploded in 2022 and that was another problem they needed to deal with. As a REIT, the "sit back and collect rent" model did not work for NHI or any other REIT in this sector. In fact, if you go back and see the last 10 years, this model has not really worked. The tenants have generally had poor rent coverage and their low-margin business required constant subsidies and bailouts. But the REIT has stepped up and dealt with these headwinds. We look at where NHI stands today and whether one can make a good investing case for this 7% yielder.

Q3-2023

NHI just released its Q3-2023 results and normalized funds from operations (FFO) improved modestly $1.08 per share. Funds available for distribution, or FAD, improved as well and the FAD payout ratio moved a smidge lower to 81.1%.

Despite a slightly stronger Q3-2023 than expected, NHI trimmed its FFO and Normalized FFO guidance. Due to a slightly lower amount of lease incentives granted, FAD guidance went up.

The numbers don't materially change the story though. At $4.30 of NFFO, NHI is comfortably covering the dividend. More importantly for investors, NHI claims to be on the other side of the "hump" as far as dealing with its problems. In assessing the validity of the above statement, is where the investing case has to be made. So let's look at that.

Portfolio Optimization

The first thing that NHI has done successfully is sell deadbeat properties. You can see that in the "cash yield" 3.2% and the sale price of $353.9 million.

In essence, NHI was able to sell properties at what would be called very low cap rates. These properties often had a tenant who was not even paying rent or paying a fraction of the rent. It was one of the best illustrations of real estate holding its value. Even when the property had zero appeal using conventional rent-generating metrics from existing tenants, possibly other factors like replacement cost or alternative use value, came into play. Of course, replacing the tenant with a stronger one could also be a motivating factor, but if it was so easy, NHI would have done it, instead of selling the property. The bottom line is that this got done and NHI got valuable cash flow when it needed it the most.

Brickford and Holiday were two other problem children and they were not easy to put away. NHI granted Brickford a big rent reset and also transitioned Holiday to a SHOP setting.

For those unaware, SHOP means that it is a Senior Housing Operating Portfolio and NHI has upside and downside on those properties. It is no longer just collecting rent.

NHI did steps one and two in a manner that they offset the leverage impact. The very low cap rate sales offset the rent cuts and move to SHOP (which was immediately EBITDA negative).

The end result has been quite impressive and perhaps the best metric here is the tenant health as measured by EBITDARM (earnings before interest, taxes, depreciation, amortization, rent and management fees) metric. You can see below that we are seeing some consistent trailing 12-month improvement across every single category.

Outlook & Verdict

NHI's balance sheet looks in good shape with debt to adjusted EBITDA at just 4.4X.

Some might argue that this is very low for a REIT, but this is not a triple-net retail REIT. The tenants here are notorious for issues and demands for rent cuts. So 4.4X is good, but definitely not something to write home about. The maturities are well spaced out as well. Note that the line of credit has enough room to absorb the entire 2025 maturity schedule, though we doubt it will be needed.

The stock sports a 7% yield and an 80% payout ratio. While it trades at a small premium to estimated NAV, this is lower than what we have seen over the last decade.

The 12X FFO multiple is not too bad either and reflects the general apathy towards REITs.

At present, we think NHI is a worthy consideration for addition to any portfolio that lacks sufficient REITs. While we are warming up to this one, we don't see a runaway bull market here. Using a conservative buy point would probably involve looking for a sub $47.00 entry price. Alternatively, investors can juice their returns and reduce their risk using the $50 covered calls. At present, the longest-dated ones available are for April 2024. That coupled with the relatively low implied volatilities means that we are still staying on the sidelines. We rate this a hold while noting the potential for good returns from here. We also think the 2031 bonds with a 7.57% yield to maturity are worth considering.

If get an 8.0% plus yield to maturity on these in a meltdown, we might buy these as well.

For further details see: