2023-08-30 09:00:00 ET
Summary
- Healthcare REITs have underperformed the Nasdaq 100, S&P, and Dow this year but outperformed the REIT average.
- Senior housing rents are expected to grow due to the largest Social Security cost-of-living adjustment since 1982.
- Skilled nursing facilities are facing a labor shortage and lower occupancy rates, but rental rates have reached a 17-year-high.
- National Health Investors offers a dividend yield in excess of 7% and a sturdy balance sheet but mixed prospects for the future.
Thus far this year, Healthcare REITs have been mildly positive, returning 3.6%, but lagging the Nasdaq 100 (37.2%), the S&P (15.4%), and the Dow (4.31%).
Hoya Capital Income Builder
Some segments of the Healthcare REIT sector are prospering, others languishing. This article focuses on a company that primarily deals in senior housing and skilled nursing facilities.
Senior housing rents are closely correlated to annual Social Security cost-of-living adjustments (COLA). The 8.6% COLA this year is the largest since 1982.
Hoya Capital Income Builder
The SH (Senior Housing) segment of the Healthcare REIT sector is expected to be among the fastest-growing as a result. The National Investment Center ("NIC") quarterly senior housing report shows that SH operators currently enjoy significant pricing power, with rent growth at 4.9%, its healthiest level in more than 15 years.
Also of note, NIC reports that inventory growth is at the lowest level since 2013. That's good news for SH REITs, as supply growth had been a persistent headwind, even before the pandemic.
Hoya Capital Income Builder
On the other hand, the severe stress of the COVID pandemic drove millions of skilled nurses out of the profession, resulting in a lingering nationwide labor shortage. Sharply increased labor costs from the reliance on third-party nursing agencies to plug staffing gaps have been the most pressing issue for the "public pay" tenants.
According to Hoya Capital ,
Skyrocketing labor costs from the reliance on third-party nursing agencies to plug staffing gaps have been the most pressing issue for ..."public pay" segments.
Hoya Capital Income Builder
SNF (Skilled nursing facility) occupancy rates bottomed in 2020, and have partially recovered, to 79.3%, but still lie far below their pre-pandemic level of 83.5%. Meanwhile, growth in rental rates for SNF's reached a 17-year high of 2.8% through the end of 2022.
The continued aging of the U.S. population, led by Baby Boomers like me, continues to be a significant tailwind for all healthcare companies.
Hoya Capital Income Builder
Meet the company
National Health Investors
Founded in 1991 and headquartered in Murfreesboro, Tennessee, National Health Investors (NHI) owns 178 SH (senior housing) and SNF (skilled nursing facilities), across 35 U.S. states, totaling more than 20,000 units.
NHI Q2 Earnings Supplemental
Of NHI's $244 million in NOI in 2022, 53% came from SH facilities leased on a triple net basis, and 34% from SNF triple nets. The remaining 13% came from:
- the SH operating portfolio at 3.5%,
- a triple-net leased specialty hospital at 1.4%,
- mortgages on 14 facilities at 4.8%, and
- other sources at 3.4%.
The company's assets skew about 63% toward SH facilities of various kinds, and 37% towards SNFs, including their one specialty hospital.
NHI Q2 Earnings Supplemental
The tenant base is not ideally diversified, as the top 4 tenants account for 63% of NOI.
NHI Q2 Earnings Supplemental
Those top four tenants are Senior Living Communities, National Healthcare Corporation, Bickford, and Ensign Group.
Quarterly results
NHI reported the following curiously mixed results for Q2 2023. Revenue, NOI, and NAREIT FFO per share are up sharply from a year ago, but down significantly from Q1. Meanwhile, interest expenses spiked 30% from a year ago, but only 1.5% since last quarter. FAD (Funds Available for Distribution) sagged 20.8% YoY and 6.5% QoQ. Partly as a result, the payout ratio has leapt from 69.5% to 85.3% YoY, and is also up 400 basis points from Q1's mark of 81.3%.
Metric | Q2 2023 | Q2 2022 | YoY change | Q1 2023 | QoQ change |
Revenue | $77.9 m | $59.9 m | +30.1 % | $82.4 m | (-5.5)% |
NOI | $65.0 m | $48.6 m | +33.7% | $70.0 m | (-7.1)% |
Adjusted EBITDA | $61.2 m | $69.4 m | (-11.8)% | $62.2 m | (-1.6)% |
FAD | $44.6 m | $56.3 m | (-20.8)% | $47.7 m | (-6.5)% |
Interest expense | $14.2 m | $10.9 m | +30.3% | $14.0 m | +1.5% |
NAREIT FFO/share | $1.05 | $0.71 | +47.9% | $1.16 | (-8.7)% |
Shares outstanding | 43.4 m | 44.7 m | (-2.9)% | 43.4 m | 0.0% |
Payout Ratio | 85.3% | 69.5% | +1580 bps | 81.3% | +400 bps |
Source: NHI Q2 Earnings Supplemental
Growth metrics
Here are the 3-year growth figures for FFO (funds from operations), and TCFO (total cash from operations).
Metric | 2019 | 2020 | 2021 | 2022 | 3-year CAGR |
FFO (millions) | $239.7 | $246.2 | $211.1 | $159.0 | -- |
FFO Growth % | -- | 2.7 | (-14.3) | (-24.7) | (-12.8)% |
FFO per share | $5.50 | $5.60 | $4.60 | $4.30 | -- |
FFO per share growth % | -- | 1.8 | (-17.9) | (-6.5) | (- 7.9)% |
TCFO (millions) | $241.0 | $232.1 | $210.9 | $185.3 | -- |
TCFO Growth % | -- | (-3.7) | (-9.1) | (-12.2) | (- 8.4)% |
Source: TD Ameritrade, Hoya Capital Income Builder, and author calculations
NHI was growing very slowly before the pandemic, which dealt SH and SNF a serious blow, from which NHI is just now beginning to recover.
Meanwhile, here is how the stock price has done over the past 3 twelve-month periods, compared to the REIT average as represented by the Vanguard Real Estate ETF (VNQ).
Metric | 2020 | 2021 | 2022 | 2023 | 3-yr CAGR |
NHI share price Aug. 28 | $62.51 | $60.83 | $67.10 | $50.66 | -- |
NHI share price Gain % | -- | (-2.7) | 10.3 | (-24.5) | (-6.8)% |
VNQ share price Aug. 28 | $82.59 | $107.00 | $95.62 | $81.70 | -- |
VNQ share price Gain % | -- | 29.6 | (-10.4) | (-14.6) | (-0.4)% |
Source: MarketWatch.com and author calculations
NHI shares did not benefit from the REIT feeding frenzy of 2021, when the VNQ shot up 29.5%. Instead, shares in NHI lost (-2.7)%. Then while REITs were selling off by (-10.4)% in 2022, NHI shares gained 10.3% instead. This year, NHI shares have been moving down along with REITs in general, but NHI shares have plunged faster, at (-24.5)%. All in all, while the VNQ has wound up essentially flat over the past 36 months, NHI investors have suffered an average annual loss of (-6.8)% on share price alone.
Balance sheet metrics
Here are the key balance sheet metrics. The sturdy liquidity ratio and debt ratio are typical of the Healthcare REIT sector, but NHI's balance sheet is investment grade bond-rated and the company's Debt/EBITDA is an excellent 5.4x.
Company | Liquidity Ratio | Debt Ratio | Debt/EBITDA | Bond Rating |
NHI | 2.07 | 34% | 5.4 | BBB- |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
NHI holds $1.13 million in debt, at a rather hefty weighted average interest rate of 4.53%, and weighted average term of 4.1 years. According to the company, 35% of their debt is held in unsecured variable rate instruments.
NHI Q2 Earnings Supplemental
Maturities are favorable this year and next, but a substantial $327 million comes due in 2025, and a whopping $700 million in 2026, in the same year that expiring leases add up to more than 15% of the company's ABR.
Dividend metrics
Despite the pandemic, NHI held its dividend even until mid-2021, and then cut modestly, from $1.10 to $0.90. The dividend has not budged since then. Seeking Alpha Premium assigns no Dividend Safety score to NHI, and the decidedly mixed metrics leave the safety of the dividend open to question. However, because of the company's low Debt/EBITDA, my guess is NHI's dividend is safe for the time being. In the meantime, NHI is an outstanding dividend payer, with a tasty yield over 7%, and despite the dividend cuts of 2021, a robust dividend score of 6.65.
Company | Div. Yield | 5-yr Div. Growth | Div. Score | Payout | Div. Safety |
NHI | 7.09% | (-2.1)% | 6.65 | 80% | -- |
Source: Hoya Capital Income Builder, TD Ameritrade, Seeking Alpha Premium
Dividend Score projects the Yield three years from now, on shares bought today, assuming the Dividend Growth rate remains unchanged.
Valuation metrics
NHI is a classic COW (cash-only-wanted) REIT. With a much higher dividend score and much lower price/FFO ratio, NHI should appeal to most value investors, though not to growth investors. However, NHI's discount to NAV is much smaller than that enjoyed by the average REIT.
Company | Div. Score | Price/FFO '23 | Premium to NAV |
NHI | 6.65 | 11.6 | (-7.7)% |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
What could go wrong?
Hoya Capital's latest sector report on Healthcare REITs reads, in part:
Triple net leases are only as "safe" as the tenant's ability to pay the rent, and questions over the financial health of many operators are certainly nothing new for healthcare REITs but remain the primary source of near-term and medium-term risk. Already dealing with challenges on the labor-front before the pandemic, staffing shortages became critical issues at healthcare facilities across the care spectrum during the pandemic as intensely-challenging work conditions prompted a surge in early retirements and career shifts. While the overall workforce recovered to pre-pandemic employment-levels by mid-2022 and is now 2% above 2019-levels, employment in the Nursing & Residential Care category remains 10% below pre-pandemic levels. Lack of competitive pay and inefficiencies in the U.S. higher education system are the most commonly cited reasons for the nursing shortage. The average hourly pay for registered nurses is $37/hour at the end of 2022 - up 7% from the prior year.
Hoya Capital Income Builder
With so much variable rate debt, NHI is exposed to the possibility of major increases in their debt expenses, if the Fed resumes raising interest rates.
Investor's bottom line
SH and SNF REITs are experiencing a complex set of headwinds and tailwinds. There is no compelling reason to sell NHI, nor do I see a compelling reason to buy. The shadow of 2026 is looming, however, when the company will face stiff debt payments and simultaneously have a large number of leases expiring. The dividend appears safe enough to merit a Hold rating, for now.
Seeking Alpha Premium
All 5 Wall Street analysts covering NHI rate it a Hold, as does the Seeking Alpha Quant ratings system.
On the other hand, The Street rates it a Buy, while Zacks rates it a Sell, and TipRanks rates it a mild Underperform.
As always, however, the opinion that matters most is yours. Because it's your money.
For further details see:
National Health Investors: Enjoy This Solid 7%+ Yield, For Now