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National Health: A Survivor In This Pandemic (NYSE:NHI)

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Via SeekingAlpha.com

National Health Investors, Inc. (NHI) is a real estate investment trust specializing in sale leaseback, joint venture, mortgage and mezzanine financing primarily in senior housing and skilled nursing facilities (SNFs) sectors. SNFs and assisted living senior housing form about half the mix with the rest distributed in several other categories. NHI has minimal exposure to medical office buildings and hospitals.

Source: NHI presentation

NHI’s portfolio, although diversified, makes it hard to find exact peers. Ventas, Inc. (VTR) has a similar senior housing exposure, but absent the skilled nursing care that NHI has. Omega Healthcare, Inc. (OHI) is almost completely into nursing care, but its senior housing portfolio is rather small compared to NHI. NHI does stand out rather uniquely here, but we can make a peer comparison by looking at similar REITs.

A Star In The Group

NHI has shown a remarkable ability to increase its funds from operations (FFO) and adjusted funds from operations (AFFO) over the last few years at a steady clip. This has been in marked contrast to its peer group which has not even been able to keep its metrics flat.

Source: NHI presentation

This growth has allowed it to steadily increase its dividends year after year and also throw in a couple of extra dividends to meet REIT requirements.

Source: NHI presentation

NHI’s dividend growth has also outpaced its peers comfortably.

Source: NHI presentation

Leverage

You can get higher returns if you use more leverage. That also comes with more risk. Where NHI has distinguished itself is in producing higher returns with less leverage.

Source: NHI presentation

Looking at OHI, VTR and even Sabra Health Care (SBRA), all are close to the 6.0X debt to adjusted EBITDA range. NHI’s lower debt ratios give it an above-average buffer in this environment. NHI does have more than a third of its debt coming due in the next three years.

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Source: NHI presentation

But in relation to probable market value of its assets, the number is still on the small side.

Valuation

NHI generated $5.50 in normalized FFO in 2019.

Source: NHI presentation

So this is the lowest valuation it has traded at in the last decade and by a wide margin.

ChartData by YCharts

The last time it traded at around this price, its FFO was half as much as today. That should tell you about the brutality of this selloff. The last estimate we have of its net asset value from analysts was on Feb 28, 2020, where the consensus number was pegged at $63.50. NHI trades at a 40% discount to that compared to its usual 20% premium. So at the minimum, it would be fair to say that NHI has been priced for a virtual disaster.

Looking at similar REITs, we do see SBRA trading at an even wider discount than NHI at sub 6X multiple. VTR trades at a similar multiple to NHI, but VTR has a big medical office building and university research building portfolio which should be better insulated here. However, VTR unfortunately also has a big senior housing operating portfolio which would get hit harder in this downturn. On the whole though we think VTR is a better buy, but investors should consider buying both here.

Key Risks

The pandemic has definitely got the attention front and center on senior centers. NHI does not operate any of these facilities (only collects rents), but the stresses on its operators will likely result in some rent relief. NHI works with a lot of better operators in this space and that is likely to help in such a crisis. It is also well diversified across the space.

Source: NHI presentation

So far it is not aware of any positive COVID-19 cases at its facilities, but the market will remain on pins and needles until the crisis is believed to be over. NHI does have one problem and that problem is pervasive throughout the senior housing space. Senior housing operators have razor-thin margins. That is reflected in the EBITDARM (earnings before interest taxes depreciation amortization rent and management fees) lease coverage.

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Source: NHI presentation

NHI will absolutely be compelled to give rent relief here or has to deal with permanently wounded operators. Move-ins have been reduced and most operators are complaining of increased costs for cleaning and screening. On the flip side, longer term this crisis might take away its biggest gripe, high labor costs, due to the Covid-induced unemployment levels. In the near term, NHI will have to bend the knee. Most likely this rent relief will target the assisted living facilities which were already struggling with oversupply issues prior to COVID-19.

Source: NHI presentation

A 30% one-year rent cut in that space would reduce FFO by about 10% in total. Even if we model a 20% loss in FFO for two years, NHI would be trading at less than 9X bombed out FFO numbers versus its usual 14x-16X average. As such for investors having a long-term view, we think this is an attractive entry point.

Conclusion

Yes, there are issues in the senior housing space, but you will not get NHI 40% under tangible NAV and at half its historic multiple during times of bliss. The yield is now at 11% and our back-of-the-napkin math suggests that NHI could fund this through and through.

ChartData by YCharts

But increasingly managements are choosing to cut first and increase liquidity versus waiting for the full impact to become obvious. SBRA went down that road, although it was already struggling with its coverage and the payout ratio was expected to be over 100% even before the pandemic. Three different NHI insiders bought shares recently and that suggests that they don’t see every senior braving it out on their own after the pandemic.

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Source: NASDAQ

Investors should consider nibbling here and backing up the truck should a dividend cut happen. We rate the shares a buy over here.

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TipRanks: Buy.

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Disclosure: I am/we are long VTR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: HDO is NOT long NHI, VTR, SBRA or OHI.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.




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