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Shares of National Health Investors (NYSE:NHI) hardly moved on the back of the announced deal to acquire another 25 independent living facilities.

The REIT has seen strong performance in recent years, as investors were looking for yield. The historically high valuation and exposure to higher rates leaves shares vulnerable at these levels to my opinion.

The Deal

National Health Investors announced that it has signed an agreement to acquire 25 independent living facilities from Holiday Acquisition Holdings for a total price of $491 million.

The facilities will be operated by affiliates of Holiday Retirement, following a 17-year master lease term. The lease provides a cash yield of 6.5%, with annual escalators of 4.5% in the years two through four. Annual escalator in the year's following are set to 3.5%, increasing to possibly 3.75% if the CPI of the preceding year would be higher.

The acquired facilities have a size of anywhere between 83 and 142 units, have a median age of 16 years, and have an occupancy rate of 89%.

CEO Justin Hutchens commented on the rationale behind the deal, "This investment is in line with our stated goals of partnering with strong operators, diversifying our portfolio, and financing growth in a conservative fashion. Holiday, a portfolio company of Fortress Investment Group, is an industry leading operator of independent living communities."

To finance the deal, National Health stands to offer 4.5 million shares which results in gross proceeds of $270 million around $60 per share.

The deal is expected to close by the end of this calendar year.

Third Quarter Results

Two weeks ago, National Health reported its third quarter results. The company reported funds from operations of $26.2 million, up 17.2% on the year before, coming in at $0.94 per share.

Revenues for the three months period came in at $31.8 million, up nearly 31% on the year before. Revenues as a percentage of total assets came in at 4.15% on a quarterly basis.

Valuation

National Health operates with $7.5 million in cash and equivalents while it holds $391.4 million in debt, for a net debt position of $384 million.

Revenues for the first nine months of the year came in at $87.9 million, up 25.2% on the year before. Funds from operations came in at $71.7 million, up 17.1% on the year before. The company guides for normalized funds from operations of $3.53-$3.55 per share for the full year.

Trading around $60 per share, the market values National Health at $1.7 billion. This values the equity in the company at nearly 17 times its funds from operations.

The current dividend yield of $0.735 per quarter, provides investors with an annual dividend yield of 4.8%.

Some Historical Perspective

Long-term holders in National Health Investors have seen very decent returns. Over the past decade shares have nearly tripled, and this is excluding the nice dividends being received in the meantime.

Between 2004 and 2009, National Health mostly traded in a $25-$35 trading range to see some real upside ever since. Shares peaked at $73 in May of this year, currently trading around $60 per share.

This growth has been the result of solid growth in operations, followed by steady dividend hikes.

Investment Thesis

National Health has been on an acquisition path which has been fueling growth in operations and the rise in its share price. In July of this year, the company announced the $135 million acquisition of 17 assisted living and memory care communities.

The latest deal involved 2,841 units, acquired for $491 million, for an average price of around $173,000. On a pre-deal basis, National Health has a $2.1 billion enterprise valuation, with some 14,000 beds available in over 152 properties. This values each bed around $150,000.

As such National Health is paying a small premium for the acquired properties versus its own valuation, which is limiting investors' enthusiasm towards the deal. However the premium seems fair given the high escalators built in to the contracts and the attractive initial yield.

Given that National Health Investors is set up as a REIT, and therefore is obligated to pay out the majority of its earnings, shares of the company have been bid up amidst lower treasury yields. With investors starving for yield, they have been bidding up fixed rate investments, including REITs. Given the historical high levels at which the company trades now, and the vulnerability of shares to a rate spike, I would remain very cautious.

As investors already saw a 20% pullback in merely one month time this summer on the back of higher rates, wiping out 4-5 years of dividends. I remain on the sidelines.

Source: National Health Investors - Another REIT Expanding At Historically Expensive Levels