National Health Investors (NYSE:NHI) maintained its reputation as a high-yield income REIT as it announced a third-quarter dividend of $1.05 per share for its common shareholders. At the current price, the REIT gives an attractive dividend yield of over 5 percent. Along with the dividend announcement, the REIT also reported positive financial numbers for the second quarter of the year. National Health Investors shows good potential for a long-term income oriented portfolio, so let's have a look at the fundamentals behind this REIT to gauge its investibility.
National Health Investors holds a well diversified portfolio of properties, with its major interest lying in the senior living and skilled nursing segment. Senior living properties have emerged as one of the most attractive sub-segments of Healthcare REIT segment. With growing ageing population, the sector is bound to see impressive growth in coming years. It is estimated that nearly 3.6 million people are added to the over-65 segment of the population. These are the people responsible for generating demand for senior living properties. Further, this demography is now more economically stable than ever, and thus is in position to spend more liberally. All these signs point towards better future for REITs involved in senior living and outpatient services segments.
Source: Company Website
Another major segment for National Health Investors is skilled nursing, which is an attractive sub segment, but is currently undergoing turmoil in its internal and external environments. The sector is currently going through a consolidation phase as M&A activities gain ground. However, the sector has a unique issue as it remains under scrutiny of policy makers as it continues to struggle with the impact of Affordable Care Act. Some of its provisions have resulted in lower reimbursements and shorter stays in the hospital, affecting the financial health of service providers. In the case of National Health Investors, the overall effect is largely compensated by its stake in relatively attractive senior living and other segments.
The geographical spread of National Health Investors’ portfolio is relatively limited as the REIT has properties in 34 states. However, even within these states, the major concentration of its facilities is in large urban centers. While this proposition translates to ability to charge higher rentals, it also means that the REIT faces more intense competition from its peers.
REIT investment is generally income oriented and thus is heavily focused upon dividend payments. In this regard, National Health Investors scores well as the company has a solid track record of dividend payment and growth. The following chart shows the growth of National Health Investors' dividend over the years.
Another important metric for gauging the health of a REIT and its potential is its free funds from operations (FFO). During its latest quarterly earnings, the company reported its NAREIT FFO per diluted common share at $1.36, showing 2.3 percent gain over the corresponding quarter of the previous year. The increase in FFO shows that National Health Investors is running its business in a sustainable manner. It also alludes to the security potential of its dividend payments as REITs with growth in their FFOs are less likely to cut their dividends.
While the above metrics are important for measuring the long-term potential of a REIT stock, National Health Investors stands out on another front. The REIT boasts of a particularly conservative leverage position as the company has managed to carry out acquisitions and achieve growth without taking on excessive loan or debt. Lower debt exposures add to the value of a REIT as it moderates the risk profile of the company. As per the company’s latest annual report, its debt burden stands close to $1.48 billion, only 15 percent higher than the previous year and 2 percent of its net income.
Similarly, EBITDARM is yet another metric of REITs for measuring their efficiency and performance and the term stands for earnings before interest, taxes, depreciation, amortization, rent and management fees. This metric is a customized form of EBITDA for measuring the performance of REITs. For the latest year, the company has shown clear growth over previous year, which is a good omen for the future prospects of National Health Investors. It is also worth noticing that the REIT has shown the best ratio in the highly competitive skilled nursing segment, which again shows the robustness of the company’s operations.
National Health Investors has a highly attractive portfolio with strong fundamentals, but as stated earlier, there are some concerns which should be thoroughly looked into before deciding to take a plunge. The REIT’s high dependence on complicated and currently beleaguered skilled nursing segment is a cause of concern. National Health Investors has elaborated that despite its SNF operators “receive a significant portion of their revenues from governmental payors, primarily Medicare (federal) and Medicaid (states). Changes in reimbursement rates and limits on the scope of services reimbursed to skilled nursing facilities could have a material impact on the operators’ liquidity and financial condition.” However, it also contended that its operators are expected to be able to cushion the blow. Still, it is advisable to critically examine the developments in the skilled nursing segment.
The stock’s valuation is another point of concern for potential investors. In its recent earnings announcement, the company pegged its normalized FFO to be in the range of $5.44 and $5.50. With its current price of roughly $82, the FFO multiple stands close to 15x which is quite expensive in comparison to many of the company’s peers. However, keeping in view the prospects ahead and the solid financial situation of the REIT, these potential pitfalls may be overlooked to a certain extent, making National Health Investors a solid investment opportunity.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.