National Health Management Believes The 6.4% Yield Is Sustainable

Nov. 17, 2021 4:09 PM ETNational Health Investors, Inc. (NHI)14 Comments10 Likes

Summary

  • National Health Investors, Inc. is hovering near 52-week lows and appears cheap based on most REIT metrics.
  • Outside a brief trade last year from the long side, we have still stayed out.
  • Q3-2021 results missed the mark and delivered a lot of key development news as well.
  • I do much more than just articles at Conservative Income Portfolio: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

Close up snowy owl eye making shock or funny face expression with wooden pattern background.

Domepitipat/iStock via Getty Images

Captured Above: Investor face after NHI dividend cut

We are not averse to changing our bias on a stock purely due to valuation. In the case of National Health Investors, Inc. (NYSE:NHI) we made a very bullish case in April 2020. Valuations had gotten compelling and as we like to remind ourselves, "the end of the world does not come often." So this Cassandra-like state where we keep harping on problems and issues is not a personality disorder. For NHI, the last time we looked we probably irritated a few bulls by calling for a second dividend cut within 12 months. We look at where that prediction is going as of today.

Q3-2021

NHI had a small drop in revenues in Q3-2021 vs last year. That has pretty much been the trend for all of this year. Share counts were slightly higher.

National Health Management statements of income

Source: NHI Q3-2021 Supplemental, (highlights in this image and subsequent images are from the author)

This 12.5% revenue drop created a 19% drop in funds from operations (FFO) per share.

National Health Management FFO

Source: NHI Q3-2021 Supplemental

The revenues and FFO also include some deferred rents.

National Health Management deferrals and abatements

Source: NHI Q3-2021 Supplemental

Cumulative deferred amounts are rather substantial, and it is our belief that a good deal of this will be written off down the line. We base that on where these tenants are in terms of EBITDARM (earnings before interest taxes, depreciation, amortization, rent & management fees) rent coverage.

National Health Management EBITDARM lease coverage

Source: NHI Q3-2021 Supplemental

144 properties have a sub 1.0X combined coverage. Of course, that is the average, and we are certain there are properties there that can make the 1.0X mark. We are also certain there are some really bad apples in that mix. This of course is worsened by the fact that we are looking at a trailing 12-month coverage and not a real time snapshot. Unlike analysts who dive into where the last penny is hiding, we are comfortable in aiming to get the big picture right. The big picture here can be discerned by how this number is evolving quarter after quarter exactly how we predicted 16 months back. Even from last quarter we can see the drop in the ratio.

National Health Management EBITDARM lease coverage

Source: NHI Q2-2021 Supplemental

Key Events

Bickford was front and center in the Q3-2021 conference call. We will paste a few key sentences that were mentioned about it, but readers must keep in mind that this is not completely sequential, and they may want to read the full context around it.

Kevin Pascoe

But they are discussed, we have reached a preliminary agreement that transforms our Bickford relationship. As we work to complete several more asset sales, we have agreed to defer $4.5 million in fourth quarter rent and up to an additional $4 million in the first quarter of 2022.

This reset would improve Bickford's lease coverage after management fee and capital expenditures of 500 per unit, to 1.21 times from 0.91 times.

Jordan Sadler

Okay. And then just how did you arrive at the degree of the rent cut? Was it just -- was it based on pro forma lease service coverage ratio or -- I'm trying to just understand the delta between the $46 million on Page 4 of the deck here, $46 million to the $37.7 million.

Kevin Pascoe

Right. Yes. So, the $37.7 million that you mentioned is the portfolio minus the seven buildings that we're looking at disposition currently. And then furthermore, the rents cut to $28 million is again what we believe the portfolio can service today, based on current NOI. So, we're expecting that step-down from the $46 million, and really to $37 million to the $28 million beginning next year. And then after 24 months, that rent will then be reset to what we believe should be a more stabilized portfolio at that time.

Source: NHI Q3-2021 Transcript

So there is that big reset we have been harping about for some time. We will see the impact of this in Q1-2022 and beyond. NHI's other major problem tenant, Holiday, went on a rent holiday in Q4-2021.

Last, we received approximately $2.3 million of rent payments from Holiday during the third quarter. But as of today's call, we have yet to receive any payments in the fourth quarter. We continue to hold an $8.8 million holiday security deposit, and the final recognition of the deposit will coincide with the termination of the legacy Holiday lease by foreclosure of agreement. We made no determination as to how or if any other deposit will be applied, but we expect a resolution on the deposit in early 2022.

Source: NHI Q3-2021 Transcript

NHI has sold a good deal of Holiday's properties and is working to move what is left to new operators. NHI also continued with other dispositions during the quarter, and we have seen about $216 million so far.

Dividend Coverage

While we remain less optimistic than management, here are their thoughts on how all of this shakes out for the dividend.

Juan Sanabria

And just last question from me, can you give us any sense of -- I know that there's still a lot of moving pieces about what the proforma dividend coverage will be kind of come, I guess, at the end of the first quarter '22 when this is all kind of washed out and the comfort level there?

John Spaid

I'd say -- this is John, Juan. I'd say we have very high degree of confidence in our payout ratio being where we think it will be, which is say low 80s to even below 80%.

Source: NHI Q3-2021 Transcript

The difference probably comes from what we see as the baseline rent paying capacity of their tenants. Higher labor costs will be front and center in 2022 and there will be more deterioration in coverage ratios by middle of 2022. But we think NHI has the smartest management team in the space, and we remain open to being proven wrong.

Conclusion

2021 marked a year where NHI used up its cushion and had to cut the dividend.

Net debt to adjusted EBITDA

Source: NHI Q3-2021 Supplemental

If all tenants were reset to an EBITDARM coverage around the point at which their leases began, we probably would be looking at something past 6.0X for this number. Out of three rating agencies, only Moody's shares our concern at present.

National Health Management outlook

Source: NHI Q3-2021 Supplemental

Alongside that, we estimate that a realistic FFO for next year will be a lot closer to $4.00 per share. You can imagine how this picture will look when both 2021 and 2022 are included.

NFFO per share

Source: NHI Q3-2021 Supplemental

That will be about a 3% compounded annual decline from 2016. In a time where most consumer prices have increased annually by that much and certainly the senior cohort has expanded quite briskly.

Age distribution in the United States

Source: Statista

So what did not work and why will the next five years be different? These are questions investors should ask themselves. Certainly, one can blame things on the pandemic, but these operator stresses have been present for a long time and the US government did dole out tons of cash under COVID relief bill to this industry. Our take has been that this is that the operators in the skilled nursing and senior housing space have the worst business models. Making money is hard and supply of new senior homes is relentless. This supply has for the most part outpaced any gains in the senior population. Down the line there may be improvements in home care alongside breakthroughs in Alzheimer treatments. Don't begin and end your research based on demographics. We continue to follow these stories and don't believe a large inflection has been reached where we can take a longer term "buy and hold" stance.

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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