National Health: Lots To Love, But Valuation Still On The High Side (NYSE:NHI)

In our last coverage of National Health Investors, Inc. (NYSE:NHI), we saw big improvements across every category and that softened our stance towards the REIT. We were also ready to buy the bonds should they move in the right direction and provide us with an 8% yield to maturity. Unfortunately, the stock rallied, and the bonds rallied as well, and we did not purchase either. We are examining the Q4-2023 results now and tell you where we stand.

Q4-2023

NHI wrapped up 2023 with nice beats on revenues as well as funds from operations (FFO). The $1.09 FFO number was 2 cents ahead of estimates, and the company has generally done well through a difficult period for REITs. A key reason for the strong performance was the improvement in net operating income (NOI) through 2023. Adjusted NOI was up by 3.7%, and it was good to see NHI get through the year without any further rent write-offs.

The bulk of that NOI improvement was unfortunately lost to the rising interest expense. You can see below that the interest expense went from $12.4 million to $14.8 million when we compare the two fourth quarters. This happened even as total liabilities were slightly lower. That ate up almost all the NOI increase.

We still saw an improvement in FFO year over year, and we have also seen a steady move up in the last few quarters.

Outlook

NHI has navigated the COVID-19 problems quite well. If you look at total FFO lost from pre-COVID-19 levels, you can see that NHI lost about 20% of its pre-COVID-19 FFO. Ventas (VTR) by comparison has lost about 24%. Sabra Health Care (SBRA) has lost closer to 30%. What is most impressive though for NHI, is that its debt to EBITDA is now lower than prior to 2020.

4.4X is an amazing number and VTR, for example, went from 6.1X to 7.0X debt to EBITDA over the same time frame. A few other relevant numbers can be grasped from the next screenshot. You can see the improving FFO trend and the FFO payout ratio, which remains very comfortable. The interest coverage is quite strong, though it has moved a bit lower recently.

That move lower in the interest coverage came as all the past rate hikes fully flowed through NHI’s variable debt structure.

At nearly 40% of the total, this is the Achilles heel of the bull case. Had NHI gone with a fully fixed rate structure from the good old days, FFO would likely be 20% higher. The next picture shows the related issues with the debt structure. The weighted average maturity is still fairly small. At 3.7 years, you can run into issues in a credit crunch. On the flip side, the rates on the two variable debt tranches are very high. NHI should be able to refinance them with fixed rate debt at lower numbers.

Valuation & Verdict

You can always argue that the senior housing and nursing care REITs are cheap. Well, you will never get them at extremely high multiples, even in the best of times. The reason is that their tenants always look like they are on life support. Below you can see the senior housing and SNF rent coverage breakdowns for NHI and SNF in particular look awful (1.13X), even after the big improvement from Q3-2022 (1.03X).

That rent coverage, we will remind you, is calculated using one of the most generous methodologies. You basically assume that the rent payment is number one after your baseline operating expenses. Interest, taxes, depreciation, amortization are not counted. So you have frequent tenant blow-ups, and that means that FFO growth is very weak to non-existent in the best of times. In the worst, you lose ground. You can see this for even other REITs in this sector. SBRA’s FFO is down about 40% from the time it merged Care Capital Properties. VTR’s FFO in 2024 will be about 27% lower than its 2017 FFO. So the maximum you want to pay for these is usually 10X FFO. It also helps to buy them 10-20% below NAV in panic selloffs. With NHI trading at nearly 12X 2024 estimated FFO and a 10% premium to estimated NAV, we don’t have either of those conditions in place, to warrant a buy. The bonds we had previously referenced (the 2031 maturities) have a YTM of just 6.6% currently. Those are also not attractive for the relative risk-reward. We continue to take a pass on both for now and think a buy point will materialize in 2024.