Everyone wants to own a high quality company when everything is looking good, and that is why you will have to pay a premium to buy one. In the same vein, the market dislikes uncertainty, and will discount the stocks of companies that are performing. Through near term issues. However, ignoring a stock when the chips are down is like paying a premium for a company when everything else is in sight.
This brings me to National Health Investors (NYSE: NHI), which, at the current price of $53.69, is now trading cheap relative to the 52-week high of $67 recently achieved in September. In this article, I highlight why NHI is an under the radar investment for high income while the market is not paying attention.
National Health Investors was founded 31 years ago, and focuses on owning and leasing healthcare properties, including senior housing and skilled nursing facilities. Its portfolio is generally located in population-dense areas in 32 states along the US East Coast, Sunbelt, Midwest and West Coast regions.
Like many other players in the senior care REIT space, NHI has seen challenges stemming from tenant labor challenges and wage inflation, which has put pressure on rent coverage. This contributed to normalized FFO per share for the first nine months of the year, which fell from $3.55 to $3.43 on a year-over-year basis.
However, I am encouraged by recent improvements and tenant lease restructuring, which helped increase trailing 12-month EBITDARM coverage for the senior housing segment from 0.98x to 1.14x. Adjusting for troubled tenant Bickford’s April 1st rent reset, their coverage is now a much healthier 1.32 times. Furthermore, the issues do not appear to be on the demand side, as Bickford’s occupancy has steadily improved since the beginning of last year, as shown below.
The management is also engaged in disposing of underperforming assets. Since announcing its asset optimization plan in the middle of last year, NHI has disposed of 32 senior housing properties for net proceeds of $296 million. Those properties had a cash NOI yield of just 2.7% and a low EBITDARM coverage of just 0.47x. Encouragingly, management expects additional tenant transitions, rent restructuring and lease maturities to have a modest impact on near-term NOI.
In addition, skilled nursing properties, which account for one-third of NHI’s net operating income, appear to be healthy overall with solid EBITDARM coverage, as noted below in a recent conference call:
The SNF portfolio, which represents 33% of annualized adjusted NOI, continues to deliver solid EBITDARM coverage at 2.47 times, including 3.24 times at NHC and 1.97 times for other SNF operators at our specialty hospital. The year-over-year and sequential decline in coverage was primarily driven by NHC, whose corporate level fixed charge coverage ratio was impacted by declining revenue from federal government stimulus programs.
NHC remains an excellent credit and, along with Ensign Group, complements our SNF portfolio. Our five other SNF operators, representing approximately 7% of adjusted NOI, have received concessions in minimum fares since the start of the pandemic, and we did not provide any SNF related deferrals in the second or third quarter.
Looking ahead, NHI is well positioned to weather near-term uncertainties from a balance sheet perspective. It includes one of the best balance sheets in the healthcare REIT space, with a net debt to adjusted EBITDA of 4.5x, down from 4.9x at the end of last year. This was partially driven by $434 million worth of debt payments since the start of the pandemic.
In addition, the majority (78%) of NHI’s loans are fixed rate, and as of the end of October, NHI had full availability on its $700 million revolving line of credit. These factors contributed to Moody’s (MCO) raising its outlook on the NHI to stable from Baa3 negative.
Meanwhile, NHI pays an attractive and well-covered 6.7% dividend yield backed by an 82% normalized FAD (funds available for distribution) payout ratio. Management also thinks the shares are relatively cheap, and repurchased 1.3 million shares for $82 million during the third quarter, and 2.5 million shares year-over-year, reducing annual dividend obligations by $8.9 million.
Ultimately, I see value in the stock at its current price of $53.69 with a forward P/FFO of 11.9, sitting below its typical P/FFO of 14.5 over the past decade. Analysts have a consensus Hold rating on NHI with an average price target of $60.60, which translates to a potential 20% total return including dividends.
National Health is under the investor radar Healthcare REITs that investors can consider for higher income. It has a solid balance sheet, an attractive and well-covered dividend yield of 6.7%, and trades at a discounted P/FFO relative to historical benchmarks.
In addition, management has been busy disposing of underperforming assets, while remaining opportunistic with share repurchases. This could potentially lead to outperformance in the near term. For higher current income and upside potential, NHI is a worthy option.