Mind Uncharted Explore. Discover. Learn.
National Health Investors Inc.: An Opportunity for Income Investors
National Health Investors Inc. (NYSE:NHI) is a real estate investment trust (REIT) that specializes in healthcare properties, mainly senior living communities, medical office buildings, skilled nursing facilities, and a small portion of mortgages related to the healthcare industry. The company is known to offer a 7% dividend yield, which makes it attractive to many investors. However, the company’s 2031 maturing bonds are now yielding 7.3%, which is 170 basis points higher than the benchmark rate for peer BBB debt securities. This makes the company’s bonds a more profitable investment than its stocks.
Sales and Revenue Decline
National Health Investors sales declined by $20 million in 2023, which was slower than the decline from 2023 to 2023. The company’s costs increased due to loan losses and the addition of senior housing to the portfolio, which has lower margins. As a result, the net income was down to nearly a third of what it was in 2023 at $65 million. However, the company’s operating performance was sufficient to cover the interest expense.
The Revenue Decline in 2023
The National Health Investor’s balance sheet shows some light on the revenue declines in 2023. The company sold approximately $150 million worth of assets. The book value of the company’s mortgages also dropped by a third. Fortunately, NHI was able to reduce its debt by $100 million, but the move was not enough to preserve shareholder equity, which dropped from $1.5 billion to under $1.3 billion.
Cash Flow and Debt
National Health Investor’s cash flow slid commensurate with their revenue. Cash flow from operations declined to $185 million in 2023 from $211 million the year before. However, despite the decline, NHI’s free cash flow increased due to the low capital expenditures. The company’s free cash flow was sufficient to cover the $161 million dividend payout in 2023, but by a slim margin.
Debt holders don’t need to worry about dividends in their returns because the bonds are senior in security to shares, and can only be impaired by solvency related problems. Furthermore, an area of concern for the company is debt maturities. NHI had $415 million in debt coming due for 2023, out of which $125 million was already paid in January. However, nearly $300 million remains to be handled this year. NHI has $658 million available to draw on its revolving credit facility, which represents roughly half of all outstanding debt.
Lease Portfolio Management
Despite the declines in operating performance, the company is excelling at managing its lease portfolio. Over the next three years, the company only has 2% of annualized gross rent coming up for lease renewal. There is a large group coming up in 2026, but National Health Investors has plenty of time to re-negotiate those leases and mitigate that wall.
The Opportunity for Income Investors
National Health Investor’s misgivings of buying back shares high, then selling them low, through a mix shelf offering are mistakes that shareholders will ultimately pay for, but bondholders will only lose principal if the company files for bankruptcy. I do not see restructuring as an option in the foreseeable future, and even if the company is downgraded to BB, the 2031 bond is yielding 40 basis points higher than the BB benchmark yield.
Furthermore, NHI’s stock prices have underperformed the S&P TR and MSCI. The stock is still underperforming in 2023 despite the share buybacks with the 1-year return at -12.5% compared to -9.3% for the S&P 500. Moreover, management has a $500 million mixed shelf filing where it can issue more common shares and further dilute the company if it needs cash.
Overall, the mistakes and headwinds of National Health Investors are being unfairly taken on the price of its bonds, and income investors should seize the opportunity.
