We had called National Health Investors, Inc (NHI) a survivor in this pandemic earlier this year. A key facet of our bullish case was the gigantic 11% yield alongside a 40% plus discount to liquidation value. We were also enamored by NHI’s focus on risk management and a refusal to play the operating side of senior housing. With the Q1-2020 results in, we decided to look at whether the management was able to shed some light on the COVID-19 related developments.
Q1-2020: What Worked Out Well
NHI reported good results for Q1-2020, and both funds from operations (FFO) and adjusted funds from operations (AFFO) were up year over year.
Source: Press Release
Of course, investors were most curious about the impact post the first quarter as that is when the lockdown was in full force. NHI did not address this in the press release for the earnings but covered it right off the bat in the conference call.
In April NHI received 99.7% of its contractual rent. And so far in May, we have collected approximately 94%, which is in line with our expectations as we typically see a portion of collections through the 15th of the month depending on underlying lease terms. As this pandemic unfolds, NHI is committed to transparency with the investment community. To that end, we have enhanced occupancy disclosure on Bickford, Holiday and Senior Living Communities (…).
Source: Earnings Call Transcript
Those numbers of 99.7% and 94% (at the time of the conference call) are the highest in our coverage universe and go to show the strength of the NHI model.
Significant Headwinds Dead Ahead
While the rent collection was impressive and NHI has no operating portfolio to worry about, it did feel the impact of the pandemic. For starters, its operators have had to shoulder significant costs related to increased protective equipment. NHI management noted that in their remarks.
On the cost side of the equation, it should not surprise anyone that our operators are spending more particularly for labor and PPE supplies. This is, obviously, pressuring our operators’ margins and we are prepared to help them weather this storm where and when necessary.
Source: Earnings Call Transcript
Occupancy also trended down rather rapidly for its operators.
Bickford, which represents 17% of our annualized cash revenue, has seen a slight downtick in their move-out rates. But like much of the industry, their lead volume and tours are down more than 40%, which impacts the rate of new move-ins and occupancy. Bickford’s average occupancy on a same-community basis was 87.3% in the first quarter and 86.6% for March. Occupancy further declined in April by 130 basis points to 85.3%.
Senior Living Communities, which represents 16% of our revenue, had first quarter average occupancy of 80.4%, which ticked up slightly to 80.6% in March, but dropped to 79% in April, as multiple entrance fee sales have been delayed due to the pandemic.
Our independent living communities have experienced a similar decline in leads, tours and move-ins as our assisted living operators. The incidence of COVID-19 is relatively low in independent living, and we had only two properties with active resident cases as of the last update.
Holiday retirement, which represents 11% of our annualized cash revenue had average occupancy of 87.3% in the first quarter and 86.7% in March. The April average occupancy declined by 170 basis points to 85%.
Bickford, SLC and Holiday represent approximately 56% of our senior housing units. On a combined basis, those three saw average occupancy decline by 150 basis points from March to April, which is a good proxy for the rest of the senior housing portfolio.
Source: Earnings Call Transcript
A key aspect of this data was that it was released on May 11 with NHI compiling it off the April 30 numbers. Ventas, Inc. (VTR), which operates in similar areas released its numbers, and they were quite bad. Their senior housing operating portfolio occupancy dropped another 480 basis points between April 2 and May 21.
Why This Is Important
One might argue that NHI needs to sit back and collect rents and not worry so much about the operators. That might be true under normal circumstances, but NHI’s operators were already operating on extremely tight margins. Their EBITDARM (earnings before interest, taxes, depreciation, amortization, rent & management fees) was already extremely tight.
Source: Q1 Presentation
This is also calculated on a rolling 12 months basis, so it likely is overstating matters as 2019 was already showing some deterioration in fundamentals. With the current decreases in occupancy and increased costs, we would expect the entire senior housing portfolio to be below 1.0X. That is 62% of the portfolio (130 out of 209 properties). This will likely result in a substantial rent relief within the next 12 months.
Equity Outperforms, Fundamentals Underperform
Since our call in April, the stock has been on a tear.
The stock now is very close to our estimate of its liquidation value (about $65). Alongside this, the fundamentals have come in worse than we expected, and occupancy declines are rather brutal. When we had first highlighted it, we were expecting $70 as our target price. We are a little less sanguine now and are downgrading it to a Neutral rating.
NHI is probably the best way to play the senior housing boom (which might mean something different today) as it does not have direct occupancy or operating exposure. However, now, we see a long struggle ahead to normalize occupancy. NHI has the cash flow and debt metrics to be the best in the business, but the current price is fair as well. Investors may love this for the dividend, but we are actually dialing up the risk of cut based on what we have heard so far. Based on all the information, NHI has a “High” level of danger of a dividend cut on our proprietary Kenny Loggins Scale.
This rating signifies a 33%-50% probability of dividend cut in the next 12 months. Investors looking to buy should wait for stabilizing senior housing occupancy or a price under $50 (which adequately compensates them for the risks).
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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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Disclosure: I am/we are long VTR. 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.