NHI Maintains Dividend For Now Despite Continued Decline in Senior Housing Occupancy

On June 16, National Health Investors (NHI) provided a brief business update and maintained its regular dividend for the second quarter.

As we discussed in our May note, NHI's dividend faces some uncertainty due to the pandemic's impact on the senior housing industry (nearly 70% of NHI's revenues).

Senior housing operators, which have low margins to begin with, face higher labor and equipment costs to protect their vulnerable populations from COVID-19, and occupancy is falling as move-in activity freezes.

As a landlord, NHI is insulated from these unfavorable trends as long as its tenants can continue paying their rent.

But NHI's three largest tenants, which account for about 44% of the firm's rent, had somewhat fragile rent coverage ratios (i.e. cash flow to rent expense) before the pandemic.

We estimated that occupancy would only need to drop by a couple of percentage points before Bickford (17% of rent) and Senior Living Communities (16%) may no longer be able to cover their rent obligations with cash flow.

Through May, Bickford and Holiday (11% of rent) saw their occupancy continue to slip, while Senior Living Communities (SLC) stabilized at a relatively low rate of 79%.
Source: National Health Investors

This trend hasn't impacted their ability to continue paying rent, at least not yet.

NHI said it has collected 99.4% of contractual rent in June to date and collected 100% of rent in May.

Management's decision to maintain the second-quarter dividend likely reflects some optimism that rent collection will remain reasonable going forward, even if Bickford and SLC's leases eventually require some amount of restructuring.

The dividend's fate will depend on how occupancy trends from here. Industrywide occupancy declines moderated a bit in May, but it's too soon to say where rates will bottom and how long a recovery will take.

Like we said in our May note, NHI entered this health crisis in solid financial health with moderate leverage, good liquidity, and a reasonable payout ratio near 80%.
Source: Simply Safe Dividends

This provides some margin of safety for the dividend, but NHI's tenant concentration increases risk of a sudden, material impact on its rent collection rates and payout ratio if any single operator falls on hard times.

NHI has said that it is unlikely to fund its dividend using debt, so management needs to continue having confidence that the firm's payout ratio will remain comfortably below 100% to support the current dividend going forward.

Given the conservative, long-term view we take with our Dividend Safety Scores, we plan to maintain NHI's Unsafe rating until we see evidence that its major tenants can improve their rent coverage and avoid restructuring their leases.

And like we said last month, if challenging operating conditions do ultimately result in a dividend cut, we'd be surprised if the reduction was very severe given NHI's current financial health:

If management opts to reduce the dividend in June, a major cut (50%+) would be surprising given NHI's reasonable pre-pandemic payout ratio, healthy liquidity, and moderate leverage profile.

This week's update was good news for income investors, but it's also still early days for senior housing operators dealing with these challenges. 

Should occupancy trends and rent coverage improve in the back half of the year, we would consider upgrading NHI's Dividend Safety Score. 

For now, income investors should review whether they are comfortable with their positions given the uncertainty and likely prolonged recovery period facing the industry.

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