Solid Rent Collection, Additional Federal Support Help NHI's Outlook

National Health Investors (NHI) has had an Unsafe Dividend Safety Score since May, reflecting the risks posed by its high exposure to senior housing (70% of rental revenue).

While NHI does not operate any of its properties, providing some cash flow insulation as long as tenants continue paying rent, many of the REIT's senior housing tenants entered the year with low rent coverage ratios (i.e. cash flow to rent expense).

COVID-19 has further strained the financial health of these operators. Labor and equipment costs have increased to protect the vulnerable senior population, and occupancy has declined to historic lows as move-in activity freezes.

Further complicating NHI's outlook, the firm's four largest tenants generate over 50% of the REIT's revenue. This increases risk of a sudden, material impact on NHI's rent collection rates, payout ratio, and credit metrics if any major operator falls on hard times.

With NHI's net debt to EBITDA leverage ratio of 4.8x near the high end of management's 4.0x to 5.0x target range and the company's BBB- credit rating only one notch above junk, NHI's dividend does not have much margin for error if cash flow materially declined.

Given this backdrop, we wanted to see evidence that NHI's most significant tenants could avoid a major restructuring of their leases before considering a score upgrade.

After reviewing NHI's November 9 earnings report and factoring in new government support available for assisted living facilities (25% of NHI's revenue), we are upgrading NHI's Dividend Safety Score from Unsafe to Borderline Safe.

NHI collected nearly 97% of rent in the third quarter, helping the REIT maintain an adjusted funds from operations (AFFO) payout ratio of 82%.

All else equal, we estimate NHI's rental income could decline about 15% before the dividend would no longer be covered by cash flow.

While NHI announced additional rent deferrals for three tenants covering the next two quarters, these amounts totaled less than 4% of estimated rent due over that period, with most repayments expected to begin by mid-2021.

Based on analysts' estimates for the year ahead, which factor in this latest news, NHI's AFFO payout ratio is tracking to sit near 85%, a supportive level for the dividend assuming no major surprises.

NHI's three largest senior housing tenants – Senior Living Communities (16% of rent), Bickford (15%), and Holiday (11%) – saw occupancy declines slow overall in the third quarter, providing some hope that a bottom could be near. 

Holiday saw the biggest occupancy hit. This tenant provides independent living communities and has a strong presence on the West Coast where limitations on visitation and travel outside the community are more limited.

As a result, Holiday's rent coverage ratio ticked down slightly from 1.2x to 1.18x. NHI said it has solid credit support behind this lease (e.g. deposits) but continues monitoring the situation closely.

Senior Living Communities, which owns and operates luxury retirement communities, saw the most stabilization. Entrance fees actually grew year-over-year in September and October, keeping its rent coverage ratio unchanged sequentially at 1.06x.

Bickford, NHI's largest assisted-living operator, also saw some stabilization last quarter and recorded a rent coverage ratio of 1.06x.

However, move-ins have since slowed as COVID-19 cases throughout the Midwest spiked. This led management to announce additional rent deferrals for Bickford.

In total, these deferrals will impact NHI's net operating income by 3.5% over the next two quarters, with repayments beginning in June 2021.

Bickford's financial position is expected to improve as it has applied for grants under the government's new relief fund for assisted living facilities (25% of NHI's revenue).

Eligible facilities will receive 2% of their annual revenue from patient care. This is a significant amount considering that many of these businesses earn no more than a single-digit profit margin. NHI expects Bickford to begin receiving funds before year-end.

Bickford is looking to buy nine of its 47 leased properties from NHI as well. NHI estimates this could improve Bickford's annual cash flow by about $3 million. For context, NHI receives around $45 million of rent per year from Bickford.

Outside of senior housing, NHI's skilled nursing portfolio (nearly 30% of revenue) has remained resilient thanks to the high level of government support for the industry.

Across senior housing and skilled nursing, management is also hopeful that Pfizer's COVID-19 vaccine could help return these industries to a more normal state by April or May.

Overall, NHI struck a more optimistic tone that future rent deferrals may not be as sensitive to any additional declines in occupancy and rent coverage:

Management does not believe today's conditions are permanent and expects the suffered occupancy losses to begin resolving themselves sometime in 2021.

As long as that plays out and the financial bridge required to get its tenants to the other side remains reasonable, NHI hopes to maintain its dividend.

NHI is not out of the woods yet, but it's encouraging to see the REIT continue to avoid major lease restructuring issues. We will continue monitoring the situation and provide updates as needed.