NHI Mulls Portfolio Restructuring Options, Increasing Uncertainty for the Dividend

National Health Investors (NHI) has kept its dividend covered with cash flow throughout the pandemic despite the challenging environment faced by its senior housing and skilled nursing tenants.

The healthcare REIT's rent collection rates averaged over 95% in 2020 and exceeded 94% in the first quarter of 2021. However, Covid's impact continues to be felt at the operator level.

Major tenants such as Senior Living Communities (16% of rent), Bickford (15%), and Holiday (11%) have yet to see occupancy rebound despite the vaccine rollout and retreat in Covid cases.

Coupled with increased staffing, testing, and personal protective equipment costs to keep residents safe, Bickford and Holiday have seen their EBITDARM rent coverage ratios (pre-rent cash flow divided by rent) slip to just 0.97x and 1.08x, respectively.

A rent coverage ratio near or below 1.0x indicates that an operator's cash flow may no longer be sufficient to cover rent. Across NHI's 215 leased properties, 97 had an average EBITDARM ratio of 0.95x at the end of 2020.

Given this backdrop and the sluggish pace of improvement in occupancy, NHI is bracing for a more challenging year and additional rent deferrals in 2021.

The REIT recently negotiated a rent deferral deal with Bickford which lowered April rent collections to 85%, and NHI is in discussions with Holiday that could result in rent concessions starting in the second quarter.

These events on their own may not jeopardize NHI's dividend, which is still projected to be covered by cash flow in the year ahead. However, they are leading management to consider making bigger changes to the business, which could affect NHI's payout.

With Covid appearing more under control and operator fundamentals hopefully bottoming, NHI is now interested in pulling bigger levers to improve the quality of its portfolio, drive lease coverage higher, and create a more stable rental income stream.

On NHI's May 11 earnings call, CEO Eric Mendelsohn said he feels "like the market is in a forgiving mood for companies that are taking their medicine and are rightsizing their portfolios to come out the other end with healthier metrics."

Mr. Mendelsohn suggested NHI could divest around 10% of its real estate later this year as it looks to transform into a stronger, leaner REIT. The firm will also explore opportunities to restructure certain leases and find operators that are better aligned with its goals.

These actions will put upward pressure on NHI's payout ratio, which is already projected to hit 87% in the year ahead, marking its highest level in at least a decade.

Depending on the pace of recovery in tenants' occupancy levels and how quickly managements moves to shed under-performing assets, NHI said it may look to reduce its dividend:

Given the industry's slow recovery, the increasing risk of lease restructurings, and management's interest in asset sales, we are downgrading NHI's Dividend Safety Score from Borderline Safe to Unsafe.

If the industry's recovery does not pick up, we would guess a dividend cut is more likely than not in the coming quarters. Based on NHI's payout ratio, the scope of management's potential divestitures, and the firm's solid balance sheet, we would be surprised if the dividend was reduced by more than around 25%.

These aren't necessarily reasons to avoid the stock, but shareholders should understand that a recovery could take years to play out, and the dividend could be trimmed along the way. 

Management has always struck a very transparent and conservative tone when speaking to investors, so there is certainly a chance NHI makes an effort to maintain its dividend. The team does not make these long-term decisions lightly.

NHI will declare its next dividend in mid-June. We will continue monitoring the situation and provide updates as needed.