National Health Has Some Issues Beneath The Surface (NYSE:NHI)
When we last covered National Health Investors, Inc. (NHI) we had suggested that those who had the courage to step in during the carnage in late March or early April, take their profits. We identified the specific risks as written below.
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.
Source: National Health: Will Survive, But May Find It Hard To Thrive
Since the stock has not done much.
With Q2 2020 results and an additional business update out from the company, we decided to see if we could gain some directional clues from them.
NHI’s Q2 2020 results were a positive delight. The company collected 100% of its rents in a quarter where things were exceptionally bad across the country. NHI’s funds from operations (FFO) came in at $1.46, handily beating both Q1 2020 and Q2 2019.
Source: NHI Q2-2020 Earnings Presentation
The REIT maintained its dividend as well. NHI’s tenants did not show a deterioration in rent coverage.
Source: NHI Q2 2020 Earnings Presentation
So on the first glance, everything looked perfect.
Beyond Q2 2020
While Q2 2020 was the apparent eye of the hurricane, the senior housing is beginning to experience far greater shifts beyond that timeframe. Occupancies are declining and costs are rising for the additional COVID-19 related precautions. These senior homes did get substantial help for the second quarter but that help is waning quickly. New legislation and stimulus is being debated but that looks likely to be a post-election affair. In the interim, NHI is contending with tenants that are having occupancies that look horrible. Below we show the updated numbers from NHI all the way till August.
Source: NHI Press Release
Note how steep these drops are in August 2020 when you benchmark versus Q1 2020. We would add here that NHI’s EBITDAR rent coverage Q2 2020 slide which we showed above, completely ignores this. That is because those calculations are done with a one-quarter lag and are done on a rolling 12 month basis. In fact, we won’t even see the next quarter reflect the true situation as most tenants received some sort of assistance. However, that occupancy drop, especially for tenants like Holiday which are now below 80%, means that rent coverage has definitely fallen below 1.0X on most if not all properties.
Remember, Ventas, Inc. (VTR) showed that their senior housing operating portfolio or SHOP had net operating income drop 42.7% in Q2 2020.
Source: VTR Q2-2020 Press Release
NHI has no SHOP in its portfolio but its tenants likely suffered a 40% drop in NOI in Q2 2020. Starting with a 1.2X EBITDAR coverage in Q1, we would estimate that this has fallen under 80%. This was Q2 2020 and the July and August occupancy declines don’t exactly warm the heart. It was hence not surprising that after collecting 100% of the rents in Q2 2020, NHI’s collections actually fell.
NHI collected 96.6% of contractual rent in September and deferred 2.9% including 2.6% related to a previously disclosed deferral to Bickford. The remaining balance relates to forecasted revenue the Company had expected to receive from transitioned properties prior to the start of the pandemic.
NHI announced today that it has finalized a rent deferral agreement with a tenant that had been previously disclosed as in negotiations. The deferral represents approximately $560,000 in each of the third and fourth quarters of 2020 and up to approximately $450,000 in the first quarter of 2021. Monthly deferral amounts vary but should not exceed 1.7% of contractual rent in any month. Amounts deferred will accrue interest at an initial rate of 8% and repayments are scheduled to commence in July 2021. Full repayment of the deferred amounts is expected in 18 months or less from the commencement date.
Source: NHI Press Release
So far no rents have been written off or renegotiated but that is a matter of time in our opinion.
How To Play This
NHI remains one of the strongest players in senior housing mainly because they refused to dabble on the SHOP side. But that does not mean that the current price offers strong returns. Investors that are very bullish though, can wait for the right price and get paid for this as well by selling the right cash secured put. This allows an investor to only become a buyer when the odds are in their favor. A cash secured put also offers a big buffer of safety on the current price and allows investors to get a much higher annualized yield. For example, the January 2021, $55 strike, presents one interesting proposition to get a 6.8% return on investment or a 20.39% annualized yield.
Source: Author’s Calculations
NHI investors holding 100 shares would receive a 7.05% yield over the next 12 months (assuming the dividend is not cut or increased), but by writing the cash secured put you can capture about the same total return a less than half the timeframe. You also get a nice buffer against capital losses. This is of course an example, and NHI puts did not pass our risk-reward requirements, hence we personally have not sold these. But they do represent the best strategy on this sector in our view, for anyone looking to dip a toe in.
Back in April, we noticed how sweetly the insiders were stepping up to buy.
The purchases on May 13 were the last one. That makes sense to us as well, as that was the last point at which shares were really undervalued. We are now in a fair value zone with significant risks to the downside, even in the best case scenario for vaccine development and deployment. NHI, like most stocks in this market, is best played intelligently and via the use of cash secured puts to buffer the abnormal 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.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.