National Health Investors Inc. (NYSE:NHI) is a real estate investment trust (REIT) that specializes in healthcare properties. The company’s portfolio consists of a variety of properties, including senior living communities, medical office buildings, skilled nursing facilities, and a small portion of mortgages related to the healthcare industry. While many investors flock to the company’s stock for its 7% dividend yield, the company’s 2031 maturing bonds are now yielding 7.3%, which is 170 basis points higher than the benchmark rate for peer BBB debt securities.
National Health Investors sales declined by $20 million in 2022, which was slower than the decline from 2020 to 2021. The company’s costs increased due to loan losses and the addition of senior housing to the portfolio (lower margins). Net income was down to nearly a third of what it was in 2020 at $65 million, but the operating performance was sufficient to cover the company’s interest expense.
National Health Investor’s balance sheet shines some light on the revenue declines in 2022. The company sold approximately $150 million worth of assets. The book value of the company’s mortgages also dropped by a third. Fortunately, NHI was able to reduce its debt by $100 million, but the move was not enough to preserve shareholder equity which dropped from $1.5 billion under $1.3 billion.
National Health Investor’s cash flow slid commensurate with their revenue. Cash flow from operations declined to $185 million in 2022 from $211 million the year before. Despite the decline, NHI’s free cash flow increased due to the company’s low capital expenditures. NHI’s free cash flow was sufficient to cover their $161 million dividend payout in 2022, but by a slim margin. Debt holders don’t need to worry about dividends in their returns because the bonds are senior in security to shares and can only be impaired by solvency related problems.
NHI also collected $200 million from the sale of assets and the net change on its mortgage note positions, but many of those proceeds went towards the $152 million repurchase of shares. I’m not favorable to stock buybacks in a higher rate environment because the capital committed leaves the balance sheet, but with that being said National Health Investors is clearly generating the cash to support the company’s debt.
Despite the declines in operating performance, the company is excelling at managing its lease portfolio. Over the next three years, the company only has 2% of annualized gross rent coming up for lease renewal. There is a large group coming up in 2026, but National Health Investors has plenty of time to re-negotiate those leases and mitigate that wall.
An additional area of concern for the company is debt maturities. NHI had $415 million in debt coming due for 2023 coming into this year. Fortunately, the company has already paid $125 million down using its existing liquidity in January, but nearly $300 million remains to be handled this year. Going into 2023, NHI had $658 million available to draw on its revolving credit facility. With the pay off of the January loan, I’m presuming the company still has approximately $530 million in borrowing capacity plus cash as liquidity, which represents roughly half of all outstanding debt.
So why take the debt over the company’s stock? NHI share prices have underperformed the S&P TR and MSCI, both selected by the company for comparable return analysis in the company’s 2022 10-K filing. The stock is still under performing in 2023 despite the share buybacks with the 1-year return at -12.5% compared to -9.3% for the S&P 500. Furthermore, management has a $500 million mixed shelf filing where it can issue more common shares and further dilute the company if it needs cash.
National Health Investor’s misgivings of buying back shares high, then selling them low through a mix shelf offering are mistakes that shareholders will ultimately pay for, but bondholders will only lose principal if the company files for bankruptcy. I do not see restructuring as an option in the foreseeable future and even if the company is downgraded to BB, the 2031 bond is yielding 40 basis points higher than the BB benchmark yield.
Overall, the mistakes and headwinds of National Health Investors are being unfairly taken on the price of its bonds, and income investors should seize the opportunity.