When National Health Investors announced its first quarter earnings results last week, investors liked what they heard and sent the shares up by 8%, and they stayed up. The REIT has been dealing with problems at a few major tenants since the onset of the pandemic, and while the problems are not entirely over, most indicators are moving in the right direction.
During the quarter, cash collections hit a near-term high of 98%, which should give investors a lot more confidence in the durability of the dividend. Total year-over-year occupancy increased by 400 basis points to 81.3%, driven by a 440-basis point increase in seniors housing and a 350-basis point increase in skilled nursing.
Two major tenants, Bickford (39 properties) and Senior Living Communities (10 properties), posted sequential and year-over-year declines in occupancy, but both are over 80% and fare comparatively well against the overall market. The SHOP portfolio, which is quite small at just 15 communities, was a disappointment during the quarter. Occupancy slipped from 77.7% a year ago to 75.2% in the first quarter, and the NOI margin dropped from 32.4% to 16.2% in the same time period.
Management explained that part of this had to do with having three different operators over the course of a year plus, in addition to deferred capex largely because of costs and supply chain issues. The capex will help in marketing the communities. They thought 2023 was going to be a transition year for the SHOP portfolio, but that has now been pushed out to mid-2024.
The goal is to get to mid-30% margins by mid-2024 and then look to grow it. NHI still likes the sale/leaseback model and believes that is where their returns will be the highest. But given we are coming out of a market bottom, that is the time to start buying and owning all the cash flow when growth should be the highest.
NHI has sold five properties year-to-date, but took two off the market that were classified as “held for sale” because the financing market for buyers was so bad. They expect the remaining sales to close in the second and third quarters.
Coverage for the remaining portfolio is increasing, and is the highest since the first quarter of 2020, and their operators are basically not offering concessions anymore, which is a great trend.
The guidance for 2023 was increased, largely because of a reduction in employee stock-based compensation, but we also believe management sees a lot more upside than downside at this point in the cycle. And, they are more confident about collecting rent deferrals. All this is good for shareholders.
