Fresh from its success in getting two people voted onto the Ventas Board of Directors, Land & Buildings is at it again, this time with National Health Investors. Like all the REITs, NHI’s managers and tenants had their share of problems during the pandemic. Who didn’t? Most of these issues are behind it, but the REIT could be in even stronger financial shape with just a few changes, which is what L&B wants to do.
National Health Investors went public in 1991 and has had a long-term relationship with publicly traded National HealthCare Corporation (NHC), which leases several of its nursing homes from NHI. These 35 nursing facilities provide a solid foundation for NHI, and NHC has always had a strong balance sheet and cash flow. As a result, the leases with NHI have very strong coverage ratios. For the third quarter 2023, the coverage was 3.54x and the occupancy rate was 87.1%. Both are way above average for the industry, and we are sure other REITs are envious.
Even though that exceptional coverage makes NHI a more secure REIT financially, especially in these trying times, the argument that L&B is making is that the lease payments should be increased when they come up for renewal, which is relatively soon, because they are so below market rates. With that high coverage ratio, there is certainly room to move, but it would also end up lowering NHC’s profitability. And therein lies the rub: there appears to be a conflict of interests with certain Board members of NHI who came to the REIT from NHC and who also have large holdings of NHC stock. In theory, an increase in those lease payments should devalue the price of NHC’s shares. But these Board members also own NHI shares, although smaller in relation.
We like NHI’s management team, but it has always seemed their hands have been tied with the control exerted by the Adams family, which controls NHC and, to a lesser extent, NHI. Land & Buildings’ beef is with the Board, not the management, and they want shareholders to vote out two long standing Board members at the upcoming annual meeting. If we had to bet, we would wager that the petition to vote against the two Board members will fail, partly because it is a new petition.
In addition, NHI’s share price is a hair under its 52-week high, so shareholders are not very cranky right now, and they do like the 5.85% yield. That said, the lease rates should be increased “closer” to a market rate at renewal, but not enough to damage NHC’s prospects. We may see this come up again next year, especially if NHI’s shares do not perform well during the rest of 2024. And you never know, an increase in those lease rates could provide the flexibility for NHI to increase its dividend. Wouldn’t that be nice.
