National Health Investors: Poor Price Growth But Stable Yield (NYSE:NHI)

National Health Investors, Inc. (NYSE:NHI) is a small-cap healthcare real estate investment trust (REIT) with a market capitalization of $2.57 billion. NHI is highly focused on the Skilled Nursing and Senior Housing segment. NHI’s investment portfolio included 213 real estate properties that included 75 Skilled Nursing facilities, 137 Senior Housing communities and one Hospital. The REIT is conducting its operations through 31 operating partners in 33 states in the United States.

National Health Investors, Inc. is based in Murfreesboro, Tennessee. It specializes in mortgage and mezzanine financing, sale-leaseback and joint-venture. NHI generates revenue from rental income, mortgage and other fixed rate investments on real estate assets. This REIT seeks to grow through mergers and acquisitions.

National Health Investors has been paying strong and steady quarterly dividends since its inception in 1991. It has recorded a dividend yield of 6.6 percent last year, and an attractive average yield of 5.5 percent over the past 10 years. However, a very interesting point to note here is that NHI is not paying this dividend entirely out of its earnings. During the past five years, the dividend per share (DPS) has been significantly higher than the normalized diluted earnings per share (EPS). That means, it is reaching into its capital coffers.

During the past 5 years, while National Health Investors, Inc. has recorded an average normalized diluted EPS of $2.22, it paid an average dividend of $4.04. This suggests that the REIT is paying dividends out of its capital, which certainly is not a positive growth factor. The REIT also had a poor revenue CAGR of 0.26 percent and 3.73 percent over the past three years and five years, respectively. With such revenue growth, it will be difficult for NHI to generate substantial earnings to support this level of yield purely from its earnings.

The market has not ignored that the earnings of the company have not grown over these years. As a result, NHI’s stock had a negative growth rate over this period. Its stock price fell by 25.5 percent over the past year, 28.4 percent over the past three years, and 25.3 percent over the past five years. The stock has also generated negative growth of around 4 percent so far in 2022. Though it has been able to generate positive growth over the long run, that still is disappointing. A 15 percent price growth over the past 10 years, and 119 percent in a little over 30 years is not enough to attract growth-seeking investors. Since its inception, NHI’s price has recorded a compounded annual growth of 2.6 percent only.

When compared to S&P 500, the stock has really performed poorly. S&P500 had a positive growth of 90 percent during the past five years. Being highly concentrated on the Skilled Nursing and senior housing segment has not worked well for this healthcare REIT. These two segments have been hugely impacted by the pandemic as well as regulatory issues pertaining to the reimbursement system and service classification codes. These headwinds have wreaked havoc in this sector, and that has impacted REITs focusing on it.

Various provisions of the Affordable Care Act led to a decline in profitability and rentals, and negatively impacted all the major operators in this segment. Introduction of the new Patient Driven Payment Model (PDPM) has brought new classifications codes, and thus, in the short term, these care providers had to adjust their service portfolios accordingly. These changes led to some disruption, and thus the REITs focusing on skilled nursing facilities, especially the smaller ones, had to suffer in the short run.

The stock has 65 percent institutional holdings, out of which around 28 percent is held by the big three investment management firms – Vanguard Group, Inc., BlackRock, Inc. (BLK), and State Street Corporation (STT). Another 336 institutional investors hold NHI’s equity shares. However, no other institutions hold more than 2.5 percent of NHI’s total equity holdings.

A very interesting point to note here is that, on September 30, 2021 (when the price was $53.5) and on December 31, 2021 (when the price was $57.4), these institutional investors acquired significant equities of National Health. They have bought almost eight times more than they have sold of NHI’s equity stock. This suggests that this small-cap healthcare REIT is deeply followed by institutional investors, and is bought whenever the price is low. Because it has a history of paying steady and strong dividends, institutions seek to generate an assured return through investing in NHI.

Though some institutional investors hold a significant percentage of NHI’s equity shares, those are distributed over a number of funds managed by that institutional investor. Barring Vanguard Real Estate Index Fund Investor Shares (VGSIX), no other fund holds more than 2.8 percent of NHI’s total equity shares. As the price is only $55, most funds have a very small amount of investments in equities of NHI. Thus, it makes sense for those investment funds to stay invested in National Health Investors in order to balance their portfolio with income-generating stocks.

However, I don’t see the stock having huge upside potential in the short and medium term, more so because the company will take time to generate substantial earnings from its existing portfolio of senior housing and skilled nursing facilities. However, to reach that stage, the stock might have to go through major ups and downs. This REIT will also be required to reinvest a much higher proportion of its earnings to achieve a strong and sustained growth, which it did not do in the recent past. Thus, expecting a smooth bullish ride for National Health Investors is not a wise idea.

NHI’s price multiples are also low as compared to its peers. Despite significant buying, a Price/Book of 1.69 and Price/Cash Flow of 12.05 suggest that investors are not very optimistic about the future growth potential of the stock. We also need to keep in mind that 31 percent of investors in National Health Investors are the general public, who might have a different objective than institutional investors.

Skilled nursing and senior housing segments will still have to overcome various uncertainties, which makes this REIT even riskier. The short-term technical indicators don’t make me bullish either. The long-term simple moving averages (SMA) are placed above the short-term moving averages. There is a wide gap between 200 days SMA and 100 days SMA.

So, this small-cap healthcare REIT may be attractive to investors with above-average risk appetite who are betting it will pay out a steady dividend, like the investment funds are doing. But generating sufficient earnings in order to both pay steady dividend as well as reinvest in capital expenditures for future growth seems quite unlikely. The future growth of National Health Investors, in my opinion, is surrounded by a lot of uncertainties. I am not convinced about its growth potential on a consistent basis over the long term.