Published February 24th, 2017 by Bob Ciura
Income investors interested in buying real estate investment trusts, otherwise known as REITs, should pay particular attention to the health care REITs.
Health care REITs, such as National Health Investors (NHI), have a unique and compelling growth opportunity that sets them apart from other REITs—the aging U.S. population.
There are 76 million Baby Boomers in the U.S. As these individuals age, health care spending is likely to exceed GDP growth in the U.S. going forward.
NHI stands to capitalize from the trend, and investors will likely benefit from growing dividends. It recently increased its dividend. The stock currently offers a hefty 5% dividend yield.
Plus, it is a regular dividend grower. NHI is a Dividend Achiever, a group of 272 stocks with 10+ years of consecutive dividend increases.
You can see the full Dividend Achievers List here.
This article will discuss why NHI has a positive growth outlook for the future, and why investors should consider it a solid dividend growth REIT.
NHI specializes in senior housing and medical investments. It has a highly-diversified portfolio.
Its investments include a wide range of property types, including independent and assisted living communities, skilled nursing facilities, medical office buildings, and specialty hospitals.
Source: 4Q Supplemental Presentation, page 3
As of the end of 2016, NHI held 205 properties in its portfolio, spread across 32 U.S. states. The 205 properties are spread across the following types:
- Senior Housing: 129
- Skilled Nursing: 71
- Hospital: 3
- Medical Office: 2
The NHI portfolio occupancy averaged 91.8% for 2016.
High levels of demand for health care properties provide NHI with stable cash flows and the ability to raise rents over time.
And, the company’s high-quality properties have resulted in excellent growth rates in recent years.
NHI, like most REITs, reports its financial performance with funds from operation, or FFO, instead of earnings-per-share.
That is because earnings-per-share are impacted by non-cash expenses like depreciation. This disproportionately affects REITs, which is why they utilize the non-GAAP FFO metric.
NHI increased FFO by 12% in the fourth quarter, and 7.1% in 2016. Total adjusted FFO reached $4.39 per share last year.
Demographic changes in the U.S. will be a powerful force over the next several decades.
Property acquisitions are a key growth catalyst for NHI. It routinely purchases properties, such as its recent $16 million deal for two assisted living/memory care facilities in North Carolina.
The properties will be leased for a term of 15 years at an annual lease rate of 7.35%. This is a high rate of return, which easily covers the company’s cost of debt financing.
A successful acquisition process has fueled industry-leading growth over the past several years.
Source: 4Q Supplemental Presentation, page 5
Last year, NHI acquired 11 senior housing and 11 skilled nursing communities.
In addition to property acquisitions, the company has done a very good job of reducing costs. This has helped boost profitability.
General and administrative expenses for the fourth quarter were just 3.9% of revenue. Its G&A expense has fallen considerably over the past several years:
- 2012 G&A expense: 8.4% of revenue
- 2013 G&A expense: 7.9% of revenue
- 2014 G&A expense: 5.1% of revenue
- 2015 G&A expense: 4.6% of revenue
- 2016 G&A expense: 3.9% of revenue
Margin expansion has helped the company grow FFO.
Moving forward, NHI management expects 2017 to be another year of consistent growth.
At the midpoint of guidance, the company is projected to earn $4.63 in 2017 FFO. This would represent a 5.5% increase from 2016.
This would be enough FFO growth to justify another dividend increase, similar to the company’s recent pattern.
NHI stock offers a great mix of a high yield and dividend growth. For example, the company recently raised its quarterly dividend by 5.5%, to $0.95 per share.
NHI has increased its dividend for 15 years in a row.
On an annualized basis, the forward dividend rises to $3.80 per share. This represents approximately 87% of NHI’s 2016 FFO.
While this is high, it is not unusual for REITs to distribute 80%-90% of their FFO.
NHI has a solid balance sheet. To be sure, the company’s debt metrics, such as net-debt-to-adjusted EBITDA, have ticked up in recent years.
Source: 4Q Supplemental Presentation, page 9
However, this is not necessarily a bad thing. NHI had held a very conservative capital structure in 2013.
There was plenty of room to take on additional debt, especially since the internal rate of return generated from acquired properties handily exceeded the cost of debt.
Even after taking on more debt recently, NHI maintains a manageable amount of leverage, with a 4.4 net debt-to-adjusted EBITDA ratio. Its weighted-average debt maturity is 6.9 years.
The company made a shrewd move to take advantage of low interest rates when it did. This is why NHI’s FFO has grown at a higher rate than its peer group.
Higher interest rates moving forward could impact the company’s ability to aggressively raise and invest capital. A rising cost of capital could reduce NHI’s FFO growth rate.
However, only 14% of the company’s debt is variable rate. The vast majority is fixed-rate debt. And, NHI’s strong portfolio and cash flow generation should allow it to continue raising capital at attractive rates.
NHI’s total unsecured and secured debt has a weighted average interest rate of 3.62%.
A well-managed balance sheet provides for a sustainable dividend payout.
One of the biggest demographic forces the U.S. will experience moving forward is an aging population. This trend sets up a structural tailwind for REITs that invest in health care properties.
As one of the major industry players, National Health has a long runway of steady growth up ahead. It has a highly profitable business model, and as a REIT, is committed to returning cash to shareholders through dividends.
With a combination of a 5% dividend yield, and dividend growth potential of 4%-6% each year, NHI is an attractive REIT for income investors.