After years of losses and oversupply, maybe, after all, it’s time to invest in senior housing. The sector appears to have bottomed out as tenant unrest has come to an end and margins are near record lows. However, the outlook has been advanced especially due to the following factors:
From its lowest point, occupancy can increase up to 900 foundation emissions and margins can reach up to 1,100 foundation emissions. Altogether, this represents really extensive growth, but in the form of a recovery in the net operating income (NOI) that was lost.
In any cyclical sector, the “right” habit of pricing in the market is for earnings multiples to be at their lowest when earnings are at their lowest. National Health Investors (NYSE:NHI) didn’t have a good industry according to this rule, which in my opinion makes it opportunistic.
NHI is trading at 12 times the FFO minimum, which may be too reasonable given the prospects of a future recovery. An expected uptick in the profitability of senior housing will increase NHI’s profits directly through its SHOP (Operational Portfolio of Senior Housing) and through strengthening its triple network that will ultimately pay off when it is re-leased.
Given the expansion and improved stability, I believe that a price of 14X is better suited for NHI, implying an advantage of about 15% over the existing price.
Some trends grab the attention of developers and lead them to build beyond logical levels.
Office towers are glamorous and, until recently, were trophies. Many were looking for their call to relate to the next iconic tower, which would lead to an ever-increasing structure even if vacuum rates exceeded 10% nationally.
The evolution of senior housing, rather than being driven by glamour, was an attempt to capture a very genuine demographic trend of what has been dubbed the “silver tsunami. “
In a vacuum, it makes sense to grow in anticipation of increased demand, but the factor here is how widely publicized the aging population has been. Too many developers had the bright idea to build, resulting in a indeed excessive wave of new offering. .
Much of the source came just before the pandemic, which had two major effects on the sector:
As a result, vacancies have skyrocketed and operators have lost much of their NOI. The REITs were exposed primarily through triple net rentals, but also had some senior housing in operation. The operating losses were immediate, while the triple net took longer to take effect. in the results. Their tenants struggled for a time and the houses were eventually vacated or rents renegotiated downwards.
NHI has been among the hardest hit due to its maximum concentration in senior housing.
S Global Market Intelligence
To be clear, this was not an NHI-specific problem, but rather a sector-specific one. Giants like Sales (VTR) have suffered a similar loss of FFO in recent years.
S Global Market Intelligence
These tenant issues continue to manifest themselves, so navigation is still smooth, although I think the industry is on the cusp of some sort of recovery.
The operating environment has largely normalized as operators are now well versed in COVID protocols, and the remaining factor is the persistent oversupply of physical housing due to emerging supply.
The pandemic has sown concern among developers, paving the way for a new era of much smaller offerings. According to the NIC data below, new structure in detached apartments (IL) and assisted living (AL) services fluctuates between 1% and 1. 5% of the year’s existing inventory.
Network Card
This contrasts with the 4, or even 5%, stock market expansion of the boom.
Thus, resource expansion has moderated while boom demand still continues. The developers probably would have been too excited about the tsunami of money, but it’s still a very real thing.
piramidepoblacional. net
As the significant portion of the graph above, between the ages of 60 and 74, continues to age, an increasing percentage of them will want senior housing.
Now that the supply is much lower, demand is expected to exceed the supply, leading to a recovery in occupancy.
NIC sees occupancy stabilized at 88%
Network Adapter
I think the first quarter of 2023 will be the base low for the NHI. SHOP’s occupancy rate hit its lowest point at 75. 2% and NOI margin fell to 16. 2%.
INSA
With the above knowledge, keep in mind that in 2Q23 and 3Q23, the occupancy rate returned to 75. 5% and then to 79%. It should also be noted that NOI margins recovered to 17. 9% and then to 18. 8% in 3Q23.
This is the result of seasonality, as can be seen above, 1Q22 has been higher than 2Q22 and 3Q22. Instead, I think it reflects the improvement in the industry’s operating environment.
Just a few years ago, NHI had a 44. 5% margin on its senior housing operating portfolio. I don’t think such high numbers will be recovered, however, 30% is plausible, which would still represent an increase of around 1,100 core issues from here.
The projected occupancy rate at the point of the NIC sector is 88% in 4Q24, which would constitute approximately 900 base issuances of occupancy gains here.
NHI peaked at $5. 60 FFO/share in 2020, falling to $4. 30 in 2022. All of this will be recovered as permanent damage occurs.
NHI has a tendency to manage conservatively, meaning that some homes have been sold to reduce exposure to more disadvantaged areas. Specifically, 34 buildings were sold with a weighted average EBITDARM policy of 1. 14X (low-rise buildings/tenants).
In my opinion, the cautious technique was the right one given the immense difficulties of the sector. This has allowed NHI’s balance sheet to remain healthy today.
These numbers look magnificent. Most REITs try to stay within a leverage range of 4 to 7 times EBITDA, which puts NHI in the low debt category.
The debt load is at its highest for NHI due to $405 million of floating rate debt that averaged 6. 57% in 3Q23.
INSA
Oddly enough, this is a smart thing to do in terms of long-term growth.
Given the fairly low leverage of the NHI, they could simply refinance it at a rate close to 5. 5-6% if they were looking for collateralized debt or even leaving it variable would likely charge less given the recent drop in interest rates.
The biggest fear in terms of debt maturities would be the November 2023 inventory, which is 3. 99%. Obviously, you’ll charge more for the refinance, but luckily it’s only $50 million.
Recovering $5. 60 FFO/share in the near term is unlikely to be imaginable due to the NOI loss similar to asset sales and the now more expensive debt (compared to 2020).
However, I see some merit to the current level. SHOP’s NOI will most likely grow as occupancy and rental rates recover. SHOP is a fairly small component of NHI that relies heavily on the triple network.
Tripled net income will take longer to adjust upwards due to existing contracts. There is a smart number of maturities in 2026 with a great opportunity in 2029.
INSA
Until those measures are renewed, it will largely involve indexing existing leases.
Consensus estimates expect a steady expansion of a small annual percentage in the NHI.
S Global Market Intelligence
I largely agree with this opinion.
The market turns out to be aware of the recovery in the senior housing sector, with SH Healthcare REITs leading the sector multiples.
S Global Market Intelligence
I find it appealing to see how superior the operations of Ventas and Welltower (WELL) are than those of NHI and LTC Properties (LTC). A certain duration-based premium is valid, but the duration of the spread between FFO multiples changes. It seems too big to me.
In my opinion, 14X FFO going forward would be the right multiple for NHI. This concept is based on a minimal profit with an obviously positive trajectory for the future, even if this expansion is slow to start due to the contractual nature of your business. .
At 12X, NHI is arguably an opportunity to jump into senior housing recovery and have to pay for it as you would with VTR or WELL.
I suspect the explanation for why the market is much more excited about VTR and WELL is that they are more exposed to triple-net SH mining like NHI. Welltower’s SHOP, as shown below, dwarfs its triple network.
I AGREE
The trading portfolio increases profits in real time by having to wait for contracts to expire. Therefore, VTR and WELL are expected to grow faster than NHI.
While I recognize that it is better to succeed in the expansion period sooner, I believe that the excessive gap between FFO multiples exaggerates the importance of the 2024-2027 period.
At the end of the day, senior apartments are physically the same, they are SHOP or triple net. Recovery will also come on triple net, it just requires a little more patience.
If you look at the overall momentum of long-term earnings, the expansion that occurred a few years ago should not justify such a multiple spread.
Problems with tenants still persist. Bickford accounts for 14% of turnover and remains with a low EBITDARM of rental coverage.
In my opinion, tenant disorders are in the eighth or ninth entry of the sector, but there may still be surprises. This is something to keep in mind.
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This article written by
Dane Bowler is a Chief Investment Officer and Registered Investment Advisor with 2d Market Capital Advisory Corporation. He has more than a decade of experience managing his own portfolio with REITs. On-site asset visits and a critical investigation of the REIT’s control assistance tell the process varied.
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