Fitch Ratings has affirmed the ratings of National Health Investors, Inc. (NHI), including the Long-Term Issuer Default Rating (IDR) at 'BBB-'.

The Rating Outlook is Stable.

NHI's ratings, including its 'BBB-' Long-Term IDR, reflect the company's ability to proactively manage its skilled nursing facility (SNF) and senior housing (SH) portfolio through secular headwinds, while maintaining leverage below 5.5x through the cycle. The ratings also reflect the issuer's diversified portfolio of triple-net leased health care real estate properties, long-lease maturity profile and above-average SNF operator lease coverage.

Most of NHI's assets are unencumbered, which provides the issuer with contingent liquidity to encumber its assets during periods of stress and repay debt maturities. However, the ratings are constrained by the issuer's less developed access to debt capital markets and high tenant concentration.

Key Rating Drivers

Significant Leverage Headroom: Fitch estimates NHI's leverage will sustain in the mid-4.0x range over the ratings horizon. Fitch believes NHI's operations have mostly stabilized and the company would deploy additional levers to stabilize and reduce leverage if rent relief provided to tenants materially impacts leverage metrics. It could accomplish this through a combination of jointly marketed dispositions of both the property and operations, issuing additional equity and/or reducing the dividend. NHI's financial policy is for leverage sustained below 5.0x.

Improving Portfolio-Level Lease Coverage: NHI's portfolio-level lease coverage (EBITDARM coverage), which Fitch views as a key indicator of lease defaults/renewal risk, has remained steady through and after the pandemic and continues to improve. Portfolio-level EBITDARM lease coverage was 1.91x at 3Q23, compared to 1.6x, 1.7x and 1.7x in 3Q22, 1Q20 and 4Q19.

NHI's SNF and SH lease coverage was 2.72x and 1.36x, respectively, at 3Q23. This represented improvement sequentially and yoy. SNF and SH lease coverage were 2.41x and 1.20x at 3Q22. NHI's SNF lease coverage remained robust through the pandemic due to the financial strength of its two large publicly traded SNF tenants: National Health Corporation (NHC), with 15% of NOI at Q4 2023, and Ensign Group (ENSG), with 10% of NOI at Q4 2023.

Fitch believes that the probability of rent deferrals for most of NHI's SNF tenants is low given that NHC and ENSG leases make up roughly 75% of NHI's SNF NOI. SH lease coverage remained steady above 1.0x through the pandemic, partly driven by dispositions of underperforming Bickford and Holiday assets.

A general factor that limits the ratings of NHI and its peers is their exposure to private unrated operators. This limits Fitch's access to publicly-available financials and operating results to assess tenant credit quality. Thus, while Fitch recognizes that lease coverage is an imperfect measure of operators' credit quality, as it measures the ratio of property-level cash flow (before interest, taxes, capex, rent, and management fees) to rent on a lagging basis, it is relatively consistently reported across REITs.

Senior Housing Recovery In Progress: Fitch assumes senior housing NOI will continue to grow over the ratings horizon, driven by improving occupancy rates and strong rent growth. Fitch also assumes occupancy rates will continue to improve due to a combination of healthy demographic trends and a favorable supply backdrop.

The 80-plus age cohort is expected to grow at a faster rate than the overall population over the next decade. Additionally, senior housing new starts remain depressed and significantly lower than 2017 peak levels due to rising construction costs and stricter bank lending standards. Finally, senior housing rent growth, both asking and in-place, has accelerated and improving occupancy rates should help rent growth outplace inflationary cost pressures.

Resolving SH Operator Issues: Fitch assumes completed restructurings with troubled operators in the last few years, including with Bickford Senior Living and Holiday Retirement, which is no longer a triple-net tenant of NHI, reduce but do not eliminate risks to rental income going forward. A number of properties were disposed of during the restructuring. This reduces Bickford's combined rents relative to pre-pandemic levels, though the company expects rents from Bickford to increase in 2024 from 2023. This should improve Bickford's financial health and increase the probability of deferral payments as the operator's lease coverage increases.

The company's restructuring of the legacy Holiday portfolio, in addition to asset sales, involved the transitioning of 15 additional assets to two new senior housing operating portfolio (SHOP) operators across separate joint-venture transactions. SHOP assets (4.5% of annual adjusted NOI as of Dec. 31,2023) introduce more potential cash flow volatility, but also provide more upside to EBITDA as fundamentals recover.

Derivation Summary

Compared with its SNF-focused peers, Sabra Health Care REIT, Inc. (SBRA; BBB-/Stable), Omega Healthcare Investors, Inc. (OHI; BBB-/Stable) and CareTrust REIT (CTRE; BB+/Stable), NHI has more conservative financial policies and better diversification across portfolio segments. However, SBRA has historically maintained higher leverage, operating with financial metrics above or near Fitch's negative rating sensitivities.

Fitch believes OHI has more established access to debt capital markets relative to NHI. CTRE has higher tenant concentration and less established access to capital relative to investment-grade health care REITs.

Ventas, Inc. (BBB/Stable) is rated higher than narrow-focused health care REIT peers due to the issuer's diversified and high-quality portfolio, conservative financial policies and above-average access to capital. However, leverage is elevated for the company at the moment.

Key Assumptions

Low single-digit annual SSNOI growth;

Dividend increasing to be consistent with historical levels;

$50 million-$60 million of annual interest expense;

Debt is refinanced as it matures;

Given the company's history, Fitch expects NHI will manage the pace of acquisitions and funding mix for those acquisitions in line with its leverage policies;

REIT leverage remains in the 4x-5x range over the ratings horizon;

REIT FCC remains above 4x over the ratings horizon.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch's expectation of REIT leverage sustaining below 4.0x;

Increased scale or improved access to unsecured debt capital relative to higher rated REITs.

Fitch's expectation of REIT fixed charge coverage sustaining above 3.5x;

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Fitch's expectation of REIT leverage sustaining above 5.5x without a timely restoration;

Fitch's expectation of REIT fixed charge coverage sustaining below 2.5x;

Fitch's expectation of unencumbered asset coverage of unsecured debt (UA/UD) sustaining below 2.0x;

Fitch's expectation of, or NHI demonstrating, deviation from its financial policies through large, leveraging transactions (e.g. a significant stock buyback or a portfolio acquisition that introduces funding risks).

Liquidity and Debt Structure

Sufficient Liquidity: Fitch estimates NHI's sources of liquidity (unrestricted cash, availability under the revolving credit facilities, as well as retained cash flow from operations) cover its uses (debt maturities, committed development expenditures and maintenance capex) by 1.4x through 2025. NHI's liquidity is supported by $22 million of cash on hand and $455 million of availability under its $700 million revolving credit facility as of Dec. 31, 2023. Overall debt maturities are well laddered.

Fitch believes NHI's relative access to capital is on the weaker end of low-investment-grade REITs. The issuer's smaller capitalization also may make it less relevant to debt and equity investors during less liquid capital market environments. The company amended its revolving credit agreement in March 2022 to upsize the facility to $700 million from $550 million and extend the maturity to 2026.

Above Average Contingent Liquidity: The ability to finance underlying real estate is a core tenet of investment-grade REIT ratings. SH and SNF generally benefit from strong access to contingent liquidity sources, including a multitude of durable government sponsored mortgage capital sources, as well as more pro-cyclical bank mortgage and CMBS market.

Fitch estimates that NHI's unencumbered assets would cover net unsecured debt (UA/UD) by around 2.4-2.5x assuming stressed cap rates between 9%-9.5% as of Dec. 31, 2023. Investment-grade REITs rated by Fitch typically have UA/UD ratios around 2.0x indicating NHI has above average amounts of unencumbered assets relative to unsecured borrowings.

Issuer Profile

Incorporated in 1991, National Health Investors, Inc. (NYSE: NHI) is a real estate investment trust specializing in the sale-leaseback, joint-venture, mortgage and mezzanine financing of needs-driven and discretionary senior housing and medical investments. NHI's portfolio consists of independent, assisted and memory care communities, entrance-fee retirement communities, skilled nursing facilities, medical office buildings and specialty hospitals.

As of Dec. 31, 2023, NHI has investments in 163 facilities located in 31 U.S. states. These investments include 97 senior housing properties, 65 skilled nursing facilities and one hospital, excluding one property classified as assets held for sale. Investments consisted of properties rented under primarily triple-net leases to 25 tenants and mortgage and other notes receivable due from 14 borrowers. Based on Annualized Adjusted NOI as of Dec. 31, 2023, senior housing, SNFs, and hospitals comprise 61%, 34% and 1% of the total NHI portfolio.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

National Health Investors, Inc. has an ESG Relevance Score of '4' for Exposure to Social Impacts as an owner, operator and provider of real estate to U.S. health care operators affected by social and political pressures to play its part in containing health care costs, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

(C) 2024 Electronic News Publishing, source ENP Newswire