National Health Investors: Shelter from the hurricane

Lynne Heitman | Oct 03, 2008 6:20am EDT | Comment

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National Health Investors (NYSE:NHI), headquartered in Murfreesboro, Tenn., is a real estate investment trust — more commonly known as a REIT — that invests primarily in income-producing healthcare properties with emphasis on the long-term health care sector.

REITS have great tax benefits for shareholders and an operating model that can generate a liquidity surplus. They are also required to distribute roughly 90% of earnings to shareholders.

What makes National Health particularly attractive is its concentration in health care-related real estate. The company’s entire portfolio is made up of properties such as medical office buildings, residential projects for the developmentally disabled and long-term care facilities. Unlike the demand for shopping malls or condominium complexes, the demand for health care never dwindles and is not significantly affected by economic downturns. The current economic downturn might actually be a boon for doctors, particularly those in the business of treating stress-related maladies. As long as there are doctors, hospitals and treatment facilities, there will be a demand for the real estate they occupy. Owning and leasing those types of properties is National Health’s business.

Making the company even more of a shelter in the current economic hurricane is its investments in assisted-living facilities and retirement centers. These markets should grow over the next several years as the glut of baby boomers continues to work its way through middle age and into retirement.

National Health is also reasonably well diversified geographically. As of June 30, 2008, its 124 health care facilities were spread across 17 states. One area of diversification the company has pursued aggressively is customer mix. Its single-largest customer constitutes only 20% of its total real estate portfolio — down from 100% at its inception in 1991. As it continues this trend with investments in additional properties, it does so with the goal of limiting external financing. A concerted effort over the past five years to lower debt has paid off with a debt-to-capitalization ratio of 1.75%, the lowest in the company’s history. Its cash and marketable securities at June 30 totaled $136.5 million compared with debt outstanding of $7.8 million, which means National Health is not reliant on the increasingly inaccessible credit markets to expand its portfolio or to maintain current properties. New acquisitions as well as short-term cash requirements can be funded out of current liquidity, which continues to benefit from strong earnings and cash flow.

Total revenues for the three months ended June 30, 2008 were $16.3 million versus $16.2 million in 2007. Net income for second quarter was $14.8 million, or $0.53 per common share, compared with $15 million and $0.54 for the same period in 2007. Last year did include the profit from the sale of discontinued operations. Mortgage interest income declined 27.2% over that period due to the prepayment of certain loans during the 2007 fiscal year while rental income increased 7.2%, primarily due to new or extended lease agreements with several customers.

Consistent with the distribution requirements of a REIT, National Health declared a second-quarter dividend of $0.55 per common share. This follows a dividend of $0.55 and a special “spillover” dividend of $0.08 for the first quarter. The company has already announced a third-quarter dividend of $0.55.

These days it’s hard to know where to put your money, but if you believe that people will always get sick and need doctors, that baby boomers will continue to age, and that avoiding the credit markets is a wise course of action, National Health Investors is a good defensive play.