A Yield Above 5%, A Quality Operator, Demographic Dynamism: I’m In

Given the rising proportion of the US population that has and continues to attain senior-citizen status and the high demand for healthcare services of all kinds among seniors, you’d think this would be a no-brainer investment opportunity. Money and the politics around it have frustrated such ideals, so no investment in this area is a slam-dunk. But National Health Investors (NHI), a good-yielding REIT, comes as close to it as anything I’ve seen.

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Why this Stock is Being Considered

It’s important before you start to read about or evaluate an idea, to know why it came under consideration be comfortable soundness of those reasons. National Health Investors (NHI), got into my radar as a result of a High-Quality REIT screen I created on Portfolio123 that searches for the highest yields to be found among REITs that have been pre-qualified on the basis of strong “cash on cash returns” (a metric used by real estate investors and operators) and conservative, by REIT standards, use of debt. Details of the approach are described in a 7/5/18 blog post.

Whetting The Appetite

We all know how hard it is to find a decent yield nowadays. The S&P 500 SPDR ETF (SPY) yields about 2.4% and as for fixed income, we can only dream of getting to that level unless we take on a lot of market risk (the possibility that rates may rise from today’s epoch low levels and cause principal values to fall) and/or credit risk. So National Health’s yield situation definitely raises an eyebrow.

Table 1

    Medians
NHI Peers All REITs
Div Yield % 5.26 5.52 4.12
Div Growth % 1Y 11.71 1.64 7.14
Div Growth % 3Y 7.19 4.38 5.57
Div Growth % 5Y 7.44 6.50 8.17

Data from S&P Compustat via Portfolio123.com and reflects Compustat standardization protocols, TTM = Trailing 12 Months, MRQ = Most Recent Quarter. The Peer group refers to Healthcare REITs.

We see that REITs in general and Healthcare REITs in particular also have good yields, but National Health stands out in the way it combines yield with a historic track record of good dividend growth. Yes, the past is the past and we care about the future so we won’t use the growth record to aspire to any sort of dividend aristocrat stature (which we couldn’t do anyway since the very nature of a REIT is inconsistent with perfect quarter-after-quarter or year-after-year dividend trends). But it does at least make for a nice jumping off point to get us into the business itself.

The Business

National Health, as a Real Estate Investment Trust, is a landlord. Its portfolio of properties are all leased to operators of health care facilities that serve elderly clients. Traditionally, we think of this as being nursing homes, and that is part of National’s business mix. But the field has evolved over the years to accommodate a wide variety of seniors with differing physical and mental capabilities and differing needs for care. Nursing homes are for those with substantial needs. For others, there is senior living, assisted living, memory-care facilities, skilled nursing, etc.

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