Fitch Ratings has affirmed the ratings of
The Rating Outlook is Stable.
The affirmation and Stable Outlook reflect Fitch's view that NHI's long-term credit profile remains unchanged despite the effects of the coronavirus pandemic on senior housing (SH) and skilled nursing facilities (SNFs). The rating and Outlook also reflect that there is significant headroom in key metrics to withstand rental non-payments and lease amendments in the interim.
Further deteriorations in operating fundamentals due to operator issues and larger than anticipated reduction in rental revenues could cause NHI's leverage to sustain above Fitch's negative sensitivities, which could lead to negative ratings momentum without sufficient offsetting actions.
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 that NHI would deploy additional levers to stabilize and reduce leverage if rent reliefs provided to tenants materially impact leverage metrics through a combination of jointly marketed dispositions of both the property and operations, issuing additional equity, and/or reducing the dividend. If rent relief causes leverage to sustain above Fitch's negative sensitivities without any offsetting steps by NHI, Fitch may revise the ratings and/or Outlook. NHI's financial policy is leverage sustaining below 5.0x.
Resolving SH Operator Issues: Fitch assumes recent restructurings with troubled operators, including Bickford and Holiday reduce but do not eliminate risks to rental income going forward. Both deferred and/or did not pay rent in 2021-2022, and Holiday is no longer a triple-net tenant of NHI. Between 2021 and 2022, NHI disposed of nine Bickford and 10 Holiday properties. NHI's restructuring will reduce Bickford combined rents through 2024, which 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 Holiday portfolio, in addition to asset sales, involved the transitioning of 15 additional assets to two new SHOP operators across separate joint venture transactions, which is a modest departure from the company's strategic triple-net focus. SHOP assets introduce more potential cash flow volatility, but also provide more upside to EBITDA as fundamentals recover.
Stable 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 the pandemic. Portfolio level EBITDARM lease coverage was 1.6x at 3Q22 compared to 1.7x and 1.7x in 1Q20 and 4Q19.
NHI's SNF and SH lease coverage was 2.4x and 1.2x, respectively at 3Q22, representing some decline in SNF coverage and some recovery in SHO coverage compared to 3Q21, when SNF and SH lease coverage was 2.8x and 1.1x, respectively. NHI's SNF lease coverage remained robust through the pandemic due to the financial strength of its two large publicly-traded SNF tenants,
Fitch believes that the probability of rent deferrals for most of NHI's SNF tenants is low given that
Derivation Summary
NHI's ratings reflects the its ability to proactively manage its skilled nursing and 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 periods of stress and repay its debt maturities. The ratings are constrained, however, by the issuer's less developed access to debt capital markets and high tenant concentration.
Compared to its SNF-focused peers,
Key Assumptions
Low single-digit annual SSNOI growth after taking into account an additional quarter of SHOP operating expenses in 2023;
Dividend increasing to be consistent with historical levels;
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;
Fitch's expectation of REIT fixed charge coverage sustaining above 3.5x;
Increased scale or improved access to unsecured debt capital relative to higher rated REITs.
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).
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Sufficient Liquidity: NHI's liquidity is supported by
Fitch views NHI's relative access to capital to be 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
Adequate Contingent Liquidity: The financeability of the 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 2x assuming stressed cap rates between 9%-9.5% as of
Issuer Profile
Incorporated in 1991,
As of
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
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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