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

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, National Health Corporation (NHC; 16% of NOI at YE 2022) and Ensign Group (ENSG; 11% of NOI at YE 2022).

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 75% of NHI's SNF NOI at YE 2022. SH lease coverage has remained steady above 1.0x through the pandemic, partly driven by dispositions of underperforming Bickford and Holiday assets.

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, 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. SBRA, on the other hand, has historically maintained higher leverage, operating with financial metrics above or near Fitch's negative rating sensitivities. Fitch views OHI as having 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. (VTR; BBB+/Negative) 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. The negative outlook is based on the expectation that the company's leverage will remain above its negative sensitivity in the intermediate term, in part due to the assumption of debt related to a portfolio of assets from Santerre.

Healthcare Realty Trust Inc.'s (HR; BBB/Stable) medical office building portfolio benefits from highly durable operating cash flows that are strengthened by secular tailwinds including higher health care spending as well as the shift of medical procedures to outpatient and community-based settings. This positively differentiates them from NHI's SNF and SH portfolio, which face headwinds in comparison. However, its merger with Healthcare Trust of America is also expected to result in a higher leverage target between 6x-6.5x, which is more consistent with a 'BBB' rating.

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;

$50 million-$70 million of annual interest expense as interest rates peak in 2023, decline in 2024 and remain flat through the end of the ratings horizon;

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Sufficient Liquidity: NHI's liquidity is supported by $26.4 million of cash on hand and $498 million of availability under its $700 million revolving credit facility as of Jan. 31, 2023, pro forma for the company's repayment of $125 million of private placement notes using its revolver. The company has a number of 2023 maturities remaining, including $50 million of private placement notes and $240 million remaining under its bank term loan. Sources are sufficient to cover uses by 1.2x through 2024. Outside of 2023, overall debt maturities are well laddered.

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 March 2022 to upsize the facility to $700 million from $550 million and extend the maturity to 2026.

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 Dec. 31, 2022. 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, 2022, NHI has investments in 177 facilities located in 32 U.S. states. These investments involve 103 senior housing properties, 73 skilled nursing facilities and one hospital, excluding 13 properties classified as assets held for sale. Investments consisted of properties rented under primarily triple-net leases to 24 tenants and mortgage and other notes receivable due from 14 borrowers. Based on Q4 NOI, senior housing, SNFs, and hospitals comprise 55%, 43% and 2% 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

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.

(C) 2023 Electronic News Publishing, source ENP Newswire