NATIONAL HEALTH INVESTORS INC Annual Report - Fiscal Year 2023 Performance Review

NATIONAL HEALTH INVESTORS INC (NHI), a real estate investment trust (REIT) specializing in healthcare properties, actively managed its portfolio and maintained operational stability throughout a dynamic fiscal year 2023. As a prominent owner and lessor of essential facilities like senior housing communities and skilled nursing facilities, NHI primarily generates income from rent. This past year, NHI focused on strategic portfolio management, navigating market shifts while supporting its tenant operators.

Business Overview: NHI is a real estate investment trust (REIT) specializing in the healthcare sector. The company acquires, owns, and leases healthcare properties, including senior housing communities (such as independent living, assisted living, and memory care facilities) and skilled nursing facilities. NHI generates income primarily from rental revenues and interest from mortgage and mezzanine loans. The company maintains a diversified portfolio of healthcare real estate assets and fosters strong relationships with its tenant operators.

Financial Performance Highlights (Fiscal Year Ended December 31, 2023): NHI reported total revenues of approximately $325 million for fiscal year 2023, a modest 2% increase year-over-year. This growth stemmed from fixed lease escalations and new acquisitions.

Key financial metrics for the year include:

• Net income: $110 million, or $2.50 per diluted share.
• Funds From Operations (FFO): $185 million, or $4.20 per diluted share. (FFO is a crucial metric for REITs, reflecting cash flow from operations.)
• Adjusted Funds From Operations (AFFO): $170 million, or $3.85 per diluted share.

NHI's FFO saw a slight 3% decline, and AFFO decreased by 2% compared to the prior year. This was primarily due to the impact of non-performing assets and dispositions. Despite these challenges, NHI maintained its quarterly dividend of $1.10 per share, resulting in an annual dividend yield of approximately 6.5% based on recent stock prices.

NHI's income relies on both fixed and variable lease escalations, along with managing tenant escrow funds and lease incentives. To assess tenant health and income stability, NHI closely monitors the EBITDARM coverage ratio. This ratio indicates a tenant's ability to cover rent and other expenses.

• For NHI's mortgage investments, 75% of tenants demonstrated strong coverage (above 1.5x), indicating they comfortably pay rent.
• However, 15% were in the 1.0x to 1.5x range.
• A concerning 10% fell below 1.0x, suggesting potential payment difficulties.
• For mezzanine loans, a subset of tenants, particularly those with non-performing financing receivables, showed "no coverage." This directly risks NHI's cash flow.

Risk Factors:

1. Tenant Performance: The financial health of NHI's tenants is the paramount risk. A deterioration in EBITDARM coverage for a larger portion of the portfolio could reduce rental income, increase loan defaults, and lead to asset write-downs.
2. Asset Dispositions: The need to dispose of underperforming assets, while strategic, can impact investor confidence and may result in sales at less favorable terms.
3. Interest Rate Fluctuations: As a REIT, NHI is sensitive to interest rate changes. These changes can affect borrowing costs, property valuations, and the attractiveness of its dividend yield compared to other income-generating investments.
4. Geographic Concentration: NHI's portfolio shows notable geographic concentration, with approximately 18% of its value in South Carolina and 15% in Texas. Adverse economic conditions, healthcare policy changes, or natural disasters in these states could disproportionately affect NHI's performance.
5. Healthcare Industry Trends & Regulatory Changes: Changes in Medicare/Medicaid reimbursement policies, staffing shortages, or evolving healthcare delivery models could affect the profitability of NHI's tenants and, consequently, its rental income.

Management Discussion (MD&A Highlights): NHI actively managed its portfolio throughout 2023 and into early 2024, balancing growth with strategic divestments.

Strategic Acquisitions: NHI invested approximately $150 million in several senior living communities and assisted living facilities. These acquisitions, from operators including Generations LLC, Mainstay Healthcare, Juniper Communities, Agemark Senior Living, Priority LifeCare, William James Group, and Compass Senior Living, will contribute to future revenue growth. NHI completed further acquisitions from Encore Senior Living, Spring Arbor, and William James Group in early 2024, signaling ongoing expansion.

Asset Dispositions and Underperformance: The year also brought challenges, particularly managing underperforming assets. NHI designated properties related to Silverado Senior Living and Bickford Senior Living as "disposal groups" in 2023. This strategic decision aimed to divest assets due to underperformance or lack of strategic fit. The company successfully disposed of $75 million in assets, primarily from the Silverado portfolio.

Non-Performing Financing Receivables: A significant challenge remains with non-performing financing receivables, specifically loans to operators like SLM and Bickford. These approximately $40 million in loans are not being serviced as agreed, resulting in a $15 million write-down in asset value and directly impacting FFO. NHI is actively negotiating the sale of additional Bickford properties to mitigate further losses and reallocate capital.

Overall, NHI's management strategy continues to prioritize active portfolio optimization. This includes opportunistic acquisitions, strategic dispositions of underperforming assets, and fostering strong tenant relationships to ensure stable cash flows and dividend sustainability.

Financial Health: As of December 31, 2023, NHI reported total debt of $1.2 billion, with a debt-to-EBITDA ratio of 5.5x. The company maintained a healthy interest coverage ratio of 3.0x. Cash and cash equivalents were $50 million, with an additional $300 million available under its revolving credit facility, providing ample liquidity for operations and planned investments. While non-performing loans and asset dispositions put some pressure on cash flow, NHI's overall financial structure remains sound, supported by its access to capital markets and credit facilities.

Future Outlook: NHI expects to continue optimizing its portfolio. The company plans to acquire nine assisted living facilities in February 2026, reflecting a long-term growth perspective. Concurrently, it anticipates disposing of additional senior living campuses in the first quarter of 2026, part of its ongoing strategy to enhance portfolio quality and reduce exposure to underperforming assets.

The aging demographic trend provides a favorable long-term tailwind for the healthcare real estate sector. However, near-term challenges related to inflation, labor costs, and interest rates persist. NHI's future strategy emphasizes active portfolio management, including opportunistic acquisitions in key healthcare sectors, strategic dispositions, and maintaining strong tenant relationships to ensure stable cash flows and dividend sustainability.

Competitive Position: NHI operates in a highly competitive healthcare REIT market, competing with other public and private REITs for both acquisitions and tenants. Its long-standing relationships with various operators and a diversified portfolio of senior housing and skilled nursing facilities provide a stable foundation, even without holding a dominant market share.

NHI differentiates itself through:

• A disciplined investment approach.
• A strong focus on operator relationships.
• Strategic portfolio management aimed at long-term value creation within the healthcare real estate sector.