You May Have Been Looking At National Health Investors, Inc. (NYSE:NHI) All Wrong

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National Health Investors, Inc. is a US$3.4b mid-cap, real estate investment trust (REIT) based in Murfreesboro, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how NHI’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess NHI.

See our latest analysis for National Health Investors

Funds from Operations (FFO) is a higher quality measure of NHI’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For NHI, its FFO of US$208m makes up 71% of its gross profit, which means the majority of its earnings are high-quality and recurring.

NYSE:NHI Historical Debt, June 1st 2019
NYSE:NHI Historical Debt, June 1st 2019

NHI’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky NHI is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 16%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take NHI 6.17 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.

I also look at NHI’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 4.24x, it’s safe to say NHI is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at NHI’s valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. In NHI’s case its P/FFO is 16.35x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.

Next Steps:

As a REIT, National Health Investors offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in NHI, I highly recommend taking a look at other aspects of the stock to consider:

  1. Future Outlook: What are well-informed industry analysts predicting for NHI’s future growth? Take a look at our free research report of analyst consensus for NHI’s outlook.
  2. Valuation: What is NHI worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether NHI is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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