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NHC’s main business is the operation of skilled nursing and assisted living facilities. They own most of these and the company has always operated with low debt. Current long term debt/equity is 10%. The company’s earnings, revenue and margins have all increased rapidly since pandemic lows in 2022. On paper, the stock price looks cheap with a PEGY well below one. However, around 30% of the properties NHC operates are owned by another company. NHC has to pay rent to them. This lease expires Dec. 31st 2026 and renewal will result in rent increases of 60%. The goal of this model is to calculate fair value today, including the effect of the lease expiration.
Assumptions
1. NHC will purchase ⅓ of the properties subject to the rent increase at the end of 2026. I estimate the cost of this will be $180 million. The effect of this will be a net rent increase of zero. They will pay 60% more rent on ⅔ of the properties and they will pay no rent on the purchased properties. Because of the acquisition, free cash flow to equity will be greatly reduced in 2026. However, after that, the company’s organic growth and profitability will not be affected from 2027 onwards because total rent paid will not increase.
2.After the purchase of properties at the end of 2026, there will be no further acquisitions. I don’t think this is what is best for the company and I don’t think this is what they will actually do. The purpose of this assumption is to simplify the valuation to better gauge the effect of lease expiration.
The company's debt level will remain the same after 2025. The 2026 acquisition will be a cash purchase.
3. NHC has been depreciating their properties by $40 million annually for years. I am assuming that this will continue.
4. Earnings growth will be 10% for operating profits excluding depreciation. I used ((cash flow from previous year)-$40 million))*1.10+$40 million. Earnings growth since 2022 has been well over 20% so I believe 10% is conservative. Insurance reimbursements alone have been growing at 6-7% per year. And then there will be occupancy gains and rent increases for elderly tenants at the assisted living facilities.
5. Capex will increase at 4% per year after 2025. The year 2026 has the $180 million acquisition added to the regular capex growing at 4%.
6. Calculated weighted average cost of capital = 8.5%
Results
Fair value is $165.14 and current share price is $112.12.
Discussion
I tried to be conservative with all the numbers I used. 10% earnings growth was used and I think actual earnings growth will be significantly higher. I added on a 1.5% small cap premium when I calculated WACC. And I only projected 5 years of 10% earnings growth before terminal 2.5% growth. I actually think this industry has a much longer runway than 5 years because the elderly population is projected to grow rapidly over the next 20 years. I still got a fair value well above current share price so I would like to get some feedback. If you notice any factors that I missed or mistakes, let me know. Also I’d be happy to answer any questions about the methods I used. Thanks!

https://photos.app.goo.gl/CSDUqKDPAigYV6kr6
NHC’s main business is the operation of skilled nursing and assisted living facilities. They own most of these and the company has always operated with low debt. Current long term debt/equity is 10%. The company’s earnings, revenue and margins have all increased rapidly since pandemic lows in 2022. On paper, the stock price looks cheap with a PEGY well below one. However, around 30% of the properties NHC operates are owned by another company. NHC has to pay rent to them. This lease expires Dec. 31st 2026 and renewal will result in rent increases of 60%. The goal of this model is to calculate fair value today, including the effect of the lease expiration.
Assumptions
1. NHC will purchase ⅓ of the properties subject to the rent increase at the end of 2026. I estimate the cost of this will be $180 million. The effect of this will be a net rent increase of zero. They will pay 60% more rent on ⅔ of the properties and they will pay no rent on the purchased properties. Because of the acquisition, free cash flow to equity will be greatly reduced in 2026. However, after that, the company’s organic growth and profitability will not be affected from 2027 onwards because total rent paid will not increase.
2.After the purchase of properties at the end of 2026, there will be no further acquisitions. I don’t think this is what is best for the company and I don’t think this is what they will actually do. The purpose of this assumption is to simplify the valuation to better gauge the effect of lease expiration.
The company's debt level will remain the same after 2025. The 2026 acquisition will be a cash purchase.
3. NHC has been depreciating their properties by $40 million annually for years. I am assuming that this will continue.
4. Earnings growth will be 10% for operating profits excluding depreciation. I used ((cash flow from previous year)-$40 million))*1.10+$40 million. Earnings growth since 2022 has been well over 20% so I believe 10% is conservative. Insurance reimbursements alone have been growing at 6-7% per year. And then there will be occupancy gains and rent increases for elderly tenants at the assisted living facilities.
5. Capex will increase at 4% per year after 2025. The year 2026 has the $180 million acquisition added to the regular capex growing at 4%.
6. Calculated weighted average cost of capital = 8.5%
Results
Fair value is $165.14 and current share price is $112.12.
Discussion
I tried to be conservative with all the numbers I used. 10% earnings growth was used and I think actual earnings growth will be significantly higher. I added on a 1.5% small cap premium when I calculated WACC. And I only projected 5 years of 10% earnings growth before terminal 2.5% growth. I actually think this industry has a much longer runway than 5 years because the elderly population is projected to grow rapidly over the next 20 years. I still got a fair value well above current share price so I would like to get some feedback. If you notice any factors that I missed or mistakes, let me know. Also I’d be happy to answer any questions about the methods I used. Thanks!