Intro and background info
National Healthcare Corporation (NHC) owns and operates skilled nursing facilities and assisted living facilities (SNFs and ALFs). NHC is based in Tennessee and most of their facilities are in Tennessee and nearby states.
The pandemic and its effects were catastrophic for the nursing home industry and NHC. In 2020, excess deaths in the 85+ age bracket were well over 25% of expected deaths and continued to remain elevated until early 2023. The increase in deaths caused occupancy rates to plummet and the number of vacant beds doubled for NHC in 2021.
And just when the death rate was beginning to approach normal levels, the labor shortage worsened. Immigration to the USA was restricted in 2020-21 due to the pandemic. This caused a severe labor shortage that peaked in 2022, with 12 million total US job openings. Wage inflation exceeded 6% for most of 2022 & 2023. The elderly care industry was especially hard hit because it is a labor intensive industry. NHC was forced to extensively use expensive staffing agencies & traveling nurses to fill vacancies.
Occupancy rates and labor balance are only now starting to approach pre-2020 baseline levels. Because of this, the stock price has already increased sharply. I first wrote about NHC here in April 2024. Since then, the price has increased by 38% in 4 months. But there are still multiple factors and trends that will improve margins and accelerate earnings growth.
1. The labor situation will continue to improve
Goldman Sachs estimates that the net immigration rate to the United States is currently +160K/month or +2 million/year. Many of these new immigrants will compete for entry level positions like housekeeper and caregiver, which will decrease wage pressure and turnover. Also, nursing shortages are continuing to ease. Nursing job postings on Indeed are down 30% from 2022 peak levels. NHC reported a 57% year on year (YoY) decrease in staffing agency utilization. Traveling nurses are incredibly expensive and NHC will continue to see a decreasing need for them. NHC reported a net YoY total salaries/wages increase of only 2.7% in the most recent quarter. It’s reasonable to expect that YoY changes in total salaries/wages will continue to decrease.
2. Occupancy and Demand will continue to increase
Occupancy rates at NHC are 89%, which is very near pre-2020 baseline levels of around 90%. But occupancy rate will likely continue to increase and exceed 90% in the coming quarters because there is an increasing supply & demand imbalance of senior living facilities including SNFs. Because of the 2020-2023 headwinds, intensive construction of senior living facilities stopped. Meanwhile, demographic changes continue as the first baby boomers approach 80 years old. Increasing occupancy & demand will not only increase resident volume, it will allow NHC to become more selective and allow them to select the more profitable Medicare and Privately insured residents.
3. Insurance reimbursement rates will continue to increase
Because of the current and projected demand increases, insurance has been forced to increase reimbursement rates. Before 2020, Medicare’s annual rate increase was normally around 2%. In July 2023, Medicare announced a rate increase of 4.0%. In July 2024 they announced another 4.2% increase that will take effect in October of this year. Annual Medicaid increases were sometimes below 1% pre-2020. NHC recently reported its 2024 YTD Medicaid reimbursement rates have already increased 5.0%. And new, significant Medicaid increases started in July for Tennessee and South Carolina. These increases will contribute to earnings in upcoming quarters.
Conclusion and positions
For the most recent quarter, NHC reported normalized earnings growth of 12.4% vs Q2 2023. I think that earnings growth is likely to accelerate in coming quarters. I'd appreciate any feedback. What other related stocks are you all following?
Current elderly care positions:
ADUS: 300 shares
NHC: 212 shares
OHI: 459 shares
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