NATIONAL HEALTH INVESTORS INC quarterly report, Q2 FY2020

National Health Investors, Inc. — Q2 2020 Form 10-Q

Business context and reporting period. NHI is a healthcare real estate investment trust (REIT) investing in senior housing and medical properties, primarily through triple-net leases, mortgages and other notes. This unaudited report covers the quarter and six months ended June 30, 2020. Its portfolio included 227 properties in 34 states and 16 mortgage and other notes; senior housing generated 63.7% of portfolio revenue for the first half.

Financial and operating performance

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Total revenue	$84.2m	$78.1m	$167.3m	$154.2m
Net income	$44.4m	$40.0m	$105.5m	$75.7m
Net income attributable to common stockholders	$44.4m	$40.0m	$105.4m	$75.7m
Diluted EPS	$0.99	$0.92	$2.36	$1.75

First-half rental income rose 7.6% to $154.4m; interest income and other rose to $12.8m. Management attributed growth mainly to investments made since June 2019.
First-half net income included a $21.0m gain on real estate sales, principally the sale of eight properties. Excluding real estate gains, NAREIT FFO per diluted share was $2.81 versus $2.67; normalized AFFO per diluted share was $2.65 versus $2.48.
First-half operating cash flow was $116.8m, down from $126.9m. Investing used $80.1m, including real estate and note investments, partly offset by $39.3m of property-sale proceeds. Dividends paid were $96.0m.
At June 30, total assets were $3.17bn, debt carrying value $1.55bn, and equity $1.50bn. Unrestricted cash was $46.9m; $137m remained available on the revolver. Net debt to annualized adjusted EBITDA was 4.8x and six-month fixed-charge coverage was 5.8x.
The quarterly dividend declared was $1.1025 per share, up from $1.05 a year earlier. The filing does not provide formal earnings or dividend guidance.

Material changes and notable items

Debt increased from $1.44bn at year-end 2019, primarily reflecting net revolving-credit borrowings. About $563m of variable-rate debt was exposed to rate changes at June 30; management estimated a 50-basis-point rate increase would raise annual net interest expense by approximately $2.8m. Major scheduled principal maturities include $664m in 2022 and $476m in 2023.
New investments included the Timber Ridge senior-living transaction, two Autumn Trace properties and other property and lending commitments. NHI reported a $1.29m first-half loss from its 25% Timber Ridge operating-company investment.
The adoption of expected-credit-loss accounting resulted in a $3.9m opening allowance. The allowance for funded notes was $5.2m at June 30, including an increase reflecting COVID-related credit assumptions; the liability for unfunded loan commitments was $0.2m.
First-half net income also reflected higher depreciation and interest expense than a year earlier. The 2019 comparison included a $2.5m property impairment, while 2020 included the disposal gain.

Outlook, risks and contingencies

COVID-19 was identified as a significant, uncertain risk to occupancy, tenant operating costs, rent collections, asset values, financing access and dividends. NHI reported collecting approximately 100% of Q2 contractual rent and 97% of July rent. Senior-housing occupancy weakened; reported Q2 occupancy was 82.5% for Bickford, 79.1% for Senior Living Communities and 83.5% for Holiday.
Effective July 1, NHI agreed to defer $2.1m of Bickford’s Q3 rent, with half escrowed. A non-binding letter of intent contemplated a possible sale of nine Bickford-leased properties; forgiveness of the deferred rent and return of escrow were conditional on closing by December 31, 2020. NHI was also negotiating a possible rent deferral with another tenant. These arrangements and future concessions could affect results.
Quorum Health filed for Chapter 11 bankruptcy in April; it completed restructuring in July and was reported to be operating and paying rent timely. NHI had changed to cash-basis rent recognition and wrote off $0.38m of straight-line rent receivable.
NHI reported no significant property impairment from COVID-19 as of June 30, but noted estimates may change. Other exposures include tenant concentration, operator financial health, healthcare reimbursement and regulation, interest rates and LIBOR transition, refinancing, and senior-housing operating performance.
Known commitments included $64.0m of remaining loan commitments, $4.9m of remaining development commitments and $31.4m of unfunded contingent lease inducements. Ongoing East Lake/Regency litigation was described as not expected to have a material adverse effect by management.
After quarter-end, NHI obtained a one-year $100m term loan and reported approximately $83.9m unrestricted cash and $237m revolver availability at July 31. Fitch reaffirmed its BBB-/Stable rating in July; S&P was also reported at BBB-/Stable.

Important facts for investors to verify

Whether rent deferrals, tenant occupancy and operator liquidity—especially at Bickford and other large tenants—develop as described, and whether the proposed Bickford property transaction closes on its stated conditions.
How much first-half earnings growth depends on the non-recurring $21.0m property-sale gain, versus recurring rent and interest income; review FFO, AFFO and cash available for distributions alongside GAAP results.
Whether the $5.2m expected-credit-loss reserve and $0.2m unfunded-commitment liability remain adequate as COVID-related borrower and tenant conditions evolve.
Debt maturities, covenant headroom, variable-rate exposure and the company’s ability to refinance, particularly around 2022–2023 and the LIBOR transition.
The sustainability of the dividend relative to recurring cash generation, future concessions, investment commitments and access to capital.