National Health Investors, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. NHI is a healthcare real estate investment trust focused on senior housing and medical properties, primarily through triple-net leases, joint ventures, and mortgage and other loans. It owned 228 properties in 33 states and reported investments involving 242 facilities, including notes receivable, as of quarter-end.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $78.1 million | $73.0 million | $154.2 million | $145.7 million |
| Net income | $40.0 million | $37.8 million | $75.7 million | $76.3 million |
| Diluted EPS | $0.92 | $0.91 | $1.75 | $1.83 |
| Operating cash flow | Not separately presented | Not separately presented | $126.9 million | $102.2 million |
| Investing cash flow | Not separately presented | Not separately presented | $(268.0) million | $(140.9) million |
| Financing cash flow | Not separately presented | Not separately presented | $147.7 million | $39.1 million |
Q2 net income margin was approximately 51.2% of revenue, versus 51.9% a year earlier; six-month margin was approximately 49.1%, versus 52.3%. These are calculated from reported GAAP figures, not company guidance. Six-month NAREIT FFO per diluted share was $2.67 in both periods; normalized FFO per diluted share declined to $2.67 from $2.72, while normalized AFFO per diluted share was $2.48 in both periods. Normalized FAD increased 4.3% to $109.8 million.
Balance sheet, debt, and liquidity
- Total assets were $3.00 billion at June 30, 2019, up from $2.75 billion at year-end 2018. Debt carrying value was $1.47 billion, versus $1.28 billion. Cash and cash equivalents were $5.6 million; cash, cash equivalents, and restricted cash totaled $16.5 million.
- NHI had $277 million available on its $550 million revolving credit facility. It reported compliance with financial covenants, while noting its leverage ratio was near the upper boundary of the current pricing tier.
- Management reported six-month fixed-charge coverage of 5.2x and consolidated net debt to annualized Adjusted EBITDA of approximately 4.8x. About $213 million of debt was exposed to variable-rate risk after hedging; a 50-basis-point rate change was estimated to affect annual interest expense by approximately $1.1 million.
- Six-month financing included $47.9 million of net common-stock proceeds and net revolving-credit borrowings. Dividends paid were $88.1 million. The quarterly dividend was increased to $1.05 per share in February 2019, equivalent to $4.20 annually.
Material changes versus the prior comparable period
- Q2 revenue rose 7.0% and net income rose 5.7%. For the first half, revenue increased 5.8%, but net income attributable to common stockholders declined 0.8% and diluted EPS fell from $1.83 to $1.75.
- Growth reflected new property investments and higher interest income from loans, particularly to Life Care Services and Bickford. In the first half, rental income increased 3.2% and interest income from mortgage and other notes increased 62.8%.
- Expense growth exceeded revenue growth in the first half: total expenses rose 14.3%, including a 14.4% increase in interest expense and a $2.5 million impairment charge for two properties held for sale. The prior-year period included a $0.7 million convertible-note retirement loss.
- Investing cash outflow increased substantially, reflecting $200.6 million of real estate investments and $59.7 million of investments in mortgage and other notes. NHI’s May acquisition of six senior housing facilities was consolidated through a subsidiary in which NHI held a 97.5% interest.
- Share issuance increased weighted-average diluted shares. Management attributed unchanged six-month FFO per diluted share, and lower normalized FFO per diluted share, principally to dilution from shares issued since June 2018.
Outlook, commentary, and risks
- NHI expected to continue evaluating real estate and note investments during the remainder of 2019, funded through operating cash, debt, and ATM equity issuance; larger acquisitions could require an underwritten equity offering. No specific full-year earnings or FFO guidance is provided in the filing.
- Management’s stated priorities include dividend growth, maintaining relatively low leverage, and balancing acquisition returns against financing costs. It noted competition for healthcare assets and pressure on investment spreads and cost of capital; it may consider obtaining a public credit rating.
- Tenant performance bears monitoring. Bickford represented about 17% of Q2 revenue and 19% of six-month rental income in the filing’s tenant table. Its same-store occupancy improved to 85.9% in Q2 from 84.1% in Q1, but reported total-portfolio lease coverage for Bickford was 1.07x for the trailing twelve months ended March 31, 2019, down from 1.19x a year earlier.
- Management identified weaker coverage in need-driven senior housing, associated with occupancy softness and wage pressure. Skilled nursing operators face Medicare and Medicaid reimbursement risks. The new Medicare Patient-Driven Payment Model was scheduled to take effect October 1, 2019; CMS had proposed a net 2.5% payment increase, and management said the ultimate impact on tenants was uncertain.
- Two assisted living properties were classified as held for sale after a $2.5 million impairment, leaving a reported net carrying value of $3.745 million. NHI also disclosed ongoing litigation involving former Regency-related parties and LaSalle; Autumn Leaves, the LaSalle manager, had filed for Chapter 11 bankruptcy. Management did not expect pending litigation to materially affect financial condition, results, or cash flows.
- Remaining disclosed commitments included $115.1 million of unfunded loan commitments, $22.9 million of development commitments, and $29.6 million of contingent lease inducements. These amounts are subject to their contractual terms and, for contingent items, applicable conditions.
- Other considerations include tenant and borrower credit risk, concentration in major operators, interest-rate exposure, LIBOR transition, healthcare regulation, real estate impairment risk, and the REIT’s ability to maintain required distributions. NHI adopted the new lease accounting standard in January 2019 with no cumulative retained-earnings adjustment; it was evaluating the expected-credit-loss standard scheduled for adoption in 2020.
Most important facts for investors to verify
- Tenant-level rent collections, lease coverage, and occupancy—especially for Bickford and the properties still being stabilized after tenant transitions.
- Whether new investments and loan commitments generate returns sufficient to cover higher debt costs, dividends, and potential additional equity dilution.
- Debt covenant headroom, variable-rate exposure, upcoming maturities, and refinancing or LIBOR-transition plans.
- Progress on selling the two impaired properties, resolving Regency and LaSalle litigation, and funding remaining loan and development commitments.
- How Medicare’s payment-model transition and state Medicaid funding affect skilled nursing operators and NHI’s rent and loan collections.