National Health Investors, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This annual filing includes fourth-quarter data, but the principal results below are for the full year. NHI is a self-managed healthcare REIT investing in senior housing and medical properties through leases and loans.
Business context and portfolio
At year-end, NHI had investments involving 232 facilities in 33 states: 220 owned properties leased to operators and 12 facilities associated with mortgage loans. The owned portfolio included 143 senior housing communities, 72 skilled nursing facilities, three hospitals and two medical office buildings. NHI reported $2.816 billion of original-cost real estate investments and $246.1 million of mortgage and other notes receivable.
Four operators—Bickford, Senior Living Communities, Holiday Retirement and National HealthCare Corporation—accounted for approximately 62% of total revenue. Senior housing and medical operators’ ability to pay rent and interest depends on occupancy, operating costs, private-pay demand and, for skilled nursing, government reimbursement.
Financial results and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Total revenue | $294.6 million | $278.7 million | +5.7% |
| Rental income | $280.8 million | $265.2 million | +5.9% |
| Net income attributable to common stockholders | $154.3 million | $159.4 million | -3.2% |
| Diluted earnings per share | $3.67 | $3.87 | -5.2% |
| Net cash from operating activities | $207.9 million | $198.1 million | +4.9% |
| Dividends declared per common share | $4.00 | $3.80 | +5.3% |
Revenue growth reflected new investments and lease escalators. Net income declined despite higher revenue, in part because 2017 included $10.1 million in investment gains from securities sales, while 2018 included $5.1 million in loan and realty losses and a $0.7 million loss on convertible-note retirement. Interest expense rose 5.9% to $49.1 million, principally amid higher LIBOR and debt levels. NHI reported no investment and other gains in 2018.
Year-end total assets were $2.751 billion, debt carrying value was $1.282 billion, total liabilities were $1.361 billion and equity was $1.390 billion. Cash and cash equivalents were $4.7 million; including restricted cash, cash and restricted cash totaled $9.9 million. NHI had $466 million available on its $550 million revolving credit facility. Reported fixed-charge coverage was 6.0x and consolidated net debt to Adjusted EBITDA was approximately 4.5x. A 50-basis-point move in variable rates was estimated to change annual net interest expense by approximately $1.92 million.
Investing activities used $250.3 million of cash, mainly for real estate and note investments. Financing activities provided $44.3 million, including net equity proceeds, borrowings and dividend payments. NHI reported $132.4 million of remaining loan commitments, $24.3 million of development commitments and $17.1 million of contingent commitments at year-end.
Supplemental REIT measures: diluted FFO per share was $5.36 versus $5.50; normalized FFO per share was $5.46 versus $5.29; normalized AFFO per share was $5.04 versus $4.75; and normalized FAD was $214.4 million versus $198.0 million. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Material changes and unusual items
- Holiday lease restructuring: In November 2018, NHI amended the master lease covering 25 independent-living facilities, extended its maturity to December 2035 and reset annual rent from approximately $39.0 million scheduled for 2019 to $31.5 million effective January 1, 2019. In exchange, NHI was to receive approximately $65.8 million in cash and property consideration, including forfeiture of half the $21.3 million security deposit. In January 2019, NHI acquired a Florida facility for $38.0 million and received the remaining $17.1 million in cash. Future rent escalators begin in November 2020 and are generally 2%–3%. The lower contractual rent is a material forward consideration despite the additional credit protections and consideration.
- New investments: NHI reported approximately $364.3 million in 2018 commitments for real estate and loans, including a $180 million construction-loan facility for Sagewood, Texas skilled-nursing acquisitions leased to Ensign, and senior-housing investments with Bickford and Comfort Care. The Sagewood loan had $86.8 million funded at year-end.
- Tenant distress and write-offs: Regency vacated three facilities in December after a dispute; NHI arranged interim management and wrote off $1.82 million of straight-line rent receivables. NHI also wrote off $1.44 million associated with a nonperforming Wisconsin lease and $1.50 million related to The LaSalle Group, which was in material lease non-compliance and two months in arrears at year-end. These items contributed to 2018 loan and realty losses.
- Litigation: East Lake-affiliated entities’ original libel action against NHI continued after a December agreement covering Regency’s departure from the facilities. The filing reports unspecified monetary damages sought; management expected ordinary-course facility litigation to have no material financial-statement effect.
- Debt and equity financing: NHI expanded its bank facility in September 2018, converting $300 million of revolver borrowings into a term loan due in 2023. It also issued 1.11 million shares through its at-the-market program for net proceeds of $81.8 million and repurchased $27.6 million face value of convertible notes.
Outlook, management commentary and risks
Management expected to pursue real estate and note investments in 2019, funded initially with liquid resources and debt, with potential equity issuance as needed to rebalance leverage. It cited demographic demand and opportunities to finance development, while acknowledging competition for healthcare assets and rising capital costs. No specific 2019 earnings or FFO guidance is provided in the filing text.
Management noted pressure on investment spreads as interest rates rose and expected higher asset capitalization rates and lease rates could partly offset that pressure. It also described skilled-nursing reimbursement as a key uncertainty: PDPM was scheduled to replace RUGs-IV effective October 1, 2019, and state Medicaid funding was not expected to keep pace with inflation. About 27% of NHI revenue was derived from skilled-nursing operators with significant government-payor exposure.
Principal risks include operator defaults or bankruptcy, concentration in major tenants, occupancy and wage pressure, Medicare and Medicaid reimbursement changes, construction and stabilization risk, rising interest costs, debt covenant constraints, real-estate illiquidity, impairment, REIT qualification and cybersecurity. The filing states that NHI remained within credit-facility covenant limits, but its leverage ratio was near the upper boundary of the applicable pricing tier.
Most important facts for investors to verify
- Holiday’s operating performance, lease coverage, credit enhancements and ability to sustain rent after the 2019 reset.
- Whether NHI can replace or stabilize operations at the three former Regency facilities, and the outcome and potential cost of the surviving East Lake litigation.
- Collections and lease compliance at the Wisconsin and LaSalle properties, and any further cash-basis rent recognition or receivable write-offs.
- Funding, construction progress, stabilization and repayment prospects for Sagewood, Bickford and other development commitments.
- Debt maturity and refinancing plans, variable-rate exposure, covenant headroom, and the effects of further interest-rate increases.
- Whether normalized FFO, AFFO and FAD growth translates into sustainable dividend coverage; declared dividends were $4.00 per share versus diluted EPS of $3.67, so compare distributions with appropriate REIT cash-flow measures.
- Government reimbursement changes, particularly PDPM implementation and Medicaid funding, and their effects on operators’ ability to pay NHI.