NATIONAL HEALTH INVESTORS INC quarterly report, Q2 FY2016

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National Health Investors, Inc. — Q2 2016 Form 10-Q

Business context and reporting period. NHI is a healthcare REIT investing in senior housing and medical properties through leases, loans and a joint venture. This unaudited filing covers the quarter and six months ended June 30, 2016, compared with the same 2015 periods. At quarter-end, NHI reported 202 portfolio facilities and notes across 32 states, including 194 owned properties; its real estate was leased to 26 tenants.

Financial performance and position

  • Q2 revenue: $61.2 million, up 8.7% year over year. Rental income increased 8.3% to $57.0 million; mortgage and other note interest income rose 28.2% to $3.2 million.
  • Q2 earnings: Net income attributable to common stockholders was $44.6 million, or $1.16 per diluted share, versus $31.2 million, or $0.83, a year earlier. Results included $26.4 million of investment and other gains and $14.7 million of loan and realty losses.
  • Six-month revenue and earnings: Revenue was $120.2 million, up 7.3%; common-stockholder net income was $77.3 million, up 27.0%, and diluted EPS was $2.01 versus $1.62.
  • REIT operating measures, six months: Diluted FFO was $2.61 per share versus $2.29; normalized FFO was $2.38 versus $2.28; normalized AFFO was $2.15 versus $2.00; and normalized FAD was $2.18 versus $2.04. These are non-GAAP measures and may not be comparable across REITs.
  • Cash flow, six months: Operating cash flow was $83.2 million, compared with $80.0 million. Investing activities used $230.5 million, primarily reflecting real estate investment; financing activities provided $137.9 million. Cash declined from $13.3 million at year-end to $3.9 million.
  • Debt and liquidity: Debt carrying value was $1.073 billion, up from $914.4 million at December 31, 2015. The company reported $359 million available under its revolving credit facility and total liquidity of $362.9 million, including cash. Annualized net debt to adjusted EBITDA was 4.4x; six-month fixed-charge coverage was 5.8x.
  • Dividends: NHI declared $1.80 per share for the first six months, including $0.90 for Q2. Management’s stated 2016 annualized dividend projection was $3.60 per share.

The filing does not provide a single comparable operating-margin measure. It reports higher depreciation and interest costs alongside revenue growth.

Material changes versus the prior comparable period

  • Revenue growth primarily reflected property investments made since June 2015. Six-month rental income rose 6.6%; note interest income rose 36.2%, principally from funding the Timber Ridge construction loans.
  • Interest expense increased 18.2% for the first half, reflecting increased borrowing and management’s shift toward longer-term fixed-rate debt. Debt rose as NHI funded acquisitions and other investments.
  • Common-stockholder earnings increased, but comparisons were materially affected by $28.1 million of investment and other gains in 2016, including $23.5 million from marketable-securities sales and $4.6 million from real estate dispositions. There were no such gains in the 2015 first half.
  • The $14.7 million Q2 loan and realty loss was a non-cash write-off tied to the Legend-to-Ensign lease transition: $8.3 million of straight-line rent receivable and $6.4 million of lease intangible value.
  • Other comprehensive income fell by $21.8 million for the first half, largely reflecting changes in unrealized securities and cash-flow-hedge values and reclassification of realized securities gains.

Outlook, management commentary and risks

  • Management said it would continue evaluating acquisitions and development financing in 2016, using operating cash, debt, marketable securities and potentially equity. It expected to continue funding Timber Ridge and other loan commitments; substantial repayment of Timber Ridge’s $94.5 million construction loan was expected during 2017.
  • Management anticipated rising longer-term borrowing rates and pressure on investment spreads, and said it was balancing growth and dividend objectives against leverage and financing costs. A 50-basis-point change in rates on variable-rate debt was estimated to change annual net interest expense by approximately $955,000.
  • About 28% of first-half revenue was associated with skilled nursing operators receiving significant Medicare and Medicaid revenue. Management cited reimbursement reductions and regulatory changes as risks; it described selective underwriting for future skilled-nursing acquisitions.
  • Tenant/operator concentration is relevant: Holiday Retirement, Senior Living Communities, NHC and Bickford each generated at least 10% of first-half rental income. NHI depends on tenants’ and borrowers’ ability to meet rent and debt payments.
  • Commitments include up to $154.5 million for Timber Ridge loans, $56 million to purchase four planned Ensign facilities, and other construction, renovation and loan commitments. The filing’s contractual-obligations table reported $1.455 billion in total obligations and contingent liabilities, including debt and interest.
  • After quarter-end, NHI committed to issue $75 million of eight-year notes at 3.93%; agreed to provide up to $24.5 million in loans to Senior Living Management; and extended Bickford a $14 million construction-loan facility. On August 4, NHI and Bickford announced a conditional plan to unwind their RIDEA joint venture and move to a triple-net tenancy. The proposed exchanges include $25.1 million paid by NHI for Bickford’s PropCo interest and $8.1 million paid by Bickford for NHI’s OpCo interest; closing timing and final accounting remain uncertain.
  • Management said ordinary-course litigation was not expected to have a material adverse effect. No material risk-factor changes were reported for the first half. Disclosure controls were assessed as effective as of June 30, 2016.

Key facts for investors to verify

  • How much recurring earnings and cash available for dividends exclude the $28.1 million of gains and the $14.7 million non-cash lease-transition write-off; compare GAAP earnings with normalized FFO, AFFO and FAD.
  • Whether tenant rent coverage and payment performance remain sound, particularly among the largest operators and government-reimbursement-dependent skilled nursing tenants.
  • How remaining acquisition, construction and loan commitments will be funded, and whether debt, leverage and liquidity remain within management’s stated targets.
  • Whether the proposed Bickford joint-venture unwind closes, its final valuation and accounting, and the resulting effect on rent, earnings and cash flows.
  • Whether the expected Timber Ridge construction-loan repayment occurs as planned and how future interest rates affect borrowing costs and investment spreads.