National Health Investors, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; filed May 5, 2016. NHI is a healthcare real estate investment trust focused on senior housing and medical properties, funded through operating cash flow, debt and equity. It reported one operating segment.
Financial performance
| Metric | Q1 2016 | Q1 2015 / prior period | Change |
|---|---|---|---|
| Total revenue | $59.0 million | $55.8 million | +5.9% |
| Net income attributable to common stockholders | $32.7 million | $29.7 million | +10.2% |
| Diluted EPS | $0.85 | $0.79 | Up $0.06 |
| Net cash from operating activities | $41.3 million | $38.6 million | +7.1% |
| FFO per diluted share | $1.16 | $1.13 | +2.7% |
| Normalized AFFO per diluted share | $1.04 | $0.99 | +5.1% |
| Normalized FAD per diluted share | $1.07 | $1.03 | +3.9% |
Rental income was $55.1 million, up 4.9%; mortgage and other note interest income was $3.1 million, up 45.8%, primarily reflecting increased Timber Ridge loan funding. Interest expense rose 22.0% to $10.3 million, mainly due to higher borrowings and the shift toward longer-term fixed-rate financing. Depreciation increased 5.5% to $13.7 million. The quarter included $1.7 million of investment and other gains, principally a $1.654 million gain on a property sale. Adjusted EBITDA was $55.7 million versus $51.7 million; fixed-charge coverage was 5.7x versus 6.5x.
Cash and cash equivalents were $28.8 million at March 31, 2016, versus $13.3 million at year-end. Marketable securities were $58.5 million. NHI reported $522.8 million of cash and available revolving-credit capacity, including $494 million available to draw. Investing activities used $14.3 million; financing activities used $11.5 million, including $32.6 million of dividends paid.
Debt carrying value was $937.1 million, compared with $914.4 million at December 31, 2015; aggregate principal was $955.5 million. NHI had $56 million outstanding on its revolving facility, $494 million of unused revolving capacity, and $250 million of variable-rate term loans hedged with swaps. The weighted-average debt rate was 3.73%. The declared quarterly dividend was $0.90 per share, versus $0.85 a year earlier; management presented $3.60 per share as the 2016 annualized rate.
Business and material changes
- At quarter-end, NHI owned 181 healthcare properties in 31 states and held mortgage and other notes receivable with a carrying value of $150.7 million. Its portfolio included senior housing, skilled nursing, hospitals and medical office buildings; the company reported 190 facilities across real estate and note investments.
- Q1 revenue growth primarily reflected investments completed since March 2015. Rental growth included new East Lake rent, higher Bickford rent and increased NHC percentage rent. Straight-line rent adjustments declined by $0.8 million year over year.
- In January, NHI acquired Woodland Village, a 98-unit Washington independent-living community, for $9.463 million, plus a $350,000 improvement commitment. It also sold an Idaho skilled nursing facility for $3 million, recording a $1.654 million gain.
- After quarter-end, NHI purchased eight Texas skilled nursing facilities for $118.5 million. Effective May 1, operations at 15 former Legend facilities transitioned to Ensign under a new 15-year lease with initial annual rent of $17.75 million. NHI also agreed to sell two Texas facilities to Ensign for $24.6 million and committed to purchase four developing facilities for $56 million. The transition is expected to result in noncash write-offs of approximately $6 million for former purchase options and $8.247 million of accumulated straight-line rent receivable.
Outlook, risks and contingencies
Management said it would evaluate additional 2016 investments, primarily funded with liquid assets and debt, and might use ATM or other equity issuance if leverage warranted rebalancing. It expected to refinance revolving borrowings into longer-term debt and anticipated higher borrowing costs. Management emphasized disciplined underwriting, maintaining relatively low leverage and balancing dividend growth against financing costs. No specific earnings or FFO guidance was provided.
Management cited tenant and borrower operating performance, concentration among major tenants, Medicare and Medicaid reimbursement, liability insurance costs, development execution, interest rates, refinancing availability, debt covenants, real estate illiquidity and REIT qualification as important risks. About 29% of continuing-operations revenue came from skilled nursing operators with significant government-payor exposure. CMS had proposed a 1.6% Medicare reimbursement increase for fiscal 2017; management viewed the increase as modest and noted Medicaid funding may not keep pace with inflation.
At quarter-end, disclosed construction commitments were $31.6 million and loan commitments were $74.1 million. These include the remaining Timber Ridge funding obligation (up to $55.645 million), Bickford development funding and Senior Living Communities commitments. Contingent obligations included an East Lake lease incentive of up to $8 million and a $3.93 million Sycamore letter of credit; certain other lease-inducement payments were not considered probable. Management said ordinary-course litigation was not expected to have a material adverse effect. No material risk-factor changes were reported.
Unconsolidated Timber Ridge loan funding reached $97.607 million against a maximum $154.5 million commitment; management anticipated further funding through 2016 and substantial repayment of the $94.5 million construction note during 2017. These are expectations, not assurances. Management reported that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Key facts for investors to verify
- Whether major tenants—including Holiday, Senior Living Communities, NHC and Bickford—continue to meet lease and debt obligations, and whether their revenue concentration changes.
- Performance and repayment progress for Timber Ridge, including remaining loan funding and the expected 2017 construction-loan repayment.
- Execution and economics of the Ensign transition, related facility sale, future $56 million purchase commitment and the expected noncash write-offs.
- Actual debt costs, use of revolving capacity or equity issuance, covenant headroom and the effect of higher rates on investment spreads and dividend coverage.
- Whether skilled nursing operators can manage reimbursement and operating-cost pressures, and whether contingent commitments become payable.
- FFO, AFFO and FAD are company-defined supplemental measures, not GAAP cash flow or necessarily comparable across REITs; assess them alongside GAAP earnings and operating cash flow.