National Health Investors, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. NHI is a healthcare real estate investment trust focused on senior housing and medical properties, typically leased under triple-net agreements, with additional mortgage and note investments. Its portfolio included 174 owned properties and $99.7 million of mortgage and other notes receivable, across 31 states.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $56.3 million | $44.2 million | $112.1 million | $87.3 million |
| Net income attributable to common stockholders | $31.2 million | $25.3 million | $60.9 million | $48.8 million |
| Diluted earnings per share | $0.83 | $0.76 | $1.62 | $1.48 |
| Net cash from operating activities | Not separately provided | Not separately provided | $80.0 million | $61.6 million |
| Net cash used in investing activities | Not separately provided | Not separately provided | $45.5 million | $36.6 million |
| Net cash used in financing activities | Not separately provided | Not separately provided | $34.5 million | $29.1 million |
- Revenue rose 27.5% in Q2 and 28.4% for the first half. Common-stockholder net income increased 23.3% and 24.7%, respectively. Management attributed much of the revenue growth to real estate investments completed since June 2014, including the December 2014 Senior Living Communities acquisition.
- Calculated common-stockholder net margin was approximately 55.4% in Q2 2015 versus 57.3% in Q2 2014, and 54.3% for the first half versus 55.9%. Higher depreciation and interest expense grew faster than revenue.
- First-half diluted normalized FFO was $2.28 per share versus $2.09; normalized AFFO was $2.00 versus $1.87; and normalized FAD was $2.04 versus $1.92. These are non-GAAP measures and may not be comparable across REITs.
- Dividends declared were $0.85 per share in each quarter, or $1.70 for the first half. The filing presents a 2015 regular dividend of $3.40 per share on an annualized basis; it does not provide earnings guidance.
Balance sheet, debt and liquidity
- At June 30, 2015, total assets were $2.013 billion, carrying-value debt was $893.0 million, and total equity was $1.047 billion. Debt increased from $862.7 million at year-end 2014.
- Cash and cash equivalents were $3.3 million; marketable securities were $14.7 million. Management reported total liquidity of approximately $467.0 million, including $449.0 million available on the revolving credit facility.
- NHI amended its senior unsecured credit facility to $800 million, with an accordion feature of up to $250 million subject to conditions. The revolving facility matures in June 2020, including a one-year extension option. The company also issued $225 million of unsecured private-placement notes and obtained $78.1 million of 10-year Fannie Mae financing during the period.
- Management reported annualized debt-to-Adjusted-EBITDA of approximately 4.2x and first-half fixed-charge coverage of 6.3x, down from 7.4x in the prior-year period. These are company-defined non-GAAP measures.
- Approximately $101 million of debt was variable-rate and unhedged; $250 million of term debt was hedged with swaps. Management estimated that a 50-basis-point rate change would move annual net interest expense by approximately $0.5 million, assuming balances were unchanged.
Changes, outlook and risks
- Senior housing and discretionary senior housing increased as a share of portfolio revenue, while medical facilities declined: first-half revenue mix was 39% discretionary senior housing, 23% need-driven senior housing and 36% medical facilities, compared with 27%, 27% and 44%, respectively, in 2014.
- Revenue concentration remains material: Holiday contributed 20% of first-half revenue, Senior Living Communities 18%, NHC 16% and Bickford 10%. About 31% of revenue was derived from skilled-nursing operators with significant government-payor exposure.
- Management plans to pursue investments that meet its underwriting criteria, funding them with liquid resources and debt and potentially equity if needed. It expects borrowing costs to rise in the near to mid-term and is seeking to extend debt maturities and manage interest-rate exposure. The $300 million ATM equity program had not been used by June 30.
- The company had $53.9 million of construction commitments and $115.5 million of loan commitments listed in its contractual-obligations table. Additional contingent payments depend on tenant performance; some were considered not probable and were not accrued. The filing reports $3.55 million of letter-of-credit exposure for a Bickford affiliate.
- After quarter-end, NHI acquired three properties for $66.9 million on July 1 and a 92-unit assisted-living/memory-care facility for $21 million on July 31. The East Lake transaction also included contingent earn-outs and a capital-improvement commitment.
- Management cited tenant and borrower solvency, construction and development performance, Medicare and Medicaid reimbursement, liability and environmental exposure, acquisition execution, real estate illiquidity, interest rates, debt covenants and REIT qualification as risks. CMS finalized a 1.2% Medicare reimbursement increase for fiscal 2016; management considered the increase modest but gave no assurance about future reimbursement effects.
- Two older skilled-nursing properties held for sale had a carrying value of $8.5 million; management reported no impairment at June 30 and was marketing them ahead of the lease end in February 2016. Ordinary-course litigation was not expected by management to have a material adverse effect. No material changes to previously disclosed risk factors were reported, and disclosure controls were deemed effective.
Investor verification points
- Assess whether rent growth and tenant coverage support the company’s sizable tenant concentrations, especially Holiday, Senior Living Communities and government-payor-exposed skilled nursing operators.
- Review the quality and cash realizability of straight-line rent receivables, which increased to $47.5 million, and distinguish GAAP earnings from cash-based AFFO/FAD.
- Track the funding, repayment and construction risks of the Timber Ridge loans, Bickford developments and other commitments, as well as performance-based contingent payments.
- Verify liquidity and leverage after the post-quarter acquisitions, and monitor refinancing needs, covenant headroom and the effect of higher rates on the unhedged revolver.
- Monitor the sale of the two held-for-sale facilities, tenant reimbursement changes, and any material developments in litigation or contingent liabilities.