National Health Investors, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. NHI is a self-managed healthcare real estate investment trust focused on senior housing and medical properties, primarily through triple-net leases and mortgage and other loans.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $63.3 million | $58.2 million | $183.5 million | $170.3 million |
| Net income attributable to common stockholders | $33.0 million | $33.6 million | $110.4 million | $94.5 million |
| Diluted EPS | $0.83 | $0.89 | $2.84 | $2.51 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $129.3 million | $120.8 million |
Q3 revenue rose 8.6%, mainly from new investments; common-stockholder net income fell 1.7% and diluted EPS declined, partly reflecting higher expenses and share dilution. Nine-month net income rose 16.8%, but included $23.5 million of realized gains on marketable securities and other gains. Nine-month loan and realty losses were $15.9 million, largely non-cash write-offs associated with lease transitions and a tenant issue.
Nine-month operating margin, calculated as income before equity-method, tax and investment items divided by revenue, was approximately 45.7%, versus 55.7% in 2015; the decline reflects higher expenses, including the unusual write-offs. Interest expense increased 15.6% to $31.7 million. NHI reported diluted normalized FFO of $3.60 per share for nine months, up from $3.49; diluted normalized FAD was $3.28 per share, up from $3.12. These are company-defined non-GAAP measures and are not substitutes for GAAP results or operating cash flow.
Balance sheet, cash flow and liquidity
- At September 30, total assets were $2.388 billion, debt was $1.086 billion, and total equity was $1.207 billion. Debt increased from $914.4 million at year-end 2015.
- Cash was $4.2 million; NHI reported $421.4 million available on its revolving credit facility and total liquidity of approximately $425.6 million, excluding additional potential liquidity from marketable securities.
- Nine-month investing cash outflow was $300.2 million, reflecting substantial property and loan investments. Financing cash inflow was $161.8 million, including $104.2 million of net common-share proceeds and additional borrowing. Dividends paid were $102.4 million.
- Management reported fixed-charge coverage of 5.8x for the nine-month period and annualized net debt to adjusted EBITDA of approximately 4.4x for Q3. These are non-GAAP measures.
- Approximately $128.6 million of debt was variable-rate and unhedged. Management estimated that a 50-basis-point rate move would change annual net interest expense by about $643,000, assuming balances remained constant.
Material changes and portfolio activity
- Rental income increased 7.4% for the nine months, primarily from acquisitions and investments; mortgage and other note interest income increased 38.7%, mainly from Timber Ridge lending.
- NHI completed or committed to $321.2 million of real estate investments during the nine months, including Texas skilled nursing facilities, senior housing communities and Connecticut continuing-care communities. It also originated or committed to additional tenant loans.
- NHI ended its Bickford RIDEA joint venture arrangement, converting Bickford’s participation in 32 stabilized properties to a triple-net tenancy. Contractual rent for those facilities remained $26.26 million annually, with 3% escalators. NHI also sold its operating-company interest and recognized a $1.7 million gain.
- In May, NHI transitioned 15 skilled nursing facilities from Legend to Ensign under a new 15-year lease with initial annual rent of $17.75 million. It sold two facilities for $24.6 million and committed to purchase four additional facilities for $56 million.
- Common shares outstanding increased to 39.85 million from 38.40 million at year-end 2015, including shares issued through ATM offerings that generated $104.2 million net proceeds.
Outlook, risks and contingencies
- No formal earnings guidance was provided. Management projected a 2016 annual dividend of $3.60 per share, based on three quarterly dividends of $0.90 and the same rate for the fourth quarter; future dividends remain subject to board approval.
- Management expected to continue investing during the remainder of 2016 and 2017, using operating cash flow, revolving credit, marketable-security sales, ATM equity and longer-term debt. It anticipated higher borrowing costs over time and described balancing growth, leverage and dividend growth as priorities.
- On November 3, 2016, NHI announced a planned $74 million acquisition of Evergreen Woods, a 299-unit Connecticut continuing-care community, to be added to its Senior Living Communities master lease.
- Timber Ridge Phase II opened in October 2016; repayments on its construction loan began, including $20.6 million received in October. Management expected the $94.5 million construction loan to be repaid by the end of 2017, which would reduce related interest income.
- A tenant’s material lease noncompliance prompted NHI to consider transitioning or marketing a 126-unit assisted-living portfolio; NHI recorded a $1.1 million non-cash reserve against straight-line rent receivables. Management anticipated recovery of amounts billed to date, but transition costs were not estimated.
- Key risks include reliance on tenant and borrower performance, concentration among major operators, Medicare and Medicaid reimbursement pressure, development and construction execution, refinancing and interest-rate risk, debt covenant compliance, REIT qualification, and real estate impairment. Management said ordinary-course litigation was not expected to have a material adverse effect.
- Contractual obligations included $27.2 million of construction commitments and $69.3 million of loan commitments, in addition to debt obligations. NHI also disclosed conditional lease incentives and earnouts, a $3.9 million letter-of-credit commitment, and other contingent funding obligations.
Investor verification priorities
- Assess the recurring earnings and cash-flow contribution separately from the $23.5 million securities gain and other transaction-related gains and write-offs.
- Monitor collection and resolution of the noncompliant tenant’s lease, and the performance and transition of the former Legend facilities under Ensign.
- Verify that tenant and borrower commitments, including Timber Ridge repayments and the $56 million Ensign-related property purchases, progress as planned.
- Track leverage, refinancing capacity, interest-rate exposure and the cost and dilution from ATM equity issuance.
- Evaluate rent concentration: Holiday Retirement, Senior Living Communities, NHC and Bickford each represented significant shares of rental income; also monitor skilled-nursing exposure to government reimbursement.
- Confirm the timing, funding and lease economics of the announced Evergreen Woods acquisition, and whether the stated dividend outlook is maintained.