National Health Investors, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. NHI is a healthcare real estate investment trust focused on long-term care and senior housing.
Business context
At June 30, NHI reported 126 owned healthcare properties across 24 states, leased to 18 lessees, plus mortgage and other notes receivable associated with 19 facilities. Its broader continuing-operations portfolio included 145 facilities and related investments across 26 states. National HealthCare Corporation (NHC) was its largest customer, representing 31% of first-half continuing-operations revenue.
Financial performance and position
| Metric | Q2 2013 | Six months 2013 | Comparison |
|---|---|---|---|
| Continuing revenue | $28.0 million | $56.1 million | Q2 +28.5%; first half +22.3% year over year |
| Net income attributable to common stockholders | $19.9 million | $35.7 million | Q2 +17.7%; first half +1.1% |
| Diluted EPS | $0.71 | $1.27 | Q2 versus $0.61; first half unchanged year over year |
| Operating cash flow | Not stated separately | $47.9 million | Up from $41.9 million |
| Investing cash flow | Not stated separately | $(77.9) million | Primarily acquisitions and property investment |
| Cash and cash equivalents | $36.5 million | $36.5 million at period end | Up from $9.2 million at year-end 2012 |
| Total debt | $386.8 million | $386.8 million at period end | Up from $203.3 million at year-end 2012 |
| Dividends declared per share | $0.735 | $1.43 | Compared with $0.65 and $1.30, respectively |
Management reported $133.7 million of liquidity, including cash, highly liquid marketable securities and available revolver capacity; $83 million remained available under the revolving facility. The company did not provide a clear operating-margin figure. Six-month FFO was $43.4 million, up 5.0%, and normalized FFO was $48.0 million, up 12.2%; these are non-GAAP measures and are not substitutes for operating cash flow.
Material changes and unusual items
- Rental income rose principally due to new investments. In June, the Bickford joint venture acquired 17 assisted-living and memory-care facilities; NHI’s investment in the Care and Bickford assets totaled approximately $137.5 million. The transactions added contractual annual rent, with the full effect expected in future periods.
- First-half expenses included a $4.0 million impairment on SeniorTrust mortgage notes, reflecting declining borrower operating income. SeniorTrust subsequently repaid its notes for $15 million in June under a litigation settlement.
- Interest expense increased as borrowings funded investment growth. The company also recorded a $353,000 write-off of debt issuance costs after amending its credit facility.
- The new $370 million unsecured credit facility includes a $250 million revolver and $120 million of term loans. NHI also assumed Fannie Mae debt in the Bickford acquisition. Two swaps hedge $120 million of variable-rate debt.
- Operating cash flow increased, while investment outlays expanded substantially. Financing included increased revolver borrowing; $44.2 million of dividends were paid during the first half.
- Six older skilled-nursing facilities were held for sale to NHC for $21 million, with sale expected by August 2013. Their sale would reduce annual base rent by $2.95 million.
Outlook, risks and contingencies
NHI gave no specific earnings guidance. Management said it would continue evaluating investments that meet its underwriting criteria, using available liquidity and debt financing, and expects additional investment-related borrowing to raise interest expense. It also expected mortgage interest income to be lower for the remainder of 2013 following the SeniorTrust and ElderTrust settlements, absent new loan investments.
The ElderTrust settlement required NHI to acquire seven skilled-nursing facilities for cancellation of a $13.7 million note and $23.35 million cash, subject to state licensure; the filing expected completion by August 31, 2013. NHI planned to lease them to NHC. Separately, three Bickford facilities were under construction, with total maximum cost of $27 million and $7.9 million incurred at quarter-end. Subsequent to quarter-end, NHI acquired an Ohio senior-housing community for $15.3 million and made a $9.2 million, 12%-interest loan to Bickford affiliates.
Key risks include tenant and borrower financial health, Medicare and Medicaid reimbursement changes, concentration in healthcare operators, variable-rate debt and refinancing needs, debt-covenant restrictions, real-estate or loan impairment, and dependence on acquisitions and reinvestment. Management stated that the Tennessee Attorney General investigation and related SeniorTrust/ElderTrust litigation were settled. Management considered ordinary-course litigation not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Completion and final terms of the ElderTrust facility acquisition and the planned NHC sale of six older facilities.
- Whether new Bickford and other acquisitions deliver the expected rent, operating performance and returns, including final purchase-price allocations.
- Borrower and tenant payment capacity, particularly NHC and operators reliant on Medicare and Medicaid reimbursements.
- Debt levels, covenant compliance, refinancing of the $19.25 million mortgage maturing in November 2013, and sensitivity to interest-rate increases.
- Cash available for dividends after investment spending and debt service; assess FFO and normalized FFO alongside GAAP cash flow.
- Potential further impairment exposure following the SeniorTrust write-down and the settlement of related receivables.