National Health Investors, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. NHI is a self-managed healthcare REIT investing in senior housing and medical properties through leases, loans and joint ventures.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $58.3 million | $44.5 million | $170.3 million | $131.8 million |
| Net income attributable to common stockholders | $33.6 million | $25.3 million | $94.5 million | $74.1 million |
| Diluted EPS | $0.89 | $0.76 | $2.51 | $2.24 |
| Normalized AFFO per diluted share | $1.07 | $0.94 | $3.07 | $2.81 |
| Net cash from operating activities | — | — | $120.8 million | $93.2 million |
- Revenue increased 31.0% for Q3 and 29.3% year to date; common-stockholder net income rose 33.1% and 27.5%, respectively. Revenue growth was primarily driven by investments completed since September 2014.
- Calculated common-stockholder net income as a share of revenue was approximately 57.6% for Q3 2015 versus 56.8% in Q3 2014, and 55.5% for the first nine months versus 56.2% in 2014. These are simple ratios, not company-reported operating margins.
- Year-to-date normalized FFO per diluted share increased 11% to $3.49; normalized AFFO rose 9% to $3.07. Normalized FAD was $3.12 per diluted share, up 9%.
- Operating cash flow was $120.8 million; investing cash outflow was $158.7 million, mainly for property and loan investments; financing cash inflow was $48.9 million. Cash at quarter-end was $14.2 million.
- Debt was $1.009 billion, compared with $862.7 million at December 31, 2014. NHI reported $333 million of revolver availability and total liquidity of $382.3 million, including cash and highly liquid marketable securities. Net debt to annualized Adjusted EBITDA was approximately 4.7x; nine-month fixed-charge coverage was 6.3x, versus 7.0x in 2014.
- Quarterly dividends were $0.85 per share; declared dividends for the first nine months totaled $2.55 per share. Management projected regular 2015 dividends of $3.40 per share, based on $0.85 each quarter.
Material changes and notable items
- Portfolio growth included the July acquisition of three East Lake facilities for $66.9 million, a Bickford facility for $21 million, and two smaller senior-living acquisitions in August. NHI also advanced $67.1 million under the Timber Ridge loan commitment by quarter-end.
- Q3 included a $1.126 million gain on sale of two properties. NHI also recorded a $491,000 recovery of a previously written-off loan during the first nine months.
- Interest expense rose 39.5% in Q3 and 47.9% year to date, reflecting additional borrowing and financing activity. Depreciation also increased with portfolio expansion.
- On September 30, NHI sold two skilled nursing facilities for $9.593 million. A separate Idaho facility was classified as held for sale at a $1.346 million carrying value, with an agreed sale price of $3 million; completion was expected by year-end, subject to HUD financing.
- CEO Justin Hutchens departed in August; Eric Mendelsohn, interim CEO, was promoted to CEO effective October 5, 2015. A $575,000 accrued-bonus reversal benefited Q3 earnings, but management said it had no net effect on year-to-date earnings.
Outlook, risks and contingencies
- Management said full-year AFFO guidance was revised upward and that results exceeded the prior range’s upper limit, citing lower-than-planned financing costs, the Q3 compensation reversal and a pause in refinancing. The filing text does not provide a clear numeric revised guidance range.
- Management emphasized disciplined investment, internal growth and maintaining a conservative balance sheet. It noted that market volatility delayed planned refinancing and put contemplated ATM share issuance on indefinite hold. The company’s $300 million ATM program had produced no proceeds as of September 30.
- Subsequent to quarter-end, NHI issued $100 million of unsecured notes at 3.99% and 4.33%, using proceeds to repay revolver borrowings. Management also anticipated funding Timber Ridge loans through 2016, with substantial construction-loan repayment expected in 2017.
- Contractual obligations included $97.2 million of loan commitments and $49.1 million of construction commitments. Additional contingent exposure includes East Lake lease incentives of up to $8 million, a $3.55 million Sycamore letter of credit and other performance-based payments. Timber Ridge’s maximum loan commitment is $154.5 million; $67.1 million had been funded.
- Key risks include tenant and borrower financial health, government reimbursement changes, development execution, rising financing costs and interest-rate exposure. About 30% of nine-month revenue came from operators of skilled nursing facilities reliant in significant part on government payors. A 50-basis-point change in variable rates was estimated to change annual net interest expense by approximately $1.085 million.
- Management reported no material change in disclosed risk factors. Ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective.
Investor verification priorities
- Confirm the revised AFFO guidance range and reconcile reported earnings growth with the one-time gain, bonus reversal, straight-line rent and financing effects.
- Assess tenant concentration and coverage, particularly Holiday, Senior Living Communities, NHC and Bickford, and review the operating performance of the RIDEA venture.
- Track Timber Ridge funding, construction progress and expected repayment, alongside other committed development and loan funding.
- Review debt maturities, revolver usage, covenant headroom and the sensitivity of financing costs to interest rates; note the post-quarter $100 million refinancing.
- Verify completion and proceeds from the Idaho property sale, and monitor performance-based contingent payments and other commitments.