National Health Investors, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. NHI is a healthcare real estate investment trust (REIT) investing in leased properties and mortgage loans. Unless indicated otherwise, amounts below are in millions of dollars.
Financial results and position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $24.069 | $21.937 | +9.7% |
| Rental income | $21.307 | $18.929 | +12.6% |
| Income from continuing operations | $17.127 | $15.490 | +10.6% |
| Net income | $18.350 | $19.093 | -3.9% |
| Diluted EPS | $0.66 | $0.69 | Continuing-operations EPS: $0.62 vs. $0.56 |
| Operating cash flow | $21.247 | $17.355 | +22.4% |
| FFO per diluted share | $0.77 | $0.70 | +10.0% |
| Normalized FFO per diluted share | $0.77 | $0.65 | +18.5% |
Continuing-operations income was about 71% of revenue (calculated from reported amounts). The filing does not present a conventional operating-margin measure. Net income declined mainly because Q1 2011 included a $2.299 million real estate sale gain; there was no comparable gain in Q1 2012. Discontinued-operations income was $1.223 million versus $3.603 million.
At March 31, assets were $572.904 million, including net real estate of $396.311 million, mortgage notes receivable of $77.853 million, and cash of $6.927 million. Debt was $95.300 million, down from $97.300 million at year-end. Stockholders’ equity was $445.614 million. Marketable securities were $11.772 million; management reported $123.399 million of liquidity including cash, marketable securities, and revolver availability. The separate $38.132 million LTC preferred-stock investment was convertible into shares with an estimated market value of about $64 million.
Quarterly cash flows included $4.881 million invested in real estate and $24.144 million of dividends paid; cash declined $8.959 million to $6.927 million. The declared quarterly dividend was $0.65 per share. FAD was $22.085 million, or $0.79 per diluted share; the company cautions that FFO and FAD are non-GAAP supplemental measures, not substitutes for operating cash flow or earnings.
Material changes and business developments
- Revenue growth primarily reflected 2011 investments. Rental income from Legend-leased facilities rose $1.157 million; NHI also reported $0.319 million from Selah leases. Depreciation increased 17.3% with the expanded property base.
- NHC, the largest customer, accounted for $9.903 million, or 46%, of continuing rental income, compared with 50% a year earlier. Its 41 leased properties represented 9.6% of the real estate portfolio by net book value.
- The portfolio comprised 127 healthcare facilities in 24 states: 97 owned properties and 30 facilities securing mortgage investments. Five Texas skilled nursing facilities, carried at $29.381 million, remained held for sale pending HUD financing for the buyer.
- Construction continued on a 60-bed Polaris hospital; $9.864 million had been funded toward a commitment of up to $21.5 million. NHI also entered into development and renovation commitments with Bickford and Kentucky River, and an April 2012 loan commitment of up to $15 million to Capital Funding Group, of which $5 million was funded at closing.
Outlook, risks, and unusual items
- Management said it would evaluate new investments, expects to fund 2012 investments with liquid assets and debt, and aims to keep leverage relatively low. It gave no specific earnings or revenue guidance. Management stated it believed liquidity and capital access were sufficient for existing commitments and new investments.
- On May 1, 2012, NHI amended its unsecured credit facility to $320 million, including a $200 million revolver and $120 million of term loans drawn at closing. The term loans were used to repay revolver borrowings and for other corporate purposes. The facility includes an uncommitted additional-borrowing feature of up to $130 million; a swap fixed the rate on the seven-year term loan at 3.04%.
- CMS’s fiscal 2012 skilled-nursing payment rule reduced Medicare payments by a net 11.1% beginning October 1, 2011. NHI estimated most borrowers and lessees could withstand the reduction but identified two nonprofit mortgage borrowers as potentially adversely affected. Their notes had aggregate principal of $37.302 million; one maturity had been extended to August 31, 2012. Certain previously nonperforming notes, with a $6.319 million carrying value, recognized interest only when cash was received.
- Other stated risks include tenant and borrower financial distress, reimbursement and operating-cost pressures, property and loan impairment, financing availability, real estate illiquidity, and maintaining REIT qualification. NHI reported that the Shearer derivative suit was dismissed with prejudice and the appeal period had elapsed. The Tennessee Attorney General investigation remained relevant to proposed transactions involving two nonprofits; approval of one transaction was not assured.
- Disclosure controls were assessed as effective, with no material changes reported in internal control over financial reporting. The filing reported no material changes to the prior annual report’s risk factors.
Investor verification points
- Monitor NHC concentration and tenant operating performance, including the effect of reimbursement cuts on lease coverage and collections.
- Check status and repayment prospects of the two nonprofit mortgage exposures, including the extended maturity, receiver appointment, and required Tennessee Attorney General approval.
- Confirm timing and proceeds of the five Texas facility sales, which depend on the buyer arranging HUD financing, and assess related financing commitments.
- Track funding, completion, and lease commencement for Polaris, Bickford, Kentucky River, and the CFG loan; distinguish announced commitments from amounts funded.
- Review dividend sustainability against cash generation and investment needs. Q1 operating cash flow was below dividends paid, although the payment included the prior-quarter dividend.
- Reconcile the filing’s inconsistent disclosure of the revolver’s unused commitment fee: Note 7 states 35 basis points, while MD&A states zero basis points.