National Health Investors, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; filed August 6, 2018. NHI is a self-managed healthcare real estate investment trust focused on senior housing and medical properties, primarily leased under triple-net agreements.
Business context and portfolio
At quarter-end, NHI owned 219 healthcare real estate properties in 33 states and held notes receivable involving 10 facilities. Its real estate portfolio included 143 senior housing communities, 71 skilled nursing facilities, three hospitals and two medical office buildings. Including notes, the portfolio involved 229 facilities and investments with a reported carrying value of approximately $2.95 billion. Senior housing accounted for 66.5% of first-half portfolio revenue; skilled nursing accounted for 26.1%.
First-half acquisitions totaled approximately $130.3 million: three skilled nursing facilities leased to Ensign, five senior housing properties leased to Bickford, and two assisted living facilities leased to Comfort Care.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $73.0 million | $69.8 million | $145.7 million | $136.2 million |
| Net income | $37.8 million | $38.2 million | $76.3 million | $82.5 million |
| Diluted EPS | $0.91 | $0.93 | $1.83 | $2.03 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $101.8 million | $94.9 million |
Q2 revenue increased 4.5%, while net income declined 1.1%. For the first half, revenue rose 7.0%, but net income fell 7.5%. Net income as a share of revenue was approximately 51.9% for Q2 2018 versus 54.8% in Q2 2017, and 52.3% for first-half 2018 versus 60.6% for first-half 2017; the prior-year comparison includes a $10.0 million gain on marketable securities.
Rental income increased 6.3% in Q2 and 8.0% year to date, mainly from new investments. First-half normalized diluted AFFO per share rose 6.9% to $2.48; normalized FAD increased 9.4% to $105.2 million. These are non-GAAP supplemental measures and may not be comparable with similarly named measures at other REITs.
At June 30, total debt carrying value was $1.226 billion, versus $1.145 billion at December 31, 2017. Cash was $3.0 million; $223.0 million remained available on the revolving credit facility, for reported liquidity of $226.0 million. Management reported 6.1x fixed-charge coverage and 4.3x annualized net debt to Adjusted EBITDA. First-half dividends declared were $2.00 per share; the 2018 annualized dividend was $4.00 per share.
First-half investing cash outflow was $140.9 million, including $129.6 million of real estate investment and $9.8 million invested in notes receivable. Financing cash flow was $39.1 million. NHI issued shares through its ATM program for net proceeds of $44.9 million and paid $81.0 million in dividends. Operating cash flow exceeded net income, partly reflecting noncash depreciation and straight-line rent adjustments.
Material changes versus the prior comparable period
- New real estate investments supported rental growth, while interest income declined 8.0% year to date, partly due to loan repayments and the absence of prior-period note discount income.
- First-half depreciation increased 6.6% and interest expense increased 1.9% year over year.
- First-half 2018 included $1.849 million of loan and realty losses and a $738,000 loss on convertible-note retirements. First-half 2017 included $10.038 million of gains on marketable securities; this largely explains the decline in reported net income and EPS.
- Debt carrying value increased by approximately $80.2 million from year-end. The revolving facility balance rose to $327 million from $221 million at December 31, 2017.
Outlook, risks and unusual items
NHI provided no specific earnings forecast. Management stated goals of growing normalized AFFO and regular annual dividends by at least 5% per share, and projected 2018 dividends of $4.00 per share. It expects to consider additional investments during the remainder of 2018, financed with available liquidity and debt, potentially followed by equity issuance to rebalance capital. Management cautioned that competition for healthcare assets and rising interest rates may pressure investment spreads and the cost of capital.
- Tenant and portfolio risks: A single-property lease was deemed non-performing; NHI plans to transition the property, will recognize future rent when collected, and wrote off $1.436 million of straight-line receivable. Two other tenants were in material lease non-compliance, representing less than 4% and less than 2% of rental income, respectively; both remained current on rent and no concessions were made. Management reported no impairment for these properties.
- Other credit loss: NHI recorded a $413,000 write-down on a non-mortgage receivable. Together with the lease receivable write-off, these items comprised the $1.849 million quarterly loan and realty loss expense.
- Tenant concentration and operating trends: Bickford, Senior Living Communities, Holiday and NHC generated approximately 17%, 16%, 15% and 13% of first-half revenue, respectively. Management cited softer occupancy and wage pressure affecting need-driven senior housing and Bickford coverage; reported need-driven coverage declined year over year.
- Litigation: East Lake Capital Management and related entities sued NHI seeking injunctive and declaratory relief and unspecified damages. NHI countersued Regency over alleged lease defaults and failure to provide required financial information. Management expects no material adverse effect.
- Commitments: Remaining loan commitments were $36.7 million, development commitments $13.0 million, and contingent payments $29.4 million. NHI expected to fully fund the $3.5 million remaining on Life Care Services Note A during 2018.
- Interest-rate exposure: Approximately $327 million of variable-rate debt was unhedged. NHI estimated a 50-basis-point rate increase would raise annual net interest expense by approximately $1.635 million, assuming debt balances were unchanged.
- Accounting outlook: NHI expected to adopt lease standard Topic 842 in 2019. Management anticipated little balance-sheet impact but had not determined the effect on presentation; rental income and expenses may be grossed up for property taxes and insurance paid by tenants.
Important facts for investors to verify
- Whether tenant operating performance, lease coverage and collections improve, particularly for Bickford and the two non-compliant tenants.
- Whether acquisition returns and new lease income adequately offset higher borrowing costs and continued growth in debt.
- The sustainability of the $4.00 annualized dividend against normalized FAD, cash needs and planned investment commitments.
- Subsequent developments in the East Lake/Regency litigation and the planned transition of the non-performing property.
- Actual funding of outstanding loan, development and contingent commitments, and the eventual effects of Topic 842 adoption.