National Health Investors, Inc. — 2014 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. NHI is a healthcare REIT investing in senior housing, skilled nursing, hospitals, medical office buildings, and healthcare loans. Unless stated otherwise, dollar amounts below are in millions.
Financial results and position
- Second quarter: Revenue was $44.2, up 62.9% year over year, primarily from new property investments. Net income attributable to common stockholders was $25.3, up 27.0%. Diluted EPS was $0.76, versus $0.71; continuing-operations diluted EPS was $0.76, versus $0.66.
- First half: Revenue was $87.3, up 61.0%. Net income attributable to common stockholders was $48.8, up 36.9%. Diluted EPS was $1.48, versus $1.27; continuing-operations diluted EPS was $1.48, versus $1.15.
- Cash flow: Operating cash flow was $61.6, compared with $47.9 in the first half of 2013. Investing activities used $36.6, versus $77.9, reflecting lower real estate investment spending. Financing activities used $29.1, compared with $57.3 provided a year earlier. Cash fell to $7.2 from $11.3 at year-end.
- REIT supplemental measures: First-half diluted FFO was $2.03 per share versus $1.59; normalized AFFO was $1.87 versus $1.68; and normalized FAD was $1.92 versus $1.74. These are non-GAAP measures and may not be comparable across REITs.
- Balance sheet and liquidity: Total assets were $1,483.1 and debt was $638.0, compared with $1,455.8 and $617.1 at year-end. Cash, marketable securities, and available revolving-credit capacity totaled $355.1; $334.0 was available under the revolver. Management reported approximately 7:1 first-half fixed-charge coverage and approximately 4:1 annualized debt-to-Adjusted-EBITDA.
- Dividends: NHI declared $1.54 per common share in the first half, versus $1.43 in the comparable 2013 period. Cash dividends paid were $49.7.
Material changes and business developments
- Rental income rose 69.5% in the first half, mainly reflecting investments made since June 2013, including the Holiday portfolio acquired in December 2013 and properties added through the Bickford and Prestige relationships. First-half straight-line rent adjustments increased to $8.5 from $2.6.
- Interest income from mortgage and other notes declined 11.1% to $3.5, principally because ElderTrust and SeniorTrust balances were settled. The prior-year period included a $4.0 loan impairment; none was recorded in the first half of 2014.
- Interest expense and related amortization increased substantially, including a $2.1 write-off of deferred financing costs following credit-facility modifications. Depreciation also rose with portfolio growth. These costs partly offset higher rental income.
- In March, NHI issued $200.0 of 3.25% convertible senior notes due 2021 and amended its unsecured credit facility to $700.0, including a $450.0 revolver. The notes’ initial conversion price is approximately $71.81 per share; the conversion feature was anti-dilutive for the reported periods.
- At quarter-end, the portfolio included 162 owned healthcare properties and mortgage and other notes receivable with a $60.9 carrying value. Holiday, NHC, and Bickford contributed 25%, 21%, and 12% of first-half continuing-operations revenue, respectively.
Outlook, risks, and unusual items
- Management gave no specific earnings or FFO guidance. It expected to consider further investments in 2014, generally funded with liquidity and debt, while maintaining relatively low leverage; equity issuance could be considered for larger acquisitions.
- Management expected competition for healthcare properties to remain strong and borrowing costs to rise over the near to medium term, potentially pressuring investment spreads. It intended to balance dividend growth, investment returns, and longer-term financing.
- In July 2014, after quarter-end, NHI obtained $29.2 of HUD mortgage debt at 4.3%, maturing in 2049, and planned additional financing to bring proceeds to approximately $38.0; proceeds were intended to repay revolver borrowings.
- Two Fannie Mae mortgages had principal balances totaling $77.8 and mature July 1, 2015; management anticipated retiring them after prepayment restrictions expired in December 2014. Refinancing could require new financing costs.
- Healthcare operator performance, tenant and borrower payment capacity, Medicare and Medicaid reimbursement, liability costs, interest rates, and REIT qualification are key risks. About 38% of continuing-operations revenue came from skilled nursing operators with significant government-payor exposure. CMS had proposed a 2% Medicare reimbursement increase for fiscal 2015; management noted that Medicaid funding may not keep pace with inflation.
- Commitments included construction and improvement projects, a $2.8 letter of credit benefiting a Bickford joint-venture partner, and up to $6.4 of Prestige contingent earn-outs; $3.0 of the earn-outs was recorded as probable. Management said pending ordinary-course litigation was not expected to have a material adverse effect. No material risk-factor changes were reported.
- Early adoption of the discontinued-operations accounting standard means future disposals will generally qualify only if they represent a strategic shift with a major effect on operations and financial results.
Important facts for investors to verify
- Whether rental growth translates into cash collections: first-half straight-line rent was $8.5, including $6.0 from Holiday.
- Tenant concentration and underlying coverage, particularly Holiday, NHC, and Bickford, and operators’ exposure to government reimbursement.
- Debt refinancing plans for the 2015 Fannie Mae maturities, use of the revolver, and the effect of higher interest rates on funding costs and investment spreads.
- Execution and funding of committed developments, capital improvements, and contingent earn-outs, along with the operating performance of recently acquired and lease-up properties.
- Dividend coverage and sustainability: compare declared dividends with normalized FAD while recognizing that FAD is a non-GAAP measure, not GAAP operating cash flow.