National Health Investors, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Although the request identifies 2013 Q4, this filing is an annual report; fourth-quarter figures are noted separately below. NHI is a healthcare-property REIT whose income primarily comes from triple-net leases, mortgage and other notes, and investments in other healthcare REITs.
Business context and portfolio
- At year-end, continuing operations included 168 healthcare facilities or related investments in 30 states: 94 senior housing communities, 68 skilled nursing facilities, four hospitals and two medical office buildings, plus other notes receivable. Real estate was leased to 23 lessees; loans were due from 15 borrowers.
- Portfolio revenue was concentrated in skilled nursing (54.4%) and senior housing (34.8%). Approximately 52% of continuing-operations revenue came from operators exposed significantly to Medicare and Medicaid reimbursement.
- 2013 revenue sources were rental income of $106.0 million (90%), mortgage and other note interest of $7.6 million (6%), and investment and other income of $4.2 million (4%).
Financial performance and material changes
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $117.8 million | $93.3 million | Up 26.3% |
| Income from continuing operations | $79.5 million | $72.8 million | Up 9.1% |
| Net income attributable to common stockholders | $106.2 million | $90.7 million | Up 17.0% |
| Diluted EPS from continuing operations | $2.77 | $2.61 | Up $0.16 |
| Diluted total EPS | $3.74 | $3.26 | Up $0.48 |
| Net cash from operating activities | $104.2 million | $86.3 million | Up 20.8% |
| Normalized FFO per diluted share | $3.55 | $3.18 | Up 11.6% |
| Normalized AFFO per diluted share | $3.33 | $3.01 | Up 10.6% |
| Normalized FAD per diluted share | $3.49 | $3.15 | Up 10.8% |
- Revenue growth primarily reflected new property investments. Rental income rose 30.1% to $106.0 million; depreciation rose 36.1% to $20.1 million and interest expense to $9.2 million from $3.5 million as acquisitions were debt-funded.
- Total net income included $27.7 million from discontinued operations, including $22.3 million of real-estate sale gains. Thus, total EPS growth exceeded growth in continuing-operations EPS.
- Quarter ended December 31, 2013: revenue was $32.8 million, continuing income attributable to common stockholders was $24.1 million, net income attributable to common stockholders was $27.8 million, and diluted EPS was $0.93. Fourth-quarter investment and other gains were $3.3 million.
- Operating cash flow was $104.2 million; investing activities used $625.8 million and financing activities provided $523.8 million. Year-end cash was $11.3 million.
Debt, liquidity and distributions
- Year-end debt was $617.1 million, versus $203.3 million a year earlier; total assets were $1.456 billion and total equity $777.2 million. Debt increased mainly to finance property acquisitions.
- Management reported $107.0 million of liquidity, comprising cash, highly liquid marketable securities and available revolving-credit capacity. The revolver had $83 million available at year-end. A $370 million unsecured facility included $250 million of revolving capacity and $120 million of term loans; a further $250 million term loan was obtained for the Holiday acquisition.
- Approximately $417 million of debt was variable-rate and unhedged; $120 million of term loans was hedged with swaps. Management estimated that a 50-basis-point rate increase would raise annual net interest expense by approximately $2.1 million, or $0.07 per diluted share.
- Management reported fixed-charge coverage of approximately 12x and debt-to-Adjusted EBITDA of 5x. It described leverage as relatively low compared with peers, while noting that the company planned to refinance revolving borrowings into longer-term debt.
- Regular dividends declared rose to $2.90 per share in 2013 from $2.64 in 2012; no special dividend was declared in 2013. Management’s stated objective is continued regular dividend growth, subject to earnings, cash flow, capital needs and debt covenants.
Investments, outlook and unusual items
- Holiday acquisition: NHI acquired 25 independent-living properties for approximately $493.0 million including transaction costs in December 2013. The 17-year master lease began at $31.9 million annual base rent, with 4.5% escalators for the first three years and at least 3.5% thereafter. Holiday was expected to provide more than 25% of NHI revenue in 2014. Acquisition funding included a $250 million term loan and a public offering of 5.175 million shares that generated approximately $282.5 million net.
- Other growth: NHI funded or committed approximately $751.6 million of new real-estate and loan investments during 2013. Bickford-related rental income rose to $14.6 million (12% of continuing revenue), while NHC contributed $34.8 million (29%), down from 35% in 2012. NHI expects less than 40% of 2014 contractual revenue to come from skilled nursing following the Holiday acquisition.
- Guidance and management commentary: No specific earnings or FFO guidance was provided. Management expected to consider additional healthcare investments in 2014, generally funded with liquid resources and debt, with equity issuance possible for larger acquisitions. It anticipated higher borrowing costs and said refinancing revolving debt was a priority; it expected lease-rate increases to partly offset interest-rate pressure.
- Dispositions and settlements: NHI sold six skilled nursing facilities to NHC for $21.0 million, recognizing a $19.4 million gain, and sold three facilities to Fundamental for $18.5 million. It also completed a settlement with former borrowers SeniorTrust and ElderTrust: SeniorTrust paid $15.0 million to settle its notes, and NHI acquired seven ElderTrust facilities for $37.4 million, partly by canceling $13.7 million of notes. NHI recorded a $4.0 million SeniorTrust loan impairment before settlement and a $2.1 million recovery on a separate mortgage payoff.
- Commitments: Reported construction commitments totaled $34.45 million, with additional loan and purchase-related obligations. Potential lease-inducement payments included up to $2.5 million for Discovery and $2.0 million for Santé; management said these were not probable at year-end and recorded no provision. A $1.6 million Fundamental purchase consideration remained contingent on operating metrics and was considered probable.
Principal risks and investor verification points
- Verify Holiday’s operating performance, rent coverage and ability to support a tenant representing more than one-quarter of expected 2014 revenue; also monitor NHC and Bickford concentration.
- Assess tenant and borrower exposure to Medicare and Medicaid reimbursement changes, occupancy and private-pay demand, labor and liability-insurance costs, and operator financial distress or bankruptcy.
- Check debt maturities, covenant headroom, refinancing terms and the effect of higher variable rates. NHI’s income is mainly from fixed-rate investments while a substantial portion of debt is variable-rate.
- Review whether acquisitions deliver expected returns and whether property valuations, impairment assumptions and Holiday purchase-price allocations—preliminary at filing—are ultimately supported.
- Track cash available for dividends against operating cash flow, debt service, acquisition commitments and the REIT requirement to distribute at least 90% of taxable income. FFO, AFFO and FAD are non-GAAP supplemental measures, not substitutes for GAAP cash flow.
- Management said pending ordinary-course litigation was not expected to have a material adverse effect. The previously disclosed Tennessee Attorney General investigation and related SeniorTrust/ElderTrust disputes were resolved through the 2013 settlement.