National Health Investors, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts below are U.S. dollars.
Business context
NHI is a self-managed healthcare real estate investment trust (REIT) focused primarily on long-term care and senior housing. At year-end, its continuing-operations portfolio comprised 118 facilities in 23 states: 88 owned properties and mortgage investments related to 30 facilities. NHI also held $60.6 million in preferred stock and marketable securities.
Financial results and liquidity
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Revenue | $78.4 million | $63.2 million | +24.1% |
| Rental income | $71.7 million | $54.0 million | +32.7% |
| Mortgage interest income | $6.7 million | $9.1 million | -26.3% |
| Income from continuing operations | $62.1 million | $57.4 million | +8.3% |
| Net income | $69.4 million | $64.2 million | +8.1% |
| Diluted EPS | $2.50 | $2.32 | +7.8% |
| FFO | $78.0 million | $72.6 million | +7.4% |
| Normalized FFO | $76.5 million | $64.3 million | +18.9% |
Reported net margin, calculated as net income divided by revenue, was approximately 88.6% versus 101.7%; continuing-operations income divided by revenue was 79.3% versus 90.8%. These ratios reflect non-operating income and discontinued operations and are not solely property operating margins.
Fourth-quarter revenue was $19.6 million and net income was $17.0 million, versus $16.1 million and $16.3 million, respectively, in fourth-quarter 2009. Diluted fourth-quarter EPS was $0.61, compared with $0.59.
Cash provided by operations was $77.5 million, up from $69.1 million. Investing activities used $92.0 million, including substantial property and mortgage investment funding; financing activities used $28.6 million, including $66.5 million of dividends paid and $37.8 million of net credit-facility borrowings. Year-end cash was $2.7 million; cash plus marketable securities was $25.1 million. Debt was $37.8 million, about 7.4% of total assets, and stockholders’ equity was $442.5 million. The company reported $62.2 million of unused credit availability at year-end and compliance with facility covenants.
Annual dividends declared were $2.36 per share, compared with $2.30 in 2009. The 2010 declaration included no special dividend.
Material changes and unusual items
- Revenue growth was principally driven by new real estate investments, including acquisitions and purchase/leaseback transactions. NHI funded or committed $141.4 million to new real estate and mortgage investments during 2010.
- NHI completed a $67.0 million acquisition of six Florida skilled nursing facilities from Care Foundation of America (CFA), settling the related mortgage balance and resolving CFA litigation. New leases also included assisted living and psychiatric hospital properties.
- Mortgage interest income declined because of amortization, maturities and loan payoffs, partly offset by interest from new loans. Management said it could continue to decline without additional mortgage investments.
- Depreciation rose 49.6% to $11.0 million, primarily due to property additions. General and administrative expense rose 46.5% to $7.7 million, including higher staffing and share-based compensation. Non-operating income fell to $5.2 million from $8.6 million, including lower interest income and realized security gains.
- FY2010 included a $2.0 million gain on the sale of two Texas skilled nursing facilities and a $0.6 million recovery of prior mortgage write-downs. NHI recognized $1.5 million of past-due rent from a former tenant in connection with properties now leased to Emeritus.
- NHI held six Texas skilled nursing facilities for sale at year-end; the transaction was expected to close after HUD financing was arranged. Two medical office buildings classified as held for sale were sold in February 2011 for $5.3 million.
Outlook, risks and contingencies
Management expected to evaluate further investments in 2011, maintain relatively low debt compared with total capitalization, and use liquid investments and external financing where appropriate. No quantified earnings or FFO guidance was provided. Management expected higher interest expense as borrowings funded investments. A $50 million five-year term loan was drawn in January 2011 and used to repay the revolving line; its rate was fixed at 3.98% through a swap.
Key risks include tenant and borrower payment capacity, reliance on government reimbursement and regulatory approvals, operator bankruptcy, rising labor and liability-insurance costs, real estate illiquidity and asset impairment, access to financing, and continued REIT qualification. National HealthCare Corporation (NHC) accounted for 49% of continuing-operations rental income in 2010, down from 64% in 2009, making customer concentration an ongoing consideration. NHI also reported future funding commitments, including construction lending and property improvements, plus conditional purchase payments and financing of up to $8 million for the planned sale of six facilities.
Management considered ordinary-course facility litigation not likely to have a material adverse effect. The CFA adversary proceeding was dismissed with prejudice after the acquisition settlement. A separate derivative action was dismissed with prejudice in September 2010, but a new lawsuit asserting similar allegations was filed on February 3, 2011; NHI had not yet responded. The Tennessee Attorney General agreed to take no further action concerning CFA, but NHI said it did not know whether other nonprofit-related transactions would prompt proceedings. The independent auditor gave an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Whether NHI can sustain rent collections and reduce reliance on NHC while managing exposure to individual operators and government reimbursement changes.
- Progress and final terms of the six-facility Texas disposition, including the planned seller financing, and any remaining held-for-sale assets.
- Actual returns, funding needs and operator performance for the substantial 2010 investment program and the Sante Mesa construction loan.
- Liquidity and leverage after the January 2011 term loan, including remaining revolver capacity, covenant headroom and the effect of financing costs.
- Whether mortgage maturities and repayments are replaced with new loans, given management’s warning that mortgage interest income may otherwise decline.
- Developments in the new derivative lawsuit and any further regulatory or legal inquiries involving other nonprofit transactions.
- Dividend coverage in relation to cash flows, FFO, capital commitments and the REIT distribution requirement.