Business Context and Reporting Period
Company: National Health Investors, Inc. (NHI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2011
Business Overview: NHI is a self-managed Real Estate Investment Trust (REIT) investing in income-producing health care properties, primarily skilled nursing facilities, assisted living facilities, and medical office buildings. As of June 30, 2011, the portfolio consisted of 92 real estate properties and 30 mortgage notes receivable. The company's largest customer is National HealthCare Corporation (NHC), which leases 41 properties representing approximately 11.6% of the total portfolio's net book value.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|
| Total Revenue | $40,897,000 | $39,284,000 |
| Net Income | $44,210,000 | $35,132,000 |
| Earnings Per Share (Diluted) | $1.59 | $1.27 |
| Net Cash Provided by Operating Activities | $38,732,000 | $38,903,000 |
| Cash and Cash Equivalents (Ending) | $21,901,000 | $11,744,000 |
| Total Debt Outstanding | $48,750,000 | $37,765,000 |
| Total Assets | $521,959,000 | $509,341,000 |
Liquidity: The company reported strong liquidity with $82,273,000 available in cash, marketable securities, and unused borrowing capacity on its revolving credit facility. Dividends paid to stockholders for the six-month period totaled $33,794,000.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased by 4.1% ($1.6 million) year-over-year. Rental income rose 5.6% to $37.7 million, driven by new real estate investments in 2010 and 2011. Mortgage interest income decreased 10.2% to $3.2 million due to loan maturities and payoffs, partially offset by new investments.
- Profitability Surge: Net income increased 25.8% ($9.1 million). This increase was significantly driven by a non-operating gain of $8.8 million from the sale of marketable securities (specifically NHC convertible preferred stock and LTC common shares).
- Discontinued Operations: Income from discontinued operations decreased slightly to $4.7 million, reflecting the sale of one skilled nursing facility in January 2011 and two medical office buildings in February 2011, which generated a combined gain of $2.3 million.
- Debt Structure: The company restructured its debt, drawing $50 million on a new five-year term loan (fixed at 3.98% via an interest rate swap) to repay its revolving credit facility. Total debt increased from $37.8 million to $48.8 million.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items: The primary driver of the current period's earnings was the $8.8 million realized gain on the sale of marketable securities. Additionally, the company recognized a $2.3 million gain on the sale of real estate properties classified as discontinued operations.
- Medicare Reimbursement Risk: On July 29, 2011, CMS announced an 11.1% net cut to Medicare payments for skilled nursing facilities effective October 1, 2011. Management estimates that two mortgage borrowers (non-profit entities) may be adversely impacted, potentially affecting their ability to make scheduled payments. NHI is discussing extensions or asset acquisitions with these borrowers.
- Legal Proceedings: A shareholder derivative lawsuit filed by Burt Shearer regarding the 2010 Care Foundation of America (CFA) transaction remains pending. The company has filed motions to dismiss, arguing the plaintiff lacks standing. Management believes the resolution will not have a material adverse effect.
- Outlook: Management intends to maintain a low debt level relative to peers and fund new investments through liquid assets and debt financing. The company continues to evaluate new portfolio investments cautiously.
Investor Verification Checklist
- Non-Recurring Gains: Verify the sustainability of earnings by excluding the $8.8 million gain on marketable securities and $2.3 million gain on real estate sales to assess core operating performance.
- Medicare Cut Impact: Monitor the financial health of the two identified mortgage borrowers exposed to the 11.1% Medicare reimbursement cut to assess potential credit risk or impairment charges.
- Concentration Risk: Review the dependency on National HealthCare Corporation (NHC), which accounts for 48.6% of rental income from continuing operations, despite representing only 11.6% of the portfolio's net book value.
- Dividend Coverage: Confirm that Funds From Operations (FFO) and Normalized FFO continue to support the quarterly dividend rate of $0.615 per share in light of the one-time gains.
- Legal Status: Track the status of the Shearer derivative lawsuit and any potential outcomes regarding the CFA transaction settlement.