NATIONAL HEALTH INVESTORS INC quarterly report, Q2 FY2023

Business context and reporting period

National Health Investors, Inc. (NHI) is a self-managed healthcare REIT focused on senior housing and medical properties, leases, and mortgage and other financing. This Form 10-Q covers the quarter and six months ended June 30, 2023. NHI reports Real Estate Investments and Senior Housing Operating Portfolio (SHOP) segments. At quarter-end, its portfolio included 163 real estate properties, 14 mortgage investments, and 15 SHOP communities across 31 states.

Financial performance and key metrics

Net income margin, calculated as net income divided by revenue, was approximately 50.7% in Q2 2023 versus 35.8% in Q2 2022; for the six-month periods it was 46.0% versus 22.6%. These results include gains on real estate sales and other items, so they are not a measure of recurring operating profitability.

Six-month NAREIT FFO per diluted share was $2.22, up from $1.76; normalized FFO per diluted share was $2.16, down from $2.37. Normalized FAD was $92.3 million, down 15.3% from $109.0 million. Management cautions that these non-GAAP measures may not be comparable with similarly named measures at other REITs.

At June 30, total assets were $2.50 billion, debt was $1.13 billion, and stockholders’ equity was $1.27 billion. Cash and cash equivalents were $17.4 million; $504.0 million remained available under the $700 million revolving facility. Six-month investing cash flow was $6.0 million and financing cash flow was negative $89.8 million. The quarterly dividend was $0.90 per share; $1.80 per share was declared for the first half.

Material changes versus the prior comparable period

• Revenue increased 30.0% in Q2 and 22.1% for the first half. Comparisons were materially affected by prior-year write-offs of $25.2 million related to Bickford rent receivables and lease incentives, prior-year Holiday lease deposits and escrow income, reduced pandemic-related rent concessions, and new investments. SHOP resident revenue also reflects the operating model transition effective April 2022.
• First-half net income rose $43.9 million. A major factor was the prior-year $28.7 million of real estate impairment charges; 2023 included $12.8 million in gains on real estate sales and $0.5 million of impairment charges.
• Interest expense increased 34.0% in the first half to $28.2 million, reflecting higher rates and borrowings. Interest income from mortgage and other notes declined 28.5% to $10.4 million, primarily due to loan paydowns.
• Operating cash flow decreased $13.9 million year over year. Investing cash flow fell substantially from the prior year, which included much higher collections of notes receivable and real estate sale proceeds.
• Debt declined modestly from year-end 2022. NHI repaid $125 million of private placement notes due January 2023 and refinanced part of its maturing 2023 term loan with a new $200 million variable-rate term loan due in 2025. The company made no share repurchases in the first half of 2023, compared with $70.0 million of repurchases in the first half of 2022.

Outlook, management commentary, risks and unusual items

• NHI provided no specific earnings or FFO guidance in the supplied filing text. Management expects 2023 operating cash flow to be adequate to fund dividends at the current rate and does not expect to borrow to pay dividends.
• Management reported compliance with debt covenants at June 30. Fixed-charge coverage was 4.5x for the first half, compared with 6.6x a year earlier; consolidated net debt to annualized adjusted EBITDA was approximately 4.6x.
• Variable-rate debt was approximately $396 million. Management estimates that a 50-basis-point rate increase would raise annual net interest expense by about $2.0 million, assuming balances remain unchanged. The company had no interest-rate derivatives at quarter-end.
• Credit and tenant risks remain notable. A $10 million mortgage and $14.5 million mezzanine loan to affiliates of one operator were designated non-performing. The allowance for expected credit losses on funded loans was $15.0 million. Pandemic-related rent concessions outstanding, net of repayments and other reductions, were approximately $29.5 million.
• Three tenants were on cash-basis revenue recognition. Bickford’s outstanding pandemic-related deferrals were $19.8 million. For first-half real estate investment revenues, Senior Living Communities represented 16%, Bickford 12%, and NHC 12%, highlighting tenant concentration.
• Other exposures include inflation and higher interest rates, refinancing and capital-market access, tenant and borrower financial health, healthcare reimbursement and regulation, and operational risks in SHOP. Management identified no material changes to previously disclosed risk factors apart from added discussion of inflation/rates and financial-services industry risks.
• Six-month acquisitions totaled approximately $54.8 million; completed property sales generated approximately $49.1 million in net proceeds and $12.4 million in gains. After quarter-end, NHI sold an Oregon assisted-living property for approximately $2.9 million net.
• Management stated that ordinary-course legal matters are not expected to have a direct material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.

Important facts for investors to verify

• Whether recurring rent collections and tenant coverage support revenue, particularly for cash-basis operators and concentrated tenants.
• Repayment prospects and collateral support for the $24.5 million of non-performing loans, and the adequacy of the $15.0 million funded-loan reserve.
• How much of reported revenue and earnings growth reflects recurring operations versus prior-year write-offs, pandemic-deferral reductions, asset-sale gains, and the SHOP transition.
• Exposure to floating rates and upcoming maturities, including the 2025 term loan and 2023–2025 private placement maturities, and the effect on coverage and refinancing costs.
• Whether operating cash flow and normalized FAD sustain the $0.90 quarterly dividend while meeting debt service, investment commitments, and remaining loan and development commitments.