NATIONAL HEALTH INVESTORS INC quarterly report, Q1 FY2020

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National Health Investors, Inc. — Q1 2020 Form 10-Q

Business context and reporting period

National Health Investors (NHI) is a healthcare real estate investment trust (REIT) focused on senior housing and medical properties, using leases, joint ventures, and loans. This unaudited report covers the three months ended March 31, 2020, compared with Q1 2019. At quarter-end, NHI had investments involving 240 facilities in 34 states, including 225 owned properties and loans to 15 facilities.

Financial and operating performance

  • Revenue: $83.1 million, up 9.2% from $76.1 million. Rental income rose 7.9% to $76.5 million; interest income and other rose to $6.5 million.
  • Profit: Net income attributable to common stockholders was $61.0 million, or $1.37 per diluted share, versus $35.7 million, or $0.83, a year earlier. The increase was substantially driven by a $21.0 million gain on real estate sales. Excluding that gain, reported net income is not directly comparable without further adjustments.
  • REIT operating measures: Diluted normalized FFO was $1.36 per share versus $1.31; normalized AFFO was $1.29 versus $1.22. These non-GAAP measures are defined by NHI and may not be comparable across REITs.
  • Expenses and coverage: Total expenses increased 5.3% to $42.6 million, including depreciation of $20.4 million and interest expense of $14.1 million. Adjusted EBITDA was $76.8 million versus $70.7 million; fixed-charge coverage was 5.8x versus 5.3x.
  • Cash flow: Operating cash flow was $57.1 million, down from $73.8 million. Investing used $51.0 million, while financing provided $58.1 million. Cash and restricted cash ended the quarter at $79.8 million; unrestricted cash and cash equivalents were $46.0 million.
  • Debt and liquidity: Debt carrying value was $1.55 billion, up from $1.44 billion at year-end, primarily reflecting increased revolver borrowing. NHI reported $142 million available on its $550 million revolving facility and was in compliance with debt covenants. Net debt to annualized Adjusted EBITDA was approximately 4.7x.
  • Dividends: NHI declared a Q1 dividend of $1.1025 per common share, up from $1.05 in Q1 2019. Dividends declared totaled $49.2 million.

Material changes versus the prior comparable period

  • Revenue growth reflected new investments and higher loan interest income, partly offset by lower income from disposed properties.
  • The quarter included a $21.0 million gain from the sale of eight assisted-living properties; NHI received $39.3 million and intended to use a like-kind exchange to defer recognition of the gain.
  • NHI acquired an 80% interest in Timber Ridge PropCo, a 401-unit continuing care retirement community, and a 25% interest in its operating company. The acquisition added consolidated assets and a noncontrolling interest; NHI recorded a $442,000 equity-method loss from the operating company.
  • NHI adopted the expected-credit-loss accounting standard on January 1, 2020, recording a $3.9 million opening allowance for loan losses and a $325,000 liability for unfunded commitments. The quarter-end allowance for funded loans was $5.5 million.
  • Operating cash flow declined despite revenue growth. The company also drew a net $108 million on its revolving credit facility during the quarter.

Outlook, risks, contingencies, and unusual items

  • COVID-19: Management warned that lower occupancy and higher operating costs at tenant facilities could impair rent and loan collections. NHI expected to consider hardship-based rent concessions, but said their scope and financial impact could not then be estimated. Management reported no significant real estate impairment as of the report date, while acknowledging future impairments, lease changes, and credit losses were possible.
  • Reported occupancy at several major operators weakened into April: Bickford same-store occupancy was 85.3%, Senior Living Communities 79.0%, and Holiday 85.0%, compared with their Q1 averages of 87.3%, 80.4%, and 87.3%, respectively.
  • Tenant concentration and credit: Bickford, Senior Living Communities, NHC, and Holiday each contributed at least 10% of rental income. Need-driven senior housing coverage was already under pressure from occupancy softness and wage costs. About 24% of revenue came from skilled-nursing operators with significant Medicare and Medicaid exposure.
  • Quorum bankruptcy: Quorum, tenant at the Kentucky River hospital, filed for Chapter 11 on April 7, 2020. NHI wrote off approximately $380,000 of straight-line rent and will recognize lease income only as cash is received. The $10.2 million property investment was not impaired at quarter-end under management’s cash-flow test, but a future write-down remained possible.
  • Funding and dividends: Management said it expected to continue evaluating investments in 2020 but planned greater selectivity. Lower share prices made near-term ATM equity issuance less attractive; management noted that severe economic conditions could prompt review of its dividend policy, while intending to meet REIT distribution requirements.
  • Commitments and debt risks: Remaining loan commitments totaled $58.5 million, development commitments $10.2 million, and listed contingencies $31.4 million. NHI also disclosed $18.97 million of Timber Ridge resident loans secured by the property; it recorded no guarantee liability, expecting no material cash outflow. Interest-rate exposure, upcoming swap expirations, and the planned transition away from LIBOR were identified as risks.
  • After quarter-end, NHI acquired two Indiana senior housing facilities for $14.25 million on May 1, 2020. Shareholders approved an increase in authorized common shares to 100 million on May 6.

Important facts for investors to verify

  • Whether COVID-19 occupancy declines, tenant cost pressures, and any rent concessions materially affect collections, credit allowances, and dividend coverage.
  • How much of the reported earnings increase is attributable to the one-time property-sale gain, and how recurring FFO/AFFO and operating cash flow develop.
  • Whether tenant and borrower exposures—including Bickford, Quorum, and Timber Ridge—remain current and whether any further impairments or credit-loss provisions are required.
  • Debt maturities, covenant headroom, revolver availability, interest-rate hedging and LIBOR replacement plans, and the funding required for remaining commitments and planned investments.
  • Whether the declared dividend remains supported by recurring cash generation and taxable income as conditions evolve.