National Health Investors, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 22, 2021. This is an annual report, not a standalone fourth-quarter filing. NHI is a healthcare real estate REIT investing in senior housing and medical properties through leases, loans and joint ventures.
Business context and portfolio
At year-end, NHI had investments involving 242 facilities in 34 states: 228 owned properties and 14 facilities associated with mortgage loans, plus other notes receivable. The owned portfolio had an original cost of $3.26 billion; mortgage and other notes receivable had an aggregate carrying value of $297.4 million before a $4.9 million credit-loss allowance. Rental income and mortgage interest are the principal revenue sources. Four tenants—Senior Living Communities, Bickford, Holiday and NHC—accounted for 53% of 2020 revenue.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Total revenue | $332.8 million | $318.1 million | Up 4.6% |
| Rental income | $307.2 million | $294.2 million | Up 4.4%; includes $9.7 million of tenant reimbursements for property expenses |
| Net income | $185.3 million | $160.4 million | Up 15.5%; includes $21.3 million of gains on real estate sales |
| Net income attributable to common stockholders | $185.1 million | $160.5 million | Basic EPS $4.14 versus $3.70; diluted EPS $4.14 versus $3.67 |
| Net cash from operating activities | $232.1 million | $241.0 million | Down 3.7% |
| Net cash used in investing activities | $89.7 million | $342.5 million | Lower investment outlays, partly offset by note collections and property-sale proceeds |
| Dividends declared per common share | $4.41 | $4.20 | Up 5.0%; annual declared dividends exceeded GAAP EPS |
Fourth-quarter revenue was $81.3 million versus $82.2 million in fourth-quarter 2019; net income attributable to common stockholders was $37.1 million versus $42.0 million. Quarterly diluted EPS was $0.83 versus $0.95.
Management-reported diluted per-share measures rose year over year: NAREIT FFO was $5.51 versus $5.49, normalized FFO $5.60 versus $5.50, and normalized AFFO $5.29 versus $5.10. Normalized FAD was $239.7 million, up 5.8%. These are non-GAAP supplemental measures and may not be comparable with similarly named measures at other REITs.
At December 31, 2020, total assets were $3.12 billion, debt was $1.50 billion, equity was $1.52 billion, and cash and cash equivalents were $43.3 million. The company reported $252 million available on its revolving credit facility and compliance with debt covenants. Adjusted EBITDA was $307.4 million; fixed-charge coverage was 6.0x and net debt to Adjusted EBITDA was approximately 4.7x. About $548 million of variable-rate debt was exposed to interest-rate risk; a 50-basis-point rate change was estimated to affect annual interest expense by approximately $2.7 million.
Material changes versus 2019
- Revenue increased with new investments, including the Timber Ridge transaction and other property and loan investments; 2020 investment commitments totaled approximately $226.9 million.
- Net income benefited from $21.3 million in real estate-sale gains, including the $20.8 million gain on the sale of eight Brookdale properties. No comparable real estate-sale gain was recorded in 2019.
- Operating cash flow declined 3.7%. Interest expense fell 6.1% to $52.9 million, while depreciation rose 8.2% to $83.2 million, mainly reflecting new investments.
- NHI repaid ten Bickford-related HUD mortgages totaling $42.6 million, recording $3.9 million of total early-retirement debt loss, including a $1.6 million prepayment fee.
- NHI acquired an 80% interest in Timber Ridge PropCo and a 25% interest in its operating company. The company recorded $3.1 million of equity-method losses from Timber Ridge OpCo in 2020.
- The company adopted the expected-credit-loss standard and ended the year with a $4.9 million allowance on notes receivable. Its share count increased to 45.2 million from 44.6 million.
Outlook, commentary and risks
The filing provides no specific 2021 earnings or FFO guidance. Management said COVID-19 had materially strained operators and could continue to affect NHI; the extent of future rent concessions and the pandemic’s financial impact could not be reliably projected. Contractual cash collections fell from 100% in the first and second quarters to 96.2% in the third and 93.9% in the fourth. January 2021 collections were approximately 95.1%.
NHI deferred or abated approximately $7.0 million of 2020 rent. This included $5.85 million deferred for Bickford; $2.1 million of that amount was contingent on Bickford closing on a proposed acquisition of nine leased properties. Occupancy at selected operators weakened: December 2020 occupancy was 76.2% at Senior Living Communities, 76.7% at Bickford and 76.8% at Holiday, compared with year-earlier levels of 80.4%, 86.3% and 87.0%, respectively. Portfolio coverage also softened, particularly in senior housing.
Key risks include further occupancy declines and operator cost pressures; tenant concentration and possible defaults; changes in Medicare and Medicaid reimbursement and healthcare regulation; credit losses, impairments and difficulty replacing operators; access to capital, debt covenants, refinancing and interest-rate exposure; and REIT qualification. Timber Ridge adds operating, joint-venture, resident-liability and accounting risks. The balance secured by legacy resident loans at Timber Ridge was $17.2 million at year-end; NHI reported that it was subordinated to NHI’s security and subject to an operator indemnity.
Subsequent to year-end, NHI issued $400 million of 3.00% senior notes due 2031, using net proceeds primarily to repay its $100 million term loan and reduce revolving-credit borrowings. At January 31, 2021, the company reported approximately $520 million of revolving-facility availability. The remaining $60 million of convertible notes matured April 1, 2021. The filing also discloses $63.4 million of remaining loan commitments, $5.2 million of remaining development commitments, and $31.4 million of unfunded contingent lease inducements.
Management reported no material COVID-related impairment of long-lived assets in 2020; the auditor identified real estate impairment assessment and Timber Ridge variable-interest-entity accounting as critical audit matters. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Litigation involving East Lake Capital Management and related entities remained ongoing; management stated that pending proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether tenant collections, rent deferrals and occupancy recover, especially at Bickford, Holiday and Senior Living Communities, and whether any proposed Bickford property sale closes.
- How much reported earnings and EPS growth depended on the one-time real estate-sale gains, compared with recurring cash rent and interest income.
- Whether operating cash flow and normalized FAD continue to support the $4.41 annual dividend, considering REIT distribution requirements and available capital.
- Debt repayment and refinancing progress, including the 2021 maturities, the 2031 note proceeds, covenant headroom, variable-rate exposure and LIBOR transition.
- Performance, additional funding needs and accounting treatment of Timber Ridge, including the $5 million working-capital facility and resident-loan exposure.
- Credit quality of mortgage and other notes, the adequacy of the $4.9 million expected-credit-loss allowance, and the status of the ongoing litigation and remaining commitments.