National Health Investors, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. NHI is a self-managed healthcare REIT investing in senior housing and medical properties through leases, mortgages, and other financing. At quarter-end, it held interests involving 220 facilities in 32 states; its real estate was leased under triple-net arrangements to 27 lessees.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $72.7 million | $66.4 million; up 9.6% |
| Rental income | $69.3 million | $63.1 million; up 9.7% |
| Income before investment and other gains/losses | $39.2 million | $34.1 million; up 14.7% |
| Net income | $38.4 million; diluted EPS $0.92 | $44.2 million; diluted EPS $1.10 |
| Operating cash flow | $48.5 million | $48.7 million |
| Cash and cash equivalents | $3.2 million | $3.1 million at December 31, 2017 |
| Total debt | $1.160 billion | $1.145 billion at December 31, 2017 |
| Stockholders’ equity | $1.320 billion | $1.322 billion at December 31, 2017 |
Net income declined 13.1% primarily because Q1 2017 included a $10.0 million gain from selling marketable securities; Q1 2018 also included a $0.7 million loss on convertible-note retirement. Excluding specified unusual items, diluted normalized FFO increased 8.0% to $1.35 per share, and diluted normalized AFFO increased 8.0% to $1.22 per share. These are non-GAAP measures and may not be comparable with other REITs.
Normalized FAD was $52.4 million, up 11.5%. The quarterly dividend declared was $1.00 per share, versus $0.95 a year earlier. Management reported a 6.3x fixed-charge coverage ratio and 4.3x consolidated net debt to annualized Adjusted EBITDA.
Cash, debt, and liquidity
Operating cash flow was nearly unchanged year over year. Investing used $19.6 million, compared with $120.4 million in Q1 2017, when investment activity was substantially higher. Financing used $28.8 million, including $39.5 million of dividends paid and $30.0 million used for convertible-note redemptions; NHI drew $56.0 million and repaid $15.0 million on its revolver.
NHI reported $291.2 million of liquidity, consisting of cash and $288.0 million available on its revolving facility. The $800 million unsecured credit facility was extended to August 2022. The quarter-end debt balance included $262.0 million outstanding on the revolver; $250.0 million of bank term debt was hedged with swaps. A 50-basis-point change in rates on variable-rate debt was estimated to change annual net interest expense by about $1.31 million, or $0.03 per diluted share. Scheduled debt maturities include $638.3 million in the twelve months ending March 31, 2022.
Material changes and portfolio developments
- Revenue growth reflected new investments made since March 2017 and in Q1 2018; mortgage and other note interest income rose 12.0% to $3.5 million.
- On January 12, NHI acquired a 121-bed Texas skilled nursing facility for $14.4 million, with $1.275 million contributed by the lessee. The initial lease rate is 8.2%. NHI remains committed to purchase two additional Texas facilities for $28.0 million.
- On April 30, after quarter-end, NHI acquired five assisted-living/memory-care facilities with 320 units for $69.75 million, inclusive of closing costs and specified improvements. The Bickford lease carries a 6.85% initial rate and a 15-year term plus renewal options.
- Four operators each generated at least 10% of rental income: Bickford, Senior Living Communities, Holiday Retirement, and National HealthCare Corporation. The filing reports 16% of total revenue from Bickford, 16% from Senior Living Communities, 15% from Holiday, and 13% from NHC.
Outlook, risks, and contingencies
Management stated a goal of growing normalized AFFO and regular annual dividends by at least 5% per share annually; projected 2018 dividends were $4.00 per share, based on the $1.00 quarterly dividend. This is a corporate goal, not specific earnings guidance. Management expects to consider further investments during 2018, funded with operating cash, debt, and potentially equity. It noted rising interest rates and cost of capital may pressure investment spreads and REIT share prices.
- One tenant remained in forbearance following defaults involving lease coverage and vendor arrearages. The tenant and affiliates accounted for less than 4% of rental income, remained current on rent, and received no concessions. NHI reported a $3.8 million related straight-line rent receivable, heightened monitoring, and no current basis for impairment.
- Healthcare reimbursement changes are a risk: operators of skilled nursing facilities received significant Medicare and Medicaid revenue, and management estimated that 27% of NHI revenue came from operators of those facilities. The filing cites potential reimbursement reductions and Medicaid funding that may lag inflation.
- At quarter-end, remaining commitments included $41.2 million of loan funding, $47.0 million of development commitments, and $31.4 million of contingencies. These amounts are not all unconditional or immediately payable.
- Other stated risks include tenant or borrower financial distress, operator and property performance, acquisition competition, refinancing and covenant requirements, interest rates, real-estate impairment, REIT qualification, and legal or regulatory change. Management said ordinary-course litigation was not expected to have a material adverse effect.
- NHI adopted new revenue-recognition and hedge-accounting standards in Q1 without a material impact on income measurement; it was still evaluating the impact of the lease-accounting standard expected to take effect in 2019.
Investor verification points
- Track rent collections, operating recovery, coverage, and impairment risk for the tenant in forbearance.
- Assess exposure to major tenants and the latest available lease-coverage data; the coverage figures provided are trailing twelve-month results through December 31, 2017.
- Evaluate funding needs for the announced acquisition and remaining loan, development, and contingent commitments against available liquidity and debt covenants.
- Review the $638.3 million debt maturity shown for the year ending March 31, 2022, and the cost and availability of refinancing as rates rise.
- Compare dividends with normalized AFFO/FAD and cash generation, recognizing that these supplemental measures are not GAAP cash-flow measures.
- Monitor Medicare and Medicaid policy, tenant concentration, and the effects of interest-rate changes on borrowing costs and investment returns.