National Health Investors, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. NHI is a healthcare REIT investing in senior housing and medical properties through leases, mortgages and other loans.
Business context and portfolio
At year-end, NHI reported investments involving 218 facilities in 32 states: 209 owned real estate properties and nine facilities associated with mortgage investments, plus other notes receivable. The owned portfolio had an original cost of $2.665 billion; mortgage and other notes receivable had a carrying value of $141.5 million. Senior housing generated about 66% of owned-property revenue, and medical facilities about 29%.
Four operators—Holiday, Senior Living Communities, Bickford and National HealthCare Corporation (NHC)—accounted for approximately 60% of total revenue. NHI’s investment strategy emphasized senior housing, including private-pay assisted living, memory care, independent living and entrance-fee communities.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $278.7 million | $248.5 million | +12.2% |
| Rental income | $265.1 million | $232.4 million | +14.1% |
| Mortgage and other note interest income | $13.1 million | $13.8 million | -4.9% |
| Net income attributable to common stockholders | $159.4 million | $151.5 million | +5.2% |
| Diluted earnings per share | $3.87 | $3.87 | Unchanged |
| Net cash from operating activities | $197.3 million | $177.2 million | +11.3% |
| Dividends declared per common share | $3.80 | $3.60 | +5.6% |
GAAP net income was approximately 57% of revenue in 2017; this measure includes investment gains and should not be read as a property operating margin. NHI reported diluted FFO per share of $5.50, normalized FFO of $5.29, normalized AFFO of $4.75 and normalized FAD of $198.0 million. These are non-GAAP supplemental measures and may not be comparable with other REITs.
At December 31, 2017, total assets were $2.546 billion, debt was $1.145 billion, equity was $1.322 billion and cash was $3.1 million. NHI reported $332.1 million of liquidity, including available revolving-credit capacity. Fixed-charge coverage was 6.4x; management reported annualized net debt to Adjusted EBITDA of approximately 4.2x.
Fourth quarter: Revenue was $71.1 million, net income attributable to common stockholders was $37.8 million, and diluted EPS was $0.90.
Material changes versus 2016
- Revenue growth was driven mainly by acquisitions and other investments made in 2016 and 2017; straight-line rent adjustments increased by $3.9 million.
- Net income rose 4.4%, while common-stockholder net income rose 5.2%. The comparison reflects different non-recurring items: 2017 included $10.0 million of gains on marketable-security sales and a $2.2 million loss on convertible-note retirements; 2016 included $29.7 million of securities gains and $15.9 million of loan and realty losses.
- Operating cash flow increased, while net cash used in investing declined to $163.8 million from $329.8 million, largely reflecting lower investment spending than in 2016.
- Debt increased from $1.116 billion to $1.145 billion. NHI amended and extended its $800 million unsecured credit facility in August 2017, extending the term loan and revolving facility maturities to August 2022.
- Annual dividends increased from $3.60 to $3.80 per share. Common shares outstanding rose to 41.5 million from 39.8 million, reflecting equity issuance.
Outlook, commentary and key risks
- Management anticipated further healthcare real-estate investments in 2018, funded through operating cash flow, debt and equity. It expected to use its ATM equity program and other capital sources as needed, while seeking to preserve relatively low leverage and dividend growth.
- Management expected higher interest rates to pressure investment spreads and increase borrowing costs. At year-end, about $221 million of debt was variable-rate and unhedged; a 50-basis-point rate change was estimated to affect annual interest expense by about $1.1 million.
- Healthcare reimbursement remains a risk: CMS’s fiscal 2018 rule increased SNF Medicare payments by 1.0%, while management noted Medicaid funding may not keep pace with inflation. About 27% of revenue came from operators of SNFs with significant government-payor exposure.
- Operator concentration and tenant performance are material risks. One tenant, representing 3% of rental income, received a forbearance letter in October 2017 for coverage and liquidity-ratio defaults. Rent was current at year-end; management reported early, unaudited operational improvement, no rent concessions and no impairment charge.
- Tenant coverage ratios weakened in several categories year over year: total senior housing was 1.21x versus 1.23x, and skilled nursing was 2.52x versus 2.78x. Management attributed movements to portfolio composition, contractual changes and operator factors.
- Remaining commitments included $33.2 million of loan commitments, $63.9 million of development commitments and $30.6 million of contingent lease inducements. NHI also remained obligated to purchase two Texas SNFs for approximately $28 million after specified acquisitions; other commitment schedules disclose up to $42 million for the broader Legend/Ensign purchase program.
- Other risks include tenant bankruptcy, litigation and liability-insurance costs, regulatory and licensing changes, real-estate illiquidity, impairment, REIT qualification, cybersecurity, and the possibility that refinancing or new capital may not be available on acceptable terms. Management said pending ordinary-course litigation was not expected to materially affect results.
The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of year-end.
Most important facts for investors to verify
- Whether the four largest operators can sustain rent coverage and meet lease obligations, particularly the tenant under forbearance.
- How much of reported rental growth reflects cash rent versus straight-line rent; straight-line rent receivable rose to $97.4 million from $72.5 million.
- Whether future acquisitions and commitments earn returns above NHI’s rising cost of capital, and how remaining development and lease-inducement obligations are funded.
- Debt maturities, covenant headroom, variable-rate exposure and the effect of refinancing or additional equity issuance on per-share results.
- Dividend coverage using cash-oriented measures such as normalized AFFO/FAD, recognizing that these are non-GAAP measures and differ from GAAP net income.
- How the Medicare/Medicaid reimbursement environment and senior-housing occupancy trends affect tenant finances and property-level coverage.