National Health Investors, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. NHI is a healthcare real estate investment trust focused on senior housing and medical properties, using leases, mortgages and other financing arrangements.
Business context and portfolio
At quarter-end, NHI owned 207 healthcare properties in 32 states and had investments in notes receivable involving eight additional facilities. Its real estate portfolio was leased to 29 lessees; the broader portfolio also included loans to 10 borrowers. Senior housing accounted for 68.7% of portfolio revenue in the six-month portfolio presentation, and medical facilities 29.7%.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $69.8 million | $61.2 million | $136.2 million | $120.2 million |
| Net income attributable to common stockholders | $38.2 million | $44.6 million | $82.5 million | $77.3 million |
| Diluted EPS | $0.93 | $1.16 | $2.03 | $2.01 |
| Operating cash flow | Not separately presented | Not separately presented | $94.9 million | $83.2 million |
Q2 rental income rose 15.3% to $65.7 million; six-month rental income rose 15.0% to $128.9 million, principally reflecting investments made since mid-2016. Six-month interest income increased 9.5% to $7.1 million. Six-month depreciation increased 16.0% to $33.0 million, and interest expense increased 12.2% to $23.5 million. The filing does not present a conventional operating margin measure.
Income before equity-method, tax, investment-gain and noncontrolling-interest items increased 105.6% in Q2 to $38.2 million and 44.0% for the six months to $72.4 million. Q2 GAAP net income attributable to common stockholders nevertheless declined 14.2%, mainly because the prior-year quarter included $26.4 million of investment and other gains, versus none in Q2 2017. For the six months, 2017 included $10.1 million of gains, compared with $28.1 million in 2016; the 2017 amount primarily reflected sales of marketable securities. Six-month diluted EPS was nearly flat despite higher net income, alongside increased weighted-average shares.
Company-defined diluted normalized FFO per share was $2.57 for the first half, up 8.0%; normalized AFFO per share was $2.32, up 7.9%. Normalized FAD was $96.2 million, up 14.7%. These are supplemental, company-defined measures and are not GAAP cash-flow measures.
Cash flow, debt and liquidity
- Six-month operating cash flow was $94.9 million. Investing activities used $127.9 million, including real estate and note investments; financing activities provided $31.6 million. Cash declined $1.4 million to $3.5 million.
- Debt totaled $1.145 billion at June 30, up from $1.116 billion at year-end 2016. The balance included $188 million drawn on the revolving facility. Management reported $362 million of remaining revolver availability and total cash plus borrowing capacity of $365.5 million.
- Management reported a 4.4x annualized net-debt-to-Adjusted-EBITDA ratio and 5.8x fixed-charge coverage for the first half. These are non-GAAP measures.
- Six-month dividends paid were $74.7 million; dividends declared were $1.90 per share. The company projected a 2017 annual dividend of $3.80 per share, based on $0.95 quarterly payments.
- After quarter-end, the company amended its $800 million unsecured credit facility, extending the $550 million revolver and $250 million term loan maturity to August 2022. The amendments set initial floating rates at LIBOR plus 115 basis points on the revolver and 130 basis points on the term loan, subject to leverage metrics. Swaps hedge the term loan; the revolver remains exposed to variable rates.
Material changes, outlook and risks
First-half 2017 real estate investments totaled approximately $129.7 million, including acquisitions leased to Ravn, Prestige, LaSalle, Ensign and Bickford. The company also raised $79.8 million net through an at-the-market equity offering and used the proceeds to reduce revolver borrowings. After quarter-end, it acquired land for a ground lease to Acadia and made a $10 million mortgage loan to Evolve.
Management said it would continue evaluating investments during the remainder of 2017, generally funding them with operating liquidity and debt, with equity issuance a possible option if leverage warrants. It highlighted competition for healthcare real estate, rising interest rates and potential pressure on the spread between financing costs and investment returns. Management expected interest income from loans to decline as the Timber Ridge construction loan is repaid; $76.2 million of its $94.5 million balance had been repaid by June 30, 2017.
Key risks include tenant and borrower financial health, concentration in significant operators, Medicare and Medicaid reimbursement changes, development and construction execution, refinancing and covenant compliance, interest-rate exposure, real estate illiquidity, and the ability to maintain REIT status. Approximately 26% of first-half revenue from continuing operations came from skilled-nursing operators with significant government-payor exposure. The filing added cybersecurity and data-privacy risks. Management reported no material change to other previously disclosed risk factors and expected pending litigation to have no material adverse effect.
Known commitments at June 30 included $41.3 million of remaining loan commitments, $53.1 million of development commitments and $25.4 million of remaining contingencies. The company was obligated to purchase three Texas skilled-nursing facilities for $42 million. Contingent earnouts and lease incentives depend on specified performance or other conditions.
Important facts for investors to verify
- Whether the growth in rental income and normalized operating measures continues, and how much reflects new investments versus straight-line, non-cash rent.
- Tenant concentration and payment capacity, especially for Bickford, Holiday, NHC and Senior Living Communities; the filing reports these operators as significant revenue sources.
- Progress and funding needs for the $42 million Ensign/Legend facility purchases, other development commitments, and contingent payments.
- Debt costs, leverage and covenant headroom after the August 2017 credit-facility amendments, including exposure to floating rates and hedge-accounting effects.
- Whether normalized FAD supports dividends as investment, financing and tenant conditions change; FAD is not GAAP cash flow.