Business context and reporting period
National Health Investors, Inc. (NHI) is a self-managed healthcare real estate investment trust (REIT). This Form 10-K covers the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. NHI invests in senior housing and medical properties through triple-net leases, mortgages, other loans and a RIDEA joint venture.
At year-end, the portfolio involved 189 facilities or notes across 31 states, including 180 real estate properties and 9 mortgage or other notes. Senior housing represented 63.7% of portfolio revenue, medical facilities 34.6%, and other notes 1.7%.
Financial and operating highlights
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $229.0 million | $177.5 million | +29.0% |
| Net income attributable to common stockholders | $148.9 million | $101.6 million | +46.5% |
| Diluted EPS | $3.95 | $3.04 | +$0.91 |
| Operating cash flow | $164.4 million | $126.1 million | +30.3% |
| Dividends declared per share | $3.40 | $3.08 | +10.4% |
- Revenue mix: Rental income was $214.4 million (94% of revenue), mortgage and other note interest was $10.0 million (4%), and investment and other income was $4.6 million (2%). Rental income included $24.6 million of net straight-line lease revenue, which is not current-period cash rent.
- Profit and unusual gains: The reported net margin was about 65%, but net income included $23.5 million of gains from marketable securities sales and a $1.1 million real estate sale gain. Excluding those gains, income before equity-method losses, tax effects and noncontrolling interests was $126.7 million. Quarterly fourth-quarter data show $54.4 million of net income attributable to common stockholders, including $23.5 million of investment gains.
- REIT supplemental measures: Diluted FFO was $5.31 per share versus $4.15 in 2014; normalized FFO was $4.67 versus $4.20; normalized AFFO was $4.10 versus $3.75; and normalized FAD was $4.16 versus $3.81. These company-defined, non-GAAP measures are not substitutes for GAAP earnings or operating cash flow.
- Balance sheet and liquidity: Total assets were $2.15 billion, debt carrying value $926.3 million, and total equity $1.14 billion. Cash was $13.3 million and marketable securities $72.7 million. NHI reported $602.0 million of liquidity, including available cash, liquid securities and revolving-credit capacity; $516.0 million was available on the revolver.
- Debt and coverage: Adjusted EBITDA was $216.6 million. Management reported 6.1x fixed-charge coverage and 4.2x consolidated net debt to Adjusted EBITDA. Debt principal was $933.7 million, before discounts. NHI refinanced $325 million of revolver borrowings into longer-term private-placement notes and had about $34 million of unhedged variable-rate debt at year-end.
- Cash uses and distributions: Operating cash flow exceeded 2015 dividends paid of $124.7 million. Net cash used in investing was $136.3 million, while financing activities used $18.1 million. Declared dividends totaled $128.4 million, or $3.40 per share.
Material changes versus 2014
- Revenue rose 29.0%, largely reflecting a full year of the Senior Living Communities portfolio acquired in December 2014, plus other 2014–2015 investments. Rental income increased 29.0%; mortgage and other note interest increased 42.3%.
- Net income growth outpaced revenue growth principally because of the $24.7 million combined investment and other gains in 2015. Interest expense rose 55.3% to $37.6 million, mainly due to increased borrowing and the shift toward longer-term fixed-rate debt; depreciation rose 39.6% to $53.2 million.
- Operating cash flow increased by $38.3 million. Investing cash use fell substantially from 2014, reflecting lower acquisition spending and proceeds from securities sales. Financing cash flow shifted from a $406.1 million source in 2014 to an $18.1 million use in 2015, including a $340 million reduction in revolver borrowings.
- Debt carrying value increased to $926.3 million from $862.7 million, while year-end cash rose to $13.3 million from $3.3 million. NHI issued $49.4 million of net equity through its at-the-market program and used proceeds from equity issuance and securities sales to pay down its revolver.
Outlook, management commentary, risks and contingencies
- Management planned further investments in 2016 but warned that rising capital costs and healthcare real estate prices near historical highs could slow earnings growth. It expected to target smaller portfolios and individual acquisitions, and to continue construction and renovation financing where projected returns justified the risks.
- Management aims to grow regular dividends while maintaining relatively low leverage. Future acquisitions may be funded with liquid assets, debt and, if needed to rebalance leverage, equity offerings. No specific 2016 earnings or dividend guidance was provided.
- Tenant concentration is material: Holiday, Senior Living Communities, NHC and Bickford together generated approximately 63% of continuing-operations revenue. Tenant financial health, occupancy, reimbursement rates, labor and insurance costs, and the ability to re-lease properties are important risks.
- About 30% of revenue came from operators of skilled nursing facilities with significant government-payor exposure. Management cited the 1.2% Medicare payment increase for fiscal 2016, while noting that Medicaid funding may not keep pace with inflation and future reimbursement reductions could affect tenant payment capacity.
- Commitments included $71.1 million remaining on the Timber Ridge construction loan, $37.6 million for Bickford development, and $8.7 million available under the Senior Living Communities credit line, among other commitments. Potential contingent payments included up to $8.0 million of East Lake lease incentives and a $3.55 million letter of credit benefiting a Bickford affiliate.
- The Bickford operating-company joint venture recorded a $2.1 million net loss in 2015, versus a small loss in 2014, reflecting depreciation, straight-line rent and operating shortfalls at properties in transition or not yet stabilized. NHI accounts for the operating company as an equity-method investment and stated that its exposure is limited, subject to related commitments.
- Management reported no material adverse effect expected from pending ordinary-course litigation. The independent auditor gave unqualified opinions on the financial statements and internal controls; management and auditor concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Tenant-level coverage, liquidity and payment performance—especially for the four operators contributing about 63% of revenue—and any changes in concentration after year-end.
- How much reported rental income is cash rent versus straight-line accruals, and the implications of the $59.8 million straight-line rent receivable.
- Whether the $23.5 million securities-sale gain and other unusual items obscure recurring earnings; compare GAAP results with normalized FFO, AFFO, FAD and operating cash flow.
- Funding, construction progress, stabilization and repayment assumptions for Timber Ridge and the Bickford developments, as well as contingent funding obligations and the East Lake incentives.
- Debt maturities, covenant headroom, interest-rate exposure and the sustainability of dividend growth given capital costs and acquisition returns.
- Subsequent events disclosed in the filing: the January 2016 acquisition of a Washington independent-living community and the January 2016 modification of the Capital Funding Group loan.