National Health Investors, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; filed August 3, 2012. NHI is a self-managed healthcare real estate investment trust (REIT), investing primarily in long-term care and senior housing properties and mortgage loans.
Business context and portfolio
At June 30, NHI reported 128 healthcare facility investments across 24 states: 98 leased properties and mortgage or other notes tied to 30 facilities. The portfolio’s net real estate and mortgage investments totaled $493.8 million. National HealthCare Corporation (NHC), NHI’s largest customer, accounted for 47% of six-month continuing rental income ($18.7 million) and leased 41 properties.
Financial results and key metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $21.8m | $30.0m | $45.8m | $51.9m |
| Rental income | $18.8m | $18.6m | $40.2m | $37.5m |
| Mortgage interest income | $1.8m | $1.6m | $3.5m | $3.2m |
| Income from continuing operations | $15.7m | $23.8m | $32.8m | $39.3m |
| Net income | $16.9m | $25.1m | $35.3m | $44.2m |
| Net income per diluted share | $0.61 | $0.90 | $1.27 | $1.59 |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $41.9m | $38.7m |
For the six-month period, NHI reported NAREIT funds from operations (FFO) of $41.3 million, down 12.6%, and normalized FFO of $42.8 million, up 11.8%. Diluted normalized FFO was $1.54 per share versus $1.38. Funds available for distribution (FAD) was $42.6 million, down 12.1%; normalized FAD was $43.1 million, up 9.2%, or $1.55 per diluted share versus $1.42. FFO and FAD are non-GAAP supplemental measures as defined by the company.
At June 30, total assets were $598.4 million, debt was $120.0 million, and stockholders’ equity was $445.3 million. Cash and cash equivalents were $9.8 million; marketable securities were $13.1 million. Management reported total liquidity of $222.9 million, including cash, highly liquid securities and available revolver capacity. Dividends declared were $1.30 per share for the first half; cash dividends paid totaled $42.2 million.
Changes versus the prior comparable period
- Q2 revenue fell 27.4% and net income fell 32.6%; first-half revenue declined 11.7% and net income declined 20.2%. The principal comparison effect was $8.7 million of realized securities gains included in 2011 investment income, versus $0.03 million in 2012. First-half 2011 also included $2.3 million of real estate sale gains.
- Underlying rental income increased 1.5% in Q2 and 7.1% for the first half, while mortgage interest income rose 13.0% and 9.9%, respectively. Management attributed rental growth mainly to investments funded in 2011 and 2012.
- First-half depreciation increased 16.6% to $6.8 million, reflecting property additions. Interest expense increased 55.8% to $1.3 million, mainly due to borrowings and loan costs; prior-year swap fair-value movements also affected the comparison.
- First-half operating cash flow increased 8.1%, but investing cash flow shifted from $3.1 million provided to $27.7 million used, reflecting higher property and mortgage investment and the absence of prior-year asset-sale proceeds. Ending cash was $9.8 million, down from $15.9 million at year-end 2011.
Debt, investments and liquidity
On May 1, NHI entered a $320 million unsecured credit facility, including $200 million of revolving capacity and $120 million of term loans; an uncommitted incremental feature could bring total facility capacity to $450 million. The term loans comprised $80 million at variable rates and $40 million at a seven-year term, hedged by a swap that fixes its rate at 3.04%. The revolver was undrawn at quarter-end. A 50-basis-point change in variable rates was estimated to change annual net interest expense by about $0.4 million, or $0.01 per diluted share.
Investments during the period included a $13.5 million purchase of a 125-bed Texas skilled nursing facility leased to Legend, a $5.0 million CFG mezzanine loan at 13.5%, and $15.9 million funded toward a hospital development project. NHI said it expected to continue evaluating investments in 2012, funded by liquid investments and debt, while seeking to maintain relatively low leverage. No specific earnings or dividend guidance was provided.
Management commentary, risks and unusual items
- In June, NHI terminated a Minnesota lease after material tenant noncompliance and transitioned four assisted-living and memory-care facilities to White Pine under a 13-year lease. The transition reduced cash rent receipts by $0.45 million in Q2 and involved write-offs of $0.96 million in straight-line rent receivable, $0.13 million in billed rent and $0.17 million in legal and other expenses. The new annual lease amount is $2.34 million, plus escalators.
- Medicare reimbursement reductions, operator financial health, tenant concentration, interest-rate exposure, refinancing access, real estate impairment and continued REIT qualification are identified risks. NHI noted that two nonprofit mortgage borrowers could be adversely affected by Medicare cuts; their loans had aggregate principal of $36.7 million and generated $1.1 million of first-half interest income. One borrower had a receiver appointed; NHI said the Tennessee Attorney General was considering seeking a receiver for the other.
- Five Texas skilled nursing facilities with a $29.4 million carrying value remained classified as held for sale, with closing dependent on the buyer arranging HUD financing. NHI was also committed to finance up to $8 million of the purchase price.
- Other commitments include planned Bickford developments, up to $8 million for hospital renovations, and further CFG lending. The filing lists $14.8 million in loan commitments and $13.6 million in construction commitments in its contractual-obligations table. Management believed liquidity and capital access were sufficient for commitments and new investments.
- The Tennessee Attorney General investigation concerning transactions with three nonprofit corporations remained unresolved as to two entities. A shareholder derivative lawsuit was dismissed with prejudice, with the appeal period expired. Management said ordinary-course litigation was not expected to have a material adverse effect. A $90,000 legal settlement was recorded during the quarter.
Important facts for investors to verify
- Whether NHC’s 47% share of first-half continuing rental income and the financial performance of other major operators remain stable.
- Collection status and collateral support for the $36.7 million of nonprofit borrower loans, including the effect of reimbursement cuts and receiver proceedings.
- Whether the Minnesota tenant transition sustains the stated rent and whether the remaining Texas property sales close as planned.
- Available revolver capacity, covenant terms, future borrowing costs and the exposure of variable-rate debt to interest-rate increases.
- Funding needs and returns for development and lending commitments, and whether normalized FFO and FAD growth translates into recurring cash available for dividends.
- Progress on REIT compliance, the potential taxable REIT subsidiary, and any material developments in the Attorney General investigation.