Business Context and Reporting Period
Company: National Health Investors, Inc. (NHI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: NHI is a Real Estate Investment Trust (REIT) investing in income-producing healthcare properties, primarily long-term care facilities, and mortgage notes receivable. As of September 30, 2009, the portfolio included 125 properties across 18 states. The company's largest customer is National HealthCare Corporation (NHC), which leases 41 of NHI's properties.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenues | $19.62 million | $51.64 million |
| Net Income | $17.47 million | $47.94 million |
| Earnings Per Share (Diluted) | $0.63 | $1.74 |
| Funds From Operations (FFO) | $19.70 million | $54.00 million |
| Cash and Cash Equivalents | $63.57 million | $63.57 million (Ending Balance) |
| Total Debt (Bonds Payable) | $1.40 million | $1.40 million |
| Debt-to-Equity Ratio | 0.32% | 0.32% |
Liquidity: The company reported strong liquidity with $86.53 million in cash and marketable securities. Total assets were $456.62 million, and total stockholders' equity was $435.87 million.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 25.6% for the quarter and 9.3% for the nine-month period compared to 2008. Rental income rose significantly due to the collection of $2.0 million in past-due rents from RGL Development, LLC, and new leases with Legend Healthcare.
- Net Income Increase: Net income increased 9.5% for the quarter and 8.6% for the nine-month period year-over-year.
- Expense Increases: Total expenses rose 39.8% for the quarter and 15.2% for the nine-month period. Increases were driven by higher depreciation from new real estate investments, increased legal fees related to the CFA litigation, and higher general and administrative costs (including payroll and share-based compensation).
- Investing Activities: Cash used in investing activities turned negative ($37.7 million used) compared to a positive $47.3 million provided in the prior year, primarily due to the $55.55 million acquisition of four skilled nursing facilities from Legend Healthcare.
- Discontinued Operations: Income from discontinued operations decreased significantly from $2.49 million in the prior quarter to a loss of $4,000, as 2008 included a one-time recognition of $4.12 million in deferred credits.
Outlook, Risks, and Contingencies
Management Commentary & Guidance:
- NHI continues to evaluate new investments cautiously, focusing on risk criteria and spreads over the cost of capital.
- The company maintains a low debt level (0.32% debt-to-equity) and intends to fund new investments through liquid assets or external financing if needed.
- Dividends declared for the first nine months were $1.65 per share. The company intends to distribute at least 90% of taxable income to maintain REIT status.
Material Risks and Contingencies:
- Care Foundation of America (CFA) Litigation: CFA, a borrower with a $22.94 million non-performing mortgage note, filed for Chapter 11 bankruptcy and initiated an adversary proceeding against NHI. CFA alleges NHI exercised control over CFA and engaged in "excess benefit transactions," seeking damages exceeding $25 million. NHI denies these claims and has filed a counterclaim. A bench trial is scheduled for December 2009.
- Tennessee Attorney General Investigation: NHI has been served with a Civil Investigative Demand regarding transactions with CFA and two other Tennessee nonprofit corporations.
- Shareholder Derivative Suit: A shareholder filed a derivative complaint against NHI directors alleging breach of fiduciary duty related to the CFA transactions.
- Investment Risks: NHI holds an investment in an Investment Management Account (IMA) valued at $1.12 million, which is subject to potential further declines in fair value.
Key Facts for Investor Verification
- CFA Litigation Outcome: Verify the status and potential financial impact of the adversary proceeding filed by Care Foundation of America, including the $25 million+ damages claim and the pending December 2009 trial.
- REIT Qualification: Confirm continued compliance with REIT requirements, specifically the distribution of 90% of taxable income, to avoid federal corporate income tax.
- Concentration Risk: Monitor the financial health of National HealthCare Corporation (NHC), which accounts for 59% of rental income for the nine-month period.
- Asset Valuation: Review the valuation of the $1.12 million Investment Management Account (IMA) and the potential for further impairment charges.
- Debt Maturity: Note that the remaining $1.4 million in bonds payable matures in 2010.