National Health Investors, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context
NHI is a self-managed healthcare real estate investment trust focused on long-term care and senior housing. At year-end, its continuing portfolio covered 127 facilities in 24 states: 97 owned properties and 30 facilities securing mortgage loans. Rental income and mortgage interest represented 92% and 8% of continuing-operations revenue, respectively.
Financial performance and position
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Continuing-operations revenue | $82.7 million | $78.0 million | +6.0% |
| Rental income | $76.1 million | $71.3 million | +6.7% |
| Mortgage interest income | $6.7 million | $6.7 million | -1.4% |
| Income from continuing operations | $72.8 million | $61.8 million | +17.7% |
| Net income | $81.1 million | $69.4 million | +16.9% |
| Diluted EPS | $2.92 | $2.50 | +16.8% |
| Operating cash flow | $76.9 million | $77.5 million | -0.9% |
Rental income growth primarily reflected new property investments. A pre-non-operating-income margin—income before non-operating income divided by continuing revenue—was approximately 74.8% in 2011. Net income included $14.7 million of investment income and other, including $9.9 million in gains and recoveries on marketable-security sales, and $8.4 million from discontinued operations; therefore, reported net-income growth was not solely recurring property income.
FFO was $88.8 million, up 14%, while normalized FFO rose 4.8% to $80.2 million ($2.88 diluted per share, versus $2.76). The company attributed much of the gap between FFO growth and normalized FFO growth to securities gains and recoveries. Normalized FAD increased 5.3% to $80.4 million. FFO and FAD are non-GAAP supplemental measures and are not equivalent to operating cash flow.
Year-end total assets were $579.6 million, stockholders’ equity $443.5 million, and revolving-credit borrowings $97.3 million. Cash was $15.9 million and marketable securities $11.4 million. Reported available liquidity was $129.95 million, including $102.7 million of unused revolver capacity. Dividends declared totaled $2.715 per share, including a $0.22 special dividend.
Fourth-quarter 2011 revenue was $21.5 million, continuing-operations income $16.9 million, and net income $18.1 million, compared with fourth-quarter 2010 revenue of $19.5 million and net income of $17.0 million.
Material changes and developments
- NHI funded or committed to $100.4 million of new real estate and mortgage investments during 2011. Major activity included a $55.3 million purchase of four Texas skilled nursing facilities and development of a 60-bed Tennessee hospital, expected to open in fourth-quarter 2012.
- Real estate properties, net, increased to $394.8 million from $327.7 million in 2010. Debt rose to $97.3 million from $37.8 million, principally reflecting investment funding.
- In November 2011, NHI replaced its prior facility with a four-year, $200 million unsecured revolver priced at 150 basis points over LIBOR; it had an accordion feature to $300 million. Year-end borrowing rate was 1.78%. NHI also settled its former interest-rate swap for $1.2 million.
- NHI sold properties and recognized $3.35 million of real estate gains. Five Texas skilled nursing facilities remained classified as held for sale at year-end, with a carrying value of $29.4 million.
- NHC remained the largest tenant: 41 facilities generated $36.0 million, or 47% of continuing rental income, down from 49% in 2010. The filing reports that NHC represented 9.7% of the real estate portfolio by carrying value.
Outlook, risks and contingencies
Management said it expected to evaluate additional 2012 investments, funded from liquid investments and debt, while aiming to maintain relatively low leverage and invest only where returns exceed its cost of capital. The filing provides no specific 2012 earnings or FFO guidance. Management anticipated higher interest expense if investments were funded with revolver borrowings or government-agency debt.
- CMS’s fiscal 2012 rule reduced Medicare payments to skilled nursing operators by a net 11.1% beginning October 1, 2011. Management expected most borrowers and tenants to withstand the reduction, but identified two nonprofit mortgage borrowers as particularly exposed. Their loans had aggregate principal of $37.9 million and generated $2.2 million of 2011 interest income. One loan maturity was extended to August 2012; a related property transaction required Tennessee Attorney General approval.
- Other key risks include tenant and borrower defaults or bankruptcy; further Medicare and Medicaid reimbursement reductions; rising labor, liability-insurance and operating costs; regulatory and licensing hurdles; real estate illiquidity and possible impairment; and maintaining REIT tax qualification.
- Commitments included $16.5 million for hospital construction, a probable $2.0 million conditional mortgage advance, $9.5 million of real estate purchase liabilities, and other smaller funding commitments. NHI also agreed to provide up to $8 million in financing for the planned sale of the remaining five Texas facilities.
- A shareholder derivative suit relating to the former Care Foundation of America transaction remained pending on motions to dismiss. The Tennessee Attorney General investigation concerning nonprofit transactions was unresolved for two entities; approval of one related purchase-and-lease transaction was not assured. Management said ordinary-course facility litigation was not expected to materially affect NHI.
Investor facts to verify
- Whether the 11.1% Medicare reimbursement reduction materially affects the two identified nonprofit borrowers, scheduled payments, or loan recoverability.
- Progress and regulatory approval for the nonprofit property transaction, and completion and financing of the five remaining Texas facility sales.
- Tenant rent coverage, particularly NHC’s contribution of 47% of rental income, and performance of newer investments and construction projects.
- Recurring earnings and dividend coverage excluding securities gains, real estate disposition gains, discontinued operations, and other unusual items; compare normalized FFO/FAD with operating cash flow.
- Revolver utilization, refinancing needs, future investment funding, and the terms and timing of conditional commitments.
- Resolution of the derivative lawsuit and remaining Tennessee Attorney General matters. The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting.