National Health Investors, Inc. — Q2 2010 Form 10-Q
Business context and reporting period. NHI is a healthcare real estate investment trust (REIT) investing primarily in long-term-care properties through leases and mortgage loans. This unaudited filing covers the quarter and six months ended June 30, 2010, compared with the same periods in 2009. At quarter-end, continuing operations included 87 leased properties and mortgage investments in 33 properties across 23 states; carrying value of the combined real estate and mortgage portfolio was $401.9 million.
Financial highlights
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $19.25 million | $14.71 million | $39.58 million | $29.28 million |
| Income from continuing operations | $16.05 million | $12.84 million | $30.66 million | $26.20 million |
| Net income | $19.19 million | $15.42 million | $35.13 million | $30.46 million |
| Diluted earnings per share | $0.69 | $0.55 | $1.27 | $1.10 |
| Net cash from operating activities | Not separately provided | Not separately provided | $38.94 million | $32.79 million |
| Funds from operations (FFO) | $19.87 million | $17.33 million | $38.27 million | $34.30 million |
| Diluted FFO per share | $0.72 | $0.63 | $1.38 | $1.24 |
Revenue growth was mainly driven by new leases and acquisitions; rental income rose 45.6% in Q2 and 45.2% in the first half. Mortgage interest income declined 38.2% in Q2 and 20.1% year to date as loans were repaid, amortized, or converted to owned properties. The filing does not provide a clear operating-margin measure.
At June 30, assets were $509.9 million, including $326.6 million of net real estate, $76.1 million of mortgage notes, and $11.7 million of cash. Stockholders’ equity was $438.5 million. Revolver borrowings were $43.8 million, versus none at December 31, 2009. The $100 million unsecured facility matures in February 2011, bears interest at 250 basis points over LIBOR subject to a 1% floor (3.5% at quarter-end), and had $56.2 million of available capacity. Management reported compliance with its financial covenants.
Six-month investing cash outflow was $82.9 million, primarily reflecting $88.5 million of real estate acquisitions and $8.6 million of mortgage investments. Financing cash inflow was $10.0 million, including $43.8 million of revolver borrowings and $33.9 million of dividends paid. Cash fell from $45.7 million to $11.7 million. Management reported total liquidity of $87.8 million, including cash, marketable securities, and available revolver capacity. Dividends declared were $0.575 per share in each of the first two quarters.
Material changes and notable items
- Revenue increased 30.8% in Q2 and 35.2% in the first half; net income increased 24.4% and 15.3%, respectively. Six-month FFO increased 11.6%.
- NHI acquired six Florida skilled nursing facilities from Care Foundation of America (CFA) for $67 million in February. The transaction included satisfaction of a $22.9 million mortgage principal balance, cash funding, and revolver borrowings; it also resolved CFA litigation, with claims dismissed with prejudice.
- Other 2010 investments included purchase/leasebacks of a California psychiatric hospital, Minnesota assisted-living facilities, and three facilities in Iowa and Indiana. NHI also made new mortgage loans, including loans bearing fixed rates of 14% to 14.5%.
- Q2 included a $2.0 million gain on the sale of two Texas facilities. First-half income also included $1.52 million of past-due rent from RGL Development and a $573,000 recovery of prior mortgage write-downs. These items are not necessarily recurring.
- General and administrative expense rose materially in the first half, including $2.04 million of share-based compensation (up from $0.70 million) and $0.49 million of CFA transaction costs. Depreciation increased with the expanded property portfolio.
Outlook, risks, and contingencies
Management said it would continue evaluating investments during the remainder of 2010, while proceeding cautiously and seeking returns above its cost of capital. It expected to maintain relatively low debt compared with total book capitalization and industry peers. No specific earnings or revenue guidance was provided.
Risks include tenant and borrower financial distress or bankruptcy, healthcare reimbursement and regulatory changes, rising liability insurance costs, real estate illiquidity and impairment, refinancing availability, and maintaining REIT qualification. NHC was NHI’s largest customer: 41 properties were leased to it, and it contributed 50% of first-half continuing rental income. NHI stated that NHC’s leases extend to 2021, subject to renewal options.
Six Texas skilled nursing facilities with a $33.4 million carrying value were held for sale; closing depended on the lessee arranging HUD financing. Contractual obligations and commitments totaled $60.0 million, including $10.4 million remaining on a construction-loan commitment, $4.0 million of deferred purchase consideration, and $0.75 million of potential capital improvements. A shareholder derivative complaint alleging director fiduciary-duty breaches remained pending; defendants’ motion to dismiss was pending. The Tennessee Attorney General had agreed to take no further action concerning CFA, but NHI said it did not know whether the office might pursue matters involving other nonprofit transactions. Management believed pending facility-related proceedings would not materially affect results.
Management stated that disclosure controls were effective and that no material change in internal control over financial reporting was identified during the quarter.
Facts investors should verify
- Whether the Texas held-for-sale properties close, and the timing and proceeds of any sale.
- How NHI plans to repay or refinance the revolver maturing in February 2011 and fund remaining commitments.
- Tenant rent coverage and collection trends, especially NHC’s large share of rental income and the sustainability of past-due rent recognized from RGL.
- How much earnings growth reflects recurring lease income versus acquisitions, straight-line rent, recoveries, and the property-sale gain.
- Developments in the shareholder derivative case and any further Tennessee Attorney General inquiries.
- Dividend coverage: compare distributions with operating cash flow and REIT taxable income; reported FFO is a supplemental measure, not GAAP cash flow.