National Health Investors, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. NHI is a self-managed healthcare REIT investing in senior housing and medical properties through leases, loans and development financing. Its portfolio included 206 real estate properties and notes receivable involving 215 facilities in 32 states.
Financial performance
- Revenue: $66.4 million, up 12.5% from $59.0 million. Rental income rose 14.6% to $63.1 million, chiefly from investments made since Q1 2016; note interest income declined 2.2% to $3.1 million.
- Profit: Net income was $44.2 million versus $33.1 million; diluted EPS was $1.10 versus $0.85. Income before investment gains and other specified items increased 7.8% to $34.1 million. Q1 2017 net income included a $10.0 million gain on sales of marketable securities, so reported growth exceeded growth in underlying results.
- Supplemental REIT measures: Diluted NAREIT FFO was $1.50 per share versus $1.16; normalized FFO was $1.25 versus $1.16; normalized AFFO was $1.13 versus $1.04. Normalized FAD rose 14.4% to $47.0 million. These non-GAAP measures are company-defined and may not be comparable across REITs.
- Expenses: Total expenses rose 18.0% to $32.2 million. Depreciation increased 17.6% to $16.2 million and interest expense increased 13.6% to $11.7 million, reflecting portfolio growth, borrowings and higher LIBOR.
- Cash flow: Operating cash flow was $48.7 million, up from $41.3 million. Investing used $120.4 million, including substantial property and loan investments; financing provided $72.6 million, including $79.8 million of net equity proceeds and $29.0 million of net revolver borrowings. Ending cash was $5.7 million.
- Debt and liquidity: Debt carrying value was $1.146 billion, compared with $1.116 billion at year-end; cash was $5.7 million. NHI reported $363 million available on its revolver and $368.7 million of cash plus borrowing capacity. Net debt to annualized adjusted EBITDA was approximately 4.5x; fixed-charge coverage was 5.7x. About $187 million of debt was variable-rate and unhedged; management estimated a 50-basis-point rate change would alter annual net interest expense by approximately $935,000.
- Dividends: The company declared $0.95 per share for Q1, up from $0.90 a year earlier, and projected an annualized 2017 regular dividend of $3.80 per share.
Changes and significant activity
- NHI invested approximately $119.3 million in Q1 real estate acquisitions, including senior housing properties leased to LaSalle, Prestige and Ravn, and a skilled nursing facility leased to Ensign. It also advanced construction and other loans.
- Rental income growth reflected new investments and changes in existing portfolios, including Bickford and Senior Living Communities. The Bickford joint venture had been terminated in September 2016, converting Bickford’s participation to a triple-net tenancy.
- NHI sold its remaining LTC Properties shares in January and February, recognizing the $10.0 million gain. It issued 1.12 million shares through its ATM program at an average price of $72.31, raising $79.8 million net, which it used to reduce revolver borrowings.
- Interest income is expected to decline as the Timber Ridge construction loan is repaid; $69.9 million had been repaid by March 31, with an additional $2.5 million through May 1, 2017.
Outlook, risks and contingencies
- Management planned to evaluate further investments during 2017 and expected to fund them with operating liquidity, debt and potentially equity. It cited senior-housing demographics and continued investment opportunities, while noting acquisition competition and pressure on investment spreads from rising interest rates and a higher cost of capital. No specific earnings guidance was provided.
- The board’s stated dividend-growth objective depends on disciplined investment underwriting, access to capital and tenant performance. Management intended to maintain a relatively low-leverage balance sheet and comply with REIT distribution requirements.
- Tenant concentration is material: Holiday, Senior Living Communities, NHC and Bickford each generated roughly 14%–18% of Q1 revenue, as presented in the filing. Approximately 27% of revenue was associated with skilled nursing operators receiving significant Medicare and Medicaid funding. Reimbursement cuts, operator distress, liability costs, regulation and development execution are key risks.
- Remaining commitments included $42.2 million of loan commitments and $55.2 million of development commitments; NHI also had a $42.0 million obligation to purchase three Texas skilled nursing facilities under construction. Contingent payments and other arrangements totaled $17.4 million, including performance-based earnouts and a letter of credit. Litigation in the ordinary course was not expected by management to have a material adverse effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported earnings growth is sustainable after excluding the $10.0 million securities gain; track normalized AFFO and FAD against dividends.
- Whether new and existing tenants can meet lease obligations, particularly the largest operators and skilled nursing tenants exposed to government reimbursement.
- Execution, funding needs and expected returns on the $42.0 million facility-purchase obligation, remaining development commitments and loan commitments.
- Effects of rising rates on borrowing costs, acquisition yields, refinancing needs and the company’s leverage and coverage ratios.
- Timing and impact of Timber Ridge loan repayments on recurring interest income and future investment capacity.