Business Context and Reporting Period
Company: National Health Investors, Inc. (NHI)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2012
Business Overview: NHI is a self-managed Real Estate Investment Trust (REIT) investing in income-producing health care properties, primarily long-term care and senior housing. As of year-end 2012, the portfolio consisted of 134 health care facilities in 25 states, including skilled nursing facilities, assisted living facilities, senior living campuses, hospitals, and medical office buildings. The company utilizes triple-net leases, mortgage loans, and RIDEA (REIT Investment Diversification Empowerment Act) structures.
Key Financial Metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Total Revenue | $96,953,000 | $87,213,000 |
| Net Income (Attributable to Common Stockholders) | $90,731,000 | $81,132,000 |
| Earnings Per Share (Diluted) | $3.26 | $2.92 |
| Funds From Operations (FFO) Per Share (Diluted) | $3.38 | $3.20 |
| Dividends Declared Per Share | $2.86 | $2.715 |
| Total Assets | $705,981,000 | $579,563,000 |
| Total Debt | $203,250,000 | $97,300,000 |
| Cash and Cash Equivalents | $9,172,000 | $15,886,000 |
| Operating Cash Flow | $86,266,000 | $76,854,000 |
Revenue Composition (2012): Rental income ($85.1M, 88%), Interest income ($7.4M, 8%), Investment income ($4.4M, 4%).
Liquidity: The company reported strong liquidity with $158 million available in cash, marketable securities, and borrowing capacity on its revolving credit facility.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 11.2% to $96.95 million, driven by new real estate investments funded in 2011 and 2012 and increased rental income from existing leases.
- Net Income Increase: Net income rose 12.0% to $90.73 million. This was significantly aided by a $11.97 million gain on the sale of real estate (discontinued operations) and a $4.61 million gain on the payoff of a mortgage note.
- Debt Expansion: Total debt more than doubled from $97.3 million to $203.3 million. This increase was due to the entry into a new $320 million unsecured credit facility in May 2012, which included $120 million in term loans drawn immediately.
- Depreciation: Depreciation expense increased 43.6% to $16.58 million, primarily due to the reclassification of facilities leased to Fundamental from discontinued to continuing operations and new acquisitions.
- Loan Recoveries: The company recorded net loan and realty recoveries of $2.20 million, including a $4.50 million recovery on a previously written-down note, partially offset by a $2.30 million impairment on a note receivable from SeniorTrust of Florida, Inc.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects to continue making new investments in 2013 funded by liquid investments and debt financing. The company aims to maintain a relatively low debt level compared to peers. Approximately 65% of revenue comes from skilled nursing facilities dependent on Medicare and Medicaid, prompting a strategic diversification into private-pay assisted living and memory care properties.
Unusual Items
- Discontinued Operations: Six skilled nursing facilities leased to National HealthCare Corporation (NHC) were reclassified as held-for-sale, with a planned sale for $21 million in December 2013. Results for these facilities are reported as discontinued operations.
- Asset Sale: An assisted living facility in Edison, NJ, was sold to Sunrise Senior Living for $23 million, resulting in an $11.97 million gain.
- Impairment: A $2.30 million impairment was recorded on a mortgage note receivable from SeniorTrust of Florida, Inc., due to deteriorating financial conditions and collection history.
Risks and Contingencies
- Government Reimbursement: Significant exposure to Medicare and Medicaid reimbursement cuts, which could adversely affect tenant/borrower ability to pay rent or debt service.
- Legal Proceedings: Receivers for SeniorTrust of Florida, Inc. and ElderTrust of Florida, Inc. have filed lawsuits against NHI alleging unfair terms in past transactions. NHI intends to vigorously defend these claims.
- Interest Rate Risk: The company has significant variable-rate debt ($163.25 million exposed), creating sensitivity to rising interest rates, though a portion is hedged via an interest rate swap.
- Concentration Risk: NHC is the largest customer, accounting for 34% of continuing operations revenue in 2012.
Investor Verification Checklist
- Debt Structure: Verify the terms and covenants of the new $320 million credit facility and the impact of variable interest rates on future earnings.
- Legal Exposure: Monitor the status of litigation involving SeniorTrust and ElderTrust receivers and potential financial impact.
- Discontinued Operations: Confirm the completion of the $21 million sale of six SNFs to NHC and the resulting reduction in base rent.
- Reimbursement Policy: Assess the impact of potential future Medicare/Medicaid payment cuts on the 65% of revenue derived from government-dependent facilities.
- Asset Quality: Review the creditworthiness of the SeniorTrust and ElderTrust borrowers given the recent impairment and interest-only payment status.