Business context and reporting period
National Health Investors, Inc. (NHI) is a healthcare REIT investing in senior housing, skilled nursing, hospitals, medical office buildings, and related loans. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013, compared with the same 2012 periods. At quarter-end, NHI reported 135 owned properties in 27 states, leased to 23 operators, and mortgage and other notes receivable with a carrying value of $59.4 million.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $31.8 million | $24.3 million | $87.9 million | $70.2 million |
| Income from continuing operations | $23.1 million | $13.3 million | $57.4 million | $46.4 million |
| Net income attributable to common stockholders | $42.7 million | $14.4 million | $78.4 million | $49.6 million |
| Diluted earnings per share | $1.53 | $0.52 | $2.81 | $1.78 |
| Net cash provided by operating activities | Not separately presented for the quarter | $74.4 million | $63.7 million |
- Revenue growth reflected new property investments; nine-month rental income rose 28.6% to $78.9 million. NHI reported no single operating-margin measure in the filing.
- Quarterly and year-to-date net income included a $19.37 million gain on the sale of six skilled nursing facilities. The gain materially increased reported earnings and is not recurring rental income.
- Nine-month funds from operations (FFO) were $71.7 million, up 17.1%; normalized FFO was $74.2 million, up 13.9%. These are non-GAAP measures defined by NHI and should not be treated as cash flow.
- Cash and cash equivalents were $7.45 million at September 30, 2013. NHI reported $80.0 million of liquidity, including cash, marketable securities, and available revolving-credit capacity.
- Debt was $391.4 million, versus $203.3 million at December 31, 2012. The company reported a 17:1 fixed-charge coverage ratio and annualized debt-to-EBITDA ratio of 3:1.
- Investing activities used $117.1 million in cash; financing activities provided $41.0 million. NHI paid $64.7 million in dividends during the first nine months. Dividends declared were $2.165 per share year to date.
Material changes versus the prior period
- NHI made or committed to approximately $229.9 million of real estate investments during the first nine months, including the $137.5 million Bickford senior-housing/RIDEA investment and acquisitions leased to Fundamental, NHC, Emeritus, and Discovery.
- The company sold six skilled nursing facilities to NHC for $21.0 million, recognizing a $19.37 million book gain. Annual base rent was reduced from $33.7 million to $30.75 million before a separate NHC-leased acquisition.
- NHI acquired seven skilled nursing facilities and one vacant assisted-living facility from ElderTrust for $37.4 million, partly by cancelling $13.7 million of notes receivable. The facilities were leased to NHC; the 2014 base annual rent is $3.45 million.
- Interest expense rose to $6.0 million for the first nine months from $2.2 million, mainly because of increased borrowings. The June 2013 unsecured credit facility totaled $370 million; $59 million remained available on its revolving portion at quarter-end.
- Loan and realty expense for the nine months included a $4.04 million SeniorTrust note impairment, partly offset by a $2.06 million recovery on a repaid mortgage note.
Outlook, risks, and unusual items
- NHI gave no formal earnings or FFO guidance. Management said it would continue evaluating investments, with emphasis on private-pay senior housing and selective skilled-nursing investments. Additional investment activity depends on acceptable underwriting returns and access to capital.
- Management expected borrowing costs to rise and planned to refinance some revolving borrowings into longer-term debt. It also expected higher interest expense from funding further investments; mortgage-note interest income was expected to decline absent new lending.
- Key risks include tenant and borrower financial distress; changes to Medicare and Medicaid reimbursement; operator concentration; rising variable-rate borrowing costs; debt covenant restrictions; real-estate illiquidity and impairment; and reliance on the performance of unconsolidated OpCo. NHC generated 29% of nine-month continuing-operations revenue.
- NHI had $17.2 million of construction commitments and $2.0 million of loan commitments listed in its contractual obligations, in addition to purchase liabilities and other contingent commitments. Discovery’s potential lease-inducement payments of up to $2.5 million were not considered probable and were not accrued.
- The SeniorTrust/ElderTrust litigation and related Tennessee Attorney General investigation were settled in April 2013, with court approval in May. Management stated pending ordinary-course litigation was not expected to materially affect financial condition or results.
- Subsequent to quarter-end, NHI reported a $9.0 million senior-housing acquisition, development and loan commitments, and agreements to sell Weatherly and three Fundamental-leased facilities. The Fundamental sale was expected to close by December 31, 2013.
Important facts for investors to verify
- How much earnings and FFO growth is supported by recurring rents versus the $19.37 million sale gain and other nonrecurring items.
- NHC’s ability to meet lease obligations and the effect of its 29% share of continuing revenue, alongside NHI’s reliance on the Bickford/OpCo RIDEA arrangement.
- Debt maturities, covenant headroom, refinancing plans, and sensitivity to interest rates; NHI estimated a 50-basis-point rate change would alter annual net interest expense by about $955,000.
- Whether the acquisition pipeline and rent yields can sustain dividend growth while funding investment and managing leverage; also review the contingent payments and construction commitments.
- The completion and financial effects of post-quarter transactions, and the outcome of any required like-kind exchanges intended to defer tax gains.