Business context and reporting period
National Health Investors, Inc. (NHI) is a healthcare real estate investment trust. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods unless noted. At quarter-end, NHI’s portfolio included 109 leased healthcare properties and mortgage or other notes related to 30 facilities across 25 states.
Financial performance and position
| Metric | Q3 2012 | Nine months 2012 | Comparable-period change |
|---|---|---|---|
| Total revenue | $25.5 million | $73.8 million | Up 12.0% and 8.1% |
| Net income | $14.4 million | $49.6 million | Down 23.7% and 21.2% |
| Diluted EPS | $0.52 | $1.78 | Versus $0.68 and $2.27 |
| Operating cash flow | Not provided for quarter | $63.7 million | Up 8.7% |
| Cash and cash equivalents | $4.4 million at September 30 | — | Down from $15.9 million at December 31, 2011 |
| Total debt | $194.3 million at September 30 | — | Up from $97.3 million at December 31, 2011 |
For the first nine months, cash used in investing was $91.9 million, primarily reflecting property investment; cash provided by financing was $16.7 million, including borrowings and dividends. NHI reported $145 million available on its revolving facility and total stated liquidity of $161.2 million, including cash, marketable securities, and revolver availability. Declared dividends were $1.97 per share for the nine-month period.
Q3 depreciation was $5.9 million, interest expense $0.9 million, and loan and realty losses $2.3 million. The filing does not provide a standard operating-margin measure. Nine-month FFO was $2.20 per diluted share and normalized FFO was $2.34; both are non-GAAP measures and NHI cautions they may not be comparable with other REITs.
Material changes versus prior comparable periods
- Rental income rose 11.6% in Q3 and 8.4% for the nine months, mainly reflecting investments funded in 2011 and 2012. NHI completed purchases of a Texas skilled nursing facility, a Washington senior living campus, and a California senior living campus.
- Net income and EPS declined despite revenue growth, partly because 2011 included securities-sale gains ($1.1 million in Q3 and $9.9 million for nine months) and real estate-sale gains and discontinued-operation income. Q3 2012 also included a $2.3 million SeniorTrust loan impairment.
- Debt increased following a new unsecured credit facility and term loans. At September 30, NHI had $120 million of term loans, $55 million drawn on its revolver, and $19.25 million of mortgage debt assumed in the Bickford transaction.
- Net cash used in investing increased substantially to $91.9 million from $5.6 million in the prior-year period, reflecting greater property and joint-venture investment and the absence of prior-year asset-sale proceeds.
Outlook, commentary, risks, and unusual items
- Management said it would continue evaluating investments for the remainder of 2012, seeking returns above its cost of capital, and expected to fund investment activity with liquid investments and debt. It anticipated that future investment-related borrowing could increase interest expense. No specific earnings or FFO guidance was provided.
- NHI entered an 85%-owned Bickford property joint venture and acquired an 85% interest in its operating company. The arrangement provides a stated first-year $6.0 million guaranteed distribution, with 3% annual escalators. NHI plans up to eight development projects over three years; two had begun, with $2.0 million incurred against a maximum cost of $18.0 million.
- NHC, NHI’s largest customer, accounted for 43% of nine-month rental income. This tenant concentration makes NHI dependent on NHC’s operating and payment performance.
- NHI canceled the planned sale of five Fundamental facilities, extended their lease to February 2016, and granted an option to purchase three facilities. Reclassification from held-for-sale status resulted in $2.4 million of Q3 catch-up depreciation.
- A former Minnesota tenant’s nonpayment prompted a lease termination and transition to White Pine. NHI reported write-offs of $963,000 in straight-line rent receivables and $126,000 in billed receivables, plus $171,000 of legal and other expenses; the replacement lease has a stated annual amount of $2.3 million.
- SeniorTrust’s receiver filed suit alleging that prior transactions were unfair; NHI denies the claims and intends to defend them, and has counterclaimed for repayment of outstanding debt. A receiver was also appointed for ElderTrust; NHI said it did not know whether that receiver would bring legal proceedings.
- Management cited risks from healthcare reimbursement reductions, tenant and borrower distress, variable interest rates, real estate and loan impairments, and joint-venture partner decisions. A 50-basis-point interest-rate movement was estimated to change annual net interest expense by about $675,000. Effective October 1, 2012, a subsidiary became a taxable REIT subsidiary; NHI also noted that failure to maintain REIT qualification could materially harm results.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Assess NHC’s ability to meet lease obligations and the significance of its 43% share of nine-month rental income.
- Track SeniorTrust and ElderTrust collections, collateral realizations, the lawsuit, and potential further credit losses; NHI recorded a $2.3 million SeniorTrust impairment.
- Review debt maturities, variable-rate exposure, revolver capacity, and the terms and expiration of interest-rate hedges.
- Confirm the economics and accounting of the Bickford joint venture, including the guaranteed distribution, development commitments, and NHI’s limited control of the operating company.
- Compare dividends with recurring cash generation, while distinguishing GAAP results from management-defined FFO and normalized FFO.