National Health Investors, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unless stated otherwise, dollar amounts below are in millions. NHI is a healthcare real estate investment trust investing in leased properties and mortgage loans. At quarter-end, its portfolio included 93 real estate properties and mortgage investments secured by 31 properties.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $20.454 | $19.419 | $61.178 | $58.521 |
| Income from continuing operations | $16.525 | $15.963 | $55.857 | $46.256 |
| Net income | $18.808 | $17.334 | $63.018 | $52.466 |
| Diluted net income per share | $0.68 | $0.62 | $2.27 | $1.89 |
- For the first nine months, rental income increased 5.4% to $56.259 million; mortgage interest income declined 4.8% to $4.919 million. Q3 total revenue rose 5.3% year over year.
- Nine-month net income increased 20.1%, but included $9.899 million of realized gains on marketable securities and $3.348 million of gains on real estate sales. Management said securities gains are not expected to recur annually.
- Nine-month normalized FFO was $58.729 million, or $2.12 per basic share, up 4.0% from $56.452 million, or $2.04 per share. FFO and normalized FFO are non-GAAP measures and are not substitutes for operating cash flow.
- Operating cash flow was $58.656 million versus $58.364 million. Investing activities used $5.560 million, compared with $80.283 million in 2010; financing activities used $40.276 million, including $50.835 million of dividends paid.
Financial position and liquidity
- At September 30, total assets were $522.297 million, debt was $48.125 million, total liabilities were $74.813 million, and stockholders’ equity was $447.484 million. Cash was $15.484 million and marketable securities were $9.510 million.
- NHI reported $74.994 million of liquidity, comprising cash, marketable securities, and $50 million of unused revolving capacity. It stated that it was in compliance with its credit facility covenants and believed it had sufficient liquidity for commitments and new investments.
- The term loan carried a fixed rate of 3.98% through a swap. The swap’s fair-value change reduced reported earnings by $0.922 million over nine months, including a $1.188 million charge in Q3.
- NHI declared quarterly dividends of $0.615 per share for each of the first three quarters of 2011. Nine-month dividends declared totaled $51.142 million.
Changes, investments, and outlook
- Rental growth reflected new investments and higher percentage rent from National HealthCare Corporation (NHC). NHC accounted for $27.156 million, or 48.3%, of continuing rental income for the first nine months, although its properties represented 11.2% of portfolio net book value.
- During the first nine months, NHI completed acquisitions of four Louisiana assisted living facilities for $15 million and a Georgia assisted living facility for $5.4 million, among other investments and commitments. It sold properties with a $9.624 million carrying value and recognized $3.348 million in gains.
- On October 31, NHI acquired four Texas skilled nursing facilities for $49.8 million, with a possible additional $5.478 million payment tied to performance. The facilities were leased to Legend for 15 years at an initial 9% rate plus escalators. The acquisition raised debt outstanding to $80.125 million.
- On November 1, NHI replaced its prior facility with a four-year, $200 million unsecured revolver at a 150-basis-point margin over LIBOR, expandable to $300 million, and canceled the prior swap. Management said it was evaluating investments for the remainder of 2011 and 2012, planned to apply underwriting discipline, and expected to maintain relatively low debt. No quantitative earnings guidance was provided.
Risks, contingencies, and unusual items
- CMS’s fiscal 2012 rule reduced Medicare payments to skilled nursing operators by a net 11.1%, effective October 1, 2011. Management expected most borrowers and lessees to withstand the reduction, but identified two nonprofit mortgage borrowers as particularly exposed. Their loans had an aggregate principal balance of $38.569 million. One related property transaction was subject to Tennessee Attorney General approval.
- Five Texas skilled nursing facilities remained classified as held for sale, with a carrying value of $29.381 million; completion depended on the tenant arranging HUD financing. This amount is distinct from the October acquisition.
- The Tennessee Attorney General investigation involving nonprofit corporations remained partly unresolved. A shareholder derivative lawsuit was pending, with motions to dismiss fully briefed. Management believed ordinary-course lawsuits would not materially affect NHI.
- NHI’s REIT status depends on meeting applicable requirements, including distributing at least 90% of taxable income. Failure to qualify could materially affect results and cash flows. Other stated risks included tenant financial distress, healthcare reimbursement and regulation, refinancing, and real estate illiquidity.
Investor verification priorities
- Assess earnings quality by separating recurring rental and mortgage income from securities-sale and property-disposition gains.
- Monitor NHC’s contribution to rent and the financial capacity of the two exposed nonprofit mortgage borrowers, including approvals and outcomes of related transactions.
- Verify the October acquisition’s final cost, any contingent payment, resulting debt, and the terms and covenant capacity of the new revolver.
- Track progress on the five remaining held-for-sale facilities, CMS reimbursement effects, and the pending legal matters.
- Compare declared dividends with normalized cash generation, while recognizing that FFO and FAD are company-defined non-GAAP measures.