National Health Investors, Inc. — Q3 2010 Form 10-Q
Business context and period: NHI is a healthcare real estate investment trust (REIT) investing in leased properties and mortgage loans. This unaudited report covers the three and nine months ended September 30, 2010; balance-sheet comparisons are with December 31, 2009. At quarter-end, continuing operations included 120 properties in 23 states, with a portfolio carrying value of $396.7 million, excluding held-for-sale assets.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $19.7 million | $18.3 million | $59.2 million | $47.5 million |
| Income from continuing operations | $16.1 million | $16.4 million | $46.8 million | $42.6 million |
| Net income | $17.3 million | $17.5 million | $52.5 million | $47.9 million |
| Diluted EPS | $0.62 | $0.63 | $1.89 | $1.74 |
| Diluted FFO per share | $0.72 | $0.71 | $2.10 | $1.96 |
| Diluted normalized FFO per share | $0.72 | $0.61 | $2.04 | $1.73 |
Q3 revenue rose 7.7% year over year, while net income declined 0.8%; nine-month revenue increased 24.6% and net income 13.9%. Nine-month rental income grew $13.6 million, largely from new investments, while mortgage interest income fell $1.9 million as loans amortized, matured, or were repaid. Nine-month FFO increased 7.9% and normalized FFO 18.4%. The filing cautions that FFO is a supplemental, non-GAAP measure and may not be comparable across REITs.
Cash flow and liquidity: Nine-month operating cash flow was $58.4 million, versus $52.9 million in 2009. Investing used $80.3 million, chiefly for property acquisitions; financing used $21.3 million, including $49.8 million of dividends and $28.2 million of net revolving-facility borrowings. Cash fell to $2.5 million from $45.7 million at year-end 2009. Management reported $95.1 million of liquidity, comprising cash, marketable securities, and unused credit capacity.
Debt and balance sheet: Total assets were $497.2 million and stockholders’ equity $440.5 million at September 30. Revolver borrowings were $28.2 million, with $71.8 million available under the $100 million unsecured facility. The facility bore 3.5% interest and, as of the filing, had been extended on November 3, 2010 for three years. NHI reported compliance with its financial covenants.
Dividends: NHI declared quarterly dividends of $0.575 per share for the first two 2010 quarters and $0.605 for the third quarter. It intends to meet the REIT requirement to distribute at least 90% of taxable income.
Material changes, outlook, and risks
- Investments: NHI acquired six Florida skilled nursing facilities for $67.0 million, three other property groups through purchase/leasebacks, and entered into a lease covering eight senior living communities. It also made new mortgage loans and committed up to $13.87 million to a construction loan for an Arizona rehabilitation center.
- Dispositions and unusual items: NHI sold two Texas facilities for $6.25 million, recognizing a $2.00 million gain. It recorded a $573,000 recovery of prior mortgage write-downs. Six Texas facilities with a $33.42 million carrying value remained classified as held for sale, pending HUD financing by the buyer.
- Costs and earnings quality: Nine-month general and administrative expense increased, including higher stock-based compensation, payroll costs, and $490,000 of CFA acquisition costs. Growth in quarterly rental income was partly offset by lower mortgage interest and non-operating income and higher depreciation and interest expense.
- Concentration: NHC accounted for 49% of nine-month continuing rental income ($26.5 million), although its leased properties represented 12.8% of real estate net book value. NHI identifies NHC as its largest customer.
- Outlook: Management said it would continue evaluating investments cautiously and expected to maintain relatively low debt compared with total book capitalization and industry peers. No specific earnings or revenue guidance was provided. Management believed liquidity was sufficient for existing commitments and new investments.
- Risks and contingencies: Risks include tenant and borrower financial distress, healthcare reimbursement and regulatory changes, liability and insurance costs, property impairment, refinancing availability, and continued REIT qualification. NHI specifically warned that the Affordable Care Act could pressure operators’ reimbursement, costs, and compliance burdens, potentially affecting their ability to pay NHI.
- Legal matters: CFA-related litigation was settled in connection with the property acquisition and dismissed with prejudice; a related shareholder derivative suit was dismissed with prejudice in September 2010. A new shareholder demand letter concerning CFA was received in October and had not yet been answered. The Tennessee Attorney General agreed to take no further action regarding NHI’s relationship with CFA but could still pursue matters involving other nonprofits.
Important facts for investors to verify
- Whether the $100 million credit facility extension was completed on the stated terms and how the company manages its variable-rate borrowing.
- Whether the pending sale of the six held-for-sale Texas facilities closes, and the impact if HUD financing is delayed or unavailable.
- How NHC’s substantial share of rental income and other operator exposures change, including tenant payment capacity and lease performance.
- Progress, funding needs, and expected returns for the Arizona construction loan and other investment commitments.
- Developments relating to the October 2010 shareholder demand and any remaining legal or regulatory inquiries.
- Whether cash generation and liquidity remain adequate to fund dividends, commitments, and investment plans as cash balances have declined.