National Health Investors, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. NHI is a healthcare real estate investment trust focused on senior housing and medical facilities. At quarter-end it owned 220 properties in 33 states and held mortgage and other notes receivable; its broader portfolio involved 232 facilities and 30 lessees.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $76.1 million | $72.7 million; up 4.6% |
| Rental income | $71.0 million | $69.3 million; up 2.5% |
| Net income | $35.7 million | $38.4 million; down 7.2% |
| Diluted EPS | $0.83 | $0.92; down 9.8% |
| GAAP net margin | 46.9% | 52.8% (calculated as net income divided by revenue) |
| Operating cash flow | $73.8 million | $48.9 million |
| Investing cash flow | $(65.0) million | $(19.6) million |
| Normalized AFFO per diluted share | $1.22 | $1.22; unchanged |
| Normalized FAD | $54.5 million | $52.4 million; up 4.1% |
- Revenue growth reflected new investments and higher mortgage income, partly offset by lower Holiday rent and rent declines from Regency and LaSalle properties during tenant transitions. Mortgage and other note interest income rose 47.9% to $5.1 million.
- Expenses rose 20.4% to $40.4 million. Interest expense increased 16.4% to $13.5 million, and NHI recorded a $2.5 million real estate impairment. Depreciation increased to $18.5 million. There was no convertible-note retirement loss in Q1 2019, compared with a $0.7 million loss in Q1 2018.
- Operating cash flow included a $16.3 million increase in deferred income, as well as non-cash and working-capital items; it should not be viewed as equivalent to recurring earnings. Cash and cash equivalents were $5.2 million at March 31; cash, cash equivalents and restricted cash totaled $15.6 million.
- Debt carrying value was $1.287 billion (aggregate principal of approximately $1.299 billion). NHI reported $461 million available under its revolving facility and said it was in compliance with financial covenants, while noting its leverage ratio was near the upper boundary of its current pricing tier.
- Management reported a 5.1x fixed-charge coverage ratio, down from 6.3x, and consolidated net debt to annualized Adjusted EBITDA of approximately 4.6x. These are company-defined supplemental measures, not GAAP metrics.
- The board declared a quarterly dividend of $1.05 per share, up from $1.00. Dividends paid in the quarter totaled $42.7 million. NHI issued 462,925 shares through its ATM program for approximately $36.0 million net proceeds.
Material changes and portfolio developments
- Q1 investments included a Massachusetts senior living campus leased to Wingate for an initial 7.5% lease rate and a Florida senior housing property acquired from Holiday and added to its master lease at a 6.71% rate. A Michigan acquisition from Comfort Care for $10.8 million closed on April 30, after quarter-end.
- A 2018 Holiday lease amendment reduced base rent beginning in 2019 from $39.0 million to $31.5 million, extended the lease through 2035 and provided for consideration of $55.125 million. Holiday settled $38.0 million of that amount through the Florida property and paid the remaining $17.125 million in cash.
- Two assisted living properties were classified as held for sale. NHI recorded a $2.5 million impairment, leaving them at estimated net realizable value of $3.745 million.
- Q1 ATM issuance and stock-option activity contributed to an increase in shares outstanding; weighted-average diluted shares increased to 43.1 million from 41.6 million.
Outlook, commentary and risks
- NHI provided no specific earnings or revenue guidance. Management said it expects to continue evaluating real estate and note investments during 2019, using operating cash, debt and equity financing as appropriate. It anticipates continued ATM use and said larger acquisitions could require a separate equity offering.
- Management highlighted competition for healthcare properties, rising capital costs and interest-rate uncertainty. Approximately $189 million of debt was exposed to variable rates after hedging; a 50-basis-point rate change was estimated to affect annual net interest expense by approximately $945,000, assuming balances remained constant.
- Tenant concentration remains material. Bickford, Senior Living Communities, Holiday and NHC each generated approximately 13%–17% of total revenue, based on the filing’s tenant disclosures. Lease coverage for need-driven senior housing weakened, which management attributed primarily to occupancy softness in some markets and wage pressure.
- Three tenant-transition situations remained relevant: Regency properties were being operated under interim arrangements; LaSalle had been in rent default since November 2018, and five properties were placed with a new operator on April 16, 2019; and a Wisconsin property transitioned from Landmark to BAKA. NHI noted it could have to consolidate operators if it became the primary beneficiary of their operations.
- Regency-related litigation and NHI’s litigation to recover amounts owed by LaSalle and against its guarantor remained outstanding. Management said ordinary-course litigation was not expected to have a material adverse effect, but outcomes are uncertain.
- Skilled nursing operators face Medicare and Medicaid reimbursement risk. CMS’s new Patient-Driven Payment Model was scheduled to take effect October 1, 2019; CMS had proposed a net 2.5% Medicare payment increase for the fiscal year beginning then. Management considered near-term increases potentially adequate but gave no assurance about effects on individual operators.
- NHI adopted ASC 842 lease accounting on January 1, 2019, with no cumulative retained-earnings adjustment. The filing included $1.09 million of tenant tax and insurance reimbursements as both revenue and expense under the new lessor guidance.
- Remaining commitments included $120.8 million of loan funding, $23.9 million of development commitments and $20.9 million of contingent commitments. Funding and project performance may affect liquidity and returns.
Important facts for investors to verify
- Whether tenant transitions stabilize, rent and operating cash flows recover, and the Regency and LaSalle litigation is resolved without material loss.
- Tenant operating performance and concentration, particularly Bickford and senior housing coverage trends, alongside the timing and collectibility of straight-line rent.
- Debt covenant headroom, refinancing and interest-rate exposure, including the LIBOR-to-successor-rate transition and planned debt or equity funding.
- Whether investment commitments, development projects and acquisitions deliver expected returns without adding undue leverage.
- The recurring cash available to support dividends, considering GAAP cash flow, non-GAAP AFFO/FAD measures, and the quarter’s elevated deferred-income contribution to operating cash flow.