Business context and reporting period
National Health Investors, Inc. (NHI) is a self-managed healthcare REIT investing in senior housing and medical properties through triple-net leases, mortgages, joint ventures and other financing. This Form 10-K covers the fiscal year ended December 31, 2014; it is an annual report, not a standalone fourth-quarter filing.
At year-end, NHI’s portfolio involved 183 facilities in 31 states, including 172 owned properties leased to 24 tenants and mortgage or other notes receivable from 15 borrowers. Senior housing and medical properties accounted for 54% and 44% of portfolio revenue, respectively; other notes accounted for 2%.
Financial performance and condition
| Metric | 2014 | 2013 | Change / context |
|---|---|---|---|
| Revenue | $177.5 million | $117.8 million | Up 50.7%, primarily from new investments |
| Rental income | $166.3 million | $106.0 million | Up 56.8%; approximately 94% of 2014 revenue |
| Income from continuing operations | $103.1 million | $79.5 million | Up 29.6% |
| Net income attributable to common stockholders | $101.6 million; $3.04 diluted EPS | $106.2 million; $3.74 diluted EPS | Down 4.3% and 18.7%, respectively |
| Operating cash flow | $126.1 million | $104.2 million | Up 21.1% |
| Investing cash flow | $(540.3) million | $(625.8) million | Large investment outflows continued |
| Cash and cash equivalents | $3.3 million | $11.3 million | Year-end cash decreased |
| Total assets | $2.0 billion | $1.5 billion | Growth largely reflects acquisitions |
| Debt, balance-sheet carrying value | $862.7 million | $617.1 million | Increased with investment funding |
| Regular dividends declared per share | $3.08 | $2.90 | Up 6.2%; no special dividend in 2014 |
2013 net income included $27.7 million of discontinued operations, including $22.3 million of real estate sale gains; 2014 reported none. Thus, the decline in total net income contrasts with growth in continuing-operations income. Depreciation was $38.1 million and interest expense was $26.4 million in 2014. The filing does not provide a conventional operating-margin measure.
NHI reported diluted FFO of $4.15 per share, normalized FFO of $4.20, normalized AFFO of $3.75 and normalized FAD of $3.81. These are non-GAAP supplemental measures and may not be comparable across REITs. Management reported fixed-charge coverage of 6.8x and debt-to-Adjusted EBITDA of 4.1x, using Adjusted EBITDA that includes a full-year pro forma impact for the Senior Living Communities portfolio.
Year-end liquidity was reported as $94.8 million in cash, highly liquid marketable securities and available revolving-credit capacity; only $3.3 million of this was cash and cash equivalents. NHI had $76 million available on its revolving facility at year-end. Following its January 2015 private placement, management reported approximately $320 million of liquidity.
Material changes versus the prior comparable period
- Revenue growth reflected substantial acquisitions, including the December 2014 purchase of eight Senior Living Communities for $476 million, and the full-year contribution from the Holiday portfolio acquired in December 2013.
- Portfolio funding and expansion included $555.5 million of 2014 real estate investments. NHI issued $200 million of 3.25% convertible notes and raised approximately $270.8 million net through a common-stock offering; debt rose to $862.7 million.
- Revenue became more diversified toward private-pay senior housing. Management cited approximately 37% of continuing-operations revenue from operators of skilled nursing facilities materially reliant on government payors; exposure to discretionary senior housing also increased.
- Operating cash flow rose, while investing outflows remained substantial. Dividend declarations increased from $2.90 to $3.08 per share.
Outlook, commentary and risks
- Management expects to pursue additional investments in 2015 that meet underwriting criteria and stated a goal of continued annual dividend growth and relatively low leverage. No specific earnings or revenue guidance was provided.
- NHI anticipated announcing an at-the-market equity program to fund acquisitions as needed, alongside credit-facility borrowings and other debt or equity sources. Management warned that longer-term borrowing costs could rise and pressure investment spreads.
- After year-end, NHI issued $225 million of unsecured private-placement notes: $125 million of 8-year notes at 3.99% and $100 million of 12-year notes at 4.51%, using proceeds to repay revolving borrowings. It also finalized a commitment for up to $154.5 million of loans for a senior-housing development project.
- Major risks include tenant and borrower credit deterioration or default; Medicare and Medicaid reimbursement changes; labor, insurance and operating-cost increases; development and construction risk; interest-rate and refinancing risk; acquisition competition; real-estate illiquidity and impairment; REIT qualification; and debt-covenant compliance.
- Revenue is concentrated among large operators. Holiday generated 25% of 2014 continuing-operations revenue, NHC 21%, and Bickford 12%. Senior Living’s eight communities were acquired late in December, so 2014 reflects only a limited contribution; the filing gives differing estimates of its expected share of revenue (over 17% in one section and over 22% in another).
- Outstanding commitments included $12.2 million remaining on Senior Living’s revolving credit line and $7.4 million of construction commitments. Contingencies included up to $6.39 million of Prestige lease inducements and a $3.55 million letter of credit for a Bickford affiliate. Management said pending ordinary-course litigation was not expected to have a material adverse effect; the previously disclosed Tennessee Attorney General investigation and related litigation were settled in 2013.
Auditors issued an unqualified opinion on the financial statements and internal controls. Management also concluded that disclosure controls and internal control over financial reporting were effective at year-end.
Important facts for investors to verify
- Reconcile the differing Senior Living concentration estimates and assess the tenant’s ability to meet the $31 million initial annual rent under its master lease.
- Review tenant coverage, occupancy and credit quality—particularly for major operators and facilities exposed to Medicare and Medicaid—and monitor any lease-payment or reimbursement pressure.
- Assess the effect of higher leverage, variable-rate revolver borrowings, refinancing needs and the convertible notes’ potential dilution if the share price exceeds the approximately $71.81 conversion price.
- Compare dividend growth with normalized FAD and cash available for distribution, while recognizing that FAD is a non-GAAP measure and cash balances were low relative to reported total liquidity.
- Track development and construction commitments, contingent payments, and the funding and returns of the post-year-end Life Care Services and Bickford projects.
- Distinguish reported 2014 results from pro forma measures: the Senior Living acquisition contributed only $1.5 million of lease revenue in 2014, while the debt-to-Adjusted EBITDA figure incorporates a full-year pro forma adjustment.