National Health Investors, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; compared with the three months ended March 31, 2012 unless otherwise noted. NHI is a healthcare real estate investment trust focused on long-term care and senior housing.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $28.071 million | $24.058 million | +16.7% |
| Income from continuing operations | $15.008 million | $17.217 million | -12.8% |
| Net income attributable to common stockholders | $15.743 million | $18.350 million | -14.2% |
| Diluted earnings per share | $0.56 | $0.66 | Down $0.10 |
| Cash provided by operating activities | $23.846 million | $21.247 million | +12.2% |
| Cash used in investing activities | $2.145 million | $4.062 million | Lower use |
| Cash used in financing activities | $24.823 million | $26.144 million | Lower use |
Revenue growth reflected new investments made in 2012. Rental income rose 17.6% to $25.050 million; mortgage and other note interest income rose 15.7% to $1.969 million. Expenses increased 91.3% to $13.085 million, principally reflecting a $4.037 million loan impairment, higher depreciation and higher interest expense. Reported continuing-operations income was approximately 53.5% of revenue, versus approximately 71.6% a year earlier; this comparison is affected by the impairment and expense changes.
FFO was $19.558 million ($0.70 per diluted share), down 8.5%; normalized FFO was $23.595 million ($0.85 per diluted share), up 10.4%. FAD was $20.368 million ($0.73 per diluted share), down 7.8%; normalized FAD was $24.405 million ($0.87 per diluted share), up 10.5%. These are company-defined non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Balance sheet and liquidity
- At March 31, 2013, total assets were $700.141 million, net real estate was $533.285 million, and mortgage and other notes receivable were $80.059 million.
- Debt was $203.250 million, unchanged from year-end 2012. The company reported $136 million available on its revolving credit facility and $6.050 million of cash. Management reported total liquidity of $156.895 million including cash, marketable securities and revolving borrowing capacity.
- Debt included $64 million drawn on the revolving facility, $120 million of unsecured term loans and a $19.250 million secured mortgage. The mortgage matures November 22, 2013. A $40 million term loan was effectively fixed at 3.04% through an interest-rate swap; the remaining $163.250 million of debt was variable-rate.
- Operating cash flow exceeded dividends paid of $24.793 million, but cash declined by $3.122 million during the quarter to $6.050 million. The declared quarterly dividend was $0.695 per share. On April 26, NHI declared a $0.735 dividend for the next quarter.
Material changes and notable items
- NHI recorded a $4.037 million impairment on SeniorTrust mortgage notes after evaluating declining operating income and estimated collateral value. The carrying value of those notes was reduced to $15 million.
- In April 2013, NHI agreed, subject to court approval, to settle the SeniorTrust notes for $15 million cash. It also agreed to acquire ElderTrust’s eight skilled nursing facilities for cancellation of a $13.741 million note and $23.350 million cash, to be funded from the revolver. The facilities are to be leased to NHC for an initial 15 years at $3.450 million annual rent, with specified escalators and an NHC purchase option in year 12. The agreements also resolve related litigation and the Tennessee Attorney General investigation, subject to court approval.
- On April 18, NHI completed the purchase of two Texas skilled nursing facilities for $26.150 million cash, plus a likely $1.600 million contingent payment. The 254-bed facilities were leased to Fundamental affiliates for 10 years at a 9% lease rate plus fixed annual escalators.
- NHI planned to sell six older skilled nursing facilities to NHC for $21 million, with completion expected in June 2013. The filing states that annual base rent would decline from $33.7 million to $30.75 million upon sale.
- Discontinued operations contributed $0.915 million of income, versus $1.133 million in the prior-year quarter. The company’s 2012 cancellation of a planned sale of five Fundamental facilities resulted in their operations being reclassified into continuing operations.
- At March 31, NHI owned 107 healthcare real estate properties and held notes related to 27 facilities. NHC accounted for 32% of continuing revenue in Q1, down from 37% a year earlier.
Outlook, risks and contingencies
NHI said it was evaluating potential investments for the remainder of 2013 and expected to fund investments using liquid assets and debt financing, subject to underwriting returns and spreads over its cost of capital. It expected interest expense to rise as it financed investments with borrowings and potentially higher-cost longer-term capital. The filing provides no specific earnings or revenue guidance.
Management highlighted dependence on tenant and borrower performance, Medicare and Medicaid reimbursement changes, tenant insolvency, liability and insurance costs, property and loan impairments, interest-rate exposure, access to capital, and debt covenant compliance. Approximately 58% of continuing revenue came from operators of skilled nursing facilities with significant government-payor exposure. A 50-basis-point change in variable rates was estimated to change annual net interest expense by about $816,000, or $0.03 per diluted share. Contractual obligations included $31.745 million of construction commitments and $5.050 million of loan commitments; the company reported no outstanding guarantees or letters of credit. Management stated that disclosure controls were effective and that no material changes in internal control were identified.
Important facts for investors to verify
- Whether court approval and closing of the SeniorTrust and ElderTrust settlements occurred, and the final cash, note-cancellation and property values.
- Whether the Texas acquisitions’ contingent payment was earned and how the new leases performed.
- Completion and proceeds of the planned $21 million sale to NHC, including the resulting reduction in annual base rent.
- Collection and recoverability of remaining loans, particularly the $15 million SeniorTrust carrying value before settlement and exposure to other borrowers.
- Debt covenant headroom, refinancing or repayment of the $19.250 million mortgage due in November 2013, and the effect of variable rates on interest costs.
- Dividend sustainability relative to recurring cash generation; reported FAD and normalized FAD are non-GAAP measures and differ materially in this quarter because normalized results exclude the loan impairment.
- Ongoing concentration in NHC and exposure of skilled nursing tenants to government reimbursement changes.