National Health Investors, Inc. — Q1 2011 Form 10-Q
Business context and period. NHI is a self-managed healthcare REIT investing in leased healthcare properties and mortgage loans. This unaudited report covers the three months ended March 31, 2011, with comparisons to Q1 2010 unless otherwise noted. At quarter-end, its portfolio included 88 real estate properties and 30 mortgage investments; NHC accounted for 50% of continuing rental income.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $20.616 million | $20.183 million | +2.1% |
| Rental income | $19.020 million | $18.187 million | +4.6% |
| Mortgage interest income | $1.596 million | $1.996 million | -20.0% |
| Income before non-operating items | $13.412 million | $13.294 million | +0.9% |
| Income from continuing operations | $15.565 million | $14.499 million | +7.4% |
| Net income | $19.093 million | $15.943 million | +19.8% |
| Diluted EPS | $0.69 | $0.58 | +$0.11 |
| Operating cash flow | $17.355 million | $18.893 million | -8.1% |
Income before non-operating items was 65.1% of revenue, versus 65.9% in Q1 2010. Net income growth included a $2.299 million gain on real estate sales; continuing income also benefited from a $1.254 million increase in the interest-rate swap’s fair value, recognized as an offset to interest expense. These items make reported earnings growth less indicative of underlying rental and lending performance.
FFO was $19.484 million, up 5.9%; normalized FFO was $19.330 million, up 12.6%. Diluted FFO and normalized FFO were each $0.70 per share, compared with $0.66 and $0.62, respectively, in Q1 2010. FFO is a supplemental, non-GAAP measure and is not a substitute for operating cash flow.
Cash, debt and liquidity
- Cash and cash equivalents were $21.097 million at March 31, 2011, up from $2.664 million at December 31, 2010. Marketable securities were $21.378 million.
- Cash provided by operating activities was $17.355 million. Investing activities provided $6.020 million, including property-sale proceeds; financing activities used $4.942 million, including $16.752 million of dividends paid.
- Reported debt was $49.375 million, compared with $37.765 million at year-end 2010. NHI drew a $50 million, five-year term loan in January and had repaid its revolving balance by quarter-end. The term loan’s rate was fixed at 3.98%; the $50 million revolving facility remained undrawn and carried a floating rate of LIBOR plus 250 basis points.
- Management reported $92.475 million of liquidity, comprising cash, marketable securities and available revolver capacity. NHI was in compliance with its credit-facility covenants.
- The quarterly dividend declared was $0.615 per share, payable May 10, 2011. Total liabilities were $74.621 million and stockholders’ equity was $447.518 million.
Material changes and outlook
- Rental income rose 4.6%; management attributed underlying growth partly to 2010 investments. Excluding $1.520 million of past-due rent recognized in Q1 2010, rental income increased $2.353 million, or 13%.
- Mortgage interest income declined due to loan amortization, maturities and payoffs, partly offset by new lending. Management noted that it may continue to decline without further mortgage investments.
- NHI sold one skilled nursing facility in January and two medical office buildings in February, recognizing a combined $2.299 million gain. Five Texas facilities remained classified as held for sale at a $29.381 million carrying value.
- Management planned to evaluate new investments cautiously, subject to underwriting standards, and expected to maintain relatively low debt compared with total book capitalization and industry peers. No specific earnings or revenue guidance was provided.
- After quarter-end, NHI completed a $15 million acquisition of four Louisiana assisted-living facilities, leased for 15 years at initial annual rent of $1.275 million plus fixed escalators. It also sold marketable securities for $11.201 million net proceeds and an approximately $8.6 million financial-reporting gain.
Risks, contingencies and unusual items
- CMS’s April 28, 2011 proposed skilled-nursing Medicare rule presented alternatives ranging from a 1.5% rate increase to an 11.3% reduction, potentially effective October 1, 2011. NHI said two mortgage borrowers, with notes totaling $39.485 million, could be adversely affected and might have difficulty meeting payments or refinancing. NHI was discussing a one-year maturity extension with one borrower and potential property acquisitions with both.
- Rental income is concentrated: NHC contributed $9.477 million, or 50%, of Q1 continuing rental income. NHI reported that NHC represented 12.2% of real estate investment net book value.
- A new derivative shareholder lawsuit related to the previously settled CFA matter was filed in February 2011. NHI and individual defendants moved to dismiss; rulings were pending. The prior CFA adversary proceeding was dismissed with prejudice. Management said ordinary-course facility litigation was not expected to have a material adverse effect.
- NHI had a remaining construction-loan commitment of $3.632 million, capital-improvement commitments and other advances; it stated that liquidity was sufficient to fund commitments and new investments. Its ability to maintain REIT status remains important to its tax treatment.
- Management reported no real estate or mortgage write-downs in either comparison period, but noted future events could require impairment adjustments. The filing reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the final CMS reimbursement rule materially affects the two identified borrowers and the recoverability of their $39.485 million in notes.
- Whether NHC and other operators continue to meet lease and debt obligations, given customer concentration and healthcare reimbursement pressures.
- How much of reported earnings and FFO growth is sustainable after excluding property-sale and fair-value effects, and whether new investments offset declining mortgage income.
- Whether the pending shareholder litigation, remaining facility dispositions, and related financing commitments result in material costs or changes to expected proceeds.
- The timing and accounting impact of the post-quarter securities sales, including the approximately $8.6 million realized gain.