Business Context and Reporting Period
Company: National Health Investors, Inc. (NHI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: NHI is a Maryland corporation operating as a Real Estate Investment Trust (REIT) that invests in income-producing health care properties, primarily in the long-term care industry. As of June 30, 2009, the portfolio included 125 health care properties (75 leased real estate properties and 50 mortgage notes receivable) across 18 states. The company's largest customer is National HealthCare Corporation (NHC), which leases 41 of the company's properties.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenues | $32,019,000 | $31,611,000 |
| Net Income | $30,464,000 | $28,192,000 |
| Earnings Per Share (Diluted) | $1.10 | $1.01 |
| Funds From Operations (FFO) | $34,304,000 | $32,041,000 |
| Cash Provided by Operating Activities | $32,785,000 | $31,871,000 |
| Cash and Cash Equivalents (End of Period) | $65,254,000 | $94,810,000 |
| Total Debt (Bonds Payable) | $2,762,000 | $3,987,000 |
| Debt-to-Equity Ratio | 0.64% | N/A |
Liquidity: The company reported strong liquidity with $88,980,000 in cash and marketable securities (excluding $4,940,000 in an enhanced cash fund/IMA). Total assets were $453,223,000.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 1.3% year-over-year. Rental income rose 2.7% due to the recognition of percentage rent from NHC. Mortgage interest income decreased 6.5% due to loan payoffs and timing of interest recognition on non-performing loans.
- Profitability: Net income increased 8.1% to $30.5 million. This was driven by a $2.1 million gain from discontinued operations (including the release of deferred credits) and a $640,000 recovery on previously written-down loan amounts.
- Expense Increases: Total expenses increased 5.3%, primarily due to a $762,000 increase in stock-based compensation and $205,000 in additional legal fees related to the Care Foundation of America (CFA) litigation.
- Cash Flow Shift: Net cash used in investing activities turned negative ($32.3 million outflow) compared to a positive inflow in 2008, driven by the acquisition of three skilled nursing facilities in Texas for approximately $39.8 million.
- Debt Reduction: The company paid off $1.2 million in bonds, reducing total debt to a historic low of $2.8 million.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects rental income to increase in the second half of 2009 due to new investments in real estate leased to affiliates of Legend Healthcare, LLC. The company intends to maintain a low debt level and fund new investments through liquid assets or external financing if necessary. Dividends declared for the first half of 2009 were $0.55 per share per quarter.
Risks and Contingencies
- CFA Litigation: Care Foundation of America (CFA), a borrower with a $22.9 million non-performing mortgage note, filed for Chapter 11 bankruptcy and initiated an adversary proceeding against NHI. CFA alleges NHI exercised control over its board and engaged in "excess benefit transactions," seeking damages in excess of $25 million. NHI is vigorously defending the claims. An unfavorable outcome could have a material adverse effect on the company.
- Regulatory Risk: As a REIT, NHI must distribute at least 90% of taxable income to maintain tax-exempt status. Failure to qualify would result in significant federal and state income tax liabilities.
- Investment Risk: The company holds $4.9 million in an "enhanced cash fund" and separate investment management account (IMA) that were subject to other-than-temporary impairments in 2008. While no further impairments were recorded in the first half of 2009, future declines in fair value could result in additional losses.
Unusual Items
- Discontinued Operations: Included a $1.5 million gain from the release of deferred credits related to a 2004 property sale where the statute of limitations expired.
- Loan Recovery: Recorded a $640,000 recovery on a previously written-down loan from a former Allgood Healthcare facility.
Investor Verification Checklist
- CFA Litigation Status: Verify the progress of the adversary proceeding against Care Foundation of America and the potential impact of the $25 million claim on the $22.9 million receivable.
- REIT Compliance: Confirm the company's ability to meet the 90% distribution requirement for the full year 2009 to maintain tax-exempt status.
- Enhanced Cash Fund Valuation: Monitor the fair value of the $4.9 million investment in the Columbia Strategic Cash Fund and IMA for potential future impairments.
- Legend Healthcare Investments: Review the performance and lease terms of the new Texas facilities acquired in June and August 2009.
- Dividend Sustainability: Assess whether operating cash flows and FFO support the current dividend rate of $0.55 per quarter given the reduction in interest income.