National Health Investors, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in millions except per-share data. NHI is a healthcare REIT investing in senior housing, skilled nursing, hospitals, medical offices, and mortgage loans.
Financial performance and position
- Q3 revenue: $44.5, up 44.2% from $30.8 a year earlier, primarily reflecting new property investments. Rental income rose 49.5% to $41.7; straight-line rent adjustments were $4.2.
- Q3 earnings: Continuing-operations income was $25.5, up 14.2%; diluted continuing-operations EPS was $0.76 versus $0.79. Net income attributable to common stockholders was $25.3 versus $42.7, as the prior-year quarter included a $19.4 real-estate sale gain and discontinued-operations income.
- Nine-month results: Revenue was $131.8, up 54.9%; continuing-operations income was $75.0, up 36.2%; diluted continuing-operations EPS was $2.24 versus $1.95. Common-stockholder net income declined 5.5% to $74.1, mainly because 2013 included the sale gain and discontinued operations.
- Cash flow: Operating cash flow was $93.2 versus $74.4. Investing used $46.5 versus $117.1, and financing used $54.5 versus providing $41.0. Cash declined to $3.6 from $11.3 at year-end 2013. Dividends paid were $75.2; dividends declared for the first nine months totaled $2.31 per share.
- Debt and liquidity: Balance-sheet debt was $641.0, compared with $617.1 at year-end. Management reported $385.8 of liquidity, comprising cash, marketable securities, and $369.0 of unused revolving capacity. Management cited 7.1x fixed-charge coverage for the nine months and approximately 3.8x annualized debt to Adjusted EBITDA.
- Portfolio: At quarter-end, NHI reported 163 owned healthcare properties and $60.7 of mortgage and other notes receivable. Holiday, NHC, and Bickford generated 25%, 21%, and 12%, respectively, of nine-month continuing-operations revenue.
Material changes and notable items
- Rental growth reflected portfolio expansion, including the Holiday portfolio acquired in December 2013, 2014 acquisitions from Prestige and Chancellor, and growth in Bickford-related rent. Nine-month straight-line rent adjustments increased to $12.7 from $4.3.
- NHI issued $200.0 of 3.25% convertible senior notes due 2021 and amended its credit facility to $700.0, including a $450.0 revolver. It also obtained $38.0 of HUD financing and used the proceeds to repay revolver borrowings. Nine-month interest expense and debt-cost amortization rose substantially; $2.1 of prior credit-facility issuance costs was expensed following modifications.
- Management early-adopted the revised discontinued-operations standard prospectively. Prior-year reported sale gains remain in discontinued operations, affecting comparability.
- Subsequent to quarter-end, NHI acquired a 101-unit assisted-living facility for $18.1 million plus costs and announced up to $154.5 million of loans for a continuing-care retirement community construction project, expected to close by November 30, 2014.
Outlook, risks, and contingencies
- No formal earnings or revenue guidance was provided. Management said it would continue evaluating investments, favoring high-quality opportunities and selective senior-housing investments, while aiming to maintain relatively low leverage and grow regular dividends. Management noted that competition and asset prices were elevated and that higher longer-term borrowing costs could pressure investment spreads.
- Management expects to consider refinancing the $77.5 of assumed Fannie Mae mortgages, which mature in July 2015 and become prepayable without penalty after December 31, 2014. It is evaluating longer-term debt and other capital sources.
- Key risks include tenant and borrower ability to pay, dependence on Medicare and Medicaid reimbursement for skilled-nursing operators, interest-rate exposure, development and construction execution, refinancing access, and REIT qualification. Approximately 38% of continuing-operations revenue came from skilled-nursing operators with significant government-payor exposure.
- Commitments include construction and loan commitments shown as $9.4 and $2.2, respectively, in the contractual-obligations table, plus contingent payments and project-specific commitments described in the filing. Prestige earn-outs could reach $6.4; $3.0 was accrued as probable. Management said ordinary-course litigation was not expected to materially affect results.
- Management identified property development and construction as a new risk factor: cost overruns, lower occupancy, or other underperformance could reduce expected cash flows. No material changes to other previously reported risk factors were noted.
Investor verification priorities
- Assess how much reported rent growth is cash rent versus straight-line accruals, particularly the Holiday lease.
- Review tenant concentration and the operating and lease coverage of Holiday, NHC, and Bickford, including Bickford’s developing and lease-up properties.
- Verify refinancing plans and costs for the Fannie Mae mortgages, along with the debt maturity, covenant, and interest-rate profile.
- Track funding, collateral, presales, and repayment conditions for the proposed Timber Ridge loans, as well as the post-quarter acquisition.
- Compare recurring cash generation and normalized FAD with dividends; the filing cautions that FFO, AFFO, and FAD are non-GAAP supplemental measures and are not substitutes for operating cash flow.