National Health Investors, Inc. — Q3 2019 Form 10-Q
Business context and period. NHI is a self-managed healthcare REIT investing in senior housing and medical properties through leases, joint ventures, and mortgage and other loans. This unaudited report covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. At quarter-end, NHI owned 222 real estate properties and held mortgage and other notes receivable tied to 14 facilities, across 34 states.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $81.7 million | $74.9 million | $235.9 million | $220.6 million |
| Net income attributable to common stockholders | $42.8 million | $41.0 million | $118.4 million | $117.3 million |
| Diluted earnings per share | $0.97 | $0.97 | $2.72 | $2.80 |
| Diluted NAREIT FFO per share | $1.42 | $1.39 | $4.09 | $4.07 |
| Diluted normalized AFFO per share | $1.32 | $1.28 | $3.80 | $3.76 |
- For the nine months, rental income increased 3.8% to $218.8 million; interest income and other increased to $17.1 million from $9.8 million, primarily reflecting new loans. Total revenue rose 6.9%, while net income attributable to common stockholders rose 1.0%.
- Interest expense increased 15.8% to $41.9 million for the nine months, mainly from additional borrowings and the conversion of $300 million of revolver borrowings into a term loan. Depreciation increased 7.4% to $57.2 million as the portfolio expanded.
- Operating cash flow was $184.8 million for the nine months, versus $156.3 million. Investing used $304.9 million, primarily for real estate and loan investments; financing provided $126.5 million. Cash and restricted cash totaled $16.3 million at September 30.
- Debt was $1.449 billion, compared with $1.282 billion at year-end 2018. NHI reported $300 million available under its revolving credit facility and was in compliance with debt covenants. Management reported 4.5x consolidated net debt to annualized Adjusted EBITDA and 5.3x fixed-charge coverage for the nine months, compared with 6.1x fixed-charge coverage in the prior-year period.
- The company declared dividends of $3.15 per share during the first nine months, including $1.05 in Q3. Its regular quarterly dividend was increased to $1.05 in February 2019, or $4.20 annualized.
Material changes and significant items
- NHI made substantial new investments, including a $127.9 million investment in six Discovery senior housing facilities, property acquisitions, and new or expanded loans. It issued 1.21 million shares through its at-the-market program for approximately $95.8 million net proceeds during the nine months.
- Holiday’s lease restructuring reduced its annual base rent beginning in 2019 from $39.0 million to $31.5 million, while extending the lease through 2035. The restructuring also included a property transfer and a $17.1 million cash payment to NHI.
- NHI recorded a $2.5 million impairment on two assisted living properties being marketed for sale. Separately, an eight-property portfolio was classified as held for sale after the tenant indicated it intended to exercise a purchase option; NHI expected the transaction to close in Q1 2020.
- Common shares outstanding increased to 43.96 million from 42.70 million at year-end 2018. Nine-month diluted EPS declined despite modestly higher net income, reflecting share-count growth and other per-share effects.
- Effective January 1, 2019, NHI adopted the new lease accounting standard; management reported no cumulative adjustment to retained earnings. The company also recorded tenant property-tax and insurance reimbursements as both rental revenue and expense under the new lessor guidance.
Outlook, commentary, and risks
- Management expected to continue evaluating real estate and loan investments for the remainder of 2019, funded through available liquidity and debt, with equity issuance potentially used to rebalance capital after acquisitions. The filing does not provide specific earnings or FFO guidance.
- Management cited improving Bickford occupancy during 2019, but its reported lease coverage remained relatively weak: 1.07x for the portfolio in Q2 2019, versus 1.16x a year earlier. Management attributed pressure in need-driven senior housing partly to softer occupancy and rising wages. The filing also reports lower coverage for need-driven senior housing overall.
- Revenue is concentrated among major tenants: Bickford, Senior Living Communities, Holiday, and National HealthCare Corporation accounted for substantial portions of rental income. NHI depends on tenants’ and borrowers’ ability to operate successfully and meet rent and debt obligations; tenant defaults, bankruptcy, and operator transitions could affect collections.
- Approximately 26% of revenue was derived from operators of skilled nursing facilities, whose businesses are exposed to Medicare and Medicaid reimbursement changes. NHI also identified risks from regulation, labor and insurance costs, real estate impairment, development and construction, interest rates, refinancing, and maintaining REIT qualification.
- At September 30, approximately $190 million of variable-rate debt was exposed to interest-rate changes; $610 million was hedged through swaps. Management estimated a 50-basis-point rate increase or decrease would change annual net interest expense by approximately $950,000. LIBOR discontinuation by December 2021 could also affect borrowing costs.
- Remaining commitments included $99.3 million of loan funding and $17.8 million of development funding, as well as up to $27.4 million of contingent lease inducements. NHI reported ongoing litigation involving former Regency and LaSalle operators; management did not expect pending proceedings generally to materially affect financial condition, results, or cash flows.
- After quarter-end, Fitch and S&P announced public BBB- issuer and senior unsecured debt ratings, each with a stable outlook. Management reported no material change in risk factors from its 2018 Form 10-K.
Important facts for investors to verify
- Whether the planned sale of the eight held-for-sale properties closes on schedule and at what proceeds, and whether the separate impaired properties are sold near estimated values.
- Tenant rent coverage, occupancy, and liquidity—particularly for Bickford and properties undergoing operator transitions—and any further changes to rent or lease terms.
- Progress and credit performance of the expanding loan portfolio, including the remaining commitments and exposure to borrowers classified as variable-interest entities.
- Debt maturities, revolver availability, covenant headroom, interest-rate hedging, and the effect of LIBOR replacement and future capital needs.
- Dividend sustainability relative to normalized FAD and other cash resources; these supplemental REIT measures are not GAAP cash flow measures and may not be comparable across companies.