National Health Investors, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. NHI is a self-managed healthcare REIT investing in senior housing and medical properties through leases, mortgages and other loans.
Business context and portfolio
At quarter-end, NHI owned 207 healthcare properties in 32 states and had investments involving 216 facilities, including properties and notes receivable. Its real estate was leased to 29 lessees. Senior housing represented 65.8% of real estate revenue for the nine-month period; skilled nursing facilities represented 26.1%.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $71.4 million | $63.3 million | $207.6 million | $183.5 million |
| Net income attributable to common stockholders | $39.1 million | $33.0 million | $121.6 million | $110.4 million |
| Diluted earnings per share | $0.94 | $0.83 | $2.97 | $2.84 |
| Operating cash flow | — | — | $146.0 million | $129.3 million |
| Net cash used in investing | — | — | $144.8 million | $300.2 million |
Quarterly revenue rose 12.8% and common-stockholder net income rose 18.3% year over year. For the nine months, revenue increased 13.1% and net income increased 10.2%. Rental income grew 15.0% for both periods, chiefly from investments made since September 2016. Nine-month diluted FFO was $4.19 per share versus $3.82; normalized diluted AFFO was $3.54 versus $3.24. These are non-GAAP supplemental measures.
Cash and cash equivalents were $3.9 million at September 30. Debt carrying value was $1.111 billion; principal debt was approximately $1.128 billion. NHI reported $383 million of undrawn revolving capacity and total cash plus revolver availability of $386.9 million. Management reported a 6.4x fixed-charge coverage ratio and approximately 4.0x annualized net debt to Adjusted EBITDA. Nine-month dividends paid were $113.6 million; dividends declared were $2.85 per share.
Material changes and unusual items
- Rental income growth reflected new property investments, including acquisitions from Ravn, Prestige, LaSalle, Ensign, Bickford and Acadia. Real estate investment spending was $133.3 million during the first nine months.
- Interest expense increased 12.6% for the nine months, principally due to higher LIBOR and debt financing. In August, NHI amended its $800 million credit facility, extended the revolver and term-loan maturities to August 2022, and consolidated bank term loans into a $250 million term loan.
- NHI recognized a $10.0 million gain from sales of marketable securities in 2017, versus $23.5 million of such gains in 2016. The prior-year comparison also included $15.9 million of loan and realty write-offs; accordingly, reported net income comparisons include material nonrecurring items.
- NHI raised $122.2 million net through common-stock issuance and repurchased convertible notes. It reported a $591,000 nine-month loss on debt retirement.
- The quarterly dividend was $0.95 per share. Management’s indicated 2017 annual dividend was $3.80 per share, based on $0.95 for each of the first three quarters and annualization; this is not earnings guidance.
Outlook, risks and contingencies
Management said it would continue evaluating investments and expected to fund potential investments with available liquidity and debt; equity issuance could be used if needed to maintain its capital structure. It anticipated upward pressure on financing costs as interest rates rise and cited competition for healthcare assets. No specific full-year earnings or revenue guidance was provided.
- Tenant and borrower performance is central to rent and loan collections. Four operators—Holiday, Senior Living Communities, NHC and Bickford—accounted for about 64% of nine-month rental income. Skilled nursing operators are exposed to Medicare and Medicaid reimbursement changes; approximately 27% of revenue was derived from operators with significant government-payor exposure.
- In October, NHI issued a forbearance letter to a tenant for lease-coverage and vendor-arrearage defaults. Rent was current at September 30; the tenant and affiliates represented less than 4% of nine-month rental income, and related straight-line rent receivable was approximately $3.2 million.
- NHI committed to purchase three Texas skilled nursing facilities for $42 million and reported other remaining loan and development funding commitments. Contingent lease incentives and a $1.93 million letter-of-credit commitment also remain.
- About $167 million of debt was variable-rate and unhedged at quarter-end. Management estimated that a 50-basis-point rate increase would raise annual net interest expense by approximately $835,000, assuming balances were unchanged. Hedged term debt also experienced approximately $350,000 of hedge inefficiency after the facility amendment.
- Management said ordinary-course litigation was not expected to materially affect financial condition, results or cash flows. A new disclosed risk factor concerns cybersecurity, data privacy and potential related costs, litigation or enforcement actions.
Important facts for investors to verify
- Whether tenant coverage and payment performance—particularly the tenant under forbearance and major rent contributors—support ongoing collections.
- How much reported rental growth reflects cash rent versus straight-line rent; nine-month straight-line rental income was $19.0 million.
- Progress, funding needs and returns on the $42 million facility purchase commitment and other loan and development commitments.
- Debt covenant headroom, refinancing needs and the effect of rising rates, including future hedge performance and variable-rate exposure.
- Dividend coverage using cash-oriented measures, while accounting for NHI’s non-GAAP FFO, AFFO and FAD definitions and the impact of share issuance.