National Health Investors(NHI) - 2022 Q4 - Annual Report

Part I Business National Health Investors, Inc. (NHI) is a self-managed REIT operating through two segments: Real Estate Investments and a Senior Housing Operating Portfolio (SHOP), primarily deriving revenue from rental income, SHOP resident fees, and interest income. - NHI is a self-managed REIT specializing in senior housing and medical facility investments, operating through two main segments: Real Estate Investments and the Senior Housing Operating Portfolio (SHOP)[22] Portfolio Overview as of December 31, 2022 | Segment | Investment Value | Property Count | Description | | :--- | :--- | :--- | :--- | | Real Estate Investments | ~$2.4 billion | 160 properties | 94 senior housing, 65 skilled nursing, 1 hospital under triple-net leases | | Mortgage/Notes Receivable | $248.5 million | 17 mortgages | Secured loans to healthcare operators | | SHOP Segment | ~$338.1 million | 15 properties | Independent living facilities with 1,732 units | Revenue Sources for Fiscal Year 2022 | Revenue Source | Amount (Millions) | Percentage of Total | | :--- | :--- | :--- | | Rental Income | $217.7 | 78.3% | | SHOP Revenue | $35.8 | 12.9% | | Interest Income | $24.7 | 8.9% | | Total Revenue | $278.2 | 100.0% | - The company's revenue is highly dependent on the operational success of its tenants, borrowers, and managers, whose income is influenced by occupancy rates, patient mix (private pay, Medicare, Medicaid), and reimbursement rates[27] Classification of Properties The company's property portfolio is classified into Real Estate Investments and the Senior Housing Operating Portfolio (SHOP), encompassing various senior housing and medical facility types. - The portfolio is classified into two main segments: Real Estate Investments and the Senior Housing Operating Portfolio (SHOP)[28] - Within Real Estate Investments, properties are categorized as Senior Housing or Medical, with Senior Housing further divided into 'Need-Driven' (Assisted Living, Senior Living Campuses) and 'Discretionary' (Independent Living, Entrance-Fee Communities)[28][29] - As of December 31, 2022, the portfolio included 66 assisted living facilities, 10 senior living campuses, 7 independent living facilities, 11 entrance-fee communities, 65 skilled nursing facilities, and one hospital[30][31][32][33][36][37] - The SHOP segment consists of 15 independent living facilities with 1,732 units, which are considered discretionary senior housing[39] Nature of Investments Investments are structured through purchase-leasebacks, property acquisitions, various loan types, and RIDEA-compliant operations, primarily under triple-net leases. - Investments are structured as purchase-leasebacks, property acquisitions, loans, or RIDEA-compliant operations[40] - Leases are typically triple-net with initial terms of 10-15 years, requiring tenants to cover all property-related expenses, including taxes, insurance, and repairs[41] - The company provides various types of loans, including mortgage, mezzanine, and construction loans, with interest rates ranging from 7.0% to 9.5% in 2022[41][44][45][46] - The SHOP segment was formed on April 1, 2022, by transitioning 15 properties from a triple-net lease into two ventures where NHI holds a majority interest and third-party managers operate the communities[49] Tenant Concentration The company faces significant tenant concentration, with Senior Living Communities and NHC accounting for 18% and 13% of total 2022 revenues, respectively. Tenant Concentration by Revenue (2022) | Tenant | Asset Class | Gross Real Estate Investment | Notes Receivable | 2022 Revenue | % of Total Revenue | | :--- | :--- | :--- | :--- | :--- | :--- | | Senior Living | EFC | $573.6 million | $48.5 million | $51.2 million | 18% | | NHC | SNF | $133.8 million | - | $36.9 million | 13% | - In 2022, NHI converted its tenant Bickford to a cash basis of accounting due to substantial doubt about its ability to continue as a going concern, resulting in a write-off of $18.1 million in straight-line rents and $7.1 million in lease incentives[60] - The legacy Holiday portfolio was restructured on April 1, 2022, following a dispute with Welltower, involving a $6.9 million settlement payment to NHI and the transition of 15 properties into the new SHOP segment[65][70] Government and Tax Regulation The company's operations and REIT status are subject to extensive government healthcare regulations and complex tax rules, including Medicare/Medicaid reimbursement and distribution requirements. - NHI's tenants and borrowers are subject to extensive healthcare regulations, including licensure, certification, Medicare/Medicaid reimbursement rules, and fraud and abuse laws, which can significantly impact their financial condition[79][80] - A significant portion of revenue for SNF tenants comes from Medicare and Medicaid, which are subject to frequent changes, with CMS estimating a 2.7% increase in payments to SNFs for fiscal year 2023[82][83] - NHI has elected to be taxed as a REIT and must continuously meet complex requirements related to income sources, asset composition, distributions, and stock ownership to maintain this status and avoid corporate income taxes[105][106][107] - To qualify as a REIT, NHI must distribute at least 90% of its REIT taxable income to stockholders annually[112] Risk Factors The company identifies significant risks primarily related to its tenants' and borrowers' financial health, which is susceptible to public health crises, regulatory changes, and rising operating costs, alongside substantial tenant concentration, real estate illiquidity, and REIT status adherence. - Tenant & Borrower Risks: The company's financial performance is highly dependent on the operating success of its tenants, with public health crises (like COVID-19), declining occupancy, increased labor costs, and changes to Medicare/Medicaid reimbursement adversely affecting tenants' ability to pay rent[126][128][131] - Concentration Risk: A significant percentage of revenue comes from a small number of tenants, with Senior Living and NHC generating approximately 30% of total revenue for the year ended December 31, 2022[137] - Business & Operational Risks: The company is exposed to risks from the illiquidity of its specialized real estate assets, potential impairment charges ($51.6 million in 2022), and cybersecurity breaches[147][160][173][174] - Debt & Capital Risks: The company relies on external capital for growth and refinancing, facing increased costs on variable-rate debt from rising interest rates and potential adverse impacts from credit rating downgrades on capital availability[179][181][182] - REIT Status Risks: Failure to continuously qualify as a REIT would result in significant adverse tax consequences, including being subject to corporate income tax and the inability to deduct distributions to stockholders[185] Properties As of December 31, 2022, NHI's portfolio is geographically concentrated in South Carolina and Texas, with lease expirations staggered, including significant maturities in 2029 and after 2032, and a master lease with NHC expiring in 2026. Top 5 States by Gross Investment as of Dec 31, 2022 | Location | Gross Investment ($ thousands) | | :--- | :--- | | South Carolina | $336,291 | | Texas | $298,599 | | Florida | $224,378 | | Washington | $200,530 | | Illinois | $196,481 | Lease Expiration Schedule by Annualized Gross Rent | Year | Percentage of Annualized Gross Rent | | :--- | :--- | | 2023 | 1.5% | | 2026 | 17.8% | | 2029 | 33.2% | | Thereafter | 30.4% | Legal Proceedings The company was involved in significant litigation with Welltower, Inc. regarding unpaid rent on the legacy Holiday portfolio, which was settled effective April 1, 2022, resulting in NHI receiving $6.9 million and the properties transitioning into its new SHOP segment. - NHI filed a lawsuit against Welltower, Inc. and its subsidiaries on December 20, 2021, in the Delaware Court of Chancery, alleging failure to pay rent and honor obligations after acquiring the Holiday portfolio[208] - A settlement was reached and formalized on March 31, 2022, as part of which NHI received $6.9 million in escrowed funds, recognized as rental income[209][211] - Effective April 1, 2022, the master lease with the Welltower affiliate was terminated, and the 15 remaining properties were transitioned into two new SHOP partnership ventures[210] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities NHI's common stock trades on the NYSE under the symbol "NHI", subject to ownership limits to protect its REIT status, which requires distributing at least 90% of its taxable income annually, and has underperformed relevant market indices over the past five years. - The company's common stock is traded on the New York Stock Exchange under the symbol "NHI"[216] - To protect its REIT status, the company's charter limits stock ownership to approximately 7.5% for most stockholders[214] 5-Year Cumulative Total Return Comparison | Year | NHI | MSCI US REIT Index | S&P 500 | | :--- | :--- | :--- | :--- | | 2017 | $100.00 | $100.00 | $100.00 | | 2018 | $105.71 | $95.43 | $95.62 | | 2019 | $120.04 | $120.09 | $125.72 | | 2020 | $109.20 | $110.99 | $148.85 | | 2021 | $96.51 | $158.79 | $191.58 | | 2022 | $94.79 | $119.87 | $156.88 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, NHI's financial performance was significantly impacted by portfolio restructuring, leading to a 6.9% decrease in total revenue to $278.2 million and a 41.5% drop in net income to $65.5 million, driven by lower rental income, property impairment charges, and credit loss provisions, despite maintaining strong liquidity. - The company established a new reportable segment, the Senior Housing Operating Portfolio (SHOP), effective April 1, 2022, by transitioning 15 former Holiday properties from a triple-net lease structure[232] - During 2022, the company granted $9.3 million in pandemic-related rent deferrals and forgave $4.1 million, with aggregate concessions totaling $44.3 million since the pandemic began[241] Key Financial Results Comparison (FY 2022 vs FY 2021) | Metric | 2022 ($ in thousands) | 2021 ($ in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $278,194 | $298,715 | (6.9)% | | Rental Income | $217,700 | $271,049 | (19.7)% | | Net Income | $65,501 | $111,967 | (41.5)% | | Loan and realty losses | $61,911 | $52,766 | 17.3% | - The decrease in rental income was driven by the Holiday portfolio transition, disposition of 22 properties, and approximately $33.1 million in write-offs of straight-line rents and lease incentives for tenants placed on a cash basis[292] - The company repurchased 2.5 million shares of common stock for an average price of $61.56 per share during 2022[258] Liquidity and Capital Resources The company maintains strong liquidity through cash, a revolving credit facility, and an ATM program, managing debt maturities and interest payments. - As of December 31, 2022, NHI had $19.3 million in unrestricted cash, $658.0 million available on its revolving credit facility, and $415.7 million available under its ATM program[295] - In March 2022, the company entered into a new $700.0 million unsecured revolving credit facility, replacing its previous $550.0 million facility[301] Debt Metrics as of December 31, 2022 | Metric | Value | | :--- | :--- | | Consolidated Net Debt | $1.128 billion | | Adjusted EBITDA | $242.3 million | | Consolidated Net Debt to Adjusted EBITDA | 4.7x | | Fixed Charge Coverage Ratio | 5.9x | - The company has material cash requirements of $487.5 million for the next twelve months, primarily for debt maturities ($415.4 million) and interest payments ($37.7 million)[328] FFO & FAD Funds From Operations (FFO) and Funds Available for Distribution (FAD) per share decreased in 2022 due to write-offs, increased credit loss reserves, and property dispositions. - NAREIT FFO per diluted share decreased 23.2% from $4.62 in 2021 to $3.55 in 2022, primarily due to write-offs of straight-line rents and lease incentives, increased credit loss reserves, and property dispositions[340][346] - Normalized FFO per diluted share decreased 6.5% from $4.60 in 2021 to $4.30 in 2022[341][346] - Normalized FAD, a measure of dividend-paying ability, decreased 4.0% from $209.5 million in 2021 to $201.0 million in 2022[343][346] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk from its variable-rate debt, with a hypothetical 50 basis-point change impacting annual net interest expense by approximately $1.4 million, while inflation risk is partially mitigated by CPI-based rent escalators and triple-net leases. - As of December 31, 2022, the company had $282.0 million of variable-rate debt, exposing it to interest rate fluctuations[351] - A 50 basis-point (0.50%) increase or decrease in interest rates would change annual net interest expense by approximately $1.4 million[352] - Inflation risk is mitigated through contractual rent increases, some of which are tied to the CPI, and triple-net leases that require tenants to pay all property operating expenses[358] Financial Statements and Supplementary Data The consolidated financial statements for 2020-2022 were audited by BDO USA, LLP, receiving an unqualified opinion, with critical audit matters including property impairment assessment and SHOP venture consolidation, while the balance sheet shows decreases in total assets and liabilities due to dispositions, impairments, and debt repayments. - The independent registered public accounting firm, BDO USA, LLP, issued an unqualified opinion on the consolidated financial statements[361] - Critical audit matters included management's identification and assessment of indicators for potential impairment of real estate properties and the accounting for the consolidation of the SHOP ventures[368][370] Consolidated Balance Sheet Summary ($ in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Real estate properties, net | $2,118,210 | $2,317,880 | | Total Assets | $2,507,424 | $2,838,876 | | Total Debt | $1,147,511 | $1,242,883 | | Total Liabilities | $1,217,518 | $1,321,893 | | Total Equity | $1,280,081 | $1,516,983 | Consolidated Statement of Income Summary ($ in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenues | $278,194 | $298,715 | $332,811 | | Total Expenses | $241,856 | $216,139 | $161,766 | | Net Income | $65,501 | $111,967 | $185,311 | Controls and Procedures Company management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, an assessment affirmed by the independent auditor, with no significant changes to internal controls during the fourth quarter of 2022. - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[586] - Management's assessment concluded that the company's internal control over financial reporting was effective as of December 31, 2022[591] - No significant changes were made to internal controls over financial reporting during the fourth quarter of 2022 that materially affected, or are reasonably likely to materially affect, internal controls[588] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees Information required for Items 10 through 14, covering directors, executive officers, corporate governance, executive compensation, security ownership, related transactions, director independence, and principal accountant fees and services, is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders. - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Registrant's definitive proxy statement for its 2023 annual meeting of stockholders[603][604][605][606][607] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report, including consolidated financial statements, real estate and mortgage loan schedules, and various corporate documents and material contracts. - This part of the report contains the list of all financial statements, schedules, and exhibits filed with the Form 10-K[609]