Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 6. Exhibits.
Exhibits
EX-31.1
nhi-3312019x10qex311.htm
EX-31.2
nhi-3312019x10qex312.htm
EX-32
nhi-3312019x10qex32.htm
National Health Investors Earnings 2019-03-31
NHI 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 nhi-3312019x10qq1.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ x ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 001-10822
National Health Investors, Inc.
(Exact name of registrant as specified in its charter)
Maryland
62-1470956
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
222 Robert Rose Drive, Murfreesboro, Tennessee
37129
(Address of principal executive offices)
(Zip Code)
(615) 890-9100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [ x ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ x ]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ x ]
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
NHI
New York Stock Exchange
There were 43,199,318 shares of common stock outstanding of the registrant as of May 3, 2019.
(in thousands, except share and per share amounts)
March 31, 2019
December 31, 2018
(unaudited)
Assets:
Real estate properties:
Land
$
207,380
$
202,196
Buildings and improvements
2,676,127
2,599,526
Construction in progress
19,810
16,643
2,903,317
2,818,365
Less accumulated depreciation
(468,562
)
(451,483
)
Real estate properties, net
2,434,755
2,366,882
Mortgage and other notes receivable, net
257,481
246,111
Cash and cash equivalents
5,177
4,659
Straight-line rent receivable
75,123
105,620
Assets held for sale, net
3,745
—
Other assets
29,987
27,298
Total Assets
$
2,806,268
$
2,750,570
Liabilities and Stockholders’ Equity:
Debt
$
1,287,205
$
1,281,675
Accounts payable and accrued expenses
22,532
19,890
Dividends payable
45,359
42,700
Lease deposit liabilities
10,638
10,638
Deferred income
24,550
5,954
Total Liabilities
1,390,284
1,360,857
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value; 60,000,000 shares authorized;
43,199,318 and 42,700,411 shares issued and outstanding
432
427
Capital in excess of par value
1,406,822
1,369,919
Cumulative net income in excess of dividends
8,388
18,068
Accumulated other comprehensive income
342
1,299
Total Stockholders' Equity
1,415,984
1,389,713
Total Liabilities and Stockholders’ Equity
$
2,806,268
$
2,750,570
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. The Condensed Consolidated Balance Sheet at December 31, 2018 was derived from the audited consolidated financial statements at that date.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
We, the management of National Health Investors, Inc., (“NHI” or the “Company”) believe that the unaudited condensed consolidated financial statements of which these notes are an integral part include all normal, recurring adjustments that are necessary to fairly present the condensed consolidated financial position, results of operations and cash flows of NHI in all material respects. The Condensed Consolidated Balance Sheet at December 31, 2018 has been derived from the audited consolidated financial statements at that date. We assume that users of these condensed consolidated financial statements have read or have access to the audited December 31, 2018 consolidated financial statements and that the adequacy of additional disclosure needed for a fair presentation, except regarding material contingencies, may be determined in that context. Accordingly, notes and other disclosures which would substantially duplicate those contained in our most recent Annual Report on Form 10-K for the year ended December 31, 2018 have been omitted. This condensed consolidated financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons including, but not limited to, acquisitions and dispositions, changes in interest rates, rents and the timing of debt and equity financings. For a better understanding of NHI and its condensed consolidated financial statements, we recommend reading these condensed consolidated financial statements in conjunction with the audited consolidated financial statements for the year ended December 31, 2018, which are included in our 2018 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”), a copy of which is available at our web site: www.nhireit.com.
Principles of Consolidation - The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, joint ventures, partnerships and consolidated variable interest entities (“VIE”), if any. All intercompany transactions and balances have been eliminated in consolidation.
A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.
We apply Financial Accounting Standards Board (“FASB”) guidance for our arrangements with VIEs which requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of the VIE. In accordance with FASB guidance, management must evaluate each of the Company’s contractual relationships which creates a variable interest in other entities. If the Company has a variable interest and the entity is a VIE, then management must determine whether the Company is the primary beneficiary of the VIE. If it is determined that the Company is the primary beneficiary, NHI would consolidate the VIE. We identify the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. We perform this analysis on an ongoing basis.
If the Company has determined that an entity is not a VIE, the Company assesses the need for consolidation under all other provisions of Accounting Standards Codification (“ASC”) Topic 810 Consolidation. These provisions provide for consolidation of majority-owned entities where a majority voting interest held by the Company demonstrates control of such entities in the absence of any legal constraints.
At March 31, 2019, we held an interest in six unconsolidated VIEs, and, because we generally lack either directly or through related parties any material input in the activities that most significantly impact their economic performance, we have concluded that NHI is not the primary beneficiary. Accordingly, we account for our transactions with these entities and their subsidiaries at amortized cost.
Our VIEs are summarized below by date of initial involvement. For further discussion of the nature of the relationships, including the sources of our exposure to these VIEs, see the notes to our condensed consolidated financial statements cross-referenced below.
1 Notes, straight-line rent receivables, and unamortized lease incentives
We are not obligated to provide support beyond our stated commitments to these tenants and borrowers whom we classify as VIEs, and accordingly, our maximum exposure to loss as a result of these relationships is limited to the amount of our commitments, as shown above and discussed in the notes. When the above relationships involve leases, some additional exposure to economic loss is present. Generally, additional economic loss on a lease, if any, would be limited to that resulting from a short period of arrearage and non-payment of monthly rent before we are able to take effective remedial action, as well as costs incurred in transitioning the lease to a new tenant. The potential extent of such loss will be dependent upon individual facts and circumstances, cannot be quantified, and is therefore not included in the tabulation above. Typically, the only carrying amounts involving our leases are accumulated straight-line receivables and unamortized lease incentives. For VIE relationships listed above without a note reference, refer to our financial statements included in our most recent Annual Report on Form 10-K for the year ended December 31, 2018.
Cash and Cash Equivalents and Restricted Cash - Cash equivalents consist of all highly liquid investments with an original maturity of three months or less. Restricted cash includes amounts required to be held on deposit in accordance with agency agreements governing our Fannie Mae and HUD mortgages.
The following table sets forth our cash, cash equivalents and restricted cash reported within the Company’s Condensed Consolidated Statements of Cash Flows (in thousands):
March 31, 2019
March 31, 2018
Cash and cash equivalents
$
5,177
$
3,230
Restricted cash
10,377
5,381
$
15,554
$
8,611
Leases - We record our operating leases under the guidance of ASC Topic 842, Leases. Our leases generally have an initial leasehold term of 10 to 15 years followed by one or more 5-year tenant renewal options. The leases are “triple net leases” under which the tenant is responsible for the payment of all taxes, utilities, insurance premiums, repairs and other charges relating to the operation of the properties, including required levels of capital expenditures each year. The tenant is obligated at its expense to keep all improvements, fixtures and other components of the properties covered by “all risk” insurance in an amount equal to at least the full replacement cost thereof, and to maintain specified minimal personal injury and property damage insurance, protecting us as well as the tenant. The leases also require the tenant to indemnify and hold us harmless from all claims resulting from the use, occupancy and related activities of each property by the tenant, and to indemnify us against all costs related to any release, discovery, clean-up and removal of hazardous substances or materials, or other environmental responsibility with respect to each facility. These provisions, along with a growing senior demographic and the historical propensity for real estate to hold its value, collectively constitute much of the means by which the risk associated with the residual value of our properties is mitigated. Additionally, in monitoring the performance of our properties, we are positioned to respond appropriately to declines in physical plant or tenant performance. While we do not incorporate residual value guarantees, the above lease provisions and considerations inform our expectation of realizable value from our properties upon the expiration of their lease terms. The residual value of our real estate under lease is still subject to various market, asset, and tenant-specific risks and characteristics. As the classification of our leases is dependent on the fair value of estimated cash flows at lease commencement, residual values represent significant assumptions in our accounting for operating leases. Similarly, the exercise of options is also subject to these same risks, making a tenant’s lease term another significant variable in a lease’s cash flows.
Most of our existing leases contain annual fixed escalators in rent payments, and, for financial statement purposes, rental income is recognized on a straight-line basis over the term of the lease. Other operators lease from us under leases that provide for variable escalation in lease payments based on contingent factors not determinable in advance. Principally, variable revenue from two operators constitutes 21% of our total revenue and derives from either an index applied to the measured level of operations or the
consumer price index. Additionally, we derive variable payments from those operators discussed under the sub-heading “Tenant Transition” for which variable payments are determined as discussed later in Note 2. Our variable revenue from these operators is recognized when received. A summary of future minimum lease payments as of March 31, 2019, can be found in Note 2.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Earnings Per Share - The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assumes the exercise of stock options using the treasury stock method, to the extent dilutive. Diluted earnings per share also incorporate the potential dilutive impact of our convertible senior notes. We apply the treasury stock method to our convertible debt instruments, the effect of which is that conversion will not be assumed for purposes of computing diluted earnings per share unless the average share price for the period exceeds the conversion price per share.
Reclassifications - We have reclassified certain balances where necessary to conform the presentation of prior periods to the current period. These reclassifications had no effect on previously reported net income.
New Accounting Pronouncements - For a review of recent accounting pronouncements pertinent to our operations and management’s judgment as to the impact that the eventual adoption of these pronouncements will have on our financial position and results of operations, see Note 10.
NOTE 2. REAL ESTATE
As of March 31, 2019, we owned 220 health care real estate properties located in 33 states and consisting of 143 senior housing communities (“SHO”), 72 skilled nursing facilities (“SNF”), 3 hospitals and 2 medical office buildings. Our senior housing communities include assisted living facilities, senior living campuses, independent living facilities, and entrance-fee communities. These investments (excluding our corporate office of $2,471,000) consisted of properties with an original cost of approximately $2,900,846,000 rented under triple-net leases to 30 lessees.
During the three months ended March 31, 2019, we made the following real estate investments and commitments as described below ($ in thousands):
Operator
Date
Properties
Asset Class
Amount
Wingate Healthcare
January 2019
1
SHO
$
52,200
Holiday Retirement
January 2019
1
SHO
38,000
$
90,200
Wingate
On January 15, 2019, we acquired a 267-unit senior living campus in Massachusetts for a purchase price of $50,300,000, including closing costs of $300,000. The facility is being leased to Wingate Healthcare, Inc. (“Wingate”) for a term of 10 years, with three five-year renewal options, at an initial lease rate of 7.5% plus annual fixed escalators. We have committed to the additional funding of up to $1,900,000 in capital improvements, and the lease provides for incentive payments up to $5,000,000 to become available beginning in 2020 upon the attainment of certain operating metrics. NHI will have a right of first offer on two additional Wingate-operated facilities. We accounted for the transaction as an asset purchase.
Major Tenants
Holiday
In November 2018, we entered into a lease amendment and guaranty release (“the Agreement”) with an affiliate of Holiday Retirement (“Holiday”). Among other provisions, the Agreement decreased base rent beginning in 2019 from $39,000,000 to $31,500,000, extended the term of the original lease through 2035, and increased required minimum capital expenditure per unit. As consideration for amending provisions included in the original 2013 lease, Holiday agreed to pay NHI $55,125,000 in cash or real estate and forfeit $10,637,000 of their original $21,275,000 security deposit.
On January 31, 2019, we acquired a senior housing facility in Vero Beach, Florida from Holiday consisting of 157 independent living and 71 assisted living units in exchange for $38,000,000 toward the $55,125,000 receivable arising from the lease amendment, discussed above. The property was added to the master lease at a 6.71% lease rate. Under the restructured master lease, annual lease escalators ranging from 2% to 3%, based on portfolio revenue growth, will go into effect on November 1, 2020. Holiday settled the remaining commitment to NHI with cash of $17,125,000 at closing. Acquisition of the property and collection of residual cash flowed through our accounts as adjustments to lease receivables and resulted in the change of our straight-line receivable from Holiday at the beginning of the year into a straight-line payable, which is included in the accompanying Condensed Consolidated Balance Sheets as “deferred income” at March 31, 2019.
As of March 31, 2019, we leased 26 independent living facilities to Holiday. Of our total revenues, $9,930,000 (13%) and $10,954,000 (15%) were derived from Holiday for the three months ended March 31, 2019 and 2018, respectively, including $1,630,000 and $1,530,000 in straight-line rent income, respectively. Our tenant operates the facilities pursuant to a management agreement with a Holiday-affiliated manager.
Bickford
As of March 31, 2019, our Bickford Senior Living (“Bickford”) lease portfolio consists of the following ($ in thousands):
Lease Expiration
June 2023
September 2027
May 2031
April 2033
Total
Number of Properties
13
4
28
5
50
2019 Contractual Rent
$
11,468
$
1,576
$
30,765
$
4,826
$
48,635
2019 Straight Line Rent
358
195
3,937
843
5,333
$
11,826
$
1,771
$
34,702
$
5,669
$
53,968
Of our total revenues, $13,244,000 (17%) and $11,445,000 (16%) were recognized as rental income from Bickford for the three months ended March 31, 2019 and 2018, including $1,371,000 and $1,169,000 in straight-line rent income, respectively.
Senior Living Communities
As of March 31, 2019, we leased 11 retirement communities totaling 2,216 units to Senior Living Communities, LLC (“Senior Living”). The 15-year master lease, which began in December 2014, contains two 5-year renewal options and provides for an annual escalator of 3% effective January 1, 2019.
Of our total revenues, $11,532,000 (15%) and $11,449,000 (16%) in rental income were derived from Senior Living for the three months ended March 31, 2019 and 2018, respectively, including $1,058,000 and $1,359,000 in straight-line rent income, respectively.
NHC
As of March 31, 2019, we leased 42 facilities under two master leases to National HealthCare Corporation (“NHC”), a publicly-held company. The facilities leased to NHC consist of 3 independent living facilities and 39 skilled nursing facilities (4 of which are subleased to other parties for whom the lease payments are guaranteed to us by NHC). These facilities are leased to NHC under the terms of an amended master lease agreement originally dated October 17, 1991 (“the 1991 lease”) which includes our 35 legacy properties and a master lease agreement dated August 30, 2013 (“the 2013 lease”) which includes 7 skilled nursing facilities acquired in 2013.
The 1991 lease expiration is December 31, 2026. There are two additional 5-year renewal options, each at fair rental value as negotiated between the parties and determined without including the value attributable to any improvements to the leased property voluntarily made by NHC at its expense. Under the terms of the 1991 lease, the base annual rental is $30,750,000 and rent escalates by 4% of the increase, if any, in each facility’s revenue over a 2007 base year. The 2013 lease provides for a base annual rental of $3,450,000 and has a lease expiration of August 2028. Under the terms of the 2013 lease, rent escalates 4% of the increase, if any, in each facility’s revenue over the 2014 base year. For both the 1991 lease and the 2013 lease, we refer to this additional rent component as “percentage rent.” During the last three years of the 2013 lease, NHC will have the option to purchase the facilities for $49,000,000.
The following table summarizes the percentage rent income from NHC (in thousands):
Three Months Ended
March 31,
2019
2018
Current year
$
877
$
853
Prior year final certification1
334
285
Total percentage rent income
$
1,211
$
1,138
1 For purposes of the percentage rent calculation described in the master lease agreement, NHC’s annual revenue by facility for a given year is certified to NHI by March 31st of the following year.
Of our total revenues, $9,748,000 (13%) and $9,674,000 (13%) in rental income were derived from NHC for the three months ended March 31, 2019 and 2018, respectively.
The chairman of our board of directors is also a director on NHC’s board of directors. As of March 31, 2019, NHC owned 1,630,462 shares of our common stock.
Purchase Options
Certain of our operators hold purchase options allowing them to acquire properties they currently lease from NHI. For options open or coming open in the near future, we are engaged in preliminary negotiations to continue as lessor or in some other capacity.
A summary of these tenant options is presented below ($ in thousands):
Asset
Number of
Lease
1st Option
Option
Contractual
Type
Properties
Expiration
Open Year
Basis
Rent
MOB
1
February 2025
Open
i
$
302
SHO
4
September 2027
Open
iv
$
1,560
HOSP
1
September 2027
2020
ii
$
2,673
SHO
8
December 2024
2020
ii
$
6,027
HOSP
1
March 2025
2020
iv
$
1,900
SHO
2
May 2031
2021
iv
$
4,892
HOSP
1
June 2022
2022
i
$
3,460
SNF
7
August 2028
2025
iii
$
3,732
SNF
1
September 2028
2028
iii
$
463
Tenant purchase options generally give the lessee an option to purchase the underlying property for consideration determined by i) greater of fixed base price or fair market value; ii) a fixed base price plus a specified share in any appreciation; iii) fixed base price; or iv) a fixed capitalization rate on lease revenue.
Other Portfolio Activity
Tenant Transition
As of March 31, 2019, we continued to transition three lease portfolios to new operators as a result of non-compliance with our lease terms. The properties consist of three former Regency buildings, five former LaSalle Autumn Leaves properties and a property formerly leased to Landmark. To expedite stabilization of the facilities, NHI has committed to specified income-generating capital expenditures for the re-branding and refurbishment of certain of these properties. While the transition is now underway, during the first quarter of 2019, some agreements concerning the transition were informal in nature. Background of the tenant relationships is described in the financial statements included in Form 10-K for the year ended December 31, 2018.
In June 2018, East Lake Capital Management LLC (“East Lake”) and certain related entities, including SH Regency Leasing, LLC (for three assisted living facilities in Tennessee, Indiana and North Carolina referred to as “Regency”), filed suit against NHI in Texas seeking injunctive and declaratory relief and unspecified monetary damages. We countered with motions calling for the immediate appointment of a receiver and for pre-judgment possession. Resulting from these claims and counterclaims, on December 6, 2018, the plaintiff parties entered into an agreement resulting in Regency vacating the facilities in December 2018. NHI arranged with experienced third-party operators to operate the three buildings. Until operations become stabilized or
more formal long-term lease agreements are entered into, NHI is to receive 95% of operating cash flow, after management fees, generated by the Tennessee facility, and 100% of operating cash flow from a similar arrangement for the Indiana facility. The Charlotte facility remains closed while undergoing significant upgrades which are expected to be completed in June 2019. NHI has committed $3,100,000 toward these upgrades as well as anticipated facility operating losses.
Another of our tenants, The LaSalle Group (“LaSalle”), has been in default on its rent payments since November 2018. With no rent payment forthcoming in the first quarter of 2019, we began the process to transition to a new tenant, and on April 16, 2019, we placed the five buildings with a new tenant with NHI to receive 100% of operating cash flow, after management fees, generated by the facilities pending stabilization of the operations of the facility. We also commenced litigation for the recovery of certain funds owed under the lease and against the principal executive personally under the guaranty agreement
At December 31, 2018, we had a single-property lease in Wisconsin with Landmark Senior Living (”Landmark”) that was non-performing. For the three months ended March 31, 2019, we recorded $625,000 in lease income for amounts collected during the period. In February 2019, we transitioned the lease to BAKA Enterprises, (“BAKA”), temporarily acting under a management agreement with Landmark. Under terms of the new lease, after regulatory approval, NHI will receive 95% of operating cash flow, after management fees, as generated by the facilities. Upon the establishment of an operational baseline, beginning in year two, the agreement calls for a rent reset to fair value. The agreement provides for a term of 8 years, subject to renewal.
As we seek to stabilize the operations of these facilities, if our resulting tenants or operating partners do not have adequate liquidity to accept the risks and rewards of a tenant-lessee, NHI might be deemed the primary beneficiary of the operations and might be required to consolidate those statements of financial position and results of operations of the managers or operating partners into our consolidated financial statements.
Of our total revenue, $702,000 (1%) and $3,172,000 (4%) in lease revenues were derived from the above properties for the three months ended March 31, 2019 and 2018, respectively.
Assets Held For Sale
During the three months ended March 31, 2019, we identified two assisted living properties for disposal and began active marketing of the properties. The buildings are smaller than are typical of our portfolio and are no longer considered to be an appropriate investment for NHI. In January we ceased recording depreciation on the properties, and we booked an adjustment to lease revenues to write off the associated $124,000 in straight-line receivables. We recognized an impairment loss of $2,500,000 to write down the properties to their estimated net realizable value of $3,745,000 and have classified the assets as available for sale on the Condensed Consolidated Balance Sheet at March 31, 2019.
Future Minimum Lease Payments
With the adoption of Accounting Standards Codification (“ASC”) Topic 842, Leases, as discussed in Note 10, our minimum lease payments are now determined under guidance different from that required as of December 31, 2018, when we were subject to ASC Topic 840 Leases. Presented in the following table are future minimum lease payments, as of March 31, 2019, to be received by us under our operating leases, as determined under ASC 842 (in thousands):
March 31, 2019
2019
$
192,261
2020
256,991
2021
257,610
2022
259,674
2023
253,653
Thereafter
1,719,019
$
2,939,208
We assess the collectibility of our lease receivables, including deferred rents receivable, based on several factors, including payment history, the financial strength of the tenant and any guarantors, historical operations and operating trends of the property, and current economic conditions. If our evaluation of these factors indicates it is not probable that we will be to recover substantially all of the receivable, we de-recognize the deferred rent receivable asset and record as a reduction in rental revenue.
At March 31, 2019, we had net investments in mortgage notes receivable with a carrying value of $213,563,000, secured by real estate and UCC liens on the personal property of 12 facilities, and other notes receivable with a carrying value of $43,918,000, guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. All our notes receivable were on full accrual basis and no allowance for doubtful accounts was considered necessary at March 31, 2019 or December 31, 2018.
Bickford
At March 31, 2019, our construction loans to Bickford are summarized as follows:
Commencement
Rate
Maturity
Commitment
Drawn
Location
July 2016
9%
5 years
$
14,000,000
$
(13,047,000
)
Illinois
January 2017
9%
5 years
14,000,000
(13,191,000
)
Michigan
January 2018
9%
5 years
14,000,000
(6,134,000
)
Virginia
July 2018
9%
5 years
14,700,000
(4,042,000
)
Michigan
$
56,700,000
$
(36,414,000
)
The construction loans are secured by first mortgage liens on substantially all real and personal property as well as a pledge of any and all leases or agreements which may grant a right of use to the property. Usual and customary covenants extend to the agreements, including the borrower’s obligation for payment of insurance and taxes. NHI has a fair market value purchase option on the properties at stabilization of the underlying operations. On these development projects, Bickford as borrower is entitled to up to $2,000,000 per project in incentive loan draws based on the achievement of predetermined operational milestones and, if funded, will increase the principal amount and NHI's future purchase price and eventual NHI lease payment.
Our loans to Bickford represent a variable interest. Bickford is structured to limit liability for potential claims for damages, is capitalized to achieve that purpose and is considered a VIE within the definition set forth in Note 1.
Life Care Services - Sagewood
On December 21, 2018 we entered into an agreement to lend LCS-Westminster Partnership IV LLP (“LCS-WP IV”), an affiliate of Life Care Services (“LCS”), the manager of the facility, up to $180,000,000. The loan agreement conveys a mortgage interest and will facilitate the construction of Phase II of Sagewood, a Type-A Continuing Care Retirement Community in Scottsdale, AZ. As an affiliate of a larger company, LCS-WP IV is structured to limit liability for potential damage claims, is capitalized to achieve that purpose and is considered a VIE within the definition set forth in Note 1.
The loan takes the form of two notes under a master credit agreement. The senior note (“Note A”) totals $118,800,000 at a 7.25% interest rate with 10 basis-point annual escalators after year three and has a term of 10 years. We have funded $77,118,000 of Note A as of March 31, 2019. Note A is interest-only and is locked to prepayment until January 2021. After 2020, the prepayment penalty starts at 2% and declines to 1% in 2022. The second note (“Note B”) is a construction loan for up to $61,200,000 at an annual interest rate of 8.5% and carries a five-year maturity. The total amount funded on Note B was $15,612,000 as of March 31, 2019.
Life Care Services - Timber Ridge
In February 2015, we entered into an agreement with LCS-Westminster Partnership III LLP (“LCS-WP III”), an affiliate of LCS, the manager of the facility, to lend up to $154,500,000. The loan agreement conveys a mortgage interest and facilitated the construction of Phase II of Timber Ridge at Talus (“Timber Ridge”), a Type-A continuing care retirement community in Issaquah, Washington. Our loan to LCS-WP III represents a variable interest. As an affiliate of a larger company, LCS-WP III is structured to limit liability for potential damage claims, is capitalized to achieve that purpose and is considered a VIE within the definition set forth in Note 1.
The loan took the form of two notes under a master credit agreement. The senior note (“Note A”) totals $60,000,000 at an initial rate of 6.75% (currently 6.95%) with 10 basis-point escalators after year three and has a term of 10 years. We have funded $58,975,000 of Note A as of March 31, 2019. Note A is interest-only and is locked to prepayment for three years. Beginning in February 2018, the prepayment penalty started at 5% and will decline 1% annually for five years. Note B was a construction loan for up to $94,500,000, with the remaining outstanding balance being fully repaid during the first quarter of 2018.
NHI has an option to purchase the entire Timber Ridge property for the greater of a mutually agreed-upon fair market value or $115,000,000 during a window of 120 days that opened in February 2019.
Senior Living Communities
In connection with the acquisition in December 2014 of properties leased to Senior Living, we provided a $15,000,000 revolving line of credit, the maturity of which mirrors the 15-year term of the master lease. Borrowings are used to finance construction projects within the Senior Living portfolio, including building additional units. Up to $5,000,000 of the facility may be used to meet general working capital needs. Amounts outstanding under the facility, $2,758,000 at March 31, 2019, bear interest at an annual rate equal to the prevailing 10-year U.S. Treasury rate, 2.41% at March 31, 2019, plus 6%.
NHI has two mezzanine loans of up to $12,000,000 and $2,000,000, respectively, to affiliates of Senior Living, whose purpose was to partially fund construction of a 186-unit senior living campus on Daniel Island in South Carolina, which opened in April 2018. The loans bear interest payable monthly at a 10% annual rate and mature in March 2021. The loans were fully drawn at March 31, 2019, and provide NHI with a purchase option on the development upon its meeting certain operational metrics. The option is to remain open during the term of the loans, plus any extensions.
Our loans to Senior Living and its subsidiaries represent a variable interest. Senior Living is structured to limit liability for potential claims for damages, is appropriately capitalized for that purpose and is considered a VIE.
Senior Living Management
In August 2016, we entered into an agreement to furnish to our current tenant, Senior Living Management, Inc. (“SLM”), through its affiliates, loans of up to $24,500,000 to facilitate SLM’s acquisition of five senior housing facilities that it currently operates. The loans consist of two notes under a master credit agreement, include both a mortgage and a corporate loan, and bear interest at 8.25% with terms of five years, plus optional one and two-year extensions. NHI has a right of first refusal if SLM elects to sell the facilities. The loans were fully funded as of March 31, 2019.
Our loans to SLM represent a variable interest. SLM is structured to limit liability for potential damage claims, is capitalized for that purpose and is considered a VIE.
NOTE 4. OTHER ASSETS
Other assets consist of the following (in thousands):
March 31, 2019
December 31, 2018
Accounts receivable and other assets
$
2,864
$
6,381
Regulatory escrows
8,208
8,208
Unamortized lease incentive payments
8,538
7,456
Restricted cash
10,377
5,253
$
29,987
$
27,298
Restricted cash consists of reserves for replacement, insurance and tax escrows required to be held on deposit in accordance with regulatory agreements governing our Fannie Mae and HUD mortgages.
HUD mortgage loans (net of discount of $1,299 and $1,320)
42,717
42,906
Fannie Mae term loans - secured, non-recourse
95,958
96,044
Convertible senior notes - unsecured (net of discount of $1,199 and $1,391)
118,802
118,609
Unamortized loan costs
(9,272
)
(9,884
)
$
1,287,205
$
1,281,675
Aggregate principal maturities of debt as of March 31, 2019, and for each of the next five years and thereafter are as follows (in thousands):
Twelve months ended March 31,
2020
$
1,196
2021
1,244
2022
121,291
2023
465,340
2024
351,390
Thereafter
358,513
1,298,974
Less: discount
(2,497
)
Less: unamortized loan costs
(9,272
)
$
1,287,205
Revolving credit facility and bank term loans - unsecured
Our unsecured bank credit facility consists of $250,000,000 and $300,000,000 term loans and a $550,000,000 revolving credit facility. The $250,000,000 term loan and $550,000,000 revolving facility mature in August 2022, and the $300,000,000 term loan matures in September 2023. On March 22, 2019, we entered into swap agreements to fix the interest rates on $200,000,000 of the $300,000,000 term loans through December 2021, when LIBOR is scheduled to cease automatic recalculation.
The revolving facility fee is currently 20 basis points per annum, and based on our current leverage ratios, the facility presently provides for floating interest on the revolver and the term loans at 30-day LIBOR plus 115 and a blended 127 bps, respectively. At March 31, 2019 and December 2018, 30-day LIBOR was 249 and 250 bps, respectively. Within the facility, the employment of interest rate swaps for a portion of our fixed term debt leaves only our revolving credit facility and $100,000,000 of our term loans exposed to interest rate risk through April 2019, when our $40,000,000 swap expires. Our swaps and the financial instruments to which they relate are described in the table below, under the caption “Interest Rate Swap Agreements.”
At March 31, 2019, we had $461,000,000 available to draw on the revolving portion of our credit facility, subject to usual and customary covenants. Among other stipulations, the unsecured credit facility agreement requires that we maintain certain financial ratios within limits set by our creditors. At March 31, 2019, we were in compliance with these ratios.
Pinnacle Bank is a participating member of our banking group. A member of NHI’s board of directors and chairman of our audit committee is also the chairman of Pinnacle Financial Partners, Inc., the holding company for Pinnacle Bank. NHI’s local banking transactions are conducted primarily through Pinnacle Bank.
Our unsecured private placement term loans, payable interest-only, are summarized below (in thousands):
Amount
Inception
Maturity
Fixed Rate
$
125,000
January 2015
January 2023
3.99%
50,000
November 2015
November 2023
3.99%
75,000
September 2016
September 2024
3.93%
50,000
November 2015
November 2025
4.33%
100,000
January 2015
January 2027
4.51%
$
400,000
Except for specific debt-coverage ratios, covenants pertaining to the private placement term loans are generally conformed with those governing our credit facility.
HUD mortgage loans
Our HUD mortgage loans are secured by ten properties leased to Bickford and having a net book value of $50,437,000 at March 31, 2019. Nine mortgage notes require monthly payments of principal and interest from 4.3% to 4.4% (inclusive of mortgage insurance premium) and mature in August and October 2049. One additional HUD mortgage loan assumed in 2014, at a discount, requires monthly payments of principal and interest of 2.9% (inclusive of mortgage insurance premium) and matures in October 2047. The loan has an outstanding principal balance of $8,652,000 and a carrying value of $7,353,000, which approximates fair value.
Fannie Mae term loans - secured, non-recourse
In March 2015 we obtained $78,084,000 in Fannie Mae financing. The term debt financing consists of interest-only payments at an annual rate of 3.79% and a 10-year maturity. The mortgages are non-recourse and secured by thirteen properties leased to Bickford. In a December 2017 acquisition, we assumed additional Fannie Mae debt that amortizes through 2025 when a balloon payment will be due, is subject to prepayment penalties until 2024, bears interest at a nominal rate of 4.60%, and has remaining balance of $17,874,000 at March 31, 2019. All together, these notes are secured by facilities having a net book value of $137,416,000 at March 31, 2019.
Convertible senior notes - unsecured
In March 2014 we issued $200,000,000 of 3.25% senior unsecured convertible notes due April 2021 (the “Notes”) with interest payable April 1st and October 1st of each year. The Notes were convertible at an initial rate of 13.93 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $71.81 per share for a total of approximately 2,785,200 underlying shares. The conversion rate is subsequently adjusted upon each occurrence of certain events, as defined in the indenture governing the Notes, including the payment of dividends at a rate exceeding that prevailing in 2014. The conversion option was accounted for as an “optional net-share settlement conversion feature,” meaning that upon conversion, NHI’s conversion obligation may be satisfied, at our option, in cash, shares of common stock or a combination of cash and shares of common stock. Because we have the ability and intent to settle the convertible securities in cash upon exercise, we use the treasury stock method to account for potential dilution.
As of March 31, 2019, our senior unsecured convertible notes were convertible at a rate of 14.47 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $69.11 per share for a total of 1,736,340 remaining underlying shares. For the three months ended March 31, 2019, dilution resulting from the conversion option within our convertible debt is 223,513 shares. If NHI’s current share price increases above the adjusted $69.11 conversion price, further dilution will be attributable to the conversion feature. On March 31, 2019, the value of the convertible debt, computed as if the debt were immediately eligible for conversion, exceeded its face amount by $16,390,000.
Interest Rate Swap Agreements
Our existing interest rate swap agreements will collectively continue through December 2021 to hedge against fluctuations in variable interest rates applicable to $450,000,000 of our bank term loans. During the next year, approximately $881,000 of gains, which are included in accumulated other comprehensive income (loss), are projected to be reclassified into earnings.
As of March 31, 2019, we employ the following interest rate swap contracts to mitigate our interest rate risk on our bank term loans described above (dollars in thousands):
Date Entered
Maturity Date
Fixed Rate
Rate Index
Notional Amount
Fair Value
May 2012
April 2019
2.84%
1-month LIBOR
$
40,000,000
$
31
June 2013
June 2020
3.41%
1-month LIBOR
$
80,000,000
$
230
March 2014
June 2020
3.46%
1-month LIBOR
$
130,000,000
$
298
March 2019
December 2021
3.46%
1-month LIBOR
$
100,000,000
$
(92
)
March 2019
December 2021
3.47%
1-month LIBOR
$
100,000,000
$
(127
)
If the fair value of the hedge is an asset, we include it in our Condensed Consolidated Balance Sheets among other assets, and, if a liability, as a component of accrued expenses. See Note 9 for fair value disclosures about our interest rate swap agreements. Net asset (liability) balances for our hedges included as components of consolidated other comprehensive income on March 31, 2019 and December 31, 2018 were $339,000 and $1,297,000, respectively.
The following table summarizes interest expense (in thousands):
Three Months Ended
March 31,
2019
2018
Interest expense on debt at contractual rates
$
13,074
$
10,527
Losses reclassified from accumulated other
comprehensive income (loss) into interest expense
(292
)
276
Capitalized interest
(157
)
(24
)
Amortization of debt issuance costs and debt discount
893
835
Total interest expense
$
13,518
$
11,614
NOTE 6. COMMITMENTS AND CONTINGENCIES
In the normal course of business, we enter into a variety of commitments, typically funding of revolving credit arrangements, construction and mezzanine loans to our operators to conduct expansions and acquisitions for their own account, and commitments for the funding of construction for expansion or renovation to our existing properties under lease. In our leasing operations, we offer to our tenants and to sellers of newly-acquired properties a variety of inducements which originate contractually as contingencies but which may become commitments upon the satisfaction of the contingent event. Contingent payments earned will be included in the respective lease bases when funded. The tables below summarize our existing, known commitments and contingencies as of March 31, 2019 according to the nature of their impact on our leasehold or loan portfolios.
Asset Class
Type
Total
Funded
Remaining
Loan Commitments:
LCS Sagewood Note A
SHO
Construction
$
118,800,000
$
(77,118,000
)
$
41,682,000
LCS Sagewood Note B
SHO
Construction
61,200,000
(15,612,000
)
45,588,000
LCS Timber Ridge Note A
SHO
Construction
60,000,000
(58,975,000
)
1,025,000
Bickford Senior Living
SHO
Construction
56,700,000
(36,415,000
)
20,285,000
Senior Living Communities
SHO
Revolving Credit
15,000,000
(2,758,000
)
12,242,000
$
311,700,000
$
(190,878,000
)
$
120,822,000
See Note 3 to our condensed consolidated financial statements for full details of our loan commitments. As provided above, loans funded do not include the effects of discounts or commitment fees.
Contingent lease inducement payments of $10,000,000 related to the five Bickford development properties constructed in 2016 and 2017 include a licensure incentive of $250,000 per property and a three-tiered operator incentive schedule paying up to an additional $1,750,000, based on the attainment of certain performance metrics. Upon funding, these payments are added to the lease base and amortized against rental income.
Litigation
See Note 2 for a discussion of our litigation involving our former tenants East Lake Capital Management LLC, SH Regency Leasing LLC and The LaSalle Group, including our transition of properties to other operators.
Our facilities are subject to claims and suits in the ordinary course of business. Our lessees and borrowers have indemnified, and are obligated to continue to indemnify us, against all liabilities arising from the operation of the facilities, and are further obligated to indemnify us against environmental or title problems affecting the real estate underlying such facilities. While there may be lawsuits pending against certain of the owners and/or lessees of the facilities, management believes that the ultimate resolution of all such pending proceedings will have no material adverse effect on our financial condition, results of operations or cash flows.
NOTE 7. STOCK-BASED COMPENSATION
We recognize stock-based compensation for all stock options granted over the requisite service period using the fair value of these grants as estimated at the date of grant using the Black-Scholes pricing model. All restricted stock granted (if any) is recognized over the requisite service period using the market value of our publicly-traded common stock on the date of grant.
Stock-Based Compensation Plans
The Compensation Committee of the Board of Directors (“the Committee”) has the authority to select the participants to be granted options; to designate whether the option granted is an incentive stock option (“ISO”), a non-qualified option, or a stock appreciation right; to establish the number of shares of common stock that may be issued upon exercise of the option; to establish the vesting provision for any award; and to establish the term any award may be outstanding. The exercise price of any ISO’s granted will not be less than 100% of the fair market value of the shares of common stock on the date granted, and the term of an ISO may not be more than ten years. The exercise price of any non-qualified options granted will not be less than 100% of the fair market value of the shares of common stock on the date granted unless so determined by the Committee.
In May 2012, our stockholders approved the 2012 Stock Incentive Plan (“the 2012 Plan”) pursuant to which 1,500,000 shares of our common stock were made available to grant as stock-based payments to employees, officers, directors or consultants. Through a vote of our shareholders on May 7, 2015, we increased the maximum number of shares under the plan from 1,500,000
shares to 3,000,000 shares; increased the automatic annual grant to non-employee directors from 15,000 shares to 20,000 shares; and limited the Company’s ability to re-issue shares under the Plan. Through a second amendment approved on May 4, 2018, our shareholders voted to increase the maximum number of shares under the plan to 3,500,000 and to increase the automatic annual grant to non-employee directors to 25,000. The individual restricted stock and option grant awards may vest over periods up to five years. The term of the options under the 2012 Plan is up to ten years from the date of grant. As of March 31, 2019, there were 319,669 shares available for future grants under the 2012 Plan.
On May 3, 2019, our stockholders approved the 2019 Stock Incentive Plan (“the 2019 Plan”) pursuant to which 3,000,000 shares of our common stock were made available to grant as stock-based payments to employees, officers, directors or consultants. The individual option grant awards may vest over periods up to five years. The term of the options under the 2019 Plan is up to ten years from the date of grant.
Compensation expense is only recognized for the awards that ultimately vest. Accordingly, pre-vesting forfeitures that were not expected will result in the reversal of previously recorded compensation expense. Non-cash compensation expense reported for the three months ended March 31, 2019 and 2018 was $2,001,000 and $1,425,000, respectively and is included in general and administrative expense in the Condensed Consolidated Statements of Income.
At March 31, 2019, we had, net of expected forfeitures, $2,298,000 of unrecognized compensation cost related to unvested stock options which is expected to be expensed over the following periods: 2019 - $1,430,000, 2020 - $776,000 and 2021 - $92,000.
The weighted average fair value per share of options granted during the three months ended March 31, 2019 and 2018 was $6.17 and $4.49, respectively. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
2019
2018
Dividend yield
5.5%
6.5%
Expected volatility
18.6%
19.4%
Expected lives
2.9 years
2.9 years
Risk-free interest rate
2.50%
2.39%
The following table summarizes our outstanding stock options:
Three Months Ended
March 31,
2019
2018
Options outstanding January 1,
920,346
859,182
Options granted under 2012 Plan
602,000
560,000
Options exercised under 2012 Plan
(352,830
)
—
Options forfeited under 2012 Plan
—
(15,000
)
Options outstanding, December 31,
1,169,516
1,404,182
Exercisable at December 31,
678,997
949,160
NOTE 8. EARNINGS AND DIVIDENDS PER COMMON SHARE
The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assume the exercise of stock options and the conversion of our convertible debt using the treasury stock method, to the extent dilutive. If our average stock price for the period increases over the conversion price of our convertible debt, the conversion feature will be considered dilutive.
The following table summarizes the average number of common shares and the net income used in the calculation of basic and diluted earnings per common share (in thousands, except share and per share amounts):
Three Months Ended
March 31,
2019
2018
Net income
$
35,679
$
38,432
BASIC:
Weighted average common shares outstanding
42,825,824
41,532,154
DILUTED:
Weighted average common shares outstanding
42,825,824
41,532,154
Stock options
75,695
44,722
Convertible subordinated debentures
223,513
—
Weighted average dilutive common shares outstanding
43,125,032
41,576,876
Net income per common share - basic
$
.83
$
.93
Net income per common share - diluted
$
.83
$
.92
Incremental anti-dilutive shares excluded:
Net share effect of stock options with an exercise price in excess of the average market price for our common shares
17,415
118,639
Regular dividends declared per common share
$
1.05
$
1.00
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial assets and liabilities measured at fair value (based on the hierarchy of the three levels of inputs described in Note 1 to the consolidated financial statements contained in our most recent Annual Report on Form 10-K) on a recurring basis have included marketable securities, derivative financial instruments and contingent consideration arrangements. Derivative financial instruments include our interest rate swap agreements. Contingent consideration arrangements relate to certain provisions of recent real estate purchase agreements involving asset acquisitions.
Derivative financial instruments. Derivative financial instruments are valued in the market using discounted cash flow techniques. These techniques incorporate Level 1 and Level 2 inputs. The market inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation model for interest rate swaps are observable in active markets and are classified as Level 2 in the hierarchy.
Assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):
Carrying amounts and fair values of financial instruments that are not carried at fair value at March 31, 2019 and December 31, 2018 in the Condensed Consolidated Balance Sheets are as follows (in thousands):
Carrying Amount
Fair Value Measurement
2019
2018
2019
2018
Level 2
Variable rate debt
$
633,401
$
628,010
$
639,000
$
634,000
Fixed rate debt
$
653,804
$
653,665
$
653,455
$
644,745
Level 3
Mortgage and other notes receivable
$
257,481
$
246,111
$
260,119
$
244,206
Fixed rate debt. Fixed rate debt is classified as Level 2 and its value is based on quoted prices for similar instruments or calculated utilizing model derived valuations in which significant inputs are observable in active markets.
Mortgage and other notes receivable. The fair value of mortgage and other notes receivable is based on credit risk and discount rates that are not observable in the marketplace and therefore represents a Level 3 measurement.
Carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature. The fair value of our borrowings under our revolving credit facility and other variable rate debt are reasonably estimated at their notional amounts at March 31, 2019 and December 31, 2018, due to the predominance of floating interest rates, which generally reflect market conditions.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016 the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases, which has been codified under ASC Topic 842. In July and December 2018 the FASB updated the pending Topic 842 with ASU 2018-11, Leases - Targeted Improvements, and ASU 2018-20, Narrow-Scope Improvements for Lessors, respectively. ASU 2018-11 provides a simplified transition method under which we applied the new leases standard as of the adoption date and recognized a cumulative-effect adjustment, as appropriate, to the opening balance of retained earnings in the period of adoption. Consequently, our reporting for the comparative periods presented in the financial statements in which we adopted the new leases standard will continue to be in accordance with prior GAAP (Topic 840, Leases).
ASU 2018-20 was issued to address implementation issues related to Topic 842. We adopted Topic 842 on January 1, 2019 (the “application date”), and, effective with our adoption, we elected the package of practical expedients allowing, among other provisions, for transition with no reassessment of the lease classification for any expired or existing leases. Further, we elected the available practical expedient under ASU 2018-11 that allows us to make an accounting policy election and assess whether a contract is predominantly lease or service-based and recognize the entire contract under the relevant accounting guidance. No cumulative effect adjustment to retained earnings was necessary, based on our analysis.
The Narrow-Scope Improvements for Lessors under ASU 2018-20 requires NHI to exclude from variable payments, and therefore revenue, our costs paid by our tenants directly to third parties. Some of our leases require property tax and insurance costs be covered by our tenants through escrow reimbursement. We serve as the administrative agent for these escrow transactions and ASU 2018-20 requires the associated revenue and expense to be included in our consolidated financial statements. We have included $1,090,000 reimbursement as both a revenue and expense item in our condensed consolidated income statement for the three months ended March 31, 2019, under the captions “Rental income“ and “Property taxes and insurance on leased properties,” respectively.
The principal difference between Topic 842 and previous guidance is that, for lessees, lease assets and lease liabilities arising from operating leases will be recognized in the balance sheet. While the accounting applied by a lessor is largely unchanged from that applied under previous GAAP, changes have been made to align i) certain lessor and lessee accounting guidance, and ii) key aspects of the lessor accounting model with the revenue recognition guidance in Topic 606, Revenue from Contracts with Customers, which we adopted January 1, 2018. Under Topic 842 and unlike prior GAAP, a buyer-lessor in a sale-leaseback transaction will be required to apply the sale and leaseback guidance to determine whether the transaction qualifies as a sale. Topic 842 includes provisions which generally conform with Topic 606, and the presence of a seller-lessee repurchase option on real estate in a sale and leaseback transaction will result in recording the transaction as a financing that would otherwise meet the lease accounting requirements for buyer-lessors under previous guidance. Going forward under Topic 842, for us as lessor, existing sale-leaseback or other leases that undergo modifications may trigger reconsideration of continued accounting for the lease.
NHI has largely ceased inclusion of purchase options in new sale-leaseback transactions, and there were no material effects from the change in sale-leaseback guidance as it relates to repurchase options.
In April 2018, we entered into a ground lease as lessee in connection with our acquisition of certain real estate assets. In accordance with transition elections allowed under Topic 842, discussed above, we have continued to account for the lease as an operating lease. Upon adoption of the standard, as lessee we recognized a right-of-use asset and a lease liability at the adoption date. No cumulative effect adjustment to retained earnings was required to effect a net balance sheet adjustment resulting in an additional operating lease liability and right-of-use asset approximating $1,176,000, as a result of our adoption of Topic 842, which were included in the accompanying Condensed Consolidated Balance Sheet as of March 31, 2019 among “Accounts payable and accrued expenses” and “Real estate assets,” respectively.
Consistent with present standards, upon the adoption of Topic 842, NHI continues to account for lease revenue on a straight-line basis for most leases. Under Topic 842 only initial direct costs that are incremental to the lessor are capitalized, a standard consistent with NHI’s current practice. Under provisions of ASU 2018-20, discussed above, we continue to exclude from variable payments lessor costs paid by our lessees directly to third parties, as consistent with our prior practice.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 will require more timely recognition of credit losses associated with financial assets. While current GAAP includes multiple credit impairment objectives for instruments, the previous objectives generally delayed recognition of the full amount of credit losses until the loss was probable of occurring. The amendments in ASU 2016-13, whose scope is asset-based and not restricted to financial institutions, eliminate the probable initial recognition threshold in current GAAP and, instead, reflect an entity’s current estimate of all expected credit losses. Currently, when credit losses were measured under GAAP, we generally only considered past events and current conditions in measuring the incurred loss. The amendments in ASU 2016-13 broaden the information that we must consider in developing our expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss that will be more useful to users of the financial statements. ASU 2016-13 is effective for public entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, aligns the transition requirements and clarifies that operating lease receivables are excluded from the scope of ASU 2016-13. Instead, impairment of operating lease receivables is to be accounted for under ASC 842. Because we are likely to continue to invest in loans and generate related notes receivable, adoption of ASU 2016-13 in 2020 will have some effect on our accounting for our loan investments, though the nature of those effects will depend on the composition of our loan portfolio at that time; accordingly, we are in the initial stages of evaluating the extent of the effects that adopting the provisions of ASU 2016-13 in 2020 will have on NHI.
NOTE 11. SUBSEQUENT EVENT
Comfort Care
On April 30, 2019, we acquired a newly-constructed 60 unit assisted living facility in Michigan which has 14 memory care units under construction with an expected summer 2019 opening. The purchase price was $10,800,000, inclusive of closing costs. We leased the property to Comfort Care Senior Living (“Comfort Care”), providing for an initial 7.75% lease rate, with annual fixed escalators beginning in year three over the term of 10 years plus two five-year renewal options. The lease includes a $3,000,000 earnout incentive which will be added to the lease base when funded. We accounted for the acquisition as an asset purchase.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
References throughout this document to NHI or the Company include National Health Investors, Inc., and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words “we”, “our”, “ours” and “us” refer only to National Health Investors, Inc. and its consolidated subsidiaries and not any other person. Unless the context indicates otherwise, references herein to “the Company” include all of our consolidated subsidiaries.
This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission, as well as information included in oral statements made, or to be made, by our senior management contain certain “forward-looking” statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations, cash flows, funds from operations, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, and similar statements including, without limitation, those containing words such as “may,” “will,” “believes,” “anticipates,” “expects,” “intends,” “estimates,” “plans,” and other similar expressions, are forward-looking statements.
Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements as a result of factors including, but not limited to, the following:
*
We depend on the operating success of our tenants and borrowers for collection of our lease and note payments;
*
We depend on the success of property development and construction activities, which may fail to achieve the operating results we expect;
*
We are exposed to the risk that our tenants and borrowers may become subject to bankruptcy or insolvency proceedings;
*
Certain tenants in our portfolio account for a significant percentage of the rent we expect to generate from our portfolio, and the failure of any of these tenants to meet their obligations to us could materially and adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
*
We are exposed to the risk that the illiquidity of real estate investments could impede our ability to respond to adverse changes in the performance of our properties;
*
We are exposed to risks related to governmental regulations and payors, principally Medicare and Medicaid, and the effect that lower reimbursement rates would have on our tenants’ and borrowers’ business;
*
Legislative, regulatory, or administrative changes could adversely affect us or our security holders.
*
We are exposed to the risk that the cash flows of our tenants and borrowers would be adversely affected by increased liability claims and liability insurance costs;
*
We are exposed to risks related to environmental laws and the costs associated with liabilities related to hazardous substances;
*
We are exposed to the risk that we may not be fully indemnified by our lessees and borrowers against future litigation;
*
We depend on the success of our future acquisitions and investments;
*
We depend on our ability to reinvest cash in real estate investments in a timely manner and on acceptable terms;
*
We may need to refinance existing debt or incur additional debt in the future, which may not be available on terms acceptable to us;
*
We have covenants related to our indebtedness which impose certain operational limitations and a breach of those covenants could materially adversely affect our financial condition and results of operations;
*
When interest rates increase, our common stock may decline in price;
We depend on revenues derived mainly from fixed rate investments in real estate assets, while a portion of our debt capital used to finance those investments bears interest at variable rates;
*
We are exposed to the risk that our assets may be subject to impairment charges;
*
We depend on the ability to continue to qualify for taxation as a Real Estate Investment Trust;
*
Complying with REIT requirements may cause us to forego otherwise attractive acquisition opportunities or liquidate otherwise attractive investments, which could materially hinder our performance;
*
We have ownership limits in our charter with respect to our common stock and other classes of capital stock which may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or might otherwise be in the best interests of our stockholders;
*
We are subject to certain provisions of Maryland law and our charter and bylaws that could hinder, delay or prevent a change in control transaction, even if the transaction involves a premium price for our common stock or our stockholders believe such transaction to be otherwise in their best interests.
*
If our efforts to maintain the privacy and security of Company information are not successful, we could incur substantial costs and reputational damage, and could become subject to litigation and enforcement actions.
See the notes to the annual audited consolidated financial statements in our most recent Annual Report on Form 10-K for the year ended December 31, 2018, and “Business” and “Risk Factors” under Item 1 and Item 1A therein for a further discussion of these and of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. You should carefully consider these risks before making any investment decisions in the Company. These risks and uncertainties are not the only ones facing the Company. There may be additional risks that we do not presently know of and or that we currently deem immaterial. If any of the risks actually occur, our business, financial condition, results of operations, or cash flows could be materially and adversely affected. In that case, the trading price of our shares of stock could decline and you may lose part or all of your investment. Given these risks and uncertainties, we can give no assurance that these forward-looking statements will, in fact, occur and, therefore, caution investors not to place undue reliance on them.
Executive Overview
National Health Investors, Inc., established in 1991 as a Maryland corporation, is a self-managed real estate investment trust (“REIT”) specializing in sale-leaseback, joint-venture, mortgage and mezzanine financing of need-driven and discretionary senior housing and medical facility investments. Our portfolio consists of real estate investments in independent living facilities, assisted living facilities, entrance-fee communities, senior living campuses, skilled nursing facilities, specialty hospitals and medical office buildings. We fund our real estate investments primarily through: (1) operating cash flow, (2) debt offerings, including bank lines of credit and term debt, both unsecured and secured, and (3) the sale of equity securities.
Portfolio
As of March 31, 2019, we had investments in real estate and mortgage and other notes receivable involving 232 facilities located in 33 states. These investments involve 151 senior housing properties, 76 skilled nursing facilities, 3 hospitals, 2 medical office buildings and other notes receivable. These investments (excluding our corporate office of $2,471,000) consisted of properties with an original cost of approximately $2,900,846,000, rented under triple-net leases to 30 lessees, and $257,481,000 aggregate net carrying value of mortgage and other notes receivable due from 10 borrowers.
Our investments in real estate are located within the United States and our investments in mortgage loans are secured by real estate located within the United States. We are managed as one unit for internal reporting and decision making. Therefore, our reporting reflects our financial position and operations as a single segment.
We classify all of the properties in our portfolio as either senior housing or medical properties. Because our leases represent different underlying revenue sources and result in differing risk profiles, we further classify our senior housing communities as either need-driven (assisted living and memory care communities and senior living campuses) or discretionary (independent living and entrance-fee communities.)
Senior Housing – Need-Driven includes assisted living and memory care communities (“ALF”) and senior living campuses (“SLC”) which primarily attract private payment for services from residents who require assistance with activities of daily living. Need-driven properties are subject to regulatory oversight.
Senior Housing – Discretionary includes independent living (“ILF”) and entrance-fee communities (“EFC”) which primarily attract private payment for services from residents who are making the lifestyle choice of living in an age-restricted multi-family community that offers social programs, meals, housekeeping and in some cases access to healthcare services. Discretionary properties are subject to limited regulatory oversight. There is a correlation between demand for this type of community and the strength of the housing market.
Medical Facilities within our portfolio receive payment primarily from Medicare, Medicaid and health insurance. These properties include skilled nursing facilities (“SNF”), medical office buildings (“MOB”) and hospitals that attract patients who have a need for acute or complex medical attention, preventative medicine, or rehabilitation services. Medical properties are subject to state and federal regulatory oversight and, in the case of hospitals, Joint Commission accreditation.
The following tables summarize our investments in real estate and mortgage and other notes receivable as of March 31, 2019 (dollars in thousands):
Properties
Beds/Sq. Ft.*
Revenue
%
Investment
Real Estate Properties
Senior Housing - Need-Driven
Assisted Living
91
4,800
$
19,499
25.6
%
$
847,677
Senior Living Campus
11
1,625
4,071
5.4
%
211,911
Total Senior Housing - Need-Driven
102
6,425
23,570
31.0
%
1,059,588
Senior Housing - Discretionary
Independent Living
31
3,644
11,372
14.9
%
592,691
Entrance-Fee Communities
10
2,306
12,782
16.8
%
604,270
Total Senior Housing - Discretionary
41
5,950
24,154
31.7
%
1,196,961
Total Senior Housing
143
12,375
47,724
62.7
%
2,256,549
Medical Facilities
Skilled Nursing Facilities
72
9,433
20,020
26.3
%
577,840
Hospitals
3
207
1,998
2.6
%
55,971
Medical Office Buildings
2
88,517
*
167
0.2
%
10,486
Total Medical Facilities
77
22,185
29.1
%
644,297
Total Real Estate Properties
220
$
69,909
91.8
%
$
2,900,846
Current Year Disposals and Held for Sale
(46
)
Escrow Funds Received From Tenants
1,090
Total Rental Income
$
70,953
Mortgage and Other Notes Receivable
Senior Housing - Need-Driven
6
372
$
1,196
1.6
%
$
56,348
Senior Housing - Discretionary
2
857
2,713
3.5
%
149,778
Medical Facilities
4
270
168
0.2
%
7,437
Other Notes Receivable
—
—
1,041
1.4
%
43,918
Total Mortgage and Other Notes Receivable
12
1,499
$
5,118
6.7
%
$
257,481
Other Income
36
Total Revenue
$
76,107
Portfolio Summary
Properties
Revenue
%
Investment
Real Estate Properties
220
$
69,909
93.2
%
$
2,900,846
Mortgage and Other Notes Receivable
12
5,118
6.8
%
257,481
Total Portfolio
232
$
75,027
100.0
%
$
3,158,327
Portfolio by Operator Type
Public
74
$
18,800
25.1
%
$
538,428
National Chain (Privately-Owned)
28
12,643
16.9
%
681,156
Regional
126
42,685
56.9
%
1,886,355
Small
4
899
1.1
%
52,388
Total Portfolio
232
$
75,027
100.0
%
$
3,158,327
For the three months ended March 31, 2019, operators of facilities which provided more than 3% of our total revenues were (in alphabetical order): Bickford Senior Living; Chancellor Health Care; The Ensign Group; Health Services Management; Holiday Retirement; Life Care Services; National HealthCare Corporation; and Senior Living Communities.
As of March 31, 2019, our average effective annualized rental income was $8,489 per bed for skilled nursing facilities, $10,460 per unit for senior living campuses, $16,185 per unit for assisted living facilities, $12,782 per unit for independent living facilities, $22,171 per unit for entrance-fee communities, $38,604 per bed for hospitals, and $8 per square foot for medical office buildings.
We are evaluating and will likely make real estate and note investments during the remainder of 2019 while we continue to monitor and improve our existing properties. We seek tenants who will become mission-oriented partners in relationships where our business goals are aligned. This approach aims to fuel steady, and thus, enduring growth for those partners and for NHI. Within the context of our growth model, we rely on a cost-effective access to debt and equity capital to finance acquisitions that will drive our earnings. There is significant competition for healthcare assets from other REITs, both public and private, and from private equity sources. Large-scale portfolios continue to command premium pricing, due to the continued abundance of private and foreign buyers seeking to invest in healthcare real estate. This combination of circumstances places a premium on our ability to execute acquisitions and negotiate leases that will generate meaningful earnings growth for our shareholders. We emphasize growth with our existing tenants and borrowers as a way to insulate us from other competition.
With lower capitalization rates for existing healthcare facilities, there has been increased interest in constructing new facilities in hopes of generating better returns on invested capital. Using our relationship-driven model, we continue to look for opportunities to support new and existing tenants and borrowers with the capital needed to expand existing facilities and to initiate ground-up development of new facilities. We concentrate our efforts in those markets where there is both a demonstrated demand for a particular product type and where we perceive we have a competitive advantage. The projects we agree to finance have attractive upside potential and are expected to provide above-average returns to our shareholders to mitigate the risks inherent with property development and construction.
Following three 25 basis-point increases in 2017, the Federal Open Market Committee of the Federal Reserve announced four further increases during 2018. As inflation is expected to rise, officials have forecast a total of two increases in 2019. However, the actual path the federal funds rate takes will depend on the changing economic outlook as informed by incoming data. The anticipation of past and further increases in the federal funds rate in 2019 and beyond has been a primary source of much volatility in REIT equity markets. As a result, there will be pressure on the spread between our cost of capital and the returns we earn. We expect that pressure to be partially mitigated by market forces that would tend to result in higher capitalization rates for healthcare assets and higher lease rates indicative of historical levels. Our cost of capital has increased over the past year as we transition some of our short-term revolving borrowings into debt instruments with longer maturities and fixed interest rates. Managing long-term risk involves trade-offs with the competing alternative goal of maximizing short-term profitability. Our intention is to strike an appropriate balance between these competing interests within the context of our investor profile. As interest rates rise, our share price may decline as investors adjust prices to reflect a dividend yield that is sufficiently in excess of a risk-free rate.
For the three months ended March 31, 2019, approximately 27% of our revenue was derived from operators of our skilled nursing facilities that receive a significant portion of their revenue from governmental payors, primarily Medicare and Medicaid. Such revenues are subject annually to statutory and regulatory changes and in recent years have been reduced due to federal and state budgetary pressures. Over the past few years, we have selectively diversified our portfolio by directing a significant portion of our investments into properties which do not rely primarily on Medicare and Medicaid reimbursement, but rather on private pay sources (assisted living and memory care facilities, senior living campuses, independent living facilities and entrance-fee communities). We will occasionally acquire skilled nursing facilities in good physical condition with a proven operator and strong local market fundamentals, because diversification implies a periodic rebalancing, but our recent investment focus has been on acquiring need-driven and discretionary senior housing assets.
For individual tenant revenue as a percentage of total lease revenue, Bickford is our largest assisted living tenant, an affiliate of Holiday is our largest independent living tenant, NHC is our largest skilled nursing tenant and Senior Living Communities is our largest entrance-fee community tenant. Our shift toward private payor facilities, as well as our expansion into the discretionary senior housing market, has further resulted in a portfolio whose current composition is relatively balanced between medical facilities, need-driven and discretionary senior housing.
We manage our business with a goal of increasing the regular annual dividends paid to shareholders. Our Board of Directors approves a regular quarterly dividend which is reflective of expected taxable income on a recurring basis. Our transactions that are infrequent and non-recurring that generate additional taxable income have been distributed to shareholders in the form of special dividends. Taxable income is determined in accordance with the Internal Revenue Code and differs from net income for financial statements purposes determined in accordance with U.S. generally accepted accounting principles. Our goal of increasing annual dividends requires a careful balance between identification of high-quality lease and mortgage assets in which to invest and the cost of our capital with which to fund such investments. We consider the competing interests of short and long-term debt (interest rates, maturities and other terms) versus the higher cost of new equity. We accept some level of risk associated with leveraging our investments. We intend to continue to make new investments that meet our underwriting criteria and where the spreads over our cost of capital will generate sufficient returns to our shareholders.
In February 2019, we announced an increase in our quarterly dividend to $1.05 per common share ($4.20 on an annual basis). Our dividends per share for the last two years are as follows:
2018
2017
$
4.00
$
3.80
Our investments in healthcare real estate have been partially accomplished by our ability to effectively leverage our balance sheet. However, we continue to maintain a lower-leverage balance sheet when compared with many in our peer group. We believe that our fixed charge coverage ratio, which is the ratio of Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, including amounts in discontinued operations, excluding real estate asset impairments and gains on dispositions) to fixed charges (interest expense at contractual rates net of capitalized interest and principal payments on debt), and the ratio of consolidated net debt to Adjusted EBITDA are meaningful measures of our ability to service our debt. We use these two measures as a useful basis to compare the strength of our balance sheet with those in our peer group. We also believe this gives us a competitive advantage when accessing debt markets.
We calculate our fixed charge coverage ratio as approximately 5.1x for the three months ended March 31, 2019 (see our discussion under the heading Adjusted EBITDA including a reconciliation to our net income). Giving effect to our acquisitions and financings on an annualized basis, our consolidated net debt to Annualized Adjusted EBITDA ratio is approximately 4.6x for the three months ended March 31, 2019 (in thousands):
Consolidated Total Debt
$
1,287,205
Less: cash and cash equivalents
(5,177
)
Consolidated Net Debt
$
1,282,028
Adjusted EBITDA
$
68,233
Annualizing Adjustment
204,699
Annualized impact of recent investments
5,953
$
278,885
Consolidated Net Debt to Annualized Adjusted EBITDA
4.6
x
According to the Administration on Aging (“AoA”) of the US Department of Health and Human Services, in 2016, the latest year for which data is available, 49.2 million people were age 65 or older in the United States (a 33% increase over the last ten years). Census estimates showed that, by 2040, those 65 or older are expected to constitute 21.7% of the population. The population aged 85 and above is projected to rise from 6.4 million in 2016 to 14.6 million in the US by 2040 (a 129% increase).
Per the AoA, in 2015, the median value of homes owned by older homeowners age 75 and over was $150,000 (with a median purchase price of $53,000). In comparison, the median home value of all homeowners was $180,000. Of the 11.9 million households headed by persons age 75 and over in 2015, 76% were owners. About 78% of these older homeowners in 2015 owned their homes free and clear. Home ownership provides the elderly with greater freedom to choose their lifestyles.
Equipped with the basics of financial security, many will be economically able to enter the market for senior housing. These strong demographic trends provide the context for continued growth in senior housing in 2019 and the years ahead. We plan to fund any new real estate and mortgage investments during 2019 using our liquid assets and debt financing. As the weight of additional debt resulting from new acquisitions suggests the need to rebalance our capital structure, we would then expect to access the capital markets through an at-the-market (“ATM”) or other equity offering. Our disciplined investment strategy implemented through measured increments of debt and equity sets the stage for access to capital at the lowest possible rates, annual dividend growth, continued low leverage, a portfolio of diversified, high-quality assets, and business relationships with experienced operators whom we make our priority, continue to be the key drivers of our business plan.
See our most recent Annual Report on Form 10-K for a discussion of critical accounting policies including those concerning revenue recognition, our status as a REIT, principles of consolidation, evaluation of impairments and allocation of property acquisition costs.
Major Tenants
As discussed in Note 2 to the consolidated financial statements, we have four lessees (including their affiliated entities, which are the legal tenants) from whom we individually derive at least 10% of our rental income as follows (dollars in thousands):
Rental Income
Investment
Three Months Ended March 31,
Lease
Asset Class
Amount
2019
2018
Renewal
Senior Living Communities
EFC
$
597,000
$
11,532
17%
$
11,449
17%
2029
Holiday Retirement
ILF
531,378
9,930
14%
10,954
16%
2035
Bickford Senior Living
ALF
525,576
13,244
19%
11,445
17%
Various
National HealthCare Corporation
SNF
171,297
9,748
14%
9,674
14%
2026
All others
Various
1,075,595
25,409
36%
25,731
36%
Various
$
2,900,846
$
69,863
$
69,253
Straight-line rent of $1,630,000 and $1,530,000 was recognized from the Holiday lease for the three months ended March 31, 2019 and 2018, respectively. Straight-line rent of $1,058,000 and $1,359,000 was recognized from the Senior Living Communities lease for the three months ended March 31, 2019 and 2018, respectively. Straight-line rent of $1,371,000 and $1,169,000 was recognized from the Bickford leases for the three months ended March 31, 2019 and 2018, respectively. For NHC, rent escalations are based on a percentage increase in revenue over a base year and do not give rise to non-cash, straight-line rental income. The table above, for the three months ended March 31, 2019, excludes $1,090,000 of property tax and insurance costs covered by our tenants through escrow reimbursement.
Our operators report to us the results of their operations on a periodic basis, which we in turn subject to further analysis as a means of monitoring potential concerns within our portfolio. We have identified EBITDARM (earnings before interest, taxes, depreciation, amortization, rent and management fees) as the most elemental barometer of success for our tenants, based on results they have reported to us. We believe EBITDARM is useful in our most fundamental analyses, as it is a property level measure of our operators’ success, by eliminating the effects of the operator’s method of acquiring the use of its assets (interest and rent), its non-cash expenses (depreciation and amortization), expenses that are dependent on its level of success (income taxes), and also excluding the effect of the operator’s payment of its management fees, as typically those fees are contractually subordinate to our lease payment. For operators of our entrance-fee communities, our calculation of EBITDARM includes other cash flow adjustments typical of the industry which may include, but are not limited to, net cash flows from entrance fees; amortization of deferred entrance fees; adjustments for tenant rent obligations, depreciation and amortization; and management fee true-ups. The eliminations and adjustments reflect covenants in our leases and provide a comparable basis for assessing our various relationships
We believe that EBITDARM is a useful way to analyze the cash potential of a group of assets. From EBITDARM we calculate a lease coverage ratio (EBITDARM/Cash Rent), measuring the ability of the operator to meet its monthly rental obligation. In addition to EBITDARM and the lease coverage ratio, we rely on, a careful balance sheet analysis, and other analytical procedures to help us identify potential areas of concern relative to our operators’ ability to generate sufficient liquidity to meet their obligations, including their obligation to continue to pay the rent due to us. Typical among our operators is a varying lag in reporting to us the results of their operations. Across our portfolio, however, our operators report their results, at the latest, within ninety days of month’s end. For computational purposes, we exclude development and lease-up properties that have been in operation less than 24 months and selected immaterial properties identified in 2019 as available for sale. For stabilized acquisitions in the portfolio less than 24 months and renewing leases with changes in scheduled rent, we include pro forma cash rent. For this reporting period, we have excluded results from SH Regency Leasing, LLC, as noted below under the heading Other Portfolio Activity.