10-Q: National HealthCare Reports Strong Operational Growth, Lease Dispute Looms

National HealthCare Corporation reported significant operational revenue and income growth for Q3 and 9M 2025, driven by increased census and reduced staffing costs, despite a decline in GAAP net income due to lower unrealized gains on securities and an ongoing lease dispute with NHI.

Summary

• Net operating revenues and grant income increased by 12.5% to $382.66 million for the three months ended September 30, 2025, and by 20.6% to $1.13 billion for the nine months ended September 30, 2025, compared to the same periods in 2024.
• Income from operations surged by 33.3% to $30.38 million for Q3 2025 and by 56.2% to $95.24 million for 9M 2025.
• GAAP net income attributable to National HealthCare Corporation decreased by 8.3% to $39.24 million for Q3 2025 and by 0.7% to $95.17 million for 9M 2025, primarily due to lower unrealized gains on marketable equity securities.
• Non-GAAP adjusted net income, excluding unrealized gains and other adjustments, increased by 24.3% to $24.74 million for Q3 2025 and by 47.9% to $75.29 million for 9M 2025.
• Basic earnings per share (EPS) were $2.53 for Q3 2025 and $6.15 for 9M 2025, down from $2.78 and $6.23 respectively in 2024.
• Diluted EPS were $2.50 for Q3 2025 and $6.10 for 9M 2025, down from $2.73 and $6.15 respectively in 2024.
• Non-GAAP diluted EPS increased to $1.58 for Q3 2025 and $4.83 for 9M 2025, up from $1.27 and $3.27 respectively in 2024.
• Overall census in owned and leased skilled nursing facilities increased to 90.0% for Q3 2025 (from 88.3% in Q3 2024) and to 89.6% for 9M 2025 (from 88.6% in 9M 2024).
• Agency nurse staffing expense significantly decreased to $1.21 million for Q3 2025 (from $3.10 million in Q3 2024) and to $3.68 million for 9M 2025 (from $12.48 million in 9M 2024).
• Long-term debt was reduced by 49.3% to $65.63 million as of September 30, 2025, from $129.50 million at December 31, 2024.
• Cash and cash equivalents increased by 71.6% to $130.63 million as of September 30, 2025, from $76.12 million at December 31, 2024.
• The company repurchased 88,738 shares of common stock for $9.57 million during the nine months ended September 30, 2025.
• Dividends declared per common share increased to $0.64 for Q3 2025 and $1.89 for 9M 2025, up from $0.61 and $1.81 respectively in 2024.

Sentiment

Score: 7

Explanation: The company demonstrated strong operational performance with significant revenue growth, improved operating income, increased census, and a substantial reduction in agency staffing costs. The balance sheet was strengthened by a large reduction in long-term debt and increased cash. However, the decline in GAAP net income due to lower unrealized gains on marketable securities, unfavorable professional liability claims activity, and the material ongoing lease dispute with NHI introduce notable uncertainties and risks. The proposed Medicare payment cuts for home health agencies also present a future headwind.

Positives

• Net operating revenues and grant income increased by 12.5% for the quarter and 20.6% for the nine months, demonstrating strong top-line growth.
• Income from operations showed robust growth, increasing by 33.3% for the quarter and 56.2% for the nine months, indicating improved operational efficiency.
• Non-GAAP adjusted net income and diluted EPS saw substantial increases of 24.3% and 24.4% for the quarter, and 47.9% and 47.7% for the nine months, highlighting strong underlying business performance.
• Skilled nursing facility census improved to 90.0% for Q3 2025 and 89.6% for 9M 2025, reflecting increased patient occupancy.
• Agency nurse staffing expense was significantly reduced by 61.0% for the quarter and 70.5% for the nine months, addressing a key cost pressure in the healthcare industry.
• The August 2024 acquisition of White Oak Senior Living contributed $20.03 million in net patient revenues for Q3 2025 and $133.61 million for 9M 2025, proving accretive to earnings.
• Long-term debt was nearly halved, decreasing by 49.3% to $65.63 million, strengthening the balance sheet.
• Cash and cash equivalents increased by 71.6% to $130.63 million, enhancing liquidity.
• The company's skilled nursing facilities achieved an average 3.8-star rating, with 59% rated 4 or 5 stars, outperforming the industry average of 2.9 stars and 37% respectively.
• Medicare per diem rates for skilled nursing facilities increased by 5.9% for the nine months ended September 30, 2025.
• Medicaid per diem rates for skilled nursing facilities increased by 3.6% for the nine months ended September 30, 2025.
• State-specific Medicaid payment increases are expected for FY2026, including approximately $3.0 million annually from Tennessee and $4.2 million annually from South Carolina.

Negatives

• GAAP net income attributable to National HealthCare Corporation decreased by 8.3% for Q3 2025 and 0.7% for 9M 2025, primarily due to a significant reduction in unrealized gains on marketable equity securities.
• Unrealized gains on marketable equity securities decreased by 36.5% for Q3 2025 and 52.5% for 9M 2025, impacting overall GAAP profitability.
• Unfavorable claims activity within the professional liability captive insurance company resulted in additional other operating expenses of $4.22 million for Q3 2025 and $6.69 million for 9M 2025.
• Proposed CMS rule projects a 6.4% decrease in Medicare payments to home health agencies for fiscal year 2026, which could negatively impact the homecare and hospice segment.
• The average managed care per diem rate decreased by 7.1% for Q3 2025, attributed to delayed timing of incentive quality payments from the NHC Advantage program.
• Medicaid per diem rates decreased by 1.9% for Q3 2025.

Risks

• The status of the Master Lease with National Health Investors, Inc. (NHI) creates uncertainties and risks, including allegations of non-monetary default by NHI and the potential for termination of the lease, which could have a material adverse impact on operations, cash flows, and financial position.
• Failure to reach an agreement with NHI on base rent or other renewal terms for the Master Lease could result in the loss of the right to occupy and operate 32 skilled nursing facilities and three independent living centers.
• The long-term care industry faces significant increases in personal injury/wrongful death claims and severity of awards, leading to professional liability concerns.
• The company is self-insured for workers' compensation and general/professional liability, retaining significant insurance risk, and estimates for claims obligations are subject to material adjustments.
• Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation, with non-compliance potentially leading to fines, penalties, and exclusion from programs.
• America's healthcare labor shortage continues to amplify the challenge of maintaining desirable patient census levels.
• State Medicaid plans are subject to budget constraints, and some states may not keep pace with post-acute healthcare inflation, potentially impacting revenue.
• The company is exposed to market risk from its fixed-income and equity portfolios, including interest rate risk, credit risk, equity price risk, and concentration risk.
• A significant concentration risk exists in marketable equity securities, with the investment in NHI comprising approximately 70.4% ($129.6 million) of the total fair value of $184.24 million.

Future Outlook

The company expects to meet short-term and long-term liquidity requirements primarily from operating cash flows, current cash on hand ($130.63 million), unrestricted marketable equity securities ($166.75 million), and available borrowing capacity on its $50 million line of credit. Future performance is subject to business, economic, financial, and other factors, including changes in government payment rates, customer demand, competition, and the economy. The company is evaluating the impact of the One Big Beautiful Bill Act (OBBBA) on deferred tax balances, with results to be reflected in the 2025 Form 10-K. CMS projects a 6.4% decrease in Medicare payments to home health agencies for fiscal year 2026, while skilled nursing facilities are expected to see a net 3.2% increase and hospice a 2.6% increase in Medicare payment rates for FY2026.

Management Comments

• A primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities.
• Management has undertaken a number of steps in order to best position our current and future health care facilities, including improving systems for referral sources and payors, and finding creative initiatives to retain and attract qualified healthcare professionals.
• We are in various stages of partnerships with hospital systems, payors, and other post-acute alliances to better position ourselves as an active participant in the delivery of post-acute healthcare services.
• The Company has always strived for patient-centered care and quality outcomes as precursors to outstanding financial performance.
• Our accrued professional liability and workers' compensation reserves totaled $114.03 million at September 30, 2025, and are a primary area of management focus.
• We are working diligently to find solutions to reduce and eliminate agency nurse staffing expense within our healthcare operations.
• Management believes that it is following all applicable laws and regulations in all material respects regarding governmental regulations.

Industry Context

The healthcare industry continues to face a labor shortage, which amplifies the challenge of maintaining patient census levels. The long-term care sector, in particular, is experiencing significant increases in personal injury/wrongful death claims and awards. Government reimbursement programs, such as Medicare and Medicaid, are complex and subject to changes in payment levels and methodologies, with states facing budget constraints and pressure to shift towards community and home-based services. Regulatory scrutiny is ongoing, potentially leading to litigation or claims related to compliance matters. The company's efforts to reduce agency staffing costs and improve quality ratings are in direct response to these industry-wide challenges.

Comparison to Industry Standards

• The company's skilled nursing facilities demonstrate superior quality, with 59% rated 4 and 5-star, significantly higher than the industry average of 37%.
• The average rating for all skilled nursing facilities is 3.8 stars, compared to the industry average of 2.9 stars.

Corporate Governance

Legal Proceedings

• On July 29, 2025, NHI notified the company of alleged non-compliance with four non-monetary provisions of the Master Lease. NHI formally alleged default on September 8, 2025, initiating a 30-day cure period, with potential for lease termination.
• The company disputes the alleged non-compliance and is in communication with NHI to resolve the matters, believing a material loss is not probable.
• A Civil Investigative Demand (CID) was received by Caris Healthcare, L.P. from the U.S. Attorneys Office in May 2024, requesting medical records and billing documents for hospice services. The company cooperated.
• A Qui Tam complaint against Caris HealthCare, L.P. was unsealed on June 23, 2025, after the U.S. and states declined intervention. The relators filed a Notice of Voluntary Dismissal on September 25, 2025, concluding the matter.

Related Party Transactions

• The company leases real property of 32 skilled nursing facilities and three independent living centers from National Health Investors (NHI) under a Master Lease agreement. Mr. Robert G. Adams, non-executive Chairman of the NHC Board, also serves on the Board of Directors of NHI.
• Total facility rent expense to NHI was $9.91 million for Q3 2025 and $29.73 million for 9M 2025.
• The company manages five skilled nursing facilities owned by National Health Corporation (National), recognizing management fees and interest of $1.38 million for Q3 2025 and $4.16 million for 9M 2025.
• The company holds an investment in NHI common stock, valued at $129.64 million as of September 30, 2025, representing 70.4% of its marketable equity securities portfolio.

Stakeholder Impact

• Shareholders: Potential for increased dividends and share repurchases, but also exposure to risks from the NHI lease dispute and market volatility affecting unrealized gains.
• Employees: Continued focus on retaining and attracting qualified healthcare professionals amidst labor shortages, with efforts to reduce agency staffing.
• Customers (Patients/Residents): Emphasis on patient-centered care and quality outcomes, with high Five-Star ratings indicating strong service quality.
• Creditors: Reduced long-term debt and increased cash flow from operations improve the company's financial stability and ability to meet obligations.
• Suppliers: No specific impact mentioned, but general operating cost increases could affect supplier relationships.
• Regulatory Authorities: Ongoing compliance with complex Medicare and Medicaid regulations is critical to avoid fines, penalties, or program exclusions.

Next Steps

• Continue negotiations with National Health Investors, Inc. (NHI) to resolve alleged non-monetary defaults under the Master Lease and agree on renewal terms.
• Evaluate the impact of the One Big Beautiful Bill Act (OBBBA) on deferred tax balances and reflect any required changes in the 2025 annual report on Form 10-K.
• Monitor and adapt to changes in Medicare and Medicaid payment rates and policies, particularly the projected 6.4% decrease for home health agencies in FY2026.
• Continue efforts to attract and retain qualified healthcare professionals and reduce agency nurse staffing expense.
• Implement specific individual nursing facility Medicaid increases in Tennessee (effective July 1, 2025) and South Carolina (effective October 1, 2025) for fiscal year 2026.
• Continue to monitor and manage accrued risk reserves for workers' compensation and general/professional liability claims.

Key Dates

Recommendation

While National HealthCare Corporation demonstrated strong operational performance with significant revenue growth, improved operating income, and effective cost management (especially in agency staffing), the decline in GAAP net income due to non-operating factors (unrealized gains) and the material, ongoing lease dispute with National Health Investors, Inc. introduce substantial uncertainty. The potential for lease termination or unfavorable renewal terms could significantly impact a large portion of the company's facilities and financial position. Additionally, proposed Medicare payment cuts for home health services present a future headwind. Given the strong underlying business fundamentals offset by a significant, unresolved legal and operational risk, a 'hold' recommendation is appropriate, advising investors to monitor developments in the NHI lease dispute closely before making further investment decisions.

Keywords

Senior Healthcare, Skilled Nursing Facilities, Assisted Living, Homecare, Hospice, SEC Filing, 10-Q, Financial Results, Healthcare Operations, Medicare, Medicaid, Lease Dispute, NHI, Occupancy Rates, Staffing Costs, Earnings, Balance Sheet, Cash Flow, Risk Management