Executive Summary / Key Takeaways

• National HealthCare Corporation (NHC) demonstrated significant financial improvement in Q1 2025, with net operating revenues increasing 25.7% year-over-year, driven by strong same-facility growth (8.5%) and the accretive acquisition of White Oak.
• Adjusted net income surged 61.4% in Q1 2025, reflecting improved skilled nursing census (89.3% vs 88.5%), favorable government per diem rate increases (Medicare +5.2%, Medicaid +6.2%), and a substantial reduction in costly agency nurse staffing expense ($1.49M vs $5.29M).
• NHC operates a diversified senior care model across nine southeastern states, encompassing skilled nursing, assisted/independent living, behavioral health, homecare, and hospice, providing a broad base for revenue and managing risk across service types.
• While facing industry-wide challenges like labor shortages and evolving regulations (CMS staffing mandates), NHC's focus on operational efficiency, quality ratings (59% of SNFs rated 4 or 5 stars vs 35% industry average), and strategic partnerships positions it to capitalize on demographic tailwinds.
• The company maintains a solid liquidity position, supported by cash flows from operations, cash on hand ($90.39M), and unrestricted marketable securities ($152.78M), providing flexibility for ongoing operations, capital expenditures, and shareholder returns (evidenced by a recent 4.9% dividend increase).

A Foundation in Senior Care: NHC's Enduring Model

National HealthCare Corporation stands as a long-tenured provider in the complex and essential senior healthcare market. As the nation's oldest publicly traded company in this sector, NHC has built a diversified platform spanning skilled nursing facilities, assisted and independent living communities, behavioral health hospitals, and a significant presence in homecare and hospice services across nine states, primarily concentrated in the southeastern U.S. This integrated model, offering a continuum of care, is foundational to its strategy, aiming to serve patients and residents across different needs and acuity levels.

The company's strategic approach centers on expanding its senior care operations while diligently protecting its established markets. This involves a dual focus: enhancing the performance of existing facilities and pursuing targeted growth through acquisitions and the development of new service lines, such as recent expansions in hospice care. A core operational priority remains maintaining and increasing census levels across its facilities, a challenge amplified by the persistent healthcare labor shortage impacting the entire industry. Management has actively sought solutions, implementing initiatives to improve responsiveness to referral sources, enhance retention, and attract qualified professionals.

Navigating the Competitive Currents

The senior healthcare landscape is intensely competitive, populated by a mix of large national chains, regional operators, and specialized providers. NHC competes directly with companies offering similar services, such as Brookdale Senior Living (BKD) in assisted/independent living, Encompass Health (EHC) in rehabilitation and home health, and The Ensign Group (ENSG) in skilled nursing.

Compared to larger players like BKD, NHC's scale is more regional, which can sometimes mean slower overall revenue growth compared to competitors pursuing aggressive national expansion strategies like ENSG. However, NHC's integrated service model provides a competitive advantage. By offering a range of services from skilled nursing to homecare and hospice, NHC can potentially capture a larger share of a patient's healthcare journey, fostering loyalty and potentially improving care coordination. This integrated approach also contributes to operational efficiency; while precise comparative figures can be challenging to ascertain across all private and public peers, NHC's model, including integrated services like in-house pharmacy (as inferred from operational cost structures), can yield lower operating costs per unit compared to competitors relying more heavily on outsourced services.

In the rehabilitation space, while EHC may lead in technology integration within its hospital-based model, NHC's on-site therapy services within its skilled nursing facilities can offer advantages like faster processing times. However, the competitive analysis suggests that some peers like EHC may demonstrate greater efficiency in patient outcomes, potentially linked to more advanced technological systems. Similarly, while NHC focuses on cost leadership in long-term care, ENSG's acquisition-driven growth strategy has resulted in higher revenue growth rates and potentially better asset turnover.

Indirect competition comes from alternative care settings, including telemedicine and home health startups, which offer services that could potentially reduce the need for traditional facility-based care. While NHC's integrated model includes homecare and hospice, these alternatives could still exert pressure on facility occupancy and revenue, a risk shared by its direct competitors.

A notable vulnerability for NHC appears to be in technological differentiation. The company's need to invest in information systems is mentioned primarily in the context of cybersecurity risk, and "older systems" can lead to higher energy consumption compared to more efficient systems potentially utilized by peers. This suggests that unlike some competitors who might leverage technology for clinical outcomes or operational efficiency moats, NHC's technological infrastructure may currently represent a cost or efficiency challenge rather than a distinct competitive advantage. Future investment in this area could be crucial to maintain competitiveness.

Despite these challenges, NHC's focus on quality of patient care, measured partly by the CMS Five-Star Quality Rating System, provides a key differentiator. As of March 31, 2025, 59% of NHC's skilled nursing facilities held a 4 or 5-star rating, significantly exceeding the industry average of 35%. The company's average rating of 3.70 also surpasses the industry average of 2.80. This focus on quality is not only a regulatory requirement but a strategic imperative, potentially enhancing reputation, attracting patients, and mitigating professional liability risks.

Operational Excellence and Strategic Expansion Drive Recent Performance

The first quarter of 2025 demonstrated the tangible results of NHC's strategic focus and operational improvements. Net operating revenues saw a robust increase of 25.7%, climbing to $373.70 million from $297.18 million in the prior-year period. This significant growth was a combination of strong performance in existing operations and the impact of strategic acquisitions. Same-facility net operating revenues increased by a healthy 8.5%, indicating underlying strength in NHC's core business. Complementing this was the substantial contribution from the White Oak acquisition, completed on August 1, 2024, which added $56.73 million in net patient revenues during the quarter. Partially offsetting this growth was a $5.58 million decrease in net patient revenues due to the exit of certain operations in Missouri in March 2024, highlighting ongoing portfolio management.

Operational metrics underscored the positive trends. Total census in owned and leased skilled nursing facilities improved to 89.3% in Q1 2025, up from 88.5% in Q1 2024. This increase in occupancy, coupled with favorable reimbursement rate changes, boosted per diem rates. The composite skilled nursing facility per diem rate increased by 4.9% year-over-year, with notable increases across payor sources: Medicare per diem rates rose 5.2%, managed care rates increased 4.6%, Medicaid rates were up 6.2%, and private pay rates saw a significant 9.5% increase. While supplemental Medicaid payments decreased to $1.87 million in Q1 2025 from $3.46 million in Q1 2024, the underlying rate increases in states like Tennessee and Missouri (estimated to add approximately $11.0 million and $6.6 million annually, respectively, from July 1, 2024) provide a more sustainable tailwind.

A key operational achievement was the continued reduction in agency nurse staffing expense, a major cost pressure point for the industry. Agency staffing costs fell dramatically to $1.49 million in Q1 2025 from $5.29 million in Q1 2024. This reduction, alongside the revenue growth, helped improve cost efficiency. Salaries, wages, and benefits, while increasing 24.6% overall (largely due to the White Oak acquisition), decreased slightly as a percentage of net operating revenues, from 61.6% to 61.0%. Other operating expenses also decreased as a percentage of revenue, from 26.1% to 24.7%.

These factors culminated in a substantial improvement in profitability. Income from operations more than doubled, reaching $30.77 million in Q1 2025 compared to $15.68 million in Q1 2024. The Inpatient segment was the primary driver, contributing $32.65 million in operating income, while Homecare and Hospice contributed $5.73 million. Non-GAAP adjusted net income, which excludes items like unrealized gains on marketable securities and non-recurring gains, surged 61.4% to $24.84 million, demonstrating strong underlying earnings power from core operations.

Financial Strength and Liquidity

NHC maintains a solid financial position, characterized by healthy liquidity and manageable debt. As of March 31, 2025, the company held $90.39 million in cash and cash equivalents and $152.78 million in unrestricted marketable equity securities. A significant portion of these investments ($120.44 million) is in the common stock of National Health Investors (NHI), a related party, which also represents a concentration risk.

Cash flow generation saw a dramatic improvement in Q1 2025, with net cash provided by operating activities soaring to $39.26 million, a significant increase from $9.65 million in the prior-year period. This surge was driven by both higher net income and a favorable swing in working capital, which provided cash in Q1 2025 compared to using cash in Q1 2024.

Investing activities included $6.14 million in property and equipment additions and a $2.42 million capital contribution to a joint venture multi-family development. Net cash used in investing activities totaled $7.32 million. Financing activities included a $3.00 million payment on long-term debt and $9.42 million in dividends paid to common stockholders. The company also repurchased $1.72 million of common shares during the quarter.

NHC's liquidity is further supported by a $200 million senior credit facility, consisting of a $150 million term facility and a $50 million revolving line of credit. As of March 31, 2025, $134 million was outstanding on the term facility, with no amounts drawn on the revolving line, leaving ample borrowing capacity. The company was compliant with all financial covenants under the facility. Management believes its current cash position, investments, and credit facility provide adequate resources to meet short-term and long-term obligations and fund growth initiatives.

Regulatory Landscape and Key Risks

The senior healthcare industry operates under a complex web of governmental regulations, primarily related to Medicare and Medicaid reimbursement and quality standards. Changes in these programs, including payment levels, methodologies, and enforcement policies, represent significant risks. The recently finalized CMS Minimum Staffing Standards rule, requiring specific nurse staffing levels (3.48 HPRD total, including 0.55 RN and 2.45 nurse aide) and 24/7 RN presence, poses a potential challenge, particularly regarding labor availability and increased costs, despite staggered implementation and possible exemptions.

Medicaid funding is another area of uncertainty. While recent state-level increases in Tennessee and Missouri are positive, potential federal spending cuts or restrictions on provider taxes being considered by Congress could create state financing gaps, potentially leading to reduced eligibility, lower provider rates, or fewer covered benefits in the future.

Professional liability and workers compensation claims remain a persistent concern in the long-term care industry. NHC is self-insured for a significant portion of these risks, maintaining accrued risk reserves ($108.20 million as of March 31, 2025). While the company employs actuaries and implements performance improvement programs focused on patient care outcomes to manage this risk, a significant increase in claims or their severity could materially impact financial results.

Furthermore, the company is currently cooperating with a Civil Investigative Demand (CID) from the U.S. Attorney's Office concerning hospice billing practices at one of its locations. While the outcome is uncertain, such investigations highlight the ongoing regulatory scrutiny faced by healthcare providers.

Other risks include the ability to attract and retain qualified personnel, the availability and terms of capital for acquisitions and capital improvements, the competitive environment, the need to invest in information systems to protect against cybersecurity threats, and the ability to maintain and increase census levels amidst demographic shifts and evolving care preferences.

Outlook and Strategic Momentum

While specific quantitative guidance was not provided in the latest filing, the trends and strategic initiatives outlined by NHC management offer insight into the company's outlook. The continued focus on increasing skilled nursing census, coupled with favorable government reimbursement rate adjustments already in effect for FY2025, provides a positive revenue backdrop. The successful reduction in agency staffing costs demonstrates operational efficiency gains that are expected to continue contributing to profitability.

The integration of the White Oak portfolio is a significant growth driver, having already proven accretive to earnings. Further optimization and realization of synergies from this acquisition could enhance future results. Strategic partnerships with hospital systems and payors, along with ongoing development activities like the addition of new hospice agencies and investment in joint ventures, signal a commitment to expanding market presence and adapting to the evolving healthcare delivery landscape, including the push towards community and home-based services.

The recent 4.9% increase in the common dividend, announced concurrently with the Q1 earnings release, suggests management's confidence in the company's financial health and future cash flow generation, reinforcing its commitment to returning value to shareholders.

Conclusion

National HealthCare Corporation's first quarter 2025 results paint a picture of a company successfully executing on operational improvements and strategic growth initiatives amidst a challenging industry environment. The significant surge in revenue and adjusted earnings, driven by increased census, favorable reimbursement, reduced labor costs, and the accretive White Oak acquisition, demonstrates strong momentum.

While the company faces ongoing risks related to labor shortages, regulatory changes (including the CMS staffing mandate), and potential shifts in Medicaid funding, its diversified service model, focus on quality outcomes, and disciplined approach to cost management provide a degree of resilience. The solid liquidity position supports continued investment and shareholder returns.

For investors, NHC represents an established player in a sector with long-term demographic tailwinds. The recent performance suggests the company is effectively navigating current headwinds and capitalizing on growth opportunities. The valuation, noted by some as below historical averages despite recent earnings strength, could present a compelling opportunity, provided the company can continue its operational execution, successfully integrate acquisitions, and adapt to the evolving regulatory and competitive landscape, including addressing potential needs for technological investment. The key factors to watch will be the company's ability to sustain census growth, manage labor costs under new regulations, and the impact of future government reimbursement policies.