______________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to _________
Commission file number 333-37173
NATIONAL HEALTH REALTY, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-2059888
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
100 Vine Street, Suite 1402, Murfreesboro, Tennessee 37130
(Address of principal executive offices)
(Zip Code)
(615) 890-2020
(Company's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange
on which registered
Shares of Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of
the Act
Same
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 requirement for the past 90 days. Yes No X
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $90,951,497 as of February 28, 1998. The number of shares of
Common Stock outstanding as of February 28, 1998 was 8,693,864.
PAGE 1 OF 36 PAGES
Exhibit Index Page 29
<PAGE>
PART 1
ITEM 1
BUSINESS
GENERAL
National Health Realty, Inc. (NHR) is a newly-formed Maryland
corporation. NHR, through its subsidiary NHR/OP, L.P. (the Operating
Partnership) acquired ownership of 16 licensed skilled nursing facilities, one
160 bed certificate of need, six assisted living facilities and one
independent living center (the Healthcare Facilities), plus 50 first and
second mortgage secured promissory notes with an outstanding balance of $94.4
million (the Notes) from its then sole owner National HealthCare L.P. NHR
then leased (the Leases) the Healthcare Facilities to National HealthCare
Corporation (NHC) a successor by merger to National HealthCare L.P. NHR also
assumed certain debt of approximately $86.4 million. The Leases covering the
Healthcare Facilities are "triple net" leases. NHR entered into an Advisory,
Administrative Services and Facilities Agreement with NHC pursuant to which
NHC will provide NHR with investment advice, office space and personnel. This
agreement also provides that for that prior to the earlier to occur of (i) the
termination of the Advisory Agreement for any reason and (ii) NHC ceasing to
be actively engaged as the investment advisor for National Health Investors,
Inc. (NHI), NHR will not (without the prior approval of NHI) transact business
with any party, person, company or firm other than NHC. It is the intent of
the foregoing restriction that NHR will not be actively or passively engaged
in the pursuit of additional investment opportunities, but rather will focus
upon its capacities as landlord and note holder of those certain assets
conveyed to it by National HealthCare L.P.
NHR's revenues will be derived primarily from NHC under the Leases and
the interest and principal payments of the Notes. NHC is the manager of all
nursing facilities securing the Notes, and the Notes are due and payable upon
termination of the NHC management contract.
Forty-three of the Notes (representing approximately $74.8 million the
principal amount and collateralized with 16 nursing facilities) are from
Florida Convalescent Centers, Inc. (FCC) and are personally guaranteed by its
sole shareholder. The FCC Notes bear interest at 10.25% and most are due in
2004. The balance of the Notes are secured by seven nursing facilities and
seven separate makers and guarantors.
ASSUMED LIABILITIES.
NHR assumed approximately $86.4 million of debt from NHC but immediately
refinanced approximately $71.6 million from a commercial bank group with Bank
of Tokyo, Agent on an overall loan of $75 million. An additional line of
credit of $20 million was also made available by this group. The interest
rate on $11.6 million of the remaining Assumed Liabilities include fixed rates
of 8.4% and 8.3%. The interest rate on $3.2 million of the remaining Assumed
Liabilities is at a variable rate (4.2% at December 31, 1997). The
replacement financing and line of credit bear interest at LIBOR plus 1% (one
percent). The term of the loans extend through 2011.
INVESTMENT AND OTHER POLICIES OF NHR.
General. NHR's investment objectives are: (i) to provide current
income for distribution to stockholders, (ii) to provide the opportunity for
additional returns to investors by participating in any increase in the
operating revenues of its leased properties; (iii) to provide the opportunity
to realize capital growth resulting from appreciation, if any, in the value of
its portfolio properties, and (iv) to preserve and protect stockholder's
capital. There is no assurance that these objectives will be realized.
Advisory Agreement. NHR has contracted for its management with NHC.
The NHR Advisory Agreement provides that NHR will not, without the prior
approval of NHI, be actively or passively engaged in the pursuit of additional
investment opportunities until the earlier of the termination of the Advisory
Agreement or such time as NHC is no longer actively engaged as investment
advisor to NHI. For its services, NHC is entitled to annual compensation of
the greater of 2% of NHR's gross consolidated revenues or the actual expense
incurred by NHC. Either party may terminate the Advisory Agreement on 90 days
notice after January 1, 2000, and NHR may terminate at any time for cause.
Objectives and Policies. NHR was organized to own the Healthcare
Facilities and Notes. Because of the competitive restrictions contained in
the Advisory Agreement, NHR does not intend to seek further health care-
related investment opportunities or to provide lease or mortgage financing for
such investments. NHR expects to continue to engage in transactions with NHC,
but does not anticipate purchasing from, leasing to or financing other
operations. Subject to the Advisory Agreement, the Board of Directors may
alter NHR's investment policies if they determine in the future that such a
change is in the best interests of NHR and its stockholders. The methods of
implementing NHR's investment policies may vary as new investment and
financing techniques are developed or for other reasons.
Federal Income Tax. NHR believes that it has operated its business so
as to qualify as a REIT under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended (the Code) and NHR intends to continue to operate in
such a manner, but no assurance can be given that NHR will be able to qualify
at all times. If NHR qualifies as a REIT, it will generally not be subject to
federal corporate income taxes on its net income that is currently distributed
to its stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that typically applies to
corporate dividends.
ITEM 2
PROPERTIES
HEALTHCARE FACILITIES
The following table includes certain information regarding the Healthcare
Facilities, all of which are leased for an initial ten (10) year term to
National HealthCare Corporation
<PAGE>
<TABLE>
<CAPTION>
Minimum
No. of Book Annual
Name of Facility Location Beds Basis Rent
<S> <C> <C> <C> <C>
Healthcare Facilities
AdamsPlace Murfreesboro, TN 40 $ 6,091,586 $ 578,701
NHC HealthCare, Naples Naples, FL 60 5,713,505 542,783
NHC HealthCare, Clinton Clinton, SC 131 3,729,383 354,291
NHC HealthCare,
Coconut Creek Ft. Lauderdale, FL 120 11,297,039 1,073,219
NHC HealthCare,
Daytona Beach Daytona Beach, FL 60 6,298,576 598,365
NHC HealthCare,
Farragut(F1) Farragut, TN 60 3,260,656 ---
NHC HealthCare,
Garden City Murrells Inlet, SC 88 5,150,972 489,342
NHC HealthCare,
Greenville Greenville, SC 176 5,474,289 520,057
NHC HealthCare, Lexington Lexington, SC 88 4,939,471 412,199
NHC HealthCare, Mauldin Greenville, SC 120 8,648,897 821,645
NHC HealthCare,
Imperial(F2) Naples, FL 90 5,511,116 459,810
NHC HealthCare, N. Augusta North Augusta, SC 132 5,073,994 482,029
NHC HealthCare, Orlando Orlando, FL 120 8,617,393 818,652
NHC HealthCare, Parklane Columbia, SC 120 8,018,080 761,718
NHC HealthCare,
Port Charlotte Port Charlotte, FL 180 8,604,169 817,396
W. Plains Health,
Care Center West Plains, MO 120 3,850,766 365,823
NHC HealthCare,
Franklin(F3) Franklin, TN 160 768,765 ---
Assisted Living Facilities
NHC Place/ Vero Beach Vero Beach, FL 84 7,510,507 713,498
NHC Place/Anniston Anniston, AL 68 5,735,927 544,913
Adams Place Murfreesboro, TN 84 6,562,550 623,442
NHC Place/Merritt Island Merritt Island, FL 84 7,823,933 743,274
NHC Place/Stuart Stuart, FL 84 7,323,124 695,697
NHC HealthCare,
Farragut(F1) Farragut, TN 84 4,086,648 ---
Retirement Center
AdamsPlace Murfreesboro, TN 53 4,523,373 ---
Book Value $144,614,719
(F1) currently under construction.
(F2) 30 additional beds under construction.
(F3) a facility to be constructed. Construction has not yet begun.
(F4) additional rent equal to three percent (3%) of the increase in
gross revenues of the HealthCare Facilities commences in 2000,
with 1999 as the base year. All leases are "net, net, net".
</TABLE>
Mortgage Notes. NHR will own approximately 50 Mortgage Notes
representing approximately $92.5 million loaned to the owners of approximately
23 nursing homes, all but one of which are in Florida and managed by NHC. The
loans were utilized by the owners to acquire land, then construct and equip
the nursing homes or to provide working capital. The Mortgage Notes are
<PAGE>
secured by mortgages on each of the facilities. Forty-three of the Mortgage
Notes (representing approximately $74.9 million the principal amount) are from
FCC and are personally guaranteed by its sole shareholder. The FCC Notes bear
interest at 10.25% and most are due in 2004.
The 19 nursing homes which are located in Florida are each licensed for
approximately 120 to 180 beds. No defaults have occurred under any of the
Mortgage Notes. NHC has no reason to suspect any impending defaults under the
Mortgage Notes. In the event NHC's management agreement for the facilities is
not extended by the owner at the completion of the term, the Mortgage Note
secured by such facility becomes immediately due and payable.
ITEM 3
LEGAL PROCEEDINGS
NHR is not subject to any pending litigation. The HealthCare Facilities
are subject to claims and suits in the ordinary course of business. NHR's
lessees and mortgagees have indemnified and will continue to indemnify NHR
against all liabilities arising from the operation of the Health Care
Facilities, and will indemnify NHR against environmental or title problems
affecting the real estate underlying such facilities. While there are
lawsuits pending against certain of the mortgagees and/or lessees of the
Health Care Facilities, management believes that the ultimate resolution of
all pending proceedings will have no material adverse effect on NHR or its
operations.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During 1997 and other than the initial incorporation activities, there
were no matters submitted to a vote of security holders.
PART II
----------
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The shares are listed on the American Stock Exchange (AMEX) under the
symbol "NHR". On February 27, 1998 the last reported sale price for the
Common Stock on the AMEX was $18.0625. As of December 31, 1997, NHR had
approximately 4,713 shareholders, of which approximately 2,171 are holders of
record with the balance indicated by security listing positions.
<PAGE>
ITEM 6
SELECTED FINANCIAL DATA
(dollars in thousands) 12/31/97 (FA)
Mortgages and other investments $ 94,439
Real estate properties, net 144,615
Total assets 242,495
Long term debt 89,855
Total stockholders' equity 131,698
Common shares outstanding 8,237,423
(FA) NHR is a newly formed entity. NHR had no operations from the date of
incorporation through December 31, 1997. NHR originally issued 1,000
shares of common stock to National HealthCare Corporation (NHC) for cash
on October 15, 1997. On December 31, 1997, NHC transferred mortgage and
other notes receivable (total book value of $94,439), real property
(total book value of $144,615) and certain related liabilities (total
book value of $86,414) to NHR. Simultaneous with the transfer, NHR
obtained a term loan (principal amount of $75,000) and used the proceeds
to repay debt transferred from NHC in the amount of $71,559.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview--
National Health Realty, Inc. (NHR) is a newly formed entity intended to
qualify as a real estate investment trust (REIT) and incorporated in Maryland
on September 26, 1997. NHR originally issued 1,000 shares of common stock to
National HealthCare Corporation (NHC and formerly National HealthCare L.P.)
for $1,000 cash on October 15, 1997, but this stock was redeemed upon the
distribution of NHR common stock to the unitholders of National HealthCare
L.P. on a one for one basis effective 11:59 p.m., December 31, 1997. NHR had
no operations from the date of incorporation through December 31, 1997.
At December 31, 1997, NHC transferred certain assets and liabilities to
NHR and NHR/OP, L.P. in exchange for 8,237,423 shares of NHR common stock and
1,310,194 limited partnership units of NHR/OP, L.P. NHC then distributed the
common stock of NHR and the limited partnership units of NHR/OP, L.P. to NHC's
unitholders at the rate of one share or one unit for each NHC unit outstanding
as of December 31, 1997. The limited partnership units of NHR/OP, L.P. were
distributed to certain NHC unitholders in order to protect the REIT status of
NHR. NHR/OP, L.P. is a Delaware limited partnership that is the operating
entity of NHR and is 86% owned by NHR. NHR and NHR/OP, L.P. are collectively
referred to herein as "NHR".
<PAGE>
Liquidity and Capital Resources--
The assets transferred to NHR as of December 31, 1997 include mortgage
and other notes receivable (book value of $94,439,000) and the real property
of 17 long-term care centers, six assisted living facilities and one
retirement center (total book value of $144,615,000). NHC also transferred
certain related liabilities (total book value of $86,414,000) to NHR.
Simultaneous with the transfer, NHR obtained a term loan (principal amount of
$75,000,000) and used the related proceeds to repay debt transferred from NHC
in the amount of $71,559,000.
Approximately $74,758,00 of the transferred mortgage and other notes
receivable are due from a single debtor that operates 16 licensed nursing
centers in Florida. NHR is the primary lender to that entity.
Concurrent with NHC's conveyance of the real property, NHR leased to NHC
each of the 24 facilities. Each lease is for an initial term expiring
December 31, 2007, with two additional five year renewal terms at the option
of NHC, assuming no defaults. NHR accounts for its leases as operating
leases.
During the initial term and each renewal term, NHC is obligated to pay
NHR annual base rent on the 24 facilities of $12,417,000. In addition to base
rent, in each year after 1999, NHC must pay percentage rent to NHR equal to 3%
of the amount by which gross revenues of each facility in such later year
exceed the gross revenues of such facility in 1999. Each lease is a "triple
net lease" under which NHC is responsible for paying all taxes, utilities,
insurance premium costs, repairs and other charges relating to the operation
of the facilities.
NHR has entered into an advisory services agreement with NHC whereby the
services related to investment activities and day-to-day management and
operations are provided to NHR by NHC. Because of the competitive
restrictions contained in the advisory services agreement, NHR does not intend
to seek further health care-related investment opportunities or to provide
lease or mortgage financing for such investments. NHR expects to continue to
engage in transactions with NHC but does not anticipate purchasing from,
leasing to, or financing other operations.
NHR intends to pay quarterly distributions to its stockholders in an
amount at least sufficient to satisfy the distribution requirements of a real
estate investment trust. Such requirements necessitate that at least 95% of
NHR's taxable income be distributed annually. The primary source for
distributions will be rental and interest income NHR earns on the real
property and mortgage notes receivable transferred to it by NHC. It is
estimated that $1.33 per share will be declared for payment during 1998.
NHR has reserved an additional 1,284,478 shares of common stock for
conversion of certain convertible notes and stock options that were
outstanding obligations of NHC as of December 31, 1997. Although the notes
and options are the obligations of NHC, the notes are convertible and the
options are exercisable at the election of the holders into an equal number of
shares of the common stock of NHC and NHR. Thus, NHR is obligated to issue
NHR common stock upon the conversion of the notes and exercise of the options.
NHR will receive no proceeds from the conversion of the notes and the exercise
of the options.
<PAGE>
Certain of the real properties transferred by NHC to NHR were under
construction at December 31, 1997. NHR anticipates that NHC will complete the
construction of these properties and, upon completion of the construction, NHR
will purchase the additional constructed assets from NHC. NHR's cash on hand,
its operating and investing cash flows, and, as necessary, its borrowing
capacity are expected to be adequate to fund the purchase of the constructed
assets.
Results of Operations--
NHR's results of operations will depend upon the rental and interest
income it earns on the real property and mortgage notes receivable transferred
by NHC. NHR expects that the rental and interest income it earns on the
health care centers and mortgage notes receivable will be sufficient to
satisfy its capital expenditures, working capital, and debt requirements.
Because of the competitive restrictions contained in its advisory services
agreement with NHC, NHR does not intend to seek further health care-related
investment opportunities or to provide lease or mortgage financing for such
investments.
Impact of Inflation--
Inflation may affect NHR in the future by changing the underlying value
of NHR's real estate or by impacting NHR's cost of financing its operations.
Revenues of NHR are primarily from long-term investments. NHR's leases
with NHC require increases in rent income based on increases in the revenues
of the leased facilities.
Year 2000 Compliance--
NHR is currently in the process of evaluating its information technology
infrastructure for Year 2000 compliance. NHR does not expect that the cost to
modify its information technology infrastructure to be Year 2000 compliant
will be material to its financial condition or results of operations. NHR
does not anticipate any material disruption in its operations as a result of
any failure by NHR or NHC to be in compliance. However, with the exception of
NHC, NHR does not currently have any information concerning Year 2000
compliance status of its suppliers and other customers. In the event that any
of NHR's significant suppliers or customers does not successfully and timely
achieve Year 2000 compliance, NHR's business or operations could be adversely
affected.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To National Health Realty, Inc.:
We have audited the accompanying consolidated balance sheet of NATIONAL HEALTH
REALTY, INC. (a Maryland corporation) and subsidiaries as of December 31,
1997, and the related consolidated statement of cash flows for the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet and consolidated statement of
cash flows referred to above present fairly, in all material respects, the
financial position of National Health Realty, Inc. and subsidiaries as of
December 31, 1997, and the results of their cash flows for the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Nashville, Tennessee
February 12, 1998
<PAGE>
<TABLE>
<CAPTION>
National Health Realty, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1997
(in thousands, except shares and per share amounts)
<S> <C>
Assets
Real estate properties
Land $ 18,340
Buildings and improvements 113,767
Construction in progress 12,508
144,615
Less accumulated depreciation ---
Real estate properties, net 144,615
Mortgage and other notes receivable 94,439
Cash and cash equivalents 3,229
Deferred costs and other assets 212
$ 242,495
Liabilities and Stockholders' Equity
Long-term debt $ 89,855
Minority interest in consolidated subsidiaries 20,942
Commitments, contingencies and guarantees
Stockholders' equity:
Preferred stock, $.01 par value;
5,000,000 shares authorized;
none issued or outstanding ---
Common stock, $.01 par value;
75,000,000 shares authorized;
8,237,423 shares issued and outstanding 82
Capital in excess of par value 131,616
Cumulative net income ---
Cumulative dividends ---
Total stockholders' equity 131,698
$ 242,495
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this consolidated statement.
<PAGE>
<TABLE>
<CAPTION>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
December 31, 1997
(in thousands)
<S> <C>
Cash Flows From Operating Activities: $ ---
Cash Flows From Investing Activities: ---
Cash Flows From Financing Activities:
Proceeds from debt issuance 75,000
Payments on debt (71,559)
Financing costs paid (212)
Proceeds from issuance of common stock 1
Refund of proceeds from issuance of common stock (1)
Net cash provided by financing activities 3,229
Increase in Cash and Cash Equivalents 3,229
Cash and Cash Equivalents, at beginning of period ---
Cash and Cash Equivalents, at end of period $ 3,229
National Health Realty, Inc. was capitalized through the contribution of
assets and related liabilities from National HealthCare Corporation
at net book value:
Real estate properties and mortgage and
other notes receivable $ 239,054
Long-term debt 86,414
Equity 152,640
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this financial statement.
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET AND
STATEMENT OF CASH FLOWS
DECEMBER 31, 1997
NOTE 1. ORGANIZATION
National Health Realty, Inc. (NHR) is a Maryland corporation
incorporated on September 26, 1997. NHR plans to elect to qualify as a real
estate investment trust (REIT) under the Internal Revenue Code of 1986, as
amended (the Code). NHR originally issued 1,000 shares of common stock to
National HealthCare Corporation (NHC and formerly National HealthCare L.P.)
for $1,000 cash on October 15, 1997. At December 31, 1997, the 1,000 shares
issued to NHC were canceled and NHR refunded the $1,000 cash to NHC. NHR had
no operations from the date of incorporation through December 31, 1997.
At December 31, 1997, NHC transferred certain assets and liabilities to
NHR and NHR/OP, L.P. in exchange for 8,237,423 shares of NHR common stock and
1,310,194 limited partnership units of NHR/OP, L.P. NHC then distributed the
common stock of NHR and the limited partnership units of NHR/OP, L.P. to NHC's
unitholders at the rate of one share or one unit for each NHC unit outstanding
on the record date of December 31, 1997. The limited partnership units of
NHR/OP, L.P. were distributed to certain NHC unitholders in order to protect
the REIT status of NHR. NHR/OP, L.P. is a Delaware limited partnership that
is the operating entity of NHR and is 86% owned by NHR. NHR and NHR/OP, L.P.
are collectively referred to herein as "NHR".
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated balance sheet and consolidated
statement of cash flows include the accounts of NHR and its majority owned
subsidiaries. Significant intercompany accounts and transactions have been
eliminated.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and 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.
Real Estate Properties - NHR records properties at cost, including
capitalized interest during construction periods. Real property transferred
from NHC was recorded at NHC's net book value at the date of transfer. NHR
uses the straight-line method of depreciation for buildings and improvements
over their estimated remaining useful lives of up to 40 years.
<PAGE>
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" (SFAS 121), NHR evaluates the recoverability of the
carrying values of its properties on a property by property basis.
Cash Equivalents - Cash equivalents consist of all highly liquid
investments with a maturity of three months or less.
Federal Income Taxes - NHR plans to elect to qualify as a REIT under
Sections 856 through 860 of the Code, commencing with the period ending
December 31, 1997. Therefore, NHR will not be subject to federal income tax
provided it distributes at least 95% of its annual real estate investment
trust taxable income to its stockholders and meets other requirements to
continue to qualify as a real estate investment trust. Accordingly, no
liability for federal income taxes has been recorded in the consolidated
balance sheet.
The primary difference between NHR's tax basis and the reported amounts
of NHR's assets and liabilities is a higher tax basis than book basis (by
approximately $5,302,000) in its real estate properties.
Earnings and profits, which determine the taxability of dividends to
stockholders, differ from net income reported for financial reporting purposes
due primarily to differences in the basis of assets and differences in the
estimated useful lives used to compute depreciation expense.
Concentration of Credit Risks - NHR's credit risks primarily relate to
cash and cash equivalents and to the investments in mortgage and other notes
receivable. Cash and cash equivalents are primarily held in bank accounts and
overnight investments. The investments in mortgage and other notes receivable
relate primarily to secured loans with health care facilities as discussed in
Note 5.
NHR's financial instruments, principally its investments in mortgage and
other notes receivable, are subject to the possibility of loss of the carrying
values as a result of either the failure of other parties to perform according
to their contractual obligations or changes in market prices which may make
the instruments less valuable. NHR obtains various collateral and other
protective rights, and continually monitors these rights, in order to reduce
such possibilities of loss. NHR evaluates the need to provide for reserves
for potential losses on its financial instruments based on management's
periodic review of its portfolio on an instrument by instrument basis.
Deferred Costs - Costs incurred to acquire financings are amortized by
the interest method over the term of the related debt.
NOTE 3. RELATIONSHIP WITH NATIONAL HEALTHCARE CORPORATION
Transfer of Assets - On December 31, 1997, NHR issued 8,237,423 shares
of NHR common stock and 1,310,194 units of NHR/OP, L.P. to NHC, a publicly
traded Delaware corporation in exchange for certain assets including mortgage
notes receivable (book value of $94,439,000) and the real property of 17
long-term care centers, six assisted living facilities and one retirement
center (total book value of $144,615,000) and related liabilities (total book
value of $86,414,000). NHC simultaneously distributed the common stock of
NHR and NHR/OP, L.P. units to the NHC unitholders.
<PAGE>
Leases - Concurrent with NHC's conveyance of the real property to NHR,
NHR leased to NHC each of the 24 facilities. Each lease is for an initial
term expiring December 31, 2007, with two additional five year renewal terms
at the option of NHC, assuming no defaults. NHR accounts for the leases as
operating leases.
During the initial term and each renewal term, NHC is obligated to pay
NHR annual base rent on the 24 facilities of $12,417,000. In addition to base
rent, in each year after 1999, NHC must pay percentage rent to NHR equal to 3%
of the amount by which gross revenues of each facility in such later year
exceed the gross revenues of such facility in 1999. Each lease with NHR is a
"triple net lease" under which NHC is responsible for paying all taxes,
utilities, insurance premium costs, repairs and other charges relating to the
operation of the facilities. NHC is obligated at its expense to maintain
adequate insurance on the facilities' assets.
NHC has a right of first refusal with NHR to purchase any of the
properties transferred from NHC should NHR receive an offer from an unrelated
party during the term of the lease or up to 180 days after termination of the
related lease.
At December 31, 1997, the approximate future minimum base rent
commitments to be received by NHR on non-cancelable operating leases with NHC
are as follows:
1998 $12,417,000
1999 12,417,000
2000 12,417,000
2001 12,417,000
2002 12,417,000
Thereafter 62,085,000
Tax Treatment of the Transfer - The transfer of assets was treated as a
nontaxable exchange under Section 351 of the Internal Revenue Code of 1986, as
amended. For federal income tax purposes, no gain or loss was recognized by
NHC or by its unitholders upon the transfer of assets to NHR or upon the
distribution of the shares of NHR. The tax basis of shares of NHR received by
NHC unitholders in the distribution was $16.54 per share for most unitholders.
Advisory Agreement - NHR has entered into an Advisory Agreement with NHC
whereby services related to investment activities and day-to-day management
and operations are provided to NHR by NHC as Advisor. The Advisor is subject
to the supervision of and policies established by NHR's Board of Directors.
Either party may terminate the Advisory Agreement on 90 days notice at
any time after January 1, 2000. NHR may terminate the Advisory Agreement for
cause at any time.
For its services under the Advisory Agreement, NHC is entitled to annual
compensation of the greater of 2% of NHR's gross consolidated revenues or the
actual expenses incurred by NHC.
<PAGE>
NHC is also the Advisor of National Health Investors, Inc. (NHI).
Pursuant to the NHR Advisory Agreement, NHR has agreed that as long as NHC is
obligated both under the NHR Advisory Agreement and the NHI Advisory
Agreement, NHR will only do business with NHC and will not compete with NHI.
As a result, NHR is severely limited in its ability to grow and expand its
business. Furthermore, NHR will not seek additional investments to expand its
investment portfolio.
NOTE 4. REAL ESTATE PROPERTIES
<TABLE>
The following table summarizes NHR's real estate properties by type of
facility and by state as of December 31, 1997:
<CAPTION>
Buildings,
Number Improvements &
of Construction Accumulated
Facility Type and State Facilities Land In Progress Depreciation
- ----------------------- ---------- ---- ----------- ------------
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Long-Term Care Centers:
Florida 6 $ 5,775 $ 40,267 $ ---
Missouri 1 123 3,728 ---
South Carolina 7 6,145 34,890 ---
Tennessee 3 865 9,256 ---
Total Long-Term
Care Centers 17 12,908 88,141 ---
Assisted Living Facilities:
Alabama 1 268 5,468 ---
Florida 3 3,414 19,244 ---
Tennessee 2 875 9,774 ---
Total Assisted Living
Facilities 6 4,557 34,486 ---
Retirement Center:
Tennessee 1 875 3,648 ---
Total Retirement Center 1 875 3,648 ---
Total 24 $ 18,340 $ 126,275 $ ---
</TABLE>
<PAGE>
NOTE 5. MORTGAGE AND OTHER NOTES RECEIVABLE
<TABLE>
The following is a summary of the terms and amounts of mortgage notes
receivable at December 31, 1997:
(dollar amounts in thousands)
<CAPTION>
Final Number of Principal
Payment Date Loans Payment Terms Amount
<S> <C> <C> <C>
2001 1 Monthly interest payments of $32,000
which include interest at prime rate
plus 2%. $ 3,669
2004 32 Monthly payments from $1,000 to $71,000,
which include interest at 10.25%. 54,077
2005 5 Monthly payments from $11,000 to $35,000,
which include interest at 10.25%. 9,515
2006 4 Monthly payments from $10,000 to $45,000,
which include interest at 10.25%. 10,647
2006 1 Monthly payments of $43,000, which
include interest at prime rate plus 2%. 5,344
2015 1 Monthly payments of $42,000, which
include interest at prime rate plus 2%. 4,899
1998- 7 Monthly payments from $8,000 to $35,000,
2016 which include interest ranging from 12%
to prime plus 2%. 6,288
$94,439
</TABLE>
Approximately $74,758,000 of NHR's mortgage and other notes receivable
are due from a single debtor that operates 16 licensed nursing centers in
Florida. NHR is the primary lender to that entity. In the opinion of
management, NHR maintains adequate collateral, including first and second
mortgages, certificates of need, personal guarantees, and stock pledges, on
its mortgage notes receivable. Management continually monitors the status of
its debtors and evaluates the recoverability of its mortgage and other notes
receivable on an instrument by instrument basis.
NOTE 6. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Mortgage and other notes receivable - The fair value of NHR's mortgage
and other notes receivable is estimated based on the current rates offered by
NHR and other real estate investment trusts and financial institutions for the
same or similar types of mortgage and other notes receivable of the same or
similar maturities.
<PAGE>
Cash and cash equivalents - The carrying amount approximates fair value
because of the short maturity of these instruments.
Long-term debt - The fair value of NHR's long-term debt is estimated
based on the current rates offered to NHR and other real estate investment
trusts for debt of the same remaining maturities.
The estimated fair values of NHR's financial instruments are as follows:
December 31, 1997
(in thousands) Carrying
Amount Fair Value
-------- --------
Mortgage and other notes receivable $ 94,439 $ 94,439
Cash and cash equivalents 3,229 3,229
Long-term debt (89,855) (89,855)
NOTE 7. LONG-TERM DEBT
<TABLE>
Long-term debt consists of the following at December 31, 1997:
<CAPTION>
Weighted Average Final Principal
(dollar amounts in thousands) Interest Rate Maturities Amount
------------- ---------- --------
<S> <C> <C> <C>
Term loan, interest only payable
quarterly, effective March 21,
2000, principal and interest
payable quarterly Variable,
7.1% 2002 $75,000
Senior secured notes, principal and interest
payable semiannually 8.4 2005 6,894
Senior secured notes, principal and interest
payable semiannually 8.3 2003 4,761
First mortgage revenue bonds, interest
payable monthly, principal due
at maturity Variable,
4.2 2011 3,200
$89,855
</TABLE>
On December 31, 1997, NHR used proceeds from the term loan to repay debt
transferred from NHC in the approximate amount of $71,559,000.
The aggregate principal maturities of all long-term debt for the five
years subsequent to December 31, 1997 are as follows:
1998 1,727,000
1999 1,727,000
2000 5,476,000
2001 5,476,000
2002 69,226,000
Certain loan agreements require maintenance of specified operating
ratios and stockholders' equity by NHR. All such covenants have been met by
NHR.
<PAGE>
NOTE 8. COMMITMENTS AND GUARANTEES
Certain of the real property transferred by NHC to NHR were under
construction at December 31, 1997. NHC will complete the construction of
these properties and, upon completion of the construction, NHR is committed to
purchase the constructed assets from NHC. NHR's cash on hand, its operating
and investing cash flows, and, as needed, its borrowing capacity are expected
to be adequate to fund these commitments.
At December 31, 1997, NHC had outstanding 25,000 stock options and
$19,152,000 of 6% subordinated convertible notes (the Notes). The Notes are
the obligation of NHC and mature July 1, 2000. The stock options are
exercisable and the Notes are convertible at the election of the holders into
an equal number of shares of the common stock of NHC and NHR. Thus, NHR is
obligated to issue NHR common stock upon the exercise of the stock options and
conversion of the Notes. NHR will receive no proceeds from the exercise of
the stock options and the conversion of the notes. NHR has reserved an
additional 1,284,478 shares of common stock for the exercise of the stock
options and the conversion of the Notes.
NOTE 9. STOCK OPTION PLAN
NHR has reserved for issuance 500,000 shares of common stock under the
NHR stock option plan. As of December 31, 1997, no options to purchase shares
have been granted under the NHR stock option plan.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Directors and Executive Officers
The Board of Directors is divided into three classes. Directors will
hold office until the annual meeting for the year in which their term expires
and until their successor is elected and qualified. As each of their terms
expire, the successor shall be elected to a three-year term. A director may be
removed from office for cause only. Officers serve at the pleasure of the
Board of Directors for a term of one year. The following table sets forth the
initial directors and executive officers of NHR:
<PAGE>
<TABLE>
<CAPTION>
Current Officer of
Term as NHC's
Director Predecessor
Name Age Expires Since
- ---- --- ------ -----------
<S> <C> <C> <C>
J. K. Twilla 71 2001 ---
Robert G. Adams 51 2000 1985
Olin O. Williams 68 2000 ---
W. Andrew Adams 52 1999 1973
Ernest G. Burgess, III 58 1999 1975
Richard F. LaRoche, Jr. 52 ---- 1974
</TABLE>
Each of the directors of NHR are currently directors of National
HealthCare Corporation. Mr. W. Andrew Adams and Mr. LaRoche are directors of
National Health Investors, Inc. Messrs. Adams and Mr. LaRoche are executive
officers not only of NHR, but in similar capacity with NHC and NHI.
Drs. Twilla and Williams each were physicians in private practice in
Tennessee for more than 30 years. Dr. Williams serves as Chairman of the
Board of the Bank of Murfreesboro, Tennessee.
Mr. W. Andrew Adams has been Chairman of the Board and Chief Executive
Officer since 1995. He was president from 1981 until 1983 of the National
Council of Health Centers, the trade association for multi-facility
long-term health care center companies, and served as Chairman of the Multi-
facility Committee of the American Health Care Association from 1992 through
1994. He has an M.B.A. degree from Middle Tennessee State University. Mr.
Adams serves on the Board of Trust of David Lipscomb University, Nashville,
Tennessee, is President and Chairman of the Board of Directors of National
Health Investors, Inc. and National HealthCare Corporation and serves on the
Board of SunTrust Bank in Nashville, Tennessee.
Mr. Robert Adams (Senior Vice President, Chief Operating Officer and
Director) has served both as Administrator and as Regional Administrator of
NHC, holding the last position from 1977 to 1985. He has a B.S. degree from
Middle Tennessee State University. Mr. Robert Adams and Mr. W. Andrew Adams
are brothers.
Mr. Burgess (Director) served as NHC' s Senior Vice President for
Operations from 1975 through 1994. He has an M.S. degree from the University
of Tennessee.
Mr. LaRoche (Senior Vice President) has been Senior Vice President since
1985, and General Counsel since 1971 of NHC. He has a law degree from
Vanderbilt University and an A.B. degree from Dartmouth College. His
responsibilities include acquisitions and finance. Mr. LaRoche also serves on
the Board of National Health Investors, Inc.
<PAGE>
ITEM 11
EXECUTIVE COMPENSATION
Outside directors will receive $2,500 per meeting attended. In
addition, outside directors will receive a stock option to purchase 5,000
shares of NHR common stock at a purchase price equal to the closing price of
the Shares on the initial date of trading and will be automatically granted an
option to purchase 5,000 shares of NHR common stock at the closing price on
the date of NHR's annual meeting.
NHR's day to day operations are conducted by personnel provided by NHC.
NHR will have three executive officers, W. Andrew Adams as President, Robert
G. Adams as Vice President and Richard F. LaRoche, Jr., as Vice President and
Secretary, all of whom are also officers of NHC and NHI. These three officers
received a special bonus for their part in the formation of NHR, which was
paid by NHC.
The compensation of the executive officers is set by the Board of
Directors of NHC. Any compensation paid by NHR will be credited against the
Advisory fee paid to NHC.
<PAGE>
<TABLE>
TABLE I
NATIONAL HEALTH REALTY, INC.
SUMMARY COMPENSATION TABLE
1997
<CAPTION>
Long Term Compensation
----------------------------------------
Annual Compensation(F1) Awards Payouts
- ------------------------------------------------------------------------- --------------------------- ------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other annual Restricted All other
Name and Principal Compensation Stock Awards Options/SARs LTIP Payouts Compensation
Position Year Salary($) Bonus($)(F2) ($) ($) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Andrew Adams 1997 $ --- $1,486,843 $ --- $ --- --- $ --- $ ---
President & CEO
Robert G. Adams 1997 $ --- $ 594,258 $ --- $ --- --- $ --- $ ---
Senior Vice
President
& COO
Richard F. LaRoche, Jr. 1997 $ --- $ 796,355 $ --- $ --- --- $ --- $ ---
Sr. VP & Secretary
(F1) Compensation deferred at the election of an executive has been included
in salary column (d).
(F2) These officers also received compensation from National Health Investors,
Inc. and National HealthCare Corporation which are disclosed in those
Company's Form 10-K or proxy statements.
</TABLE>
<PAGE>
<TABLE>
TABLE II
NATIONAL HEALTH REALTY, INC.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
December 31, 1997
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Unit Price
Appreciation for Option Term(F2)
Individual Grants
- ----------------------------------------------------------------------------------- --------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Options/SARs
Granted to Exercise or Base
Options/SARs Employees in Price ($/Sh) Expiration
Executive Officers Granted (#)(F1) Fiscal Year Date 5%($) 10%($)
- ------------------ --------------- ------------ ---------------- ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
W. Andrew Adams,
President & CEO --- --- --- --- --- ---
Robert G. Adams,
Sr. VP --- --- --- --- --- ---
Richard F. LaRoche, Jr.
Sr. VP --- --- --- --- --- ---
(F1) No options were awarded during 1997 to Executive Officers
(F2) Based on remaining option term (if any) and annual compounding.
</TABLE>
<TABLE>
TABLE III
NATIONAL HEALTH REALTY, INC.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
December 31, 1997
<CAPTION>
Number of Unexercised Value of Unexercised In-the-
Options/SARs at FY-End Money Options/SARs at FY-
(#) End ($)
Shares acquired Value Realized Exercisable/ Exercisable/
Executive Officers on Exercise (#) ($)(F1) Unexercisable Unexercisable
- ------------------ --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
W. Andrew Adams
President & CEO --- --- --- ---
Robert G. Adams
Sr. VP --- --- --- ---
Richard F. LaRoche, Jr.
Sr. VP --- --- --- ---
(F1) Market value of underlying securities at exercise date, minus the exercise
or base price.
</TABLE>
<PAGE>
Stock Option Plan
The NHR Board of Directors and the initial sole shareholder of NHR
approved the adoption of the 1997 Stock Option and Stock Appreciation Rights
Plan (the NHR Stock Option Plan), under which options to purchase shares of
NHR's common stock are available for grant to consultants, advisors, directors
and employees of NHR, providing an equity interest in NHR and additional
compensation based on appreciation of the value of such stock.
The NHR Stock Option Plan allows for options to purchase in the
aggregate up to 500,000 shares of common stock to be granted by the NHR
Board of Directors. The NHR Board of Directors may, in its discretion grant
incentive stock options (ISO's), non-qualified stock options or stock
appreciation rights (SAR's)
In addition, the NHR Stock Option Plan provides that the non-employee
directors will receive a non-qualified stock option to purchase 5,000 shares
of common stock at a purchase price equal to the closing price of NHR Shares
on the initial date of trading and will be automatically granted an option to
purchase 5,000 shares of common stock annually on the date of NHR's annual
meeting with an exercise price equal to the closing price on the date of such
annual meeting.
The NHR Stock Option Plan provides that the exercise price of an ISO
option must not be less than the fair market value of NHR common stock on the
trading day next preceding the date of the grant. Payment for shares of NHR
common stock to be issued upon exercise of an option may be made either in
cash, NHR common stock or any combination thereof, at the discretion of the
option holder. Options are nontransferable, other than by will, the laws of
descent and distribution or pursuant to certain domestic relations orders. NHR
common stock subject to options granted under the NHR Stock Option Plan that
expire, terminate or are canceled without having been exercised in full become
available again for option grants.
The NHR Stock Option Plan is administered by the NHR Board of Directors,
or, at the discretion of the NHR Board of Directors, a committee of
directors. Subject to certain limitations, the NHR Board and its committee
have the authority to determine the recipients, as well as the exercise
prices, exercise periods, length and other terms of stock options granted
pursuant to the NHR Stock Option Plan. In making such determinations, the NHR
Board may take into account the nature of the services rendered or to be
rendered by option recipients, and their past, present or potential
contributions to NHR.
The number of shares of common stock that may be granted under the NHR
Stock Option Plan or under any outstanding options granted thereunder will be
proportionately adjusted, to the nearest whole share, in the event of any
stock dividend, stock split, share combination or similar recapitalization
involving NHR common stock or any spin-off, spin-out or other significant
distribution of NHR's assets to its stockholders for which NHR receives no
consideration.
<PAGE>
Generally, in the event an option holder is terminated as an employee by
reason of disability or death, the holder or his or her representative may
exercise the option for a period of 12 months following such termination
unless the Board of Directors elects, in its sole discretion, to extend the
exercise period. If the employment of an option holder is terminated for
"cause," as defined in the NHR Stock Option Plan, the unexercised options
expire. In the event the option holder is terminated as an employee for any
reason other than disability, death or cause, the holder may exercise his or
her option for a period of three months following termination, unless extended
by agreement of NHR.
In the event of a dissolution or liquidation of NHR or a merger or
consolidation or acquisition in which NHR is not the surviving corporation,
each outstanding option will become fully exercisable and each holder will
have the right, within 60 days prior to such dissolution, liquidation,
merger, consolidation or acquisition, to exercise his or her options, in whole
or in part.
Either non-qualified or incentive stock options may be granted under the
NHR Stock Option Plan. No federal income tax consequences occur to either NHR
or the optionee upon NHR's grant or issuance of a non-qualified stock option.
Upon an optionee's exercise of a non-qualified stock option, the optionee will
recognize ordinary income in an amount equal to the difference between the
fair market value of NHR common stock purchased pursuant to the exercise of
the option and the exercise price of the option. However, if NHR common stock
purchased upon exercise of the option is not transferable or is subject to a
substantial risk of forfeiture, then the optionee will not recognize income
until the stock becomes transferable or is no longer subject to such a risk of
forfeiture (unless the optionee makes an election under Internal Revenue Code
Section 83(b) to recognize the income in the year of exercise, which election
must be made within 30 days of the option exercise). NHR will be entitled to
a deduction in an amount equal to the ordinary income recognized by the
optionee in the year in which such income is recognized by the optionee. Upon
a subsequent disposition of the shares of NHR common stock, the optionee will
recognize a capital gain to the extent the sales proceeds exceed the
optionee's cost of the shares plus the previously recognized ordinary income.
Incentive stock options granted under the NHR Stock Option Plan are
intended to qualify for a favorable tax treatment under Internal Revenue Code
Section 422. No individual may be granted incentive stock options under the
NHR Stock Option Plan exercisable for the first time during any calendar year
and having an aggregate fair market value in excess of $100,000. If the
recipient of an incentive stock option disposes of the underlying shares
before the end of certain holding periods (essentially the later of one year
after the exercise date or two years after the grant date), he or she will
generally recognize ordinary income in the year of disposition in an amount
equal to the difference between his or her purchase price and the fair market
value of NHR common stock on the exercise date. If a disposition does not
occur until after the expiration of the holding periods, the recipient will
<PAGE>
generally recognize a capital gain equal to the excess of the disposition
price over the price paid by the recipient on the exercise date. NHR
generally will not be entitled to a tax deduction for compensation expense on
account of the original sales to employees, but may be entitled to a deduction
if a participant disposes of stock received upon exercise of an incentive
stock option under the NHR Stock Option Plan prior to the expiration of the
holding periods.
The only options which the NHR Board of Directors has determined to
grant under the NHR Stock Option Plan to date are the options to purchase
5,000 shares of common stock to be granted to non-employee directors on the
first trading date in 1998.
ITEM 12
<TABLE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
<CAPTION>
Names and Addresses Number of NHR Shares Percentage of
of Beneficial Owner Beneficially Owned (F1) Total NHR Shares (F2)
<S> <C> <C>
W. Andrew Adams, President
801 Mooreland Lane
Murfreesboro, TN 37128 455,719 5.53%
Dr. J. K. Twilla, Director
525 Golf Club Lane
Smithville, TN 37166 81,450 .99%
Dr. Olin O. Williams, Director
2007 Riverview Drive
Murfreesboro, TN 37139 106,895 1.30%
Robert G. Adams, Director & Sr. V.P.
2217 Tomahawk Trace
Murfreesboro, TN 37129 413,063 5.01%
Ernest G. Burgess, Director
2239 Shannon Drive
Murfreesboro, TN 37129 183,336 2.23%
Richard F. LaRoche, Jr., Sr. V.P. & Secretary
2103 Shannon Drive
Murfreesboro, TN 37130 368,326 4.47%
National Health Corporation
P. O. Box 1398
Murfreesboro, TN 37133 786,916 9.55%
All Executive Officers and
Directors of NHR 2,395,705 29.08%
<PAGE>
(F1) Based on 8,237,423 shares outstanding at December 31, 1997.
(F2) Excludes ownership of units of limited partnership interest in
NHR/OP, L.P., a subsidiary of NHR, which are redeemable at the
holders' election for either cash or shares in NHR, with the form
of redemption in the sole discretion of NHR.
</TABLE>
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Assumed Liabilities
NHR was transferred the Healthcare Facilities subject to Assumed
Liabilities of approximately $86.4 million at December 31, 1997. NHR
immediately repaid $71.6 million of the Assumed Liabilities with the proceeds
of the NHR Credit Agreement in the amount of $75 million with the Bank of
Tokyo/Mitsubishi as Agent. The balance of the Assumed Liabilities includes
$11.6 million of secured liabilities at fixed rates of 8.4% and 8.3%, which
are amortizing and will be paid in full by the end of the calendar year 2005
and $3.2 million of first mortgage revenue bonds at variable rates (4.2% at
December 31, 1997) due in 2011.
Although NHR is subject to the Assumed Liabilities, NHI and NHC will
remain liable on certain unassumed portions of such debt in certain
percentages. NHR has agreed to indemnify NHC and NHI in respect of such
continuing liability.
Of the Assumed Liabilities, approximately $11.6 million is represented
by fixed rate first mortgage notes and $3.2 million is represented by variable
rate first mortgage revenue bonds on several of the Healthcare Facilities.
NHR has obtained the consent of the holders of these notes who have agreed
that NHR's liability is limited to (1) its interest in the Healthcare
Facilities upon which the mortgages are placed, and (2) further limited to 28%
of the total outstanding mortgage notes in question which are cross
collateralized with other debt of NHC and NHI.
The Leases
The Master Lease Agreement with NHC provides that each Lease will be for
an initial term expiring on December 31, 2007 (the Initial Term). Provided
that NHC is not then in default and gives at least six months notice, NHC has
the option to renew all (but without NHR's consent not less than all) of the
Leases for a further five-year term expiring December 31, 2012 (the First
Renewal Term); and, provided that NHC is not then in default and gives at
least six (6) months notice, NHC will have the option to renew all (but not
less than all) of the Leases for a term expiring December 31, 2017 (the Second
Renewal Term).
<PAGE>
During the Initial Term and both Renewal Terms (if applicable), NHC is
obligated to pay NHR annual base rent for the respective Healthcare Facilities
in the respective amounts which upon completion of construction will initially
aggregate $15,494,437, increased each year by 3% of the increase in gross
revenues over 1999, the "base year."
The Master Agreement and the respective Leases will also obligate NHC to
pay as "other additional rent" all real estate taxes, utility charges and
other charges imposed by third parties and which, if not paid, might become a
levy or a lien upon the property. In addition to the base rent, and other
additional rent, in each year after 1999 NHC must pay percentage rent equal to
3% of the amount by which gross revenues of each Healthcare Facility in such
later year exceeds the gross revenues of such Healthcare Facility in 1999.
Base rent, other additional rent and percentage rent are collectively referred
to in the Master Agreement as "rent."
Each Lease of a Healthcare Facility is what is commonly known as a
"triple net lease" or "absolute net lease," under which NHC is responsible for
paying all taxes, utilities, insurance premium costs, repairs (including to
structural portions of the buildings constituting a part of the Healthcare
Facilities) and other charges relating to the ownership and operation of the
Healthcare Facilities. NHC is obligated at its expense to keep all
improvements and fixtures and other components of the Healthcare Facilities
covered by "all risk" insurance in an amount equal to at least 100% of the
full replacement costs thereof, and insured against boiler explosion and
similar insurance; to provide loss of rent insurance (if the same is available
at a reasonable cost), and flood insurance if the land constituting the
Healthcare Facility is located within a designated flood plain area; and to
maintain specified minimal personal injury and property damage insurance,
protecting NHR as well as NHC at each Healthcare Facility. NHC is also
obligated to indemnify and hold harmless NHR from all claims resulting from
the use and occupancy of each Healthcare Facility by NHC or persons claiming
under NHC and related activities, as well as to be fully responsible for, and
to indemnify and hold NHR harmless against, all costs related to any hazardous
substances or materials on, or other environmental responsibility with respect
to, each Healthcare Facility.
Under each Lease, NHC's use of the Healthcare Facility is limited to use
as a nursing home, healthcare facility or other purpose for which the Leased
Property is being used at the commencement date of the Lease unless NHR's
consent to some other use is obtained. NHC has responsibility to obtain and
maintain all licenses, certificates and consents needed to use and operate
each Healthcare Facility for such purposes, and to use and maintain each
Healthcare Facility in a careful, safe and proper manner and in compliance
with all local board of health and other applicable governmental and insurance
regulations. Each Lease permits NHC to replace fixtures at each Healthcare
Facility and to finance such replacement (subject to the approval of NHR in
the case of any financing in excess of $10,000), and to make alterations with
respect to any Healthcare Facility (subject to NHR's approval for any
alteration in excess of $150,000 at any one Healthcare Facility in any one
year), with the title to any such replacement fixtures and alterations
belonging to NHR.
<PAGE>
An "Event of Default" will be deemed to have occurred under the Master
Agreement and any individual Lease if NHC fails to pay Rent within ten
business days after notice of nonpayment; if NHR gives three or more notices
of nonpayment of Rent in any one year (provided however that such will not be
an Event of Default if NHR fails to exercise its remedies within 60 days after
the last of such notices); if NHC fails to perform any other covenant and NHC
does not diligently undertake to cure the same within 30 days' notice from
NHR; with respect to a Lease of any particular Healthcare Facility, if NHC
ceases operations thereof for more than 180 days other than as a result of
destruction or condemnation; if any bankruptcy proceedings are instituted by
or against NHC and, if against NHC, they are not dismissed within 90 days; if
a custodian or receiver is appointed for any Healthcare Facility and not
discharged within 60 days or NHC is enjoined or prevented from conducting a
substantial part of its business for more than 60 days; if uncontested liens
on any part of the property of NHC are not dismissed or bonded within 60 days;
or if NHC or any affiliate of NHC defaults on any other material obligation
to NHR or on any material obligation under any debt associated with any
Healthcare Facility or any debt co-guaranteed by NHR and NHC.
In the event of any Event of Default, NHR may evict NHC and either
terminate the Lease or re-let the premise. In either event, NHC shall remain
responsible for the rental value of the premises for the stated remainder
period of the term in excess of rents received by NHR from any successor
occupant. In addition, NHR may exercise any other rights that it may have
under law.
In the event of any damage or destruction to any Healthcare Facility,
NHC has the obligation to fully repair or restore the same at its expense,
with the Base Rent, real estate taxes and other impositions on the particular
Healthcare Facility being appropriately abated during the time of restoration.
If any Healthcare Facility is damaged to such an extent that 50% of the
licensed nursing home beds at such Healthcare Facility are rendered unusable
and if NHC has fully complied with the insurance obligations with respect to
such Healthcare Facility (including maintaining insurance against loss of
rents), NHC may upon turning over all insurance proceeds with respect to such
Healthcare Facility terminate the Lease of that Healthcare Facility.
In the event of a condemnation or taking of any leased Healthcare
Facility, the Lease terminates as to the portion of the Healthcare Facility
taken, and in the event of a partial taking, NHC is obligated to repair the
portion not taken, if the same may still be economically used, and the Base
Rent therefor will abate in proportion to the number of beds remaining.
The Master Agreement provides that if during the Lease Term or within
six months after termination of such Term NHR receives a bona fide third party
offer to purchase any Healthcare Facility, then, prior to accepting such third
party offer, NHR shall give NHC a 15-day right of first refusal during which
NHC may elect to purchase such Healthcare Facility on the same terms and
conditions offered by the third party. NHC also is granted a thirty day right
of first refusal to lease an Healthcare Facility expiring six months after the
expiration of the Lease Term, on the same terms and conditions as offered by a
third party, and accepted by NHR.
<PAGE>
Various other provisions of the Master Agreement with respect to Leases
of the various Healthcare Facilities provide for arbitration in the event of
NHR and NHC's inability to resolve disputes under the Master Agreement or any
Lease. Such Agreement also provides that upon its termination and the last of
the Leases between NHR and NHC, NHR will, upon NHC's request within 12 months
after such termination, use its best efforts to change its corporate name to a
name that does not include the word "National".
The Master Agreement described above applies only to the 24 Leases of
the Healthcare Facilities. NHR and NHC anticipate that any future leases of
additional healthcare facilities between them will also become subject to the
Master Agreement with appropriate modifications to fit the specific situation.
The foregoing summary of certain of the provisions of the Master Agreement
does not purport to be complete and is subject to and qualified in its
entirety by reference to all provisions of the Master Agreement.
Advisory, Administrative Services and Facilities Agreement (the Advisory
Agreement)
Services of Advisor
Under the Advisory Agreement, NHR engages NHC and NHC , as Advisor,
agrees to use its best efforts (a) to present to NHR a continuing and suitable
investment program consistent with NHR's investment policy; (b) to manage the
day-to-day affairs and operations of NHR; and (c) to provide administrative
services and facilities appropriate for such management. In performing its
obligations under the Agreement, the Advisor is subject to the supervision of
and policies established by NHR's Board of Directors.
The specific duties of the Advisor under the Advisory Agreement include
providing NHR with economic information and evaluations with respect to
additional investment opportunities, formulating an investment program and
selecting potential investments for NHR and recommending the terms thereof;
and also evaluating and making recommendations as to the possible sale or
other disposition of the assets of NHR. The Advisor also is responsible for
recommending selections of tenants, lenders, providers of professional and
specialized services and handling other managerial functions with respect to
NHR's properties. The Advisor is also obligated to provide office and clerical
facilities adequate for NHR's operations, and to provide or obtain others to
provide accounting, custodial, funds collection and payment, stockholder and
debenture holder communications, legal and other services necessary in
connection with NHR's operations. The Advisor also undertakes to keep NHR's
Directors informed as to developments in the healthcare and REIT industries
useful to NHR's existing and potential future business and investments.
The NHR Advisory Agreement also obligates the Advisor to handle or
arrange for the handling of NHR's financial and other records. The Advisor is
also required to keep its own records with respect to its services under the
NHR Advisory Agreement. Annually, or as more frequently requested by NHR's
Directors, the Advisor is obligated to report to NHR Directors its estimated
<PAGE>
costs in providing services under the NHR Advisory Agreement and such
information as the Advisor may reasonably obtain concerning the cost to other
REITs specializing in healthcare facility investments of administrative and
advisory services comparable to those provided by the Advisor, in order that
NHR's Directors may evaluate the performance of the Advisor and the efficiency
of the arrangements provided to NHR under the Advisory Agreement.
Restrictions on Investment Activities
The Advisory Agreement provides that prior to the earlier to occur of
(i) the termination, for any reason, of the Advisory Agreement or (ii) NHC
ceasing to be actively engaged as the investment advisor for NHI, NHR will not
(without the prior approval of NHI) transact business with any party, person,
company or firm other than NHC. It is the intent of the foregoing restriction
that NHR will not be actively or passively engaged in the pursuit of
additional investment opportunities, but rather will focus upon its capacities
as landlord and note holder of those certain assets, conveyed to it on
December 31, 1997, by NHC.
Term
The Advisory Agreement is for a stated term expiring December 31, 2003
and thereafter from year to year unless earlier terminated. However, either
party may terminate the Advisory Agreement at any time on or after January 1,
2000 on 90 days written notice, and NHR may terminate the Advisory Agreement
for cause at any time.
Upon termination of the Advisory Agreement for any reason, the Advisor
is obligated to deliver all property of NHR that the Advisor is holding in its
capacity as Advisor, to render a full accounting to NHR and to cooperate with
NHR Directors to provide an orderly management transition. NHR is obligated,
upon such termination, to pay NHC all compensation for services through the
date of termination, including any compensation the payment of which was
deferred during the period the Advisory Agreement was in effect.
Compensation
For its services under the Advisory Agreement, NHC is entitled to
annual compensation of the greater of (i) two percent (2%) of NHR's gross
consolidated revenues calculated according to generally accepted accounting
principles, or (ii) the actual expenses incurred by NHC as outlined in the
Advisory Agreement.
Payment of Expenses
The Advisory Agreement provides that NHC shall pay all expenses incurred
in performing its obligations thereunder, without regard to the amount of
compensation received under the Advisory Agreement. Expenses specifically
listed as expenses to be borne by NHC without reimbursement include: the cost
of accounting, statistical or bookkeeping equipment necessary for the
<PAGE>
maintenance of NHR's books and records; employment expenses of the officers
and directors and personnel of NHC and all expenses, including travel
expenses, of NHC incidental to the investigation and acquisition of properties
for NHR prior to the time NHR Directors definitively decide to acquire the
property or to have NHC continue with the acquisition process, whether the
property is acquired or not, and after NHR Directors definitively decide to
dispose of a property; advertising and promotional expenses incurred in
seeking and disposing of investments for NHR; rent, telephone, utilities,
office furniture and furnishings and other office expenses incurred by or
allocable to NHC for its own benefit and account regardless of whether
incurred or used in connection with rendering the services to NHR provided for
in the NHR Advisory Agreement; all miscellaneous administrative and other
expenses of NHC, whether or not relating to the performance by NHC of its
functions under the NHR Advisory Agreement; fees and expenses paid to
independent contractors, appraisers, consultants, attorneys, managers and
other agents retained by or on behalf of NHR and expenses directly connected
with the acquisition, financing, refinancing, disposition and ownership of
real estate interests or of other property (including insurance premiums,
legal services, brokerage and sales commissions, maintenance, repair and
improvement of property); insurance as required by NHR Directors (including
NHR Directors' liability insurance); expenses connected with payments of
dividends or distributions in cash or any other form made or caused to be made
by NHR Directors to REIT shareholders and expenses connected with payments of
interest to holders of NHR's debentures; all expenses connected with
communication to holders of securities of NHR and the other bookkeeping and
clerical work necessary in maintaining relations with holders of securities,
including the cost of printing and mailing certificates for securities and
proxy solicitation materials and reports to holders of NHR's securities;
transfer agent's, registrar's, dividend disbursing agent's, dividend
reinvestment plan agent's and indenture trustee's fees and charges. The NHR
Advisory Agreement also confirms that NHC shall pay all costs and expenses
which it is obligated to pay as tenant under any lease of healthcare
facilities from NHR.
The NHR Advisory Agreement also confirms that NHC is responsible for all
legal and auditing fees and expenses of NHR and legal, auditing accounting,
underwriting, brokerage, listing, registration and other fees and printing,
engraving and other expenses and taxes incurred in connection with the
organization of NHR, but such expenses incurred after January 1, 1998 for the
issuance, distribution, transfer, registration and listing of NHR Shares shall
remain NHR's obligation.
The NHR Advisory Agreement provides that, except as NHC may have
responsibility for such costs as tenant under the lease of any property from
NHR, NHR is responsible to pay its own expenses of the following types:
dividends, the cost of borrowed money; taxes on income and taxes and
assessments on real property and all other taxes applicable to NHR including,
without limitation, franchise and excise fees; except as assumed by NHC, all
ordinary and necessary expenses incurred with respect to and allocable to the
prudent operation and business of NHR including, without limitation, any fees,
salaries and other employment costs, taxes and expenses paid to NHR Directors,
officers and employees of NHR who are not also employees of NHC.
<PAGE>
PART IV
----------
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
a) (1) Financial Statements:
The Financial Statements are included in Item 8 and are filed as part of
this report.
(2) Financial Statement Schedules
The Financial Statement Schedules and Report of Independent Public
Accountants on Financial Statement Schedules are listed in Exhibit 13.
(3) Exhibits:
Reference is made to the Exhibit Index of this Form 10-K Annual Report.
b) Reports on Form 8-K: None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Murfreesboro, State of Tennessee, on the 30th day of March, 1998.
NATIONAL HEALTH REALTY, INC.
/s/Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed on the dates indicated by the following persons in
the capacities indicated.
Signature Title Date
/s/ W. Andrew Adams President & Director March 30, 1998
W. Andrew Adams Principal Executive Officer
/s/ Richard F. LaRoche, Jr. Secretary and Director March 30, 1998
Richard F. LaRoche, Jr. Principal Financial Officer
_______________________________ Director March 30, 1998
J. K. Twilla
/s/ Robert G. Adams Director March 30, 1998
Robert G. Adams
/s/ Olin O. Williams Director March 30, 1998
Olin O. Williams
/s/ Ernest G. Burgess, III Director March 30, 1998
Ernest G. Burgess, III
<PAGE>
EXHIBIT 13
NATIONAL HEALTH REALTY, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheet - December 31, 1997
Consolidated Statement of Cash Flows - for the period ended December 31, 1997
Notes to Consolidated Balance Sheet and Statement of Cash Flows
Financial Statements Schedules
Report of Independent Public Accountants on Financial Statement Schedules
Schedule III Real Estate and Accumulated Depreciation
Schedule IV Mortgage Loans on Real Estate
All other schedules are not submitted because they are not applicable
or not required or because the required information is included in the financial
statements or notes thereto.
The 1997 consolidated balance sheet and consolidated statement of cash
flows, together with the Report of Independent Public Accounts, listed in the
above index are filed herewith.
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
2.1 Plan of Restructure (incorporated by reference to Exhibit
2.1 to the Registrant's registration statement No. 333-37173
on Form S-4).
2.2 Agreement of Merger (incorporated by reference to Exhibit
2.2 to the Registrant's registration statement No. 333-37173
on Form S-4).
3.1 Articles of Incorporation of National Health Realty, Inc.
(incorporated by reference to Exhibit 3.1 to the
Registrant's registration statement No. 333-37173 on Form
S-4).
3.2 Bylaws of National Health Realty, Inc. (incorporated by
reference to Exhibit 3.2 to the Registrant's registration
statement No. 333-37173 on Form S-4).
3.3 Limited Partnership Agreement of NHR/OP, L.P.(incorporated
by reference to Exhibit 3.3 to the Registrant's registration
statement No. 333-37173 on Form S-4).
4 Indenture of Trust and Security Agreement dated as of
December 1, 1990 by and among National Health Corporation
Leveraged Employee Stock Ownership Trust, National Health
Corporation, and National HealthCorp L.P. to State Street
Bank and Trust Company of Connecticut, National Association,
as Indenture Trustee and Barnett Banks Trust Company,
National Association, as Florida Co-Indenture Trustee
(incorporated by reference to Exhibit 4 to the Registrant's
registration statement No. 333-37173 on Form S-4).
10.1 Master Agreement of Lease effective as of January 1, 1998 by
and among National Health Realty, Inc., NHR/OP, L.P. and
National HealthCare Corporation (incorporated by reference
to Exhibit 10.1 to the Registrant's registration statement
No. 333-37173 on Form S-4).
10.2 Advisory, Administrative Services and Facilities Agreement
effective as of January 1, 1998 between National Health
Realty, Inc., NHR/OP, L.P. and National HealthCare
Corporation (incorporated by reference to Exhibit 10.2 to
the Registrant's registration statement No. 333-37173 on
Form S-4)
10.3.2 Form of National Health Realty, Inc. 1997 Stock Option
and Stock Appreciation Rights Plan (incorporated by
reference to Exhibit 10.3.2 to the Registrant's
registration statement No. 333-37173 on Form S-4)
<PAGE>
10.4 Loan Agreement dated as of April 21, 1995 by and
between National HealthCare L.P. and First American
National Bank (incorporated by reference to Exhibit
10.4 to the Registrant's registration statement No.
333-37173 on Form S-4)
10.5 Credit Agreement dated as of December 31, 1996 by and
among National HealthCare L.P., The Banks, and
SunTrust Bank, Nashville, N.A., as Agent (incorporated
by reference to Exhibit 10.5 to the Registrant's
registration statement No. 333-37173 on Form S-4)
10.6 Reimbursement and Letter of Credit Agreement dated as
of June 1, 1989 among West Plains Manor, National
HealthCare L.P. and The Bank of Tokyo, Ltd. New York
Agency (incorporated by reference to Exhibit 10.6 to
the Registrant's registration statement No. 333-37173
on Form S-4)
10.7 Guaranty Agreement dated as of June 1, 1989 by and
between National HealthCare L.P. and The Bank of
Tokyo, Ltd., New York Agency Subsidiaries of the
Registrant (incorporated by reference to Exhibit 10.7
to the Registrant's registration statement No. 333-37173
on Form S-4)
27 Financial Data Schedule (for SEC purposes only)
21 Subsidiaries of the Registrant
<PAGE>
EXHIBIT 21
NATIONAL HEALTH REALTY, INC.
SUBSIDIARY OF NATIONAL HEALTH REALTY, INC.
Subsidiary State of Organization
NHR/OP, L.P. Delaware
NHR/Delaware, Inc. Delaware
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To National Health Realty, Inc.:
We have audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and statement of cash flows of
National Health Realty, Inc. included in this Form 10-K, and have issued our
report thereon dated February 12, 1998. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
financial statement schedules listed in the accompanying index are the
responsibility of the Company's management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and regulations
under the Securities and Exchange Act of 1934 and are not otherwise a required
part of the basic financial statements. The financial statement schedules
have been subjected to the auditing procedures applied in the audits of the
basic financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 12, 1998
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1997
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H
Cost capitalized Gross amount
Initial Cost subsequent to at which carried
to Company acquisition at close of period
-------------------- --------------------- ---------------------Accum.
Encum- Building & Improve- Carrying Bldg. & Depre- Date of Date
Description brances Land Improv. ments Costs Land Improv. Total ciation Constr. Acquired
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Health Care Centers (6)
Florida $53,066 $5,775 $40,267 $ --- $ --- $ 5,775 $ 40,267 $ 46,042 --- N/A 12/31/97
Health Care Centers (1)
Missouri 4,650 123 3,728 --- --- 123 3,728 3,851 --- N/A 12/31/97
Health Care Centers (7)
South Carolina 22,148 6,145 34,890 --- --- 6,145 34,890 41,035 --- N/A 12/31/97
Health Care Centers (3)
Tennessee --- 865 9,256 --- --- 865 9,256 10,121 --- N/A 12/31/97
Assisted Living Facilities(1)
Alabama 612 268 5,468 --- --- 268 5,468 5,736 --- N/A 12/31/97
Assisted Living Facilities(3)
Florida 5,391 3,414 19,244 --- --- 3,414 19,244 22,658 --- N/A 12/31/97
Assisted Living Facilities(2)
Tennessee 547 875 9,774 --- --- 875 9,774 10,649 --- N/A 12/31/97
Retirement Centers (1)
Tennessee --- 875 3,648 --- --- 875 3,648 4,523 --- N/A 12/31/97
$86,414$18,340 $126,275 $ --- $ --- $18,340 $126,275 $144,615$ ---
(FA) See Notes 3 and 4 of Notes to Consolidated Financial Statements.
(FB) The aggregate cost for federal income tax purposes is approximately
$149,917,000.
(FC) Depreciation is calculated using depreciation lives up to 40 years
for all completed facilities.
</TABLE>
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1997
<CAPTION>
12/31/97
(in thousands)
<S> <C>
Investment in Real Estate:
Balance at beginning of period $ ---
Transfers from National
HealthCare Corporation 144,615
Additions through cash expenditures ---
Improvements ---
Balance at December 31, 1997 $144,615
Accumulated Depreciation:
Balance at beginning of period $ ---
Addition charged to costs and expenses ---
Balance at December 31, 1997 $ ---
</TABLE>
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
FOR THE YEAR ENDED DECEMBER 31, 1997
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H
Principal Amount
of Loans Subject
Final Monthly Original to Delinquent
Interest Maturity Payment Prior Face Amount Carrying Amount Principal or
Description Rate Date Terms Liens Of Mortgages of Mortgages Interest
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM CARE FACILITIES:
First Mortgage Loans:
Clearwater, Jacksonville
Lake City, Largo, Pinellas,
Sun City and Tampa Oct., 2004-
Florida (FA)(FB) 10.25% March, 2006 $ 454 None $ 42,998 $ 42,998 None
Ocoee and Sarasota,
Florida Prime rate Sept., 2014- 98 None 11,575 11,575 None
plus 2% Sept., 2016
Palatka, Florida(FC) Prime rate Sept., 2001 32 None 3,669 3,669 None
plus 2%
First Mortgage Revenue Bonds:
Castleton Bonds 10% May, 2013 19 None 1,819 1,819 None
Second Mortgages:
Gainesville, Ocala, Orlando,
N. Miami Beach, Pensacola,
Port St. Lucie, Vero Beach,
W. Palm Beach and Winter Haven,
Florida(FA)(FD) 10.25% Oct., 2004- 324 None 31,760 31,760 None
Sept., 2006
Brownsburg, Indianapolis,
Ladoga and Plainfield,
Indiana(FE) 12% March, 1998 35 None 2,618 2,618 None
$94,439
<PAGE>
(FA) Approximately $74,758,000 mortgage and other notes receivable
are due from a single debtor that operates 16 licensed nursing
centers in Florida.
(FB) Balloon payments of approximately $34,002,000 due at maturity.
(FC) Interest only through September, 1998. Beginning October, 1998,
the mortgage will be amortized over 20 years.
(FD) Balloon payments of approximately $24,599,000 due at maturity.
(FE) Balloon payment of approximately $2,618,000 due at maturity.
(F1) See Note 5 of Notes to Consolidated Financial Statements.
(F2) For tax purposes, the cost of investments is the carrying
amount, as disclosed in the schedule.
</TABLE>
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1997
<CAPTION>
12/31/97
(in thousands)
<S> <C>
Reconciliation of mortgage loans:
Balance at beginning of period $ ---
Additions:
New mortgage loans ---
Transfers from National
HealthCare Corporation 94,439
Deductions during period:
Collection of principal ---
Balance at December 31, 1997 $ 94,439
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001047334
<NAME> NATIONAL HEALTH REALTY, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,229,000
<SECURITIES> 0
<RECEIVABLES> 94,439,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 144,615,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 242,495,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 82,000
<OTHER-SE> 131,616,000
<TOTAL-LIABILITY-AND-EQUITY> 242,495,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
