FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 of 15(d)
of the Securities Exchange Act of 1934
For quarter ended June 30, 1998 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 of (I.R.S. Employer
incorporation or organization Identification No.)
100 Vine Street
Murfreesboro, TN 37130
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (615) 890-2020
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.
Yes x No
(2) Has been subject to such filing requirements for the past 90 days.
Yes x No
9,448,693 shares of common stock were outstanding as of July 31, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
<TABLE>
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<CAPTION>
June 30 Dec. 31
1998 1997
<S> <C> <C>
ASSETS (unaudited)
Real estate properties:
Land $ 18,340 $ 18,340
Buildings and improvements 113,804 113,767
Construction in progress 12,471 12,508
144,615 144,615
Less accumulated depreciation (3,137) ---
Real estate properties, net 141,478 144,615
Mortgage and other notes receivable 94,151 94,439
Interest and rent receivable 346 ---
Cash and cash equivalents 6,770 3,229
Deferred costs and other assets 201 212
Total Assets $242,946 $242,495
LIABILITIES
Long-term debt $ 88,988 $ 89,855
Minority interest in consolidated subsidiaries 20,638 20,942
Accounts payable and other accrued expenses 39 ---
Accrued interest 272 ---
Dividends payable 3,120 ---
Distributions payable to partners 436 ---
Commitments, contingencies and guarantees --- ---
Total Liabilities 113,493 110,797
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock,
$.01 par value; 5,000,000 shares
authorized; none issued and
outstanding --- ---
Common stock, $.01 par value:
75,000,000 shares authorized;
9,382,931 and 8,237,423 shares,
respectively, issued and outstanding 94 82
Capital in excess of par value of common stock 131,600 131,616
Cumulative net income 3,989 ---
Cumulative dividends (6,230) ---
Total Stockholders' Equity 129,453 131,698
Total Liabilities and Stockholders' Equity $242,946 $242,495
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these financial statements.
The interim condensed balance sheet at December 31, 1997 is derived from
the audited financial statements at that date.
2
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
<TABLE>
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
(in thousands, (in thousands,
except share amounts) except share amounts)
<S> <C> <C>
REVENUES:
Rental income $ 3,105 $ 6,209
Mortgage interest income 2,448 4,864
Investment interest and other income 61 124
5,614 11,197
EXPENSES:
Interest 1,591 3,208
Depreciation of real estate 1,563 3,137
Amortization of loan and organi-
zation costs 10 20
General and administrative 123 280
3,287 6,645
NET INCOME BEFORE MINORITY INTEREST IN
CONSOLIDATED SUBSIDIARIES $ 2,327 $ 4,552
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES 285 563
NET INCOME $ 2,042 $ 3,989
NET INCOME PER COMMON SHARE:
Basic $ .22 $ .44
Diluted $ .21 $ .42
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 9,381,302 9,053,219
Diluted 9,526,287 9,520,712
Common dividends per share
declared $ .3325 $ .6650
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these financial statements.
3
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
<TABLE>
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Six Months Ended
June 31, 1998
(in thousands)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,989
Depreciation of real estate 3,137
Amortization of loan and organization costs 20
Increase in interest & rent receivable (346)
Increase in other assets (9)
Increase in accounts payable and
accrued liabilities 311
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,102
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in mortgage notes receivable - net 288
NET CASH USED IN INVESTING ACTIVITIES 288
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt (867)
Dividends paid to stockholders (3,110)
Increase in minority interests in subsidiaries 128
NET CASH USED IN FINANCING ACTIVITIES (3,849)
INCREASE IN CASH AND CASH EQUIVALENTS 3,541
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,229
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,770
Supplemental Information:
Cash payments for interest expense $ 2,936
During the six months ended June 30, 1998,
$17,438,000 of Senior Subordinated Convertible
Notes were converted into 1,146,742 shares
of NHC common stock. NHR is obligated to
issue NHR common stock upon the conversion
of the Notes:
Common stock $ 12
Capital in excess of par $ (12)
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these financial statements.
4
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(dollars in thousands)
<CAPTION>
Cumulative Convertible Capital in Total
Preferred Stock Common Stock Excess of Cumulative Cumulative Stockholders'
Shares Amount Shares Amount Par Value Net Income Dividends Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT 12/31/97 -- $ -- 8,237,423 $ 82 $131,616 $ -- $ -- $131,698
Net income -- -- -- -- -- 3,989 -- 3,989
Shares issued in con-
version of con-
vertible debentures
to common stock -- -- 1,145,508 12 (16) -- -- (4)
Dividends to common
shareholders ($.6650
per share) -- -- -- -- -- -- (6,230) (6,230)
BALANCE AT 6/30/98 -- $ -- 9,382,931 $ 94 $131,600 $ 3,989 $ (6,230) $129,453
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these financial statements.
5
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
The unaudited financial statements furnished herein in the opinion of
the management include all adjustments which are necessary to fairly present
the financial position, results of operations and cash flows of National
Health Realty, Inc. ("NHR" or "Company") and its majority owned subsidiaries.
NHR assumes that users of the interim financial statements herein have read or
have access to the audited financial statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations for the
preceding fiscal year ended December 31, 1997, and that the adequacy of
additional disclosure needed for a fair presentation, except in regard to
material contingencies, may be determined in that context. Accordingly,
footnotes and other disclosures which would substantially duplicate the
disclosure contained in the Company's most recent annual report to
stockholders have been omitted. The interim financial information contained
herein is not necessarily indicative of the results that may be expected for a
full year because of various reasons including changes in interest rates,
rents and the timing of debt and equity financings.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of
common shares outstanding during the year.
Diluted earnings per share assumes the conversion of convertible
subordinated debentures and the exercise of all stock options using the
treasury stock method.
The following table summarizes the earnings and the average number of
common shares and common equivalent shares used in the calculation of basic
and diluted earnings per share.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
<S> <C> <C>
BASIC:
Weighted average common shares 9,381,302 9,053,219
Net income available to common shareholders $ 2,042,000 $ 3,989,000
Net income per common share $ .22 $ .44
DILUTED:
Weighted average common shares 9,381,302 9,053,219
Stock options 15,000 15,000
Shares issuable upon conversion of NHC 129,985 452,493
Average common shares outstanding 9,526,287 9,520,712
Net income available to common shareholders $ 2,042,000 $ 3,989,000
Net income per common share $ .21 $ .42
</TABLE>
6
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
NOTE 3. COMMITMENTS, CONTINGENCIES AND GUARANTEES:
At June 30, 1998, NHR is obligated to issue at the election of the
holders 15,000 shares of its common stock related to stock options originally
issued by NHC and 112,716 shares of its common stock related to the conversion
of certain 6% subordinated convertible notes (the Notes) issued by NHC. 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 127,716 shares of common stock for the exercise of the stock
options and the conversion of the Notes.
NOTE 4. NEW ACCOUNTING PRONOUNCEMENT:
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131") effective for fiscal years beginning after December
15, 1997. This statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. NHR will be required to adopt SFAS 131
in the fourth quarter of 1998 and is currently determining the impact that
SFAS 131 will have on its financial statements. If appropriate, NHR will
begin disclosing the required information accordingly.
NOTE 5. STOCK OPTION PLAN:
On January 1, 1998, NHR granted options to purchase 30,000 shares of NHR
common stock at $18.88 per share. During the six months ended June 30, 1998,
no options to purchase shares of NHR were exercised.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
based Compensation ("SFAS 123"). SFAS 123 establishes new financial
accounting and reporting standards for stock-based compensation plans. NHR
has adopted the disclosure-only provisions of SFAS 123. As a result, no
compensation cost has been recognized for NHI's stock option plans. Based on
the number of options outstanding and the historical and expected future
trends of factors affecting valuation of those options, any compensation cost
attributable to options granted is immaterial.
7
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
June 30, 1998
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Overview
National Health Realty, Inc. (NHR) is a newly-formed Maryland
corporation which was incorporated on September 26, 1997 and began operations
on January 1, 1998. NHR, through its subsidiary NHR/OP, L.P. (the Operating
Partnership) acquired ownership of 24 health care facilities including 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.
Capital Resources and Liquidity
The assets of NHR as of June 30, 1998 include mortgage and other notes
receivable (book value of $94,151,000) and the real property of 17 long-term
care centers, six assisted living facilities and one retirement center (total
book value of $141,478,000). Long-term debt of $88,988,000 includes a term
loan with a principal amount of $75,000,000 which matures in 2002.
Approximately $74,298,000 of the 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.
NHR has generated net cash from operating activities during the six
months ended June 30, 1998 in the amount of $7.1 million. The funds were used
to make payments on debt of $0.9 million and to pay dividends to stockholders
of $3.1 million.
NHR is leasing each of the 24 facilities to NHC. 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.
8
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
June 30, 1998
(Unaudited)
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.
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
Three Months Ended June 30, 1998.
For the quarter ended June 30, 1998, the Company's net revenues of
$5,614,000 were derived from three sources:
a. Rental income of $3,105,000 (55%);
b. Mortgage interest income of $2,448,000 (44%); and
c. Investment interest and other income of $61,000 (1%).
During the same period, the Company's expenses of $3,287,000 were
composed as follows:
a. Interest on debt of $1,591,000 (48%);
b. Depreciation and amortization of $1,563,000 (48%);
c. Amortization of loan and organization costs of $10,000 (0%);
d. General and administrative of $123,000 (4%).
Net income for the period was $2,042,000 or 22 cents per share, basic,
and 21 cents per share, diluted.
9
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
June 30, 1998
(Unaudited)
Six Months Ended June 30, 1998.
For the six months ended June 30, 1998, the Company's net revenues of
$11,197,000 were derived from three sources:
a. Rental income of $6,279,000 (56%);
b. Mortgage interest income of $4,864,000 (43%); and
c. Investment interest and other income of $124,000 (1%).
During the same period, the Company's expenses of $6,645,000 were
composed as follows:
a. Interest on debt of $3,208,000 (48%);
b. Depreciation and amortization of $3,137,000 (48%);
c. Amortization of loan and organization costs of $20,000 (0%);
d. General and administrative of $280,000 (4%).
Net income for the period was $3,989,000 or 44 cents per share, basic,
and 42 cents per share, diluted.
NHR's revenues will be derived primarily from NHC or from facilities
managed by 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 $74.3 million of
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.
NHR's results of operations will depend upon the rental and interest
income it earns on the real property and mortgage notes receivable. NHR
expects that the rental and interest income it earns on the health care
centers and mortgage notes receivable and, if needed, additional borrowings,
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.
10
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
June 30, 1998
(Unaudited)
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 the Year 2000
compliance status of its suppliers and other customers. In the event that any
of NHR's significant suppliers or customers do not successfully and timely
achieve Year 2000 compliance, NHR's business or operations could be adversely
affected.
Item 3. Quantitative and Qualitative Information About Market Risk
Not Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. Not applicable
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) List of exhibits - Exhibit 27 - Financial Data Schedule
(for SEC purposes only)
(b) Reports on Form 8-K - none required
11
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
June 30, 1998
(Unaudited)
SIGNATURES
Pursuant to the requirements 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.
NATIONAL HEALTH REALTY, INC.
(Registrant)
Date July 30, 1998 /s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date July 30, 1998 /s/ Donald K. Daniel
Donald K. Daniel
Principal Accounting Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001047334
<NAME> NATIONAL HEALTH REALTY, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,770,000
<SECURITIES> 0
<RECEIVABLES> 94,497,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 144,615,000
<DEPRECIATION> (3,137,000)
<TOTAL-ASSETS> 242,946,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 94,000
<OTHER-SE> 129,453,000
<TOTAL-LIABILITY-AND-EQUITY> 242,946,000
<SALES> 0
<TOTAL-REVENUES> 11,197,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 280,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,208,000
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,989,000
<EPS-PRIMARY> .44
<EPS-DILUTED> .42
</TABLE>
