______________________________________________________________________________
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, 1998
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 X No
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 $88,272,100 as of February 26, 1999. The number of shares of
Common Stock outstanding as of February 28, 1999 was 9,542,093.
PAGE 1 OF 50 PAGES
Exhibit Index Page 41
<PAGE>
PART 1
ITEM 1
BUSINESS
General
National Health Realty, Inc. (NHR) is a Maryland corporation formed
during 1997 and in operation since January 1, 1998. On December 31, 1997,
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 (now sold), six assisted living facilities and one independent living
center (the Health Care Facilities). It additionally and simultaneously
acquired 50 first and second mortgage secured promissory notes with a then
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. During 1998, the Company increased its investment in the Healthcare
Facilities by $20,874,000, with a corresponding increase in rental income. 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 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 this 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
initially conveyed to it.
NHR's revenues are 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.
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 currently managed by NHC,
but may remain outstanding even if NHC is not the manager. The FCC Notes bear
interest at 10.25% and are due in 2004; however, the Company anticipates that
they will be prepaid, perhaps during 1999. There is no prepayment penalty.
NHR will make every effort to reinvest any amounts prepaid. However, if NHR
uses the money to reduce existing debt, this will result in a reduction of
cash flow which may cause the dividend paid by NHR to remain flat for the near
future. 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, all but
$4,500,000 of which had been drawn by December 31, 1998. 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 (5.0% at December 31, 1998). The
replacement financing and line of credit bear interest at LIBOR plus 1% (one
percent). The term of the loans extend through 2011.
<PAGE>
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. The actual amount paid to NHC in 1998 is $471,000. 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.
NHC Master Agreement to Lease
The Master Agreement to Lease (the "Master Agreement") with NHC
regarding the Health Care Facilities, sets forth certain terms and conditions
applicable to all leases entered into by and between NHC and the Company (the
"Leases"). The Leases are for an initial term expiring on December 31, 2007
with two five year renewal options at the election of NHC which allow for the
renewal of the leases on an omnibus basis only. During the initial term and
the first renewal term (if applicable), NHC is obligated to pay annual base
rent for the respective Health Care Facilities plus additional rent described
below. During the second renewal term, NHC is required to pay annual base
rent based on the then fair market rental of the property as negotiated at
that time between NHC and the Company. In addition, in each year after 1999,
NHC is obligated to pay percentage rent to the Company equal to 3% of the
amount by which gross revenues of each NHC leased Health Care Facility in such
later year exceeds the gross revenues of such Health Care Facility in 1999.
Thus, NHC will pay no percentage rent for 1998 or 1999.
The Master Agreement is a "triple net lease", under which NHC is
responsible to pay all taxes, utilities, insurance premium costs, repairs
(including structural portions of the buildings, constituting a part of the
Health Care Facilities) and other charges relating to the ownership and
operation of the Health Care Facilities. NHC is obligated at its expense to
keep all improvements and fixtures and other components of the Health Care
Facilities covered by "all risk" insurance in an amount equal to the full
replacement costs thereof, insurance against boiler explosion and similar
insurance, flood insurance if the land constituting the Health Care Facility
is located within a designated flood plain area and to maintain specified
minimal personal injury and property damage insurance, protecting the Company
as well as NHC at such Health Care Facility. NHC is also obligated to
indemnify and hold harmless the Company from all claims resulting from the use
and occupancy of each Health Care Facility by NHC or persons claiming under
NHC and related activities, as well as to indemnify the Company against, all
costs related to any release, discovery, cleanup and removal of hazardous
substances or materials on, or other environmental responsibility with respect
to, each Health Care Facility leased by NHC.
Advisory Agreement
The Company entered into the Advisory Agreement with NHC as "Advisor"
under which NHC provides management and advisory services to the Company
during the term of the Advisory Agreement. The Company believes the Advisory
Agreement benefits the Company by providing it access to NHC's extensive
experience in the ownership and management of long-term care facilities and
retirement centers. Under the Advisory Agreement, the Company engaged NHC to
use its best efforts (a) to present to the Company a continuing and suitable
investment program consistent with the investment policies of the Company
adopted by the Board of Directors from time to time; (b) to manage the day-
to-day affairs and operations of the Company; and (c) to provide administrative
services and facilities appropriate for such management. In performing its
obligations under the Advisory Agreement, NHC is subject to the supervision of
and policies established by the Company's Board of Directors.
The Advisory Agreement was initially for a stated term which expires
January 1, 2000. The Agreement thereafter is on a year to year term with a
90 day termination period by either party without cause. The Company may
terminate the Advisory Agreement for cause at any time. For its services
under the Advisory Agreement, the Advisor is entitled to annual compensation
of the greater of 2% of NHR's gross consolidated revenues or the actual
expense incurred by NHC. The actual amount paid to NHC in 1998 is $471,000.
Either party may terminate the Advisory Agreement on 90 days notice after
January 1, 2000.
Pursuant to the Advisory Agreement, NHC manages all of the day-to-day
affairs of the Company and provides all such services through its personnel.
The Advisory Agreement provides that without regard to the amount of
compensation received by NHC under the Advisory Agreement, NHC shall pay all
expenses in performing its obligations including the employment expenses of
the officers and directors and personnel of NHC providing services to the
Company. The Advisory Agreement further provides that the Company shall pay
the expenses incurred with respect to and allocable to the prudent operation
and business of the Company including any fees, salaries, and other employment
costs, taxes and expenses paid to directors, officers and employees of the
Company who are not also employees of NHC. Currently, other than the
directors who are not employees of NHC, the Company does not have any officers
or employees who are not also employees of NHC. The Company's three executive
officers, Mr. W. Andrew Adams, Mr. Robert G. Adams and Mr. LaRoche are
employees of NHC and all of their fees, salaries and employment costs are paid
by NHC, although a portion is allocated for their services to NHR.
<PAGE>
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:
<TABLE>
<CAPTION>
Minimum
No. of Book Annual
Name of Facility Location Beds Basis Rent<F2>
<S> <C> <C> <C> <C>
Long-Term Care Centers
AdamsPlace Murfreesboro, TN 40 $ 6,559,016 $ 578,701
NHC HealthCare, Naples Naples, FL 60 5,441,480 542,783
NHC HealthCare, Clinton Clinton, SC 131 3,492,531 354,291
NHC HealthCare, Coconut Creek Coconut Creek, FL 120 10,750,367 1,073,219
NHC HealthCare, Daytona Beach Daytona Beach, FL 60 6,024,975 598,365
NHC HealthCare, Farragut<F1> Farragut, TN 60 6,178,559 594,364
NHC HealthCare, Garden City Murrells Inlet, SC 88 4,946,552 489,342
NHC HealthCare, Greenville Greenville, SC 176 5,132,370 520,058
NHC HealthCare, Lexington Lexington, SC 88 6,151,444 570,964
NHC HealthCare, Mauldin Mauldin, SC 120 8,254,646 821,645
NHC HealthCare, Imperial<F1> Naples, FL 90 5,494,724 540,489
NHC HealthCare, North Augusta North Augusta, SC 132 4,783,669 482,029
NHC HealthCare, Orlando Orlando, FL 120 8,187,277 818,652
NHC HealthCare, Parklane Columbia, SC 120 7,651,482 761,718
NHC HealthCare, Pt Charlotte Port Charlotte, FL 180 8,228,460 817,396
NHC HealthCare, West Plains West Plains, MO 120 3,642,267 365,823
Assisted Living Facilities
NHC Place/ Vero Beach Vero Beach, FL 84 7,189,365 713,498
NHC Place/Anniston Anniston, AL 68 5,418,015 544,913
Adams Place Murfreesboro, TN 84 6,228,023 623,442
NHC Place/Merritt Island Merritt Island, FL 84 7,479,838 743,274
NHC Place/Stuart Stuart, FL 84 6,972,629 695,697
NHC Place/ Farragut<F1> Farragut, TN 84 7,661,313 736,997
Retirement Center
AdamsPlace<F1> Murfreesboro, TN 53 15,728,459 1,497,540
NHC Place/ Farragut<F3> Farragut, TN 90 1,312,496
<FN>
<F1> Construction completed in 1998.
<F2> 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".
<F3> Construction not yet commenced.
</TABLE>
<PAGE>
Mortgage Notes. NHR owns approximately 50 Mortgage Notes representing
approximately $93.1 million loaned to the owners of approximately 23 nursing
homes, all but one of which are in Florida and all of which are currently
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 secured by mortgages on each of the facilities. Forty-
three of the Mortgage Notes (representing approximately $73.5 million of the
principal amount) are from FCC. The FCC Notes bear interest at 10.25% and are
due in 2004. They will remain outstanding during their term even if NHC is
not managing the centers. However, the Company anticipates that they may be
prepaid as early as 1999. There is no prepayment penalty. NHR will make
every effort to reinvest any amounts prepaid. However, if NHR uses the money
to reduce existing debt, this will result in a reduction of cash flow which
may cause the dividend paid by NHR to remain flat for the near future.
The 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.
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 1998 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
In order to qualify for the beneficial tax treatment accorded to a REIT,
the Company must make quarterly distributions to holders of its Common Stock
equal on an annual basis to at least 95% of the Company's REIT taxable income
(excluding net capital gains), as defined in the Code. Cash available for
distribution to stockholders of the Company is primarily derived from interest
payments received on its mortgages and from rental payments received under the
Company's leases. All distributions will be made by the Company at the
discretion of the Board of Directors and will depend on the cash flow and
earnings of the Company, its financial condition, bank covenants contained in
its financing documents and such other factors as the Board of Directors deems
relevant. The Company's REIT taxable income is calculated without reference
to its cash flow. Therefore, under certain circumstances, the Company may not
have received cash sufficient to pay its required distributions.
The shares are listed on the American Stock Exchange (AMEX) under the
symbol "NHR". On February 26, 1999 the last reported sale price for the
Common Stock on the AMEX was $11.938. As of December 31, 1998, NHR had
approximately 4,482 shareholders, of which approximately 2,282 are holders of
record with the balance indicated by security listing positions.
High and low stock prices and dividends for 1998 were:
Cash
Sales Price Dividends
Quarter Ended High Low Declared
------------- ------ ------ ---------
March 31 $21.313 $16.875 .3325
June 30 17.750 14.125 .3325
September 30 15.625 12.875 .3325
December 31 15.125 11.125 .3325
ITEM 6
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(dollars in thousands,
except share amounts) 12/31/98 12/31/97<Fa>
<S> <C> <C>
Net revenues 23,555 ---
Net income 8,267 ---
Net income per share
Basic .89 ---
Diluted .87 ---
Mortgages and other investments 93,099 94,439
Real estate properties, net 158,910 144,615
Total assets 255,444 242,495
Long term debt 103,628 89,855
Total stockholders' equity 127,453 131,698
Common shares outstanding 9,447,693 8,237,423
Weighted average common shares
Basic 9,249,896 ---
Diluted 9,518,088 ---
Common dividends declared per share 1.33 ---
<FN>
<Fa> 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.
</TABLE>
<PAGE>
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
National Health Realty, Inc. (NHR) is a real estate investment trust
that began operations on January 1, 1998. NHR, through its subsidiary
NHR/OP, L.P. (the Operating Partnership), acquired ownership of the real
estate of 23 health care facilities, including 16 licensed skilled nursing
facilities, six assisted living facilities and one independent living center
(the Healthcare Facilities), (initial book value of $144,615,000), plus 51
first and second mortgage secured promissory notes with an initial principal
balance of $94,439,000 from its then sole owner National HealthCare L.P. NHR
then leased the Health Care Facilities to National HealthCare Corporation
(NHC), a successor by merger to National HealthCare L.P. NHR also assumed
certain debt, initially in the amount of $86,414,000.
Competitive Restrictions--
NHR entered into an advisory services agreement with NHC pursuant to
which NHC will provide NHR with investment advice, office space and personnel.
This agreement also provides 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 December 31, 1998 include mortgage and other
notes receivable (book value of $93,099,000) and the real estate of 23
properties, including 16 long-term care centers, six assisted living
facilities and one independent living center (total book value of
$158,910,000). Long-term debt of $103,628,000 includes a term loan with a
principal amount of $90,500,000 which matures in 2002.
Approximately $73,494,000 of the mortgage and other notes receivable is
due from Florida Convalescent Centers, Inc. (FCC) of Sarasota, Florida. FCC
operates 16 licensed nursing centers that are managed by NHC. NHR is the
primary lender to FCC. On October 30, 1998, NHC announced terms of its
settlement of litigation with FCC. Under the terms of NHC's settlement with
FCC, NHR may receive prepayments without penalty of up to $62,765,000 in notes
receivable. NHC is expected to assume the remaining $10,729,000 of notes
receivable. NHR will attempt to reinvest any amounts prepaid. Although NHR's
existing line of credit requires a portion of the prepayments to be used to
reduce bank debt, NHR may seek to obtain a waiver of this requirement. In the
event that NHR uses the money to pay down existing debt, it will result in a
reduction of cash flow. This could result in dividends remaining constant;
however, no dividend reductions are expected in the near future. Under the
terms of the settlement, prepayments may be made at any time.
FCC may also elect to terminate its management contract with NHC prior
to repaying its notes owed to NHR. In this event, NHR's assets will no longer
be solely managed by NHC.
Sources and Uses of Funds--
NHR's leasing and mortgage services generated net cash from operating
activities during 1998 in the amount of $14,955,000. The funds were used
along with $15,500,000 of proceeds from long-term debt and $1,340,000 from the
collections of mortgage loans receivable to fund acquisitions of property and
equipment in the amount of $20,874,000, to repay long-term debt of $1,727,000
and to pay dividends to stockholders of $9,371,000.
NHR is leasing each of the 23 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.
During the initial term and each renewal term, NHC is obligated to pay
NHR annual base rent (commencing for each center when construction is
complete) on the 23 facilities of $15,449,000. 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 with operations other than
NHC but expects to continue to engage in the existing transactions with NHC
and potentially new investments.
Commitments--
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. Dividends in
the amount of $1.33 per share were declared for payment during 1998.
Certain of the real properties transferred by NHC to NHR remain under
construction at December 31, 1998. NHC will complete the construction of
these properties and, upon completion of the construction, NHR will purchase
the additional constructed assets from NHC.
At year end, NHR's long-term debt as a percentage of total liabilities
and capital was 40.6%. The amount available to be drawn on NHR's $95.0
million term loan was $4.5 million at December 31, 1998. 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 as well as to repay borrowings at or prior to their maturity.
RESULTS OF OPERATIONS
Year Ended December 31, 1998-
Net income for the year was $8,267,000 or 89 cents per share, basic, and
87 cents per share, diluted.
The significant components of revenue for the first year of NHR's
operations are rental income (57.6% of revenues) and mortgage interest income
(41.4% of revenues).
The significant components of expenses for this first year of operations
are interest (48.8% of total expenses) and depreciation of real estate(46.5%
of total expenses).
The rental income revenues are believed by management to be secure.
However, all of the rental income is from NHC, NHR's sole lessee.
Approximately 60% of NHC's revenues are from participation in the Medicare and
Medicaid programs. During 1997, the federal government enacted the Balanced
Budget Act of 1997 (BBA) which contains numerous Medicare and Medicaid cost-
saving measures. As part of these cost-saving measures, the BBA requires that
nursing homes transition to a prospective payment system over a three cost
report year transition period. The BBA also contains certain measures which
have or will lead to reductions in Medicare payments for home health agency
services and therapy services. Furthermore, NHC has stated in its financial
statements that it is a defendant in a lawsuit filed under the Qui Tam
provisions of the Federal False Claims Act. NHR is unable to predict the
ultimate effect the enactment of the BBA or the pending lawsuit will have on
NHC's ability to make its lease payments to NHR.
The mortgage interest income revenues are also believed by management to
be secure. However, the mortgages are with five different owners and are
secured with the property of 23 long-term health care centers located in two
states, all of which are currently managed by NHC. The revenues of the 23
health care centers are subject to the cost-saving measures of the BBA. NHR
is unable to predict the ultimate effect the enactment of the BBA will have on
the ability of the 23 health care centers to make their debt service payments
to NHR.
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.
<PAGE>
YEAR 2000 COMPLIANCE
NHR has evaluated its information technology systems and embedded
technology with respect to potential Year 2000 problems. Although management
believes that the majority of NHR's information technology systems and
embedded technology is already Year 2000 compliant, NHR will complete the
testing of its information technology systems and embedded technology in the
third quarter of 1999. In addition, NHR has developed corrective plans for
any technology assessed to be non-compliant.
As a result of its advisory agreement with NHC, NHR is reliant upon NHC
for much of its information technology systems and embedded technology. NHC
has performed an evaluation of its information technology as it relates to
NHR. Although NHR believes that the majority of NHC's information technology
systems and embedded technology is already Year 2000 compliant, NHC will
complete the testing of its information technology systems and embedded
technology in the third quarter of 1999. NHR believes that NHC has developed
corrective plans for any technology assessed to be non-compliant.
Costs incurred to date for NHR's internal Year 2000 remediation efforts
have not been material, and NHR does not expect that the cost of future
internal actions will be material to its financial condition or results of
operations.
Based upon current information, NHR anticipates successful completion
and testing of its Year 2000 remediation efforts during 1999. However, there
can be no guarantee that the Year 2000 will not have a material adverse effect
on NHR's operations, financial position or liquidity if NHR's remediation
efforts are not successful or completed in a timely manner. NHR is currently
developing a contingency plan in the event that it is not able to achieve Year
2000 compliance. This contingency plan is expected to include identifying
back-up processes that do not rely on computers, whenever possible.
However, NHR also depends upon the proper functioning of information
technology systems and embedded technology operated by certain other third
parties. These third parties include lessors and debtors that participate in
the Medicare and Medicaid programs, commercial banks and other lenders, and
vendors such as telecommunications and utilities providers. NHR is currently
evaluating and obtaining information concerning the Year 2000 compliance
status of these third parties. If third parties have Year 2000 problems that
are not remedied, the following problems could result: (i) in the case of
lessors and debtors that rely on third party payors, in delayed collection of
rent, mortgage notes and interest payments; (ii) in the case of banks and
other lenders, in the disruption of capital flows potentially resulting in
liquidity stress; or (iii) in the case of vendors, in disruption of important
services upon which NHR depends, such as telecommunications and electrical
power.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
The Company's cash and cash equivalents consist of highly liquid
investments with a maturity of less than three months. All of the Company's
mortgage and other notes receivable bear interest at fixed interest rates. As
a result of the short-term nature of the Company's cash instruments and
because the interest rates on the Company's investment in notes receivable are
fixed, a hypothetical 10% change in interest rates has no impact on the
Company's future earnings and cash flows related to these instruments. A
hypothetical 10% change in interest rates has an immaterial impact on the fair
values of these instruments.
As of December 31, 1998, $93,700,000 of the Company's long-term debt
bears interest at floating interest rates. Because the interest rates of
these instruments are variable, a hypothetical 10% increase in interest rates
would result in additional interest expense of $937,000 and likewise, a 10%
reduction in interest rates would result in interest expense declining
$937,000. A hypothetical 10% change in interest rates would not have a
material impact on the fair values of these instruments. The remaining
$9,928,000 of the Company's long-term debt bears interest at fixed rates. A
hypothetical 10% change in interest rates has an immaterial impact on the fair
values of these instruments.
The Company currently does not use any derivative instruments to hedge
its interest rate expense. The Company does not use derivative instruments
for trading purposes and the use of such instruments would be subject to
strict approvals by the Company's senior officers. Therefore, the Company's
exposure related to such derivative instruments is not material to the
Company's financial position, results of operations or cash flows.
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 sheets of NATIONAL
HEALTH REALTY, INC. (a Maryland corporation) and subsidiaries as of December
31, 1998 and 1997, the related consolidated statements of income,
stockholders' equity and cash flows for the year ended December 31, 1998 and
the consolidated statement of cash flows for the 97 days 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of National Health Realty, Inc. and
subsidiaries as of December 31, 1998 and 1997, the results of their operations
and their cash flows for the year ended December 31, 1998 and the results of
their cash flows for the 97 days ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
January 13, 1999
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<CAPTION>
Dec. 31 Dec. 31
1998 1997
<S> <C> <C>
ASSETS
Real estate properties:
Land $ 19,531 $ 18,340
Buildings and improvements 144,769 113,767
Construction in progress 1,189 12,508
165,489 144,615
Less accumulated depreciation (6,579) ---
Real estate properties, net 158,910 144,615
Mortgage and other notes receivable 93,099 94,439
Interest and rent receivable 367 ---
Cash and cash equivalents 2,897 3,229
Deferred costs and other assets 171 212
Total Assets $255,444 $242,495
LIABILITIES
Long-term debt $103,628 $ 89,855
Minority interests in consolidated subsidiaries 20,351 20,942
Accounts payable and other accrued expenses 110 ---
Accrued interest 325 ---
Dividends payable 3,141 ---
Distributions payable to partners 436 ---
Total Liabilities 127,991 110,797
Commitments, contingencies and guarantees
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;
9,447,693 and 8,237,423 shares,
respectively, issued and outstanding 94 82
Capital in excess of par value of common stock 131,604 131,616
Cumulative net income 8,267 ---
Cumulative dividends (12,512) ---
Total Stockholders' Equity 127,453 131,698
Total Liabilities and Stockholders' Equity $255,444 $242,495
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated financial statements.
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<CAPTION>
Year Ended December 31 1998
(in thousands,
except share amounts)
<S> <C>
REVENUES:
Rental income $ 13,570
Mortgage interest income 9,745
Investment interest and other income 240
23,555
EXPENSES:
Interest 6,902
Depreciation of real estate 6,579
Amortization of loan costs 39
General and administrative 615
14,135
INCOME BEFORE MINORITY INTEREST IN
CONSOLIDATED SUBSIDIARIES 9,420
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES 1,153
NET INCOME $ 8,267
NET INCOME PER COMMON SHARE:
Basic $ .89
Diluted $ .87
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 9,249,896
Diluted 9,518,088
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated financial statements.
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Period Ended December 31 1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,267 $ ---
Depreciation of real estate 6,579 ---
Amortization of loan costs 39 ---
Minority interests in consolidated subsidiaries 1,153 ---
Increase in interest & rent receivable (367) ---
Decrease in other assets 2 ---
Increase in accounts payable and
accrued liabilities 435 ---
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,108 ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to and acquisitions of property &
equipment, net (20,874) ---
Collections of mortgage notes receivable 1,340 ---
NET CASH USED IN INVESTING ACTIVITIES (19,534) ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 15,500 75,000
Payments on long-term debt (1,727) (71,559)
Financing costs paid --- (212)
Dividends paid to stockholders (9,371) ---
Distributions paid to partners (1,308) ---
Proceeds from issuance of common stock --- 1
Refund of proceeds from issuance of common stock --- (1)
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,094 3,229
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (332) 3,229
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,229 ---
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,897 $ 3,229
Supplemental Information:
Cash payments for interest expense $ 6,577 $ ---
During the year ended December 31, 1998,
$18,438,000 of NHC's Senior Subordinated
Convertible Notes were converted into
1,210,270 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 value $ (12) $ ---
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated financial statements.
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
<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 --- -- -- -- -- 8,267 -- 8,267
Shares issued --- -- 1,210,270 12 (12) -- -- ---
Dividends to common
shareholders ($1.33
per share) --- -- -- -- -- -- (12,512) (12,512)
BALANCE AT 12/31/98 --- $ -- 9,447,693 $ 94 $131,604 $ 8,267 $ (12,512) $127,453
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated financial statements.
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1. ORGANIZATION
National Health Realty, Inc. (NHR) is a Maryland real estate investment
trust (REIT) that was incorporated 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.
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 88% owned by NHR. NHR and NHR/OP, L.P.
are collectively referred to herein as "NHR".
The majority of NHR's revenue is derived from interest income on
mortgage loans and from rent generated on leased properties.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements 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.
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 intends at all times to qualify as a REIT
under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended. 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 provision for federal
income taxes has been made in the consolidated financial statements.
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 $8,443,000) 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.
Rental Income - Rental income is recognized by NHR based on the terms of
NHR's leases.
Mortgage Interest Income - Mortgage interest income is recognized by NHR
based on the interest rates and principal amounts outstanding of the mortgage
notes receivable.
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 in exchange for
certain assets including mortgage notes receivable (book value of $94,439,000)
and the real property of 16 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.
Leases - Concurrent with NHC's conveyance of the real property to NHR,
NHR leased to NHC each of the 23 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 23 facilities. 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. Rental income from NHC was $13,570,000
during 1998.
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, 1998, the approximate future minimum base rent
commitments to be received by NHR on non-cancelable operating leases with NHC
are as follows:
1999 $15,485,000
2000 15,485,000
2001 15,485,000
2002 15,485,000
2003 15,485,000
Thereafter 61,940,000
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. During 1998, NHR's compensation to NHC under
the Advisory Agreement was $471,000.
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
The following table summarizes NHR's real estate properties by type of
facility and by state as of December 31, 1998:
<TABLE>
<CAPTION>
Buildings,
Number Improvements &
of Construction Accumulated
Facility Type and State Facilities Land In Progress Depreciation
- ------------------------- ---------- ---- ----------- ------------
<S> <C> <C> <C> <C>
(dollar amounts in thousands)
Long-Term Care Centers:
Florida 6 $ 5,775 $ 40,445 $2,093
Missouri 1 123 3,728 208
South Carolina 7 6,145 36,323 2,056
Tennessee 2 874 12,243 380
Total Long-Term Care Centers 16 12,917 92,739 4,737
Assisted Living Facilities:
Alabama 1 268 5,468 318
Florida 3 3,414 19,244 1,015
Tennessee 2 886 13,434 431
Total Assisted Living
Facilities 6 4,568 38,146 1,764
Retirement Centers:
Tennessee 1 2,046 15,073 78
Total Retirement Centers 1 2,046 15,073 78
Total 23 $ 19,531 $ 145,958 $6,579
</TABLE>
NOTE 5. MORTGAGE AND OTHER NOTES RECEIVABLE
The following is a summary of the terms and amounts of mortgage
notes receivable at December 31, 1998:
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Final Number of Principal
Payment Date Loans Payment Terms Amount
------------ -------- ------------- ---------
<S> <C> <C> <C>
2001 1 Monthly payments of $39,000,
which include interest at prime rate
plus 2%. $ 3,808
2004 3 Monthly payments from $1,000 to $71,000,
which include interest at 10.25%. 53,003
2005 5 Monthly payments from $11,000 to $35,000,
which include interest at 10.25%. 9,371
2006 4 Monthly payments from $10,000 to $45,000,
which include interest at 10.25%. 10,563
2015 1 Monthly payments of $42,000, which
include interest at prime rate plus 2%. 4,852
2016 1 Monthly payments of $43,000, which
include interest at prime rate plus 2%. 5,387
1999- 7 Monthly payments from $5,000 to $35,000,
2016 which include interest ranging from 12%
to prime plus 2%. 6,115
------
$93,099
======
</TABLE>
Approximately $73,494,000 of the mortgage and other notes receivable is
due from Florida Convalescent Centers, Inc. (FCC) of Sarasota, Florida. FCC
operates 16 licensed nursing centers that are managed by NHC. NHR is the
primary lender to FCC. On October 30, 1998, NHC announced terms of its
settlement of litigation with FCC. Under the terms of NHC's settlement with
FCC, NHR may receive prepayments of up to $62,765,000 in notes receivable from
FCC, and NHC is expected to assume the remaining $10,729,000. NHR will
attempt to reinvest any amounts prepaid. Although NHR's existing line of
credit requires a portion of the prepayments to be used to reduce bank debt,
NHR may seek to obtain a waiver of this requirement. In the event that NHR
uses the money to pay down existing debt, it will result in a reduction of
cash flow. Under the terms of the settlement, prepayment may be made at any
time.
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.
Interest and rent receivable - The carrying amount approximates the fair
value because of the short term nature of these receivables.
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.
<PAGE>
The estimated fair values of NHR's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1998 1998 1997
-------------------- --------------------
(In thousands) Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Mortgage and other notes receivable $ 93,099 $ 93,099 $ 94,439 $ 94,439
Interest and rent receivable 367 367 --- ---
Cash and cash equivalents 2,897 2,897 3,229 3,229
Long-term debt (103,628) (103,628) (89,855) (89,855)
</TABLE>
NOTE 7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
Weighted Average Final Principal Amount
(dollar amounts in thousands) Interest Rate Maturities 1998 1997
---------------- ---------- -------- -------
<S> <C> <C> <C> <C>
Term loan, interest only payable
quarterly, effective March 21,
2000, principal and interest Variable,
payable quarterly 6.9% 2002 $ 90,500 $75,000
Senior secured notes, principal and interest
payable semiannually 8.4 2005 6,033 6,894
Senior secured notes, principal and interest
payable semiannually 8.3 2003 3,895 4,761
First mortgage revenue bonds, interest
payable monthly, principal due Variable,
at maturity 5.0 2011 3,200 3,200
------- -------
$103,628 $ 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, 1998 are as follows:
1999 $ 1,727,000
2000 5,476,000
2001 5,476,000
2002 84,727,000
2003 1,294,000
Substantially all real estate property and certain mortgage and other
notes receivable are pledged as collateral on the long-term debt.
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, CONTINGENCIES AND GUARANTEES
Certain of the real property transferred by NHC to NHR remains under
development at December 31, 1998. 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 31,1998, NHR is obligated to issue at the election of the
holders 20,000 shares of its common stock related to stock options (the NHC
Options) originally issued by NHC and 46,954 shares of its common stock
related to the conversion of certain 6% senior subordinated convertible notes
(the NHC Notes) issued by NHC. The NHC Notes are the obligation of NHC and
mature July 1, 2000. The NHC Options are exercisable and the NHC 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 NHC Options and conversion of the NHC Notes.
NHR will receive no proceeds from the exercise of the NHC Options and the
conversion of the NHC Notes. NHR has reserved an additional 66,954 shares of
common stock for the exercise of the NHC options and the conversion of the NHC
Notes.
At December 31, 1997, in order to protect the REIT status of NHR,
certain NHC unitholders received limited partnership units of NHR/OP, L.P.
rather than shares of common stock of NHR. As a result of certain
unitholders' involuntary acceptance of NHR/OP, L.P. partnership units to
benefit all other unitholders, NHR has indemnified those certain unitholders
for any tax consequence resulting from any involuntary conversion of NHR/OP,
L.P. partnership units into shares of NHR common stock. The indemnification
expires at such time as the NHR/OP, L.P. unitholders are in a position to
voluntarily convert their partnership units into NHR common stock on a tax
free basis without violating applicable REIT requirements.
NOTE 9. STOCK OPTION PLAN
The Board of Directors of NHR has approved the 1997 Stock Option and
Appreciation Rights Plan under which options to purchase shares of NHR's
common stock are available for grant to consultants, advisors, directors and
employees of NHR at a price no less than the market value of the stock on the
date the option is granted.
At December 31, 1998, NHR has granted options to directors to purchase
15,000 shares of NHR common stock at $18.88 per share. During the twelve
months ended December 31, 1998, no options to purchase shares of NHR were
exercised. NHR has reserved 485,000 shares of common stock for issuances
under the NHR stock option plan.
NHR has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based Compensation" (SFAS
123). As a result no compensation cost has been recognized for NHR's stock
option plans. Based on the number of options granted and the historical and
expected future trends of factors affecting valuation of those options,
management believes that the additional compensation cost, as calculated in
accordance with SFAS 123, has no effect on NHI's pro forma earnings and
earnings per share.
<PAGE>
NOTE 10. EARNINGS PER SHARE
NHR has calculated earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
Basic earnings per share is based on net income as reported in the
consolidated statement of income and the weighted average number of common
shares outstanding during the year.
Diluted earnings per share assumes the conversion of the NHC Notes into
NHR common stock and the exercise of the NHC Options into shares of NHR common
stock using the treasury stock method. Because NHR will receive no proceeds
from the conversion of the NHC Notes and the exercise of NHC Options, for
purposes of calculating diluted earnings per share, there is no adjustment to
net income as reported in the consolidated statement of income.
NOTE 11. LIMITS ON COMMON STOCK OWNERSHIP
NHR's Articles of Incorporation limit the percentage of ownership that
any person may have in the outstanding common stock of NHR to 9.8% of the
aggregate of the outstanding stock. This limit is necessary in order to
reduce the possibility of NHR's failing to meet the stock ownership
requirements for REIT qualification under the Internal Revenue Code of 1986,
as amended.
NOTE 12. DIVIDENDS
Dividend payments by NHI to its common stockholders are characterized in
the following manner for tax purposes in 1998:
<TABLE>
<CAPTION>
Dividend Taxable as Non-Taxable
Payment Ordinary Taxable as Return of
Date Income Capital Gains Capital Totals
<S> <C> <C> <C> <C>
April 15, 1998 $ .295 $ --- $ .0375 $ .3325
July 15, 1998 .295 --- .0375 .3325
October 15, 1998 .295 --- .0375 .3325
January 11, 1999 .295 --- .0375 .3325
----- ------- ------ ------
$1.180 $ --- $ .1500 $1.3300
===== ======= ====== ======
</TABLE>
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
<PAGE>
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:
<TABLE>
<CAPTION>
Current Officer of
Term as NHC's
Director Predecessor
Name Age Expires Since
<S> <C> <C> <C>
J. K. Twilla 72 2001 ---
Robert G. Adams 52 2000 1985
Olin O. Williams 68 2000 ---
W. Andrew Adams 53 1999 1973
Ernest G. Burgess, III 58 1999 1975
Richard F. LaRoche, Jr. 53 ---- 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 capacities with NHC and NHI.
Drs. Twilla and Williams have been physicians in private practice in
Tennessee for more than 25 years each and are now retired. Dr. Williams is
now serving on the Board of the Bank of Murfreesboro, headquartered in
Murfreesboro, Tennessee.
Mr. W. Andrew Adams is the President and a Director of the Company and
has been the Chief Executive Officer of NHC since 1981, and on its Board since
1974. He currently serves on the Multi-facility Committee of the American
Health Care Association. 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 is Senior Vice President and a Director of the Company
and also serves in those positions for NHC. He has a B.S. degree from Middle
Tennessee State University. He is Chief Operating Officer for NHC. He is
responsible for operations in Alabama, Indiana, Kentucky, Missouri, Tennessee,
and parts of Florida, the Company's home infusion subsidiary, and all
construction.
Mr. Burgess (Director) is a retired Senior Vice President of NHC. He
has an M.S. degree from the University of Tennessee.
Mr. LaRoche is Senior Vice President and Secretary of the Company and
has also served in those positions for NHC since 1974 and as General Counsel
since 1971. He has a law degree from Vanderbilt University and an A.B. degree
from Dartmouth College. His responsibilities include legal affairs,
acquisitions and finance. Mr. LaRoche also serves as a Director, Vice
President and Secretary of National Health Investors, Inc.
ITEM 11
EXECUTIVE COMPENSATION
Outside directors receive $2,500 per meeting attended. All directors
attended all three board meetings in 1998. In addition, outside directors
receive an automatic stock option to each purchase 5,000 shares of NHR common
stock at a purchase price equal to the closing price of the Shares on the date
of NHR's annual meeting, presently scheduled for April 26, 1999.
NHR's day to day operations are conducted by personnel provided by NHC.
NHR has three executive officers, W. Andrew Adams as President, Robert G.
Adams as Vice President and Richard F. LaRoche, Jr., as Vice President and
Secretary, all of whom are also officers of NHC and NHI. These three
executive officers may receive a bonus for their work for NHR, which is paid
by NHC and credited against the advisory fee; however, no bonus as yet has
been declared or paid to them for 1998.
The following Table I sets forth certain information concerning the
compensation of the Company's chief executive officer and the other executive
officers of the Company:
<PAGE>
<TABLE>
TABLE I
NATIONAL HEALTH REALTY, INC.
SUMMARY COMPENSATION TABLE
1998
<CAPTION>
Long Term Compensation
----------------------------------------------
Annual Compensation<F1> Awards Payouts
- ---------------------------------------------------------------- ---------------------------- ------------
(a) (b) (c) (d) (e) (f) (g) (h) (I)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other annual Restricted All Other
Name and Principal Salary Bonus Compensation Stock Awards Options/SARs LTIP Payouts Compensation
Position Year ($) ($)<F2> ($) ($) (#) ($) ($)
- ------------------- ---- ------ ------ ------------ ------------- ------------- ------------ -------------
W. Andrew Adams 1998 $--- <F3> $ --- $ --- --- $ --- $ ---
President & CEO 1997 --- 1,486,843 --- --- --- --- ---
1996 --- --- --- --- --- --- ---
Robert G. Adams 1998 $--- <F3> $ --- --- --- --- ---
Senior VP 1997 --- 594,258 --- --- --- --- ---
1996 --- --- --- --- --- --- ---
Richard F.
LaRoche, Jr. 1998 --- <F3> --- --- --- --- ---
Sr. VP & Secretary 1997 --- 796,355 --- --- --- --- ---
1996 --- --- --- --- --- --- ---
<FN>
<F1>Compensation deferred at the election of an executive
has been included in 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.
<F3>No bonus has yet been declared or paid for 1998.
</TABLE>
<PAGE>
<TABLE>
TABLE II
NATIONAL HEALTH REALTY, INC.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
December 31, 1998
<CAPTION>
Potential Realizable Value at Assumed
Annual Rates of Unit Price Appreciation
Individual Grants for Option Term <F2>
- -------------------------------------------------------------------------------- --------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Options/SARs
Granted to
Options/SARs Employees in Exer. or Base
Executive Officers Granted(#)<F1> Fiscal Year Price ($/sh) Expiration Date 5%($) 10%($)
- ------------------ ------------- ------------- ------------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
W. Andrew Adams
President & CEO -0- -0- -0- -0- -0- -0-
Robert G. Adams
Sr. VP -0- -0- -0- -0- -0- -0-
Richard F. LaRoche, Jr.
Sr. VP -0- -0- -0- -0- -0- -0-
Directors
- ----------
J. K. Twilla 5,000 $18.875 January 5, 2003 -0- -0-
Olin O. Williams 5,000 $18.875 January 5, 2003 -0- -0-
Ernest G. Burgess, III 5,000 $18.875 January 5, 2003 -0- -0-
<FN>
<F1> No options have been awarded to Executive Officers.
<F2> Based on remaining option term (if any) and annual compounding over
December 31, 1998 average stock price of $11.44 per share.
</TABLE>
<PAGE>
<TABLE>
TABLE III
NATIONAL HEALTH REALTY, INC.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
December 31, 1998
<CAPTION>
Number of Unexercised Value of Unexercised In-
Options/SARs at FY-End the Money Options/SARs
(#) at FY-End ($)
Shares acquired on Value Realized Exercisable/ Exercisable/
Executive Officers Exercise (#) ($)<F1> Unexercisable Unexercisable
- ------------------ ------------------ --------------- -------------- -------------
<S> <C> <C> <C> <C>
W. Andrew Adams
President & CEO -0- -0- -0- -0-
Robert G. Adams
Sr. VP -0- -0- -0- -0-
Richard F. LaRoche, Jr.
Sr. VP -0- -0- -0- -0-
Directors
- ---------
J. K. Twilla -0- -0- 5,000 -0-
Olin O. Williams -0- -0- 5,000 -0-
Ernest G. Burgess, III -0- -0- 5,000 -0-
<FN>
<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. All such options shall have a term equal to the first to occur
of the following: I) five years from the date of grant or ii) December 31,
2007.
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.
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
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 have been granted under the NHR Stock Option Plan
to date are the automatic options to purchase 5,000 shares of common stock
granted to non-employee directors on the first trading date in 1998, which was
January 5, 1998 at $18.875.
<PAGE>
<TABLE>
ITEM 12
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
<S> <C> <C>
W. Andrew Adams, President
801 Mooreland Lane
Murfreesboro, TN 37128 1,067,064<F2> 11.3%
Dr. J. K. Twilla, Director
525 Golf Club Lane
Smithville, TN 37166 78,392 .83%
Dr. Olin O. Williams, Director
2007 Riverview Drive
Murfreesboro, TN 37139 108,645 1.1%
Robert G. Adams, Director & Sr. V.P.
2217 Tomahawk Trace
Murfreesboro, TN 37129 440,592 4.7%
Ernest G. Burgess, Director
2239 Shannon Drive
Murfreesboro, TN 37129 184,320 1.9%
Richard F. LaRoche, Jr., Sr. V.P. & Secretary
2103 Shannon Drive
Murfreesboro, TN 37130 378,341 4.00%
National Health Corporation
P. O. Box 1398
Murfreesboro, TN 37133 1,238,924<F2> 13.1%
The Nicholas Fund, Inc.
and Albert O. Nicholas
700 North Water Street
Milwaukee, WI 53202 1,176,342<F3> 12.4%
T. Rowe Price Assoc., Inc. and
T. Rowe Price Small-Cap V. Fund
P. O. Box 17218
Baltimore, MA 21297-7218 1,169,563<F4> 12.4%
All Executive Officers and Directors
of NHR 2,257,354 23.9%
<FN>
<F1> Based on 9,447,693 shares outstanding at December 31, 1998.
<F2> Included as shares beneficially owned are units of limited partnership
interest in NHR/OP, L.P., the Company's operating subsidiary.
Although these units cannot vote, they may be exchanged for shares of
the Company's common stock. This exchange has income tax consequences
to the holder, but not the Company.
<F3> These securities are owned by an individual investor and by various
mutual funds. For purposes of the reporting requirements of the
Securities Exchange Act of 1934, The Nicholas Fund is deemed to be a
beneficial owner of such securities; however, The Nicholas Fund
expressly disclaims that it is, in fact, the beneficial owner of such
securities.
<F4> These securities are owned by various individual and institutional
investors (T. Rowe Price Associates, Inc. owns 619,563 shares and T.
Rower Price Small-Cap Value Fund, Inc. owns 550,000 shares) which T.
Rower Price Associates, Inc. (Price Associates) serves as investment
adviser with power to direct investments and/or sole power to vote the
securities. For purposes of the reporting requirements of the
Securities Exchange Act of 1934, Price Associates is deemed to be a
beneficial owner of such securities; however, Price Associates
expressly disclaims that it is, in fact, the beneficial owner of
such securities.
</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 (5.0% at
December 31, 1998) 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).
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.
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.
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".
<PAGE>
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
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. The actual amount paid in 1998 was $471,000.
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
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.
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 11th day of March, 1999.
NATIONAL HEALTH REALTY, INC.
BY:/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 11, 1999
W. Andrew Adams Principal Executive Officer
/s/ Richard F. LaRoche, Jr. Secretary and Director March 11, 1999
Richard F. LaRoche, Jr. Principal Financial Officer
/s/ J. K. Twilla Director March 11, 1999
J. K. Twilla
/s/ Robert G. Adams Director March 11, 1999
Robert G. Adams
/s/ Olin O. Williams Director March 11, 1999
Olin O. Williams
/s/ Ernest G. Burgess, III Director March 11, 1999
Ernest G. Burgess, III
<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)
13 Financial Statement Schedules
21 Subsidiaries of the Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule (for SEC purposes only)
<PAGE>
EXHIBIT 13
NATIONAL HEALTH REALTY, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Financial Statement 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 1998 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>
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 financial statements of National Health Realty,
Inc. included in Item 8 of this Form 10-K, and have issued our report thereon
dated January 13, 1999. Our audits were made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. The
financial statement schedules listed in the accompanying index to Exhibit 13
are the responsibility of the Company's management and are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not otherwise a required part of the basic consolidated financial
statements. The financial statement schedules have been subjected to the
auditing procedures applied in the audits of the basic consolidated 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
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
January 13, 1999
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1998
<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- Bldg. & Improve- Carrying Buildings & Depre- Date of Date
Description brances Land Improve. ments Costs Land Improvements Total ciation Const. Acquired
- ----------- ------- ---- -------- --------- -------- ---- ------------ ----- ------- ------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Health Care Centers (6)
Florida $52,635 $5,775 $40,445 $ --- $ --- $ 5,775 $ 40,445 $ 46,220 2,093 N/A 12/31/97
Health Care Centers (1)
Missouri 4,650 123 3,728 --- --- 123 3,728 3,851 208 N/A 12/31/97
Health Care Centers (7)
South Carolina 21,845 6,145 36,323 --- --- 6,145 36,323 42,468 2,056 N/A 12/31/97
Health Care Centers (2)
Tennessee --- 874 12,243 --- --- 874 12,243 13,117 380 N/A 12/31/97
Assisted Living Facilities(1)
Alabama 501 268 5,468 --- --- 268 5,468 5,736 318 N/A 12/31/97
Assisted Living Facilities(3)
Florida 4,575 3,414 19,244 --- --- 3,414 19,244 22,658 1,015 N/A 12/31/97
Assisted Living Facilities(2)
Tennessee 478 886 13,434 --- --- 886 13,434 14,320 431 N/A 12/31/97
Retirement Centers (1)
Tennessee --- 2,046 15,073 --- --- 2,046 15,073 17,119 78 N/A 12/31/97
$84,684 $19,531$145,958 $ --- $ --- $19,531 $145,958 $165,489$ 6,579
(A) See Notes 3 and 4 of Notes to Consolidated Financial Statements.
(B) The aggregate cost for federal income tax purposes is
approximately $170,022,000.
(C) 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, 1998
<CAPTION>
12/31/98 12/31/97
(in thousands)
<S> <C> <C>
Investment in Real Estate:
Balance at beginning of period $144,615 $ ---
Transfers from National
HealthCare Corporation --- 144,615
Additions through cash expenditures 20,874 ---
Improvements --- ---
Balance at end of year $165,489 $144,615
Accumulated Depreciation:
Balance at beginning of period $ --- $ ---
Addition charged to costs and expenses --- 6,579
Balance at end of year $ --- $ 6,579
<PAGE>
</TABLE>
<TABLE>
NATIONAL HEALTH REALTY, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
FOR THE YEAR ENDED DECEMBER 31, 1998
<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 October, 2004-
Florida<FA><FB> 10.25% March, 2006 $ 454 None $ 42,998 $ 42,450 None
Ocoee and Sarasota,
Florida Prime rate Sept., 2014- 98 None 11,575 11,562 None
plus 2% Sept., 2016
Palatka, Florida<FC> Prime rate Sept., 2001 39 None 3,807 3,807 None
plus 2%
First Mortgage Revenue Bonds:
Castleton Bonds 10% May, 2013 19 None 1,819 1,755 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 31,044 None
Sept., 2006
Brownsburg, Indianapolis,
Ladoga and Plainfield,
Indiana<FE> 11% Feb., 1999 35 None 2,618 2,481 None
------
$93,099
<FN>
<FA> Approximately $73,494,000 mortgage and other notes receivable
are due from a single debtor that operates 16 licensed nursing
centers in Florida.
<FB> Balloon payments of approximately $34,409,000 due at maturity.
<FC> The mortgage will be amortized over 20 years.
<FD> Balloon payments of approximately $25,065,000 due at maturity.
<FE> Balloon payment of approximately $2,457,000 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.
</TABLE>
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1998
<CAPTION>
12/31/98 12/31/97
(in thousands)
<S> <C> <C>
Reconciliation of mortgage loans:
Balance at beginning of period $94,439 $ ---
Additions:
New mortgage loans --- ---
Transfers from National
HealthCare Corporation --- 94,439
Deductions during period:
Collection of principal 1,340 ---
Balance at end of period $93,099 $ 94,439
</TABLE>
<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>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K into the Company's
previously filed Registration Statement File No. 333-61699.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,987
<SECURITIES> 0
<RECEIVABLES> 93,466
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 165,489
<DEPRECIATION> (6,579)
<TOTAL-ASSETS> 255,444
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 94
<OTHER-SE> 127,359
<TOTAL-LIABILITY-AND-EQUITY> 255,444
<SALES> 0
<TOTAL-REVENUES> 23,555
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 615
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,902
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,267
<EPS-PRIMARY> .89
<EPS-DILUTED> .87
</TABLE>
