FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 of 15(d)
of the Securities Exchange Act of 1934
For quarter ended September 30, 2000 Commission file number 333-37173
NATIONAL HEALTH REALTY, INC.
(Exact name of registrant as specified in its Charter)
Maryland 52-2059888
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
100 Vine Street
Murfreesboro, TN 37130
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (615) 890-2020
Indicate by check mark whether the registrant
(1) Has filed all reports required to be filed by Section 13 or 15(d), of
the Securities Exchange Act of 1934 during the preceding 12 months.
Yes x No
(2) Has been subject to such filing requirements for the past 90 days.
Yes x No
9,570,323 shares of common stock were outstanding as of October 31, 2000.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
<TABLE>
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<CAPTION>
Sept. 30 Dec. 31
2000 1999
<S> <C> <C>
ASSETS (unaudited)
Real estate properties:
Land $ 19,531 $ 19,531
Buildings and improvements 147,741 144,866
Construction in progress --- 180
167,272 164,577
Less accumulated depreciation (18,920) (13,634)
Real estate properties, net 148,352 150,943
Mortgage and other notes receivable 94,907 94,336
Interest and rent receivable 1,001 801
Cash and cash equivalents 1,044 2,576
Deferred costs and other assets 435 438
Total Assets $245,739 $249,094
LIABILITIES
Debt $102,224 $101,619
Minority interest in consolidated subsidiaries 15,652 16,182
Accounts payable and other accrued expenses 703 459
Accrued interest 85 95
Dividends payable 3,182 3,188
Distributions payable to partners 404 404
Total Liabilities 122,250 121,947
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;
9,570,323 and 9,588,823 shares,
respectively, issued and outstanding 96 96
Capital in excess of par value of common stock 135,324 135,268
Cumulative net income 22,872 17,047
Cumulative dividends (34,803) (25,264)
Total Stockholders' Equity 123,489 127,147
Total Liabilities and Stockholders' Equity $245,739 $249,094
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these financial statements.
The interim condensed balance sheet at December 31, 1999 is derived from
the audited financial statements at that date.
2
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(in thousands, except share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Rental income $ 3,970 $ 3,871 $ 11,868 $ 11,614
Mortgage interest income 2,258 2,526 6,619 7,240
Investment interest and other income 27 --- 88 156
6,255 6,397 18,575 19,010
EXPENSES:
Interest 2,067 1,753 5,930 5,128
Depreciation of real estate 1,772 1,763 5,286 5,291
Amortization of loan costs 12 10 57 30
General and administrative 255 314 737 769
4,106 3,840 12,010 11,218
INCOME BEFORE MINORITY INTEREST IN
CONSOLIDATED SUBSIDIARIES 2,149 2,557 6,565 7,792
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES 241 288 740 877
NET INCOME $ 1,908 $ 2,269 $ 5,825 $ 6,915
NET INCOME PER COMMON SHARE:
Basic $ .20 $ .24 $ .61 $ .72
Diluted $ .20 $ .24 $ .61 $ .72
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 9,570,323 9,588,823 9,577,898 9,567,827
Diluted 9,587,771 9,604,086 9,594,647 9,588,115
Common dividends per share
declared $ .3325 $ .3325 $ .9975 $ .9975
</TABLE>
The accompanying notes to interim condensed consolidated
financial statements are an integral part of these financial statements.
3
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Nine Months Ended
September 30
2000 1999
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,825 $ 6,915
Depreciation of real estate 5,286 5,291
Amortization of loan costs 57 30
Deferred income --- 67
Minority interests in consolidated subsidiaries 740 877
Increase in interest & rent receivable (200) (470)
Increase in other assets (56) (315)
Increase in accounts payable and
accrued liabilities 234 83
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,886 12,478
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in mortgage notes receivable (3,008) (2,120)
Collection of mortgage notes receivable 2,437 ---
Purchase of property and equipment, net (2,695) ---
NET CASH USED IN INVESTING ACTIVITIES (3,266) (2,120)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,000 2,000
Payments on long-term debt (1,395) (864)
Dividends paid to stockholders (9,545) (9,517)
Distribution paid to partners (1,212) (1,242)
NET CASH USED IN FINANCING ACTIVITIES (10,152) (9,623)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,532) 735
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,576 2,897
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,044 $ 3,632
Supplemental Information:
Cash payments for interest expense $ 5,708 $ 5,355
During the nine months ended
September 30, 1999, $710,000
of Senior Subordinated Convertible
Notes were converted into 46,690 shares
of NHC common stock. NHR was obligated
to issue NHR common stock upon the
conversion of the Notes:
Common stock $ --- $ (1)
Capital in excess of par $ --- $ (2,379)
Minority interest in consolidated subsidiaries $ --- $ 2,380
During the nine months ended September 30, 1999,
94,440 units of NHR/OP, L.P. units were
exchanged for 94,440 shares of NHR common
stock
Common stock $ --- $ (1)
Capital in excess of par $ --- $ (1,287)
Minority interest in consolidated subsidiaries $ --- $ 1,288
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these financial statements.
4
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(dollars in thousands)
<CAPTION>
Cumulative Convertible Capital in Total
Preferred Stock Common Stock Excess of Cumulative Cumulative Stockholders'
Shares Amount Shares Amount Par Value Net Income Dividends Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT 12/31/99 -- $ -- 9,588,823 $ 96 $135,268 $ 17,047 $ (25,264) $127,147
Net income -- -- -- -- -- 5,825 -- 5,825
Shares canceled -- -- (18,500) -- 56 -- -- 56
Dividends to common
shareholders ($.9975
per share) -- -- -- -- -- -- (9,539) (9,539)
BALANCE AT 9/30/00 -- $ -- 9,570,323 $ 96 $135,324 $ 22,872 $ (34,803) $123,489
BALANCE AT 12/31/98 -- $ -- 9,447,693 $ 94 $131,604 $ 8,267 $ (12,512) $127,453
Net income -- -- -- -- -- 6,915 -- 6,915
Shares issued in con-
version of con-
vertible debentures
to common stock -- -- 46,690 1 2,379 -- -- 2,380
Shares issued in exchange
for NHR/OP, L.P. Units -- -- 94,440 1 1,287 -- -- 1,288
Dividends to common
shareholders ($.9975
per share) -- -- -- -- -- -- (9,564) (9,564)
BALANCE AT 9/30/99 -- $ -- 9,588,823 $ 96 $135,270 $ 15,182 $ (22,076) $128,472
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these financial statements.
5
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
The unaudited financial statements furnished herein in the opinion of
the management include all adjustments which are necessary to fairly present
the financial position, results of operations and cash flows of National
Health Realty, Inc. (NHR or the Company) and its majority owned subsidiaries.
NHR assumes that users of the interim financial statements herein have read or
have access to the audited financial statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations for the
preceding fiscal year ended December 31, 1999, and that the adequacy of
additional disclosure needed for a fair presentation, except in regard to
material contingencies, may be determined in that context. Accordingly,
footnotes and other disclosures which would substantially duplicate the
disclosure contained in the Company's most recent annual report to
stockholders have been omitted. The interim financial information contained
herein is not necessarily indicative of the results that may be expected for a
full year because of various reasons including changes in interest rates,
rents and the timing of debt and equity financings.
NOTE 2. EARNINGS PER SHARE:
Basic earnings per share is based on the weighted average number of
common shares outstanding during the year.
Diluted earnings per share assumes the exercise of stock options using
the treasury stock method.
The following table summarizes the earnings and the average number of
common shares and common equivalent shares used in the calculation of basic
and diluted earnings per share.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
BASIC:
Weighted average
common shares 9,570,323 9,588,823 9,577,898 9,567,827
Net income avail-
able to common
shareholders $ 1,908,000 $ 2,269,000 $5,825,000 $6,915,000
Net income per
common share $ .20 $ .24 $ .61 $ .72
</TABLE>
6
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
DILUTED:
<S> <C> <C> <C> <C>
Weighted average
common shares 9,570,323 9,588,823 9,577,898 9,567,827
Stock options 17,448 15,000 16,749 15,000
Shares issuable
upon conversion
of NHC subordi-
nated convertible
notes --- 263 --- 5,288
Average common
shares out-
standing 9,587,771 9,604,086 9,594,647 9,588,115
Net income avail-
able to common
shareholders $ 1,908,000 $ 2,269,000 $5,825,000 $6,915,000
Net income per
common share $ .20 $ .24 $ .61 $ .72
</TABLE>
NOTE 3. COMMITMENTS, CONTINGENCIES AND GUARANTEES:
At September 30, 2000, NHR is obligated to issue at the election of the
holders 15,000 shares of its common stock related to stock options (the NHC
Options) originally issued by National HealthCare Corporation (NHC). The NHC
Options are exercisable 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. NHR will receive no proceeds from the exercise
of the NHC Options. NHR has reserved an additional 15,000 shares of common
stock for the exercise of the NHC options.
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.
7
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NHR is aware of certain income tax contingencies with regard to
limitations on ownership of its stock that could impact NHR's status as a
REIT. In order to fully resolve the contingencies, NHR is in the process of
requesting from the Internal Revenue Service (IRS) a closing agreement
regarding the contingencies. NHR's management, based on its discussions with
its legal counsel, understands that other REITs have been successful in
obtaining closing agreements with the IRS regarding REIT qualification issues.
However, it is possible that the IRS will not rule in favor of NHR. Such an
unfavorable ruling could result in the assessment of taxes, penalties and
interest by the IRS that are material to NHR's financial statements taken as a
whole and could also result in the loss of NHR's status as a REIT, which would
have a significant adverse impact on the financial position, results of
operations and cash flows of NHR.
NOTE 4. MORTGAGES RECEIVABLE PAYMENT CONTINGENCIES:
Approximately $59,657,000 of the mortgage and other notes receivable is
due from Florida Convalescent Centers, Inc. (FCC) of Sarasota, Florida. The
notes bear interest at 10.25% and the majority of the notes mature October 31,
2004. The notes may be prepaid without penalty. If prepayment occurs, 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.
Effective July 31, 1999, the FCC centers are leased and operated by
Integrated Health Systems, Inc. (IHS). The ability of FCC to service the
mortgage notes held by NHR is dependent on IHS's ability to make its lease
payments to FCC. On February 2, 2000, IHS filed for bankruptcy protection.
The financial status of IHS could have a material adverse impact on the
financial position, results of operations and cash flows of FCC and FCC's
resultant ability to service its debt to NHR. NHR's payments from FCC are
current as of September 30, 2000.
Approximately $25 million of the notes receivable from FCC are secured
by second mortgages. The first mortgage notes on these eight Florida nursing
homes, total approximately $22,285,000 at September 30, 2000, are tax exempt
and are additionally secured with letters of credit issued by Norwest Bank
Minnesota N.A. Accordingly, Norwest Bank currently holds a first mortgage
which is senior to NHR's second mortgage on these eight Florida nursing homes.
NOTE 5. FORECLOSURE ON MORTGAGES RECEIVABLE:
As of September 30, 2000, NHR holds mortgage notes receivable including
accrued interest of $12,858,000 (book value at September 30, 2000 of
$11,662,000) from American Healthcare Corporation (AHC). Collateral for the
loans includes first and second mortgages on four long-term health care
centers located in the state of Indiana and the furniture, fixtures and
accounts receivable of the centers.
8
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NHR has not received its monthly principal and interest payments on the
AHC loans since June 1999. Consistent with NHR's policy on recognition of
mortgage interest income, NHR discontinued recognition of mortgage interest
income at September 30, 1999. Indiana is a state which requires a court order
in order to foreclose. This suit was filed in August, 1999, and the
foreclosure sale has been set by the Court to occur on November 22, 2000. The
Company has not obtained an independent, third party appraisal, and continues
to evaluate its collateral.
NHR's policy is to continue to accrue interest on foreclosed or non-
performing loans up to a maximum total carrying value equal to the fair value
of the respective collateral, but not to exceed 90 days of unpaid mortgage
interest income.
NOTE 6. DEBT
As of September 30, 2000, NHR remains as a partial guarantor of certain
long term secured debt which is also guaranteed by National Health Investors,
Inc. (NHI)and National HealthCare Corporation (NHC). NHI has given public
notice of certain short term liquidity demands it faces, but an extension of
that debt ($96.5 million) was obtained from NHI's bank group on November
10, 2000. NHI has also announced that it will attempt to raise additional
capital through a rights offering. Failure of NHI to meet its liquidity
demands could cause an acceleration of approximately $7.4 million of NHR's
debt, the payment of which could have a negative and material impact on NHR's
cash flow.
NOTE 7. RECENT ACCOUNTING PRONOUNCEMENT
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 (SAB 101) regarding revenue
recognition in financial statements. SAB 101 is effective January 1, 2000;
however, implementation has been delayed until the fourth quarter of 2000.
NHR's implementation of SAB 101 in the fourth quarter is not expected to have
a material impact on its financial position, results of operations or cash
flows.
9
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
September 30, 2000
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Overview
National Health Realty, Inc. (NHR or the Company) is a real estate
investment trust (REIT) 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 Health Care 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.
Subsequently, NHC has assigned each Health Care Facility
lease to separate wholly owned subsidiaries of NHC. This change in operating
entity has not altered NHC's financial obligations under the initial master
lease. 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 September 30, 2000 include mortgage and other
notes receivable (book value of $93,807,000) 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
$148,352,000). Long-term debt of $102,224,000 includes a term loan with a
principal amount of $91,687,000 which matures in 2002.
10
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
September 30, 2000
(Unaudited)
FCC Notes
Approximately $59,657,000 of the mortgage and other notes receivable is
due from Florida Convalescent Centers, Inc. (FCC) of Sarasota, Florida. The
notes bear interest at 10.25% and the majority of the notes mature October 31,
2004. The notes may be prepaid without penalty. If prepayment occurs, 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. However, no dividend reductions are expected in the near future.
Effective July 31, 1999, the FCC centers are leased and operated by
Integrated Health Systems, Inc. (IHS). The ability of FCC to service the
mortgage notes held by NHR is dependent on IHS's ability to make its lease
payments to FCC. On February 2, 2000, IHS filed for bankruptcy protection. The
financial status of IHS could have a material adverse impact on the financial
position, results of operations and cash flows of FCC and FCC's resultant
ability to service its debt to NHR. NHR's payments from FCC are current as of
September 30, 2000.
Approximately $25 million of the notes receivable from FCC are secured by
second mortgages. The first mortgage notes on eight Florida nursing homes,
totaling approximately $22.3 million at September 30, 2000, are tax exempt and
are additionally secured with letters of credit issued by Norwest Bank
Minnesota N.A. Accordingly, Norwest Bank currently holds a first mortgage
which is senior to NHR's second mortgage on these eight Florida nursing homes.
Loan Foreclosure
As of September 30, 2000, NHR holds mortgage notes receivable including
accrued interest of $12,858,000 (book value on September 30, 2000 of
$11,662,000) from American Healthcare Corporation. Collateral for the loans
includes first and second mortgages on four long-term health care centers
located in the state of Indiana and the furniture, fixtures and accounts
receivable of the centers.
NHR has not received its monthly principal and interest payments on
these loans since June, 1999. Consistent with NHR's policy on recognition of
mortgage interest income, NHR discontinued recognition of mortgage interest
income at September 30, 1999. Indiana is a state which requires a court order
in order to foreclose. This suit was filed in August, 1999, and the
foreclosure sale has been set by the Court to occur on November 22, 2000. The
Company has not obtained an independent, third party appraisal, and continues
to evaluate its collateral.
NHR's policy is to continue to accrue interest on foreclosed or non-
performing loans up to a maximum total carrying value equal to the fair value
of the respective collateral, but not to exceed 90 days of unpaid mortgage
interest income.
11
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
September 30, 2000
(Unaudited)
Sources and Uses of Funds-
NHR's leasing and mortgage services generated net cash from operating
activities during the nine months ended September 30, 2000 in the amount of
$11,886,000 compared to $12,478,000 in the prior period. Net cash from
operating activities generally includes net income plus non-cash expenses,
such as depreciation and amortization and provision for loan losses, if any,
and working capital changes. The year to year decrease is due primarily to
decreased net income offset by smaller than prior year increases in interest
and rent receivable and other assets and by increases in accounts payable and
accrued liabilities.
Cash flows used in investing activities during the nine months ended
September 30, 2000 included the net investment of $571,000 in new mortgage
notes receivable and $2,695,000 in property and equipment compared to net
investment of $2,120,000 in mortgage notes receivable in the prior period.
Cash flows from financing activities for the nine months ended September
30, 2000 and September 30, 1999 included $2,000,000 of borrowings against the
credit facility. Cash flows used in financing activities included $1,395,000
payments on long term debt ($864,000 last year), $9,545,000 to pay dividends
to stockholders ($9,517,000 last year), and $1,212,000 to pay cash
distributions to partners ($1,242,000 last year).
Dividends-
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. It is estimated that cash
distributions in the amount of $1.33 per share will be declared for payment
for 2000.
Debt-
As of September 30, 2000, NHR remains as a partial guarantor of certain
long term secured debt which is the primary obligation of National Health
Investors, Inc. (NHI). NHI has given public notice of certain short term
liquidity demands it faces, but an extension of that debt ($96.5 million)
was obtained from NHI's bank group on November 10, 2000. NHI has
also announced that it will raise additional capital through a rights
offering. Failure of NHI to meet its liquidity demands could cause an
acceleration of approximately $7.4 million of NHR's debt, the payment of which
could have a negative and material impact on NHR's cash flow.
12
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
September 30, 2000
(Unaudited)
Results of Operations
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Net income for the three months ended September 30, 2000 is $1,908,000
versus $2,269,000 for the same period in 1999, a decrease of 15.9%. Diluted
earnings per common share decreased 4 cents or 16.7% to 20 cents in the 2000
period from 24 cents in the 1999 period.
Total revenues for the three months ended September 30, 2000 decreased
$142,000 or 2.2% to $6,255,000 from $6,397,000 for the three months ended
September 30, 1999. Revenues from rental income increased $99,000 or 2.6%
when compared to the same period in 1999. Revenues from mortgage interest
decreased $268,000 or 10.6% in 2000 as compared to the same period in 1999.
The increase in rental income is due primarily to the recognition of
percentage rent. Percentage rent is being earned for the first time in 2000
and is calculated as 3% of the amount by which gross revenues of each rental
property in the current year exceeds gross revenues at such rental property in
the base year, usually 1999.
The decrease in mortgage interest income was due to decreased mortgage
notes receivable resulting from the receipt of monthly payments and the
discontinuation of interest income recognition on the notes receivable from
American Healthcare Corporation.
Total expenses for the 2000 three month period increased $266,000 or
6.9% to $4,106,000 from $3,840,000 for the 1999 three month period. Interest
expense increased $314,000 or 17.9% in the 2000 three month period as compared
to the 1999 period. Depreciation of real estate increased $9,000 or .5%.
General and administrative costs decreased $59,000 or 18.8%.
Interest expense increased primarily due to increased rates of interest
on variable rate debt.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
30, 1999
Net income for the nine months ended September 30, 2000 is $5,825,000
versus $6,915,000 for the same period in 1999, a decrease of 15.8%. Diluted
earnings per common share decreased 11 cents or 15.3% to 61 cents in the 2000
period from 72 cents in the 1999 period.
Total revenues for the nine months ended September 30, 2000 decreased
$435,000 or 2.3% to $18,575,000 from $19,010,000 for the nine months ended
September 30, 1999. Revenues from rental income increased $254,000 or 2.2%
when compared to the same period in 1999. Revenues from mortgage interest
decreased $621,000 or 8.6% in 2000 as compared to the same period in 1999.
The increase in rental income is due primarily to the recognition of
percentage rent. Percentage rent is being earned for the first time in 2000
and is calculated as 3% of the amount by which gross revenues of each rental
property in the current year exceeds gross revenues at such rental property in
the base year, usually 1999.
13
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
September 30, 2000
(Unaudited)
The decrease in mortgage interest income was due to decreased mortgage
notes receivable resulting from the receipt of monthly payments, offset by
some new investments in notes receivable, and the discontinuation of interest
income recognition on the notes receivable from American Healthcare
Corporation.
Total expenses for the 2000 nine month period increased $792,000 or 7.1%
to $12,010,000 from $11,218,000 for the 1999 nine month period. Interest
expense increased $802,000 or 15.6% in the 2000 nine month period as compared
to the 1999 period. Depreciation of real estate decreased $5,000 or .1%.
General and administrative costs decreased $32,000 or 4.2%.
Interest expense increased primarily due to increased rates of interest
on variable rate debt.
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 and that
its lenders may consider it to be in violation of certain financial covenants.
NHR is unable to predict the ultimate effect the enactment of the BBA, the
pending lawsuit or the financial covenant concerns will have on NHC's ability
to make its lease payments to NHR.
Management believes that there is some uncertainty with regards to
certain of its mortgage interest income revenues. The mortgages are with five
different owners (one of which is subject to foreclosure proceedings) and are
secured with the property of 22 long-term health care centers located in two
states, all of which are currently managed by NHC or, in the case of the FCC
centers, leased by IHS. The revenues of the 22 health care centers are subject
to the cost-saving measures of the BBA. Furthermore, the health care centers
may be subject to additional liabilities related to NHC's lawsuit filed under
the Federal False Claims Act. NHR and NHC are unable to predict the ultimate
effect the enactment of the BBA or the pending lawsuit will have on the
ability of the 22 health care centers to make their debt service payments to
NHR.
As previously mentioned, one of NHR's mortgagees is currently subject to
foreclosure proceedings. As of September 30, 2000, NHR has accrued but not
received $424,000 of interest on these mortgages. Consistent with the NHR 's
policy on recognition of mortgage interest income, NHR has discontinued
recognition of mortgage interest income after approximately 90 days. NHR does
not anticipate recording any additional unpaid mortgage interest income during
the foreclosure proceedings.
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<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
September 30, 2000
(Unaudited)
The ability of FCC to service the mortgage notes held by NHR is
dependent on IHS's ability to make its lease payments to FCC and, in turn, may
negatively impact FCC's ability to refinance approximately $22,400,000 of
first mortgage debt superior to NHR's second mortgage notes of $25 million.
See the discussion above under the caption "FCC Notes". On February 2, 2000,
IHS filed for bankruptcy protection. The financial status of IHS could have a
material adverse impact on the financial position, results of operations and
cash flows of FCC and FCC's resultant ability to service its debt to NHR.
NHR's payments from FCC are current as of September 30, 2000.
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 REIT taxable income to its stockholders and meets other requirements to
continue to qualify as a REIT. Accordingly, no provision for federal income
taxes has been made in the consolidated financial statements. NHR's failure to
continue to qualify under the applicable REIT qualification rules and
regulations would have a material adverse impact on the financial position,
results of operations and cash flows of NHR.
NHR is aware of certain income tax contingencies with regard to
limitations on ownership of its stock that could impact NHR's status as a
REIT. In order to fully resolve the contingencies, NHR is in the process of
requesting from the Internal Revenue Service (IRS) a closing agreement
regarding the contingencies. NHR's management, based on its discussions with
its legal counsel, understands that other REITs have been successful in
obtaining closing agreements with the IRS regarding REIT qualification issues.
However, it is possible that the IRS will not rule in favor of NHR. Such an
unfavorable ruling could result in the assessment of taxes, penalties and
interest by the IRS that are material to NHR's financial statements taken as a
whole and could also result in the loss of NHR's status as a REIT, which would
have a significant adverse impact on the financial position, results of
operations and cash flows of NHR.
Recent Accounting Pronouncement--
In December 1999, the staff of the Securities & Exchange Commission
issued Staff Accounting Bulletin No. 101 (SAB 101) regarding revenue
recognition in financial statements. SAB 101 is effective January 1, 2000;
however, implementation has been delayed until the fourth quarter of 2000.
NHR's implementation of SAB 101 in the fourth quarter is not expected to have
a material impact on its financial position, results of operations or cash
flows.
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.
15
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
September 30, 2000
(Unaudited)
Item 3. Quantitative and Qualitative Information 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 investments in notes receivable
are fixed, a hypothetical 10% change in interest rates would have no impact on
the Company's future earnings and cash flows related to these instruments. A
hypothetical 10% change in interest rates would also have an immaterial impact
on the fair values of these instruments.
As of September 30, 2000, $94,887,000 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 approximately $726,000 and
likewise, a reduction in interest rates would result in interest expense
declining by approximately $726,000. A hypothetical 10% change in interest
rates would not have a material impact on the fair values of these
instruments.
The remaining $7,337,000 of the Company's long-term debt bears interest
at fixed rates. Because the interest rates of these instruments are fixed, a
hypothetical 10% change in interest rates would have no impact on the
Company's future earnings and cash flows related to these instruments. A
hypothetical 10% change in interest rates would not have a material impact on
the fair values of these instruments.
The Company currently does not use any derivative instruments to hedge
its interest rate expense or for trading purposes. 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. National Health Realty, Inc. vs. American
Healthcare Corporation is a pending foreclosure action in the
State of Indiana District Court, Indianapolis, Indiana. The Court
has set the foreclosure sale to occur on November 22, 2000. See
Note 5 for a full discussion.
Item 2. Changes in Securities. Not applicable
Item 3. Defaults Upon Senior Securities. None
16
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
September 30, 2000
(Unaudited)
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) List of exhibits - Exhibit 27 - Financial Data Schedule
(for SEC purposes only)
(b) Reports on Form 8-K - none required
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL HEALTH REALTY, INC.
(Registrant)
Date November 13, 2000
Richard F. LaRoche, Jr.
Secretary
Date November 13, 2000
Donald K. Daniel
Principal Accounting Officer
17
