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 March 31, 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
9,588,823 shares of common stock were outstanding as of April 30, 2000.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
March 31 Dec. 31
2000 1999
ASSETS (unaudited)
Real estate properties:
Land $ 19,531 $ 19,531
Buildings and improvements 145,046 144,866
Construction in progress --- 180
164,577 164,577
Less accumulated depreciation (15,391) (13,634)
Real estate properties, net 149,186 150,943
Mortgage and other notes receivable 95,628 94,336
Interest and rent receivable 887 801
Cash and cash equivalents 3,576 2,576
Deferred costs and other assets 466 438
Total Assets $249,743 $249,094
LIABILITIES
Debt $103,619 $101,619
Minority interest in consolidated subsidiaries 16,028 16,182
Accounts payable and other accrued expenses 481 459
Accrued interest 87 95
Dividends payable 3,186 3,188
Distributions payable to partners 404 404
Total Liabilities 123,805 121,947
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;
9,583,323 and 9,588,823 shares,
respectively, issued and outstanding 96 96
Capital in excess of par value of common stock 135,268 135,268
Cumulative net income 19,024 17,047
Cumulative dividends (28,450) (25,264)
Total Stockholders' Equity 125,938 127,147
Total Liabilities and Stockholders'
Equity $249,743 $249,094
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
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NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
2000 1999
(in thousands,
except share amounts)
REVENUES:
Rental income $ 3,949 $ 3,871
Mortgage interest income 2,157 2,348
Investment interest and other income 29 30
6,135 6,249
EXPENSES:
Interest 1,897 1,706
Depreciation of real estate 1,757 1,764
Amortization of loan costs 32 10
General and administrative 221 163
3,907 3,643
INCOME BEFORE MINORITY INTEREST IN
CONSOLIDATED SUBSIDIARIES 2,228 2,606
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES 251 293
NET INCOME $ 1,977 $ 2,313
NET INCOME PER COMMON SHARE:
Basic $ .21 $ .24
Diluted $ .21 $ .24
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 9,588,702 9,512,885
Diluted 9,603,702 9,543,224
Common dividends per share
declared $ .3325 $ .3325
The accompanying notes to interim condensed consolidated
financial statements are an integral part of these financial statements.
3
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
2000 1999
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,977 $ 2,313
Depreciation of real estate 1,757 1,764
Amortization of loan costs 32 10
Minority interests in consolidated subsidiaries 251 293
(Increase) decrease in interest & rent receivable (86) 31
Increase in other assets (60) ---
Increase (decrease) in accounts payable and
accrued liabilities 14 (22)
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,885 4,389
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in mortgage notes receivable (1,844) ---
Collection of mortgage notes receivable 552 640
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (1,292) 640
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,000 ---
Dividends paid to stockholders (3,188) (3,141)
Distribution paid to partners (405) (434)
NET CASH USED IN FINANCING ACTIVITIES (1,593) (3,575)
INCREASE IN CASH AND CASH EQUIVALENTS 1,000 1,454
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,576 2,897
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,576 $ 4,351
Supplemental Information:
Cash payments for interest expense $ 1,905 $ 1,724
During the three months ended
March 31, 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 $ --- $ 2,378
During the three months ended March 31, 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 $ --- $ 1,286
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 THREE MONTHS ENDED MARCH 31, 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) $127,147
Net income -- -- -- -- -- 1,977 -- 1,977
Shares canceled -- -- (5,500) -- -- -- -- --
Dividends to common
shareholders ($.3325
per share) -- -- -- -- -- -- (3,186) (3,186)
BALANCE AT 3/31/00 -- $ -- 9,583,323 $ 96 $135,268 $ 19,024 $ (28,450) $125,938
BALANCE AT 12/31/98 -- $ -- 9,447,693 $ 94 $131,604 $ 8,267 $ (12,512) $127,453
Net income -- -- -- -- -- 2,313 -- 2,313
Shares issued in con-
version of con-
vertible debentures
to common stock -- -- 46,690 1 2,379 -- -- 2,380
Shares issued in exchange
for NHR/OP, L.P. Units -- -- 94,440 1 1,287 -- -- 1,288
Dividends to common
shareholders ($.3325
per share) -- -- -- -- -- -- (3,188) (3,188)
---- ---- --------- ---- -------- -------- --------- --------
BALANCE AT 3/31/99 -- $ -- 9,588,823 $ 96 $135,270 $ 10,580 $ (15,700) $130,246
The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial
statements.
</TABLE>
5
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NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 conversion of convertible
subordinated debentures and 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.
Three Three
Months Ended Months Ended
March 31, 2000 March 31, 1999
BASIC:
Weighted average common shares 9,588,702 9,512,885
Net income available to common shareholders $ 1,977,000 $ 2,313,000
Net income per common share $ .21 $ .24
DILUTED:
Weighted average common shares 9,588,702 9,512,885
Stock options 15,000 15,000
Shares issuable upon conversion of NHC
subordinated convertible notes --- 15,339
Average common shares outstanding 9,603,702 9,543,224
Net income available to common shareholders $ 1,977,000 $ 2,313,000
Net income per common share $ .21 $ .24
6
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NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
NOTE 3. COMMITMENTS, CONTINGENCIES AND GUARANTEES:
At March, 31, 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.
NHR is aware of certain income tax contingencies with regards 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. MORTGAGE PREPAYMENT CONTINGENCY:
Approximately $61,000,000 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.
7
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 2000
(Unaudited)
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. IHS has publicly disclosed that it has elected not to make
interest payments on certain of its long-term debt and is in discussions with
its lenders regarding restructuring of its debt. 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 March 31, 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 $22.4 million at December 31, 1999, are
tax exempt and are additionally secured with letters of credit issued by
either Bank of Tokyo-Mitsubishi Trust Company (BOT) or Toronto Dominion Bank
(TD). On April 25, 2000, FCC replaced the TD and BOT letters of credit with
one 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 March 31, 2000, NHR holds mortgage notes receivable of
$11,612,000 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.
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. On September 22, 1999, NHR
filed a Motion for Partial Summary Judgment to allow it to foreclose on the
first and second mortgages and is awaiting the ruling of the trial judge.
The Company does not anticipate recording any additional unpaid mortgage
interest income during the foreclosure proceedings. While the Company has
not obtained an independent, third-party appraisal, NHR believes that the
collateral will be sufficient to recover its loan balance and accrued interest.
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.
8
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 2000
(Unaudited)
NOTE 6. DEBT
As of March 31, 2000, NHC and NHI were in violation of certain
financial covenants included in a debt instrument originally financed through
the National Health Corporation Leveraged Employee Stock Ownership Plan and
Trust. In addition, NHI no longer meets a requirement that its senior
unsecured debt be rated investment grade by Standard & Poor's and Moody's
Investment Services. As of March 31, 2000, the total debt balance on the loan
was $25,892,000, of which $8,200,000 is the primary obligation of NHR. NHR is
not obligated on nor has NHR guaranteed the remaining balance of the loan.
As result of NHI not being rated investment grade, NHI has been delivered
a tender notice from the note holders to purchase, between June 10,
2000 and June 15, 2000, the $25,892,000 in outstanding notes. If NHI is forced
to purchase the notes and does not do so, the holders could accelerate the
payment of NHR's $8,200,000 obligation. If NHR is called on to pay off the
debt that it is obligated on, and fails to make such payments, other debt owed
by NHR totaling $95,444,000 could be accelerated due to cross-default
provisions in NHR's various other debt agreements. These events would have a
material adverse impact on the financial position and cash flows of NHR.
NHR, NHC and NHI are seeking to refinance the related obligation and are
in negotiations with the note holders to resolve the financial covenant
violations and investment grade rating violation issues. However, at the current
time, NHR is unable to determine the outcome of those discussions. Regardless
of whether the notes are purchased by NHI or refinanced, the note holders
may assert that NHR is obligated to pay a "make-whole" payment to the note
holders to compensate them for lost interest income on this investment.
Neither the legal existence of this duty in these circumstances
nor the amount of the "make-whole" payment has been determined
by the note holders; however, such a payment, if made, could have a material
adverse impact on the financial position, results of operations and cash flows
of NHR.
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 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 stated that it is assigning each Health Care Facility
lease to separate wholly owned subsidiaries of NHC. This change in operating
entity will not alter 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.
9
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 2000
(Unaudited)
Capital Resources and Liquidity
The assets of NHR as of March 31, 2000 include mortgage and other
notes receivable (book value of $95,628,000) and the real estate of 23
properties, including 16 long-term care centers, six assisted living facil-
ities and one independent living center (total book value of $149,186,000).
Long-term debt of $103,619,000 includes a term loan with a principal amount of
$92,218,000 which matures in 2002.
FCC Notes
Approximately $60,673,000 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. IHS has publicly disclosed that it has elected not to make
interest payments on certain of its long-term debt and is in discussions with
its lenders regarding restructuring of its debt. 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 March 31, 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 $22.4 million at December 31, 1999, are tax exempt and
are additionally secured with letters of credit issued by either Bank of
Tokyo-Mitsubishi Trust Company (BOT) or Toronto Dominion Bank (TD). On April
25, 2000, FCC replaced the TD and BOT letters of credit with one 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 March 31, 2000, NHR holds mortgage notes receivable of
$11,612,000 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.
10
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 2000
(Unaudited)
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. On September 22, 1999, NHR filed a Motion for
Partial Summary Judgment to allow it to foreclose on the first and second
mortgages and is awaiting the ruling of the trial judge. The Court, has heard
this motion, but not yet ruled. NHR does not anticipate recording any
additional unpaid mortgage interest income during the foreclosure proceedings.
While NHR has not obtained an independent, third-party appraisal, it believes
that the collateral will be sufficient to recover its loan balance and accrued
interest.
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.
Sources and Uses of Funds-
NHR's leasing and mortgage services generated net cash from operating
activities during the three months ended March 31, 2000 in the amount of
$3,885,000 compared to $4,389,000 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 and by increases in interest and rent receivable and
other assets.
Cash flows used in investing activities during the first three
months of 2000 included the net investment of $1,292,000 in new mortgage notes
receivable compared to collections on mortgage notes receivable of $640,000 in
the prior period.
Cash flows from financing activities for the first three months of
2000 included $2,000,000 of borrowings against the credit facility compared
to no borrowings in the prior period. Also, cash flows used in financing
activities included $3,188,000 to pay dividends to stockholders ($3,141,000
last year), and $405,000 to pay cash distributions to partners ($434,000 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.
11
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 2000
(Unaudited)
Debt-
As of March 31, 2000, NHC and NHI were in violation of certain
financial covenants included in a debt instrument originally financed through
the National Health Corporation Leveraged Employee Stock Ownership Plan and
Trust. In addition, NHI no longer meets a requirement that its senior
unsecured debt be rated investment grade by Standard & Poor's and Moody's
Investment Services. As of March 31, 2000, the total debt balance on the loan
was $25,892,000, of which $8,200,000 is the primary obligation of NHR. NHR is
not obligated on nor has NHR guaranteed the remaining balance of the loan.
As result of NHI not being rated investment grade, NHI has been delivered a
tender notice from the note holders to purchase, between June 10,
2000 and June 15, 2000, the $25,892,000 in outstanding notes. If NHI is forced
to purchase the notes and does not do so, the note holders could accelerate
the payment of NHR's $8,200,000 obligation. If NHR is called on to pay off the
debt that it is obligated on, and fails to make such payments, other debt owed
by NHR totaling $95,444,000 could be accelerated due to cross-default
provisions in NHR's various other debt agreements. These events would have a
material adverse impact on the financial position and cash flows of NHR.
NHR, NHC and NHI are seeking to refinance the related obligation and are
currently in negotiations with the note holders to resolve the financial
covenant violations and investment grade rating violation issues. However,
at the current time, NHR is unable to determine the outcome of those dis-
cussions. Regardless of whether the notes are purchased by NHI or refinanced,
the note holders may assert that NHR is obligated to pay a "make-whole"
payment to the note holders to compensate them for lost interest income on
this investment. Neither the legal existence of this duty in
these circumstances nor the amount of the "make-whole" payment has been
determined by the note holders; however, such a payment, if made, could have a
material adverse impact on the financial position, results of operations and
cash flows of NHR.
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999
Net income for the three months ended March 31, 2000 is $1,977,000
versus $2,313,000 for the same period in 1999, a decrease of 14.5%. Diluted
earnings per common share decreased 3 cents or 12.5% to 21 cents in the 2000
period from 24 cents in the 1999 period.
Total revenues for the three months ended March 31, 2000 decreased
$114,000 or 1.8% to $6,135,000 from $6,249,000 for the three months ended
March 31, 1999. Revenues from rental income increased $78,000 or 2.0% when
compared to the same period in 1999. Revenues from mortgage interest
decreased $191,000 or 8.1% 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 resulted primarily from
decreased mortgage notes receivable due to the receipt of monthly payments and
due to the discontinuation of interest income recognition on the notes
receivable from American Healthcare Corporation.
Total expenses for the 2000 three month period increased $264,000 or
7.2% to $3,907,000 from $3,643,000 for the 1999 three month period. Interest
expense increased $191,000 or 11.2% in the 2000 three month period as compared
to the 1999 period. Depreciation of real estate decreased $7,000 or .4%.
General and administrative costs increased $58,000 or 35.6%.
Interest expense increased primarily due to increased rates of
interest on variable rate debt.
12
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 2000
(Unaudited)
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.
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 March 31, 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.
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 $22.4 million of
first mortgage debt superior to NHR's second mortgage notes of $25 million.
See the discussion above under the caption "FCC Notes". In its Form 10-K
filed with the Securities and Exchange Commission on April 12, 2000, IHS
reported a net loss of $2,239,927,000 for the year ended December 31, 1999.
IHS also has publicly disclosed that it has elected not to make interest
payments on certain of its long-term debt and is in discussions with its
lenders regarding restructuring of its debt. 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 March 31, 2000.
13
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 2000
(Unaudited)
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 require-
ments 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 regards 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.
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.
Item 3. Quantitative and Qualitative Information About Market Risk
INTEREST RATE RISK
The Company's cash and cash equivalent 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.
14
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 2000
(Unaudited)
As of March 31, 2000, $95,418,000 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 $681,000 and likewise,
a reduction in interest rates would result in interest expense declining by
approximately $681,000. A hypothetical 10% change in interest rates would not
have a material impact on the fair values of these instruments.
The remaining $5,473,000 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. None
Item 2. Changes in Securities. Not applicable
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) List of exhibits - Exhibit 27 - Financial Data Schedule
(for SEC purposes only)
(b) Reports on Form 8-K - none required
15
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 2000
(Unaudited)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL HEALTH REALTY, INC.
(Registrant)
Date May 15, 2000 /s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date May 15, 2000 /s/ Donald K. Daniel
Donald K. Daniel
Principal Accounting Officer
16
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