NATIONAL HEALTH REALTY INC, 10-K405, 2000-03-30

NATIONAL HEALTH REALTY INC
10-K405, 2000-03-30
SKILLED NURSING CARE FACILITIES

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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, 1999
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 $57,562,000 as of February 29, 2000. The number of shares of
Common Stock outstanding as of February 29, 2000 was 9,583,323.

PAGE 1 OF 55 PAGES
Exhibit Index Page 46
<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 51 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. Since its formation, the Company has increased its investment in the
Healthcare Facilities by $20,874,000, which has been accompanied by an
increase in rental income. The Leases covering the Healthcare Facilities are
"triple net" leases. NHR's revenues are derived primarily from NHC under the
Leases and the interest and principal payments of the Notes.

Thirty-eight of the Notes (representing approximately $61.2 million in
principal amount and collateralized with 14 nursing facilities) are made by
Florida Convalescent Centers, Inc. or affiliate (FCC). Approximately $25
million of these notes are second mortgages behind approximately $22.4 million
in first mortgage tax exempt debt held by third parties. These 14 nursing
facilities were managed by NHC through July 31, 1999. Since August 1, 1999,
the 14 centers have been leased by FCC to Integrated Health Services, Inc.
(IHS) a publicly owned long term care company which filed for bankruptcy on
February 2, 2000. The FCC Notes remain outstanding and bear interest at
10.25% and are due in 2004; however, the $22.4 million tax exempt debt matures
between April 1, 2000 and March 31, 2001. On March 3, 2000, FCC obtained a
six month extension on the approximately $14 million of tax exempt debt due
April 1, 2000. FCC is attempting to refinance this first mortgage debt, but
if it is unsuccessful in such attempts the debt may be accelerated, thus
placing NHR's second mortgage notes in jeopardy. Alternatively, FCC may have
to refinance both the tax exempt debt and NHR's second mortgage notes. 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.

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.

<PAGE>
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
$4,782,000 of which had been drawn by December 31, 1999. The interest rate on
$11.6 million of the remaining Assumed Liabilities include fixed rates of 8.4%
and 8.3%. The interest rate on $3.2 million of the remaining Assumed
Liabilities is at a variable rate (4.2% at December 31, 1999). The
replacement financing and line of credit bear interest at LIBOR plus 1% (one
percent). The term of the loans extend through 2011.

Investment and Other Policies of NHR.

General. NHR's investment objectives are: (i) to provide current
income for distribution to stockholders, (ii) to provide the opportunity for
additional returns to investors by participating in any increase in the
operating revenues of its leased properties; (iii) to provide the opportunity
to realize capital growth resulting from appreciation, if any, in the value of
its portfolio properties, and (iv) to preserve and protect stockholder's
capital. There is no assurance that these objectives will be realized.

Advisory Agreement. NHR has contracted for its management with NHC.
The NHR Advisory Agreement provides that NHR will not, without the prior
approval of NHI, be actively or passively engaged in the pursuit of additional
investment opportunities until the earlier of the termination of the Advisory
Agreement or such time as NHC is no longer actively engaged as investment
advisor to NHI. For its services, NHC is entitled to annual compensation of
the greater of 2% of NHR's gross consolidated revenues or the actual expense
incurred by NHC. The actual amount paid to NHC in 1999 is $506,000. 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.

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.

NHC has assigned, with the consent of NHR, the individual healthcare
facility leases to wholly owned limited liability companies which will
henceforth operate each HealthCare Facility. NHC's obligations under each
lease to NHR remain in full force and effect, even though operational control
has been transferred.

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 adminis-
trative services and facilities appropriate for such management. In per-
forming 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 1999 is $506,000.
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.

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. REITs are subject to highly complex rules governing ownership
and relationships with tenants which can be inadvertently transgressed, thus
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.

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.

ITEM 2
PROPERTIES

Healthcare Facilities

The following table includes certain information regarding the
Healthcare Facilities, all of which were leased for an initial ten (10) year
term to National HealthCare Corporation; and have now been assigned to
individual operating subsidiaries, wholly owned ultimately by NHC:
<PAGE>
<TABLE>
<CAPTION>

Minimum
No. of Book Annual
Name of Facility Location Beds Basis Rent(1)
<S> <C> <C> <C> <C>
Long-Term Care Centers
NHC HealthCare, Naples Naples, FL 60 $ 5,169,404 $ 542,783
NHC HealthCare, Clinton Clinton, SC 131 3,273,609 354,291
NHC HealthCare, Coconut Creek Coconut Creek, FL 120 10,203,692 1,073,219
NHC HealthCare, Daytona Beach Daytona Beach, FL 60 5,750,730 598,365
NHC HealthCare, Farragut Farragut, TN 60 6,034,726 594,364
NHC HealthCare, Garden City Murrells Inlet, SC 88 4,732,779 489,342
NHC HealthCare, Greenville Greenville, SC 176 4,793,265 520,058
NHC HealthCare, Lexington Lexington, SC 120 5,898,347 570,964
NHC HealthCare, Mauldin Mauldin, SC 120 7,860,352 821,645
AdamsPlace Murfreesboro, TN 60 6,091,586 578,701
NHC HealthCare, Imperial Naples, FL 90 5,297,693 540,489
NHC HealthCare, North Augusta North Augusta, SC 132 4,496,857 482,029
NHC HealthCare, Orlando Orlando, FL 120 7,756,156 818,652
NHC HealthCare, Parklane Columbia, SC 120 7,283,024 761,718
NHC HealthCare, Port Charlotte Port Charlotte, FL 180 7,850,813 817,396
NHC HealthCare, West Plains West Plains, MO 120 3,434,514 365,823

Assisted Living Facilities
NHC Place/ Vero Beach Vero Beach, FL 84 6,869,571 713,498
NHC Place/Anniston Anniston, AL 68 5,101,181 544,913
Adams Place Murfreesboro, TN 84 5,881,424 623,442
NHC Place/Merritt Island Merritt Island, FL 84 7,135,588 743,274
NHC Place/Stuart Stuart, FL 84 6,622,134 695,697
NHC Place/ Farragut Farragut, TN 84 7,483,060 736,997

Retirement Center
AdamsPlace Murfreesboro, TN 58 15,356,265 1,497,540
</TABLE>
(1) 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".

Mortgage Notes. NHR owns approximately 51 Mortgage Notes representing
approximately $93.1 million loaned to the owners of approximately 22 nursing
homes, all but one of which are in Florida. NHC or a subsidiary manages six
of the nursing centers and owns two others. The loans were utilized by the
initial 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. Thirty-eight of the Mortgage Notes (representing
approximately $61.2 million of the principal amount) are from FCC or
affiliates. The FCC Notes remain outstanding and bear interest at 10.25% and
are due in 2004; however, a $22.4 million first mortgage tax exempt debt held
by third parties matures between April 1, 2000 and March 31, 2001. On March
3, 2000, FCC obtained a six month extension on the approximately $14 million
of tax exempt debt due April 1, 2000. NHR has approximately $25 million
second mortgage notes on these facilities. FCC is attempting to refinance
this first mortgage debt, but if it is unsuccessful in such attempts the debt
may be accelerated, thus placing NHR's second mortgage notes in jeopardy.
Alternatively, FCC may have to refinance both the tax exempt debt and NHR's
second mortgage notes. 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.

ITEM 3
LEGAL PROCEEDINGS

NHR is not subject to any significant 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

(a) The annual meeting of the shareholders was held on April 26, 1999.

(b) Matters voted upon at the meeting are as follows:

PROPOSAL NO. 1: Election of Ernest G. Burgess, III and W. Andrew Adams to
serve as directors for terms of three years or until their successors have
been fully elected and qualified. Other directors whose terms of office
continue are Mr. Robert G. Adams, Dr. J. K. Twilla and Dr. Olin O. Williams.

Withholding Percentage
Voting For Authority For
Ernest G. Burgess, III 7,546,812 52,203 99.3%
W. Andrew Adams 7,544,602 54,413 99.3%

PROPOSAL NO. 2: Ratify the appointment of Arthur Andersen LLP as the Company's
independent accountants for the fiscal year 1999.

Voting For Voting Against Abstaining Percent For
7,577,289 7,589 14,137 99.7%

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 March 8, 2000 the last reported sale price for the Common
Stock on the AMEX was $8.00. As of December 31, 1999, NHR had approximately
4,600 shareholders, of which approximately 2,186 are holders of record with
the balance indicated by security listing positions.

High and low stock prices and dividends for 1999 were:

1999 1998
----------------------------- -----------------------------
Cash Cash
Sales Price Dividends Sales Price Dividends
Quarter Ended High Low Declared High Low Declared
March 31 $12.375 $10.875 .3325 $21.313 $16.875 $.3325
June 30 12.500 9.125 .3325 17.750 14.125 .3325
September 30 12.125 9.250 .3325 15.625 12.875 .3325
December 31 10.375 7.875 .3325 15.125 11.125 .3325

<TABLE>
ITEM 6
SELECTED FINANCIAL DATA

<CAPTION>
(dollars in thousands,
except share amounts) 12/31/99 12/31/98 12/31/97
<S> <C> <C> <C>
Net revenues 25,291 23,555 ---
Net income 9,029 8,267 ---
Net income per share
Basic .94 .89 ---
Diluted .94 .87 ---
Mortgages and other investments 94,403 93,099 94,439
Real estate properties, net 150,943 158,910 144,615
Total assets 249,448 255,444 242,495
Long term debt 101,619 103,628 89,855
Total stockholders' equity 127,396 127,453 131,698

Common shares outstanding 9,588,823 9,447,693 8,237,423

Weighted average common shares
Basic 9,573,119 9,249,896 ---
Diluted 9,605,318 9,518,088 ---

Common dividends declared per share 1.33 1.33 ---
</TABLE>

<PAGE>
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION 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.

CAPITAL RESOURCES AND LIQUIDITY

The assets of NHR as of December 31, 1999 include mortgage and other
notes receivable (book value of $94,336,000) 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
$150,943,000). Long-term debt of $101,619,000 includes a term loan with a
principal amount of $90,219,000 which matures in 2002.

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 remaining 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 $15,485,000. 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 and potentially new
investments with NHC.

At year end, NHR's long-term debt as a percentage of total liabilities
and capital was 40.7%. The amount available to be drawn on NHR's $95.0 million
term loan was $4.8 million at December 31, 1999. NHR's cash on hand, its
operating and investing cash flows, and, as necessary, its borrowing capacity
are expected to be adequate to fund any new investments as well as to repay
borrowings at or prior to their maturity.

FCC Notes

Approximately $61,167,000 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. In its Form 10-Q filed with the Securities and Exchange
Commission on November 19, 1999, IHS reported a net loss of $1,830,837,000 for
the nine months ended September 30, 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.

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). TD's
letters of credit were to mature April 1, 2000, and the BOT letter of credit
matures April 1, 2001. On March 3, 2000, the TD letter of credit was extended
for six months, contingent upon FCC depositing certain cash collateral with TD
on or before April 26, 2000. FCC has also agreed to provide BOT cash
collateral in an amount equal to the letter of credit (approximately $8.5
million) on March 31, 2000. If FCC is unable or unwilling to refinance or
cause to be extended these letters of credit, a default would occur and
acceleration of the obligation could be declared, resulting in a foreclosure
action against NHR's collateral. Currently NHR does not have sufficient
liquidity to purchase the first mortgage debt, thus the value of its second
mortgage notes could be substantially impaired, with a resulting loss of
income.

Loan Foreclosure

As of December 31, 1999, 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.

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. 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.

Sources and Uses of Funds

NHR's leasing and mortgage services generated net cash from operating
activities during 1999 in the amount of $16,666,000 compared to $16,108,000 in
the prior period. Net cash from operating activities generally includes net
income plus non-cash expenses, such as depreciation and amortization and
provisions for loan losses, if any, and working capital changes. The year to
year increase is due primarily to increased net income and depreciation offset
by increases in interest and rent receivable and other assets.

Cash flows used in investing activities during 1999 included the net
investment of $1,237,000 in new mortgage notes receivable compared to
collections on mortgage notes receivable of $1,340,000 in the prior year. Also
in the prior year, $20,874,000 was invested in additions to and acquisitions
of property and equipment compared to sales of property of $912,000 in the
current year.

Cash flows from financing activities for 1999 included $2,000,000 of
borrowings against the credit facility compared to borrowings of $15,500,000
in the prior year. Also, cash flows used in financing activities included
$4,009,000 to fund payments on debt ($1,727,000 last year), $12,705,000 to pay
dividends to stockholders ($9,371,000 last year), and $1,648,000 to pay cash
distributions to partners ($1,308,000 last year).

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. Dividends in the amount of $1.33 per
share were declared for payment during 1999. This represents a payout ratio of
83%.

RESULTS OF OPERATIONS

Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998-

Net income for the year ended December 31, 1999 is $8,780,000 versus
$8,267,000 for the same period in 1998, an increase of 6.2%. Diluted earnings
per common share increased 4 cents or 4.6% to 91 cents in the 1999 period from
87 cents in the 1998 period.

Total revenues for the year ended December 31, 1999 increased $1,449,000
or 6.2% to $25,004,000 from $23,555,000 for the year ended December 31, 1998.
Revenues from rental income increased $1,915,000 or 14.1% when compared to the
same period in 1998. Revenues from mortgage interest decreased $383,000 or
4.0% in 1999 as compared to the same period in 1998.

The increase in rental income is due to additions to and acquisitions of
property and equipment of $20,874,000 during the last 24 months.

The decrease in mortgage interest income resulted from the payoff of a
mortgage note receivable, the previously mentioned foreclosure on the American
Healthcare Corporation note receivable and the amortization of the principal
of other mortgage notes receivable.

Total expenses for the year ended December 31, 1999 increased $976,000
or 7.0% to $15,111,000 from $14,135,000 for the year ended December 31, 1998.
Interest expense increased $32,000 or 0.5% in 1999 as compared to the 1998
period. Depreciation of real estate increased $476,000 or 7.2%. General and
administrative costs increased $468,000 or 76.1%.

Interest expense increased due to an increase in the interest rate of
variable rate debt compared to a year ago. Depreciation increased as a result
of the Company placing newly constructed assets in service and property
acquisitions. General and administrative expense increased primarily due to
increased franchise and excise taxes in the state of Tennessee.

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 December 31, 1999, 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 ability to refinance approximately $22.4 million of
first mortgage debt superior to NHR's second mortgage notes of $25 million.
The first mortgage debt is substantially due April 1,2000. See the discussion
above under the caption "FCC Notes". In its Form 10-Q filed with the
Securities and Exchange Commission on November 19, 1999, IHS reported a net
loss of $1,830,837,000 for the nine months ended September 19, 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.

Approximately $22,400,000 of the NHR notes from FCC are second mortgage
notes. The commercial bank issued letters of credit on these notes which
mature between April 1, 2000 and March 31, 2001, although the April 1, 2000
date has been extended for up to six months upon FCC depositing certain cash
collateral with the bank. The March 31, 2001 debt will be accelerated on
March 31, 2000 unless FCC deposits cash collateral with that Bank. FCC's
ability to refinance these mortgage notes may be handicapped by the lessee's
financial performance. Any collection action attempted by the commercial banks
could negatively impact NHR's notes and collateral, with a resulting
significant reduction of income to NHR.

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.

IMPACT OF INFLATION

Inflation may affect NHR in the future by changing the underlying value
of NHR's real estate or by impacting NHR's cost of financing its operations.

Revenues of NHR are primarily from long-term investments. NHR's leases
with NHC require increases in rent income based on increases in the revenues
of the leased facilities.

YEAR 2000 COMPLIANCE

The Year 2000 issue generally relates to computer programs that were
written using two digits rather than four to define the applicable year. In
those programs, the year 2000 may be incorrectly identified as the year 1900,
which can result in a system failure or miscalculations causing a disruption
of operations, including a temporary inability to process transactions,
prepare financial statements or engage in other normal business activities.
The following discussion identifies the actions taken by NHR to assess and
address its Year 2000 issues.

State of Readiness

NHR has developed a plan to address its Year 2000 issues, and is
utilizing its internal resources to assess, remediate and test its systems.
NHR's Year 2000 readiness plan is focused on addressing Year 2000 readiness in
the following four categories: (1) mainframe computer operations, critical
applications and related networks, (2) personal computer hardware and
software, (3) third party mortgagees and lessees, and (4) other third party
vendors that provide such services as telecommunications and electrical power.

For categories (1) and (2) described above, NHR, through its advisor
(NHC), has performed the phases of assessment, remediation and testing of the
applicable hardware, software or equipment, as applicable. Management is not
aware of any Year 2000 problems related to these areas and believes that no
significant contingencies exist related to these areas.

With regards to third party mortgagees and lessees and other third party
vendors (categories (3) and (4) above), management continues to assess its
Year 2000 status. NHR has requested all mortgagees, lessees and other third
party vendors (financial institutions, electrical providers, etc.) to disclose
their current Year 2000 readiness and their plan for achieving Year 2000
readiness. Responses have been received from most vendors and third parties.
Although most third party mortgagees, lessees and vendors have indicated that
they are currently Year 2000 compliant, NHR does not consider its assessment
complete until it verifies the readiness of all third parties. NHR continues
to evaluate contingencies that may relate to the Year 2000 status of third
party mortgagee, lessees and vendors.

NHR's sole lessee, NHC, is currently in the process of evaluating its
Year 2000 issues. NHC has formed an internal task force and is utilizing its
internal resources to assess, remediate and test its Year 2000 compliance.
NHC's Year 2000 readiness plan is focused on addressing Year 2000 readiness in
the following five categories: (1) mainframe computer operations, critical
applications and related networks, (2) personal computer hardware and
software, (3) other internal equipment such as infusion pumps, phone systems,
monitoring devices and smoke/fire alarms which rely on embedded technology
(microchips) or telecommunications, (4) third party payors, and (5) other
third party vendors utilized by NHC's health care centers such as financial
institutions, electrical providers, and food services suppliers. NHC is not
aware of any Year 2000 problems related to the mainframe computer operations,
critical applications and related networks, personal computer hardware and
software, or other internal equipment and believes that no significant
contingencies exist related to these areas. With regards to third party payors
and third party vendors, management has no indication that any third parties
are not currently Year 2000 compliant; however, NHC continues to evaluate
contingencies that may relate to the Year 2000 status of third party payors
and vendors.

NHR's mortgagees and NHC participate in the Medicare and Medicaid
programs. NHC and the mortgagees are reimbursed under these programs through
fiscal intermediaries. NHC and the mortgagees have little or no control over
the Year 2000 compliance of governmental payors and fiscal intermediaries. NHR
will continue to evaluate the Year 2000 readiness of NHC, the mortgagees,
governmental payors and fiscal intermediaries.

Year 2000 Costs

As a result of its advisory agreement with NHC, costs related to NHR's
Year 2000 readiness plan have not been material and are not expected to be
material in future periods. No additional advisory fees have been charged to
NHR related to the assessment, remediation or testing of NHR's Year 2000
compliance.

Year 2000 Risks

The failure of NHR or third parties to be fully Year 2000 compliant
could result in interruptions of normal business operations. Based on all
available information as of December 31, 1999, management's estimate of NHR's
most reasonably likely worst case scenario includes: (i) delayed collection of
rent mortgage principal payments and interest payments, (ii) the disruption of
capital flows from banks or other lenders resulting in liquidity stress, and
(iii) the disruption of important services upon which NHR depends, such as
telecommunications and electrical power. Each of these events could have a
material adverse impact on NHR's business, results of operations and financial
condition.

NHR's Year 2000 efforts are ongoing and its overall plan and cost
estimations will continue to evolve as new information becomes available. As
noted previously, NHR's analysis of its Year 2000 issues is based on
information from third parties. There can be no assurance that such
information is accurate or complete.

<PAGE>
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. Substantially 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, 1999, $93,419,000 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 $657,171 and likewise, a 10%
reduction in interest rates would result in interest expense declining
$657,171. A hypothetical 10% change in interest rates would not have a
material impact on the fair values of these instruments. The remaining
$8,200,000 of the Company's long-term debt bears interest at fixed rates. A
hypothetical 10% change in interest rates has no impact on the Company's
future earnings and cash flows related to these instruments and 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, 1999 and 1998, the related consolidated statements of income,
stockholders' equity and cash flows for the years ended December 31, 1999 and
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, 1999 and 1998, the results of their operations
and their cash flows for the years ended December 31, 1999 and 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 18, 2000

<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
1999 1998
<S> <C> <C>
ASSETS
Real estate properties:
Land $ 19,531 $ 19,531
Buildings and improvements 144,866 144,769
Construction in progress 180 1,189
164,577 165,489
Less accumulated depreciation (13,634) (6,579)
Real estate properties, net 150,943 158,910

Mortgage and other notes receivable 94,336 93,099
Interest and rent receivable 801 367
Cash and cash equivalents 2,576 2,897
Deferred costs and other assets 438 171
Total Assets $249,094 $255,444

LIABILITIES
Long-term debt $101,619 $103,628
Minority interests in consolidated subsidiaries 16,182 20,351
Accounts payable and other accrued expenses 459 110
Accrued interest 95 325
Dividends payable 3,188 3,141
Distributions payable to partners 404 436
Total Liabilities 121,947 127,991

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;
9,588,823 and 9,447,693 shares,
respectively, issued and outstanding 96 94
Capital in excess of par value of common stock 135,268 131,604
Cumulative net income 17,047 8,267
Cumulative dividends (25,264) (12,512)
Total Stockholders' Equity 127,147 127,453
Total Liabilities and Stockholders' Equity $249,094 $255,444
</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 INCOME
(in thousands, except share amounts)

<CAPTION>
Year Ended December 31 1999 1998
<S> <C> <C>
REVENUES:
Rental income $ 15,485 $ 13,570
Mortgage interest income 9,362 9,745
Investment interest and other income 157 240
25,004 23,555

EXPENSES:
Interest 6,934 6,902
Depreciation of real estate 7,055 6,579
Amortization of loan costs 39 39
General and administrative 1,083 615
15,111 14,135

INCOME BEFORE MINORITY INTERESTS IN
CONSOLIDATED SUBSIDIARIES 9,893 9,420

MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES 1,113 1,153

NET INCOME $ 8,780 $ 8,267

NET INCOME PER COMMON SHARE:
Basic $ .92 $ .89
Diluted $ .91 $ .87

FUNDS FROM OPERATIONS PER SHARE:
Basic $ 1.57 $ 1.52
Diluted $ 1.57 $ 1.48

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 9,573,119 9,249,896
Diluted 9,605,318 9,518,088
</TABLE>

<CAPTION>
Periods Ended December 31 1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,780 $ 8,267 $ ---
Depreciation of real estate 7,055 6,579 ---
Amortization of loan costs 39 39 ---
Minority interests in consolidated subsidiaries 1,113 1,153 ---
Increase in interest and rent receivable (434) (367) ---
(Increase) decrease in other assets (6) 2 ---
Increase in accounts payable and
accrued liabilities 119 435 ---
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,666 16,108 ---

CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of property & equipment, net 912 (20,874) ---
Investment in mortgage notes receivable (7,434) --- ---
Collection of mortgage notes receivable 6,197 1,340 ---
Investment in other real estate investments (300) --- ---
NET CASH USED IN INVESTING ACTIVITIES (625) (19,534) ---

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,000 15,500 75,000
Payments on long-term debt (4,009) (1,727) (71,559)
Financing costs paid --- --- (212)
Dividends paid to stockholders (12,705) (9,371) ---
Distributions paid to partners (1,648) (1,308) ---
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (16,362) 3,094 3,229

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (321) (332) 3,229
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,897 3,229 ---
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,576 $ 2,897 $ 3,229

Supplemental Information:
Cash payments for interest expense $ 7,164 $ 6,577 $ ---

During 1999 and 1998, $710,000 and $18,438,000,
respectively, of Senior Subordinated
Convertible Notes were converted into
46,690 shares and 1,210,270 shares of NHC
common stock. NHR was obligated to issue NHR
common stock upon the conversion of the Notes:
Common stock $ (1) $ (12) $ ---
Capital in excess of par value (2,378) 12 ---
Minority interests in consolidated
subsidiaries 2,379 --- ---

During 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 (1,286) --- ---
Minority interests in consolidated
subsidiaries 1,287 --- ---
</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 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 in con-
version of convertible
debentures to common
stock -- -- 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

Net income -- -- -- -- -- 8,780 -- 8,780
Shares issued in con-
version of convertible
debentures to common
stock -- -- 46,690 1 2,378 -- -- 2,379
Shares issued in ex-
change for NHR/
OP, L.P. units -- -- 94,440 1 1,286 -- -- 1,287
Dividends to common
shareholders ($1.33
per share) -- -- -- -- -- -- (12,752) (12,752)

BALANCE AT 12/31/99 -- $ -- 9,588,823 $ 96 $135,268 $ 17,047 $ (25,264) $127,147
</TABLE>

The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
<PAGE>

NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1999 AND 1998

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 89% 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 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.

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 $11,562,000) 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.

Other Assets - Other assets include NHR's $300,000 investment in
Summerfield Development LLC (Summerfield). Summerfield is a related party of
NHR, since certain members of NHR's management and board of directors are also
members of Summerfield. NHR carries its investment in Summerfield at cost in
the consolidated balance sheets.

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. NHR's policy related to mortgage interest income on
nonperforming mortgage loans is to not recognize unpaid mortgage interest
income in excess of 90 days.

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 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 remaining initial term and each renewal term, NHC is
obligated to pay NHR annual base rent on the 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
$15,485,000 and $13,570,000 during 1999 and 1998, respectively.

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, 1999, the approximate future minimum base rent
commitments to be received by NHR on non-cancelable operating leases with NHC
are as follows:

2000 $15,485,000
2001 15,485,000
2002 15,485,000
2003 15,485,000
2004 15,485,000
Thereafter 46,455,000

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.
The outcome of this lawsuit could have a material adverse impact on the
financial position, results of operations and cash flows of NHC and NHC's
resultant ability to make its lease payments to NHR.

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.

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 1999 and 1998, NHR's compensation to
NHC under the Advisory Agreement was $506,000 and $471,000, respectively.

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, 1999:
Buildings, Im-
Number provements and
of Construction Accumulated
Facility Type and State Facilities Land In Progress Depreciation

(dollar amounts in thousands)

Long-Term Care Centers:
Florida 6 $ 5,775 $ 40,445 $ 4,192
Missouri 1 123 3,728 416
South Carolina 7 6,145 36,323 4,130
Tennessee 2 874 11,474 826
Total Long-Term Care Centers 16 12,917 91,970 9,564

Assisted Living Facilities:
Alabama 1 268 5,468 635
Florida 3 3,414 19,244 2,030
Tennessee 2 886 13,434 955
Total Assisted Living
Facilities 6 4,568 38,146 3,620

Independent Living Centers:
Tennessee 1 2,046 14,930 450
Total Independent Living
Centers 1 2,046 14,930 450

Total 23 $ 19,531 $ 145,046 $13,634

NOTE 5. MORTGAGE AND OTHER NOTES RECEIVABLE

The following is a summary of the terms and amounts of mortgage and
other notes receivable at December 31, 1999:

(dollar amounts in thousands)
<TABLE>
<CAPTION>

Final Number of Principal
Payment Date Loans Payment Terms Amount
<S> <C> <C> <C>
2000 1 Monthly payments of $87,000, which
include interest at 10.68%. $ 7,448

2004 29 Monthly payments from $1,000 to $71,000,
which include interest at 10.25%. 51,659

2005 5 Monthly payments from $11,000 to $35,000,
which include interest at 10.25%. 9,105

2006 4 Monthly payments from $10,000 to $45,000,
which include interest at 10.25%. 10,309

2014 1 Monthly payments of $38,250, which
include interest at 8.5%. 4,714

2016 1 Monthly payments of $43,000, which
include interest at prime rate plus 2%. 5,356

1999- 7 Monthly payments from $5,000 to $35,000,
2016 which include interest ranging from prime
plus 2% to 12%. 5,745
$94,336
</TABLE>
Approximately $61,167,000 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. In its Form 10-Q filed with the Securities and Exchange
Commission on November 19, 1999, IHS reported a net loss of $1,830,837,000 for
the nine months ended September 30, 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. 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.

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). TD's
letters of credit mature April 1,2000, and the BOT letter of credit matures
April 1, 2001. FCC has agreed to provide BOT cash collateral in an amount
equal to the letter of credit (approximately $8.5 million) on March 31, 2001.
If FCC is unable or unwilling to refinance or cause to be extended these
letters of credit, a default would occur and acceleration of the obligation
could be declared, resulting in a foreclosure action against NHR's collateral.
Currently NHR does not have sufficient liquidity to purchase the first
mortgage debt, thus the value of its second mortgage notes could be
substantially impaired, with a resulting loss of income.

As of December 31, 1999, 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. 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.

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 and other 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 REITs 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 REITs for debt of the same
remaining maturities.

Payables and accrued expenses - The fair value approximates the carrying
amount because of the short term nature of these liabilities.

The estimated fair values of NHR's financial instruments are as follows:

December 31 1999 1998
------------------- --------------------
(in thousands) Carrying Carrying
Amount Fair Value Amount Fair Value

Mortgage and other notes
receivable $ 94,336 $ 94,336 $ 93,099 $ 93,099
Interest and rent receivable 801 801 367 367
Cash and cash equivalents 2,576 2,576 2,897 2,897
Long-term debt (101,619) (101,619) (103,628) (103,628)
Payables and accrued expenses (4,146) (4,146) (4,012) (4,012)

NOTE 7. LONG-TERM DEBT
<TABLE>
Long-term debt consists of the following:
<CAPTION>
Weighted Average Final Principal Amount
(dollar amounts in thousands) Interest Rate Maturities 1999 1998
<S> <C> <C> <C> <C>
Term loan, interest only payable
quarterly, effective March 21,
2000, principal and interest Variable,
payable quarterly 6.4% 2002 $ 90,219 $90,500

Senior secured notes, principal and interest
payable semiannually 8.3 2003 3,030 3,895

Senior secured notes, principal and interest
payable semiannually 8.4 2005 5,170 6,033

First mortgage revenue bonds, interest
payable monthly, principal due Variable,
at maturity 4.7 2011 3,200 3,200
$101,619 $103,628
</TABLE>
The aggregate principal maturities of all long-term debt for the five
years subsequent to December 31, 1999 are as follows:

2000 $ 3,196,000
2001 5,477,000
2002 86,727,000
2003 1,294,000
2004 861,000

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

At December 31, 1999, 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 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.

NOTE 9. STOCK OPTION PLAN

The stockholders of NHR have 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. The vesting period and maximum term of the
options is six years. The following table summarizes option activity:

Weighted Average
Number of Exercise
Options Outstanding Shares Price
Outstanding December 31, 1997 --- ---
Options granted 15,000 18.88
Options exercised --- ---

Outstanding December 31, 1998 15,000 18.88
Options granted 382,000 8.50
Options exercised --- ---

Outstanding December 31, 1999 397,000 8.89

At December 31, 1999, all options outstanding are exercisable. Exercise
prices on the options range from 8.38 to 18.88. The weighted average
contractual life of options outstanding at December 31, 1999 is 5.6 years.
NHR has reserved 397,000 shares of common stock for issuance under the stock
option plans.

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 NHR's pro forma earnings and
earnings per share.

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 statements of income and the weighted average number of common
shares outstanding during the year.

Diluted earnings per share assumes the exercise of stock options as well
as the NHC Options into shares of NHR common stock using the treasury stock
method. For purposes of calculating diluted earnings per share, there is no
adjustment to net income as reported in the consolidated statements 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 NHR to its common stockholders are characterized in
the following manner for tax purposes in 1999:

Dividend Taxable as Non-Taxable
Payment Ordinary Taxable as Return of
Date Income Capital Gains Capital Totals

April 15, 1999 $ .315 $ --- $ .0175 $ .3325
July 15, 1999 .315 --- .0175 .3325
October 15, 1999 .315 --- .0175 .3325
January 14, 2000 .315 --- .0175 .3325
$1.260 $ --- $ .0700 $1.3300

<PAGE>
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable.

PART III

ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

Directors and Executive Officers

The Board of Directors is divided into three classes. Directors will
hold office until the annual meeting for the year in which their term expires
and until their successor is elected and qualified. As each of their terms
expire, the successor shall be elected to a three-year term. A director may be
removed from office for cause only. Officers serve at the pleasure of the
Board of Directors for a term of one year. The following table sets forth the
initial directors and executive officers of NHR:

Current Officer of
Term as NHC's
Director Predecessor
Name Age Expires Since

J. K. Twilla 73 2001 ---
Robert G. Adams 53 2000 1985
Olin O. Williams 69 2000 ---
W. Andrew Adams 54 2002 1973
Ernest G. Burgess, III 59 2002 1975
Richard F. LaRoche, Jr. 54 ---- 1974

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.

<PAGE>
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. He also serves on the
Board of National HealthCare Corporation.

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 1999. 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 May 24, 2000.

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 1999.

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
1999
<CAPTION>
Long Term Compensation
----------------------------------------
Annual Compensation (1) Awards Payouts
- ---------------------------------------------------------------------- -------------------------- ------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other annual Restricted All Other
Name and Principal Compensation Stock Awards Options/SARs LTIP Payouts Compensation
Position Year Salary($) Bonus($)(2) ($)
- ------------------ ---- --------- ----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Andrew Adams 1999 $ --- (3) --- --- --- --- ---
President & CEO 1998 --- 100,000 --- --- --- --- ---
1997 --- 1,486,843 --- --- --- --- ---

Robert G. Adams 1999 --- (3) --- --- --- --- ---
Senior Vice President 1998 --- 100,000 --- --- --- --- ---
and COO 1997 --- 594,258 --- --- --- --- ---

Richard F. LaRoche, Jr. 1999 --- (3) --- --- --- --- ---
Sr. VP & Secretary 1998 --- 100,000 --- --- --- --- ---
1997 --- 796,355 --- --- --- --- ---
</TABLE>
1Compensation deferred at the election of an executive has
been included in column (d).
2These 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.
3No bonus has yet been declared or paid for 1999.

<PAGE>
<TABLE>
TABLE II
NATIONAL HEALTH REALTY, INC.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
December 31, 1999
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Unit Price Appreciation
Individual Grants for Option Term2
- ----------------------------------------------------------------------------------------------------- --------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Options/SARs
Granted to
Options/SARs Employees in Exercise or Base
Executive Officers Granted (#)(1) Fiscal Year Price ($/Sh) Expiration Date 5%($) 10%($)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
W. Andrew Adams,
President & CEO 44,000 11.5% 8.375 10/13/05 101,810 224,973
Robert G. Adams, Sr. VP 32,000 8.4% 8.375 10/13/05 73.920 163,617
Richard F. LaRoche, Jr., Sr. VP 32,000 8.4% 8.375 10/13/05 73,920 163,617

Directors
J. K. Twilla 5,000 1.3% $18.875 January 5, 2003 -0- -0-
Olin O. Williams 5,000 1.3% $18.875 January 5, 2003 -0- -0-
Ernest G. Burgess, III 5,000 1.3% $18.875 January 5, 2003 -0- -0-

1No options have been awarded to Executive Officers
2Based on remaining option term (if any) and annual compounding over December 31, 1998 average stock price of $11.44 per share.
</TABLE>
<TABLE>
TABLE III
NATIONAL HEALTH REALTY, INC.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
December 31, 1999
<CAPTION>
Number of Unexercised Value of Unexercised In-
Options/SARs at FY-End (#) the Money Options/Sars
at FY-End($)

Shares Acquired Value Realized ($)(1) Exercisable/ Exercisable/
Executive Officers on Exercise(#) Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
W. Andrew Adams, President & CEO --- --- 44,000 ---
Robert G. Adams, Sr. VP --- --- 32,000 ---
Richard F. LaRoche, Jr., Sr. VP --- --- 32,000 ---

Directors
J. K. Twilla --- --- 10,000 ---
Olin O. Williams --- --- 10,000 ---
Ernest G. Burgess, III --- --- 10,000 ---
</TABLE>
1Market value of underlying securities at exercise date, minus the
exercise or base price.

<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.

Pursuant to the automatic grant provisions of the plan, the three
non-NHC affiliated directors have each received options to purchase shares at
$11.50 on April 26, 1999 and at $18.875 on January 5, 1999. The outside
directors have not exercised any of the 1998 or 1999 grants. There are
currently 79,802 shares available to grant under the 1997 Plan.

<PAGE>
ITEM 12
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

Names and Addresses Number of NHR Shares Percentage of
of Beneficial Owner Beneficially Owned Total NHR Shares(1)

W. Andrew Adams, President
801 Mooreland Lane
Murfreesboro, TN 37128 1,116,180(2) 11.6%

Dr. J. K. Twilla, Director
525 Golf Club Lane
Smithville, TN 37166 83,392 *

Dr. Olin O. Williams, Director
2007 Riverview Drive
Murfreesboro, TN 37139 117,645 1.2%

Robert G. Adams, Director & Sr. V.P.
2217 Battleground Drive
Murfreesboro, TN 37129 515,309 5.4%

Ernest G. Burgess, Director
2239 Shannon Drive
Murfreesboro, TN 37129 189,320 2.0%

Richard F. LaRoche, Jr., Sr. V.P. & Secretary
2103 Shannon Drive
Murfreesboro, TN 37130 410,341 4.30%

National Health Corporation
P. O. Box 1398
Murfreesboro, TN 37133 1,271,147(2) 13.2%

The Nicholas Fund, Inc.
and Albert O. Nicholas
700 North Water Street
Milwaukee, WI 53202 1,153,428(3) 12.0%

T. Rowe Price Assoc., Inc. and
T. Rowe Price Small-Cap V. Fund
P. O. Box 17218
Baltimore, MA 21297-7218 1,152,500(4) 12.0%

All Executive Officers and Directors
of NHR 2,432,187 25.4%

(1) Based on 9,588,823 shares outstanding at December 31, 1999.

(2) 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 con-
sequences to the holder, but not the Company. Stock option shares
are also included, even though not exercised.

(3) 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. This ownership is not used for real estate investment
trust purposes.

(4) These securities are owned by various individual and institutional
investors which T. Rowe 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.
This ownership is not used for real estate investment trust purposes.

ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Assumed Liabilities

NHR was transferred the Healthcare Facilities subject to Assumed
Liabilities of approximately $86.4 million at December 31, 1997. NHR
immediately repaid $71.6 million of the Assumed Liabilities with the proceeds
of the NHR Credit Agreement in the amount of $75 million with the Bank of
Tokyo/Mitsubishi as Agent. The balance of the Assumed Liabilities includes
$11.6 million of secured liabilities at fixed rates of 8.4% and 8.3%, which
are amortizing and will be paid in full by the end of the calendar year 2005
and $3.2 million of first mortgage revenue bonds at variable rates (4.7% at
December 31, 1999) 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".

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 1999 was $506,000.

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.

<PAGE>
PART IV
----------
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K

a) (1) Financial Statements:

The Financial Statements are included in Item 8 and are filed as
part of this report.

(2) Financial Statement Schedules

The Financial Statement Schedules and Report of Independent Public
Accountants on Financial Statement Schedules are listed in Exhibit 13.

(3) Exhibits:

Reference is made to the Exhibit Index of this Form 10-K Annual
Report.

b) Reports on Form 8-K: None.

<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Murfreesboro, State of Tennessee, on the 30th day of March, 2000.

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 30, 2000
W. Andrew Adams Principal Executive Officer

/s/ Richard F. LaRoche, Jr. Secretary and Director March 30, 2000
Richard F. LaRoche, Jr. Principal Financial Officer

/s/ J. K. Twilla Director March 30, 2000
J. K. Twilla

/s/ Robert G. Adams Director March 30, 2000
Robert G. Adams

/s/ Olin O. Williams Director March 30, 2000
Olin O. Williams

/s/ Ernest G. Burgess, III Director March 30, 2000
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 1999 financial statements, 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 18, 2000. 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 18, 2000

<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1999

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 Accumulated
Encum- Building & Improve- Carrying Buildings & Depre- Date of Date
Description brances Land Improve. ments Costs Land Improvements Total ciation Constr. Acquired
- ----------- ------- ---- -------- -------- -------- ---- ------------ ----- ------- ------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Health Care Centers (6)
Florida $52,207 $5,775 $40,445 $ --- $ --- $ 5,775 $ 40,445 $ 46,220 4,192 N/A 12/31/97

Health Care Centers (1)
Missouri 4,650 123 3,728 --- --- 123 3,728 3,851 416 N/A 12/31/97

Health Care Centers (7)
South Carolina 21,541 6,145 36,323 --- --- 6,145 36,323 42,468 4,130 N/A 12/31/97

Health Care Centers (2)
Tennessee --- 874 11,474 --- --- 874 11,474 12,348 826 N/A 12/31/97

Assisted Living Facilities(1)
Alabama 390 268 5,468 --- --- 268 5,468 5,736 635 N/A 12/31/97

Assisted Living Facilities(3)
Florida 3,761 3,414 19,244 --- --- 3,414 19,244 22,658 2,030 N/A 12/31/97

Assisted Living Facilities(2)
Tennessee 410 886 13,434 --- --- 886 13,434 14,320 955 N/A 12/31/97

Retirement Centers (1)
Tennessee --- 2,046 14,930 --- --- 2,046 14,930 16,976 450 N/A 12/31/97
------ ------ ------- ----- ----- ------ ------- ------- -----
$82,959 $19,531 $145,046 $ --- $ --- $19,531 $145,046 $164,577 $13,634
====== ====== ======= ===== ===== ====== ======= ======= ======
</TABLE>
(A) See Notes 3 and 4 of Notes to Consolidated Financial Statements.

(B) The aggregate cost for federal income tax purposes is approximately
$169,309,000.

(C) Depreciation is calculated using depreciation lives up to 40 years
for all completed facilities.
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1999
<CAPTION>

12/31/99 12/31/98 12/31/97
(in thousands)
<S> <C> <C> <C>
Investment in Real Estate:
Balance at beginning of period $165,489 $144,615 $ ---
Transfers from National
HealthCare Corporation --- --- 144,615
Additions through cash expenditures --- 20,874 ---
Cost of real estate sold (912) --- ---
Balance at end of year $164,577 $165,489 $144,615

Accumulated Depreciation:
Balance at beginning of period $ 6,579 $ --- $ ---
Addition charged to costs and expenses 7,055 6,579 ---
Balance at end of year $ 13,634 $ 6,579 $ ---
</TABLE>

<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
FOR THE YEAR ENDED DECEMBER 31, 1999
<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
Largo, Pinellas,
Sun City and Tampa October, 2004-
Florida (A)(B) 10.25% March, 2006 $ 388 None $ 36,982 $ 35,239 None

Lake City and Pensacola,
Florida (D) 10.25% Nov., 2004 111 None 10,729 10,412 None

Brownsburg, Ladoga, and
Plainfield, Indiana(E) 10.68% On demand 87 None 7,448 7,448 $7,448

Sarasota, Florida(F) Prime rate Sept., 2016 51 None 6,137 6,118 None
plus 2%

Ocoee, Florida(G) 8.5% Sept., 2014 43 None 5,438 5,026 None
plus 2%

First Mortgage Revenue Bonds:
Castleton Bonds 10% May, 2013 19 None 1,819 1,684 None
Second Mortgages:
Gainesville, Ocala, Orlando,
N. Miami Beach,
Port St. Lucie, Vero Beach,
W. Palm Beach and Winter Haven,
Florida(A)(C) 10.25% Oct., 2004- 272 None 26,864 25,928 None
Sept., 2006
Brownsburg, Indianapolis,
Ladoga and Plainfield,
Indiana(H) 12% On demand 35 None 2,618 2,481 2,481
$94,336
</TABLE>
(A) Approximately $61,167,000 mortgage and other notes receivable are due from
a single debtor that operates 14 licensed nursing centers in Florida.
(B) Balloon payments of approximately $29,234,000 due at maturity.
(C) Balloon payments of approximately $22,034,000 due at maturity.
(D) Balloon payment of approximately $8,430,000 due at maturity.
(E) Balloon payment of approximately $7,448,000 due at maturity.
(F) Balloon payment of approximately $5,570,000 due at maturity.
(G) Balloon payment of approximately $3,334,000 due at maturity.
(H) Balloon payment of approximately $2,481,000 due at maturity.

(1) See Note 5 of Notes to Consolidated Financial Statements.
(2) For tax purposes, the cost of investments is the carrying amount.
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1999

12/31/99 12/31/98 12/31/97
(in thousands)
<S> <C> <C> <C>
Reconciliation of mortgage loans:
Balance at beginning of period $93,099 $94,439 $ ---
Additions:
New mortgage loans 7,434 --- ---
Transfers from National
HealthCare Corporation --- --- 94,439

Deductions during period:
Collection of principal 6,197 1,340 ---

Balance at end of period $94,336 $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 and No. 333-82737.

ARTHUR ANDERSEN LLP

Nashville, Tennessee
March 27, 2000

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,576,000
<SECURITIES> 0
<RECEIVABLES> 95,137,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 164,577,000
<DEPRECIATION> (13,634,000)
<TOTAL-ASSETS> 249,094,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 96,000
<OTHER-SE> 127,051,000
<TOTAL-LIABILITY-AND-EQUITY> 249,094,000
<SALES> 0
<TOTAL-REVENUES> 25,004,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,083,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,934,000
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,780,000
<EPS-BASIC> .92
<EPS-DILUTED> .91

</TABLE>