FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 of 15(d)
of the Securities Exchange Act of 1934
For quarter ended March 31, 1999 Commission file number 33-41863
NATIONAL HEALTH INVESTORS, INC.
(Exact name of registrant as specified in its Charter)
Maryland 62-1470956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
100 Vine Street
Murfreesboro, TN 37130
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (615) 890-9100
Indicate by check mark whether the registrant
(1) Has filed all reports required to be filed by Section 13
or 15(d), of the Securities Exchange Act of 1934 during
the preceding 12 months.
Yes x No
(2) Has been subject to such filing requirements for the past 90 days.
Yes x No
24,364,888 shares of common stock were outstanding as of April 30, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<CAPTION>
March 31 Dec. 31
1999 1998
---------- ----------
<S> <C> <C>
ASSETS (unaudited)
Real estate properties:
Land $ 27,525 $ 22,649
Buildings and improvements 272,317 267,962
Construction in progress 808 798
300,650 291,409
Less accumulated depreciation (48,370) (45,871)
Real estate properties, net 252,280 245,538
Mortgage and other notes receivable, net 405,113 394,174
Investment in preferred stock 38,132 38,132
Investment in real estate mortgage
investment conduits 37,034 36,861
Cash and cash equivalents 3,318 20,407
Marketable securities 41,307 26,797
Interest and rent receivable 6,693 4,542
Deferred costs and other assets 2,950 2,747
Total Assets $786,827 $769,198
LIABILITIES AND DEFERRED INCOME
Long-term debt $164,805 $151,559
Credit facilities 70,250 58,500
Convertible subordinated debentures 100,086 100,096
Accounts payable and other accrued expenses 2,441 1,696
Accrued interest 4,135 6,463
Dividends payable 18,030 18,030
Deferred income 7,993 8,194
Total Liabilities and Deferred Income 367,740 344,538
Commitments, contingencies and guarantees
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock,
$.01 par value; 10,000,000 shares
authorized; 768,694 and 768,894
shares, respectively, issued and
outstanding; stated at liquidation
preference of $25 per share 19,217 19,222
Common stock, $.01 par value:
40,000,000 shares authorized;
24,364,888 and 24,364,391 shares,
respectively, issued and outstanding 244 244
Capital in excess of par value of common stock 425,463 425,449
Cumulative net income 356,790 340,547
Cumulative dividends (375,964) (357,518)
Unrealized gains (losses) on securities (6,663) (3,284)
Total Stockholders' Equity 419,087 424,660
Total Liabilities and Stockholders' Equity $786,827 $769,198
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these financial statements.
The interim condensed balance sheet at December 31, 1998 is taken from the
audited financial statements at that date.
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended
March 31
1999 1998
(in thousands,
except share amounts)
<S> <C> <C>
REVENUES:
Mortgage interest income $ 12,388 $ 14,230
Rental income 11,152 10,453
Facility operating revenue 4,123 ---
Investment interest and other income 2,293 1,397
29,956 26,080
EXPENSES:
Interest 6,128 4,870
Depreciation of real estate 2,502 2,182
Amortization of loan and organization costs 167 186
Facility operating expense 4,055 ---
General and administrative 861 996
13,713 8,234
NET INCOME 16,243 17,846
DIVIDENDS TO PREFERRED STOCKHOLDERS 408 431
NET INCOME APPLICABLE TO COMMON STOCK $ 15,835 $ 17,415
NET INCOME PER COMMON SHARE:
Basic $ .65 $ .70
Diluted $ .65 $ .69
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 24,364,703 24,925,574
Diluted 27,932,648 29,006,468
Common dividends per share
declared $ .74 $ .74
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these financial statements.
3
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Three Months Ended
March 31
1999 1998
-------- -------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,243 $ 17,846
Depreciation of real estate 2,502 2,182
Provision for loan losses 58 300
Amortization of loan and organization costs 167 186
Interest on debenture conversion --- 299
Deferred income 117 114
Amortization of deferred income (319) (310)
Increase in interest & rent receivable (2,151) (233)
Increase in other assets (370) (192)
Decrease in accounts payable
and accrued liabilities (1,582) (1,717)
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,665 18,475
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in mortgage notes receivable (7,197) (10,989)
Collection of mortgage notes receivable 9,718 1,185
Prepayment of mortgage notes receivable --- 38,588
Acquisition of property and equipment, net (9,244) (3,026)
Increase in marketable securities (17,889) ---
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (24,612) 25,758
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facilities 11,750 ---
Proceeds from long-term debt --- 229
Principal payments on long-term debt (445) (410)
Dividends paid to shareholders (18,447) (18,747)
Sale of stock and exercise of options --- 545
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (7,142) (18,383)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (17,089) 25,850
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,407 64,915
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,318 $ 90,765
</TABLE>
4
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Three Months Ended
March 31
1999 1998
(in thousands)
<S> <C> <C>
Supplemental Information:
Cash payments for interest expense $ 7,832 $ 7,392
During the three months ended March 31, 1999
and March 31, 1998, $10,000 and $17,146,000
respectively, of Senior Subordinated Convertible
Debentures were converted into 316 shares
and 553,978 shares, respectively, of NHI's
common stock:
Senior subordinated convertible debentures $ (10) $(17,146)
Financing costs $ --- $ 220
Accrued interest $ (1) $ (300)
Common stock $ --- $ 6
Capital in excess of par $ 9 $ 17,220
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these financial statements.
5
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(dollars in thousands)
<CAPTION>
Cumulative Convertible Capital in Unrealized Total
Preferred Stock Common Stock Excess of Cumulative Cumulative Gains(Losses) Stock
Shares Amount Shares Amount Par Value Net Income Dividends on Securities Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT 12/31/98 768,894 $ 19,222 24,364,391 $ 244 $425,449 $340,547 $(357,518) $ (3,284) $424,660
Net income --- --- --- --- --- 16,243 --- --- 16,243
Unrealized gains (losses)
on securities --- --- --- --- --- --- --- (3,379) (3,379)
Total Comprehensive
Income 12,864
Shares sold --- --- --- --- --- --- --- --- ---
Common shares repurchased --- --- --- --- --- --- --- --- ---
Shares issued in con-
version of converti-
ble debentures to
common stock --- --- 316 --- 9 --- --- --- 9
Shares issued in con-
version of preferred
stock to common stock (200) (5) 181 --- 5 --- --- --- ---
Dividends to common
shareholders (.74
per share) --- --- --- --- --- --- (18,038) --- (18,038)
Dividends to preferred
shareholders ($.53125
per share) --- --- --- --- --- --- (408) --- (408)
BALANCE AT 3/31/99 768,694 $ 19,217 24,364,888 $ 244 $425,463 $356,790 $(375,964) $ (6,663) $419,087
BALANCE AT 12/31/97 833,664 $ 20,842 24,753,570 $ 248 $434,135 $270,902 $(282,047) $ --- $444,080
Net income --- --- --- --- --- 17,846 --- --- 17,846
Shares sold --- --- 18,680 --- 545 --- --- --- 545
Shares issued in con-
version of convertible
debentures to common
stock --- --- 553,979 6 17,220 --- --- --- 17,226
Shares issued in con-
version of preferred
stock to common stock (21,650) (541) 19,584 --- 541 --- --- --- ---
Dividends to common
shareholders ($.74
per share) --- --- --- --- --- --- (18,749) --- (18,749)
Dividends to preferred
shareholders ($.5313
per share) --- --- --- --- --- --- (432) --- (432)
BALANCE AT 3/31/98 812,014 $ 20,301 25,345,813 $ 254 $452,441 $288,748 $(301,228) $ --- $460,516
</TABLE>
6
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
Note 1. SIGNIFICANT ACCOUNTING POLICIES:
The unaudited financial statements furnished herein in the opinion of
management include all adjustments which are necessary to fairly present the
financial position, results of operations and cash flows of National Health
Investors, Inc. ("NHI" or the "Company"). NHI assumes that users of the
interim financial statements herein have read or have access to the audited
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in NHI's Form 10-K for the year
ended December 31, 1998 and that the adequacy of additional disclosure needed
for a fair presentation, except in regard to material contingencies, may be
determined in that context. Accordingly, footnotes and other disclosures
which would substantially duplicate the disclosure contained in the Company's
most recent annual report to stockholders have been omitted. The interim
financial information contained herein is not necessarily indicative of the
results that may be expected for a full year because of various reasons
including changes in interest rates, rents and the timing of debt and equity
financings.
Note 2. NET INCOME PER COMMON SHARE:
Basic earnings per share is based on the weighted average number of
common and common equivalent shares outstanding. Net income is reduced by
dividends to holders of cumulative convertible preferred stock.
Diluted earnings per common share assumes the conversion of convertible
subordinated debentures, the conversion of cumulative convertible preferred
stock and the exercise of all stock options using the treasury stock method.
Net income is increased for interest expense on the convertible subordinated
debentures.
The following table summarizes the earnings and the average number of
common shares and common equivalent shares used in the calculation of basic
and diluted earnings per share.
7
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
----------- -----------
<S> <C> <C>
BASIC:
Weighted avg. common
shares 24,364,703 24,925,574
Net income $16,243,000 $17,846,000
Dividends paid to pre-
ferred shareholders (408,000) (431,000)
Net income available to
common stockholders $15,835,000 $17,415,000
Net income per common
share $ .65 $ .70
DILUTED:
Weighted average common
shares 24,364,703 24,925,574
Stock options 2 37,718
Convertible subordinated
debentures 2,872,244 3,295,240
Cumulative convertible
preferred stock 695,699 747,936
Average common shares
outstanding 27,932,648 29,006,468
Net income $16,243,000 $17,846,000
Interest expense on
convertible sub-
ordinated debentures 1,828,000 2,081,000
Net income assuming con-
version of subordinated
convertible debentures
to common stock $18,071,000 $19,927,000
Net income per common
share $ .65 $ .69
</TABLE>
8
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
Note 3. INVESTMENTS IN MARKETABLE SECURITIES:
NHI's investments in marketable securities include available for sale
securities and held to maturity securities. Unrealized gains and losses on
available for sale securities are recorded in stockholders' equity in
accordance with SFAS 115. Realized gains and losses from securities sales
are determined on the specific identification of the securities.
Note 4. COMMITMENTS AND GUARANTEES:
At March 31, 1999, NHI was committed, subject to due diligence and
financial performance goals, to fund approximately $62,400,000 in health care
real estate projects of which approximately $16,900,000 is eligible to be
funded within the next 12 months. The commitments include mortgage loans or
purchase leaseback agreements for six long-term care centers, two medical
office buildings, and seven assisted living facilities, all at rates ranging
from 9% to 11.5%. NHI has recorded deferred income for commitment fees
related to these loans where applicable.
In order to obtain the consent of appropriate lenders to National
HealthCare Corporation's ("NHC"'s) transfer of assets to NHI, NHI guaranteed
certain debt ($17,679,000 at March 31, 1999) of NHC. The debt is at fixed and
variable interest rates with a weighted average interest rate of 8.3% at March
31, 1999. NHI receives from NHC compensation of approximately $88,000 per
annum for the guarantees which is credited against NHC's base rent
requirements.
In management's opinion, these guarantee fees approximate the guarantee
fees that NHI would currently charge to enter into similar guarantees.
All of the guaranteed indebtedness discussed above is secured by first
mortgages and rights which may be enforced if either party is required to pay
under their respective guarantees. NHC has agreed to indemnify and hold
harmless NHI against any and all loss, liability or harm incurred by NHI as a
result of having to perform under its guarantee of any or all of the
guaranteed debt.
Additionally, NHI has also guaranteed bank loans in the amount of
$1,449,570 to key employees and directors which amount was utilized for the
exercise of NHI stock options. Shares of NHI stock are held as security by
NHI and the loans are limited to $100,000 per individual per year.
Note 5. CONVERTIBLE SUBORDINATED DEBENTURES:
At March 31, 1999, $56,286,000 of 7% convertible subordinated debentures
(the "1997 debentures") remain outstanding. The 1997 debentures are
convertible at the option of the holder into common stock at a conversion
price of $37.50, subject to adjustment. During the three months ended March
31, 1999, none of the 1997 debentures were converted into common stock. NHI
has reserved 1,500,960 shares of common stock for conversions of 1997
debentures. 9
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
At March 31, 1999, $38,060,000 of 7.75% convertible subordinated
debentures (the "1995 debentures") remain outstanding. The 1995 debentures
are convertible at the option of the holder into the common stock of NHI at a
conversion price of $31.625, subject to adjustment. During the three months
ended March 31, 1999, $10,000 of the 1995 debentures have been converted into
316 shares of common stock. NHI has reserved 1,203,478 shares of common stock
for conversions of 1995 debentures.
At March 31, 1999, $5,535,000 of debentures remain outstanding related
to "1995 debt service debentures" issued to mortgagees or lessees to satisfy
debt service escrow requirements. The debentures are convertible at the
option of the holder into common stock of the Company at a conversion price of
110% of the market price on the date of issuance of the debentures, subject to
adjustment. During the three months ended March 31, 1999, none of the
debentures were converted into common stock. NHI has reserved 157,419 shares
of common stock for conversion of 1995 debt service debentures.
At March 31, 1999, $205,000 of the 10% senior convertible subordinated
debentures (the "senior debentures") remain outstanding. The senior
debentures are convertible into the common stock of the Company at $20 per
share. During the three months ended March 31, 1999, none of the senior
debentures were converted. The Company has reserved 10,250 shares of common
stock for conversion of the senior debentures.
Note 6. CUMULATIVE CONVERTIBLE PREFERRED STOCK:
In February and March, 1994, NHI issued $109,558,000 of 8.5% Cumulative
Convertible Preferred Stock ("Preferred Stock") with a liquidation preference
of $25 per share. Dividends at an annual rate of $2.125 are cumulative from
the date of issuance and are paid quarterly. At March 31, 1999, $19,217,350
of the preferred stock remains outstanding.
The Preferred Stock is convertible into NHI common stock at the option
of the holder at any time at a conversion price of $27.625 per share of common
stock, which is equivalent to a conversion rate of 0.905 per share of common
stock for each share of Preferred Stock, subject to adjustment in certain
circumstances.
The Preferred Stock is redeemable by NHI for common stock only if the
trading price of the Common Stock on the New York Stock Exchange (NYSE)
exceeds $27.625 per share for 20 trading days within a period of 30 trading
days prior to the exercise. NHI has reserved 695,651 shares of common stock
for Preferred Stock conversions.
The Preferred Stock is listed on the NYSE under the symbol "NHIPr."
10
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
Note 7. NEW ACCOUNTING PRONOUNCEMENT:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS 133 is effective for fiscal quarters
beginning after June 15, 1999. The impact of the adoption of SFAS 133 is not
expected to have a material impact on NHI's results of operations or financial
position.
Note 8. Foreclosure on Mortgages Receivable
In 1993, NHI funded a mortgage loan for Stockbridge Investment Partners,
Inc. and its subsidiary York Hannover Nursing Centers, Inc. in the original
principal amount of $29,500,000. Collateral for the loan includes first
mortgages on six long-term healthcare centers located in the state of Florida,
the personal guarantee of certain of the owners, certain accounts receivable
balances above another creditor's $2,000,000 loan, and the corporate guarantee
of NHC for up to $5,000,000 of principal and interest.
On March 22, 1999 and April 1, 1999, NHI declared the borrowers in
default under the terms of the loan agreements. The events of default
included the violation of the financial covenants contained in the loan
agreement and the failure to make timely payments of principal and interest.
After expiration of the applicable grace period, NHI filed a foreclosure
action against the borrowers, and also joined with two other creditors to
place the borrowers in involuntary bankruptcy.
The balance due on the loan after the application of certain debt
service reserves is approximately $26,700,000. NHI is currently evaluating
the healthcare center portion of the collateral given the recent changes in
reimbursement by Medicare and other circumstances affecting the centers.
However, NHI does believe that all of the combined collateral (including the
personal and corporate guarantees) will be sufficient to recover its loan
balance.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Overview
National Health Investors, Inc. ("NHI" or the "Company") is a real
estate investment trust which invests primarily in income producing health
care properties with emphasis on the long-term care sector. As of March 31,
1999, NHI had interests in net real estate owned, and investments in
mortgages, REMICs, preferred stock and marketable securities resulting in
total invested assets of
11
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
March 31, 1999
(Unaudited)
$773.9 million. NHI's strategy is to invest in health care real estate which
generates current income which will be distributed to stockholders. NHI
intends to implement this strategy by making mortgage loans and acquiring
properties to lease nationwide primarily in the long-term health care
industry.
As of March 31, 1999, the Company was diversified with investments in
204 health care facilities located in 26 states consisting of 150 long-term
care facilities, two acute care hospitals, eight medical office buildings, 21
assisted living facilities, six retirement centers and 17 residential projects
for the developmentally disabled. These investments consisted of
approximately $436.9 million aggregate principal amount of loans to 33
borrowers, $252.2 million of
purchase leaseback transactions with seven lessees and $37.0 million invested
in REMIC pass through certificates backed by first mortgage loans to 16
operators. Of these 204 facilities, 43 are leased to National HealthCare
Corporation ("NHC") and nine additional facilities are managed by NHC. NHC is
the Company's investment advisor. Consistent with its strategy of
diversification, the Company has reduced the portion of its portfolio operated
or managed by NHC from 100.0% of total invested assets on October 17, 1991 to
20.2% of total invested assets on March 31, 1999.
At March 31, 1999, 59.4% of the total invested assets of the health care
facilities were operated by public operators, 24.8% by regional operators, and
15.8% by small operators.
Liquidity and Capital Resources
Sources and Uses of Funds
NHI has generated net cash from operating activities during the first
three months of 1999 totaling $14.7 million compared to $18.5 million in the
prior period. Net cash from operating activities generally includes net
income plus non-cash expenses, such as depreciation and amortization and
provision for loan losses, and working capital changes.
Cash flows from investing activities during the first three months of
1999 included collection on mortgage notes receivable of $9.7 million compared
to $1.2 million for the prior period, along with prepayment of $38.6 million
of mortgage notes receivable in the prior period.
Cash flows used in investing activities during the first three months of
1999 included investment in mortgage notes receivable of $7.2 million, real
estate properties of $9.2 million, and marketable securities of $17.9 million.
Cash flows used in investing activities of the prior period included
investment in mortgage notes receivable of $11.0 million and real estate
properties of $3.0 million.
Cash flows from financing activities for the first three months of 1999
included $11.8 million from credit facility proceeds, compared to proceeds
from long term debt for the prior period of $.2 million.
12
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
March 31, 1999
(Unaudited)
Cash flows used in financing activities for the first three months of
1999 included principal payments on long-term debt of $.4 million and
dividends paid to shareholders of $18.4 million. This compares to principal
payments on long term debt of $.4 million and dividends paid to shareholders
of $18.7 million in the prior period.
NHI expects to maintain the current quarterly dividend of 74 cents per
common share in 1999, assuming continued success in the Company's investment
program.
The amount available to be drawn on NHI's $100 million revolving line of
credit was $29.8 million at March 31, 1999. NHI's nonconvertible debt as a
percentage of total capitalization is 30.0% at March 31, 1999. The Company
continues to be well positioned to take advantage of new investment
opportunities.
Commitments
At March 31, 1999, the Company was committed, subject to due diligence
and financial performance goals, to fund approximately $62.4 million in health
care real estate projects, of which approximately $16.9 million is expected to
be funded within the next 12 months. The commitments include mortgage loans
or purchase leaseback agreements for five long-term health care centers, two
medical office buildings, and seven assisted living facilities all at rates
ranging from 9% to 11.5%.
Financing for current commitments and future commitments to others may
be provided by cash balances, by borrowings under the Company's bank credit
facilities, new lines of credit, private placements or public offerings of
debt or equity, the assumption of secured or unsecured indebtedness, or by the
sale of all or a portion of certain currently held investments.
The Company believes it has sufficient liquidity and financing
capability to finance future investments as well as to repay borrowings at or
prior to their maturity.
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
Net income for the three months ended March 31, 1999 is $16.2 million
versus $17.8 million for the same period in 1998, a decrease of 9.0%. Diluted
earnings per common share decreased 4 cents or 5.8%, to $.65 in the 1999
period from $.69 in the 1998 period.
13
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
March 31, 1999
(Unaudited)
Total revenues for the three months ended March 31, 1999 increased $3.9
million to $30.0 million from $26.1 million for the three months ended March
31, 1998. Revenues from mortgage interest income decreased $1.8 million, or
12.7%, when compared to the same period in 1998. Revenues from rental income
increased $.7 million, or 6.7% in 1999 as compared to the same period in 1998.
Facility operating revenue was $4.1 million in 1999 compared to $0.0 million
in 1998. Revenues from investment interest, dividends and other income
increased $1.0 million or 71.4% compared to the 1998 period.
The decrease in mortgage interest income is due to the receipt by NHI of
prepayments of $93.9 million of first mortgages receivable during the year
1998, compared to new mortgage investments of $67.6 million during the same
period. Mortgage interest income included no prepayment penalties and
unamortized commitment fees applicable to early loan repayments in the three
months ended March 31, 1999 as compared to $1.9 million in the 1998 period.
Loan loss provisions were $.1 million for the three months ended March 31,
1999 based on the application of the Company's policy for determining loan
loss provisions.
The increase in rental income resulted primarily from the increase in
investments in real estate properties of $60.6 million during the last 12
months. The increase in investment interest and other income is due to the
investment of $38.1 million in the preferred stock of LTC Properties, Inc. and
$48.0 million in securities during the last 12 months. The increase in
facility operating revenue is due to the purchase, in lieu of foreclosure, of
four long-term health care centers previously owned by All Seasons Living
Centers on October 16, 1998.
Total expenses for the 1999 three month period increased $5.5 million or
66.5% to $13.7 million from $8.2 million for the 1998 three month period.
Interest expense increased $1.3 million or 25.8% in the 1999 three month
period as compared to the 1998 period. Depreciation of real estate increased
$.3 million or 14.7%. Facility operating expense increased $4.1 million in
1999 compared to $0.0 million in 1998. General and administrative costs
decreased 13.6%.
Interest expense increased due to increased credit facilities and long-term
debt compared to a year ago. Depreciation increased as a result of the
Company placing newly constructed assets in service and property acquisitions.
Facility operating expense increased due to the purchase, in lieu of
foreclosure, of four long-term health care centers previously owned by All
Seasons Living Centers on October 16, 1998.
The 1998 repurchase of 1,122,000 shares of common stock for $31.3
million resulted in a reduction of weighted average basic and diluted common
shares outstanding in the three months ended March 31, 1999 of 1,122,000.
Notwithstanding alternative uses of the cash used to repurchase the common
stock, the repurchase resulted in an increase in the 1999 period net income
per share of 3 cents basic and diluted.
14
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
March 31, 1999
(Unaudited)
Future Growth
The Company expects to make new investments in health care facilities
that would increase interest and rental revenues as well as interest and
depreciation expense. Increases in revenues are expected to more than offset
increases in associated expenses.
Impact of Inflation
Inflation may affect the Company in the future by changing the
underlying value of the Company's real estate or by impacting the Company's
cost of financing its operations.
Revenues of the Company are primarily from long-term investments.
Certain of the Company's leases require increases in rental income based upon
increases in the revenues of the tenants. The Company has negotiated similar
provisions in many of its mortgage notes receivable.
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the
balance sheet as either as asset or liability measured at its fair value.
SFAS 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Statement 133 is effective for fiscal quarters beginning after June 15, 1999.
The impact of the adoption of SFAS 133 is not expected to have a material
impact on NHI's results of operations or financial position.
Year 2000 Compliance and Related Risks
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 NHI to assess and
address its Year 2000 issues.
15
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
March 31, 1999
(Unaudited)
State of Readiness--
NHI has developed a plan to address its Year 2000 issues, and is
utilizing its internal resources to assess, remediate and test its systems.
As a result of its advisory agreement with NHC, NHI is reliant upon NHC for
much of its information technology systems and embedded technology. NHC is
currently performing an evaluation of its information technology and embedded
technology that are utilized in the operations of NHI. The Year 2000
readiness plan developed by NHI and NHC includes an inventory and review of
all core application systems, networks, desktop systems, infrastructure and
critical supply chains. NHI'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 each of the above categories, NHI, through its advisor (NHC), will
perform or has performed the phases of assessment, remediation and testing of
the applicable hardware, software or equipment, as applicable. The assessment
phase has been completed for category 1. The remediation phase is underway
and modifications of non-compliant application programs have begun. NHI has
historically developed the majority of its application programs internally.
All internally developed systems have been assessed and inventoried and plans
have been made to modify or replace them, if necessary, in order to make them
Year 2000 compliant. Purchased applications are either being modified,
replaced or upgraded. Most critical applications, whether internally
developed or purchased externally, have been tested and are already Year 2000
compliant. All server hardware, dumb terminals and printers have also been
assessed, repaired as necessary and tested and are now Year 2000 compliant.
It is expected that the remediation and testing phases related to category 1
will be completed by October 1, 1999.
NHI is currently in the assessment phase for categories 2, 3 and 4. For
personal computer software vendors, NHI is aware of the packages that will not
be Year 2000 compliant and is currently in the process of assessing the types
of packages utilized by each personal computer. This assessment is expected
to be completed by October 1, 1999 with remediation and testing to be
completed by December 31, 1999. NHI has also requested all mortgages, 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. For those vendors and third parties that have not yet
responded, NHI is in the process of sending out additional requests. Although
most third party vendors have indicated that they area currently Year 2000
compliant or expect to be compliant prior to January 1, 2000, there can be no
assurance that such third parties will achieve Year 2000 compliance by January
1, 2000.
16
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
March 31, 1999
(Unaudited)
NHI's largest lessee, NHC, is currently in the process of evaluating its
Year 2000 issues. NHC has developed a detailed plan to assess, remediate and
test its Year 2000 compliance prior to January 2, 1000. NHC has formed an
internal task force and is utilizing its internal resources to assess,
remediate and test its systems. NHC's Year 2000 readiness plan is focused on
addressing Year 2000 readiness in the following five categories: (1) mainframe
computer operations, critical application 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 healthcare centers
such as financial institutions, electrical providers, and food services
suppliers. NHC has completed the assessment phase related to its mainframe
computer operations and related networks. Although the majority of NHC's
information technology applications are already Year 2000 compliant, NHC is
currently modifying or replacing applications and hardware as necessary. NHC
is expected to complete the remediation and testing of any non-compliant
applications and hardware by October 1, 1999. NHC is currently in the
assessment phase of its plan for personal computer applications and hardware,
internal equipment utilizing embedded technology, third party payors and other
third party vendors. NHC is expected to complete the assessment phase for its
personal computer applications and hardware and for its internal equipment by
October 1, 1999 and to complete remediation and testing by December 31, 1999.
It is expected that the assessments of third party payors and third party
vendors will be an ongoing process that will continue through December 31,
1999.
The majority of NHI's mortgagees and lessees participate in the Medicare
and Medicaid programs. The lessees and mortgagees are reimbursed under these
programs through fiscal intermediaries. The Health Care Financing
Administration ("HCFA"), the government agency that administers the Medicare
program, had previously publicly stated that it would be Year 2000 compliant
by December 31, 1998. HCFA announced that it required all fiscal
intermediaries to be Year 2000 compliant by December 31, 1998 and that it
expected state Medicaid agencies to be Year 2000 compliant by March 31, 1999.
While HCFA has made no public announcement as to whether the fiscal
intermediaries and state Medicaid agencies have met this schedule, recent
reports by the General Accounting Office report that the various states may
not currently be in compliance. With respect to itself, HCFA recently issued
a Provider Correspondence Letter dated January 12, 1999 indicating that they
have not met their schedule. This letter states that HCFA's systems will
function on January 1, 2000 and will be able to process "acceptable" claims.
The mortgages and lessees have little or no control over the Year 2000
compliance of governmental payors and fiscal intermediaries and it is expected
that NHI's assessment of the third party payors will be an ongoing process
throughout 1999. NHI will continue to request and seek information through
all sources available related to the Year 2000 readiness of the mortgages,
lessees, governmental payors and fiscal intermediaries.
17
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
March 31, 1999
(Unaudited)
Year 2000 Costs--
As a result of its advisory agreement with NHC, costs related to NHI'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
NHI related to the assessment, remediation or testing of NHI's Year 2000
compliance.
Year 2000 Risks--
The failure of NHI or third parties to be fully Year 2000 compliant for
essential systems and equipment by January 1, 2000 could result in
interruptions of normal business operations. Based on all available
information as of March 31, 1999, management's estimate of NHI'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 NHI depends, such as
telecommunications and electrical power. Each of these events could have a
material adverse impact on NHI's business, results of operations and financial
condition.
Contingency Plans--
Contingency plans for NHI's Year 2000 issues continue to be developed
and include, but are not limited to, the identification of alternate
suppliers, alternate technologies and alternate manual systems and processes.
NHI's contingency plans are expected to be completed by October 1, 1999.
NHI's Year 2000 efforts are ongoing and its overall plan and cost
estimations will continue to evolve as new information becomes available. The
costs of NHI's Year 2000 compliance plan and the date on which NHI expects to
complete it are based on current estimates, which reflect numerous assumptions
about future events, including the continued availability of certain
resources, the timing and effectiveness of third party remediation plans and
other factors. NHI can given no assurance that these estimates will be
achieved, and actual results could differ materially from NHI's plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct relevant computer source codes and embedded
technology, the results of internal assessments, remediation and testing and
the timeliness and effectiveness of remediation efforts of third parties. In
addition, NHI's analysis of its Year 2000 issues is based in part on
information from third parties. There can be no assurance that such
information is accurate or complete.
18
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
March 31, 1999
(Unaudited)
Item 3. Quantitative and Qualitative Information About Market Risk
INTEREST RATE RISK
The Company's cash and cash equivalents consist of highly liquid
investments with a maturity of less than three months. All of the Company's
mortgage and other notes receivable bear interest at fixed interest rates.
The Company's investments in preferred stock and corporate bonds also bear
interest at fixed rates. The underlying mortgages included in the Company's
investments in real estate mortgage investment conduits (REMIC's) also bear
interest at fixed rates. As a result of the short-term nature of the
Company's cash instruments and because the interest rates on the Company's
investments in notes receivable, preferred stock, corporate bonds and REMIC's
are fixed, a hypothetical 10% change in interest rates would have no impact on
the Company's future earnings and cash flows related to these instruments. A
hypothetical 10% change in interest rates would also have an immaterial impact
on the fair values of these instruments.
As of March 31,1999, $128,177,000 of the Company's long-term debt bears
interest at fixed interest rates. All of the Company's convertible
subordinated debentures bear interest at fixed rates. Because the interest
rates on these instruments are fixed, a hypothetical 10% change in interest
rates would have no impact on the Company's future earnings and cash flows
related to these instruments. A hypothetical 10% change in interest rates
would also have an immaterial impact on the fair values of these instruments.
The remaining $36,628,000 of the Company's long-term debt and $70,250,000 line
of credit bear interest at variable rates. However, in order to mitigate the
impact of fluctuations in interest rates on its variable rate debt, the
Company has entered into interest rate swap agreements whereby the Company has
exchanged certain variable interest rates on a $50,000,000 notional principal
amount for a fixed rate of interest. Therefore, after including the
mitigating impact of the interest rate swaps, a hypothetical 10% change in
interest rates would have an immaterial impact on the Company's future
earnings and cash flows related to these instruments. A hypothetical 10%
change in interest rates would also have an immaterial impact on the fair
values of these instruments.
The Company's use of derivative instruments is limited to the interest
rate swaps discussed above. The Company does use derivative instruments for
trading purposes and the use of such instruments is subject to strict
approvals by the Company's senior officers. The Company's exposure related to
such derivative instruments is not material to the Company's financial
position, results of operations or cash flows.
19
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
March 31, 1999
(Unaudited)
EQUITY PRICE RISK
The Company's investments in marketable securities include available for
sale securities and held to maturity securities. Unrealized gains and losses
on available for sale securities are recorded in stockholders' equity in
accordance with Statement of Financial Accounting Standards No. 115. The
investments in marketable securities classified as available for sale are
recorded at their fair market value based on quoted market prices. Thus,
there is exposure to equity price risk, which is the potential change in fair
value due to a change in quoted market prices. Hypothetically, a 10% change
in quoted market prices would result in a related 10% change in the fair value
of the Company's investments in marketable securities classified as available
for sale.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. Not applicable
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders.
(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 Jack Tyrrell 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 T. Webb, Mr. Ted H. Welch and Mr. Richard F. LaRoche, Jr.
Voting For Withholding Percent For
Authority
Jack Tyrrell 22,873,832 123,087 93.9%
W. Andrew Adams 22,868,970 127,938 93.9%
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
22,865,199 73,449 58,260 93.85%
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) List of exhibits - none required
(b) Reports on Form 8-K - none required
20
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
March 31, 1999
(Unaudited)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL HEALTH INVESTORS, INC.
(Registrant)
Date May 13, 1999 /s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date May 13, 1999 /s/ Donald K. Daniel
Donald K. Daniel
Principal Accounting Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,318,000
<SECURITIES> 41,307,000
<RECEIVABLES> 448,840,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 300,650,000
<DEPRECIATION> (48,370,000)
<TOTAL-ASSETS> 786,827,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
19,217,000
<COMMON> 244,000
<OTHER-SE> 399,626,000
<TOTAL-LIABILITY-AND-EQUITY> 786,827,000
<SALES> 0
<TOTAL-REVENUES> 25,901,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 861,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,128,000
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,243,000
<EPS-PRIMARY> .65
<EPS-DILUTED> .65
</TABLE>
