_____________________________________________________________________________
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
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
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 (I.R.S. Employer
of incorporation or organization) Identification Number)
100 Vine Street, Suite 1202, Murfreesboro, Tennessee 37130
(Address of principal executive offices)
(Zip Code)
(615) 890-9100
(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 New York Stock Exchange
Shares of Preferred Convertible Stock New York Stock Exchange
Senior Subordinated Convertible Debentures
Due 2006 (10%) New York Stock Exchange
Senior Subordinated Convertible Debentures
Due 1998 (7-3/8%) New York Stock Exchange
Convertible Subordinated Debentures Due
2001 (7-3/4%) New York Stock Exchange
Convertible Subordinated Debentures Due
2006 (7%) New York Stock Exchange
$100,000,000 of 7.30% Notes Due 2007 --------
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 $553,650,000 as of February 26, 1999. The number of shares of
Common Stock outstanding as of February 28, 1999 was 24,364,572.
PAGE 1 OF 79 PAGES
Exhibit Index Page 46
<PAGE>
PART I
Item 1. Business
General
The Company is a real estate investment trust ("REIT") which invests in
income producing health care properties primarily in the long-term care
industry. As of December 31, 1998, the Company had interests in net real
estate owned by it, mortgage investments and REMIC investments totaling
approximately $684.4 million, and other investments in preferred stock and
marketable securities of $64.9 million, resulting in total invested assets of
$749.3 million. The Company's strategy is to provide current income for
distribution to stockholders through investments in health care related
facilities, including long-term care facilities, acute care hospitals, medical
office buildings, retirement centers and assisted living facilities, all of
which are collectively referred to herein as "Health Care Facilities". The
Company intends to implement this strategy by acquiring additional properties
and making additional mortgage loans nationwide, predominately in the long-
term care industry. The Company funds these investments through three sources
of capital: current cash flow, including principal prepayments, the sale of
equity in the form of common and preferred stock and debt offerings, including
bank lines of credit, the issuance of convertible debt instruments, and the
issuance of straight debt. NHI is investment grade rated on its senior
unsecured debt from the two major rating agencies, Moody's Investment Service
(Baa3) and Standard & Poor's (BBB).
As of December 31, 1998, the Company had approximately $684.4 million in
real estate and mortgage investments in 203 health care facilities located in
26 states consisting of 151 long-term care facilities, two acute care
hospitals, nine medical office buildings, 18 assisted living facilities, six
retirement centers and 17 residential projects for the developmentally
disabled. These investments consist of approximately $402.0 million aggregate
principal amount of loans to 34 borrowers and $245.5 million of purchase
leaseback agreements with seven lessees and $36.9 million invested in REMIC
pass through certificates. Of these 203 facilities, 43 are leased to NHC and
nine additional facilities are managed by NHC.
At December 31, 1998, NHI was committed, subject to due diligence and
financial performance goals, to fund approximately $136.9 million in health
care real estate projects of which all is expected to be funded within the
next 12 months. The commitments include mortgage loans for six long-term
health care centers, two medical office buildings, and 24 assisted living
centers all at rates ranging from 9.0% to 11.5%. Also included in the $136.9
million of commitments is a commitment to loan an additional $3.3 million on
three loans when the mortgagee obtains certain operating ratios.
The Company commenced operations on October 17, 1991 with approximately
$121.8 million in net assets obtained when it acquired 40 skilled long-term
care facilities and three retirement centers and four first mortgage notes
from National HealthCare Corporation, successor to National HealthCare L.P.
("NHC") in exchange for 7,306,570 shares of the Company's Common Stock.
Concurrently, the Company assumed mortgage indebtedness and certain other
obligations of NHC related to the acquired properties. The 43 properties were
then leased to NHC. NHC is a publicly traded corporation which at December 31,
1998 operated 108 long-term care facilities with a total of 13,983 licensed
beds. Included within seven of these centers are 129 assisted care beds;
within 21 centers are located 650 Alzheimer's beds and finally 487 sub-acute
beds are located in 17 centers. NHC also operates five retirement centers
with a total of 445 units, nine freestanding assisted living facilities with a
total of 645 units and 36 home health care programs. All NHC operations are
in the southeastern United States.
Since the Company commenced operations, NHC has provided advisory
services pursuant to an Advisory, Administrative Services and Facilities
Agreement (the "Advisory Agreement"). In addition, the Company and NHC have
certain other relationships. See "Certain Relationships and Related
Transactions."
Unless the context indicates otherwise, references herein to the Company
include all of the Company's subsidiaries.
Types of Health Care Facilities
Long-term care facilities. As of December 31, 1998, the Company owned
and leased 43 licensed long-term care facilities, 40 of which were operated by
NHC. The Company also owns four additional licensed long-term care facilities
which are managed by Sunrise Healthcare Corporation, a subsidiary of Sun
Healthcare Group, Inc. It also had outstanding first mortgage loans on 104
additional licensed long-term care facilities, nine (9) of which were operated
by NHC. All of these facilities provide some combination of skilled and
intermediate nursing and rehabilitative care, including speech, physical and
occupational therapy. The operators of the long-term care facilities receive
payment from a combination of private pay sources and government programs such
as Medicaid and Medicare. Long-term care facilities are required to obtain
state licenses and are highly regulated at the federal, state and local level.
Most long-term care facilities must obtain certificates of need from the state
before opening or expanding such facilities.
Acute and long term care hospitals. As of December 31, 1998, the
Company owned and leased one acute care hospital and had an outstanding first
mortgage loan on one additional operating long term care hospital. Acute care
hospitals provide a wide range of inpatient and outpatient services and are
subject to extensive federal, state and local legislation and regulation.
Long-term care hospitals provide specialty care services for chronic care
patients, whose average length of stay must exceed twenty-five days. Acute
and long term care hospitals undergo periodic inspections regarding standards
of medical care, equipment and hygiene as a condition of licensure. Services
provided by acute and long term care hospitals are generally paid for by a
combination of private pay sources and governmental programs.
Medical office buildings. As of December 31, 1998, the Company owned
and leased seven medical office buildings. In addition, the Company had first
mortgage loans on two medical office buildings. Medical office buildings are
specifically configured office buildings whose tenants are primarily
physicians and other medical practitioners. Medical office buildings differ
from conventional office buildings due to the special requirements of the
tenants and their patients. Each of the Company's owned medical office
buildings is leased to one lessee, and is physically attached to an acute care
hospital. The lessee then leases individual office space to the physicians or
other medical practitioners. The lessee is responsible to the Company for the
lease obligations of the entire building, regardless of its ability to lease
the individual office space.
Assisted Living Facilities. The Company owns four assisted living
facilities all of which are leased to a subsidiary of Marriott International
and the remaining eight to Alternative Living Services, Inc. The Company also
has first mortgages on six additional assisted living projects. Assisted
living unit facilities are free standing facilities or facilities which are
attached to long term care facilities or retirement facilities and provide
basic room and board functions for the elderly. Some assisted living projects
include licensed long term care (nursing home) beds. On-site staff are
normally available to assist in minor medical needs on an as needed basis.
Additionally, the Company has granted $100,000,000 in a line of credit for
construction and permanent financing to one publicly traded assisted living
company. Currently $31,628,000 has been funded on this line which is invested
in eight assisted living projects now in operation. These lines will expire,
if not used, by the end of fiscal year 1999. Each project must be
individually approved under each line at the time funding is requested.
Certificates of need are normally not necessary to build these projects.
Retirement Centers. The Company owns three retirement centers, all of
which are leased to NHC, and has first mortgages on three others. Retirement
centers offer specially designed residential units for the active and
ambulatory elderly and provide various ancillary services for their residents
including restaurants, activity rooms and social areas. Charges for services
are paid from private sources without assistance from government programs.
Retirement centers may be licensed and regulated in some states, but do not
require the issuance of a certificate of need such as is normally required for
long-term care facilities.
Residences for the developmentally disabled. As of December 31, 1998,
the Company had outstanding first mortgage notes on 17 residences for the
developmentally disabled. Residences for the developmentally disabled are
generally small home-like environments which accommodate six mentally and
developmentally disabled persons. These persons obtain custodial care which
includes food, lodging, education and transportation services. These
community based services are replacing the large state institutions which have
historically provided care to the developmentally disabled. Services to the
developmentally disabled are primarily paid for by state Medicaid programs.
Nature of Investments
The Company's investments are typically structured as either purchase
leaseback transactions or mortgage loans. The Company also provides
construction loans for facilities for which it has already committed to
provide long-term financing or which agree to enter into a lease with the
Company upon completion of the construction. The capitalization rates of the
Company's leases and the interest rates on the mortgage loans and construction
loans have historically ranged between 9.25% and 12% per annum. For
transactions closed in 1998, rates were comparable to those charged in 1997
and generally ranged from 9.25% to 10.75%. The Company charges a commitment
fee of 1% based on the purchase price of the property of a purchase leaseback
or the total principal loan amount of a mortgage loan. In instances where
construction financing has also been supplied, there is generally an
additional 1% commitment fee for the construction financing. The Company
believes its lease terms, mortgage loan and construction loan terms are
competitive in the market place. All of the operating Health Care Facilities
are currently performing under their mortgage loans or leases. Typical
characteristics of these transactions are as follows:
Mortgage Loans. In general, the term of the Company's mortgage loans is
10 years with the principal amortized over 20 to 25 years and a balloon
payment due at the end of the 10 year term. Substantially all mortgage loans
have an additional interest component which is based on the escalation of
gross revenues at the project level or fixed rate increases. These escalators
are between 2.5% and 5% of the increase in gross revenue over a base year for
nursing homes (typically, the first year following the close of the financing)
and are negotiated on a project by project basis. Assisted living escalators
are generally higher, (5 to 7%) while medical office buildings are lower
(generally 2% or so). The escalators, while not currently material to net
income, are expected to be more significant in future periods. In certain of
its mortgage loans, the Company has received an equity participation which
allows the Company to share in a portion of any appreciation of the equity
value of the underlying property. The Company does not expect the equity
participations to constitute a significant or frequent source of income. Most
mortgage loans have prepayment penalties starting at 10% during the first year
and decreasing by 1% each year thereafter. In most cases, the owner of the
property has committed to make minimum annual capital improvements for the
purpose of maintenance or upgrading the facility.
In most circumstances, the Company will require some additional form of
security and/or collateral beyond that provided by the lien of the mortgage.
This additional security or collateral may consist of some or all of the
following: (a) a guaranty by the borrowers' parent, if any, affiliates or
individual principals; (b) an assignment of the leases and rents relating to
the mortgaged property; (c) cross collateralization among loans; (d) security
interest in other real property; (e) an assignment of personal property
including accounts receivable; (f) letters of credit or certificates of
deposit, and (g) other intangibles.
Leases. The Company's leases generally have an initial leasehold term
of 10 to 14 years with one or more five year renewal options. The leases are
"triple net leases" under which the tenant is responsible to pay all taxes,
utilities, insurance premium costs, repairs and other charges relating to the
ownership and operation of the Health Care Facilities. The tenant is
generally 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 at least the full replacement costs thereof and to
maintain specified minimal personal injury and property damage insurance,
protecting the Company as well as the tenant at such Health Care Facility.
The leases also require the tenant to indemnify and hold harmless the Company
from all claims resulting from the use and occupancy of each Health Care
Facility by the tenant and related activities, as well as to indemnify the
Company against all costs related to any release, discovery, clean-up and
removal of hazardous substances or materials on, or other environmental
responsibility with respect to, each Health Care Facility.
All of the Company's leases contain annual escalators in rent payments.
Revenue escalators for both long-term care centers and acute care hospitals
are typically between 3% and 5% of the revenue increase per annum. Rent
escalators on certain medical office buildings generally range from 2% to 4%
of the prior year's rent or in certain instances are based on increases in the
Consumer Price Index. All of the acute care and medical office building
properties which the Company owns and leases give the lessee an option to
purchase the underlying property at the greater of i) the Company's
acquisition costs; ii) the then fair market value as established by
independent appraisers or iii) the sum of the land costs, construction costs
and any additional capital improvements made to the property by the Company.
None of the Company's other leases have options to purchase. In addition, the
acute care and medical office building leases contain a right of first refusal
for the lessee if the Company receives an offer to buy the underlying leased
property.
Most of the obligations under the leases are guaranteed by the parent
corporation of the lessee, if any, or affiliates or individual principals of
the lessee. In some leases, the third party operator will also guarantee some
portion of the lease obligations, usually for a fixed period such as six
months or one year. Some obligations are further backed by other collateral
such as machinery, equipment, furnishings and other personal property.
Construction loans. The Company also provides construction loans that
by their terms convert either into purchase leaseback transactions or mortgage
loans upon the completion of the construction of the facility. Generally the
interest rates on the construction loans range from 9.0% to 11.5%. The term
of such construction loans are for a period which commences upon the closing
of such loan and terminates upon the earlier of (a) the completion of the
construction of the applicable facility or (b) a specific date. During the
term of the construction loan, funds are usually advanced pursuant to draw
requests made by the borrower in accordance with the terms and conditions of
the loan. In addition to the security of the lien against the property, the
Company will generally require additional security and collateral in the form
of either payment and performance completion bonds or completion guarantees by
the borrower's parent, affiliates of the borrower or one or more of the
individuals who control the borrower.
Competition
The Company competes, primarily on the basis of price, knowledge of the
industry, and flexibility of financing structure, with real estate
partnerships, other REITs and other investors (including, but not limited to,
banks, insurance companies, and investment bankers developing securities in
mortgage funds) in the acquisition, leasing and financing of health care
related entities.
The operators of the Health Care Facilities compete on a local and
regional basis with operators of facilities that provide comparable services.
Operators compete for patients and staff based on quality of care, reputation,
physical appearance of facilities, services offered, family preference,
physicians, staff and price. They compete with independent operators as well
as companies managing multiple facilities, some of which are substantially
larger and have greater resources than the operators of the Health Care
Facilities. Some of these facilities are operated for profit while others are
owned by governmental agencies or tax-exempt non-profit organizations.
Operators
The majority (by total real estate assets) of the Health Care Facilities
are operated by third party management companies on behalf of the owner or
lessee. The balance of the Health Care Facilities are operated by the owner
or lessee. As a percent of total investments, 59.7% of the Health Care
Facilities are operated by publicly-owned companies, while 23.5% are operated
by multistate regional health care operators. Generally, a third party
operator of a facility is not liable to the Company under the mortgage or
lease; however, the Company considers the operator to be an important factor
in determining the creditworthiness of the investment and the Company
generally has the right to approve any changes in operators. On some
investments, the third party operator of a facility guarantees at least a
portion of the lease or mortgage. Operators of the Health Care Facilities
include NHC, Marriott Senior Living Services, IATROS Health Network, Inc.,
Alternative Living Services, Inc., Sun Healthcare, Integrated Health
Services, Inc., Columbia/HCA, Living Centers of America, Paracelcus, Beverly
Enterprises, Res-Care, Inc., American Retirement Corp., Grand Care, and
Healthcare Properties, Inc.
Investment in REMIC Certificates
1993 Transactions
On November 9, 1993, the Company purchased $34.2 million principal
amount of SC Commercial Mortgage Pass-Through Certificates, Series 1993-1 (the
Certificates), which qualify as a real estate mortgage investment conduit
(REMIC). The Certificates consist of nine classes issued in the aggregate
principal amount of $172.9 million. The Certificates represent the entire
beneficial ownership interest in a trust fund consisting of a pool of forty-
one mortgage loans generally secured by a first lien on a single property that
provides long-term care and/or assisted living care. All loans bear a fixed
rate of interest, the weighted average of which is 9.308%. The Certificates
were purchased in a private placement offering and are not readily marketable
or freely tradable.
The Company's investment in the Certificates includes Class D and Class
E Certificates which bear interest and the Class I Certificates which have no
principal amount and are not entitled to distributions of principal, but are
entitled to certain priority interest distributions. The Class D and Class E
Certificates were issued with original issue discount.
The Class D Certificates were rated "BB" by Standard & Poor's Rating
Group (S&P) and Fitch Investors Services (Fitch) and the Class I Certificates
were rated "AA" by Fitch. (As a policy S&P does not rate interest only
certificates.) The Class E Certificates were not rated. Fitch's rating of
the Class I Certificates does not address the possibility that Class I
Certificate holders might suffer a lower than anticipated yield or that if
there is a rapid rate of principal payments (including both voluntary and
involuntary prepayments), investors in such Certificates could fail to recover
their initial investments.
Distributions of interest and principal on the Class D and Class E
Certificates are subordinated to distributions of interest and principal with
respect to the other classes of Certificates (which aggregate $137.9 million
in principal amount). Distributions of interest on the Class I certificates
are senior to (or, with respect to certain classes of Certificates, pari passu
to) distributions of principal and interest of the other classes of
Certificates.
1995 Transactions
On December 28, 1995, the Company purchased $7,305,000 face amount
(purchase price was $6,158,000) of SC Commercial Mortgage Pass Through
Certificates, Series 1995-1 (the Certificates) which qualifies as a REMIC.
The Certificates consist of ten classes issued in the aggregate principle
amount of $140,258,000. The Certificates represent the entire beneficial
ownership interest in a trust fund consisting of a pool of 36 first mortgage
loans secured by a first lien on 38 properties that provide long term and/or
assisted living care. All loans bear a fixed rate of interest the weighted
average of which is 10.47%. The Certificates were purchased in a private
placement offering and are not readily marketable or freely tradable.
The Company's investment is in Certificate Class F which are rated "B"
by S & P and Fitch. Distributions of interest and principal on the Class F
certificates are subordinated to distributions of interest and principle with
respect to the other classes of the Certificates totaling $132,953,000 in
principal amount.
NHC Master Agreement to Lease
The Master Agreement to Lease (the "Master Agreement") with NHC
regarding 40 nursing homes and three retirement centers, 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, 2001 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 aggregating
$15.2 million 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.
The Master Agreement also obligates NHC to pay as additional rent under each
Lease all payments of interest and principal and other payments due under each
mortgage to which the conveyance of the respective Health Care Facility to the
Company was subject or any refinancing of mortgage debt that matures or is
required to be paid in its entirety during the term of the Lease. In
addition, in each year after 1992 (the first full calendar year of the term of
the Master Agreement), 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 1992. NHC paid $2.48 million as percentage rent for 1998.
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.
Repayments
Although NHI structures its first mortgages with a declining prepayment
penalty commencing at 10%, the Company experienced material loan prepayments
in 1998. $93,891,000 was prepaid during the year, of which $18.3 million was
received on December 31, 1998. Funds received have either been reinvested or
used to repurchase Company common stock.
1998 All Seasons, Inc. - Center Purchases
On October 31, 1994, the Company loaned approximately $14.5 million to
All Seasons, Inc., a Washington state corporation, owned by a single
shareholder. The loan was secured by the guarantee of the shareholder as well
as first mortgages on four licensed nursing homes and a leasehold mortgage on
two additional licensed nursing homes. The sole shareholder passed away
unexpectedly in early April 1998. Upon commencement of the administration of
the deceased shareholder's estate, irregularities in the handling of All
Seasons' cash were disclosed and the Estate informed the Company that it was
insolvent. The Board of Directors of All Seasons, Inc., none of whom had any
ownership interest therein, informed NHI that they intended to tender their
resignation from the Board unless additional capital sources were made
available to the corporation. Upon being informed that NHI would not make
additional capital lines of credit available, the Board agreed to deed in lieu
of foreclosure the four properties owned in fee simple by All Seasons to NHI
or a designated subsidiary thereof. This transaction was accomplished on
October 16, 1998. Although the Company was also offered the right to assume
the two leases, it elected not to do so. Simultaneously with the receipt of
the deeds to the properties, the Company entered into a management contract
with a public nursing home chain, which management agreement subordinates the
payment of management fees to the debt service assumed by NHI's subsidiary.
At the present time, the Company's investment in the collateral is
approximately $13,700,000 represented by first mortgage notes. Based upon the
management company's 1999 budgets, and two months of operation, the Company
believes that the properties will generate operating income in excess of the
debt service but there can be no assurance that this will be the outcome. The
Company and the management company are aggressively seeking new lessees and/or
owners for these four properties.
Commitments
The Company has received commitment fees to make loans and to fund
construction in progress to third parties for $136.9 million. Commitments
include construction financings which have closed but which have not been
fully funded as of December 31, 1998 and also investment amounts for which the
Company has received a commitment fee but which have not been funded as of
December 31, 1998.
The following table sets forth certain information regarding the
Company's commitments as of December 31, 1998.
<PAGE>
<TABLE>
<CAPTION>
No. of
Facil- Commitments
Facility Type ities Current Future Total
- ------------- ------ ------- ------ ------
(in thousands)
<S> <C> <C> <C> <C>
Long-term care 6 $ 14,111 $ 3,300 $ 17,411
Medical office bldgs 2 957 --- 957
Assisted Living 24 118,480 --- 118,480
-- ------- ------ -------
Commitments 32 $133,548 $ 3,300 $136,848
== ======= ====== =======
</TABLE>
Sources of Revenues
General. The Company's revenues are derived primarily from mortgage
interest income and rental income. During 1998, mortgage interest income
equaled $52.7 million of which all except $4.8 million was from non-NHC
borrowers. Rental income totaled $42.3 million, 76% of which was from
properties operated by NHC. The interest and rental payments are primarily
derived from the operations of the Health Care Facilities. The source and
amount of revenues from such operations are determined by (I) the licensed bed
or other capacity of the Health Care Facilities, (ii) the occupancy rate of
the Health Care Facilities, (iii) the extent to which the services provided at
each Health Care Facility are utilized by the patients, (iv) the mix of
private pay, Medicare and Medicaid patients at the Health Care Facilities, and
(v) the rates paid by private paying patients and by the Medicare and Medicaid
programs.
Governmental and popular concerns regarding health care costs may result
in significant reductions in payments to health care facilities, and there can
be no assurance that future payment rates for either governmental or private
health care plans will be sufficient to cover cost increases in providing
services to patients. Any changes in reimbursement policies which reduce
reimbursement to levels that are insufficient to cover the cost of providing
patient care could adversely affect revenues of the Company's health-related
lessees and borrowers and thereby adversely affect those lessees' and
borrowers' abilities to make their lease or debt payments to the Company.
Failure of the lessees or borrowers to make their lease or debt payments would
have a direct and material adverse impact on the Company.
Medicare and Medicaid. A significant portion of the revenue of the
Company's lessees and borrowers is derived from governmental-funded
reimbursement programs, such as Medicare and Medicaid.
Medicare is a federal health insurance program under the Social Security
Act for individuals age 65 and over and certain chronically disabled
individuals. In recent years, there have been fundamental changes in the
Medicare program which have resulted in reduced levels of payment for a
substantial portion of health care services.
Medicaid is a joint federal and state program designed to provide
medical assistance to "medically indigent persons". These programs are
operated by state agencies which adopt their own medical reimbursement formula
and standards, and rates and covered services vary from state to state.
However, in many instances, revenues from Medicaid programs are insufficient
to cover the actual costs incurred in providing care to those patients.
The Medicare and Medicaid programs are highly regulated and subject to
frequent and substantial changes resulting from legislation, adoption of rules
and regulations, and administrative and judicial interpretations of existing
law. Moreover, health care facilities have experienced increasing pressures
from private payors attempting to control health care costs, and reimbursement
from private payors has in many cases effectively been reduced to levels
approaching those of government payors.
Governmental Funding of Medicare and Medicaid. Government at both the
federal and state levels has continued in its efforts to reduce, or at least
limit the growth of, spending for health care services, including services to
be provided by the Company's lessee's or their operators. On August 5, 1997,
President Clinton signed into law the Balanced Budget Act of 1997 (BBA), which
contains numerous Medicare and Medicaid cost-saving measures, as well as new
anti-fraud provisions. The BBA has been projected to save $115 billion in
Medicare spending over the next five years, and $13 billion in the Medicaid
program. Section 4711 of the BBA, entitled "Flexibility in Payment Methods
for Hospital, Nursing Facility, ICF/MR, and Home Health Services", repealed
the Boren Amendment, which has required that state Medicaid programs pay to
nursing home providers amounts adequate to enable them to meet government
quality and safety standards; the Boren Amendment was previously the
foundation of litigation by nursing homes seeking rate increases. In place of
the Boren Amendment, the BBA requires only that, for services and items
furnished on or after October 1, 1997, a state Medicaid program must provide
for a public process for determination of Medicaid rates of payment for
nursing facility services, under which proposed rates, the methodologies
underlying the establishment of such rates, and justifications for the
proposed rates are published, and which give providers, beneficiaries and
other concerned state residents a reasonable opportunity for review and
comment on the proposed rates, methodologies and justifications. Several of
the states in which the Company has assets are actively seeking ways to reduce
Medicaid spending for nursing home care by such methods as capitated payments
and substantial reductions in reimbursement rates. The BBA also requires that
nursing homes transition to a prospective payment system under the Medicare
program during a three-year "transition period" commencing with the first cost
reporting period beginning on or after July 1, 1998. Substantially all of the
health care facilities in which the Company has invested will commence
reimbursement under this program effective January 1, 1999. The Company
anticipates that the deduction in Medicare revenues will negatively impact its
additional percentage rent, but not the base rent, of its skilled nursing
facilities. In addition, the BBA creates a managed care Medicare Program
called "Medicare + Choice", which allows Medicare beneficiaries to participate
in either the original Medicare fee-for-service program or to enroll in a
coordinated care plan such as health maintenance organizations ("HMOs"). Such
coordinated care plans would allow HMOs to enter into risk-based contracts
with the Medicare program, and the HMO's would then contract with providers
such as those financed by NHI. No assurances can be given that such
facilities will be successful in negotiating favorable contracts with Medicare
+ Choice managed care organizations.
The BBA also contains several new antifraud provisions. Given the
recent enactment of the BBA, the Company is unable to predict the impact of
the BBA and potential changes in state Medicaid reimbursement methodologies on
the operations of its tenants or borrowers; however, any significant reduction
in either Medicare or Medicaid payments could adversely affect their cash
flows. Changes in certification and participation requirements of the
Medicare and Medicaid programs have restricted, and are likely to continue to
restrict further, eligibility for reimbursement under those programs. Failure
to obtain and maintain Medicare and Medicaid certification at the Company's
tenants or borrowers will result in denial of Medicare and Medicaid payments
which could result in a significant loss of revenue to those providers. In
addition, private payors, including managed care payors, increasingly are
demanding that providers accept discounted fees or assume all or a portion of
the financial risk for the delivery of health care services. Such measures
may include capitated payments whereby the provider is responsible for
providing, for a fixed fee, all services needed by certain patients.
Capitated payments can result in significant losses if patients require
expensive treatment not adequately covered by the capitated rate. Efforts to
impose reduced payments, greater discounts and more stringent cost controls by
government and other payors are expected to continue. Any reforms that
significantly limit rates of reimbursement under the Medicare and Medicaid
programs, therefore, could have a material adverse effect on the Company's
tenants or borrowers. The Company is unable to predict what reform proposals
or reimbursement limitations will be adopted in the future or the effect such
changes will have on its operations. No assurance can be given that such
reforms will not have a material adverse effect on the Company.
Although it is clear that there will be a reduction in the growth of
governmental revenues for Medicare and Medicaid, NHI and similar financial
institutions believe that their position as either lessee or first mortgage
holder is protected by a sufficient revenue base so that it does not
anticipate the creation of problems or defaulting loans due to these cuts.
Licensure and Certification. The health care industry is highly
regulated by federal, state and local law, and is directly affected by state
and local licensing requirements, facility inspections, state and federal
reimbursement policies, regulations concerning capital and other expenditures,
certification requirements, and other such laws, regulations and rules.
Sanctions for failure to comply with these regulations and laws include (but
are not limited to) loss of licensure, fines, and loss of certification to
participate in the Medicare and Medicaid programs, as well as potential
criminal penalties. The failure of any lessee or borrower to comply with such
laws, requirements and regulations could affect its ability to operate the
facility or facilities and could adversely affect such lessee's or borrower's
ability to make lease or debt payments to the Company.
In the past several years, due to rising health care costs, there has
been an increased emphasis on detecting and eliminating fraud and abuse in the
Medicare and Medicaid programs. Payment of any consideration in exchange for
referral of Medicare and Medicaid patients is generally prohibited by federal
statute, which subjects violators to severe penalties, including exclusion
from the Medicare and Medicaid programs, fines, and even prison sentences. In
recent years, both federal and state governments have significantly increased
investigation and enforcement activity to detect and punish wrongdoers. In
addition, legislation has been adopted at both state and federal levels which
severely restricts the ability of physicians to refer patients to entities in
which they have a financial interest.
It is anticipated that the trend toward increased investigation and
enforcement activity in the area of fraud and abuse, as well as self-referral,
will continue in future years. Certain of the Company's investments are with
lessees or borrowers which are partially or wholly owned by physicians. In
the event that any lessee or borrower were to be found in violation of laws
regarding fraud and abuse or self-referral, that lessee's or borrower's
ability to operate the facility as a health care facility could be
jeopardized, which could adversely affect the lessee's or borrower's ability
to make lease or debt payments to the Company and thereby adversely affect the
Company.
Certificates of Need. Certain Health Care Facilities in which the
Company invests are also generally subject to state statutes which may require
regulatory approval, in the form of a certificate of need ("CON") prior to the
addition or construction of new beds, the addition of services or certain
capital expenditures. CON requirements are not uniform throughout the United
States and are subject to change. The Company cannot predict the impact of
regulatory changes with respect to CON's on the operations of the Company's
lessees and mortgagees.
Investment Policies
The Company's investment objectives are (I) to provide current income
for distribution to its stockholders through investments primarily in health
care related facilities, (ii) to provide the opportunity to realize capital
growth resulting from appreciation, if any, in the residual value of its
portfolio properties, and (iii) to preserve and protect stockholders' capital.
There can be no assurance that these objectives will be realized. It is not
the present intention of the Company to sell its properties and reinvest in
other investments for the purpose of realizing gains resulting from the
appreciation of value of those properties; the Company, however, in the future
would consider selling properties in the event circumstances should arise
which would make a sale advisable or attractive.
The Company intends to seek further health care related investment
opportunities and to provide lease or mortgage financing for such investments
with additional capital, possibly including debt, from public or private
sources. The Company plans to continue its goal of maintaining a one to one
ratio of debt to shareholder's equity. The Company will be competing with
health care providers and investors, including other real estate investment
trusts, for additional health care related investments. In evaluating
potential investments, the Company expects to consider such factors, as (I)
the geographic area and type of property, (ii) the location, construction
quality, condition and design of the property, (iii) the current and
anticipated cash flow and its adequacy to meet operational needs and lease or
mortgage obligations and to provide a competitive market return on equity to
the Company's investors, (iv) the growth, tax and regulatory environments of
the communities in which the properties are located, (v) occupancy and demand
for similar health care facilities in the same or nearby communities, (vi) the
quality, experience and creditworthiness of the management operating the
facilities located on the property; and (vii) the mix of private and
government sponsored patients. There can be no assurances that these
intentions will be realized.
The Company will not, without the prior approval of a majority of the
Board of Directors, enter into any joint venture relationships with or acquire
from or sell to any director, officer, or employee of NHC or the Company, or
any affiliate thereof, as the case may be, any of the assets or other property
of the Company. The Company's Credit Agreements limit the amount of
investment in any one borrower to 25% of the Company's assets, except for
investments in NHC which is limited to 35% of the Company's assets. As of
December 31, 1998, investments in NHC totaled approximately 22.8%. The
Company is unable to predict the extent to which it will engage in activities
with NHC or any other operator within these limits.
The Board of Directors, without the approval of the stockholders, may
alter the Company's investment policies if they determine that such a change
is in the best interests of the Company and its stockholders. The methods of
implementing the Company's investment policies may vary as new investment and
financing techniques are developed or for other reasons.
The Company may incur additional indebtedness in the future to make
investments in health care related facilities when it is advisable in the
opinion of the Board of Directors. The Company may negotiate other lines of
credit, or arrange for other short or long term borrowings from banks, NHC or
otherwise. The Company has and may arrange for long term borrowings from
institutional investors or through public offerings. The Company has invested
and may in the future invest in properties subject to existing loans or
secured by mortgages, deeds of trust or similar liens with favorable terms or
REMIC investments.
Advisory Agreement
The Company entered into the Advisory Agreement on October 17, 1991 with
NHC as "Advisor" under which NHC provides management and advisory services to
the Company during the term of the Advisory Agreement. The Company believes
the Advisory Agreement benefits the Company by providing it access to NHC's
extensive experience in the ownership and management of long-term care
facilities and retirement centers. Under the Advisory Agreement, the Company
engaged NHC to use its best efforts (a) to present to the Company a continuing
and suitable investment program consistent with the investment policies of the
Company adopted by the Board of Directors from time to time; (b) to manage the
day-to-day affairs and operations of the Company; and (c) to provide
administrative services and facilities appropriate for such management. In
performing its obligations under the Advisory Agreement, NHC is subject to the
supervision of and policies established by the Company's Board of Directors.
The Advisory Agreement was initially for a stated term which expired
December 31, 1997. The Agreement is now on a year to year term. Either party
may terminate the Advisory Agreement at any time on 90 days notice, and 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 in a base amount of $1.6 million, payable in monthly installments
of $135,417. Under the Advisory Agreement, the Company reimburses NHC for
certain out of pocket expenses including those incurred in connection with
borrowed money, taxes, fees to independent contractors, legal and accounting
services and stockholder distributions and communications. For 1993 and later
years the annual compensation is calculated on a formula which is related to
the increase in Funds from Operations per common share (as defined in the
Advisory Agreement). In 1998, the annual compensation under the Advisory
Agreement was $3.3 million.
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, but a portion of their bonus, if any, is allocated to the Company.
In addition, although not specifically provided for in the Advisory
Agreement, during 1993 the Company granted stock options to purchase a total
of 100,000 shares of Common Stock for the benefit of various NHC employees and
outside directors of NHC who provided services to the Company. An additional
100,000 shares were granted as options to various NHC employees and outside
directors in 1995 and 194,000 shares in 1997. Additionally, the Company has
implemented an option exercise loan guaranty program, the purpose of which is
to facilitate Directors and key personnel exercising options to purchase NHI
common stock. Pursuant to Board of Directors' resolution unanimously passed,
each Director and Key Employee to whom options to purchase NHI common shares
have been granted is eligible to benefit from a Company guaranty on up to
$100,000 per year of loans made from commercial banking institutions, the
proceeds of which are used to exercise NHI options. The guarantee is
structured as follows: Option holders must pledge to NHI 125% of the loan
amount in publicly traded stock as additional collateral for the guarantee;
the option holder must personally guarantee the loan to the bank; the interest
rate charged by the bank and all expenses pertaining to the loan are to be
borne by the Director or Employee and the maximum outstanding amount of loan
guarantees is $5.0 million. Furthermore, this facility is to have a one year
term and be renewable at the Board's discretion. The table in Item 13
indicates the current amount of loans outstanding by Directors of NHI
individually and by all designated NHC employees collectively as of December
31, 1998. The total outstanding as of December 31, 1998 is $1.3 million, and
none is owed by directors or executive officers.
Federal Income Tax
The Company 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 the Company intends to continue to operate in such
a manner, but no assurance can be given that the Company will be able to
qualify at all times. If the Company qualifies as a REIT, it will generally
not be subject to federal corporate income taxes on its net income that is
currently distributed to its stockholders. This treatment substantially
eliminates the "double taxation" (at the corporate and stockholder levels)
that typically applies to corporate dividends.
Item 2. Properties
<TABLE>
NHI PROPERTIES
<CAPTION>
LONG TERM CARE
Center City Beds
<S> <C> <C>
ALABAMA
NHC HealthCare, Anniston Anniston 151
NHC HealthCare, Moulton Moulton 136
ARIZONA
Royal Sun West Care Center Avondale 157
COLORADO
Brookside Inn Castle Rock 120
FLORIDA
Alachua Nursing Home Gainesville 120
Bear Creek Nursing Center Hudson 120
Brooksville Nursing Manor Brooksville 180
Cypress Cove Care Center New Port Richey 120
Health Care Center at
Mercy Hospital Miami 120
Heather Hill Nursing Home Crystal River 120
Huber Restorium St. Petersburg 96
Jefferson Nursing Center Monticello 60
Lake Park - Madison Lake Park 99
Medic-Ayers Nursing Center Trenton 120
Plantation Gardens Rehab & Nursing Ocoee 120
Miracle Hill Nursing & Conv. Tallahassee 120
NHC HealthCare, Hudson Hudson 180
NHC HealthCare, Merritt Island Merritt Island 180
NHC HealthCare, Plant City Plant City 172
NHC HealthCare, Stuart Stuart 118
Oakview Nursing Williston 180
Osceola Health Care Center St. Cloud 120
Pine Lake Nursing Home Greeneville 58
Royal Oak Nursing Center Dade City 120
GEORGIA
Ashton Woods Dekalb County 157
Forest Lake Manor Augusta 100
Jennings Health Care Center Augusta 100
Meadowbrook Nursing Center Tucker 144
Moss Oaks Health Care Center Pooler 122
Rossville Convalescent Center Rossville 112
West Lake Manor Augusta 100
IDAHO
Grangeville Care Center Grangeville 62
Sunny Ridge Care Center Nampa 192
KANSAS
Bethesda Nursing Center Chanute 84
Country Club Home Council Grove 94
Green Meadows Nursing Center Haysville 120
Hammond Holiday Home Larned 93
Sedgwick Convalescent Center Sedgwick 84
Hoisington Rehabilitation Center Hoisington 70
Emporia Rehabilitation Center Emporia 79
KENTUCKY
NHC HealthCare, Dawson Springs Dawson Springs 80
NHC HealthCare, Glasgow Glasgow 206
NHC HealthCare, Madisonville Madisonville 94
MARYLAND
Windsor Ridge Nursing and
Rehabilitation Center Rockville 120
MASSACHUSETTS
Buckley Nursing Home Greenfield 120
Buckley Nursing &
Retirement Center Holyoke 102
Longmeadow of Taunton Taunton 100
John Adams Nursing Home Quincy 71
MISSOURI
Charleviox Nursing Center St. Charles 122
Clayton House Healthcare Clayton 230
Columbia House Healthcare Columbia 107
Florissant Nursing Center Florissant 120
Hunter Acres Nursing Center Sikeston 120
Medicenter-Springfield Springfield 105
NHC HealthCare, Desloge Desloge 120
NHC HealthCare, Joplin Joplin 126
NHC HealthCare, Kennett Kennett 170
NHC HealthCare, Maryland Heights St. Louis 220
NHC HealthCare, St. Charles St. Charles 120
Oak View Living Center Jefferson City 120
Ozark Nursing Center West Plains 120
Spanish Lake Nursing Center Florissant 120
Tradition House Healthcare Joplin 84
NEW HAMPSHIRE
Epsom Manor, Inc. Epsom 108
Maple Leaf Health Care Center Manchester 114
Villa Crest, Inc. Manchester 152
NEW JERSEY
Imperial Manor (U/C)* Trenton 130
Willow Care (U/C)* Dover 130
OKLAHOMA
Skyline Terrace Tulsa 120
PENNSYLVANIA
Briarcliff Pavilion for
Special Care N. Huntingdon 120
Kade Nursing Home Canton Township 68
Nipple Convalescent Center Liverpool 37
SOUTH CAROLINA
NHC HealthCare, Anderson Anderson 290
NHC HealthCare, Greenwood Greenwood 152
NHC HealthCare, Laurens Laurens 176
TENNESSEE
NHC HealthCare, Athens Athens 98
NHC HealthCare, Chattanooga Chattanooga 212
NHC HealthCare, Columbia Columbia 120
NHC HealthCare, Dickson* Dickson 197
NHC HealthCare, Franklin Franklin 84
NHC HealthCare, Hendersonville Hendersonville 117
NHC HealthCare, Hillview Columbia 98
NHC HealthCare, Johnson City* Johnson City 179
NHC HealthCare, Knoxville Knoxville 152
NHC HealthCare, Lewisburg Lewisburg 104
NHC HealthCare, McMinnville McMinnville 150
NHC HealthCare, Milan Milan 129
NHC HealthCare, Nashville Nashville 133
NHC HealthCare, Oakwood Lewisburg 62
NHC HealthCare, Pulaski Pulaski 104
NHC HealthCare, Scott Lawrenceburg 62
NHC HealthCare, Sequatchie Dunlap 120
NHC HealthCare, Smithville Smithville 107
NHC HealthCare, Somerville* Somerville 72
NHC HealthCare, Sparta Sparta 150
NHC HealthCare, Springfield Springfield 112
TEXAS
Autumn Hills Convalescent Center Houston 113
Autumn Hills Convalescent Center Richmond 90
Autumn Hills Convalescent Center Sugarland 138
Autumn Hills Convalescent Center Tomball 145
Bonham Nursing Center Bonham 65
Canterbury Villa of Falfurrias Falfurrias 98
Canterbury Villa of Kingsville Kingsville 194
College Street Nursing Center Beaumont 50
Columbus Care Center Columbus 134
Conroe Convalescent Center Conroe 106
Denison Manor Mt. Vernon 71
Fair Park Nursing Center Huntsville 87
Friendswood Arms Conv. Center Friendswood 100
Galaxy Manor Nursing Center Cleveland 100
Golden Charm Nursing Center Liberty 110
Lindbergh Health Care Center Beaumont 77
Shoreline Health Care Center Taft 200
Silver Threads Nursing Center Houston 78
Terry Haven Nursing Center Mt. Vernon 65
Town Park Convalescent Center Houston 120
Willis Convalescent Center Willis 114
Willow Bend Care Center Mesquite 251
Heritage Forest Lane Dallas 120
Heritage Manor - Canton Canton 110
Heritage Manor - Mesquite Dallas 152
Heritage Oaks Arlington 204
Heritage Village Dallas 280
Winterhaven Houston 160
VIRGINIA
Brian Center of Alleghany Low Moor 60
Brian Center of Bastian Bastian 60
Brian Center of Fincastle Fincastle 60
Maple Grove Health Care Lebanon 60
NHC HealthCare, Bristol Bristol 120
The Springs Nursing Center Hot Springs 60
Willow Creek Health Care Center Midlothian 120
WASHINGTON
Highline Care Center Seattle 73
Park Ridge Care Center Seattle 115
Park West Care Center Seattle 139
Sehome Park Care Center Bellingham 115
WISCONSIN
River Hills South Health
Care Center Milwaukee 196
<CAPTION>
ACUTE CARE PROPERTIES
<S> <C> <C>
KENTUCKY
Kentucky River Hospital Jackson 55
LOUISIANA
University Rehab Hospital New Orleans 106
<CAPTION>
MEDICAL OFFICE BUILDINGS
Square
Center City Footage
<S> <C> <C>
ARIZONA
North Valley Medical Center Scottsdale 80,000
FLORIDA
North Okaloosa Crestview 27,017
ILLINOIS
Crossroads(U/C) Mt. Vernon 12,910
KENTUCKY
Scott Hospital Georgetown 24,824
LOUISIANA
Women's & Children's Lafayette 30,000
TEXAS
Pasadena Pasadena 61,500
Hill Regional Hillsboro 23,000
UTAH
Pioneer Valley Salt Lake City 69,000
WASHINGTON
Capital Medical Office Building Olympia 67,152
<CAPTION>
RETIREMENT CENTERS
Center City Beds
<S> <C> <C>
MISSOURI
Lake St. Charles Retirement
Center* St. Charles 155
NEW HAMPSHIRE
Heartland Place Epsom 60
TENNESSEE
Parkwood Retirement Center Chattanooga 32
Colonial Hill Retirement Center Johnson City 63
TEXAS
Remington Retirement Community Corpus Christi 90
Tiffany Walk Congregate Center Tomball 105
<CAPTION>
ASSISTED LIVING AND
DEVELOPMENTALLY DISABLED
Center City Beds
<S> <C> <C>
ARIZONA
Claire Bridge - Glendale Glendale 38
Sterling House - Gilbert Gilbert 50
Sterling House - Tucson Tucson 50
FLORIDA
19th Street Group Home Gainesville 6
107th Place Group Home Belleview 6
Bessent Road Group Home Starke 6
Brighton Gardens of Maitland Maitland 141
Brighton Gardens of
West Palm Beach West Palm Beach 134
Claire Bridge - Maitland Maitland 38
Coletta Drive Group Home Orlando 6
Frederick Avenue Group Home Daytona Beach 6
High Desert Court Group Home Jacksonville 6
McFarland Avenue Group Home Lake City 6
Naples Court Group Home Jacksonville 6
Plaza Oval Group Home Casselberry 6
Rosewood Group Home Ormond Beach 6
Second Street Group Home Ocala 6
Somerset on Lake Saunders Tavares 54
Sterling House - Daytona Beach Daytona Beach 42
Suffridge Drive Group Home Bonita Springs 6
Tunis Street Group Home Jacksonville 6
Walnut Street Group Home Starke 6
Wynwood Maitland 78
MARYLAND
Morningside - St. Charles St. Charles 86
Morningside - Satyr Hill (U/C) Baltimore 110
Morningside House of Harmans Harmans 98
MISSOURI
Lake St. Charles Retirement
Center* St. Charles 25
NEW JERSEY
Brighton Gardens of Edison Edison 128
Imperial Manor (U/C)* Trenton 20
Willow Care (U/C)* Dover 20
NORTH CAROLINA
Manorhouse - Charlotte (U/C) Charlotte 125
SOUTH CAROLINA
Sterling House - Conway Conway 42
<PAGE>
TENNESSEE
717 Cheatam Street Springfield 8
305 West Hillcrest Drive Springfield 8
307 West Hillcrest Drive Springfield 8
Sterling House - Kingsport Kingsport 42
NHC HealthCare, Dickson* Dickson 20
NHC HealthCare, Johnson City* Johnson City 15
NHC HealthCare, Somerville* Somerville 12
TEXAS
Brighton Gardens of Preston Road Dallas 109
VIRGINIA
Morningside House of Leesburg Leesburg 79
*These facilities are listed in multiple categories.
U/C = Under construction
</TABLE>
REAL ESTATE MORTGAGE INVESTMENT CONDUITS
20.0% participating interest 15 Properties 2,039
5.2% participating interest 25 Properties 3,124
Item 3. Legal Proceedings
The Company is not subject to any pending litigation. The Health Care
Facilities are subject to claims and suits in the ordinary course of business.
The Company's lessees and mortgagees have indemnified and will continue to
indemnify the Company against all liabilities arising from the operation of
the Health Care Facilities, and will indemnify the Company against
environmental or title problems affecting the real estate underlying such
facilities. While there are lawsuits pending against certain of the owners
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 the Company or its operations.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the Shareholders was held on March 31, 1998.
(b) Matters voted upon at the meeting are as follows:
PROPOSAL NO. 1: Election of Ted H. Welch and Richard F. LaRoche, Jr.
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. Jack
Tyrrell and Mr. W. Andrew Adams.
<PAGE>
<TABLE>
<CAPTION>
% of Total
Outstanding Shares
-------------------
For Abstain Voting Voting For
---------- ------ ----- -----
<S> <C> <C> <C> <C>
Ted Welch 23,380,287 63,838 94.0% 94.2%
Richard F. LaRoche, Jr. 23,284,029 60,096 94.0% 94.2%
</TABLE>
PROPOSAL NO. 2: Ratify the appointment of Arthur Andersen LLP as
the Company's independent accountant.
<TABLE>
<CAPTION>
% of Total
Outstanding Shares
--------------------
For Against Abstain Voting Voting For
---------- ------- ------- ------ ----------
<S> <C> <C> <C> <C>
23,341,939 29,149 73,037 94.0% 94.0%
</TABLE>
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters
On October 16, 1996, the NHI Board of Directors, pursuant to powers
granted by NHI's charter, changed the limit on the percentage of ownership
which any person may have in the outstanding common stock of NHI from a limit
of 7.0% (as passed on October 17, 1995) to a limit of 9.9%. The limit on
ownership of any other class of stock (including issues convertible into
common stock) remains at 9.9% of the outstanding stock.
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.
Common Stock Market Prices and Dividends
The Company's common stock is traded on the New York Stock Exchange
under the symbol NHI. The closing price for NHI stock on February 26, 1999
was $25.50. As of December 31, 1998, there were approximately 3,274 holders
of record of shares and the Company estimates that as of such date there were
in addition in excess of 23,500 beneficial owners of the shares.
<PAGE>
High and low stock prices and dividends for the last two years were:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
Cash Cash
Sales Price Dividends Sales Price Dividends
Quarter Ended High Low Declared High Low Declared
------- ------- -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
March 31 $42.2500 $38.6250 .74 $40.000 $36.750 $.74
June 30 39.9375 32.1250 .74 40.000 35.250 .74
September 30 33.8750 25.3125 .74 40.000 37.687 .74
December 31 30.9375 24.3750 .74 44.750 38.312 .74
</TABLE>
Item 6. Selected Financial Data
The following table represents financial information with respect to the
Company for the five years ended December 31, 1998. This financial
information has been derived from financial statements included elsewhere in
this Form 10-K and should be read in conjunction with those financial
statements and accompanying footnotes.
BALANCE OF THIS PAGE LEFT INTENTIONALLY BLANK
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SELECTED FINANCIAL DATA
(dollars in thousands, except per share amounts)
<CAPTION>
Year Ended December 31 1998 1997 1996 1995 1994
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 102,292 $ 110,179 $ 99,429 $ 87,924 $ 70,850
Net income 69,645 75,388 67,164 49,692 38,880
Net income per share
Basic $ 2.72 $ 3.01 $ 2.92 $ 2.63 $ 2.35
Diluted 2.69 2.92 2.81 2.48 2.28
- -------------------------------------------------------------------------------------------------------------
Mortgages and other
investments, net $ 495,964 $ 479,194 $ 553,456 $ 505,108 $ 507,619
Real estate properties, net 245,538 200,069 184,255 123,195 118,152
Total assets 769,198 753,033 748,672 639,256 634,907
Long term debt 151,559 155,659 160,008 141,103 90,210
Credit facilities 58,500 --- 59,000 31,750 193,944
Convertible subordinated
debentures 100,096 119,038 90,735 82,316 102,840
Total stockholders' equity 424,660 444,080 409,683 356,981 223,879
- -------------------------------------------------------------------------------------------------------------
Common shares outstanding 24,364,391 24,753,570 23,474,751 20,535,014 14,047,563
Weighted average common shares
Basic 24,964,047 24,394,044 21,916,921 16,381,826 13,236,205
Diluted 28,689,192 28,887,987 27,211,999 22,851,888 20,796,237
- -------------------------------------------------------------------------------------------------------------
Common dividends declared
per share $ 2.960 $ 2.960 $ 2.840 $ 2.610 $ 2.380
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition 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 December
31, 1998, NHI had interests in net real estate owned, and investments in
mortgages, REMICs, preferred stock and marketable securities resulting in
total invested assets of $741.5 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 December 31, 1998, the Company was diversified with investments in
203 health care facilities located in 26 states consisting of 151 long-term
care facilities, two acute care hospitals, nine medical office buildings, 18
assisted living facilities, six retirement centers and 17 residential projects
for the developmentally disabled. These investments consisted of
approximately $394.2 million aggregate principal amount of loans to 34
borrowers, $245.5 million of purchase leaseback transactions with seven
lessees and $36.9 million invested in REMIC pass through certificates backed
by first mortgage loans to four operators. Of these 203 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 20.8% of total invested assets on
December 31, 1998.
At December 31, 1998, 59.7% of the total invested assets of the health
care facilities were operated by public operators, 23.5% by regional
operators, and 16.8% by small operators.
Liquidity and Capital Resources
Sources and Uses of Funds
NHI has generated net cash from operating activities during 1998
totaling $84.9 million. 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. In 1998, collections
on mortgage notes receivable were $3.9 million and prepayments on mortgage
notes receivable were $93.9 million. Proceeds from NHI's line of credit draw
were $58.5 million.
While maintaining its high investment standards, during 1998, NHI made
investments in real estate properties of $40.7 million, mortgage loans of
$67.6 million, preferred stock of another real estate investment trust of
$38.1 million, and marketable securities of other real estate investment
trusts totaling $30.1 million.
Stockholders' equity was reduced by $31.3 million as a result of the
repurchase of 1,122,000 shares of the Company's common stock.
Debt of $4.3 million was repaid in 1998. Dividends paid to the
stockholders were $75.8 million. NHI expects to be able 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 $41.5 million at December 31, 1998. The Company's balance sheet
was further strengthened by the conversion of $19.0 million of convertible
debentures to common equity during 1998. NHI's nonconvertible debt as a
percentage of total capitalization is 27.3% at December 31, 1998. The Company
continues to be well positioned to take advantage of new investment
opportunities.
Commitments
At December 31, 1998, the Company was committed, subject to due
diligence and financial performance goals, to fund approximately $136.9
million in health care real estate projects, all of which is expected to be
funded within the next 12 months. The commitments include mortgage loans or
purchase leaseback agreements for six long-term health care centers, two
medical office buildings, and 24 assisted living facilities all at rates
ranging from 9% to 11.5 %. Also included in the $136.9 million of commitments
is a commitment to loan an additional $3.3 million on three existing loans
when the mortgagee obtains certain operating ratios.
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
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net income for the year ended December 31, 1998 is $69.6 million versus
$75.4 million for the same period in 1997, a decrease of 7.7%. Diluted
earnings per common share decreased 23 cents or 7.9%, to $2.69 in 1998 from
$2.92 in 1997.
Total revenues for the year ended December 31, 1998 decreased $7.9
million or 7.2% to $102.3 million from $110.2 million for the year ended
December 31, 1998. Revenues from mortgage interest income decreased $13.5
million, or 20.4%, when compared to the same period in 1997. Revenues from
rental income increased $2.3 million, or 5.8% in 1998 as compared to 1997.
Revenues from investment interest and other income increased $3.3 million or
84% compared to 1997.
The decrease in mortgage interest income is due to the receipt by NHI of
prepayments of $93.9 million of first mortgages receivable during 1998,
compared to new mortgage investments of $67.6 million during the same period.
Mortgage interest income included $7.3 million of prepayment penalties and
unamortized commitment fees applicable to early loan repayments in 1998. Loan
loss provisions were $4.3 million for 1998 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 $40.7 million during the last 12
months and also from increased "revenue participations" and "additional rent"
earned under NHI's existing leases and mortgage agreements. The increase in
investment interest and other income is due to the investment of higher cash
amounts, as well as the investment of $38.1 million in the preferred stock of
LTC Properties, Inc. and $30.1 million in marketable securities.
Total expenses for the 1998 twelve month period decreased $2.2 million
or 6.3% to $32.6 million from $34.8 million for the 1997 twelve month period.
Interest expense decreased $3.1 million or 14.0% in the 1998 twelve month
period as compared to the 1997 period. Depreciation of real estate increased
$.9 million or 11.4% while amortization of loan and organization costs
decreased $.1 million or 17.7% in 1998 when compared to 1997. General and
administrative costs increased 5.2%.
Interest expense decreased due to lower average levels of long-term and
subordinated debt compared to a year ago. Depreciation increased as a result
of the Company placing newly constructed assets in service and property
acquisitions.
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 1998 of 343,000. Notwithstanding alternative uses of
the cash used to repurchase the common stock, the repurchase resulted in an
increase in 1998 net income per share of 3 cents basic and diluted.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Net income for the year ended December 31, 1997 is $75.4 million versus
$67.2 million for 1996, an increase of 12.2%. Diluted earnings per common
share increased 11 cents or 3.9% to $2.92 in 1997 from $2.81 in 1996.
Total revenues for the year ended December 31, 1997 increased $10.8
million or 10.8% to $110.2 million from $99.4 million in the year ended
December 31, 1996. Revenues from mortgage interest income increased $3.8
million or 6.0% when compared to the same period in 1996. Mortgage interest
income included $5.1 million of prepayment penalties and unamortized
commitment fees applicable to early loan repayments in 1997. Loan loss
provisions were $1.2 million for 1997.
Revenues from rental income increased $5.4 million or 15.5% in 1997 as
compared to 1996. These increases resulted primarily from investments in
additional facilities during 1997 and 1996 and from the recognition of
commitment fees.
Total expenses for 1997 increased $2.5 million or 7.8% to $34.8 million
from $32.3 million for 1996. Interest expense increased $1.6 million or 7.7%
in 1997 as compared to 1996. Depreciation on real estate increased $1.2
million or 17.6% while amortization of loan and organization costs decreased
$0.3 million or 25.0% when compared to 1996. General and administrative costs
increased 0.4%.
The increase in interest expense is due primarily to higher average
amounts borrowed in 1997 when compared to 1996. Depreciation increased as a
result of the Company placing newly constructed assets in service in 1997 and
1996.
Future Growth
The Company expects increases in both mortgage interest income and
rental income from the additional investments it has made in mortgage loans
and owned facilities during 1998 and from revenue participations and
escalators the Company has negotiated in its mortgages and leases.
Additionally, 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 1997, NHI adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" and Statement of Financial Accounting Standards No.
129, "Disclosure of Information About Capital Structure". The adoption of the
provisions of these accounting pronouncements did not have a material impact
on NHI's financial condition or results of operations.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 requires that changes in the amounts of
certain items, including gains and losses on marketable securities, be shown
in the consolidated financial statements. NHI adopted the provisions of SFAS
130 effective January 1, 1998. NHI has elected to disclose comprehensive
income, which includes net income and unrealized gains and losses on
marketable securities, in the consolidated statements of stockholders' equity.
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
NHI has evaluated its information technology systems and embedded
technology with respect to potential Year 2000 problems. Although management
believes that the majority of NHI's information technology systems and
embedded technology is already Year 2000 compliant, NHI will complete the
testing of its information technology systems and embedded technology in the
third quarter of 1999. In addition, NHI has developed corrective plans for
any technology assessed to be non-compliant.
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
has performed an evaluation of its information technology as it relates to
NHI. Although NHI believes that the majority of NHC's information technology
systems and embedded technology is already Year 2000 compliant, NHC will
complete the testing of its information technology systems and embedded
technology in the third quarter of 1999. NHI believes that NHC has developed
corrective plans for any technology assessed to be non-compliant.
Costs incurred to date for NHI's internal Year 2000 remediation efforts
have not been material, and NHI does not expect that the cost of future
internal actions will be material to its financial condition or results of
operations. Based upon current information, NHI anticipates successful
completion and testing of its own Year 2000 remediation efforts during 1999.
However, there can be no guarantee that the Year 2000 will not have a material
adverse effect on NHI's operations, financial position or liquidity if NHI's
remediation efforts are not successful or completed in a timely manner. NHI
is currently developing a contingency plan in the event that it is not able to
achieve Year 2000 compliance. This contingency plan is expected to include
identifying back-up processes that do not rely on computers, whenever
possible.
However, NHI also depends upon the proper functioning of information
technology systems and embedded technology operated by certain other third
parties. These third parties include lessors and debtors that participate in
the Medicare and Medicaid programs, commercial banks and other lenders, and
vendors such as telecommunications and utilities providers. NHI is currently
evaluating and obtaining information concerning the Year 2000 compliance
status of these third parties. If third parties have Year 2000 problems that
are not remedied, the following problems could result: (i) in the case of
lessors and debtors that rely on third party payors, in delayed collection of
rent, mortgage notes and interest payments; (ii) in the case of banks and
other lenders, in the disruption of capital flows potentially resulting in
liquidity stress; or (iii) in the case of vendors, in disruption of important
services upon which NHI depends, such as telecommunications and electrical
power.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk
The Company's cash and cash equivalents consist of highly liquid
investments with a maturity of less than three months. All of the Company's
mortgage and other notes receivable bear interest at fixed interest rates.
The Company's investment in preferred stock represents an investment in the
preferred stock of another real estate investment trust and bears interest at
a fixed rate of 8.5%. The underlying mortgages included in the Company's
investments in real estate mortgage investment conduits (REMIC's) also 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, preferred stock and REMIC's are fixed, a
hypothetical 10% change in interest rates has no impact on the Company's
future earnings and cash flows related to these instruments. A hypothetical
10% change in interest rates has an immaterial impact on the fair values of
these instruments.
As of December 31, 1998, $114,506,000 of the Company's long-term debt
bears interest at fixed interest rates. As of December 31, 1998, all of the
Company's $100,096,000 of convertible subordinated debentures bear interest at
fixed rates. Because the interest rates of these instruments 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. The remaining $37,053,000 of the Company's long-term debt
and $58,500,000 line of credit facility 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 has an immaterial 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.
The Company's use of derivative instruments is limited to the interest
rate swap discussed above. The Company does not 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.
Equity Price Risk
The Company considers its investments in marketable securities as
available for sale securities and unrealized gains and losses are recorded in
stockholders' equity in accordance with Statement of Financial Accounting
Standards No. 115. The investments in marketable securities 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. In addition, a hypothetical
10% change in the quoted market prices of the Company's subordinated
convertible debentures would result in a related 10% change in the fair value
of the debenture instruments.
Item 8. Financial Statements and Supplementary Data
The following Consolidated Financial Statements are included as Exhibit
13 and are incorporated in this Item 8 by reference:
a. Report of Independent Public Accountants
b. Consolidated Balance Sheets
c. Consolidated Statements of Income
d. Consolidated Statements of Cash Flows
e. Consolidated Statements of Stockholders' Equity
f. Notes to Consolidated Financial Statements
The following table sets forth selected quarterly financial data for the
two most recent fiscal years.
<TABLE>
Selected Quarterly Financial Data
(Unaudited, in thousands, except per share amounts)
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
1998 ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Revenues $26,080 $25,857 $25,834 $24,521
Net Income 17,846 17,889 17,768 16,142
Basic Earnings Per Share .700 .690 .690 .640
Diluted Earnings Per Share .690 .680 .680 .640
<CAPTION>
1997
<S> <C> <C> <C> <C>
Net Revenues $26,445 $27,204 $28,360 $28,170
Net Income 17,942 18,525 19,056 19,865
Basic Earnings Per Share .700 .720 .730 .790
Diluted Earnings Per Share .710 .720 .740 .760
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable
<PAGE>
PART III
Item 10. Directors and Executive Officers of Registrant
Management
The following table sets forth the directors and executive officers of
the Company. Each executive officer of the Company is elected by the
directors, serves at the pleasure of the Board of Directors and holds office
until a successor is elected or until the earliest of resignation or removal.
Directors hold office until the annual meeting for the year in which their
term expires and until their successor is elected and qualified. A director
may be removed from office for cause only.
<TABLE>
<CAPTION>
Director
Term
Name Age Position with the Company Expires
- ---- --- ------------------------- -------
<S> <C> <C> <C>
W. Andrew Adams 53 Director and President 1999
Richard F.
LaRoche, Jr. 53 Director and Secretary 2001
Jack Tyrrell 52 Director 1999
Robert T. Webb 54 Director 2000
Ted H. Welch 65 Director 2001
Robert G. Adams 52 Vice President ----
</TABLE>
W. Andrew Adams has been President and a director of the Company since
its inception in 1991. Mr. Adams has also been President and a director of
National HealthCare Corporation ("NHC"), the Company's Investment Advisor,
since 1974. He has served on the Multi-Facility Committee of the American
Health Care Association, the trade association for long-term health care
center companies. He has an M.B.A. from Middle Tennessee State University.
Mr. Adams serves on the Board of Directors of David Lipscomb University in
Nashville, Tennessee, the Board of Directors of SunTrust Bank in Nashville,
Tennessee, and the Board of Directors of National Health Realty, Inc.
Richard F. LaRoche, Jr. has served as Vice President, Secretary and a
director of the Company since its inception in 1991. Mr. LaRoche has also
been General Counsel of NHC since 1971, Secretary of NHC since 1974 and Senior
Vice President of NHC since 1986. He serves in the same capacities for
National Health Realty, Inc. He received a J.D. from Vanderbilt University
and an A.B. from Dartmouth College. Mr. LaRoche is responsible for legal
affairs, acquisitions and finance for all three companies.
Jack Tyrrell has served as a director of the Company since its inception
in 1991. Mr. Tyrrell is managing partner of Richland Ventures, L.P. and
Richland Ventures II, L.P., venture capital firms based in Nashville,
Tennessee which were founded in May 1994 and September 1996. He also
currently serves as general partner of Lawrence, Tyrrell, Ortale & Smith and
Lawrence, Tyrrell, Ortale & Smith, II, L.P., venture capital partnerships
based in Nashville, Tennessee and New York, New York.
Robert T. Webb has served as a director of the Company since its
inception in 1991. Mr. Webb is the owner of commercial buildings and rental
properties in the Middle Tennessee area, a subdivision developer, and a
partner in commercial properties located in Rosslyn, Virginia and Phoenix,
Arizona. Mr. Webb is the President and the sole owner of Webb's Refreshments,
Inc. which has been in operation serving the Middle Tennessee area since 1976.
Mr. Webb attended David Lipscomb College and received a B.A. in business
marketing from Middle Tennessee State University in 1969.
Ted H. Welch has served as a director of the Company since its inception
in 1991. Mr. Welch has owned and operated income producing real estate
(primarily office buildings) in the southeastern United States since 1976.
From 1953 until 1971, Mr. Welch worked for the Southwestern Company where he
became Executive Vice President. From 1971 to 1974, he served as the
Commissioner of Finance and Administration for the State of Tennessee, in
which capacity he was responsible for all construction and maintenance of
State of Tennessee real property, along with being chief operating officer.
Mr. Welch received a B.S. from the University of Tennessee at Martin and
attended the Graduate School of Management at Indiana University. Mr. Welch is
Chairman and Chief Executive Officer of Eagle Communications. Mr. Welch
serves on the Board of Directors of American Constructors, Inc.; First
American Corporation, Nashville, Tennessee; Logan's Roadhouse, Inc.; and
Southeast Service Corporation.
Robert G. Adams has served as Vice President since 1997. He is the
brother of W. Andrew Adams. He is the Chief Operating Officer of NHC, serves
on NHC's Board of Directors and on the Board of National Health Realty, Inc.
He is responsible for oversight of all company due diligence reports and
financial pro formas. He received a B.S. degree from Middle Tennessee State
University.
The following employees of NHC have material involvement with the
Company:
Donald K. Daniel (Vice President and Controller) joined NHC in 1977 as
Controller. He received a B.A. degree from Harding University and an M.B.A.
from the University of Texas. He is a certified public accountant.
Kenneth D. DenBesten (Vice President/Finance) has served as Vice
President/ Finance since 1992. From 1987 to 1992, he was employed by
Physicians Health Care, most recently as Chief Operating Officer. From 1984
to 1986, he was employed by Health America Corporation as Treasurer, Vice
President of Finance and Chief Financial Officer. Mr. DenBesten received a
B.S. in business administration and an M.S. in Finance from the University of
Arizona.
Charlotte A. Swafford (Treasurer) has been Treasurer of NHC since 1985.
She joined NHC in 1973 and has served as Staff Accountant, Accounting
Supervisor and Assistant Treasurer. She has a B.S. degree from Tennessee
Technological University.
Dinsie B. C. Hale (Senior Accountant) has been with NHC since 1985. She
oversees portfolio compliance and reports on those issues monthly to the NHC
Advisory Committee and quarterly to the Board of Directors. She has a B.S.
degree from Middle Tennessee State University.
Jack W. Anderson (Chief Development Officer) joined NHI in 1998 with 19
years experience in real estate and investment banking. He is responsible for
investment identification, review and presentation, as well as overseeing the
due diligence process through closing. Mr. Anderson received a B.A. degree in
Business Administration from Austin College.
Item 11. Executive Compensation
The Company's day to day operations are conducted by personnel provided
by NHC. The Company does have three executive officers, all of whom are also
officers of NHC. The three executive officers may receive a bonus for their
work for NHI, which is paid by NHC and credited against the advisory fee;
however, no bonus has yet been declared or paid to them for 1998.
The following Table 1 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 INVESTORS, INC.
SUMMARY COMPENSATION TABLE
1998
<CAPTION>
Long Term Compensation
-------------------------------------
Annual Compensation <F1> Awards Payouts
- --------------------------------------------------------- ------------------------ ------------ ---------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted
Other Annual Stock All Other
Name and Principal Year Salary Bonus Compensation Awards Options/SARs LTIP Payouts Comp.
Position ($)<F2> ($) ($) (#) ($) ($)
- ------------------ ---- ------ ------- ------------ ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Andrew Adams 1998 $ --- $ <F3> $ --- $ --- --- $ --- $ ---
President & 1997 --- 600,000 --- --- --- --- ---
Director 1996 --- 450,000 --- --- --- --- ---
Robert G. Adams 1998 $ --- $ <F3> $ --- $ --- --- $ --- $ ---
Vice President 1997 --- 400,000 --- --- --- --- ---
1996 --- --- --- --- --- --- ---
Richard F.
LaRoche, Jr. 1998 $ --- $ <F3> $ --- $ --- --- $ --- $ ---
VP/Secretary and 1997 --- 400,000 --- --- --- --- ---
Director 1996 --- 225,000 --- --- --- --- ---
<FN>
<F1> Compensation deferred at the election of an executive has been included
in salary column (d).
<F2> These officers also received compensation from National HealthCare
Corporation and National Health Realty, Inc., Inc. which are dis-
closed in those Company's Form 10-K or proxy statements.
<F3> No bonus has yet been declared or paid for 1998.
</TABLE>
The compensations of Messrs. Adams and Mr. LaRoche are set by the board
of directors of NHC (NHC Board) and are the obligations of NHC pursuant
to the Advisory Agreement. Any compensation paid by the Company is
credited against the Advisory fee paid to NHC. See "Business - Advisory
Agreement". NHC's Board is composed of J. K. Twilla, Olin O. Williams,
W. Andrew Adams, Ernest G. Burgess, III, Robert G. Adams, and
Lawrence C. Tucker.
Messrs. Adams and Mr. LaRoche also serve as Executive Officers of
National Health Realty, Inc., and National HealthCare Corporation.
Directors' Compensation
Directors not affiliated with NHC (Messrs. Welch, Tyrrell, and Webb)
receive $2,500 for each meeting attended, plus reimbursement for any actual
travel expenses. In addition, non-NHC affiliated directors are granted
options to purchase 15,000 shares of Common Stock at the first Annual Meeting
each year pursuant to the 1997 Stock Option Plan. See "Stock Option Plan"
below.
Stock Option Plan
The 1991 Option Plan (as amended in 1994) provided for an automatic
grant to each non-NHC affiliated director of an option to purchase 5,000
shares of Common Stock on the date of the Annual Stockholder's Meeting at the
then fair market value. The 1997 Stock Option Plan increased that number to
15,000 shares per Annual Meeting.
Both Plans permit options to be exercised for cash or by surrender of
shares of Common Stock of the Company valued at the then fair market value.
Unless otherwise specifically provided in the option agreement, no option or
SAR shall be transferable other than by will, family gift, or the laws of
descent and distribution. All shares which may be issued under either Plan
and the exercise prices for outstanding options are subject to adjustment in
the event that the number of outstanding shares of Common Stock will be
changed by reason of stock splits, stock dividends, reclassifications or
recapitalizations. In addition, upon a merger or consolidation involving the
Company, participants are entitled to shares in the surviving corporation.
Pursuant to the automatic grant provisions of the Plans, the three
non-NHC affiliated directors have each received options to purchase shares at
$28.75 per share in 1994, $25.375 in 1995, $33.50 in 1996, $36.00 in 1997 and
$39.875 in 1998. The outside directors have exercised all options granted in
1994, all but 5,060 of the 1995 grants, all but 10,000 of the 1996 grants and
none of the 1997 and 1998 grants.
In 1993 the Board awarded options on 100,000 shares at the then fair
market value of $25.00 to its Investment Advisor, with the direction that they
be allocated among those employees who were directly involved in the provision
of investment advisory services to the Company. On June 1, 1995, the Company
awarded options on another 100,000 shares at the then fair market value of
$26.00 per share to key NHC employees. On January 15, 1997, the balance of
the shares available under the 1991 Plan were granted to Key Employees at
$36.00 per share. 90,000 shares of the 1997 Plan have been granted to non NHC
affiliated directors, and -0- to NHC Key Employees.
Options Granted in 1998
The table below provides certain information on grants of stock options
to the executive officers and directors pursuant to the Company's 1991 Option
Plan during the fiscal year ended December 31, 1998. Although stock
appreciation rights are available under the plan, none have been issued to
date.
<TABLE>
<CAPTION>
Potential Realizable
Percent of Value at Assumed
Total Exercise Annual Rates of
Options/SAR's or Base Stock Price Appreciation
Options/SAR's Granted in Price Expiration for Option Term<F1>
Name Granted (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ---- ------------- ------------ --------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Ted H. Welch 15,000 33.33% $39.875 3/20/03 $ -0- $ -0-
Jack Tyrrell 15,000 33.33% 39.875 3/20/03 -0- -0-
Robert T. Webb 15,000 33.33% 39.875 3/20/03 -0- -0-
W. Andrew Adams -0- ---% --- --- --- ---
Richard F. LaRoche, Jr. -0- ---% --- --- --- ---
Robert G. Adams -0- ---% --- --- --- ---
____________
<FN>
<F1> Amounts represent hypothetical gains that could be achieved for the
options if exercised at the end of the option terms over the
December 31, 1998 average stock price of $24.69. These gains are
based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted. Actual
gains, if any, on stock option exercises will depend on the future
performance of the Common Stock and the date on which the options
are exercised.
</TABLE>
1998 Year-End Option Values
The following table summarizes certain information regarding stock
options exercised during the fiscal year ended December 31, 1998 and stock
options held as of December 31, 1998 by the Executive Officers and Directors.
No SARs were held or exercised during fiscal 1998.
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
Number of Shares
Shares Underlying Unexercised Value of Unexercised
Acquired on Value Options at Fiscal In-the-Money Options
Exercise Realized Year-End at Fiscal Year-End
Name (#) ($)<F1> (#) ($)<F2>
- ---- ---------- -------- --------------------- -------------------
<S> <C> <C> <C> <C>
W. Andrew Adams 36,000 $ 64,625 40,000 $ -0-
Richard F. LaRoche, Jr. 4,000 61,625 30,000 -0-
Robert T. Webb -0- -0- 30,000 -0-
Ted H. Welch 3,940 61,809 35,000 -0-
Jack Tyrrell 2,000 3,500 41,000 -0-
Robert G. Adams 4,000 61,625 30,000 -0-
<FN>
<F1> Represents the difference between the exercise price and the average sales
price of the Common stock on the date of exercise.
<F2> Value based on the average sales price per share ($24.6875) of the
Company's Common Stock on December 31, 1998, as reported on the New
York Stock Exchange, less the exercise price.
</TABLE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as to the number of
shares of Common Stock of the Company beneficially owned as of December 31,
1998 (a) by each person (including any "group" as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") who is known to the Company to own beneficially 5% or more of the
outstanding shares, (b) by each director, and (c) by all executive officers
and directors of the Company:
<TABLE>
<CAPTION>
Names and Addresses Number of Shares Percentages of
of Beneficial Owners Beneficially Owned<F1> Total Shares
- -------------------- ------------------ --------------
<S> <C> <C>
W. Andrew Adams<F2> 1,151,426 4.7%
1927 Memorial Blvd.
Murfreesboro, TN 37129
Richard F. LaRoche, Jr.<F3><F9> 328,073 1.3%
2103 Shannon Drive
Murfreesboro, TN 37129
Jack Tyrrell<F4><F9> 45,586 *
3100 West End Avenue
Nashville, TN 37203
Robert T. Webb<F5> 72,623 *
149 MTCS Drive
Murfreesboro, TN 37129
Ted Welch<F6> 55,000 *
611 Commerce, 29th Floor
Nashville, TN 37219
Robert G. Adams<F7><F9> 356,169 1.1%
2217 Tomahawk Trace
Murfreesboro, TN 37129
Franklin Resources, Inc.<F10> 2,557,073 8.6%
777 Mariners Island Blvd.
San Mateo, CA 94403
Nicholas Fund, Inc. 1,619,800 6.6%
and Nicholas Income Fund, Inc.
6002 North Highway 83
Hartland, WI 53029-8503
All Executive Officers and
Directors as a Group
(6 persons)<F8> 2,008,877 8.2%
________________
*Less than 1%.
<FN>
<F1> The percentages shown are based on 24,364,391 shares of Common
Stock outstanding on December 31, 1998 plus, as to each individual
and group listed, the number of shares of Common Stock deemed to
be owned by such holder pursuant to Rule 13d-3 under the Exchange
Act as disclosed by Vickers Stock Research Corporation.
<F2> Includes options to purchase 40,000 shares of Common Stock held by
Mr. Adams.
<F3> Includes options to purchase 30,000 shares of Common Stock held by
Mr. LaRoche.
<F4> Includes options to purchase 41,000 shares of Common Stock held by
Mr. Tyrrell or family trusts.
<F5> Includes options to purchase 30,000 shares of Common Stock held by
Mr. Webb.
<F6> Includes options to purchase 35,000 shares of Common Stock held by
Mr. Welch.
<F7> Includes options to purchase 30,000 shares of Common Stock held by
Mr. Adams.
<F8> Includes options to purchase 176,000 shares of Common Stock.
<F9> Substantially all the options included in this total have been
transferred to a family partnership or trust.
<F10>This is ownership for SEC purposes and not for purposes of real
estate investment trust regulations.
</TABLE>
The Charter contains certain limitations on the number of shares of the
Company's stock that any one stockholder may own, which limitations are
designed to ensure that the Company maintains its status as a REIT. This
limitation (as amended) states that no person (as defined in the Code) may own
directly or indirectly 9.9 percent or more of the Common Stock of the Company.
Any shares of Common Stock in excess of such limits are deemed to be "Excess
Common Stock". Excess Common Stock shall be deemed automatically to have been
converted into a class separate and distinct from the class from which
converted and from any other class of Excess Common Stock, each such class
being designated "Excess Common Stock of [stockholder's name]". No Excess
Common Stock may be voted, nor considered outstanding for the purpose of
determining a quorum at any meeting of stockholders. Any dividends or other
distributions payable upon the Excess Common Stock may, in the discretion of
the Company, be paid into a non-interest bearing account and released to the
stockholder only at such time as he or she ceases to be the holder of Excess
Common Stock. The Company, upon authorization of the Board of Directors, may
redeem any or all Excess Common Stock, and from the date of the giving of
notice of redemption such shares shall cease to be outstanding and the
stockholder shall cease to be entitled to dividends, voting rights and other
benefits with respect to such shares. The redemption price will be based on
the trading prices of the class of stock from which the Excess Common Stock
being redeemed were converted, and is payable, without interest, only upon the
liquidation of the Company. However, the Charter contains provisions under
which the holder of Excess Common Stock may cause the Company to rescind such
redemption by selling (and notifying the Company of such sale), within 30 days
after notice of the redemption, a number of the shares of Common Stock held by
such holder equal to the number of shares of Excess Common Stock. In addition,
Excess Common Stock held by any holder may be converted back into shares of
Common Stock if the holder sells such shares prior to their being called for
redemption.
Upon demand of the Company, each stockholder must disclose to the
Company such information with respect to direct and indirect ownership of
stock owned (or deemed to be owned after applying the rules applicable to
REITs under the Code) as the Board of Directors deems reasonably necessary in
order that the Company may fully comply with the REIT provisions of the Code.
Proposed transferees of stock must also satisfy the Board, upon demand, that
such transferees will not cause the Company to fall out of compliance with
such provisions.
Item 13. Certain Relationships and Related Transactions
Advisory, Administrative Services and Facilities Agreement
The Company entered into an Advisory, Administrative Services and
Facilities Agreement with NHC as "Advisor" under which NHC provides management
and advisory services to the Company during the term of the Advisory
Agreement. See "Business - Advisory, Administrative Services and Facilities
Agreement".
Leases
Pursuant to NHC's conveyance of certain of the Health Care Facilities to
the Company, the Company leases to NHC 43 of the Health Care Facilities.
Pursuant to these Leases, the Company and NHC have entered into a Master
Agreement to Lease. See "Business - NHC Master Agreement to Lease". Since
the date of the original lease to NHC (October 17, 1991), NHC has expanded the
number of licensed beds at 15 of the 43 centers. By authority and unanimous
vote of the non-NHC affiliated Directors, at such time as the bed additions
were completed, NHI reimbursed NHC its actual out of pocket costs and expenses
in connection with the plant expansions and received a corresponding increase
in the base rent paid by NHC. The 15 expansions were funded at a cost of
$10,534,135 in 1996 and $23,375,000 in 1997 and the lease increases at all
expanded centers are now in effect. At the expiration of the leases, all of
the expansions remain the full and complete property of NHI.
The Mortgage Debt
In connection with NHC's conveyance of 43 of the Health Care Facilities
(the "NHC Health Care Facilities") to the Company in 1991, the Company assumed
mortgage debt of $120.4 million (the "NHC Mortgage Debt"). As of December 31,
1998, after the early retirement by the Company of $20,662,000 for which NHC
is still obligated under the original terms, the aggregate principal balance
of the mortgage debt was $48,676,000. If the Company were required to redeem
all or a material portion of such debt, there can be no assurance that the
Company would be able to replace such debt on the same or similar terms or in
a similar amount. NHC has agreed to indemnify and hold the Company harmless
from certain costs and damages incurred in refinancing or so redeeming this
debt, including closing or commitment fees, legal fees, and increased interest
rates. The balance of the mortgage indebtedness encumbering the Health Care
Facilities received from NHC is long-term self-amortizing debt with final
maturities from 1999 through 2017.
Although the Company assumed the NHC Mortgage Debt, NHC remains liable
on such debt and the Company has agreed to indemnify NHC in respect of such
continuing liability. In connection with the transfer of the NHC Health Care
Facilities and the Notes to the Company, and the assumption by the Company of
the NHC Mortgage Debt, NHC and the Company obtained the written consent of
each material lender of such Mortgage Debt and of the Guaranteed Debt (defined
below). In addition, the Company and NHC have covenanted with such lenders to
maintain certain debt coverage and similar financial ratios. Although there
can be no assurance, management believes that the Company and NHC will be able
to comply with each such covenant, during all relevant periods. In the event,
however, that the Company or NHC fails to comply with any such covenant, and
such failure is deemed to constitute a default under the related NHC Mortgage
Debt or Guaranteed Debt, the Company may be required to retire such NHC
Mortgage Debt or Guaranteed Debt prior to its stated maturity. A default
under such debt, if not waived or cured, could result in a loss of certain of
the Company's assets through foreclosure or other means. NHC has agreed to
indemnify and hold the Company harmless from suffering any loss, liability or
harm as a result of this cross-collateralization, regardless of the form of
such loss, liability or harm.
The majority of the NHC Mortgage Debt is cross-defaulted with other NHC
liabilities and is cross-collateralized as mentioned above. Thus, in the
event NHC defaulted on its remaining obligations under its debt package, the
Company could lose its interest in the Notes or the NHC Health Care
Facilities, even if its own payments on the NHC Mortgage Debt were current.
The Guaranteed Debt
In order to obtain the consent of appropriate lenders to NHC's transfer
of assets to NHI, NHI guaranteed the debt ($17,679,000 at December 31, 1998)
of unrelated parties which NHC has also guaranteed. The debt is at fixed
interest rates with a weighted average interest rate of 8.3% at December 31,
1998. NHI receives from NHC compensation of approximately $88,000 per annum
for the guarantees which is credited against NHC's base rent requirements.
Additionally, NHI has outstanding letters of credit for $10,316,000 of debt.
NHI also has guaranteed bank loans in the amount of $1,449,570 to key
employees and directors of the Company and NHC employees and directors
utilized for the exercise of stock options. No fee is charged for these
option exercise guarantees.
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 is secured by first mortgages,
pledges of personalty, accounts receivable and, in certain instances, by the
guarantees of the owners of the facilities. The borrower has granted second
mortgages over the relevant properties in favor of NHC, and NHC has assigned
its rights in such mortgages to NHI. Such rights 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.
Management Conflict of Interest
Two of the five directors and all of the officers of the Company occupy
positions with NHC, and therefore, there may be conflicts of interest in their
duties to the NHC Unitholders and Company stockholders. Although the
Directors of the Company believe the terms of the NHC leases and the Advisory
Agreement are fair and reasonable, not all of the terms of the leases or the
Advisory Agreement are fair and reasonable, not all of the terms of the leases
or the Advisory Agreement were negotiated on an arm's-length basis. The
Company may purchase additional equity interests in real estate from, or make
additional mortgage loans to, NHC. Since NHC will be the Company's investment
advisor, it will have a conflict of interest in determining the price to be
paid by the Company for additional assets which may be purchased from NHC and
the terms of any leases to be entered into between the Company and NHC.
Security Counsel to NHC also represents the Company on certain security
matters. In the course of such representation, circumstances may arise in
which NHC and the Company have conflicting interests, in which event separate
counsel will be retained to represent one or both of the parties.
Investment Advisor's Conflict of Interest
The Company's Investment Advisor, NHC, is also serving as the Investment
Advisor for National Health Realty, Inc. ("NHR") a separate health care real
estate investment trust founded in December, 1997, by NHC. Although NHR is
publicly traded on the American Stock Exchange, its investment activities are
restricted by the terms of NHC's Advisory Agreement.
NHR's 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 upon its
formation by NHC.
Option Exercise Loan Guaranty Program
The Company has implemented an option exercise loan guaranty program,
the purpose of which is to facilitate Directors and key personnel exercising
options to purchase NHI common stock. Pursuant to Board of Directors'
resolution unanimously passed, each Director and Key Employee to whom options
to purchase NHI common shares have been granted is eligible to obtain an NHI
guaranty of up to $100,000 per year on loans made from commercial banking
institutes, the proceeds of which are used to exercise NHI options. The
guarantee is structured as follows: Option holders must pledge to NHI 125% of
the loan amount in publicly traded stock as additional collateral for the
guarantee; the option holder must personally guarantee the loan to the bank;
the interest rate charged by the bank and all expenses pertaining to the loan
are to be borne by the Director or Employee and the maximum outstanding amount
of loan guarantees is $5,000,000. Furthermore, this facility is to have a one
year term and be renewable at the Board's discretion. The table below
indicates the current amount of loans outstanding by Directors of NHI
individually and by all designated NHC employees collectively as of December
31, 1998.
<PAGE>
<TABLE>
<CAPTION>
Current Maximum
Loan Loan Commercial Bank
Outstanding Outstanding Originating Loan
----------- ----------- ----------------
<S> <C> <C> <C>
W. Andrew Adams $ -0- $ -0- --
Richard F.
LaRoche, Jr. -0- 200,000 SouthTrust Bank
Jack Tyrrell -0- -0- --
Robert T. Webb -0- -0- --
Ted Welch -0- -0- --
Robert G. Adams -0- 100,000 SouthTrust Bank
NHC Employees 1,298,570 1,654,333 SouthTrust Bank
</TABLE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
FINANCIAL STATEMENTS AND SCHEDULES
(a) The following documents are filed as part of this Report:
1. Financial Statements
The Consolidated Financial Statements are included as Exhibit 13 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 listed in the Index to Financial
Statements are filed as part of this Form 10-K.
3. Exhibits
Exhibits required as part of this report are listed in the Exhibit
Index.
(b) Reports on Form 8-K. - Filed July 31, 1998
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Murfreesboro, State of Tennessee, on the 11th day of March, 1999.
NATIONAL HEALTH INVESTORS, INC.
BY: /s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed on the dates indicated by the following persons in
the capacities indicated.
Signature Title Date
/s/ W. Andrew Adams President & Director March 11, 1999
W. Andrew Adams (Principal Executive Officer)
/s/ Richard F. LaRoche, Jr. Secretary and Director March 11, 1999
Richard F. LaRoche, Jr. (Principal Financial Officer)
/s/ Jack Tyrrell Director March 11, 1999
Jack Tyrrell
/s/ Robert T. Webb Director March 11, 1999
Robert T. Webb
/s/ Ted H. Welch Director March 11, 1999
Ted H. Welch
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDING DECEMBER 31, 1998
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit No. Description Page No. or Location
- ---------------- ------------ ---------------------
<S> <C> <C>
3.1 Articles of Incorporation Incorporated by reference
to Exhibit 3.1 to Form S-11
Registration Statement
No. 33-41863
3.2 Bylaws Incorporated by reference
to Exhibit 3.2 to Form S-11
Registration Statement
No. 33-41863
4.1 Form of Common Stock Certificate Incorporated by reference
to Exhibit 39 to Form S-11
Registration Statement
No. 33-41863
4.2 Form of Preferred Convertible Incorporated by reference
Stock Certificate to Exhibit 60 to Form S-3
Registration Statement
No. 33-72370
4.3 Form of Debenture due 2006 Incorporated by reference
(10%) to Exhibit 38 to Form S-11
Registration Statement
No. 33-41863
4.4 Form of Indenture Governing Incorporated by reference
the Debentures to Exhibit 4.3 to Form S-4
Registration Statement No.
33-41863
4.5 Form of Debenture due 2001 Incorporated by reference
(7-3/4%) to Exhibit 4.3 to Form S-3
Registration Statement
No. 33-85398
4.6 Form of Debenture due 2006 Incorporated by reference
(7%) to Exhibit 1 to Form S-3
Registration Statement
No. 33-72370
4.7 First Supplemental Indenture Incorporated by reference
Dated December 15, 1995 to Exhibit 4.7 to Form 10-K
dated February 26, 1996
</TABLE>
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDING DECEMBER 31, 1998
<TABLE>
EXHIBIT INDEX (Continued)
<CAPTION>
Exhibit No. Description Page No. or Location
----------- ----------- --------------------
<S> <C> <C>
10 Materials Contracts Incorporated by reference
from Exhibits 10.1 thru
10.9 to Form S-4 Registration
Statement No. 33-41863
10.12 1991 Stock Option Plan Incorporated by reference
from Exhibit 10.12 to Form
S-4 Registration No. 33-41863
1997 Stock Option Plan Incorporated by reference from
the 1997 Proxy Statement as
filed
13 Report of Independent Public Filed Herewith
Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of
Cash Flows
Consolidated Statements of
Stockholders' Equity
Notes to Consolidated Financial
Statements
Financial Statement Schedules
23 Consent of Independent Public Filed Herewith
Accountants
27 Financial Data Schedule (for SEC purposes only)
</TABLE>
<PAGE>
EXHIBIT 13
NATIONAL HEALTH INVESTORS, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets-December 31, 1998 & 1997
Consolidated Statements of Income-For the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows-For the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity-For the
Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Financial Statements Schedules
Report of Independent Public Accountants on Financial
Statement Schedules
Schedule II Valuation and Qualifying Accounts
Schedule III Real Estate and Accumulated
Depreciation
Schedule IV Mortgage Loans on Real Estate
All other schedules are not submitted because they are not applicable or
not required or because the required information is included in the financial
statements or notes thereto.
The 1998 consolidated financial statements, together with the Report of
Independent Public Accountants, listed in the above index are filed herewith.
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
Report of Independent Public Accountants
To National Health Investors, Inc.:
We have audited the accompanying consolidated balance sheets of National
Health Investors, Inc. (a Maryland corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for the years ended December 31, 1998,
1997 and 1996. 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 referred to above
present fairly, in all material respects, the financial position of National
Health Investors, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for the years ended
December 31, 1998, 1997 and 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
January 13, 1999
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
<CAPTION>
December 31 1998 1997
- ----------- ---- ----
<S> <C> <C>
Assets
Real estate properties:
Land $ 22,649 $ 20,468
Buildings and improvements 267,962 205,631
Construction in progress 798 10,899
291,409 236,998
Less accumulated depreciation (45,871) (36,929)
Real estate properties, net 245,538 200,069
Mortgage and other notes receivable, net 394,174 442,037
Investment in preferred stock 38,132 ---
Investments in real estate mortgage investment conduits 36,861 37,157
Cash and cash equivalents 20,407 64,915
Marketable securities 26,797 ---
Interest and rent receivable 4,542 5,185
Deferred costs and other assets 2,747 3,670
Total Assets $769,198 $753,033
Liabilities and Deferred Income
Long-term debt $151,559 $155,659
Credit facilities 58,500 ---
Convertible subordinated debentures 100,096 119,038
Accounts payable and other accrued expenses 1,696 700
Accrued interest 6,463 6,928
Dividends payable 18,030 18,318
Deferred income 8,194 8,310
Total Liabilities and Deferred Income 344,538 308,953
Commitments and guarantees
Stockholders' Equity
Cumulative convertible preferred stock, $.01 par value;
10,000,000 shares authorized;
768,894 and 833,664 shares, respectively,
issued and outstanding; stated
at liquidation preference of $25 per share 19,222 20,842
Common stock, $.01 par value;
40,000,000 shares authorized;
24,364,391 and 24,753,570 shares,
respectively, issued and outstanding 244 248
Capital in excess of par value 425,449 434,135
Cumulative net income 340,547 270,902
Cumulative dividends (357,518) (282,047)
Unrealized losses on marketable securities (3,284) ---
Total Stockholders' Equity 424,660 444,080
Total Liabilities and Stockholders' Equity $769,198 $753,033
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
Consolidated Statements of Income
(In thousands, except share amounts)
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Revenues:
Mortgage interest income $ 52,698 $ 66,242 $ 62,508
Rental income 42,268 39,948 34,579
Investment interest
and other income 7,326 3,989 2,342
102,292 110,179 99,429
Expenses:
Interest 19,112 22,219 20,633
Depreciation of real estate 8,955 8,036 6,832
Amortization of loan and organization costs 688 836 1,115
General and administrative 3,892 3,700 3,685
32,647 34,791 32,265
Net income 69,645 75,388 67,164
Dividends to preferred stockholders 1,676 1,916 3,118
Net income applicable to common stock $ 67,969 $ 73,472 $ 64,046
Net income per common share:
Basic $ 2.72 $ 3.01 $ 2.92
Diluted 2.69 2.92 2.81
Weighted average common shares outstanding:
Basic 24,964,047 24,394,044 21,916,921
Diluted 28,689,192 28,887,987 27,211,999
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
Consolidated Statements of Cash Flows
(In thousands)
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 69,645 $ 75,388 $ 67,164
Depreciation of real estate 8,955 8,036 6,832
Provision for loan losses 4,260 1,231 (325)
Amortization of loan and organization costs 688 836 1,115
Interest on debenture conversion 324 300 719
Deferred income 1,906 1,495 6,335
Amortization of deferred income (2,022) (2,370) (6,190)
Decrease in interest & rent receivable 643 197 679
(Increase) decrease in other assets (2) (25) 68
Increase in accounts payable
and accrued liabilities 531 4,848 316
Net cash provided by operating activities 84,928 89,936 76,713
Cash flows from investing activities:
Investment in mortgage notes receivable (67,564) (115,876) (153,084)
Collection of mortgage notes receivable 3,872 7,695 8,750
Prepayment of mortgage notes receivable 93,891 181,212 96,311
Acquisition of and construction of
property and equipment, net (40,724) (23,848) (67,892)
Investment in preferred stock (38,132) --- ---
Investment in marketable securities (30,081) --- ---
Net cash provided by (used in)
investing activities (78,738) 49,183 (115,915)
Cash flows from financing activities:
Repayment of credit facilities --- (151,000) (95,250)
Proceeds from credit facilities 58,500 92,000 122,500
Proceeds from long-term debt 243 99,756 103,168
Principal payments on long-term debt (4,343) (104,105) (84,263)
Proceeds from (payments on) convertible
subordinated debentures (40) 60,000 57,735
Financing costs paid --- (2,671) (1,548)
Dividends paid to stockholders (75,759) (73,577) (64,484)
Sale of stock and exercise of stock options 1,953 1,993 2,622
Repurchase of common stock (31,252) --- ---
Net cash provided by (used in)
financing activities (50,698) (77,604) 40,480
Increase (decrease)in cash and cash equivalents (44,508) 61,515 1,278
Cash and cash equivalents, beginning of period 64,915 3,400 2,122
Cash and cash equivalents, end of period $ 20,407 $ 64,915 $ 3,400
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<CAPTION>
Cumulative Convertible Capital in Unrealized Total
Preferred Stock Common Stock Excess of Cumul. Cumulative Losses on Mar- Stock.
Shares Amount Shares Amount Par Value Net Inc. Dividends ketable Sec. Equity
--------- ------ ------ ------ -------- -------- ---------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT 12/31/95 2,311,533 $ 57,788 20,535,014 $205 $311,908 $128,350 $(141,270) $ --- $356,981
Net income --- --- --- --- --- 67,164 --- --- 67,164
Shares sold --- --- 95,878 1 2,621 --- --- --- 2,622
Shares issued in conversion
of convertible debentures
to common stock --- --- 1,702,366 18 49,151 --- --- --- 49,169
Shares issued in con-
version of preferred
stock to common stock (1,261,411) (31,535) 1,141,493 11 31,524 --- --- --- ---
Dividends to common share-
holders ($2.840 per share) --- --- --- --- --- --- (63,135) --- (63,135)
Dividends to preferred share-
holders ($2.125 per share) --- --- --- --- --- --- (3,118) --- (3,118)
BALANCE AT 12/31/96 1,050,122 26,253 23,474,751 235 395,204 195,514 (207,523) --- 409,683
Net income --- --- --- --- --- 75,388 --- --- 75,388
Shares sold --- --- 61,999 1 1,992 --- --- --- 1,993
Shares issued in conversion
of convertible debentures
to common stock --- --- 1,020,926 10 31,530 --- --- --- 31,540
Shares issued in con-
version of preferred
stock to common stock (216,458) (5,411) 195,894 2 5,409 --- --- --- ---
Dividends to common share-
holders($2.960 per share) --- --- --- --- --- --- (72,608) --- (72,608)
Dividends to preferred share-
holders($2.125 per share) --- --- --- --- --- --- (1,916) --- (1,916)
BALANCE AT 12/31/97 833,664 20,842 24,753,570 248 434,135 270,902 (282,047) --- 444,080
Net income --- --- --- --- --- 69,645 --- --- 69,645
Unrealized losses
on marketable securities --- --- --- --- --- --- --- (3,284) (3,284)
Total comprehensive income 66,361
Shares sold --- --- 66,973 1 1,952 --- --- --- 1,953
Common shares repurchased --- --- (1,122,075) (12) (31,240) --- --- --- (31,252)
Shares issued in conversion
of convertible debentures
to common stock --- --- 607,327 6 18,983 --- --- --- 18,989
Shares issued in con-
version of preferred
stock to common stock (64,770) (1,620) 58,596 1 1,619 --- --- --- ---
Dividends to common share-
holders($2.960 per share) --- --- --- --- --- --- (73,795) --- (73,795)
Dividends to preferred
shareholders ($2.125
per share) --- --- --- --- --- --- (1,676) --- (1,676)
BALANCE AT 12/31/98 768,894 $ 19,222 24,364,391 $244 $425,449 $340,547 $(357,518) $(3,284) $424,660
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997, and 1996
Note 1. Organization
National Health Investors, Inc. ("NHI" or the "Company") is a Maryland
real estate investment trust which was incorporated on July 24, 1991. The
majority of NHI's revenue is derived from interest income on mortgage loans
and from rent generated on leased properties. NHI invests in health care
properties including long-term care centers, acute care hospitals, medical
office buildings, assisted living facilities and retirement centers. These
properties are located throughout the United States and are operated by
qualified health care providers.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation - The consolidated financial statements include
the accounts of NHI and its wholly-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 - NHI records properties at cost, including
capitalized interest during construction periods. NHI 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"), NHI evaluates the recoverability of the
carrying values of its properties on a property by property basis.
Allowance for Loan Losses - The allowance for loan losses is considered
adequate to cover potential losses in NHI's mortgage and other notes
receivable. The allowance is determined on a specific loan basis and is based
on an evaluation of the estimated collectibility of loan payments and general
economic conditions.
Cash Equivalents - Cash equivalents consist of all highly liquid
investments with a maturity of three months or less.
Federal Income Taxes - NHI intends at all times to qualify as a real
estate investment trust under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended. Therefore, NHI will not be subject to federal
income tax provided it distributes at least 95% of its annual real estate
investment trust taxable income to its stockholders and meets other
requirements to continue to qualify as a real estate investment trust.
Accordingly, no provision for federal income taxes has been made in the
financial statements.
The primary difference between NHI's tax basis and the reported amounts
of NHI's assets and liabilities is a higher tax basis than book basis (by
approximately $17,298,000) 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, differences in
recognition of commitment fees, differences in the estimated useful lives used
to compute depreciation expense and differences in the treatment of accrued
interest expense which existed at the time the debentures were converted to
common stock.
Concentration of Credit Risks - NHI's credit risks primarily relate to
cash and cash equivalents, to the investments in real estate mortgage
investment conduits and to mortgage and other notes receivable. Cash and cash
equivalents are primarily held in bank accounts and overnight investments.
The investments in real estate mortgage investment conduits relate to a
participating interest in two real estate mortgage investment conduits as
discussed in Note 8. Mortgage and other notes receivable relate primarily to
secured loans with health care facilities as discussed in Note 4.
NHI's financial instruments, principally its investments in the real
estate mortgage investment conduits and 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. NHI
obtains various collateral and other protective rights, and continually
monitors these rights, in order to reduce such possibilities of loss. NHI
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. See Notes 4 and 8 for additional
information on the notes receivable and real estate mortgage investment
conduits.
NHI considers its investments in marketable securities as available for
sale securities and unrealized gains and losses are recorded in stockholders'
equity in accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115").
Deferred Costs - Costs incurred to acquire financings are amortized by
the interest method over the term of the related debt.
Loan Commitment Fees - Non-refundable loan commitment fees received by
NHI are amortized into income by the interest method over the expected period
of the related loans. In the event that a potential borrower chooses not to
borrow funds from NHI, the related commitment fees are recognized into income
when the commitment expires.
In management's opinion, these loan commitment fees approximate the loan
commitment fees that NHI would currently charge to enter into similar
agreements based on the terms of the agreements and the creditworthiness of
the parties, and the committed interest rates are approximately the same as
current levels of interest rates.
Rental Income - Rental income is recognized by NHI based on the terms of
NHI's leases.
Mortgage Interest Income - Mortgage interest income is recognized by NHI
based on the interest rates and principal amounts outstanding of the mortgage
notes receivable. Mortgage interest income includes prepayment penalties,
which are recognized into income upon prepayment of notes receivable.
Note 3. Real Estate Properties
The following table summarizes NHI's real estate properties by type of
facility and by state as of December 31, 1998:
<TABLE>
<CAPTION>
Buildings,
Number Improvements & Mortgage
of Construction Accumulated Notes
Facility Type and State Facilities Land in Progress Depreciation Payable
- ----------------------- ---------- ---- ----------- ------------ -------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Long-Term Care:
Alabama 2 $ 95 $ 5,165 $ 1,579 $ 470
Arizona 1 453 6,678 312 2,885
Florida 4 2,249 33,022 7,088 10,912
Georgia 1 52 865 449 150
Idaho 2 365 6,824 433 ---
Kentucky 3 201 2,899 1,148 ---
Missouri 5 1,070 23,070 6,173 15,379
South Carolina 3 572 11,543 3,884 6,214
Tennessee 21 2,118 44,970 12,967 10,782
Virginia 1 176 2,511 746 3,635
Washington 4 1,881 11,810 47 ---
Total Long-Term Care 47 9,232 149,357 34,826 50,427
Acute Care:
Kentucky 1 540 6,961 1,298 ---
Total Acute Care 1 540 6,961 1,298 ---
Medical Office Buildings:
Florida 1 170 3,349 682 ---
Illinois 1 --- 2,077 19 ---
Kentucky 1 23 3,667 707 ---
Louisiana 1 --- 3,487 710 ---
Texas 2 631 9,676 1,094 ---
Utah 1 223 6,886 1,400 ---
Total Medical Office
Buildings 7 1,047 29,142 4,612 ---
Assisted Living:
Arizona 3 --- 11,160 --- ---
Florida 4 5,089 35,051 1,574 ---
New Jersey 1 4,229 13,030 1,019 ---
South Carolina 1 --- 3,221 --- ---
Tennessee 1 --- 2,922 --- ---
Texas 1 2,094 9,091 676 ---
Total Assisted Living 11 11,412 74,475 3,269 ---
Retirement Centers:
Missouri 1 354 3,181 852 ---
Tennessee 2 64 5,644 1,014 492
Total Retirement Centers 3 418 8,825 1,866 492
-- ------- ------- ------ ------
Total 69 $22,649 $268,760 $45,871 $50,919
</TABLE>
<PAGE>
In 1994, NHI funded a mortgage loan for All Seasons Living Centers in
the original principal amount of $15,000,000. Collateral for the loan
included first mortgages on four long-term health care facilities and a
leasehold mortgage on two additional properties, all located in the State of
Washington. On October 16, 1998, NHI purchased from All Seasons Living
Centers for approximately $13,700,000 (the then current loan balance) all of
the real estate, property and equipment of the four long term health care
facilities described above (502 beds), but excluding the two leasehold
properties. The purchase was undertaken in lieu of foreclosure after certain
technical defaults on NHI's loan agreements and after the death of the
principal owner. Sunrise Healthcare Corporation, a subsidiary of Sun
Healthcare Group, Inc., has been engaged by NHI to manage the facilities. NHI
will elect to treat the property as foreclosure property for federal income
tax purposes. With this election, unqualified income generated by the
property is expected to be treated as qualified income for up to two years
from the purchase date for purposes of the income-source tests which must be
satisfied by real estate investment trusts to maintain their tax status. Net
operating income of the facilities for the period subsequent to acquisition
was not material in 1998 and has been included in investment interest and
other income in the consolidated statements of income.
Note 4. Mortgage and Other Notes Receivable
The following is a summary of mortgage and other notes receivable by
type:
<TABLE>
<CAPTION>
December 31
1998 1997
----------- -----------
<S> <C> <C>
Mortgage loans $380,417,000 $424,272,000
Construction loans 17,965,000 17,638,000
Term loans 3,618,000 3,693,000
----------- -----------
402,000,000 445,603,000
Loan loss allowance (7,826,000) (3,566,000)
----------- -----------
$394,174,000 $442,037,000
=========== ===========
</TABLE>
The following is a summary of the terms and amounts of mortgage and
other notes receivable at December 31, 1998:
<TABLE>
<CAPTION>
Final Number of Principal
Payment Date Loans Payment Terms Amount
------------ --------- ------------- ---------
First Mortgage Notes:
<S> <C> <C> <C>
1999 1 Monthly payments of $258,000, which
include interest at 11%. $ 25,568,000
2000 1 Loan participation agreement with
SouthTrust Bank acquiring a 50% interest
in six mortgage notes. Monthly payments
of $194,000, which include interest at
a variable rate equal to LIBOR plus 2%. 26,363,000
2003 1 Monthly payments of $98,000, which
include interest at 11%. Contingent
interest related to the increase in
certain lease payments of the facilities
over a base year is paid annually. 9,485,000
2003 1 Monthly payments of $294,000, which
include interest at 10%. 28,404,000
2005 1 Monthly payments of $99,000, which include
interest at 11.45%. The interest rate
escalates annually by .1% per year.
Contingent interest related to a percentage
of the facilities' annual increase in revenue
over a base year is due annually. 9,374,000
2006 1 Monthly interest payments of $207,000 at
10.5%. Effective January 1999, the monthly
payment will be adjusted annually to include
principal and interest at a rate equal to
.15% above the previous year's rate. 22,896,000
2007 1 Monthly interest payments of $466,000 at
10.5% through October 1999. Beginning
November 1999, monthly payments of principal
and interest of $501,000, which include
interest at 10.5%. Contingent interest
related to a percentage of the facilities'
annual increase in revenue over a base
year is due annually beginning in 1999. 51,500,000
2007 1 Monthly interest payments of $90,000 at
10.5% through April 1999. Beginning May
1999, monthly payments of principal and
interest of $94,000, which include interest
at 10.5%. Contingent interest related to
a percentage of the facilities' annual in-
crease in revenue over a base year is due
annually. 10,000,000
2007 1 Monthly payments of $91,000, which include
interest at 10.5%. Contingent interest re-
lated to a percentage of the facilities'
annual increase in revenue over a base
year is due annually. 9,379,000
2008 1 Monthly payments of $135,000, which
include interest at 9.50%. Contingent
interest related to a percentage of
the facilities' annual increase in revenue
over a base year is paid annually. 15,243,000
2010 1 Monthly payments of $186,000, which include
interest at 11.55%. The interest rate will
escalate .1% per year through September 1,
2005, the anniversary date of the note. Effec-
tive September 1, 2005, the monthly payment
will be adjusted to include interest at the
greater of 12.25% or the rate that five-year
United States securities yield plus 4.5%. 17,530,000
2011 1 Monthly interest payments of $240,000 at
10.8%. The interest rate will be in-
creased by .15% annually. Principal on the
loan is due at maturity. 25,805,000
1999 - 2008 28 Monthly payments from $12,000 to $91,000,
which include interest at 9.5% to 12.45%.
Principal outstanding ranges from $330,000
to $8,446,000. 128,870,000
Construction Loans:
2002-2010 4 Monthly payments of interest only
at the rates of 9% to 10.75% during con-
struction. Construction notes will convert
to mortgage notes at close of construction.
The notes provide for interest escalation at
various anniversary dates of the notes.
Contingent interest related to a
percentage of the facilities' annual
increase in revenue over a base year
will be paid annually beginning during the
term of the mortgage loans. 17,965,000
Term Notes:
2019 3 Monthly payments of $29,000, which
include interest at 7.5%. 3,618,000
-----------
$402,000,000
===========
</TABLE>
The mortgage notes receivable are generally first mortgage notes secured
by the real estate of long-term health care centers, medical office buildings,
assisted living facilities and retirement centers in the states of Alabama,
Arizona, Colorado, Florida, Georgia, Kansas, Louisiana, Maryland,
Massachusetts, Missouri, New Hampshire, Oklahoma, Pennsylvania, Tennessee,
Texas, Virginia, Washington, and Wisconsin. Construction loans are for the
construction of two nursing homes located in New Jersey, one nursing home
addition in Florida, one assisted living facility in North Carolina and one
assisted living facility located in Maryland. NHI has agreed to provide
permanent financing for the projects upon completion of the construction.
The mortgage notes receivable are secured by first mortgages on the real
property and UCC liens on the personal property of the facilities. Certain of
the notes receivable are also secured by guarantees of significant parties and
by cross-collateralization on properties with the same respective owner.
Mortgage and other notes receivable are reduced by an allowance for loan
losses of $7,826,000 at December 31, 1998 and $3,566,000 at December 31, 1997.
The provision for loan losses in 1998, 1997, and 1996 was $4,260,000,
$1,231,000, and $(325,000) respectively, and has been recorded as a reduction
of mortgage interest income in the consolidated statements of income.
Note 5. 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 NHI's mortgage
and other notes receivable is estimated based on the current rates offered by
NHI and other real estate investment trusts and financial institutions for the
same or similar types of mortgage and other notes receivable of the same or
similar maturities.
Investments in real estate mortgage investment conduits - The fair value
of NHI's investments in real estate mortgage investment conduits is estimated
based on the present value of the estimated cash flows discounted at a rate
comparable to current rates offered by NHI and other real estate investment
trusts for similar investments.
Investment in preferred stock - The fair value is estimated based on the
current rates offered by NHI and other real estate investment trusts for
similar investments and is the same as the carrying amount.
Investment in marketable securities - The fair market value is estimated
based on quoted market prices and is the same as the carrying amount.
Interest and rent receivable - The carrying amount approximates 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 and credit facilities - The fair value of NHI's long-term
debt and credit facilities is estimated based on the current rates offered to
NHI and other real estate investment trusts for debt of the same remaining
maturities. The fair value of the debt transferred from National HealthCare
Corporation ("NHC") to NHI is estimated to approximate the carrying value of
the debt as NHC is obligated to pay NHI debt service rent.
Convertible subordinated debentures - The fair value of NHI's 1997
debentures, 1995 debentures and senior debentures is estimated based on the
quoted market prices of the debentures.
The estimated fair values of NHI's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Mortgage and other
notes receivable $ 394,174 $ 394,174 $ 442,037 $ 442,037
Investment in preferred stock 38,132 38,132 --- ---
Investments in real estate mort-
gage investment conduits 36,861 36,861 37,157 37,157
Marketable securities 26,797 26,797 --- ---
Interest and rent receivable 4,542 4,542 5,185 5,185
Cash and cash equivalents 20,407 20,407 64,915 64,915
Long-term debt and credit
facilities (210,059) (210,059) (155,659) (155,659)
Convertible subordinated
debentures (100,096) (72,562) (119,038) (144,486)
</TABLE>
<PAGE>
Note 6. Investment in Preferred Stock
In September 1998, NHI purchased two million shares of the cumulative
preferred stock of another real estate investment trust. The nonvoting
preferred stock is convertible into common stock at a 1:1 ratio. The
preferred stock has an annual cumulative coupon rate of 8.5% payable quarterly
and a liquidation preference of $19.25 per share. The preferred stock is not
redeemable by NHI or the issuer. The preferred stock, which is not listed on
a stock exchange, is considered a nonmarketable security and is recorded at
cost in the consolidated balance sheets. Amounts received from the 8.5%
coupon rate are recorded as income when earned.
Note 7. Investment in Marketable Securities
NHI considers its investments in marketable securities as available for
sale securities and unrealized gains and losses are recorded in stockholders'
equity in accordance with SFAS 115. No sales of marketable securities
occurred during 1998. Upon sale, realized gains and losses from securities
sales are determined on the specific identification of the securities.
Note 8. Investments in Real Estate Mortgage Investment Conduits
On December 29, 1995, NHI purchased for $6,158,000 a participating
interest in a real estate mortgage investment conduit ("REMIC") in the form of
one class of certificates issued in the aggregate principal amount of
$146,104,000 ("the 1995 REMIC"). On November 9, 1993, NHI purchased for
$34,196,000 a participating interest in a REMIC in the form of nine classes of
certificates issued in the aggregate principal amount of $172,928,000 ("the
1993 REMIC"). Both of the REMICs represent the entire beneficial ownership
interest in a trust fund. Each trust fund consists of pools of mortgage
loans, each secured by a first lien on a property which is used in providing
long-term nursing care and certain other assets.
A portion of the 1993 REMIC certificates are interest-only certificates
and entitle NHI to receive cash flow designated as interest. Principal and
interest distributions on other certificates purchased by NHI are subordinated
to distributions of principal and interest with respect to certain other
classes of certificates.
Pursuant to SFAS 115, NHI has classified its investments in the
certificates as held-to-maturity debt securities. Accordingly, the
investments in the certificates have been recorded at the amortized cost in
NHI's consolidated financial statements. The effective yields, as calculated,
have been used to accrue income based on actual and projected future cash
flows that reflect actual and assumed mortgage prepayments and interest rates.
The average remaining lives of the mortgages in the 1995 REMIC and the 1993
REMIC are calculated to be 6.9 years and 4.8 years, respectively. NHI
continually monitors the carrying values of the 1995 and 1993 REMIC
investments based on actual cash payments received and revised cash flow
projections that reflect updated assumptions about interest rates and
prepayment rates. In the opinion of management, no impairments of the
carrying values have occurred as of December 31, 1998.
Note 9. Long-term Debt and Credit Facilities
Short-Term Borrowings - As of December 31, 1998 and 1997, there were no
short-term borrowings outstanding.
Long-Term Debt - Long-term debt and credit facilities, including
refinancing commitments, consist of the following:
<TABLE>
<CAPTION>
Weighted Average Final Principal
Interest Rate Maturities Amount
December 31 1998 1997
- ----------- --------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Bank credit facility, principal and Variable,
interest payable quarterly 5.8% 2009 $ 22,003,000 $ 23,301,000
Senior secured notes, principal and interest
payable semiannually 8.4 2005 12,825,000 14,657,000
Senior secured notes, principal and interest
payable semiannually 8.3 2003 746,000 912,000
Senior unsecured line of credit agreement,
payable in periodic installments of Variable,
principal and interest 7.0 2000 58,500,000 ---
Unsecured notes, interest payable semi-
annually, principal due at maturity 7.3 2007 100,000,000 100,000,000
First mortgage notes, principal payable in
periodic installments, interest
payable monthly 5.0 2017 935,000 834,000
First mortgage revenue bonds, principal
payable in periodic installments, Variable,
interest payable monthly 4.9 1999-2014 15,050,000 15,955,000
----------- -----------
$210,059,000 $155,659,000
=========== ===========
</TABLE>
NHI has established a senior unsecured revolving line of credit which
allows it to borrow a maximum of $100,000,000. The agreement allows NHI to
borrow up to two-thirds of its borrowing base, which consists primarily of
NHI's mortgage notes receivable and REMIC investments. The loan bears
interest at the prime rate or at a premium over the London Interbank Offered
Rate ("LIBOR") at the option of NHI. The loan matures in October 2000. At
December 31, 1998, NHI had borrowed $58,500,000 under this credit facility.
On June 25, 1997, NHI received proceeds from the sale of $100,000,000 of
7.3% notes payable ("the Notes"), which mature on July 16, 2007 and have no
sinking fund provisions. The Notes are general unsecured obligations of NHI
and rank equally with NHI's other unsecured and subordinated debt. NHI agrees
in the note indenture that it will limit liens on assets to certain
percentages of tangible assets and that it will limit the issuance of new debt
to certain multiples of capital or net worth.
On October 11, 1995 and April 28, 1995, NHI entered into two five-year
interest rate swap agreements. Pursuant to these agreements, NHI has
exchanged certain variable interest rates on a $50,000,000 notional principal
amount for a weighted average fixed rate of 7.6% per annum.
Interest rate swap agreements are used to reduce the potential impact of
increases in interest rates on variable rate long-term debt and credit
facilities. The fair value of the swap agreements are not recognized in the
consolidated financial statements as they are accounted for as hedges.
Amounts payable under such agreements are accrued as an increase in interest
expense. NHI is exposed to credit losses in the event of nonperformance by
the counterparties to these agreements. NHI anticipates, however, that
counterparties will be able to fully satisfy their obligations under the
contracts. NHI does not obtain collateral or other security to support these
agreements subject to credit risk but does monitor the credit standing of
counterparties.
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. 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.
Substantially all real estate property and certain mortgage notes
receivable are either pledged as collateral on the long-term debt and credit
facilities or are subject to a negative pledge.
The debt identified as senior secured notes is cross-defaulted with
other liabilities of NHC and its affiliates and is cross-collateralized to the
extent of approximately $17,679,000 of debt. Thus, in the event NHC defaulted
on its obligations under its debt packages, NHI could lose its interest in the
related mortgage notes receivable or real estate properties.
The aggregate principal maturities of all long-term debt and credit
facilities, including refinancing commitments, for the five years subsequent
to December 31, 1998 are as follows:
1999 $ 4,505,000
2000 62,930,000
2001 4,617,000
2002 4,769,000
2003 4,948,000
Certain loan agreements require maintenance of specified operating
ratios as well as specified levels of working capital and stockholders' equity
by NHI and NHC. All such covenants have been met by NHI, and NHI believes all
such covenants have been met by NHC.
Note 10. Convertible Subordinated Debentures
1997 Debentures - On January 29, 1997, NHI issued $60,000,000 of 7%
convertible subordinated debentures (the "1997 debentures") due on February 1,
2004. At December 31, 1998, 1997 debentures in the amount of $56,286,000 were
outstanding.
The 1997 debentures are convertible at the option of the holder into
common stock of NHI at a conversion price of $37.50, subject to adjustment.
During 1998 and 1997, $3,349,000 and $365,000, respectively, of the 1997
debentures were converted into 89,302 and 9,733 shares of common stock. NHI
has reserved an additional 1,500,960 shares of common stock for 1997 debenture
conversions.
The 1997 debentures will not be redeemable prior to February 8, 2002
except in the event of certain tax-related events or to the extent necessary
to preserve and protect NHI's status as a real estate investment trust. The
debentures are subordinated in right of payment to the prior payment in full
of all senior indebtedness of the Company. Interest is payable semiannually
on February 1 and August 1 of each year.
1995 Debentures - On December 12, 1995, NHI sold $45,000,000 of a total
of $100,000,000 of 7.75% convertible subordinated debentures (the "1995
debentures") due on January 1, 2001. The remaining $55,000,000 were sold on
January 15, 1996. At December 31, 1998, 1995 debentures in the amount of
$38,070,000 were outstanding.
The 1995 debentures are convertible at the option of the holder into
common stock of NHI at a conversion price of $31.625, subject to adjustment.
During 1998 and 1997, $9,352,000 and $27,472,000, respectively, of the 1995
debentures were converted into 295,711 and 868,664 shares of common stock.
NHI has reserved an additional 1,203,794 shares of common stock for 1995
debenture conversions.
The 1995 debentures will not be redeemable prior to maturity except in
the event of certain tax-related events or to the extent necessary to preserve
and protect NHI's status as a real estate investment trust. The debentures
are subordinated in right of payment to the prior payment in full of all
senior indebtedness of the Company. Interest is payable semiannually on
January 1 and July 1 of each year.
1995 Debt Service Debentures - In November 1995, NHI began offering 7%
subordinated convertible debentures due on January 1, 2006. NHI may offer up
to $25,000,000 of these debentures to current and future mortgagees and
lessees of NHI to satisfy existing debt service reserve escrow requirements
under applicable mortgages or leases. At December 31, 1998, debentures in the
amount of $5,535,000 were outstanding.
The debentures are convertible at the option of the holder into common
stock of NHI at a conversion price of 110% of the market price on the date of
issuance of the debentures, subject to adjustment. During 1998, $871,000 of
the debentures were converted into 26,393 shares of common stock. NHI has
reserved 157,419 shares of common stock for conversion of 1995 debt service
debentures. Interest is payable semiannually on April 1 and October 1 of each
year.
1993 Debentures - On March 25, 1993, NHI issued $112,210,000 of 7.375%
convertible subordinated debentures (the "1993 debentures"). During 1998 and
1997, $5,305,000 and $3,790,000, respectively, of the debentures were
converted into 194,671 and 139,074 shares of common stock. In accordance with
the terms of the 1993 debentures, in April 1998, NHI redeemed all of the
remaining 1993 debentures.
Senior Debentures - On October 17, 1991, NHI issued $110,000,000 of 10%
senior convertible subordinated debentures (the "senior debentures") due 2006.
At December 31, 1998, senior debentures in the amount of $205,000 were
outstanding.
The senior debentures are convertible at the option of the holder into
NHI's common stock at a price of $20 per share, subject to adjustment. In
1998 and 1997, $25,000 and $70,000, respectively, of the senior debentures
were converted into 1,250 and 3,500 shares of common stock. NHI has reserved
an additional 10,250 shares of common stock for senior debenture conversions.
The senior debentures rank equally with other unsecured debt of NHI
(other than the trade debt) but are subordinated to all existing and secured
indebtedness. NHI may not incur or guarantee unsecured indebtedness which is
senior in right of payment to the senior debentures. Interest at 10% is
payable semiannually on January 1 and July 1 of each year.
Note 11. Commitments and Guarantees
At December 31, 1998, NHI was committed, subject to due diligence and
financial performance goals, to fund approximately $136,900,000 in health
care real estate projects, all of which is expected to be funded within the
next 12 months. The commitments include mortgage loans or purchase leaseback
agreements for six long-term health care centers, two medical office
buildings, and 24 assisted living facilities, all at rates ranging from 9% to
11.5%. Also included in the $136,900,000 of commitments is a commitment to
loan an additional $3,300,000 on three existing loans when the mortgagee
obtains certain operating ratios.
In order to obtain the consent of appropriate lenders to NHC's transfer
of assets to NHI, NHI guaranteed certain debt ($17,679,000 at December 31,
1998) of NHC and its affiliates. The debt is at fixed interest rates with a
weighted average interest rate of 8.3% at December 31, 1998. 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 outstanding letters of credit totaling
$10,316,000. NHI also has guaranteed bank loans in the amount of $1,449,570
to key employees and directors utilized for the exercise of stock options.
All shares of NHI stock purchased with the proceeds of the guaranteed loans
are held as collateral by NHI and the loans are limited to $100,000 per
individual per year. NHI's potential accounting loss related to these
guaranteed bank loans, if all collateral failed, is the face amount of the
guaranteed loans outstanding.
<PAGE>
Note 12. 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.
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 not redeemable by NHI prior to February 15, 1999
and is not redeemable for cash. On or after February 15, 1999, the Preferred
Stock will be redeemable by NHI for common stock. NHI may redeem the
Preferred 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.
At December 31, 1998, 768,894 shares of the Preferred Stock, which are
convertible into 695,849 shares of common stock, are outstanding. During 1998
and 1997, respectively, 64,770 and 216,458 shares of preferred stock were
converted into 58,596 and 195,894 shares of common stock. NHI has reserved
695,849 shares of common stock for Preferred Stock conversions.
Note 13. Limits on Common Stock Ownership
On October 16, 1996, the NHI Board of Directors, pursuant to powers
granted by the Company's charter, changed the limit on the percentage of
ownership which any person may have in the outstanding common stock of the
Company from a limit of 7.0% to a limit of 9.9%. The limit on ownership of
any other class of stock (including issues convertible into common stock)
remains at 9.9% of the outstanding stock. This limit is a provision of the
Company's charter and is necessary in order to reduce the possibility of the
Company's failing to meet the stock ownership requirements for qualification
as a real estate investment trust under the Internal Revenue Code.
Note 14. Stock Option Plan
NHI has stock option plans which provide for the granting of options to
key employees and directors of NHI to purchase shares of common stock at a
price no less than the market value of the stock on the date the option is
granted. The options may be exercised immediately, but the Company may
purchase the shares at the grant price if employment is terminated prior to
six years from the date of grant. The maximum term of the options is five
years. The following table summarizes option activity:
<PAGE>
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise
Options Outstanding Shares Price
------------------- --------- ----------------
<S> <C> <C>
Outstanding December 31, 1995 156,791 $25.65
Options granted 15,000 33.50
Options exercised 71,079 25.75
Outstanding December 31, 1996 100,712 26.75
Options granted 194,000 36.00
Options exercised 39,365 29.78
Outstanding December 31, 1997 255,347 33.31
Options granted 45,000 39.88
Options exercised and canceled 79,213 28.42
Outstanding December 31, 1998 221,134 $36.40
</TABLE>
At December 31, 1998, all options outstanding are exercisable. Exercise
prices on the exercisable options range from $25.38 to $39.88. The weighted
average remaining contractual life of options outstanding at December 31, 1998
is 3.2 years. NHI has reserved 767,347 shares of common stock for issuance
under the stock option plans.
NHI 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 NHI's stock
option plans. Based on the number of options outstanding and the historical
and expected future trends of factors affecting valuation of those options,
management believes that the additional compensation cost, as calculated in
accordance with SFAS 123, has no effect on NHI's pro forma earnings and
earnings per share.
Note 15. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
(in thousands, except share amounts)
Year Ended December 31 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Cash payments for interest expense $ 16,451 $ 13,577 $ 15,530
During 1998, 1997 and 1996,
$18,902,000, $31,697,000 and
$49,316,000, respectively,
of convertible subordinated
debentures were converted
into 607,327 shares, 1,020,926
shares and 1,702,366 shares,
respectively, of NHI's common
stock:
Convertible subordinated
debentures $ (18,902) $(31,697) $ (49,316)
Financing costs 237 457 866
Accrued interest (324) (300) (719)
Common stock 6 10 18
Capital in excess
of par value 18,983 31,530 49,151
<PAGE>
During 1998, NHI acquired property
and equipment in exchange
for NHI's rights under a
mortgage note receivable
Mortgage and other notes
receivable $ 13,700 $ --- $ ---
Land (1,881) --- ---
Buildings and improve-
ments (11,819) --- ---
</TABLE>
Note 16. Earnings Per Share
In 1997, the FASB issued Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128"). NHI adopted the provisions of SFAS
128 during the fourth quarter of 1997 and has restated earnings per share for
1996.
Basic earnings per share is based on the weighted average number of
common shares outstanding during the year. Net income is reduced by dividends
to holders of cumulative convertible preferred stock.
Diluted earnings per share assumes the conversion of convertible
subordinated debentures, the conversion of cumulative convertible preferred
stock and the exercise of stock options using the treasury stock method. Net
income is increased for interest expense on the convertible subordinated
debentures.
The following table summarizes the average number of common shares and
the net income used in the calculation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
BASIC:
Weighted average common
shares 24,964,047 24,394,044 21,916,921
Net income $69,645,000 $75,388,000 $67,164,000
Dividends paid to preferred
stockholders (1,676,000) (1,916,000) (3,118,000)
Net income available to
common stockholders $67,969,000 $73,472,000 $64,046,000
Net income per common share $ 2.72 $ 3.01 $ 2.92
DILUTED:
Weighted average common
shares 24,964,047 24,394,044 21,916,921
Stock options 13,302 36,897 29,937
Convertible subordinated
debentures 2,990,904 3,621,812 3,851,251
Cumulative convertible pre-
ferred stock 720,939 835,234 1,413,890
Average common shares
outstanding 28,689,192 28,887,987 27,211,999
Net income $69,645,000 $75,388,000 $67,164,000
Interest expense on con-
vertible subordinated
debentures 7,594,000 9,046,000 9,184,000
Net income assuming con-
version of convertible
subordinated debentures
to common stock $77,239,000 $84,434,000 $76,348,000
Net income per common share $ 2.69 $ 2.92 $ 2.81
</TABLE>
Note 17. Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
requires that changes in the amounts of certain items, including gains and
losses on marketable securities, be shown in the consolidated financial
statements. NHI adopted the provisions of SFAS 130 effective January 1, 1998.
SFAS 130 requires retroactive application; however, the Company had no
comprehensive income items other than net income in 1997 and 1996. NHI has
elected to disclose comprehensive income for 1998, which includes net income
and unrealized gains and losses on marketable securities, in the consolidated
statements of stockholders' equity.
Note 18. Dividends
Dividend payments by NHI to its common stockholders are characterized in
the following manner for tax purposes in 1998:
<TABLE>
<CAPTION>
Dividend Taxable Non-Taxable
Payment as Ordinary Taxable as Return of
Date Income Capital Gains Capital Totals
- -------- ----------- ------------- ----------- ------
<S> <C> <C> <C> <C>
May 11, 1998 $ .74 $--- $--- $ .74
Aug. 10, 1998 .74 --- --- .74
Nov. 10, 1998 .74 --- --- .74
Jan. 29, 1999 .74 --- --- .74
---- ---- ---- ----
$2.96 $--- $--- $2.96
===== ==== ==== ====
</TABLE>
Note 19. Relationship with National HealthCare Corporation
Leases - On October 17, 1991, concurrent with NHC's conveyance of real
property to NHI, NHI leased to NHC 40 long-term care facilities and three
retirement centers. Each lease is for an initial term expiring December 31,
2001, with two additional five-year renewal terms at the option of NHC,
assuming no defaults. NHI accounts for its leases as operating leases.
During the initial term of the first renewal term, NHC is obligated to
pay annual base rent on all 43 facilities of $15,238,000. If NHC exercises
its option to extend the leases for a second renewal term, the base rent will
be the then fair rental value as negotiated by NHI and NHC.
The leases also obligate NHC to pay as debt service rent all payments of
interest and principal due under each mortgage to which the conveyance of the
facilities was subject. Payments for debt still being serviced are required
for the shorter of the remaining life of the mortgage or lease term.
In addition to base rent and debt service rent, in each year after 1992,
NHC must pay percentage rent to NHI equal to 3% of the amount by which gross
revenue of each facility in such later year exceeds the gross revenue of such
facility in 1992.
Each lease with NHC 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 ownership of the facilities. NHC is
obligated at its expense to maintain adequate insurance on the facilities'
assets.
NHC has a right-of-first refusal with NHI to purchase any of the initial
properties transferred from NHC should NHI receive an offer from an unrelated
party during the term of the lease or up to 180 days after termination of the
related lease.
Rental income was $42,268,000 ($31,732,000 from NHC) in 1998;
$39,948,000 ($29,829,000 from NHC) in 1997; and $34,579,000 ($26,910,000 from
NHC) in 1996.
During 1997, NHI purchased $23,375,000 of additional property from NHC.
This property represents capital improvements at 15 long-term care centers
owned by NHI and leased to NHC. Additional base rent equal to 9.5% of the
amount transferred is paid annually by NHC.
At December 31, 1998, the future minimum lease payments to be received
by NHI under its operating leases, including debt service payments which are
based on interest rates in effect at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
NHC Others Total
<S> <C> <C> <C>
1999 $29,297,000 $ 13,785,000 $ 43,082,000
2000 29,290,000 13,900,000 43,190,000
2001 29,313,000 14,018,000 43,331,000
2002 -0- 13,615,000 13,615,000
2003 -0- 13,364,000 13,364,000
Thereafter -0- 114,342,000 114,342,000
</TABLE>
Advisory Agreement - NHI has entered into an Advisory Agreement with NHC
whereby services related to investment activities and day-to-day management
and operations are provided to NHI by NHC. As Advisor, NHC is subject to the
supervision of and policies established by NHI's Board of Directors.
Either party may terminate the Advisory Agreement on 90 days notice at
any time. NHI 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 $3,310,000 in 1998 ($3,101,000 in 1997 and
$3,101,000 in 1996). The annual compensation is reduced by any compensation
paid by NHI to its executive officers, if any. However, the payment of such
annual compensation is conditional upon NHI having funds from operations
sufficient to enable NHI to pay annual dividends of $2.00 per common share and
upon NHI paying such dividends. Funds from operations is defined for these
purposes as net income, plus depreciation and amortization, less the effect of
any capital gains or losses included in such net income. Increases in
compensation to NHC under the Advisory Agreement are proportional to increases
in NHI's funds from operations per common share as defined above.
Note 20. Prior Year Reclassifications
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform to the 1998 presentation.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To National Health Investors, Inc.:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements of National Health Investors,
Inc. included in Exhibit 13 to this Form 10-K, and have issued our report
thereon dated January 13, 1999. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The financial statement schedules listed in the accompanying index to
Exhibit 13 are the responsibility of the Company's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not otherwise a required part of the basic
consolidated financial statements. The financial statement schedules have
been subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
January 13, 1999
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(in thousands)
<CAPTION>
Column A Column B Column C Column D Column E
- -------- -------- --------- -------- --------
Additions
-----------------------
Balance- Charged to Charged to Balance
Beginning Costs and Mortgage -End of
Description of Period Expenses Int. Income Deductions Period
- ----------- --------- ---------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31,
1996-Loan loss
allowance $2,660 $ --- $ (325) $ --- $2,335
For the year ended
December 31,
1997-Loan loss
allowance $2,335 $ --- $1,231 $ --- $3,566
For the year ended
December 31,
1998-Loan loss
allowance $3,566 $ --- $4,260 $ --- $7,826
</TABLE>
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1998
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H
- --------------- -------- ------------------- -------------------- ------------------------- -------- -------- --------
Cost capitalized Gross amount
Initial Cost subsequent to at which carried
to Company acquisition at close of period Accum.
Encum- Building & Improve- Carrying Buildings & Depre- Date of Date
Description brances Land Improvements 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 (2)
Alabama $ 470 $ 95 $ 5,165 $ --- $ --- $ 95 $ 5,165 $ 5,260 $1,579 N/A 10/17/91
Health Care Centers (1)
Arizona 2,885 453 6,678 --- --- 453 6,678 7,131 312 N/A 8/13/96
Health Care Centers (4)
Florida 10,912 2,249 33,022 --- --- 2,249 33,022 35,271 7,088 N/A 10/17/91
Health Care Centers (1)
Georgia 150 52 865 --- --- 52 865 917 449 N/A 10/17/91
Health Care Centers (2)
Idaho --- 365 6,824 --- --- 365 6,824 7,189 433 N/A 8/13/96
Health Care Centers (3)
Kentucky --- 201 2,899 --- --- 201 2,899 3,100 1,148 N/A 10/17/91
Health Care Centers (5)
Missouri 15,379 1,070 23,070 --- --- 1,070 23,070 24,140 6,173 N/A 10/17/91
Health Care Centers (3)
South Carolina 6,214 572 11,543 --- --- 572 11,543 12,115 3,884 N/A 10/17/91
Health Care Centers (21)
Tennessee 10,782 2,118 44,970 --- --- 2,118 44,970 47,088 12,967 N/A 10/17/91
Health Care Centers (1)
Virginia 3,635 176 2,511 --- --- 176 2,511 2,687 746 N/A 10/17/91
Health Care Centers (4)
Washington --- 1,881 11,810 --- --- 1,881 11,810 13,691 47 N/A 10/16/98
Acute Care Hospital (1)
Kentucky --- 540 6,961 --- --- 540 6,961 7,501 1,298 N/A 6/12/92
</TABLE>
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1998
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H
- ------------------ --------- --------------- ------------------------ ----------------------- -------- -------- --------
Cost capitalized Gross amount
Initial Cost subsequent to at which carried
to Company acquisition at close of period Accum.
Encum- Bldg & Improve- Carrying Buildings & Depre- Date of Date
Description brances Land Improv ments Costs Land Improvements Total ciation Const. Acquired
- ----------- ------- ---- ------ -------- -------- ---- ----------------- ------ ------- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Medical Office Building (1)
Florida --- 170 3,349 --- --- 170 3,349 3,519 682 N/A 6/30/93
Medical Office Building (1)
Illinois --- --- 2,077 --- --- --- 2,077 2,077 19 12/31/98 N/A
Medical Office Building (1)
Kentucky --- 23 3,667 --- --- 23 3,667 3,690 707 N/A 7/27/93
Medical Office Building (1)
Louisiana --- --- 3,487 --- --- --- 3,487 3,487 710 1/1/95 N/A
Medical Office Building (2)
Texas --- 631 9,676 --- --- 631 9,676 10,307 1,094 1/1/95 N/A
& 7/31/97
Medical Office Building (1)
Utah --- 223 6,886 --- --- 223 6,886 7,109 1,400 1/1/95 N/A
Assisted Living Centers (3)
Arizona --- --- 11,160 --- --- --- 11,160 11,160 --- --- 12/31/98
Assisted Living Centers (2) 8/6/96 &
Florida --- 5,089 35,051 --- --- 5,089 35,051 40,140 1,574 --- 12/31/98
Assisted Living Centers (1)
New Jersey --- 4,229 13,030 --- --- 4,229 13,030 17,259 1,019 --- 8/6/96
Assisted Living Centers (1)
South Carolina --- --- 3,221 --- --- --- 3,221 3,221 --- --- 12/31/98
Assisted Living Centers (1)
Tennessee --- --- 2,922 --- --- --- 2,922 2,922 --- --- 12/31/98
Assisted Living Centers (1)
Texas --- 2,094 9,091 --- --- 2,094 9,091 11,185 676 --- 8/6/96
Retirement Center (1)
Missouri --- 354 3,181 --- --- 354 3,181 3,535 852 N/A 10/17/91
Retirement Centers (2)
Tennessee 492 64 5,644 --- --- 64 5,644 5,708 1,014 N/A 10/17/91
------ ------ ------- ------ ----- ------- ------- ------- ------
$50,919 $22,649 $268,760 $ --- $ --- $22,649 $268,760 $291,409 $45,871
====== ====== ======= ====== ===== ====== ======= ======= =======
(A) See Notes 3 and 19 of Notes to Consolidated Financial Statements.
(B) The aggregate cost for federal income tax purposes is approximately
$335,709,000.
(C) Depreciation is calculated using depreciation lives up to 40 years
for all completed facilities.
</TABLE>
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1998
<CAPTION>
December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Investment in Real Estate:
Balance at beginning of period $236,998 $213,150 $145,285
Additions through cash expenditures 40,720 23,848 67,892
Additions in exchange for rights
under a mortgage note receivable 13,691 --- ---
Improvements --- --- ---
Balance at end of year $291,409 $236,998 $213,150
Accumulated Depreciation:
Balance at beginning of period $ 36,929 $ 28,895 $ 22,063
Addition charged to costs and expenses 8,942 8,034 6,832
Balance at end of year $ 45,871 $ 36,929 $ 28,895
</TABLE>
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
FOR THE YEAR ENDED DECEMBER 31, 1998
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H
- --------------------- -------- -------- -------- -------- -------- -------- ----------------
Principal Amount
of Loans Subject
Final Monthly Original to Delinquent
Interest Maturity Payment Prior Face Amount Carrying Amt. Principal or
Description Rate Date Terms Liens Of Mortgages of Mortgages Interest
- ----------- -------- -------- ------- ----- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM CARE FACILITIES:
First Mortgage Loans:
Missouri and Kansas (A)(L) 11.0% Aug., 1999 $ 258,000 None $ 26,000,000 $ 25,568,000 None
SouthTrust Loan Participation(B) LIBOR + 2% July, 2001 194,000 None 26,500,000 26,363,000 None
Florissant, Joplin, Sikeston
Missouri (C)(L) 11.00% Sept., 2003 98,000 None 10,000,000 9,485,000 None
Pittsfield, Massachusetts (D)(L) 10.00% Dec., 2003 294,000 None 29,500,000 28,404,000 None
Williston and Gainesville,
Florida (E)(L) 11.45% Dec., 2005 99,000 None 9,620,000 9,374,000 None
Fincastle, Hot Springs, Lebanon,
Bastian, Low Moor, Bristol,
Midlothian, Virginia (F)(L) 10.5% Feb., 2006 207,000 None 25,000,000 22,896,000 None
Friendswood, Richmond, Sugarland,
Conroe, Beaumont, Huntsville,
Cleveland, Liberty, Houston,
and Tomball, Texas (G)(L) 10.5% Sept., 2007 466,000 None 51,500,000 51,500,000 None
Holyoke and Greenfield,
Massachusetts (H)(L) 10.5% April, 2007 90,000 None 10,000,000 10,000,000 None
Augusta and Pooler,
Georgia (I)(L) 9.5% Dec., 2008 135,000 None 15,243,000 15,243,000 None
Manchester and Epsom,
New Hampshire (J)(L) 10.8% July, 2011 240,000 None 25,805,000 25,805,000 None
Eight Mortgages(L) 7.75%-11.54% March, 2002 N/A None N/A 12,857,000 None
Dec., 2008
Ten Mortgages(L) 9.50%-12.45% Jan., 2002- N/A None N/A 44,393,000 None
Dec., 2008
Eleven Mortgages(L) 9.50%-11.7% May, 1999- N/A None N/A 80,999,000 None
Dec., 2008
Dallas, Texas (M)(L) 11.55% June, 2010 186,000 None 18,000,000 17,530,000 None
Construction Loans:
Madison, Florida (K)(L) 10.50% June, 2006 --- None 1,200,000 590,000 None
Trenton and Dover, NJ (K)(L) 10.25% Dec., 2009 --- None 20,000,000 9,917,000 None
</TABLE>
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
FOR THE YEAR ENDED DECEMBER 31, 1998
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H
- ----------------------- -------- -------- -------- -------- -------- --------- -------------
Principal Amt.
of Loans Subject
Final Monthly Original to Delinquent
Interest Maturity Payment Prior Face Amount Carrying Amt. Principal or
Description Rate Date Terms Liens Of Mortgages of Mortgages Interest
- ----------- -------- --------- ------- ----- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Term Notes:
Johnson City, Tennessee 7.5% June, 2019 15,000 None 2,062,000 1,852,000 None
Lewisburg, Tennessee 7.5% December, 2018 7,000 None 968,000 867,000 None
Smithville, Tennessee 7.5% December, 2017 7,000 None 1,016,000 899,000 None
ASSISTED LIVING CENTERS:
Construction Loans:
Townson, Maryland (K)(L) 10.75% December, 2002 --- None 7,565,000 2,922,000 None
Charlotte, NC (K)(L) 9.0% December, 2010 --- None 7,769,000 4,536,000 None
-----------
$402,000,000
===========
(A) Balloon payment of $25,414,000 due at maturity.
(B) Mortgage loan participation agreement, of which the
Company has 50% participation. Balloon payment of
$25,199,000 due at maturity.
(C) Balloon payment of $8,667,000 due at maturity.
(D) Balloon payment of $27,346,000 due at maturity.
(E) Interest escalates 0.1% per year. Balloon payment
of $8,420,000 due at maturity.
(F) Effective January, 1999, the interest escalates .15%
per year through maturity. Balloon payment of $23,336,000
due at maturity.
(G) Balloon payment of $45,436,000 due at maturity.
(H) Balloon payment of $9,076,860 due at maturity.
(I) Balloon payment of $11,854,000 due at maturity.
(J) Effective August, 1997, and annually thereafter,
the interest rate will be increased by .15%.
Principal of $25,805,000 due at maturity.
(K) Monthly payments of interest only during construction.
The Company is committed to provide permanent financing
when construction is completed.
(L) Mortgages provide for prepayment penalties.
(M) Interest escalates 0.1% per year through September 1, 2005.
Thereafter the payment will be adjusted to include interest at
the greater of 12.25% or the rate that five-year United States
securities yield plus 4.5%. Balloon payment of $15,806,000 due
at maturity.
</TABLE>
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1998
(1) See Note 4 of Notes to Consolidated Financial Statements.
(2) For tax purposes, the cost of investments is the carrying amount.
<CAPTION>
December 31
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
Reconciliation of mortgage loans:
Balance at beginning of period $445,603 $519,229 $469,628
Additions:
New mortgage loans 67,564 115,876 153,084
Deductions during period:
Collection of principal 111,167 189,502 103,483
------- ------- -------
Balance at end of period $402,000 $445,603 $519,229
======= ======= =======
</TABLE>
<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. 33-72370 and No. 33-85398.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,407
<SECURITIES> 26,797
<RECEIVABLES> 435,577
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 291,409
<DEPRECIATION> (45,871)
<TOTAL-ASSETS> 769,198
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
19,222
<COMMON> 244
<OTHER-SE> 405,194
<TOTAL-LIABILITY-AND-EQUITY> 769,198
<SALES> 0
<TOTAL-REVENUES> 102,292
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,892
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,112
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,645
<EPS-PRIMARY> 2.72
<EPS-DILUTED> 2.69
</TABLE>
