FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 of 15(d)
of the Securities Exchange Act of 1934
For quarter ended March 31, 2000 Commission file number 33-41863
NATIONAL HEALTH INVESTORS, INC.
(Exact name of registrant as specified in its Charter)
Maryland 62-1470956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
100 Vine Street
Murfreesboro, TN 37130
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (615) 890-9100
Indicate by check mark whether the registrant
(1) Has filed all reports required to be filed by Section 13 or 15(d),
of the Securities Exchange Act of 1934 during the preceding
12 months.
Yes x No
(2) Has been subject to such filing requirements for the past 90 days.
Yes x No
24,383,620 shares of common stock were outstanding as of April 30, 2000.
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
Item 1. Financial Statements.
NATIONAL HEALTH INVESTORS, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<CAPTION>
March 31 Dec. 31
2000 1999
<S> <C> <C>
ASSETS (unaudited)
Real estate properties:
Land $ 30,673 $ 31,875
Buildings and improvements 316,417 340,966
Construction in progress 1,326 567
348,416 373,408
Less accumulated depreciation (60,838) (57,387)
Real estate properties, net 287,578 316,021
Mortgage and other notes receivable, net 341,870 316,454
Investment in preferred stock 38,132 38,132
Investment in real estate mortgage
investment conduits 37,904 37,670
Cash and cash equivalents 17,153 16,723
Marketable securities 47,446 49,650
Accounts receivable 15,971 10,714
Deferred costs and other assets 3,730 3,181
Total Assets $789,784 $788,545
LIABILITIES AND DEFERRED INCOME
Debt $172,393 $172,870
Credit facilities 94,000 88,000
Convertible subordinated debentures 95,741 95,741
Accounts payable and other accrued expenses 10,380 7,228
Accrued interest 3,319 6,412
Dividends payable 15,605 18,033
Deferred income 7,407 7,621
Total Liabilities and Deferred Income 398,845 395,905
Commitments and guarantees
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock,
$.01 par value; 10,000,000 shares
authorized:
747,994 and 748,694 shares, respectively,
issued and outstanding; stated at
liquidation preference of $25 per share 18,700 18,717
250,000 shares issued and outstanding, stated
at liquidation preference of $12.00
per share 3,000 ---
Common stock, $.01 par value;
40,000,000 shares authorized;
24,383,620 and 24,382,987 shares,
respectively, issued and outstanding 244 244
Capital in excess of par value of common stock 425,980 425,963
Cumulative net income 408,118 394,165
Cumulative dividends (447,285) (431,282)
Unrealized gains (losses) on securities (17,818) (15,167)
Total Stockholders' Equity 390,939 392,640
Total Liabilities and Stockholders' Equity $789,784 $788,545
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these financial statements.
The interim condensed balance sheet at December 31, 1999 is taken from the
audited financial statements at that date.
2
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended
March 31
2000 1999
(in thousands,
except share amounts)
<S> <C> <C>
REVENUES:
Mortgage interest income $ 10,380 $ 12,388
Rental income 11,597 11,152
Investment interest and other income 2,936 2,293
Facility operating revenue 13,110 4,123
38,023 29,956
EXPENSES:
Interest 6,943 6,128
Depreciation of real estate 3,451 2,502
Amortization of loan costs 222 167
General and administrative 1,492 861
Facility operating expense 11,962 4,055
24,070 13,713
NET INCOME 13,953 16,243
DIVIDENDS TO PREFERRED STOCKHOLDERS 397 408
NET INCOME APPLICABLE TO COMMON STOCK $ 13,556 $ 15,835
NET INCOME PER COMMON SHARE:
Basic $ .56 $ .65
Diluted $ .56 $ .65
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 24,383,091 24,364,703
Diluted 24,383,091 27,932,648
Common dividends per share
declared $ .64 $ .74
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these financial statements.
3
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Three Months Ended
March 31
2000 1999
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,953 $ 16,243
Depreciation of real estate 3,451 2,502
Amortization of loan costs 222 167
Deferred income --- 117
Amortization of bond discount (447) (225)
Amortization of deferred income (214) (319)
Increase in accounts receivable (3,008) (2,093)
Increase in other assets (772) (370)
Increase (decrease) in accounts payable
and accrued liabilities 60 (1,582)
NET CASH PROVIDED BY OPERATING ACTIVITIES 13,245 14,440
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in mortgage notes receivable (1,435) (7,197)
Collection of mortgage notes receivable 2,435 9,718
Acquisition of property and equipment, net (908) (9,244)
Increase in marketable securities --- (17,664)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 92 (24,387)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facilities 6,000 11,750
Principal payments on long-term debt (477) (445)
Dividends paid to shareholders (18,430) (18,447)
NET CASH USED IN FINANCING ACTIVITIES (12,907) (7,142)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 430 (17,089)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,723 20,407
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,153 $ 3,318
</TABLE>
4
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Three Months Ended
March 31
2000 1999
(in thousands)
<S> <C> <C>
Supplemental Information:
Cash payments for interest expense $ 9,062 $ 7,832
During the three months ended March 31, 2000
and March 31, 1999, $0 and $10,000
respectively, of Senior Subordinated Convertible
Debentures were converted into 0 shares
and 316 shares, respectively, of NHI's
common stock:
Senior subordinated convertible debentures $ --- $ (10)
Financing costs $ --- $ ---
Accrued interest $ --- $ (1)
Common stock $ --- $ ---
Capital in excess of par $ --- $ 9
During the three months ended March 31, 2000
NHI acquired notes receivable in
exchange for NHI's rights
under property and equipment
Mortgage and other notes receivable $(25,900) $ ---
Land $ 1,202 $ ---
Buildings and Improvements $ 24,698 $ ---
During the three months ended March 31, 2000,
NHI issued cumulative convertible preferred
stock to National HealthCare Corporation
in exchange for accounts receivable
Accounts receivable $ (3,000) $ ---
Cumulative convertible preferred stock $ 3,000 $ ---
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these financial statements.
5
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(dollars in thousands)
<CAPTION>
Cumulative Convertible
Preferred Stock Capital in Unrealized Total
Shares Amount Shares Amount Common Stock Excess of Cumulative Cumulative Gains(Losses) Stock.
at $25 per Share at $12 per Share Shares Amount Par Value Net Income Dividends on Securities Equity
---------------- ---------------- ------ ------ --------- ---------- --------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT 12/31/99 748,694 $ 18,717 --- --- 24,382,987 $ 244 $425,963 $394,165 $(431,282) $(15,167) $392,640
Net income --- --- --- --- --- --- --- 13,953 --- --- 13,953
Unrealized gains(losses)
on securities --- --- --- --- --- --- --- --- --- (2,651) (2,651)
Total Comprehensive Income 11,302
Shares sold --- --- 250,000 $ 3,000 --- --- --- --- --- --- 3,000
Shares issued in con-
version of preferred
stock to common stock (700) (17) --- --- 633 --- 17 --- --- --- ---
Dividends to common
shareholders ($.64
per share) --- --- --- --- --- --- --- --- (15,606) --- (15,606)
Dividends to preferred
shareholders ($.53125
per share) --- --- --- --- --- --- --- --- (397) --- (397)
BALANCE AT 3/31/00 747,994 $ 18,700 250,000 $ 3,000 24,383,620 $ 244 $425,980 $408,118 $(447,285) $(17,818) $390,939
BALANCE AT 12/31/98 768,894 $ 19,222 --- $ --- 24,364,391 $ 244 $425,449 $340,547 $(357,518)$ (3,284) $424,660
Net income --- --- --- --- --- --- --- 16,243 --- --- 16,243
Unrealized gains (losses)
on securities --- --- --- --- --- --- --- --- --- (3,379) (3,379)
Total Comprehensive Income 12,864
Shares issued in con-
version of converti-
ble debentures to
common stock --- --- --- --- 316 --- 9 --- --- --- 9
Shares issued in con-
version of preferred
stock to common stock (200) (5) --- --- 181 --- 5 --- --- --- ---
Dividends to common
shareholders (.74
per share) --- --- --- --- --- --- --- --- (18,038) --- (18,038)
Dividends to preferred
shareholders ($.53125
per share) --- --- --- --- --- --- --- --- (408) --- (408)
BALANCE AT 3/31/99 768,694 $ 19,217 ---$ --- 24,364,888 $ 244 $425,463 $356,790 $(375,964)$ (6,663) $419,087
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these financial statements.
6
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
Note 1. SIGNIFICANT ACCOUNTING POLICIES:
The unaudited financial statements furnished herein in the opinion of
management include all adjustments which are necessary to fairly present the
financial position, results of operations and cash flows of National Health
Investors, Inc. ("NHI" or the "Company"). NHI assumes that users of the
interim financial statements herein have read or have access to the audited
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in NHI's Form 10-K for the year
ended December 31, 1999 and that the adequacy of additional disclosure needed
for a fair presentation, except in regard to material contingencies, may be
determined in that context. Accordingly, footnotes and other disclosures
which would substantially duplicate the disclosure contained in the Company's
most recent annual report to stockholders have been omitted. The interim
financial information contained herein is not necessarily indicative of the
results that may be expected for a full year because of various reasons
including changes in interest rates, rents and the timing of debt and equity
financings.
Note 2. NET INCOME PER COMMON SHARE:
Basic earnings per share is based on the weighted average number of
common and common equivalent shares outstanding. Net income is reduced by
dividends to holders of cumulative convertible preferred stock.
Diluted earnings per common share assumes the conversion of convertible
subordinated debentures in 1999, the conversion of cumulative convertible
preferred stock in 1999 and the exercise of all stock options using the
treasury stock method. Net income is increased for interest expense on the
convertible subordinated debentures in 1999.
The following table summarizes the earnings and the average number of
common shares and common equivalent shares used in the calculation of basic
and diluted earnings per share.
<TABLE>
<CAPTION>
Three Months Ended
March 31
2000 1999
<S> <C> <C>
BASIC:
Weighted average common
shares 24,383,091 24,364,703
Net income $13,953,000 $16,243,000
Dividends paid to pre-
ferred shareholders (397,000) (408,000)
Net income available to
common stockholders $13,556,000 $15,835,000
Net income per common
share $ .56 $ .65
DILUTED:
Weighted average common
shares 24,383,091 24,364,703
Stock options --- 2
Convertible subordinated
debentures in 1999 --- 2,872,244
Cumulative convertible
preferred stock in 1999 --- 695,699
Average common shares
outstanding 24,383,091 27,932,648
Net income $13,953,000 $16,243,000
Interest expense on
convertible subordi-
nated debentures in 1999 --- 1,828,000
Net income (assuming con-
version of subordinated
convertible debentures
to common stock in 1999) $13,953,000 $18,071,000
Net income per common
share $ .56 $ .65
</TABLE>
For the three months ended March 31, 2000, convertible subordinated
debentures and convertible preferred stock were convertible into 2,747,428 and
677,447 incremental shares, respectively. These incremental shares were
excluded from the computation of diluted earnings per share, since inclusion
of these incremental shares in the calculation would have been anti-dilutive.
Note 3. INVESTMENTS IN MARKETABLE SECURITIES:
NHI's investments in marketable securities include available for sale
securities and held to maturity securities. Unrealized gains and losses on
available for sale securities are recorded in stockholders' equity in
accordance with SFAS 115. Realized gains and losses from securities sales are
determined on the specific identification of the securities.
Note 4. COMMITMENTS AND GUARANTEES:
At March 31, 2000, NHI was committed, subject to due diligence and
financial performance goals, to fund approximately $11,121,000 in health care
real estate projects of which approximately $9,121,000 is eligible to be
funded within the next 12 months. The commitments include mortgage loans or
purchase leaseback agreements for two long-term care centers, one medical
office building, three assisted living facilities, and one hospital all at
rates ranging from 9% to 11.5%. NHI has recorded deferred income for
commitment fees related to these loans where applicable.
In order to obtain the consent of appropriate lenders to National
HealthCare Corporation's ("NHC"'s) transfer of assets to NHI, NHI guaranteed
certain debt ($14,320,000 at March 31, 2000) of NHC. The debt is at fixed
interest rates with a weighted average interest rate of 8.3% at March 31,
2000. NHI receives from NHC compensation of approximately $72,000 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.
NHI has outstanding letters of credit totaling $10,000,000.
Additionally, NHI has also guaranteed bank loans in the amount of $1,447,700
to key employees and directors which amount was utilized for the exercise of
NHI stock options. Shares of NHI stock are held as security by NHI and the
loans are limited to $100,000 per individual per year.
NHI is aware of certain income tax contingencies with regards to
limitations on ownership of its stock and to its use of an independent
contractor to manage certain of its foreclosure properties. In order to fully
resolve the contingencies, NHI is in the process of requesting from the
Internal Revenue Service ("IRS") closing agreements regarding each of these
contingencies. NHI's management, based on its discussions with its legal
counsel, understands that other real estate investment trusts have been
successful in obtaining closing agreements with the IRS regarding real estate
investment trust qualification issues. However, it is possible that the IRS
will not rule in favor of NHI. Such an unfavorable ruling could result in the
assessment of taxes, penalties and interest by the IRS that are material to
NHI's financial statements taken as a whole and could also result in the loss
of NHI's status as a real estate investment trust, which would have a
significant adverse impact on the financial position, results of operations
and cash flows of NHI.
Note 5. CONVERTIBLE SUBORDINATED DEBENTURES:
At March 31, 2000, $56,286,000 of 7% convertible subordinated debentures
due on February 1, 2004 (the "1997 debentures") remain outstanding. The 1997
debentures are convertible at the option of the holder into common stock at a
conversion price of $37.50, subject to adjustment. During the three months
ended March 31, 2000, none of the 1997 debentures were converted into common
stock. NHI has reserved 1,500,960 shares of common stock for conversions of
1997 debentures.
At March 31, 2000, $38,060,000 of 7.75% convertible subordinated
debentures due on January 1, 2001 (the "1995 debentures") remain outstanding.
The 1995 debentures are convertible at the option of the holder into the
common stock of NHI at a conversion price of $31.625, subject to adjustment.
During the three months ended March 31, 2000, none of the 1995 debentures were
converted into common stock. NHI has reserved 1,203,478 shares of common
stock for conversions of 1995 debentures.
At March 31, 2000, $1,190,000 of debentures due on January 1, 2006
remain outstanding related to "1995 debt service debentures" issued to
mortgagees or lessees to satisfy debt service escrow requirements. The
debentures are convertible at the option of the holder into common stock of
the Company at a conversion price of 110% of the market price on the date of
issuance of the debentures, subject to adjustment. During the three months
ended March 31, 2000, none of the debentures were converted into common stock.
NHI has reserved 32,740 shares of common stock for conversion of 1995 debt
service debentures.
At March 31, 2000, $205,000 of the 10% senior convertible subordinated
debentures due 2006 (the "senior debentures") remain outstanding. The senior
debentures are convertible into the common stock of the Company at $20 per
share. During the three months ended March 31, 2000, none of the senior
debentures were converted. The Company has reserved 10,250 shares of common
stock for conversion of the senior debentures.
Note 6. CUMULATIVE CONVERTIBLE PREFERRED STOCK:
In February and March, 1994, NHI issued $109,558,000 of 8.5% Cumulative
Convertible Preferred Stock ("8.5% Preferred Stock") with a liquidation
preference of $25 per share. Dividends at an annual rate of $2.125 are
cumulative from the date of issuance and are paid quarterly. At March 31,
2000, $18,699,850 of the preferred stock remains outstanding.
The 8.5% 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 8.5% Preferred Stock is redeemable by NHI for common stock only if
the trading price of the Common Stock on the New York Stock Exchange ("NYSE")
exceeds $27.625 per share for 20 trading days within a period of 30 trading
days prior to the exercise. NHI has reserved 676,935 shares of common stock
for 8.5% Preferred Stock conversions.
The 8.5% Preferred Stock is listed on the NYSE under the symbol "NHIPr."
On March 31, 2000, NHI issued $3,000,000 of Cumulative Convertible
Preferred Stock (the "2000 Preferred Stock") to NHC. The 2000 Preferred
Stock, which is not listed on a stock exchange, is convertible at $12.00 per
share into NHI common stock after December 31, 2000. The shares pay dividends
at the rate of 8% through June 30,2000, at the rate of 10% from July 1, 2000
through September 30, 2000, and at the rate of 12% thereafter. The shares
were sold to NHC, the Company's investment advisor. NHI has reserved 250,000
shares of common stock for preferred stock conversion related to this issue.
NHI received payment for the shares in May, 2000.
Note 7. NEW ACCOUNTING PRONOUNCEMENT:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS 133, as amended by Statement of
Financial Accounting Standards No. 137, "Deferral of the Effective Date of
SFAS 133", is effective for fiscal quarters beginning after June 15, 2000.
The impact of the adoption of SFAS 133 is not expected to have a material
impact on NHI's results of operations or financial position.
Note 8. SALE OF REAL ESTATE:
In 1993, NHI funded a mortgage loan for Stockbridge Investment Partners,
Inc. and its subsidiary York Hannover Nursing Centers, Inc. ("York Hannover")
in the original principal amount of $29,500,000. Collateral for the loan
included first mortgages on six long-term health care centers located in the
state of Florida, the personal guarantee of certain of the owners, certain
accounts receivable balances above another creditor's $2,000,000 loan, and the
corporate guarantee of NHC for up to $5,000,000 of principal and interest.
On December 30, 1999, NHI purchased from the borrowers for approximately
$25,900,000 (the then current loan balance) all of the real estate, property
and equipment of the six long-term health care facilities. NHI also received
on December 30, 1999, the accounts receivable of the facilities approximating
$2,200,000 as consideration for unpaid interest on the mortgage loan. The
purchase was undertaken in lieu of foreclosure.
Effective January 1, 2000, NHI sold to Care Foundation of America, Inc.
("Care") all of the real estate, property and equipment of the six long-term
nursing facilities. The sale price was $25,900,000, which was NHI's basis in
the properties. Care assumed the first mortgage which had previously been
owned by York Hannover. In accordance with the provisions of Statement of
Financial Accounting Standards No. 66, Accounting for Sales of Real Estate,
NHI has accounted for the sale under the installment method. The note
receivable from Care bears interest at 10% and is collateralized by the first
mortgages on the six long-term health care facilities and the corporation
guarantee of NHC for up to $3,000,000 of principal and interest.
Note 9. MORTGAGE AND OTHER NOTES RECEIVABLE:
Borrower Bankruptcy
NHI was informed on November 4, 1999, that Lenox Healthcare, Inc. and
its affiliates ("Lenox") have filed for Chapter 11 Bankruptcy protection in
the United States Bankruptcy District Court in Wilmington, Delaware. NHI's
loans may be impacted as follows:
Zurich North America Capital Corporation - In 1996, NHI funded a
mortgage loan for Zurich North America Capital Corporation in the original
principal amount of $26,000,000. Collateral for the loan includes first
mortgages on ten long-term health care facilities, the corporate guarantees of
Lenox and Greylock Health Corporation, and certain personal guarantees. Lenox
is the manager of the ten long-term health care facilities located in the
states of Kansas and Missouri.
At March 31, 2000, the net carrying value of the loan is approximately
$21,700,000, which earns 11% interest. NHI is currently evaluating the health
care center portion of the collateral given the bankruptcy status of the
manager and other circumstances affecting the centers but believes that the
combined collateral supports the net carrying value of the mortgage.
Pinellas Healthcare Investors, Inc. - In 1995, NHI funded a mortgage
loan for Pinellas Healthcare Investors, Inc. in the original principal amount
of $4,500,000. An affiliate of Lenox is the operator and lessee of the
facility. Collateral for the loan includes a first mortgage on the facility,
the corporate guarantee of Stockbridge Investment Partners, Inc., certain
personal guarantees, and certain accounts receivable. Lenox notified NHI that
it has rejected its lease with bankruptcy court approval. NHI's Florida
subsidiary has accepted assignment of the Lenox lease and has retained an
unaffiliated management company to manage the project. NHI has initiated
foreclosure action against the borrower in order to obtain title to the
project.
At March 31, 2000, the net carrying value of the loan is approximately
$1,000,000, which earns $12.60% interest. NHI has not received principal and
interest payments on these loans since August 1999 and discontinued interest
income recognition on the loan on the same date. NHI is currently evaluating
the health care center portion of the collateral given the bankruptcy status
of the operator, disavowment of the lease, the condition of the physical
plant, and other circumstances affecting the center. NHI believes that the
combined collateral supports the net carrying value of the mortgage.
Colonial Land Corporation - In 1996, NHI funded a mortgage loan for
Colonial Land Corporation in the original amount of $25,000,000. Collateral
for the loan includes first mortgages on six long-term health care facilities
located in Virginia. Although Colonial Land Corporation is not included in
the bankruptcy filing, Lenox manages three of the facilities, and Mr. Tom
Clarke, the owner of Lenox, is also the owner of Colonial Land Corporation.
At March 31, 2000, the net carrying value of the loan is approximately
$19,200,000, which earns interest at 10.8%. NHI is currently evaluating the
health care portion of the collateral given the bankruptcy status of the
manager and other circumstances affecting the centers but believes that the
combined collateral supports the net carrying value of the mortgage.
Other Entities Owned by Principals of Lenox - Not Affected by Lenox
Bankruptcy - Although not impacted by the bankruptcy filing, Mr. Tom Clarke,
the owner of Lenox, is involved as a principal in other entities financed by
NHI. The carrying value of NHI's investments in these other entities is
$10,900,000 at March 31, 2000. At the present time, NHI knows of no reason to
assume that these entities will be negatively impacted by the Lenox filing or
that any loss of income or asset value will occur.
Other Non-Performing Loans
Brookside Inn - NHI has not recognized income on this loan since
January, 2000. NHI's investment totaled $5,579,000 as of March 31,2000.
Additionally, NHI has initiated foreclosure proceedings against the owner.
SouthTrust Loan Participation - NHI has a 50% interest in a loan to
Integrated Health Services, Inc. ("IHS"). NHI's loan balance at March 31,
2000 totaled $25,912,000. NHI has been informed that IHS and its affiliates
have filed for Chapter 11 bankruptcy protection. NHI is seeking adequate
protection payments on this loan from the bankruptcy court. NHI has not
recognized interest income on this loan since February, 2000.
Loan Reserves
Mortgage and other notes receivable are reduced by an allowance for loan
losses of $9,671,000 at March 31, 2000 and $7,884,000 at March 31, 1999.
Note 10: DEBT AND RELATED GUARANTEE:
As of March 31, 2000, NHI and NHC were in violation of certain financial
covenants included in a debt instrument originally financed through the
National Health Corporation Leveraged Employee Stock Ownership Plan
Trust. In addition, NHI no longer meets a requirement that its senior un-
secured debt be rated investment grade by Standard & Poor's and Moody's
Investment Services. As of March 31, 2000, the total debt balance on the
loan was $25,892,000, of which $11,573,000 is the primary obligation of NHI.
NHI guarantees, and is contingently obligated on, the remaining $14,319,000
of the outstanding balance under this loan. As a result of NHI's
investment grade down rating, NHI has been delivered a tender
notice from the note holders to purchase, between June 10, 2000 and June 15,
2000, the $25,892,000 in outstanding notes. As a result of the above
violations, other debt owed by NHI totaling $253,678,000 could be accelerated
due to cross-default provisions in NHC's various other debt agreements.
These events could have a material adverse impact on the financial position
and cash flows of NHI. NHI, NHC and NHR are also seeking to refinance the
related obligations and are currently in negotiations with the note holders to
resolve the financial covenant violations and investment grade rating issue.
However, at the current time, NHI is unable to determine the outcome of those
discussions. Regardless of whether NHI purchases the notes or refinances
the obligation, the note holders may assert that NHI is obligated to pay a
"make-whole" payment to the note holders to compensate them for lost interest
income on this investment. Neither the legal existence of this duty in these
circumstances nor the amount of the "make-whole" payment has been determined
by the parties; however, such a payment, if made, could have a material
adverse impact on the financial position, results of operations and cash flows
of NHI.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Overview
National Health Investors, Inc. ("NHI" or the "Company") is a real
estate investment trust which invests primarily in income producing health
care properties with emphasis on the long-term care sector. As of March 31,
2000, NHI had interests in net real estate owned, and investments in
mortgages, REMICs, preferred stock and marketable securities resulting in
total invested assets of $762.6 million. NHI's strategy is to invest in
health care real estate which generates current income which will be
distributed to stockholders. NHI intends to implement this strategy by making
mortgage loans and acquiring properties to lease nationwide primarily in the
long-term health care industry.
As of March 31, 2000, the Company was diversified with investments in
202 health care facilities located in 26 states consisting of 146 long-term
care facilities, two acute care hospitals, eight medical office buildings, 22
assisted living facilities, seven retirement centers and 17 residential
projects for the developmentally disabled. These investments consisted of
approximately $351.5 million aggregate principal amount of loans to 29
borrowers, $287.6 million of purchase leaseback transactions with seven
lessees and $37.9 million invested in REMIC pass through certificates backed
by first mortgage loans to 10 operators. Of these 202 facilities, 51 are
leased to National HealthCare Corporation ("NHC") and three additional
facilities are managed by an affiliate of NHC. NHC is the Company's
investment advisor.
At March 31, 2000, 55.8% of the total invested assets of the health care
facilities were operated by public operators, 23.4% by regional operators, and
20.8% by small operators.
Liquidity and Capital Resources
Sources and Uses of Funds
NHI has generated net cash from operating activities during the first
three months of 2000 totaling $10.2 million compared to $14.4 million in the
prior period. The primary reason for this period's decline was a reduction in
net income accompanied by an increase in accounts receivable offset in part by
increased depreciation expense. Net cash from operating activities generally
includes net income plus non-cash expenses, such as depreciation and
amortization and working capital changes.
Cash flows from investing activities during the first three months of
2000 included collection on mortgage notes receivable of $2.4 million compared
to $9.7 million for the prior period.
Cash flows used in investing activities during the first three months of
2000 included investment in mortgage notes receivable of $1.4 million and real
estate properties of $.9 million. Cash flows used in investing activities of
the prior period included investment in mortgage notes receivable of $7.2
million, real estate properties of $9.2 million, and marketable securities of
$17.7 million.
Cash flows from financing activities for the first three months of 2000
included $6.0 million from credit facility proceeds, compared to the prior
period of $11.8 million.
On March 31, 2000, NHI issued $3,000,000 of Cumulative Convertible
Preferred Stock (the "2000 Preferred Stock") to NHC. The 2000 Preferred
Stock, which is not listed on a stock exchange, is convertible at $12.00 per
share into NHI common stock after December 31, 2000. The shares pay dividends
at the rate of 8% through June 30,2000, at the rate of 10% from July 1, 2000
through September 30, 2000, and at the rate of 12% thereafter. The shares
were sold to NHC, the Company's investment advisor. NHI has reserved 250,000
shares of common stock for preferred stock conversion related to this issue.
Cash flows used in financing activities for the first three months of
2000 included principal payments on long-term debt of $.5 million and
dividends paid to shareholders of $18.4 million. This compares to principal
payments on long term debt of $.4 million and dividends paid to shareholders
of $18.4 million in the prior period.
In March 2000, NHI announced a reduction in its quarterly dividend of 10
cents per common share to 64 cents. The reduction reflects the Company's
concern over continuing volatility in the long-term care industry and
increased interest expense on the Company's bank debt.
NHI has established a senior unsecured revolving line of credit that
allows it to borrow a maximum of $100.0 million. The amount available to be
drawn on this revolving line of credit is $6.0 million at March 31, 2000, and
the entire balance outstanding matures in October 2000. In addition, $38.1
million of the Company's convertible subordinated debentures outstanding at
March 31, 2000 mature on January 1, 2001, and NHI likely will redeem these
debentures in cash. It is unlikely that holders of these convertible
subordinated debentures will convert them to common stock prior to January 1,
2001. The debentures may be repaid from the proceeds of mortgage prepayments
or through the sale of short-term investments. NHI believes that it will be
able to refinance its commitments under the line of credit and the convertible
subordinated debentures at or prior to their maturity; however, it is likely
that NHI's costs under new debt or equity issues will exceed the interest
rates NHI currently pays on its line of credit and convertible subordinated
debentures. The lack of availability of reasonably priced capital limits
NHI's ability to make new investments, and future refinancings at higher
interest rates could have an adverse impact on NHI's financial position,
results of operations and cash flows.
Commitments and Guarantees
At March 31, 2000, the Company was committed, subject to due diligence
and financial performance goals, to fund approximately $11.1 million in health
care real estate projects, of which approximately $9.1 million is expected to
be funded within the next 12 months. The commitments include mortgage loans
or purchase leaseback agreements for two long-term health care centers, one
medical office building, three assisted living facilities, and one hospital
all at rates ranging from 9% to 11.5%.
Financing for current commitments and future commitments to others may
be provided by cash balances, by borrowings under the Company's bank credit
facilities, new lines of credit, private placements or public offerings of
debt or equity, the assumption of secured or unsecured indebtedness, or by the
sale of all or a portion of certain currently held investments.
NHI is currently limited in its ability to make new investments due to a
lack of availability of reasonably priced capital. However, the Company
believes it has sufficient liquidity and financing capability to finance
current investments for which it is committed as well as to repay or refinance
borrowings at or prior to their maturity.
Loan Foreclosures and Bankruptcy
During late 1998 and during 1999, NHI purchased 17 long-term health care
facilities and a retirement center for $81.4 million. The purchases were
undertaken either in foreclosure or in lieu of foreclosure due to financial
defaults on first mortgage loans with three different owners. The mortgages
had been funded from 1993 through 1996 in original principal amounts totaling
$88.6 million.
NHI is treating each of the properties described above as foreclosure
property for federal income tax purposes. With this election, unqualified
income generated by the properties is expected to be treated as qualified
income for a minimum of two years from the purchase date for purpose of the
income-source tests that must be satisfied by real estate investment trusts to
maintain their tax status.
In January 2000, NHI sold the real estate, property and equipment of the
six long-term health care facilities on which it had foreclosed to Care
Foundation of America, Inc. ("Care") for $25,900,000 in exchange for a note
receivable from CFA. In accordance with the provisions of Statement of
Financial Accounting Standards No. 66, Accounting for Sales of Real Estate,
NHI has accounted for the transaction under the installment method. The note
receivable from CFA bears interest at 10% and is collateralized by the first
mortgages on the six long-term health care facilities and the corporate
guarantee of NHC for up to $3,000,000 of principal and interest.
As more fully described in Note 9 to the Interim Condensed Consolidated
Financial Statements, during late 1999, NHI was informed of the bankruptcy of
one of its major customers. The bankruptcy may affect three of NHI's
mortgage loans. The three loans, which are secured by 17 long-term health
care facilities and other property, were made to three different entities in
the original principal amounts totaling $55.5 million. Current carrying
amounts of the three loans total $41.9 million. NHI is currently evaluating
the collateral given for the loans, but believes that for each of the three
loans the collateral supports the net carrying value of the loan.
Loan Income Recognition
During the three months ended March 31, 2000, NHI continued not to
recognize income on one loan that had a carrying value of $1.0 million. NHI
discontinued income recognition on one loan with a carrying value of
$5,300,000 and another loan with a carrying value of $25.6 million. As of
March 31, 2000, one loan with a carrying value of $50.3 million earning
interest at 10.5%, has unpaid interest beyond 30 days outstanding. Consistent
with its policy on nonperforming loans to not recognize unpaid mortgage
interest income in excess of 90 days, NHI may discontinue income recognition
on this and other mortgage notes receivable in 2000.
Debt and Related Guarantee
As of March 31, 2000, NHI and NHC were in violation of certain financial
covenants included in a debt instrument originally financed through the
National Health Corporation Leveraged Employee Stock Ownership Plan and Trust.
In addition, NHI no longer meets a requirement that its senior unsecured
debt be rated investment grade by Standard & Poor's and Moody's Investment
Services. As of March 31, 2000, the total debt balance on the loan was
$25,892,000, of which $11,573,000 is the primary obligation of NHI. NHI
guarantees, and is contingently obligated on, the remaining $14,319,000 of
the outstanding balance under this loan. As a result of NHI's investment grade
down rating, NHI has been delivered a tender notice from the note holders to
purchase, between June 10, 2000 and June 15, 2000, all of the $25,892,000
outstanding notes. As a result of the above violations, other debt owed by
NHI totaling $253,678,000 could be accelerated due to cross-default
provisions in NHC's various other debt agreements. These events could have
a material adverse impact on the financial position and cash flows of NHI.
NHI, NHC and NHR are also seeking to refinance the related obligation and are
currently in negotiations with the note holders to resolve the financial
covenant violations and investment grade rating issue. However, at the current
time, NHI is unable to determine the outcome of those discussions. Regardless
of whether NHI purchases the notes or refinances the obligation,
the note holders may assert that NHI is obligated to pay a "make-whole"
payment to the note holders to compensate them for lost interest income on
this investment. Neither the legal existence of this duty in these circum-
stances nor the amount of the "make-whole" payment has been determined
by the parties; however, such a payment, if made, could have material
adverse impact on the financial position, results of operations and cash
flows of NHI.
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999
Net income for the three months ended March 31, 2000 is $14.0 million
versus $16.2 million for the same period in 1999, a decrease of 14.1%.
Earnings per common share decreased 9 cents or 13.8%, to $.56 in the 2000
period from $.65 in the 1999 period.
Total revenues for three months ended March 31, 2000 increased $8.1
million or 26.9% to $38.0 million from $30.0 million for the three months
ended March 31, 1999. Revenues from mortgage interest income decreased $2.0
million, or 16.2%, when compared to the same period in 1999. Revenues from
rental income increased $.4 million, or 4.0% in 2000 as compared to 1999.
Revenues from investment interest and other income increased $.6 million or
28.0% compared to 1999. Facility operating revenue increased to $13.1 million
in 2000 compared to $4.1 million in 1999.
The decrease in mortgage interest income is due to a decline in the
average amount of mortgage investments outstanding as a result of foreclosure
on mortgage loans and due to the discontinuation of interest income
recognition on other loans. During 1999, NHI foreclosed on mortgage loans
totaling $41.8 million, which resulted in the purchase of seven long-term
health care centers and one retirement center.
The increase in rental income resulted primarily from the increase in
investments in real estate properties of $14.3 million during 1999. The
increase in investment interest and other income is due to the investment of
higher cash amounts, as well as the net investment of $33.2 million in
marketable securities during 1999.
The increase in facility operating revenues is due primarily to the
purchase, in lieu of foreclosure, of seven long-term health care centers and
one retirement center previously managed and guaranteed by Phoenix Healthcare
Corporation (formerly Iatros Health Network) in August, 1999.
Total expenses for the three months ended March 31, 2000 increased $10.4
million or 75.5% to $24.1 million from $13.7 million for 1999. Interest
expense increased $.8 million or 13.3% in 2000 as compared to 1999.
Depreciation of real estate increased $.9 million or 37.9% when compared to
1999. General and administrative costs increased $0.6 million or 73.3%.
Facility operating expense increased by $7.9 million in 2000 compared to $4.1
million in 1999.
Interest expense increased due to increased borrowing on credit
facilities and long-term debt compared to the prior period. Depreciation
increased as a result of the Company placing newly constructed assets in
service, property acquisitions, and the purchase, in lieu of foreclosure, of
seven long term health care centers and one retirement center previously
managed and guaranteed by Phoenix Healthcare Corporation (formerly Iatros
Health Network) in August, 1999. General and administrative expense increased
primarily due to increased franchise tax expenses.
The increase in facility operating expense is due to the purchase, in
lieu of foreclosure, of seven long-term health care centers and one retirement
center previously managed and guaranteed by Phoenix Healthcare Corporation
(formerly Iatros Health Network) in August, 1999.
Income Taxes
NHI intends at all times to qualify as a real estate investment trust
under Section 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. NHI's failure to
continue to qualify under the applicable REIT qualification rules and
regulations would have a material adverse impact on the financial position,
results of operations and cash flows of NHI.
NHI is aware of certain income tax contingencies with regards to
limitations on ownership of its stock and to its use of an independent
contractor to manage certain of its foreclosure properties. In order to fully
resolve the contingencies, NHI is in the process of requesting from the
Internal Revenue Service ("IRS") closing agreements regarding each of these
contingencies. NHI's management, based on its discussions with its legal
counsel, understands that other real estate investment trusts have been
successful in obtaining closing agreements with the IRS regarding real estate
investment trust qualification issues. However, it is possible that the IRS
will not rule in favor of NHI. Such an unfavorable ruling could result in the
assessment of taxes, penalties and interest by the IRS that are material to
NHI's financial statements taken as a whole and could also result in the loss
of NHI's status as a real estate investment trust, which would have a
significant adverse impact on the financial position, results of operations
and cash flows of NHI.
Impact of Inflation
Inflation may affect the Company in the future by changing the
underlying value of the Company's real estate or by impacting the Company's
cost of financing its operations.
Revenues of the Company are primarily from long-term investments.
Certain of the Company's leases require increases in rental income based upon
increases in the revenues of the tenants. The Company has negotiated similar
provisions in many of its mortgage notes receivable.
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair value.
SFAS 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
133, as amended by Statement of Financial Accounting Standards No. 137,
"Deferred of the Effective Date of SFAS 133", is effective for fiscal quarters
beginning after June 15, 2000. 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.
Item 3. Quantitative and Qualitative Information About Market Risk
INTEREST RATE RISK
The Company's cash and cash equivalents consist of highly liquid
investments with a maturity of less than three months. All of the Company's
mortgage and other notes receivable bear interest at fixed interest rates.
The Company's 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 March 31, 2000, $112,215,000 of the Company's long-term debt bears
interest at fixed interest rates. As of March 31, 2000, all of the Company's
$95,741,000 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 $60,178,000 of the Company's long-term debt
and $94,000,000 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 swaps discussed above. The Company does use derivative instruments for
trading purposes and the use of such instruments is subject to strict
approvals by the Company's senior officers. The Company's exposure related to
such derivative instruments is not material to the Company's financial
position, results of operations or cash flows.
EQUITY PRICE RISK
The Company's investments in marketable securities include available for
sale securities and held to maturity securities. Unrealized gains and losses
on available for sale securities are recorded in stockholders' equity in
accordance with Statement of Financial Accounting Standards No. 115. The
investments in marketable securities classified as available for sale are
recorded at their fair market value based on quoted market prices. Thus,
there is exposure to equity price risk, which is the potential change in fair
value due to a change in quoted market prices. Hypothetically, a 10% change
in quoted market prices would result in a related 10% change in the fair value
of the Company's investments in marketable securities classified as available
for sale. 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. Not applicable
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) List of exhibits - none required
(b) Reports on Form 8-K - none required
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL HEALTH INVESTORS, INC.
(Registrant)
Date May 22, 2000 /s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date May 22, 2000 /s/ Donald K. Daniel
Donald K. Daniel
Principal Accounting Officer
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