_______________________________________________________________________
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, 1999
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 re-
quirement 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 $301,370,000 as of February 29, 2000. The number of shares of
Common Stock outstanding as of February 29, 2000 was 24,382,987.
PAGE 1 OF 86 PAGES
Exhibit Index Page 50
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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, 1999, the Company had interests in net real
estate owned by it, mortgage investments and REMIC investments totaling
approximately $680.6 million, and other investments in preferred stock and
marketable securities of $87.8 million, resulting in total invested assets of
$768.4 million. The Company's strategy is to provide current income for
distribution to stockholders through investments in health care related
businesses and 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". Although, the Company intends to implement this strategy by
acquiring additional properties and making additional mortgage loans
nationwide, predominately in the long-term care industry, current market
conditions make it unlikely that any material new investments in Health Care
Facilities will occur during the new year. Instead the Company is actively
engaged in monitoring and improving its existing portfolio. 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.
As of December 31, 1999, the Company had approximately $680.6 million in
real estate and mortgage 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 consist of approximately $326.9 million aggregate
principal amount of loans to 29 borrowers and $316.0 million of purchase
leaseback agreements with seven lessees and $37.7 million invested in REMIC
pass through certificates. Of these 202 facilities, 51 are leased to NHC and
nine additional facilities are managed by NHC.
At December 31, 1999, NHI was committed, subject to due diligence and
financial performance goals, to fund approximately $9.0 million in health care
real estate projects of which $7.0 million is expected to be funded within the
next 12 months. The commitments include mortgage loans for two long-term
health care centers, one medical office buildings, and three assisted living
centers all at rates ranging from 9.0% to 11.5%. Included in the $9.0 million
of commitments is a commitment to loan an additional $2.0 million on one loan
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, three retirement centers, and four third party first mortgage
notes from National HealthCare Corporation ("NHC"), successor by merger to
National HealthCare L.P. 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, 1999 operated 95 long-term care facilities with a total of
12,783 licensed beds. Included within seven of these centers are 150 assisted
care beds; within 21 centers are located 683 Alzheimer's beds and finally 363
sub-acute beds are located in 14 centers. NHC also operates six retirement
centers with a total of 473 units, eight freestanding assisted living
facilities with a total of 654 units and 34 home health care programs. Except
for properties directly managed for the Company, all NHC operations are in the
southeastern United States.
Since the Company commenced operations, NHC has provided advisory
services to the Company since its inception 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, 1999, the Company owned
and leased 59 licensed long-term care facilities, 47 of which were operated by
NHC. The remaining twelve licensed long-term care facilities are managed by
two other long-term care companies. It also had outstanding first mortgage
loans and REMIC investments on 87 additional licensed long-term care
facilities, three 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, 1999, 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, 1999, the Company owned
and leased seven medical office buildings. In addition, the Company had a
first mortgage loan on one medical office building. 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 16 assisted living
facilities. Four of which are leased to a subsidiary of Marriott
International and eleven to Alterra, Inc. and one to Sun Healthcare. The
Company also has first mortgages on seven 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.
Retirement Centers. The Company owns five retirement centers, all of
which are leased to NHC, and has first mortgages on two 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, 1999,
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 to eight 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 9.0% and 12% per annum. For
transactions closed in 1999, rates were comparable to those charged in 1998
and generally ranged from 9.0% to 11.5%. 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. Except for eight properties, as described
under the heading "Foreclosure Properties", 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. 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 and Market Conditions
The Company competes, primarily on the basis of price, available
capital, 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.
In mid 1998 the long term care industry began experiencing Medicare
revenue reductions brought about by he enactment of the 1997 Balanced Budget
Act ("BBA 97"). Additionally, the assisted living industry experienced slower
fill-up rates on new projects and more competition for their mature projects a
overbuilding occurred in more and more markets. Stock prices for publicly
traded companies declined precipitously and companies announced greatly
reduced earnings or even significant losses. By the end of 1999, two of the
four largest public long term care companies were in bankruptcy and at least
three of the top ten private long term care companies were also. By February
3, 2000 two other public healthcare companies filed for bankruptcy protection.
With the operators in such dire financial distress it is not surprising
that the health care REIT industry - including this Company - have seen such a
reduction in market capitalization to the extent that using publicly sold
equity to generate capital is not a realistic option. Additionally,
commercial borrowing sources are restricting if not altogether avoiding
investments in health care REIT debt issues. Accordingly, the Company is not
currently competing with any healthcare REITs or commercial banks for placing
new mortgage loans or sale leasebacks. Instead, the Company is focusing on
monitoring closely its investments, rather than making new ones.
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, 55.4% of the Health Care
Facilities are operated by publicly-owned companies, while 24.0% 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, Lenox HealthCare, Inc., Alterra,
Inc. Sun Healthcare, Integrated Health Services, Inc., Columbia/HCA,
Paracelcus, Beverly Enterprises, Res-Care, Inc., American Retirement Corp.,
Mariner Post Acute Services, and Centennial Healthcare Corporation. Although
Lenox, Sun HealthCare, Mariner Post Acute Services and Integrated Health
Services are currently in bankruptcy, only one of Lenox's ten properties is
impacted, and none of Sun Healthcare's three properties. As of yet, no impact
has been felt or is anticipated due to the Mariner and IHS bankruptcies. For
additional information, see "Foreclosure Properties".
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. The Company is not aware of any defaults by the properties
servicing this REMIC.
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. The Company is not aware of any defaults by the properties
servicing this REMIC.
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 $1.2 million as percentage rent for 1999.
The Master Agreement is a "triple net lease", under which NHC is
responsible to pay all taxes, utilities, insurance premium costs, repairs
(including structural portions of the buildings, constituting a part of the
Health Care Facilities) and other charges relating to the ownership and
operation of the Health Care Facilities. NHC is obligated at its expense to
keep all improvements and fixtures and other components of the Health Care
Facilities covered by "all risk" insurance in an amount equal to the full
replacement costs thereof, insurance against boiler explosion and similar
insurance, flood insurance if the land constituting the Health Care Facility
is located within a designated flood plain area and to maintain specified
minimal personal injury and property damage insurance, protecting the Company
as well as NHC at such Health Care Facility. NHC is also obligated to
indemnify and hold harmless the Company from all claims resulting from the use
and occupancy of each Health Care Facility by NHC or persons claiming under
NHC and related activities, as well as to indemnify the Company against, all
costs related to any release, discovery, cleanup and removal of hazardous
substances or materials on, or other environmental responsibility with respect
to, each Health Care Facility leased by NHC.
Repayments
Although NHI structures its first mortgages with a declining prepayment
penalty commencing at 10%, the Company has experienced no loan prepayments in
1999 as contrasted with 1998. During 1998, $93,891,000 of loans were prepaid,
and during 1999 $0.00 was prepaid.
Foreclosure Properties
During the last quarter of 1998, the Company experienced its first
default, and took title by deed in lieu of foreclosure to four long term care
properties in Washington state. These properties have continued to service
their debt to the company during 1999. In the second quarter of 1999, six
long term care properties in Florida were placed in bankruptcy. The Company
acquired title by Trustees deed on December 31, 1999, and has received all
required debt service payments for 1999. In the third quarter of 1999, the
Company acquired title by deed in lieu of foreclosure on three long-term care
and one assisted living project in New Hampshire and four long term care
projects in Massachusetts. The Company has not booked any interest revenue
from these projects for the last seven months of 1999. The Company began
recording the operating revenues of these facilities upon foreclosure of the
properties in August 1999. In the fourth quarter of 1999, Texas Health
Enterprises, Sun Health Care and Lenox HealthCare filed for bankruptcy
protection. By February 3, 2000, Mariner Post Acute Services and Integrated
Health Services had also filed for bankruptcy protection. Sun has three
leased properties from the Company and is current on all lease payments.
Lenox's nine mortgaged properties and one lease are current on payments except
for the default on the leased property. Texas Health Enterprises has a
subsidiary which owns twelve properties financed by NHI. Mariner has
approximately six centers in the 1993 REMIC collateral pool and Integrated has
six centers securing a note in which the Company participates. Except as
discussed below, all payments are current and NHI believes its principal is
fully covered by the asset value of the properties. All of these properties
are referred to as "Foreclosure Properties" and more specifically described as
follows:
Washington State Properties
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. 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. Accordingly, the Board deeded in lieu of
foreclosure the four properties to NHI's subsidiary on October 16, 1998.
Simultaneously with the receipt of the deeds to the properties, the Company
entered into a management contract with a public nursing home chain operating
a number of other properties in Washington. Commencing February 1, 2000, the
management of these facilities has been transferred to a subsidiary of NHC.
At the present time, the Company's investment in the collateral is
approximately $13,700,000 represented by first mortgage notes. These
properties paid their required debt service payments during 1999 and the
Company believes that the properties will continue to generate operating
income in excess of the debt service but there can be no assurance that this
will be the outcome. Through a broker, the Company is aggressively seeking
new lessees and/or owners for these four properties.
Florida Properties
In December 1993 the Company provided first mortgage financing to a
Florida corporation known as York Hannover Nursing Properties, Inc. The loan
was secured by first mortgages on six licensed nursing homes. In April of
1999, this company was placed in bankruptcy and a court ordered trustee
assumed operational control in August of 1999. The bankruptcy court ordered
the sale of the properties to the Company on December 30, 1999. The
transaction was accomplished by Trustees Deed on December 31, 1999. The
Company received assets in this purchase sufficient, in its opinion, to value
the properties at the then outstanding principal mortgage amount and received
additional current assets sufficient to pay all interest and expenses in 1999.
NHI has now sold the properties to a third party in an amount equal to the
first mortgage debt obligation. NHI has also obtained a $5 million guarantee
of principal and interest. The Company knows of no reason why these
properties will not continue to make required debt service payments.
New England Properties
In the mid 1990's the Company made a series of first mortgage loans to a
public long term care company initially known as Iatros Healthcare Systems,
which by change of name, became Phoenix Healthcare. In the third quarter of
1999, Phoenix defaulted on its loan payments on the three nursing homes and
one assisted living center in New Hampshire and four licensed nursing homes in
Massachusetts. Phoenix deeded these properties to the Company in lieu of
foreclosure on August 11, 1999 and the Company retained an operating
subsidiary of NHC to manage the properties. Although the transaction required
Phoenix to pay all liabilities including payroll of these operations for
periods prior to August 11, 1999, it has failed to do so. Consequently, NHI
has focused on stabilizing operations and providing working capital funding
for periods after the deed in lieu of foreclosure. The Company has recorded
no interest revenue for these properties for the last seven months of 1999.
The Company began recording the operating revenues of these facilities upon
foreclosure of the properties in August 1999. The Company believes that these
properties have the potential to generate sufficient cash flows to cover a
debt service comparable to their previous debt service to NHI.
Lenox Healthcare
On November 3, 1999, Lenox Healthcare, one of the nation's largest
privately owned long term care companies, filed for bankruptcy protection.
NHI's investments with Lenox included first mortgages on ten nursing homes in
Kansas and Missouri and also a first mortgage on a facility leased by Lenox in
Florida. The ten properties in Kansas and Missouri have continued to make
required payments and the debtor in possession has advised the Company that it
intends to retain these properties in its plan of reorganization. However,
the single property leased in Florida, has been rejected by Lenox and
foreclosure proceedings against the owner of that property have been
commenced. The single Florida property is not making its scheduled lease
payments to NHI nor is it anticipated to do so during 2000.
Sun HealthCare
In the third quarter of 1999, SunRise HealthCare, one of the nation's
largest publicly owned long term care chains, filed for bankruptcy protection.
The Company has three properties which it leases to Sun. All properties are
current in their lease payments and have lease coverage ratios sufficient to
maintain compliance with all lease covenants. The Company has no reason to
anticipate a diminution of income from these leases during 2000.
Texas Health Enterprises
The Company has twelve licensed nursing facilities securing a first
mortgage note made by a subsidiary of Texas Health Enterprises. All note
payments are current and the Company has no reason to anticipate a diminution
of income from this loan in 2000.
Mariner
Mariner has six properties in the 1993 REMIC collateral pool. All
payments are current and NHI believes its principal is fully covered by the
asset value of the properties.
Integrated Health Services
The Company participates with a commercial bank in a first mortgage note
made by IHS and secured with six properties. All note payments are current
and NHI believes its principal is fully covered by the asset value of the
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, 1999.
No. of
Facil- Commitments
Facility Type ities Current Future Total
(in thousands)
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
Sources of Revenues
General. The Company's revenues are derived primarily from mortgage
interest income and rental income. During 1999, mortgage interest income
equaled $49.0 million of which all except $.5 million was from non-NHC
borrowers. Rental income totaled $46.0 million, 67% 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 have and
may continue to 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. The BBA'97 is blamed by many for
the current state of financial disarray in the long term care business. Any
changes in reimbursement policies which reduce reimbursement to levels that
are insufficient to cover the cost of providing patient care have and could
continue to 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. BBA'97 made fundamental changes in the Medicare program which
have resulted in reduced levels of payment for a substantial portion of health
care services. Amendments to the BBA'97 Medicare enactments were made in late
1999, but the effects, if any, will not be financially reported by providers
until mid-2000.
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'97),
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 commenced
reimbursement under this program effective January 1, 1999. The Company
believes that the deduction in Medicare revenues have negatively impacted 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 its 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; however, the Company believes the most material
negative impact occurred during 1999.
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; however, in the Company's primary market areas, a
significant reduction in new construction of long term care beds as occurred.
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 does not anticipate seeking further health care related
investment opportunities such as lease or mortgage financing during 2000 and
will instead focus on monitoring and enhancing its current investments, with
specific emphasis on its foreclosure properties. The Company plans to
continue its goal of maintaining a one to one ratio of debt to shareholder's
equity. If the late 1999 amendments to BBA'97 generate renewed investment
confidence in the long term care industry, the Company will once again compete
with health care providers and investors, including other real estate
investment trusts, for additional health care related investments. In
evaluating potential investments, the Company considers 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, 1999, investments in NHC totaled approximately 22.1%. 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 or business 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. This fee is subordinate to the payment of a minimum $2.00 per
share dividend. In 1999 the dividend declared and paid was $2.96. 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 1999, the annual compensation under the Advisory Agreement was $3.0
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 1999 the Company granted stock options to purchase a total
of 145,000 shares of Common Stock for the benefit of various key employees and
outside directors. 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, 1999. The total
outstanding as of December 31, 1999 is $1.4 million.
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. 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 mange 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.
<PAGE>
Item 2. Properties
NHI PROPERTIES
LONG TERM CARE
Center City Beds
ALABAMA
NHC HealthCare, Anniston Anniston 151
NHC HealthCare, Moulton Moulton 136
ARIZONA
Estralla Care and Rehab Avondale 161
COLORADO
Brookside Inn Castle Rock 95
FLORIDA
Alachua Nursing Home Gainesville 120
Bear Creek Nursing Center Hudson 120
Brighton Gardens of Edison* Edison 30
Brighton Gardens of Maitland* Maitland 39
Brighton Gardens of West Palm Beach* West Palm Beach 30
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 119
Medic-Ayers Nursing Center Trenton 120
Plantation Gardens Rehab & Nursing Ocoee 120
Miracle Hill Nursing & Convalescent Tallahassee 120
NHC HealthCare, Hudson Hudson 180
NHC HealthCare, Merritt Island Merritt Island 180
NHC HealthCare, Plant City Plant City 180
NHC HealthCare, Stuart Stuart 153
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
Park Place HealthCare Chanute 84
Twin Lakes HealthCare Council Grove 94
Prestige Rehab & Nursing Haysville 120
Larned Healthcare & Living Center Larned 83
Sedgwick Convalescent Center Sedgwick 79
Hoisington Rehabilitation Center Hoisington 62
Emporia Rehabilitation Center Emporia 79
KENTUCKY
NHC HealthCare, Dawson Springs Dawson Springs 80
NHC HealthCare, Glasgow Glasgow 206
NHC HealthCare, Madisonville Madisonville 94
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 142
Clayton House Healthcare Clayton 282
Columbia House Healthcare Columbia 141
Florissant Nursing Center Florissant 120
Hunter Acres Nursing Center Sikeston 120
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
Woodland Park Healthcare Center Joplin 92
NEW HAMPSHIRE
Epsom Manor, Inc. Epsom 108
Maple Leaf Health Care Center Manchester 114
Villa Crest Manchester 163
NEW JERSEY
Health Gate Nursing & Rehab* Trenton 120
Regal Manor Health Care Center Toms River 130
OKLAHOMA
Skyline Terrace Tulsa 209
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 116
Autumn Hills Convalescent Center Richmond 99
Autumn Hills Convalescent Center Sugarland 150
Autumn Hills Convalescent Center Tomball 150
Bonham Nursing Center Bonham 65
Canterbury Villa of Falfurrias Falfurrias 98
Canterbury Villa of Kingsville Kingsville 162
College Street Nursing Center Beaumont 50
Columbus Care Center Columbus 129
Conroe Convalescent Center Conroe 108
Denison Manor Denison 71
Fair Park Nursing Center Huntsville 92
Friendswood Arms Convalescent Center Friendswood 102
Galaxy Manor Nursing Center Cleveland 148
Golden Charm Nursing Center Liberty 118
Lindbergh Health Care Center Beaumont 82
Shoreline Health Care Center Taft 200
Terry Haven Nursing Center Mt. Vernon 65
Town Park Convalescent Center Houston 125
Willis Convalescent Center Willis 114
Willow Bend Care Center Mesquite 162
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 Fincastle Fincastle 60
Kegley Manor Bastian 57
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
Haney Creek Health & Rehab Center Milwaukee 196
ACUTE CARE PROPERTIES
KENTUCKY
Kentucky River Hospital Jackson 55
LOUISIANA
University Rehab Hospital New Orleans 106
MEDICAL OFFICE BUILDINGS
Square
Center City Footage
FLORIDA
North Okaloosa Crestview 27,017
ILLINOIS
Crossroads 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 69,910
WASHINGTON
Capital Medical Office Building Olympia 67,152
RETIREMENT CENTERS
Center City Beds
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 60
ASSISTED LIVING AND
DEVELOPMENTALLY DISABLED
Center City Beds
ARIZONA
Clare Bridge - Glendale Glendale 38
Sterling House - Gilbert Gilbert 50
Sterling House - Tucson Tucson 50
Clare Bridge - Tanque Verde Tucson 38
FLORIDA
19th Street Group Home Gainesville 6
107th Place Group Home Belleview 6
Bessent Road Group Home Starke 6
Brighton Gardens of Maitland* Maitland 112
Brighton Gardens of West Palm Beach* West Palm Beach 114
Clare Bridge - Maitland Maitland 38
Coletta Drive Group Home Orlando 6
Frederick Avenue Group Home Daytona Beach 6
High Desert Court Group Home Jacksonville 6
Spring Street Group Home Lake City 6
Claudia Drive 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 66
Sterling House - Daytona Beach Daytona Beach 60
Suffridge Drive Group Home Bonita Springs 6
Tunis Street Group Home Jacksonville 6
Walnut Street Group Home Starke 6
Wynwood Maitland 78
Park Place of St. Augustine (U/C) St. Augustine 89
MARYLAND
Morningside House of St. Charles St. Charles 86
Morningside House of Friendship Hanover 120
Morningside House of Harmans Harmans 98
MISSOURI
Lake St. Charles Retirement Center* St. Charles 25
NEW JERSEY
Brighton Gardens of Edison* Edison 118
Royal Health Gate Nursing & Rehab* Trenton 30
Regal Manor Health Care Center* Toms River 30
NORTH CAROLINA
Manorhouse - Charlotte Charlotte 144
SOUTH CAROLINA
Sterling House - Conway Conway 52
TENNESSEE
717 Cheatam Street Springfield 8
305 West Hillcrest Drive Springfield 8
307 West Hillcrest Drive Springfield 8
Sterling House - Gallatin Gallatin 49
Sterling House - Kingsport Kingsport 49
Sterling House - Tullahoma Tullahoma 49
NHC HealthCare, Dickson* Dickson 20
NHC HealthCare, Johnson City* Johnson City 15
NHC HealthCare, Somerville* Somerville 12
NHC HealthCare, Smithville Smithville 10
TEXAS
Brighton Gardens of Preston Road Dallas 109
VIRGINIA
Morningside House of Leesburg Leesburg 110
*These facilities are listed in multiple categories.
U/C = Under construction
REAL ESTATE MORTGAGE INVESTMENT CONDUITS
20.0% participating interest 14 Properties 1,971
5.2% participating interest 23 Properties 2,896
Item 3. Legal Proceedings
The Company is not subject to any material pending litigation, although
a number of its operators or mortgagors are currently in bankruptcy. See
"Foreclosure Properties". 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 1999 Annual Meeting of the Shareholders was held on April 26,
1999.
(b) Matters voted upon at the meeting are as follows:
PROPOSAL NO. 1: Election of Jack Tyrrell and W. Andrew Adams to serve
as directors for terms of three years or until their successors have
been fully elected and qualified. Other directors whose terms of office
continue are Mr. Robert T. Webb; Mr. Ted H. Welch and Mr. Richard F.
LaRoche, Jr.
% of Total
Outstanding Shares
For Abstain Voting Voting For
Jack Tyrrell 22,873,832 123,087 94.4% 93.9%
W. Andrew Adams 22,868,970 127,938 94.4% 93.9%
PROPOSAL NO. 2: Ratify the appointment of Arthur Andersen LLP as the
Company's independent accountant.
% of Total
Outstanding Shares
For Against Abstain Voting Voting For
22,865,199 73,449 58,260 94.4% 93.85%
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 29, 2000
was $13.3125. As of December 31, 1999, there were approximately 1,671 holders
of record of shares and the Company estimates that as of such date there were
in addition in excess of 25,700 beneficial owners of the shares.
High and low stock prices and dividends for the last two years were:
1999 1998
---------------------------- ------------------------------
Cash Cash
Sales Price Dividends Sales Price Dividends
Quarter Ended High Low Declared High Low Declared
March 31 $28.2500 $21.5000 .74 $42.2500 $38.6250 $.74
June 30 25.7500 20.0000 .74 39.9375 32.1250 .74
September 30 23.2500 15.2500 .74 33.8750 25.3125 .74
December 31 17.2500 14.1250 .74 30.9375 24.3750 .74
Item 6. Selected Financial Data
The following table represents financial information with respect to the
Company for the five years ended December 31, 1999. 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.
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SELECTED FINANCIAL DATA
(dollars in thousands, except per share amounts)
<CAPTION>
Year Ended December 31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net revenues $ 131,158 $ 106,552 $ 111,410 $ 99,429 $ 90,068
Net income 53,618 69,645 75,388 67,164 49,692
Net income per share
Basic $ 2.13 $ 2.72 $ 3.01 $ 2.92 $ 2.63
Diluted 2.13 2.69 2.92 2.81 2.48
Mortgages and other
investments, net $ 441,906 $ 495,964 $ 479,194 $ 553,456 $ 505,108
Real estate properties, net 316,021 245,538 200,069 184,255 123,195
Total assets 788,545 769,198 753,033 748,672 639,256
Long term debt 172,870 151,559 155,659 160,008 141,103
Credit facilities 88,000 58,500 --- 59,000 31,750
Convertible subordinated
debentures 95,741 100,096 119,038 90,735 82,316
Total stockholders' equity 392,640 424,660 444,080 409,683 356,981
Common shares outstanding 24,382,987 24,364,391 24,753,570 23,474,751 20,535,014
Weighted average common shares
Basic 24,365,027 24,964,047 24,394,044 21,916,921 16,381,826
Diluted 24,367,529 28,689,192 28,887,987 27,211,999 22,851,888
Common dividends declared
per share $ 2.960 $ 2.960 $ 2.960 $ 2.840 $ 2.610
</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 that invests primarily in income producing health care
properties with emphasis on the long-term care sector. As of December 31,
1999, NHI had interests in net real estate owned, and investments in
mortgages, real estate mortgage investment conduits ("REMICs"), preferred
stock and marketable securities resulting in total invested assets of $757.9
million. NHI's strategy has been to invest in health care real estate which
generates current income that will be distributed to stockholders. NHI has
implemented this strategy by making mortgage loans and acquiring properties to
lease nationwide primarily in the long-term health care industry. Current
market conditions make it unlikely that any material new investments in
health care properties will occur during 2000. Instead, NHI is monitoring and
improving its existing properties.
As of December 31, 1999, 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 $316.5 million aggregate principal amount of loans to 29
borrowers, $316.0 million of purchase leaseback transactions with seven
lessees and $37.7 million invested in REMIC pass through certificates backed
by first mortgage loans to four operators. Of these 202 facilities, 51 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 22.1% of total invested assets on
December 31, 1999.
At December 31, 1999, 55.4% of the total invested assets of the health
care facilities were operated by public operators, 24.0% by regional
operators, and 20.6% by small operators.
Liquidity and Capital Resources
Sources and Uses of Funds
NHI has generated net cash from operating activities during 1999
totaling $73.4 million compared to $84.9 million in the prior year. The
primary reason for this year to year decline was a reduction in net income
accompanied by an increase in accounts receivable offset in part by increased
depreciation expense, loan loss provisions and accounts payable. The
increased accounts receivable and payable are due primarily to patient
accounts receivable generated from operations of nursing centers taken over in
loan foreclosures. 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.
Net cash used in investing activities during 1999 totaled $53.4 million
compared to $78.7 million in the prior year. Cash flows provided from
investing activities during 1999 included collections on mortgage notes
receivable of $16.3 million compared to $3.9 million for the prior year, along
with prepayment of $93.9 million of mortgage notes receivable in the prior
period.
Cash flows used in investing activities during 1999 included investment
in mortgage notes receivable of $22.2 million, real estate properties of $14.3
million, and marketable securities of $33.2 million. Cash flows used in
investing activities in the prior period included investment in mortgage notes
receivable of $67.6 million, in real estate properties of $40.7 million, in
preferred stock of $38.1 million and in marketable securities of $30.1
million.
Net cash used in financing activities during 1999 totaled $23.8 million
compared to $50.7 million in the prior year. Cash flows provided by financing
activities included $29.5 million from credit facility borrowings and $25.8
million from long term debt borrowings, compared to $58.5 million from credit
facility borrowings, $0.2 million from long term debt borrowing and $2.0
million from the sale of common stock.
Cash flows used in financing activities for 1999 included principal
payments on long-term debt of $4.5 million and dividends paid to shareholders
of $73.8 million. This compares to prior year activity of $4.3 million of
principal payments on long term debt, dividends paid to shareholders of $75.8
million and the repurchase of common stock of $31.3 million.
In March 2000, we announced a reduction in our quarterly dividend of 10
cents per common share to 64 cents. This is NHI's first dividend decline and
it 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 $12.0 million at December 31, 1999,
and the entire balance outstanding matures in October 2000. In addition,
$38.1 million of the Company's convertible subordinated debentures outstanding
at December 31, 1999 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
At December 31, 1999, the Company was committed, subject to due
diligence and financial performance goals, to fund approximately $9.0 million
in health care real estate projects, of which $7.0 million is expected to be
funded within the next 12 months. The commitments include mortgage loans for
two long-term health care centers, one medical office building, and three
assisted living facilities all at rates ranging from 9.0% to 11.5 %. Also
included in the $9.0 million of commitments is a commitment to loan an
additional $2.0 million on one existing loan 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.
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
As more fully described in Note 3 to the Consolidated Financial
Statements, 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.
As more fully described in Note 4 to the 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 Write-offs and Income Recognition
As more fully described in Note 4 to the Consolidated Financial
Statements, during 1999 NHI wrote off $10.0 million of mortgage notes
receivable with carrying values before write-off of $74.0 million. In
addition, NHI discontinued income recognition on one loan that had a carrying
value of $4.5 million. As of December 31, 1999, two loans with carrying
values of $40.9 million earning interest at approximately 11% have unpaid
interest of from 30 to 60 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 these and other mortgage
notes receivable in 2000.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net income for the year ended December 31, 1999 is $53.6 million versus
$69.6 million for the same period in 1998, a decrease of 23.0%. Diluted
earnings per common share decreased 56 cents or 20.8%, to $2.13 in 1999 from
$2.69 in 1998.
Total revenues for the year ended December 31, 1999 increased $24.6
million or 23.1% to $131.2 million from $106.6 million for the year ended
December 31, 1999. Revenues from mortgage interest income decreased $7.9
million, or 13.9%, when compared to the same period in 1998. Revenues from
rental income increased $3.7 million, or 8.8% in 1999 as compared to 1998.
Revenues from investment interest and other income increased $4.5 million or
61.2% compared to 1998. Facility operating revenue increased to $24.3 million
in 1999 compared to $0.00 million in 1998.
The decrease in mortgage interest income is due in part to a decline in
the average amount of mortgage investments outstanding as a result of
prepayments and foreclosure on mortgage loans. During the prior year 1998,
NHI received $93.9 million of prepayments on mortgage notes receivable. In
addition, during 1998 and 1999, NHI foreclosed on mortgage loans totaling
$81.4 million. Furthermore, mortgage interest income in 1999 included no
income from prepayment penalties and unamortized commitment fees applicable to
early loan repayments as compared to $5.0 million of income in 1998.
The increase in rental income resulted primarily from the increase in
investments in real estate properties of $55.0 million during the last 24
months. 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.
Total expenses for 1999 increased $40.6 million or 110.1% to $77.5
million from $36.9 million for 1998. Interest expense increased $6.5 million
or 33.9% in 1999 as compared to 1998. Depreciation of real estate increased
$2.5 million or 28.3% when compared to 1998. General and administrative costs
decreased $0.6 million or 15.9%. Loan loss expense increased $9.5 million or
223.9% to $13.8 million. Facility operating expense increased to $22.6
million in 1999 compared to $0.0 million in 1998.
Interest expense increased due to increased borrowing on credit
facilities and long-term debt compared to the prior year. Depreciation
increased as a result of the Company placing newly constructed assets in
service, property acquisitions, and the purchase, in lieu of foreclosure, of
four long-term health care centers previously owned by All Seasons Living
Centers, and seven long term health care centers and one retirement center
previously managed and guaranteed by Phoenix Healthcare Corporation (formerly
Iatros Health Network) as discussed in Note 3 to the Consolidated Financial
Statements.
NHI recorded a non-cash charge of $10.0 million, a decrease of 41 cents
per share basic and diluted, in the fourth quarter because of the impairment
of values related to mortgage loans, foreclosures and lease terminations. The
charge reduces net income but has no impact on funds from operations ("FFO").
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 1997, a decrease of 7.6%. 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 $4.9
million or 4.4% to $106.6 million from $111.4 million for the year ended
December 31, 1998. Revenues from mortgage interest income decreased $10.5
million, or 15.6%, 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
83.7% 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.
The increase in rental income resulted primarily from the increase in
investments in real estate properties of $40.7 million during the previous 12
months. 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 increased $0.9 million
or 2.5% to $36.9 million from $36.0 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%. Loan loss provisions were $4.3 million
for 1998 compared to $1.2 million for 1997.
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. Loan loss provisions increased based on the application of the
Company's policy for determining loan loss provisions.
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.
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, 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
In recent years, as part of its Year 2000 readiness plan, NHI focused on
potential Year 2000 issues in areas such as mainframe and network computer
operations, personal computer hardware and software, third party mortgagees
and lessees, and third party vendors. Based on the results of NHI's Year 2000
assessment remediation and testing and based on experience since January 1,
2000, NHI does not believe that any significant Year 2000 issues continue to
exist related to these areas.
With regard to NHI's third party mortgagees and lessees, NHI's
assessment of Year 2000 issues has been based primarily on information
provided by mortgagees and lessees and on NHI's uninterrupted receipt of
monthly mortgage and lease payments. However, there can be no assurance that
the information provided by the mortgagees and lessees is accurate or complete
or that NHI's third party mortgagees and lessees are not experiencing or may
experience Year 2000 issues.
As a result of its advisory agreement with NHC, costs related to NHI's
Year 2000 plan have not been material and are not expected to be material in
future periods. No additional advisory fees have been or will be charged to
NHI related to the assessment, remediation and testing of NHI's Year 2000
compliance.
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, 1999, $112,488,000 of the Company's long-term debt
bears interest at fixed interest rates. As of December 31, 1999, 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 $60,382,000 of the Company's long-term debt
and $88,000,000 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 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.
<PAGE>
<TABLE>
Selected Quarterly Financial Data
(Unaudited, in thousands, except per share amounts)
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
1999
<S> <C> <C> <C> <C>
Net Revenues $30,014 $29,182 $32,888 $39,074
Net Income 16,243 15,953 15,785 5,637
Basic Earnings Per Share .650 .640 .630 .210
Diluted Earnings Per Share .650 .640 .630 .210
1998
Net Revenues $28,244 $26,423 $25,544 $26,341
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
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable
PART III
Item 10. Directors and Executive Officers of Registrant
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.
Director
Term
Name Age Position with the Company Expires
W. Andrew Adams 54 Director and President 2002
Richard F. 54 Director, Senior Vice
LaRoche, Jr. President and Secretary 2001
Jack Tyrrell 53 Director 2002
Robert T. Webb 55 Director 2000
Ted H. Welch 66 Director 2001
Robert G. Adams 53 Senior Vice President ----
W. Andrew Adams has been President and a director of the Company since
its inception in 1991. Mr. Adams is also President and a director of National
HealthCare Corporation ("NHC"), the Company's Investment Advisor. 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 is also
General Counsel, Secretary and Senior Vice President of NHC. 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. Mr. Webb is
Chairman of the Board and a Director of Care Foundation of America, Inc., a
non-profit, tax exempt operating long term care provider.
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 and
serves on the Board of Directors of NHC and National Health Realty, Inc. He
is responsible for oversight of all company due diligence efforts 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
is responsible for billing and collection and functions as a senior account
for NHI. She has a B.S. degree from Middle Tennessee State University.
Kristin S. Gaines (Credit Analyst) has been with NHI since 1998. 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.
and an M.B.A. from Middle Tennessee State University.
Sherel A. Cochran (Administrative Secretary) has been with NHC since
1999. She has held several administrative positions within the banking and
finance industry. She is a graduate of Western Business University in
Portland, Oregon.
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 1999.
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
1999
<CAPTION>
Restricted
Name and Principal Other annual Stock All Other
Position Year Salary($) Bonus Compensation Awards Options/SARs LTIP Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Andrew Adams 1999 $ --- $ (3) --- --- --- --- ---
President & 1998 --- 253,225 --- --- --- --- ---
Director 1997 --- 600,000 --- --- --- --- ---
Robert G. Adams 1999 $ --- $ (3) --- --- --- --- ---
Vice President 1998 --- 202,000 --- --- --- --- ---
1997 --- 400,000 --- --- --- --- ---
Richard F. 1999 $ --- $ (3) --- --- --- --- ---
LaRoche, Jr. 1998 --- 202,995 --- --- --- --- ---
VP/Secretary 1997 --- 400,000 --- --- --- --- ---
& Director
</TABLE>
1Compensation deferred at the election of an executive has been included in
salary column (d).
2These officers also received compensation from National HealthCare Corporation
and National Health Realty, Inc. which are disclosed in those Company's Form
10-K or proxy statements.
3No bonus has yet been declared or paid for 1999.
<PAGE>
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
$25.375 in 1995, $33.50 in 1996, $36.00 in 1997, $39.875 in 1998 and $24.25 in
1999. The outside directors have exercised all but 5,060 of the 1995 grants,
all but 10,000 of the 1996 grants and none of the 1997, 1998 or 1999 grants.
On January 15, 1997, the option to purchase 194,000 shares were granted
to Key Employees at $36.00 per share. On October 26, 1999, the Company
awarded options on 145,000 shares at the then fair market value of $14.50 per
share to Key Employees from the 1997 Stock Option Plan. None of the Stock
Option grants have been exercised. Of the 620,800 shares available under the
Company's Option Plans, 395,000 are available for future grants.
Options Granted in 1999
The table below provides certain information on grants of stock options
to the executive officers and directors pursuant to the Company's 1991 Option
Plan during the fiscal year ended December 31, 1999. Although stock
appreciation rights are available under the plan, none have been issued to
date.
<TABLE>
<CAPTION>
Potential Realizable
Percent of Value at Assumed
Total Exercise Annual Rates of
Options/SAR's or Base Stock Price Appreciation
Options/SAR's Granted in Price Expiration for Option Term (1)
Name Granted (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
Ted H. Welch 15,000 7.9% $24.250 4/25/04 $ -0- $ -0-
Jack Tyrrell 15,000 7.9% 24.250 4/25/04 -0- -0-
Robert T. Webb 15,000 7.9% 24.250 4/25/04 -0- -0-
W. Andrew Adams 30,000 15.8% 14.500 10/2005 --- ---
Richard F. LaRoche, Jr. 20,000 10.5% 14.500 10/2005 --- ---
Robert G. Adams 20,000 10.5% 14.500 10/2005 --- ---
</TABLE>
(1) Amounts represent hypothetical gains that could be achieved for the options
if exercised at the end of the option terms over the December 31, 1999
average stock price of $14.6563. These gains are based on assumed rates
of stock appreciation of 5% and 10% compounded annually from the date
the respective options were granted. Actual gains, if any, on stock
option exercises will depend on the future performance of the Common Stock
and the date on which the options are exercised.
1999 Year-End Option Values
The following table summarizes certain information regarding stock
options exercised during the fiscal year ended December 31, 1999 and stock
options held as of December 31, 1999 by the Executive Officers and Directors.
No SARs were held or exercised during fiscal 1999.
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
Number of Shares
Shares Underlying Unexercised Value of Unexercised
Acquired on Value Options at Fiscal In-the-Money Options
Exercise Realized Year-End at Fiscal Year-End
Name (#) ($)(1) (#) ($)(2)
<S> <C> <C> <C> <C>
W. Andrew Adams -0- $ -0- 70,000 $ -0-
Richard F. LaRoche, Jr. -0- -0- 50,000 -0-
Robert T. Webb -0- -0- 45,000 -0-
Ted H. Welch -0- -0- 50,000 -0-
Jack Tyrrell -0- -0- 55,000 -0-
Robert G. Adams -0- -0- 50,000 -0-
</TABLE>
(1) Represents the difference between the exercise price and the average sales
price of the Common stock on the date of exercise.
(2) Value based on the average sales price per share ($14.6563) of the Com-
pany's Common Stock on December 31, 1999, as reported on the New York
Stock Exchange, less the exercise price.
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(1) Total Shares
<S> <C> <C>
W. Andrew Adams(2) 1,405,727 5.8%
1927 Memorial Blvd.
Murfreesboro, TN 37129
Richard F. LaRoche, Jr.(3)(9) 376,248 1.5%
2103 Shannon Drive
Murfreesboro, TN 37129
Jack Tyrrell(4)(9) 85,586 *
3100 West End Avenue
Nashville, TN 37203
Robert T. Webb(5) 100,671 *
149 MTCS Drive
Murfreesboro, TN 37129
Ted Welch(6) 73,940 *
611 Commerce, 29th Floor
Nashville, TN 37219
Robert G. Adams(7)(9) 384,370 1.6%
2217 Tomahawk Trace
Murfreesboro, TN 37129
Franklin Resources, Inc.(10) 2,443,915 10.0%
777 Mariners Island Blvd.
San Mateo, CA 94403
Nicholas Fund, Inc. 1,931,000 7.9%
and Nicholas Income Fund, Inc.
6002 North Highway 83
Hartland, WI 53029-8503
All Executive Officers and
Directors as a Group
(6 persons)(8) 2,426,542 9.9%
________________
*Less than 1%.
</TABLE>
(1) The percentages shown are based on 24,365,159 shares of Common
Stock outstanding on December 31, 1999 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.
(2) Includes options to purchase 70,000 shares of Common Stock held by
Mr. Adams.
(3) Includes options to purchase 50,000 shares of Common Stock held by
Mr. LaRoche.
(4) Includes options to purchase 56,000 shares of Common Stock held by
Mr. Tyrrell or family trusts.
(5) Includes options to purchase 45,000 shares of Common Stock held by
Mr. Webb.
(6) Includes options to purchase 54,000 shares of Common Stock held by
Mr. Welch.
(7) Includes options to purchase 50,000 shares of Common Stock held by
Mr. Adams.
(8) Includes options to purchase 250,000 shares of Common Stock.
(9) Substantially all the options included in this total have been
transferred to a family partnership or trust.
(10) This is ownership for SEC purposes and not for purposes of real
estate investment trust regulations.
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. NHC has advised
the Company that an event of default has been declared on one approximately
$32,000,000 loan which the Company guarantees. The lenders dispute the
allocation of certain collateral between itself and another lending
institution. It has advised the Company that it is in continuing negotiations
with the lenders on curing the default. 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 ($14,320,000 at December 31, 1999)
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,
1999. NHI receives from NHC compensation of approximately $72,000 per annum
for the guarantees which is credited against NHC's base rent requirements.
Additionally, NHI has outstanding letters of credit for $9,580,000 of debt.
NHI also has guaranteed bank loans in the amount of $1,447,700 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.
Advisory Contracts
A subsidiary of NHC, the Company's investment advisor, was retained by
the Company in August 1999 to manage its eight New England properties.
Additionally, effective February 1, 2000, the Company has transferred
managerial control of its four Washington state properties pursuant to an
advisory agreement with other subsidiaries of NHC. Details of these
properties can be found in the section entitled "Foreclosure Properties". The
advisory fee is substantially the same to that which NHI negotiated with a
third party management company who operated the Washington state properties
for approximately 16 months.
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 stockholders 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, 1999.
<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. 100,000 200,000 SouthTrust Bank
Jack Tyrrell -0- -0- --
Robert T. Webb -0- -0- --
Ted Welch -0- -0- --
Robert G. Adams -0- 100,000 SouthTrust Bank
Olin O. Williams 50,000 50,000 SouthTrust Bank
NHC Employees 1,437,699 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 November 9, 1999
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Murfreesboro, State of Tennessee, on the 28th day of March, 2000.
NATIONAL HEALTH INVESTORS, INC.
BY: /s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed on the dates indicated by the following persons in
the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ W. Andrew Adams President & Director March 28, 2000
W. Andrew Adams (Principal Executive Officer)
/s/ Richard F. LaRoche, Jr. Secretary and Director March 28, 2000
Richard F. LaRoche, Jr. (Principal Financial Officer)
/s/ Jack Tyrrell Director March 28, 2000
Jack Tyrrell
/s/ Robert T. Webb Director March 28, 2000
Robert T. Webb
/s/ Ted H. Welch Director March 28, 2000
Ted H. Welch
</TABLE>
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999
<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, 1999
<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, 1999 & 1998
Consolidated Statements of Income-For the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows-For the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity-For the
Years Ended December 31, 1999, 1998 and 1997
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 1999 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, 1999 and 1998, and the related consolidated statements of income,
stockholders' equity and cash flows for the years ended December 31, 1999,
1998 and 1997. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Health Investors, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for the years ended
December 31, 1999, 1998 and 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
January 18, 2000
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
<CAPTION>
December 31 1999 1998
<S> <C> <C>
Assets
Real estate properties:
Land $ 31,875 $ 22,649
Buildings and improvements 340,966 267,962
Construction in progress 567 798
373,408 291,409
Less accumulated depreciation (57,387) (45,871)
Real estate properties, net 316,021 245,538
Mortgage and other notes receivable, net 316,454 394,174
Investment in preferred stock 38,132 38,132
Investments in real estate mortgage investment conduits 37,670 36,861
Cash and cash equivalents 16,723 20,407
Marketable securities 49,650 26,797
Accounts receivable 10,714 4,542
Deferred costs and other assets 3,181 2,747
Total Assets $788,545 $769,198
Liabilities and Deferred Income
Long-term debt $172,870 $151,559
Credit facilities 88,000 58,500
Convertible subordinated debentures 95,741 100,096
Accounts payable and other accrued expenses 7,228 1,696
Accrued interest 6,412 6,463
Dividends payable 18,033 18,030
Deferred income 7,621 8,194
Total Liabilities and Deferred Income 395,905 344,538
Commitments and guarantees
Stockholders' Equity
Cumulative convertible preferred stock, $.01 par value;
10,000,000 shares authorized;
748,694 and 768,894 shares, respectively,
issued and outstanding; stated
at liquidation preference of $25 per share 18,717 19,222
Common stock, $.01 par value;
40,000,000 shares authorized;
24,382,987 and 24,364,391 shares,
respectively, issued and outstanding 244 244
Capital in excess of par value 425,963 425,449
Cumulative net income 394,165 340,547
Cumulative dividends (431,282) (357,518)
Unrealized losses on marketable securities (15,167) (3,284)
Total Stockholders' Equity 392,640 424,660
Total Liabilities and Stockholders' Equity $788,545 $769,198
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
<CAPTION>
Consolidated Statements of Income
(In thousands, except share amounts)
Year Ended December 31 1999 1998 1997
<S> <C> <C> <C>
Revenues:
Mortgage interest income $ 49,049 $ 56,958 $ 67,473
Rental income 45,993 42,268 39,948
Investment interest
and other income 11,810 7,326 3,989
Facility operating revenue 24,306 --- ---
131,158 106,552 111,410
Expenses:
Interest 25,596 19,112 22,219
Depreciation of real estate 11,485 8,955 8,036
Amortization of loan costs 743 688 836
General and administrative 3,275 3,892 3,700
Loan loss expense 13,800 4,260 1,231
Facility operating expenses 22,641 --- ---
77,540 36,907 36,022
Net income 53,618 69,645 75,388
Dividends to preferred stockholders 1,633 1,676 1,916
Net income applicable to common stock $ 51,985 $ 67,969 $ 73,472
Net income per common share:
Basic $ 2.13 $ 2.72 $ 3.01
Diluted 2.13 2.69 2.92
Weighted average common shares outstanding:
Basic 24,365,027 24,964,047 24,394,044
Diluted 24,367,529 28,689,192 28,887,987
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
<CAPTION>
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31 1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 53,618 $ 69,645 $ 75,388
Depreciation of real estate 11,485 8,955 8,036
Provision for loan losses 13,800 4,260 1,231
Amortization of loan costs 743 688 836
Interest on debenture conversion --- 324 300
Deferred income 1,095 1,906 1,495
Amortization of deferred income (1,668) (2,022) (2,370)
Amortization of bond discount on held
to maturity marketable securities (1,563) --- ---
(Increase) decrease in accounts receivable (8,382) 643 197
Increase in other assets (1,177) (2) (25)
Increase in accounts payable
and accrued liabilities 5,482 531 4,848
Net cash provided by operating activities 73,433 84,928 89,936
Cash flows from investing activities:
Investment in mortgage notes receivable (22,163) (67,564) (115,876)
Collection of mortgage notes receivable 16,287 3,872 7,695
Prepayment of mortgage notes receivable --- 93,891 181,212
Acquisition of and construction of
property and equipment, net (14,318) (40,724) (23,848)
Investment in preferred stock --- (38,132) ---
Investment in marketable securities, net (33,173) (30,081) ---
Net cash provided by (used in)
investing activities (53,367) (78,738) 49,183
Cash flows from financing activities:
Repayment of credit facilities --- --- (151,000)
Proceeds from credit facilities 29,500 58,500 92,000
Proceeds from long-term debt 25,773 243 99,756
Principal payments on long-term debt (4,462) (4,343) (104,105)
Proceeds from (payments on) convertible
subordinated debentures (800) (40) 60,000
Financing costs paid --- --- (2,671)
Dividends paid to stockholders (73,761) (75,759) (73,577)
Sale of stock and exercise of stock options --- 1,953 1,993
Repurchase of common stock --- (31,252) ---
Net cash used in financing activities (23,750) (50,698) (77,604)
Increase (decrease)in cash and cash equivalents (3,684) (44,508) 61,515
Cash and cash equivalents, beginning of period 20,407 64,915 3,400
Cash and cash equivalents, end of period $ 16,723 $ 20,407 $ 64,915
</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 Cumulative Cumulative Losses on Mar- Stockholders'
Shares Amount Shares Amount Par Value Net Income Dividends ketable Sec. Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 share-
holders ($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
Net income --- --- --- --- --- 53,618 --- --- 53,618
Unrealized losses on market-
able securities --- --- --- --- --- --- --- (11,883) (11,883)
Total comprehensive income 41,735
Shares issued in conversion
of convertible debentures
to common stock --- --- 316 --- 9 --- --- --- 9
Shares issued in con-
version of preferred
stock to common stock (20,200) (505) 18,280 --- 505 --- --- --- ---
Dividends to common share-
holders ($2.960 per share) --- --- --- --- --- --- (72,131) --- (72,131)
Dividends to preferred share-
holders ($2.125 per share) --- --- --- --- --- --- (1,633) --- (1,633)
BALANCE AT 12/31/99 748,694 $ 18,717 24,382,987 $244 $425,963 $394,165 $(431,282) $(15,167) $392,640
</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, 1999, 1998, and 1997
Note 1. Organization
National Health Investors, Inc. ("NHI" or the "Company") is a Maryland
real estate investment trust that 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. NHI
reviews its properties for recoverability when events or circumstances,
including significant physical changes in the property, significant adverse
changes in general economic conditions, and significant deteriorations of the
underlying cash flows of the property, indicate that the carrying amount of
the property may not be recoverable. The need to recognize an impairment is
based on estimated future cash flows from a property compared to the carrying
value of that property. If recognition of an impairment is necessary, it is
measured as the amount by which the carrying amount of the property exceeds
the fair value of the property.
Allowance for Loan Losses - The allowance for loan losses is considered
adequate to cover potential losses on NHI's mortgage and other notes
receivable. In accordance with Statement of Financial Accounting Standards
No. 114, "Accounting for Creditors for Impairment of a Loan - An Amendment of
FASB Statements No. 5 and 15," 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. 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.
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 in its
real estate properties by approximately $13,050,000 and in mortgage and other
notes receivable (by approximately $10,422,000).
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 that 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'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,
"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.
Other Assets - Other assets include NHI's $300,000 investment in
Summerfield Development LLC ("Summerfield"). Summerfield is a related party
of NHI, since certain members of NHI's management and board of directors are
also members of Summerfield. NHI carries its investment in Summerfield at
cost in the consolidated balance sheets.
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. Under certain of its mortgages, NHI receives contingent
interest, which is based on the increase in the current year revenues of a
borrower over a base year. NHI recognizes contingent interest income annually
when, based on the actual revenues of the borrower, receipt of such income is
assured. Mortgage interest income includes prepayment penalties, which are
recognized into income upon prepayment of notes receivable. The Company's
policy related to mortgage interest income on nonperforming mortgage loans is
to not recognize unpaid mortgage interest income in excess of 90 days.
Note 3. Real Estate Properties
The following table summarizes NHI's real estate properties by type of
facility and by state as of December 31, 1999:
<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 $ 1,833 $ 441
Arizona 1 453 6,678 506 2,765
Florida 10 3,503 62,208 8,787 9,582
Georgia 1 52 865 496 141
Idaho 2 365 6,824 614 ---
Kentucky 3 201 2,899 1,272 ---
Massachusetts 4 1,189 16,034 477 ---
Missouri 5 1,171 23,072 7,055 14,509
New Hampshire 3 1,483 20,060 588 ---
South Carolina 3 572 11,543 4,420 5,556
Tennessee 21 2,118 45,061 15,061 10,384
Virginia 1 176 2,511 842 3,535
Washington 4 1,881 12,148 461 ---
Total Long-Term Care 60 13,259 215,068 42,412 46,913
Acute Care:
Kentucky 1 540 6,961 1,498 ---
Total Acute Care 1 540 6,961 1,498 ---
Medical Office Buildings:
Florida 1 170 3,349 806 ---
Illinois 1 --- 1,925 72 ---
Kentucky 1 23 3,667 838 ---
Louisiana 1 --- 3,487 878 ---
Texas 2 631 9,676 1,446 ---
Utah 1 223 6,886 1,713 ---
Total Medical Office
Buildings 7 1,047 28,990 5,753 ---
Assisted Living:
Arizona 4 1,757 13,622 311 ---
Florida 4 7,095 33,044 2,519 ---
New Hampshire 1 218 2,962 86 ---
New Jersey 1 4,229 13,030 1,440 ---
South Carolina 1 344 2,879 69 ---
Tennessee 3 874 7,061 150 ---
Texas 1 2,094 9,091 957 ---
Total Assisted Living 15 16,611 81,689 5,532 ---
Retirement Centers:
Missouri 1 354 3,181 968 ---
Tennessee 2 64 5,644 1,224 457
Total Retirement Centers 3 418 8,825 2,192 457
Total 86 $31,875 $341,533 $57,387 $47,370
</TABLE>
All Seasons Living Centers
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.
Iatros Health Network
In 1996, NHI funded mortgage loans for Heartland Healthcare Corporation
in the original principal amount of $25,805,500. In 1997, NHI funded mortgage
loans for Buckley Nursing Home, Inc. and Greenfield Associates Real Estate
Trust in the original principal amount of $10,000,000, and for OHI Realty
Limited Partnership I OHI Corporation d/b/a Oasis Healthcare in the original
principal amount of $8,300,000. Phoenix Healthcare Corp. (formerly Iatros
Health Network) and its subsidiary, OHI Corporation, which did business as
Oasis Healthcare, were the manager and guarantor of all facilities securing
these loans. Collateral for the loans included first mortgages on seven
long-term health care facilities and one retirement center located in the
states of Massachusetts and New Hampshire, the corporate guarantee of Phoenix
Healthcare Corp., and certain accounts receivable.
In May 1999, NHI declared the borrowers in default under the terms of
the loan agreements. The events of default included the violation of the
financial covenants contained in the loan agreement and the failure to make
timely payments of principal and interest.
On August 10, 1999, NHI purchased from the borrowers for approximately
$41,800,000, (the then current loan balance) all of the real estate, property
and equipment of the seven long-term health care facilities and the retirement
center. The purchase was undertaken in lieu of foreclosure. NHI has engaged
a subsidiary of National HealthCare Corporation to manage the facilities.
Stockbridge Investment Partners, Inc.
In 1993, NHI funded a mortgage loan for Stockbridge Investment Partners,
Inc. and its subsidiary York Hannover Nursing Centers, Inc. in the original
principal amount of $29,500,000. Collateral for the loan 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.
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 up to 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.
Note 4. Mortgage and Other Notes Receivable
The following is a summary of mortgage and other notes receivable by
type:
December 31
1999 1998
Mortgage loans $321,722,000 $380,417,000
Construction loans 1,617,000 17,965,000
Term loans 3,537,000 3,618,000
326,876,000 402,000,000
Loan loss allowance (10,422,000) (7,826,000)
$316,454,000 $394,174,000
The following is a summary of the terms and amounts of mortgage and
other notes receivable at December 31, 1999:
<TABLE>
<CAPTION>
Final Number of Principal
Payment Date Loans Payment Terms Amount
Mortgage Loans:
<S> <c > <C> <C>
2000 1 Monthly payments of $258,000, which
include principal and interest at 11%. $ 23,699,000
2000 1 Loan participation agreement with
SouthTrust Bank acquiring a 50% interest
in six mortgage notes. Monthly payments
averaging $195,000, which include interest
at a variable rate equal to the London
Interbank Offered Rate ("LIBOR") plus 2.2%. 25,696,000
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. 9,347,000
2005 1 Monthly payments of $99,000, which include
interest at 11.55%. 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. 9,281,000
2006 1 Monthly payments of $209,000, which include
interest at 10.65%, adjusted annually to
include principal and interest at a rate
equal to .15% above the previous year's rate 20,755,000
2007 1 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. 51,363,000
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. 9,282,000
2009 1 Monthly payments of $135,000, which
include interest at 9.5%. Contingent
interest related to a percentage of
the facilities' annual increase in revenue
over a base year is paid annually. 15,100,000
2009 1 Monthly payments of $188,000, which include
interest at 10.25%. 19,952,000
2010 1 Monthly payments of $183,000, which include
interest at 11.65%. The interest rate will
escalate .1% per year through September 1,
2005, the anniversary date of the note.
Effective 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%. 13,328,000
2000 - 2009 28 Monthly payments from $12,000 to $114,000,
which include interest at 7.75% to 12.60%.
Principal outstanding ranges from $326,000
to $7,832,000. 123,919,000
Construction Loan:
2010 1 Monthly payment of interest only
at the rate of 10% during construction.
The construction note will convert to a
mortgage note at close of construction. 1,617,000
Term Loans:
2019 3 Monthly payments of $29,000, which
include interest at 7.5%. 3,537,000
-----------
$326,876,000
</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, New Jersey, North Carolina, Oklahoma,
Pennsylvania, Tennessee, Texas, Virginia, Washington, and Wisconsin.
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.
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 December 31, 1999, the net carrying value of the loan is
approximately $21,700,000, which earns 11% interest. NHI has not received
principal and interest payments on the loan since October 1999. 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. Lenox is the manager of the long-term health care facility
located in the state of Florida. 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 its affiliate does not intend to honor its lease commitment.
NHI is in the process of negotiating a management contract with a subsidiary
of NHC to manage the facility.
At December 31, 1999, the net carrying value of the loan is
approximately $1,000,000, which earns $12.45% 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 December 31, 1999, the net carrying value of the loan is
approximately $19,200,000, which earns interest at 10.65%. NHI has not
received principal and interest payments on the loan since November 1999. 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
$12,640,000 at December 31, 1999. 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.
Loan Write-offs and Reserves
During 1999, NHI wrote-off $10,000,000 of its mortgage notes receivable
from the aforementioned Iatros Health Network, Pinellas Healthcare Investors,
Inc. and Colonial Land Corporation. In addition, mortgage and other notes
receivable are reduced by an allowance for loan losses of $10,422,000 at
December 31, 1999 and $7,826,000 at December 31, 1998. The provision for loan
losses in 1999, 1998, and 1997 was $13,800,000, $4,260,000, and $1,231,000
respectively, and has been recorded as loan loss expense 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.
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.
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.
Marketable securities - The fair market value is estimated based on
quoted market prices and is the same as the carrying amount for securities
available for sale.
Accounts 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 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.
Payables and accrued expenses - The carrying amount approximates fair
value because of the short-term nature of these liabilities.
The estimated fair values of NHI's financial instruments are as follows:
<TABLE>
<CAPTION>
(in thousands)
December 31 1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Mortgage and other
notes receivable $ 316,454 $ 316,454 $ 394,174 $ 394,174
Investment in preferred stock 38,132 38,132 38,132 38,132
Investments in real estate mort-
gage investment conduits 37,670 37,670 36,861 36,861
Marketable securities 49,650 45,798 26,797 26,797
Accounts receivable 10,714 10,714 4,542 4,542
Cash and cash equivalents 16,723 16,723 20,407 20,407
Long-term debt and credit
facilities (260,870) (260,870) (210,059) (210,059)
Convertible subordinated
debentures (95,741) (40,868) (100,096) (72,562)
Payables and accrued expenses (31,673) (31,673) (26,189) (26,189)
</TABLE>
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'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.
Marketable securities consist of the following:
(in thousands)
December 31 1999 1998
----------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
Available for sale $43,835 $28,668 $22,042 $18,758
Held to maturity 20,982 17,130 8,039 8,039
$64,817 $45,798 $30,081 $26,797
NHI's available for sale marketable securities consist of the common
stock of other publicly traded real estate investment trusts. None of these
available for sale marketable securities have stated maturity dates. NHI's
held to maturity marketable securities consist of corporate bonds, all of
which mature in the next five years.
Proceeds from the sale of investments in available for sale securities
during the year ended December 31, 1999 were $804,000. Gross investment gains
of $83,000 were realized on these sales during the year ended December 31,
1999. No sales of marketable securities occurred during 1998.
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 5.9 years and 3.8 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, 1999.
Note 9. Long-term Debt and Credit Facilities
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 1999 1998
<S> <C> <C> <C> <C>
Bank credit facility, principal and Variable,
interest payable quarterly 5.5% 2009 $ 20,592,000 $ 22,003,000
Senior secured notes, principal and interest
payable semiannually 8.4 2005 10,993,000 12,825,000
Senior secured notes, principal and interest
payable semiannually 8.3 2003 580,000 746,000
Senior unsecured line of credit agreement,
payable in periodic installments of Variable,
principal and interest 6.2 2000 88,000,000 58,500,000
Senior unsecured term loan, interest pay-
able monthly, principal due at Variable,
maturity 10.75 2004 500,000 ---
Unsecured notes, interest payable semi-
annually, principal due at maturity 7.3 2007 100,000,000 100,000,000
Unsecured term credit note, interest pay- Variable,
able in periodic installments,
principal due at maturity 7.2 2002 25,000,000 ---
First mortgage notes, principal payable in
periodic installments, interest
payable monthly 5.0 2017 915,000 935,000
First mortgage revenue bonds, principal
payable in periodic installments, Variable,
interest payable monthly 4.6 2000-2014 14,290,000 15,050,000
$260,870,000 $210,059,000
</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, 1999, NHI had borrowed $88,000,000 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 6.5% 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. 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.
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 bank credit facility was financed through NHC,
National Health Corporation, ("National") and through the National Health
Corporation Leveraged Employee stock Ownership Plan and Trust before being
transferred to NHI with the creation of NHI in 1991. On July 30, 1999,
National was notified by SunTrust Bank of Nashville, N.A., the Agent for
itself and certain other lenders for the above-referenced loan, that as Agent
it disputes the allocation of certain collateral between itself and another
lending institution. National is actively negotiating for resolution of this
dispute. In the event the dispute is not resolved, the Agent may call the
loan into default. If the loan is called into default, payments by NHI to
repay the loan may have a material adverse impact upon NHI's cash flows and
liquidity.
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 $15,906,000 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, for the five years subsequent to December 31, 1999 are as follows:
2000 $92,574,000
2001 4,606,000
2002 30,952,000
2003 5,084,000
2004 5,886,000
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, 1999, 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 1999, none of the 1997 debentures were converted. During 1998,
$3,349,000 of the 1997 debentures were converted into 89,302 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, 1999, 1995 debentures in the amount of
$38,060,000 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 1999 and 1998, $10,000 and $9,352,000, respectively, of the 1995
debentures were converted into 316 and 295,711 shares of common stock. NHI
has reserved an additional 1,203,478 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. During 1999, $4,347,000 of the
debentures were redeemed. At December 31, 1999, debentures in the amount of
$1,190,000 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 1999, none of the
debentures were converted into common stock. During 1998, $871,000 of the
debentures were converted into 26,393 shares of common stock. NHI has
reserved 32,740 shares of common stock for conversion of 1995 debt service
debentures. Interest is payable semiannually on April 1 and October 1 of each
year.
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, 1999, 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
1999, none of the senior debentures were converted. In 1998, $25,000 of the
senior debentures were converted into 1,250 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, 1999, NHI was committed, subject to due diligence and
financial performance goals, to fund approximately $9,000,000 in health care
real estate projects, of which $7,000,000 is expected to be funded within the
next 12 months. The commitments include mortgage loans for two long-term
health care centers, one medical office building, and three assisted living
facilities, all at rates ranging from 9% to 11.5%. Included in the $9,000,000
of commitments is a commitment to loan an additional $2,000,000 on one
existing loan 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 ($14,320,000 at December 31,
1999) of NHC and its affiliates. The debt is at fixed interest rates with a
weighted average interest rate of 8.3% at December 31, 1999. 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.
Additionally, NHI has outstanding letters of credit totaling $9,580,000.
NHI also has guaranteed bank loans in the amount of $1,447,700 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.
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 mange 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 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 for cash, but effective February
15, 1999, the Preferred Stock is 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, 1999, 748,694 shares of the Preferred Stock, which are
convertible into 677,568 shares of common stock, are outstanding. During 1999
and 1998, respectively, 20,200 and 64,770 shares of Preferred Stock were
converted into 18,280 and 58,596 shares of common stock. NHI has reserved
677,568 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 of 1986, as
amended.
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:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise
Options Outstanding Shares Price
<S> <C> <C>
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
Options granted 190,000 16.81
Options expired 1,000 28.75
Outstanding December 31, 1999 410,134 $27.34
</TABLE>
At December 31, 1999, all options outstanding are exercisable. Exercise
prices on the exercisable options range from $14.50 to $39.88. The weighted
average remaining contractual life of options outstanding at December 31, 1999
is 3.4 years. NHI has reserved 577,347 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 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 1999 1998 1997
<S> <C> <C> <C>
Cash payments for interest expense $ 21,299 $ 16,451 $ 13,577
During 1999, 1998 and 1997,
$10,000, $18,902,000 and
$31,697,000, respectively,
of convertible subordinated
debentures were converted
into 316 shares, 607,327
shares and 1,020,926 shares,
respectively, of NHI's common
stock:
Convertible subordinated
debentures $ (8) $(18,902) $ (31,697)
Financing costs --- 237 457
Accrued interest (1) (324) (300)
Common stock --- 6 10
Capital in excess
of par value 9 18,983 31,530
During 1999 and 1998, NHI acquired
property and equipment in ex-
change for NHI's rights under
mortgage notes receivable
Mortgage and other notes
receivables $ 67,650 $ 13,700 $ ---
Land (4,091) (1,881) ---
Buildings and improve-
ments (63,559) (11,819) ---
During 1999, NHI redeemed certain
1995 Debt Service Debentures
and applied those debentures
against mortgage notes re-
ceivable
Mortgage notes re-
ceivable $ 3,547 $ --- $ ---
Convertible sub-
ordinated de-
bentures (3,547) --- ---
</TABLE>
Note 16. Earnings Per Share
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 1999 1998 1997
<S> <C> <C> <C>
BASIC:
Weighted average common
shares 24,365,027 24,964,047 24,394,044
Net income $53,618,000 $69,645,000 $75,388,000
Dividends paid to preferred
stockholders (1,633,000) (1,676,000) (1,916,000)
Net income available to
common stockholders $51,985,000 $67,969,000 $73,472,000
Net income per common share $ 2.13 $ 2.72 $ 3.01
DILUTED:
Weighted average common
shares 24,365,027 24,964,047 24,394,044
Stock options 2,502 13,302 36,897
Convertible subordinated
debentures --- 2,990,904 3,621,812
Cumulative convertible pre-
ferred stock --- 720,939 835,234
Average common shares
outstanding 24,367,529 28,689,192 28,887,987
Net income $53,618,000 $69,645,000 $75,388,000
Dividends paid to pre-
ferred stockholders (1,633,000) --- ---
Interest expense on con-
vertible subordinated
debentures --- 7,594,000 9,046,000
Net income assuming con-
version of convertible
subordinated debentures
to common stock $51,985,000 $77,239,000 $84,434,000
Net income per common share $ 2.13 $ 2.69 $ 2.92
</TABLE>
For the year ended December 31,1999, convertible subordinated debentures
and convertible preferred stock were convertible into 2,822,553 and 695,480
incremental shares, respectively. In accordance with SFAS 128, 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 17. Dividends
Dividend payments by NHI to its common stockholders are characterized in
the following manner for tax purposes in 1999:
<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 10, 1999 $ .6656 $--- $.0744 $ .74
Aug. 10, 1999 .6656 --- .0744 .74
Nov. 10, 1999 .6656 --- .0744 .74
Jan. 31, 2000 .2552 --- .4848 .74
$2.2520 $--- $.7080 $2.96
</TABLE>
Note 18. 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 $45,993,000 ($30,735,000 from NHC) in 1999;
$42,268,000 ($31,732,000 from NHC) in 1998; and $39,948,000 ($29,829,000 from
NHC) in 1997.
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, 1999, 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, 1999, are as follows:
NHC Others Total
2000 $29,652,000 $ 15,077,000 $ 44,729,000
2001 29,504,000 15,201,000 44,705,000
2002 -0- 14,783,000 14,783,000
2003 -0- 14,539,000 14,539,000
2004 -0- 14,673,000 14,673,000
Thereafter -0- 105,779,000 105,779,000
NHC has stated in its financial statements that it is a defendant in a
lawsuit filed under the Qui Tam provisions of the Federal False Claims Act.
The outcome of this pending lawsuit could have a material adverse impact on
the financial position, results of operations and cash flows of NHC and NHC's
resultant ability to make its lease payments to NHI.
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 $2,779,000 in 1999 ($3,310,000 in 1998 and
$3,101,000 in 1997). 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 19. Prior Year Reclassifications
Certain reclassifications have been made to the 1997 and 1998 financial
statements to conform to the 1999 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 18, 2000. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The financial statement schedules listed in the accompanying index to
Exhibit 13 are the responsibility of the Company's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not otherwise a required part of the basic
consolidated financial statements. The financial statement schedules have
been subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
January 18, 2000
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(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,
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
For the year ended
December 31,
1999-Loan loss
allowance $7,826 $13,800 $ --- $11,204 $10,422
</TABLE>
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1999
<CAPTION>
Column A Column B Column C Column D Column E
Cost capitalized Gross amount
Initial Cost subsequent to at which carried
to Company acquisition at close of period
Encum- Building & Improve- Carrying Buildings &
Description brances Land Improvements ments Costs Land Improvements Total
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Health Care Centers (2)
Alabama $ 441 $ 95 $ 5,165 $ --- $ --- $ 95 $ 5,165 $ 5,260
Health Care Centers (1)
Arizona 2,765 453 6,678 --- --- 453 6,678 7,131
Health Care Centers (10)
Florida 9,582 3,503 62,208 --- --- 3,503 62,208 65,711
Health Care Centers (1)
Georgia 141 52 865 --- --- 52 865 917
Health Care Centers (2)
Idaho --- 365 6,824 --- --- 365 6,824 7,189
Health Care Centers (3)
Kentucky --- 201 2,899 --- --- 201 2,899 3,100
Health Care Centers (4)
Massachusetts --- 1,189 16,034 --- --- 1,189 16,034 17,223
Health Care Centers (5)
Missouri 14,509 1,171 23,072 --- --- 1,171 23,072 24,243
Health Care Centers (3)
New Hampshire --- 1,483 20,060 --- --- 1,483 20,060 21,543
Health Care Centers (3)
South Carolina 5,556 572 11,543 --- --- 572 11,543 12,115
Health Care Centers (21)
Tennessee 10,384 2,118 45,061 --- --- 2,118 45,061 47,179
Health Care Centers (1)
Virginia 3,535 176 2,511 --- --- 176 2,511 2,687
Health Care Centers (4)
Washington --- 1,881 12,148 --- --- 1,881 12,148 14,029
Acute Care Hospital (1)
Kentucky --- 540 6,961 --- --- 540 6,961 7,501
</TABLE>
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1999
<CAPTION>
Column F Column G Column H
Accumulated Date of Date
Depreciation Construction Acquired
<S> <C> <C>
$ 1,833 N/A 10/17/91
506 N/A 8/13/96
8,787 N/A 10/17/91
& 12/31/99
496 N/A 10/17/91
614 N/A 8/13/96
1,272 N/A 10/17/91
477 N/A 8/10/99
7,055 N/A 10/17/91
588 N/A 8/10/99
4,420 N/A 10/17/91
15,061 N/A 10/17/91
842 N/A 10/17/91
461 N/A 10/16/98
1,498 N/A 6/12/92
</TABLE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1999
<CAPTION>
Column A Column B Column C Column D Column E
Cost capitalized Gross amount
Initial Cost subsequent to at which carried
to Company acquisition at close of period
Encum- Building & Improve- Carrying Buildings &
Description brances Land Improvements ments Costs Land Improvements Total
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Medical Office Building (1)
Florida --- 170 3,349 --- --- 170 3,349 3,519
Medical Office Building (1)
Illinois --- --- 1,925 --- --- --- 1,925 1,925
Medical Office Building (1)
Kentucky --- 23 3,667 --- --- 23 3,667 3,690
Medical Office Building (1)
Louisiana --- --- 3,487 --- --- --- 3,487 3,487
Medical Office Building (2)
Texas --- 631 9,676 --- --- 631 9,676 10,307
Medical Office Building (1)
Utah --- 223 6,886 --- --- 223 6,886 7,109
Assisted Living Centers (4)
Arizona --- 1,757 13,622 --- --- 1,757 13,622 15,379
Assisted Living Centers (4)
Florida --- 7,095 33,044 --- --- 7,095 33,044 40,139
Assisted Living Centers (1)
New Hampshire --- 218 2,962 --- --- 218 2,962 3,180
Assisted Living Centers (1)
New Jersey --- 4,229 13,030 --- --- 4,229 13,030 17,259
Assisted Living Centers (1)
South Carolina --- 344 2,879 --- --- 344 2,879 3,223
Assisted Living Centers (3)
Tennessee --- 874 7,061 --- --- 874 7,061 7,935
Assisted Living Centers (1)
Texas --- 2,094 9,091 --- --- 2,094 9,091 11,185
Retirement Center (1)
Missouri --- 354 3,181 --- --- 354 3,181 3,535
Retirement Centers (2)
Tennessee 457 64 5,644 --- --- 64 5,644 5,708
------ ------ ------- ------ ----- ------ ------- -------
$47,370 $31,875 $341,533 $ --- $ --- $31,875 $341,533 $373,408
====== ====== ======= ====== ====== ====== ======= =======
</TABLE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1999
<CAPTION>
Column F Column G Column H
Accumulated
Depreciation Date of Construction Date Acquired
<S> <C> <C>
806 N/A 6/30/93
72 12/31/98 N/A
838 N/A 7/27/93
878 1/1/95 N/A
1,446 1/1/95 N/A
& 7/31/97
1,713 1/1/95 N/A
311 --- 12/31/98
& 3/31/99
2,519 --- 8/6/96, 12/31/98
& 1/1/99
86 N/A 8/10/99
1,440 --- 8/6/96
69 --- 12/31/98
150 --- 12/31/98
& 3/31/99
957 --- 8/6/96
968 N/A 10/17/91
1,224 N/A 10/17/91
- -------
$57,387
=======
</TABLE>
(A) See Notes 3 and 18 of Notes to Consolidated Financial Statements.
(B) The aggregate cost for federal income tax purposes is approximately
$386,387,000.
(C) Depreciation is calculated using depreciation lives up to 40 years for
all completed facilities.
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
<CAPTION>
December 31
1999 1998 1997
<S> <C> <C> <C>
Investment in Real Estate:
Balance at beginning of period $291,409 $236,998 $213,150
Additions through cash expenditures 14,318 40,724 23,848
Additions in exchange for rights
under mortgage notes receivable 67,681 13,687 ---
Improvements --- --- ---
Balance at end of year $373,408 $291,409 $236,998
Accumulated Depreciation:
Balance at beginning of period $ 45,871 $ 36,929 $ 28,895
Addition charged to costs and expenses 11,516 8,942 8,034
Balance at end of year $ 57,387 $ 45,871 $ 36,929
</TABLE>
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
FOR THE YEAR ENDED DECEMBER 31, 1999
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H
Principal Amt.
of Loans Sub.
Final Monthly Original to Delinquent
Interest Maturity Payment Prior Face Amount Carrying Amount Principal or
Description Rate Date Terms Liens Of Mortgages of Mortgages Interests
<S> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM CARE FACILITIES:
First Mortgage Loans:
Missouri and Kansas (A)(L)(N) 11.0% January, 2000 $ 258,000 None $ 26,000,000 $ 21,457,000 None
SouthTrust Loan
Participation(B) LIBOR + 2.2% July, 2001 195,000 None 26,500,000 25,696,000 None
Florissant, Joplin, Sikeston
Missouri (C)(L) 11.00% September, 2003 98,000 None 10,000,000 9,347,000 None
Williston and Gainesville,
Florida (E)(L)(M) 11.55% December, 2005 99,000 None 9,620,000 9,031,000 None
Fincastle, Hot Springs, Lebanon,
Bastian, Low Moor, Bristol,
Midlothian,
Virginia (F)(L)(N) 10.65% February, 2006 209,000 None 25,000,000 16,608,000 None
Friendswood, Richmond, Sugarland,
Conroe, Beaumont, Huntsville,
Cleveland, Liberty, Houston,
and Tomball, Texas (G)(L)(M) 10.5% September, 2007 501,000 None 51,500,000 50,363,000 None
Kansas and Wisconsin 10.50% July, 2007 91,000 None 9,500,000 9,282,000 None
Augusta and Pooler,
Georgia (I)(L) 9.5% January, 2009 135,000 None 15,243,000 15,100,000 None
Trenton and Dover,
NJ (K)(L)(M) 10.25% December, 2009 --- None 20,000,000 19,502,000 None
Seven Mortgages(L)(M) 7.75%-11.88% January, 2002 N/A None N/A 10,795,000 None
December, 2008
Eight Mortgages(L)(M) 10.05%-12.60% January, 2002- N/A None N/A 35,401,000 None
May, 2007
Twelve Mortgages(L)(M) 9.00%-12.15% January, 2000- N/A None N/A 75,390,000 None
December, 2010
Dallas, Texas (J)(L) 11.65% September, 2010 183,000 None 18,000,000 13,328,000 None
Construction Loan:
St. Augustine, Florida (K) 10.00% July, 2010 --- None 1,617,000 1,617,000 None
</TABLE>
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
FOR THE YEAR ENDED DECEMBER 31, 1999
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H
Principal Amount
of Loans Subject
Final Monthly Original to Delinquent
Interest Maturity Payment Prior Face Amount Carrying Amount Principal or
Description Rate Date Terms Liens Of Mortgages of Mortgages Interest
<S> <C> <C> <C> <C> <C> <C> <C>
Term Notes:
Johnson City, Tennessee 7.5% June, 2019 15,000 None 2,062,000 1,813,000 None
Lewisburg, Tennessee 7.5% December, 2018 7,000 None 968,000 847,000 None
Smithville, Tennessee 7.5% December, 2017 7,000 None 1,016,000 877,000 None
$316,454,000
</TABLE>
(A) Balloon payment of $23,699,000 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 $8,161,000 due at maturity.
(E) Interest escalates 0.1% per year. Balloon payment of $8,449,000
due at maturity.
(F) Effective January, 1999, the interest escalates .15% per year through
maturity. Balloon payment of $20,755,000 due at maturity.
(G) Balloon payment of $45,042,000 due at maturity.
(H) Balloon payment of $17,010,000 due at maturity.
(I) Balloon payment of $12,923,000 due at maturity.
(J) 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%.
(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) The Company has reduced the carrying amount of this mortgage loan by a
reserve calculated in accordance with the provisions of Statement of
Financial Accounting Standards 114, Accounting by Creditors for Impair-
ment of a Loan - An Amendment of FASB Statements No. 5 and 15. The
reserve is based on the Company's knowledge of the general economic
condition in the long-term health care industry and the cash flows of
the long-term health care facilities that service the mortgage loan.
(N) The Company has reduced the carrying amount of this mortgage loan by a
reserve calculated in accordance with the provisions of Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan - An Amendment of FASB Statements No. 5 and 15.
The reserve is based on the Company's knowledge of the general economic
condition in the long-term health care industry, the cash flows of the
long-term health care facilities that service the mortgage loan and the
declaration of bankruptcy by the borrower and/or the borrower's principal
owner.
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1999
(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
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
Reconciliation of mortgage loans
Balance at beginning of period $402,000 $445,603 $519,229
Additions:
New mortgage loans 22,163 67,564 115,876
Deductions during period:
Loans written off 10,000 --- ---
Collection of principal 16,287 111,167 189,502
Acquisition of property and
equipment in exchange for
mortgage notes receivable 71,000 --- ---
97,287 111,167 189,502
Balance at end of period $326,876 $402,000 $445,603
</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 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 16,723,000
<SECURITIES> 49,650,000
<RECEIVABLES> 327,168,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 373,408,000
<DEPRECIATION> (57,387,000)
<TOTAL-ASSETS> 788,545,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
18,717,000
<COMMON> 244,000
<OTHER-SE> 373,679,000
<TOTAL-LIABILITY-AND-EQUITY> 788,545,000
<SALES> 0
<TOTAL-REVENUES> 131,158,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,275,000
<LOSS-PROVISION> 13,800,000
<INTEREST-EXPENSE> 25,596,000
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,985,000
<EPS-BASIC> 2.13
<EPS-DILUTED> 2.13
</TABLE>
