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Proc-Type: 2001,MIC-CLEAR
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Quarterly Report Under Section 13 of 15(d) of the Securities Exchange Act of 1934 NATIONAL HEALTH INVESTORS, INC. (Exact name of registrant as specified in its Charter) Yes x Yes x
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
For quarter ended June 30, 2004
Commission file number 33-41863
Maryland
62-1470956 (State or other jurisdiction of
(I.R.S. Employer incorporation or organization)
Identification No.)
100 Vine Street
Murfreesboro, TN
37130 (Address of principal
(Zip Code) executive offices)
Registrant's telephone number, including area code (615) 890-9100
Indicate by check mark whether the registrant
(1) Has filed all reports required to be filed by Section 13 or 15(d), of the Securities Exchange Act of 1934 during the preceding 12 months.
No
(2) Has been subject to such filing requirements for the past 90 days.
No
Indicate by check mark whether the registrant is an accelerated filer. Yes x No
27,489,036 shares of common stock were outstanding as of July 31, 2004.
PART I. FINANCIAL INFORMATION | ||
Item 1. Financial Statements. | ||
NATIONAL HEALTH INVESTORS, INC. | ||
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS | ||
(in thousands, except share and per share amounts) | ||
June 30, | December 31, | |
2004 | 2003 | |
(unaudited) | ||
ASSETS | ||
Real estate properties: | ||
Land | $ 33,265 | $ 33,600 |
Buildings and improvements | 364,717 | 366,215 |
Construction in progress | 426 | 588 |
398,408 | 400,403 | |
Less accumulated depreciation | (116,731) | (110,938) |
Real estate properties, net | 281,677 | 289,465 |
Mortgage and other notes receivable, net | 143,019 | 149,892 |
Investment in preferred stock | 38,132 | 38,132 |
Investment in real estate mortgage investment conduits | - | 16,043 |
Cash and cash equivalents | 124,776 | 93,687 |
Marketable securities | 20,639 | 26,835 |
Accounts receivable | 3,481 | 4,309 |
Deferred costs and other assets | 7,236 | 6,003 |
Total Assets | $618,960 | $624,366 |
LIABILITIES | ||
Unsecured public notes | $100,000 | $100,000 |
Debt | 56,608 | 62,100 |
Convertible subordinated debentures | 1,185 | 1,351 |
Accounts payable and other accrued expenses | 28,799 | 30,882 |
Accrued interest | 3,391 | 3,409 |
Dividends payable | 11,682 | 13,385 |
Deferred income | 3,422 | 3,595 |
Total Liabilities | 205,087 | 214,722 |
Commitments and guarantees | ||
STOCKHOLDERS' EQUITY | ||
Cumulative convertible preferred stock, | ||
$.01 par value; 10,000,000 shares authorized, 747,994 | ||
shares, issued and outstanding at December 31, 2003, stated at | ||
liquidation preference of $25 per share | - | 18,700 |
Common stock, $.01 par value; 40,000,000 shares authorized; 27,486,894 | ||
and 26,770,123 shares, respectively, issued and outstanding | 274 | 267 |
Capital in excess of par value of common stock | 460,350 | 441,178 |
Cumulative net income | 527,817 | 502,421 |
Cumulative dividends | (587,263) | (563,681) |
Unrealized gains on marketable securities, net | 12,695 | 10,759 |
Total Stockholders' Equity | 413,873 | 409,644 |
Total Liabilities and Stockholders' Equity | $618,960 | $624,366 |
The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements. The interim condensed balance sheet at December 31, 2003 is taken from the audited financial statements at that date.
Three Months Ended |
Six Months Ended | |||
June 30 | June 30 | |||
2003 |
2004 |
2003 | ||
REVENUES: | ||||
Mortgage interest income | $ 4,818 | $ 4,705 | $ 9,669 | $10,248 |
Rental income | 12,300 | 13,044 | 24,479 | 26,366 |
Facility operating revenue | 20,769 | 19,833 | 41,169 | 38,954 |
37,887 | 37,582 | 75,317 | 75,568 | |
EXPENSES: | ||||
Interest | 3,083 | 3,176 | 6,203 | 7,164 |
Depreciation | 3,481 | 3,743 | 7,016 | 7,513 |
Amortization of loan costs | 37 | 40 | 74 | 223 |
Legal expense | 769 | 265 | 918 | 184 |
Franchise and excise tax | 66 | 67 | 136 | 463 |
General and administrative | 1,064 | 720 | 1,920 | 1,434 |
Loan, REMIC, and security (recoveries) losses, net | 1,093 | --- | (896) | 1,500 |
Facility operating expense | 20,080 | 19,498 | 40,282 | 38,160 |
29,673 | 27,509 | 55,653 | 56,641 | |
INCOME BEFORE NON-OPERATING INCOME | 8,214 | 10,073 | 19,664 | 18,927 |
Non-operating income (investment interest and other) | 2,794 | 1,157 | 4,927 | 2,801 |
INCOME FROM CONTINUING OPERATIONS | 11,008 | 11,230 | 24,591 | 21,728 |
Discontinued Operations | ||||
Operating loss - discontinued | (299) | (414) | (447) | (724) |
Gain on sale of real estate | 1,252 | --- | 1,252 | 1,932 |
953 | (414) | 805 | 1,208 | |
NET INCOME | 11,961 | 10,816 | 25,396 | 22,936 |
DIVIDENDS TO PREFERRED STOCKHOLDERS | 117 | 398 | 514 | 795 |
NET INCOME APPLICABLE TO COMMON STOCK | $11,844 | $10,418 | $24,882 | $22,141 |
INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE: | ||||
Basic | $ .40 | $ .41 | $ .89 | $ .78 |
Diluted | $ .40 | $ .40 | $ .88 | $ .78 |
DISCONTINUED OPERATIONS PER COMMON SHARE: | ||||
Basic | $ .03 | $ (.02) | $ .03 | $ .05 |
Diluted | $ .03 | $ (.01) | $ .03 | $ .04 |
NET INCOME PER COMMON SHARE: | ||||
Basic | $ .43 | $ .39 | $ .92 | $ .83 |
Diluted | $ .43 | $ .39 | $ .91 | $ .82 |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||
Basic | 27,267,605 | 26,720,197 | 27,021,602 | 26,704,594 |
Diluted | 27,534,171 | 26,976,360 | 27,299,444 | 26,960,445 |
Common dividends per share declared | $ .425 | $ .40 | $ .85 | $ .80 |
The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements.
NATIONAL HEALTH INVESTORS, INC. | ||
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||
(Unaudited) | ||
Six Months Ended | ||
June 30 | ||
2004 | 2003 | |
(in thousands) | ||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||
Net income | $ 25,396 | $ 22,936 |
Depreciation | 7,058 | 7,751 |
Loan, REMIC, and security (recoveries) losses, net | (896) | 1,500 |
Gain on sale of real estate | (1,252) | (1,932) |
Amortization of loan costs | 74 | 223 |
Realized gain on sale of marketable securities | (1,995) | (12) |
Amortization of bond discount | (9) | (16) |
Amortization of REMIC discount | (1,182) | -- |
Amortization of deferred income | (173) | (303) |
Decrease (increase) in accounts receivable | 828 | (1,669) |
Increase in deferred costs and other assets | (1,307) | (1,550) |
Increase in accounts payable and accrued liabilities | 923 | 1,916 |
Decrease in accrued interest payable | (18) | (1,182) |
NET CASH PROVIDED BY OPERATING ACTIVITIES | 27,447 | 27,662 |
CASH FLOWS FROM INVESTING ACTIVITIES: | ||
Investment in mortgage and other notes receivable | (875) | (1,681) |
Collection of mortgage and other notes receivable | 7,299 | 14,429 |
Disposition of mortgage notes receivable | 1,750 | -- |
Collection of real estate mortgage investment conduits | 13,126 | -- |
Acquisition of property and equipment, net | (806) | (604) |
Disposition of property and equipment, net | 2,789 | 4,045 |
Decrease in marketable securities, net | 10,823 | 198 |
NET CASH PROVIDED BY INVESTING ACTIVITIES | 34,106 | 16,387 |
CASH FLOWS FROM FINANCING ACTIVITIES: | ||
Proceeds from debt | -- | 6,215 |
Principal payments on debt | (5,492) | (2,014) |
Redemption of subordinated convertible debentures | -- | (39,917) |
Sale of common stock | 891 | 149 |
Repurchase of common stock | (578) | -- |
Dividends paid to stockholders | (25,285) | (20,815) |
NET CASH USED IN FINANCING ACTIVITIES | (30,464) | (56,382) |
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 31,089 | (12,333) |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 93,687 | 43,062 |
CASH AND CASH EQUIVALENTS, END OF PERIOD | $124,776 | $ 30,729 |
(continued)
NATIONAL HEALTH INVESTORS, INC. | ||
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||
(unaudited) | ||
Six Months Ended | ||
June 30 | ||
2004 | 2003 | |
(in thousands) | ||
Supplemental Information: | ||
Cash payments for interest expense | $ 3,890 | $ 5,309 |
During the six months ended June 30, 2004 and 2003, $166,000 and | ||
$216,000 of Senior Subordinated Convertible Debentures were con- | ||
verted into 23,709 and 30,849 shares of NHI's common stock: | ||
Senior subordinated convertible debentures | $ (166) | $ (216) |
Financing costs | --- | --- |
Accrued interest | --- | (3) |
Common stock | --- | --- |
Capital in excess of par | 166 | 219 |
During the six months ended June 30, 2004, $18,700,000 or 747,994 shares | ||
of 8.5% Cumulative Convertible Preferred stock was called by NHI
for redemption into 676,922 shares of NHI's common stock: |
||
Cumulative convertible preferred stock | $(18,700) | $ --- |
Common stock | 7 | --- |
Capital in excess of par | 18,693 | --- |
During the six months ended June 30, 2003, NHI acquired | ||
property in exchange for its rights under mortgage notes receivable: | ||
Mortgage notes receivable | $ --- | $ 13,069 |
Land | --- | (1,096) |
Buildings and improvements | --- | (11,973) |
The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements.
NATIONAL HEALTH INVESTORS, INC. | |||||||||
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | |||||||||
FOR THE SIX ENDED JUNE 30, 2004 AND 2003 | |||||||||
(in thousands, except share and per share amounts) | |||||||||
Cumulative Convertible |
Unrealized | Total | |||||||
Preferred Stock | Capital in | Gains | Stock- | ||||||
Shares | Amount | Common Stock | Excess of | Cumulative | Cumulative | (losses) on | holders' | ||
at $25 per Share | Shares | Amount | Par Value | Net Income | Dividends | Securities | Equity | ||
BALANCE AT 12/31/03 | 747,994 | $18,700 | 26,770,123 | $267 | $441,178 | $502,421 | $(563,681) | $ 10,759 | $409,644 |
Net income | --- | --- | --- | --- | --- | 25,396 | --- | --- | 25,396 |
Unrealized gains on securities | --- | --- | --- | --- | --- | --- | --- | 1,936 | 1,936 |
Total Comprehensive Income | 27,332 | ||||||||
Shares sold | --- | --- | 40,000 | --- | 891 | --- | --- | --- | 891 |
Shares repurchased | --- | --- | (23,860) | --- | (578) | --- | --- | --- | (578) |
Shares issued in conversion of convertible | |||||||||
debentures to common stock | --- | --- | 23,709 | --- | 166 | --- | --- | --- | 166 |
Shares issued in conversion of preferred | |||||||||
stock to common stock | (747,994) | (18,700) | 676,922 | 7 | 18,693 | --- | --- | --- | --- |
Dividends to common stockholders | --- | --- | --- | --- | --- | --- | (23,068) | --- | (23,068) |
Dividends to preferred stockholders | --- | --- | --- | --- | --- | --- | (514) | --- | (514) |
BALANCE AT 6/30/04 | --- | $ --- | 27,486,894 | $274 | $460,350 | $527,817 | $(587,263) | $ 12,695 | $413,873 |
BALANCE AT 12/31/02 | 747,994 | $18,700 | 26,682,994 | $266 | $440,360 | $458,613 | $(516,632) | $ (878) | $400,429 |
Net income | --- | --- | --- | --- | --- | 22,936 | --- | --- | 22,936 |
Unrealized gains on securities | --- | --- | --- | --- | --- | --- | --- | 4,225 | 4,225 |
Total Comprehensive Income | 27,161 | ||||||||
Shares sold | --- | --- | 15,000 | --- | 149 | --- | --- | --- | 149 |
Shares issued in conversion of convertible | |||||||||
debentures to common stock | --- | --- | 30,849 | --- | 219 | --- | --- | --- | 219 |
Dividends to common stockholders | --- | --- | --- | --- | --- | --- | (21,373) | --- | (21,373) |
Dividends to preferred stockholders | --- | --- | --- | --- | --- | --- | (795) | --- | (795) |
BALANCE AT 6/30/03 | 747,994 | $18,700 | 26,728,843 | $266 | $440,728 | $481,549 | $(538,800) | $ 3,347 | $405,790 |
The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements.
Note 1. SIGNIFICANT ACCOUNTING POLICIES:
We, the management of National Health Investors, Inc., believe that the unaudited financial statements to which these notes are attached include all adjustments which are necessary to fairly present the financial position, results of operations and cash flows of National Health Investors, Inc. ("NHI" or the "Company"). We assume that users of these interim financial statements have read or have access to the audited December 31, 2003 financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate the disclosure contained in our most recent annual report to stockholders have been omitted. This interim financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons including acquisitions and dispositions, changes in interest rates, rents and the timing of debt and equity financings. Our audited December 31, 2003 financial statements are available at our web site: www.nhinvestors.com.
Note 2. NEW ACCOUNTING PRONOUNCEMENTS:
New Accounting Pronouncements - In August 2001, the FASB issued SFAS 144. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes 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"), and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB 30"), for the disposal of a segment of a business (as previously defined in APB 30). SFAS 144 retains the fundamental provisions of SFAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS 121. SFAS 144 also broadens the scope of defining discontinued operations. NHI adopted SFAS 144 on January 1, 2002. As the result of the adoption of SFAS 144, NHI has reported as discontinued operations in its consolidated statements of income, the revenues and expenses of one medical office building that NHI sold during the first quarter of 2003, two nursing facilities sold and one nursing facility designated for sale during the third quarter of 2003 (and sold during the second quarter of 2004), another nursing facility sold in the second quarter of 2004, and the related gains or losses on the sales.
In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds Statement of Financial Accounting Standards No. 4, "Reporting Gains and Losses From Extinguishment of Debt" ("SFAS 4"), which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in APB 30 will now be used to classify those gains and losses. SFAS 145 amends SFAS 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. As permitted, NHI elected to adopt SFAS 145 effective January 1, 2002. As a result, gains of $65,000 on the retirement of convertible subordinated debentures during the first quarter of 2003 have been included in investment interest and other income.
On December 31, 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 amends Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of transition to SFAS 123's fair value method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, "Interim Financial Reporting", to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS 148 does not amend SFAS 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for the compensation using the fair value method of SFAS 123 or the intrinsic value method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). See Note 3.
In May 2003 the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 was generally effective for NHI July 1, 2003. The adoption of SFAS 150 has not had a material effect on NHI's financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantees. FIN 45 also requires additional disclosure requirements about the guarantor's obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for financial statement periods ending after December 15, 2002. Through June 30, 2004, adoption of FIN 45 has not had a material effect on the Company's financial statements. The future effect of FIN 45 on the Company's financial statements will depend on whether the Company enters into new or modifies existing guarantees.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which requires the consolidation of variable interest entities by the primary beneficiary of such variable interest entities. FIN 46, as revised by the FASB, generally requires that variable interest entities must be consolidated by their primary beneficiary effective March 31, 2004. The Company adopted FIN 46 at March 31, 2004. The Company is not the primary beneficiary of any variable interest entity and, therefore, has not consolidated any additional entities as the result of adoption of FIN 46. The Company has five first mortgage loans with five variable interest entities (total outstanding balances of $19,439,000 at June 30, 2004) that operate five skilled nursing facilities. However, the Company is not the primary beneficiary of these variable interest entities. The Company's maximum exposure to loss as a result of its involvement with these variable interest entities is the outstanding balance of the first mortgage notes receivable.
Note 3. STOCK OPTION PLAN
NHI has stock option plans that 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. Options to purchase 135,000 shares vested immediately upon grant and may be exercised at any time prior to expiration. Options to purchase 140,000 shares vest approximately six years after grant and may be exercised during a 30 day vesting period prior to expiration. The term of the options is five years (135,000 shares) or six years (140,000 shares). The following table summarizes option activity:
Number of | Weighted Average | |
Shares | Exercise Price | |
Outstanding December 31, 2001 | 340,074 |
$23.460 |
Options granted | 45,000 |
14.720 |
Options expired | 105,074 | 36.000 |
Options exercised | 45,000 | 11.600 |
Outstanding December 31, 2002 | 235,000 | 18.440 |
Options granted | 90,000 | 15.733 |
Options expired | 32,500 | 37.923 |
Options exercised | 35,000 | 12.910 |
Outstanding December 31, 2003 | 257,500 | 15.789 |
Options granted | 60,000 | 23.900 |
Options expired | 2,500 | 14.500 |
Options exercised | 40,000 | 22.275 |
Outstanding June 30, 2004 | 275,000 | 16.627 |
Exercisable June 30, 2004 | 135,000 | 18.833 |
Exercise | ||
Price | ||
140,000 | $ 14.50 | 1.33 |
15,000 | 10.125 | .92 |
15,000 | 14.72 | 2.83 |
45,000 | 16.35 | 3.83 |
60,000 | 23.90 | 4.83 |
275,000 |
The weighted average remaining contractual life of options outstanding at June 30, 2004 is 2.57 years. NHI's Board of Directors has authorized an additional 450,800 shares of common stock that may be issued under the stock option plans.
Based on the number of options granted and the historical and expected future trends of factors affecting valuation of those options, management believes that the additional compensation cost, as calculated in accordance with SFAS 123, has no effect on NHI's earnings per share for the three and six months ended June 30, 2004 and 2003.
Note 4. REAL ESTATE PROPERTIES:
The following table summarizes NHI's real estate properties by leased facilities and operating facilities:
(Dollars in thousands)
June 30, 2004 | December 31, 2003 | |||||
Leased | Operating | Total | Leased | Operating | Total | |
Land | $ 29,206 | $ 4,059 | $ 33,265 | $ 29,250 | $ 4,350 | $ 33,600 |
Buildings and improvements | 300,629 | 64,088 | 364,717 | 301,347 | 64,868 | 366,215 |
Construction in progress | 33 | 393 | 426 | 33 | 555 | 588 |
329,868 | 68,540 | 398,408 | 330,630 | 69,773 | 400,403 | |
Less accumulated depreciation | (96,755) | (19,976) | (116,731) | (92,389) | (18,549) | (110,938) |
Real estate properties, net | $233,113 | $ 48,564 | $281,677 | $238,241 | $ 51,224 | $289,465 |
Foreclosure and Other Troubled Real Estate Properties
We are treating or have previously treated the Washington State, New England, Kansas and Missouri properties described below as foreclosure properties for federal income tax purposes. With certain elections, unqualified income generated by the properties is expected to be treated as qualified income for up to six years from the purchase date for purpose of the income-source tests that must be satisfied by REITs to maintain their tax status.
Washington State Properties - On October 16, 1998, we accepted deeds in lieu of foreclosure on four long-term care properties in Washington State. We have included the operating revenues and expenses of these facilities in our operating results since October 1998. The Highline Care Center was sold in June 2002 for proceeds of $882,000. The facility had been closed since December 2000. During the third quarter of 2003, the Park Ridge Care Center and Park West Care Center were sold for proceeds of $5,200,000. The resulting loss of $397,000 on the sale was reflected in the discontinued operations caption of the December 31, 2003 consolidated statements of income. During the second quarter of 2004, the Sehome center was sold for proceeds of $1,034,000. The resulting loss of $345,000 on the sale is reflected in the discontinued operations caption of the June 30, 2004 consolidated statements of income. The Sehome center had been designated as "held for sale", consistent with the provisions of SFAS 144, effective the third quarter of 2003. The facility was closed on March 19, 2004. The results of operations of this facility have been included in discontinued operations for all periods presented. We have disposed of all four long-term care properties in Washington State.
New England Properties - In the third quarter of 1999, we accepted deeds in lieu of foreclosure on three nursing homes and one retirement center in New Hampshire and four nursing homes in Massachusetts. During 2001, we sold the properties to a not-for-profit entity and provided 100% seller financing to close the sale. We account for this transaction under the deposit method in accordance with the provisions of Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS 66"). Consistent with the deposit method, we have not recorded the sale of the assets and continue to record the results of operations of these properties each period. No down-payment was made by the buyer and no subsequent payments have been received. As required by paragraph 5(b) of SFAS 66, the buyer's initial and continuing investments must be adequate to demonstrate a commitment to pay for the property. This requirement has not been met. As required by paragraph 5(d) of SFAS 66, the seller must have transferred to the buyer the usual risks and rewards of ownership in a transaction that is in substance a sale and does not have a substantial continuing involvement with the property. This requirement has not been met. Operating revenue, operating expense, depreciation and related cash flows are included in NHI's financial statements. Any future cash received from the buyer will be reported as a deposit until the down payment and continuing investment criteria of SFAS 66 are met, at which time we will account for the sale under the full accrual method. The new owner is seeking to refinance these properties but to date has been unsuccessful. No deposits have been received to date. Management believes that the carrying amount of these properties at June 30, 2004 of $28,309,000 is realizable.
Kansas and Missouri Properties - In July 2001, we were awarded, through foreclosure, possession of nine nursing homes in Kansas and Missouri and have recorded the operating revenues and expenses of these facilities since that date. NHC has been engaged to manage these facilities. During 2001, prior to the foreclosure sales on these properties, we recorded a $4,000,000 writedown of our mortgage note receivable from these properties. Management believes that the carrying amount of these properties at June 30, 2004 of $20,255,000 is realizable.
Alterra Properties - In March 2001, Alterra defaulted on its rent payment for eleven properties and NHI immediately terminated the leases and arranged for new lessees. We have filed suit for damages against Alterra. On January 22, 2003, Alterra filed bankruptcy. As a result, damages against Alterra will be subject to the bankruptcy process. The new lessees took possession of the centers during the late spring and summer of 2001. Under the terms of the new leases, we experienced reduced rental income in 2001 and 2002. Lease income for the six months ended June 30, 2004, and 2003 was $1,500,000 and $1,650,000 respectively. Furthermore, in the third quarter of 2003, we recognized as income $1,195,000 of cash that was received previously but which had been subject to dispute. Based on the rental payments received and expected to be received, and our impairment analyses, we recorded an impairment of $4,900,000 during 2001. We believe that the carrying amount of these properties at June 30, 2004 of $31,479,000 is realizable.
Integrated Health Services, Inc. ("IHS") - IHS filed bankruptcy in February 2000 and failed to make its required mortgage payments to SouthTrust Bank on six Texas nursing homes. At that time, NHI owned a 50% participation in this loan with SouthTrust Bank. Effective September 1, 2001, IHS deeded the six nursing homes to a subsidiary of NHI in return for the forgiveness of the debt held jointly by SouthTrust Bank and NHI. We recorded these six nursing homes and certain non-recourse debt to SouthTrust Bank at the estimated fair value of the properties of approximately $44,700,000. NHI leases the six Texas health care centers to IHS under a 66-month lease with minimum payments equal to approximately $3,078,000 per year plus additional rent based on cash flow of the facilities. We collect these rent payments and service non-recourse debt owed to SouthTrust Bank, which debt service is substantially equal to the rent payments collected. Through a separate participation agreement, NHI and SouthTrust each beneficially own 50% of the lease revenue. Our interest in the lease revenue is represented by a note receivable from SouthTrust Bank. We have a legal right of offset as it relates to the non-recourse debt and note receivable with SouthTrust Bank. Therefore, the $19,052,000 note receivable offsets the non-recourse debt in the consolidated balance sheet. IHS has the right to terminate its lease with us with 90 days notice. Lease payments commenced September 1, 2001 and are current. We believe that the carrying amount of our net investment in these properties of approximately $14,379,000 at June 30, 2004 is realizable. Our net investment is composed of $40,016,000 of realty reduced by $25,637,000 of debt. Manor House of Charlotte - In June 2002, the owner and corporate guarantor surrendered possession, provided a deed in lieu of foreclosure to us, made tax payments current, paid $1,016,000 toward the debt and deeded to us an unimproved parcel of land in another state. As a result, we released the parent's guarantee. Prior to our accepting the deed in lieu of foreclosure, the borrower paid $1,175,000 on the loan balance and the remaining loan balance of $2,173,000 was determined to be the fair value of the foreclosed real estate. The property was immediately leased to a new operator in June of 2002. Under the terms of the new lease, we experienced reduced revenue in periods subsequent to 2001. We believe the carrying amount of our net investment in this property at June 30, 2004 of $1,979,000 is realizable.
Two New Jersey Centers - During the third quarter of 2001, we filed a foreclosure lawsuit against the borrower and separate action against the individual guarantors and owners of these two New Jersey facilities. In January, 2003, NHI received these properties through foreclosure and immediately leased the facilities to a new operator, Royal Holding, LLC, who brought past due property taxes current and agreed to monthly lease payments. The lease includes monthly rent of $155,000, with provisions for increases in later periods through 2016 and provides the lessee with a purchase option during the term of the lease at amounts which decrease over time. The lease with Royal Holding, LLC is being accounted for as an operating lease. Presently, NHI has not begun to recognize rental income from these properties on a straight-line basis due to concerns about collectibility of the future increases.
Based on the previous loan history, and in accordance with SFAS 114 analysis, we recorded impairments of $5,304,000 during 2001. The borrower on the previous loan did not have the ability to make payments. The tenant on the new lease is making payments. Lease income of $1,169,000 and $1,541,000 was recognized on the property for the six months ended June 30, 2004 and 2003, respectively. We believe that the carrying amount of our net investment in this property at June 30, 2004 of $12,534,000 is realizable.
Marriott Senior Living Services - In July 2003, we reached an agreement with Marriott Senior Living Services ("Marriott") to terminate their leases with us on four assisted living facilities, two of which are located in Florida, one in Texas and one in New Jersey. Under the terms of the settlement with Marriott, we were paid $6,211,000 to settle our claims for certain deferred maintenance and repairs, for accrued real estate taxes, and to compensate us for future rental periods. A portion ($1,580,000) of the $6,211,000 received has been reserved for known costs related to existing needs for maintenance and repairs. In addition, $223,000 was allocated to pay property taxes due. The remainder of $4,408,000 was recognized as rental income in the third quarter of 2003.
We leased the New Jersey facility to Sunrise Living Services, Inc. ("Sunrise"), which company acquired the outstanding stock of Marriott in March 2003. We leased the Texas facility to Medallion Senior Living at Dallas, LLC. We leased the two Florida facilities to The Palms of Maitland, Inc. and The Place at West Palm Beach, Inc.
Based on rental payments received and expected to be received, and our impairment analysis, we recorded an impairment of $5,400,000 during the third quarter of 2003 on one of the Florida facilities. The impairment was necessitated by the financial condition of the new lessee, the physical condition of the facility and significant market competition. Lease income of $1,160,000 and $2,497,000 was recognized on these four facilities for the six months ended June 30, 2004 and 2003, respectively. We believe that the carrying amount of these properties at June 30, 2004 of $38,143,000 is realizable.
Note 5. MORTGAGE AND OTHER NOTES RECEIVABLE:
Note Receivable from National Health Realty, Inc.
Effective December 31, 2002, in exchange for an equal amount of cash, National Health Realty, Inc. ("NHR") transferred to us three mortgage notes receivable secured by three long-term care facilities in Florida with total principal balances outstanding of $15,672,000. The transfer agreement with NHR included provisions that, beginning January 2, 2004, allowed us to put to NHR the transferred notes at any time, with 60 days notice, at a price equal to the outstanding principal and interest balance or require NHR to make debt service payments if not made by the debtors. The agreement also provided that NHR could repurchase after July 1, 2003, the notes from us at a price equal to the then outstanding principal and interest balance. Consistent with the provisions of Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140"), we accounted for the transfer of the notes receivable from NHR as a loan to NHR rather than as a purchase of the notes. As a result, we recognized notes receivable from NHR on our consolidated balance sheet of December 31, 2002 and recognized interest income from NHR during 2003. NHR repurchased the notes in December 2003 at the outstanding principal balance of $14,922,000 plus accrued interest, thereby eliminating our note receivable from NHR. NHR is another REIT to which NHC provides advisory services. NHR owns 225,000 shares of our common stock.
Installment Method Mortgage Receivable
Autumn Hills Convalescent Centers, Inc. (HSM of Texas, new borrower) - In 1997, we funded a mortgage loan for Autumn Hills Convalescent Centers, Inc. ("Autumn Hills") in the original principal amount of $51,500,000. Collateral for the loan included first mortgages on thirteen long-term health care facilities in Texas and certain corporate and personal guarantees. Principal and interest payments between April 2000 and May 2001 were only partially made and the debtor filed for bankruptcy on May 15, 2001. Based on these events and SFAS 114 analyses, we recorded impairments of $10,000,000 and $7,900,000 during 2001 and 2000, respectively, to reduce the loan to our estimate of net realizable value. The debtor's plan of reorganization, confirmed on January 28, 2002, required the debtor to reaffirm the original debt and accrued interest and commence monthly payments on April 10, 2002, which it did until October of 2002, at which time the borrower advised us that payments could no longer be made. We applied $1,600,000 of payments received in the third quarter of 2002 against our loan balance, and we initiated foreclosure action during the fourth quarter of 2002. Our net receivable balance at December 31, 2002, after the above writedowns and principal reductions, was $28,855,000.
On January 7, 2003, NHI received the projects through foreclosure and then sold the facilities to an unrelated not-for-profit entity, HSM of Texas, providing seller financing. NHI accounts for the sale of the properties using the installment method, consistent with the provisions of SFAS 66. The new borrower has made monthly principal and interest payments during 2003. The new loan with HSM of Texas bears interest at 5.85%, is payable at $354,000 monthly and matures in December 2007. The outstanding balance at June 30, 2004 is $26,811,000, which we believe is realizable. The average recorded investment in the loan was $27,151,000 and $30,530,000 for the six months ended June 30, 2004 and 2003, respectively. The related amount of interest income recognized on the loan was $1,487,000 and $1,480,000 for the six months ended June 30, 2004 and 2003, respectively.
American Medical Associates, Inc. ("AMA") - Two first mortgage loans totaling $13,646,000 to AMA were secured by three Florida-based nursing homes. The loans, funded in 1995 and 1996, were cross-collateralized and cross-defaulted. Management's analysis of the future expected cash flows consistent with SFAS 114, historical occupancy, and operating income of the project resulted in the recording of a $5,200,000 writedown of this mortgage loan value during 2002. The borrower filed for bankruptcy protection in January 2003.
In January, 2004, we assigned our right to credit bid our mortgage to a third party who purchased the facilities in February, 2004. On May 1, 2004 NHI provided financing to the new purchaser of the three Florida-based nursing homes formerly owned by American Medical Associates, Inc. The new financing consists of three new mortgage loans (each with two notes) and four new working capital loans. The first of the loans is to Central Florida Health Care Properties, Inc. consisting of Mortgage Note A for $5,552,000 at 8% and Mortgage Note B for $448,000. The second of the loans is to Williston Health Care Center, Inc. consisting of Mortgage Note A for $5,655,000 at 8% and Mortgage Note B for $345,000. The third of the loans is to HealthCare Properties, Inc. consisting of Mortgage Note A for $2,293,000 at 8% and Mortgage Note B for $207,000. The mortgage notes all mature May 14, 2009.
Three of the four working capital loans are for $225,000 each and are to each of the three new borrowers, Central Florida Health Care Properties, Inc., Williston Health Care Center, Inc. and HealthCare Properties, Inc. The three working capital loans mature on May 14, 2005, carry a 6% interest rate, and have a total outstanding balance of $375,000 at June 30, 2004. The fourth working capital loan called the Second Stage Working Capital Note for $1,000,000 is for all three borrowers, Central Florida Health Care Properties, Inc., Williston Health Care Center, Inc., and Health Care Properties, Inc. and may be used once the center has fully drawn their individual working capital note. The note matures on May 14, 2005, carries an interest rate of prime plus 2%, and has not been funded at June 30, 2004.
Management believes that the remaining carrying amount of $8,362,000, net of prior writedowns, at June 30, 2004 is supported by the value of the collateral. The average recorded investment in the mortgage loans was $8,372,000 and $8,382,000 for the six months ended June 30, 2004 and 2003, respectively. The related amount of interest income recognized on the mortgage loans was $93,000 and $0 for the six months ended June 30, 2004 and 2003, respectively.
Borrower Bankruptcy and Other Non-Performing Loans
Ashton Woods - At June 30, 2004, we hold 75%, or $4,129,000, of a $5,506,000 first mortgage with Ashton Woods. The remaining 25% of the loan is held by SouthTrust Bank. The loan is secured by a first mortgage on a nursing home located in Atlanta, Georgia and is further secured by the lease payments which are made by Ashton Woods Healthcare, Inc. Note A under the loan is in the amount of $4,250,000, amortizing over 25 years at 6.5% per annum and due in September, 2013. Note B is an interest free note in the amount of $1,256,000, is payable out of excess cash flow of the facility and if not repaid by September, 2013, is forgiven in full. Management believes that the remaining carrying amount of $1,076,000 at June 30, 2004 is supported by the value of the collateral. The average recorded investment in the Ashton Woods loan was $1,089,000 and $1,120,000 for the six months ended June 30, 2004 and 2003, respectively. The related amount of interest income recognized on the loan was $104,000 and $108,000 for the six months ended June 30, 2004 and 2003, respectively.
Midwest Nursing Home Investors, Inc. ("Midwest") - An approximate $8,735,000 first mortgage loan made to Midwest in 1997 is secured by three nursing homes in Kansas and Wisconsin. The properties are cross defaulted and cross collateralized and are managed by Rainmakers, LLC who operates long-term care facilities in Kansas, Missouri and Wisconsin. Payments to NHI are past due and the loan is in default on a number of technical covenants. Management's analysis of the future expected cash flows consistent with SFAS 114, historical occupancy and operating income of the project resulted in the recording of a $2,000,000 writedown of this mortgage loan value during 2002 and an additional writedown of $2,000,000 during 2003. Management believes that the remaining carrying value amount of $4,324,000 at June 30, 2004 is supported by the value of the collateral. The average recorded investment in the Midwest loan was $4,324,000 and $6,465,000 for the six months ended June 30, 2004 and 2003, respectively. The related amount of interest income recognized on the loan was $-0- and $292,000 for the six months ended June 30, 2004 and 2003, respectively.
Allgood HealthCare, Inc. ("Allgood") - We have two loans secured by five properties which are operated by Allgood. The loans have an outstanding balance of approximately $21,716,000, before writedown. Both of these loans were guaranteed by the two separate estates of the principals of the operator. As a result of the payment and technical defaults, the loans have been declared in default and the principal amount due has been accelerated. In January 2003, the borrowers filed for bankruptcy protection. Management's analysis of the future expected cash flows consistent with SFAS 114, historical occupancy and operating income of the project resulted in the recording of a $5,000,000 writedown of this mortgage loan in 2002. During the third quarter of 2003, NHI received a $1,000,000 payment from the estate of one of the owners of Allgood. This estate was released from further liability. Based on management's updated analysis of the future expected cash flows of this note, this payment was applied to reduce the principal balance outstanding. Management believes that the remaining carrying amount of $15,716,000 at June 30, 2004 is supported by the value of the collateral. The average recorded investment in the Allgood loans were $15,716,000, and $16,614,000 for the six months ended June 30, 2004 and 2003, respectively. Beginning in January, 2004, the borrower voluntarily began making monthly payments of $86,700. The related amount of interest income recognized on the loans was $520,000, and $-0-for the six months ended June 30, 2004 and 2003, respectively.
Somerset on Lake Saunders - This facility has suffered from poor occupancy and other operational issues. Management's analysis of the future cash flows consistent with SFAS 114, historical occupancy and operating income of the project resulted in the recording of a $1,500,000 writedown of this mortgage loan value during the first quarter of 2003. This loan was sold in January 2004 for cash proceeds of $1,750,000 resulting in a gain of $1,302,000, which is included in loan recoveries.
Note 6. INVESTMENTS IN MARKETABLE SECURITIES:
Our 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.
Gross unrealized gains and gross unrealized losses related to available for sale securities are as follows:
Gross unrealized gains |
$12,837,000 |
$10,907,000 |
Gross unrealized losses |
(142,000) |
(148,000) |
$12,695,000 |
$10,759,000 |
During the six months ended June 30, 2004 and 2003, we received and recognized $2,202,000 and $2,336,000, respectively, of dividend and interest income from our marketable securities. Such income is included in non-operating income in the consolidated statements of income.
Proceeds from the sale of investments in marketable securities during the six months ended June 30, 2004 was $10,823,000. Gross investment gains of $2,682,000 were realized on these sales during the six months ended June 30, 2004, $687,000 of which is included in security recoveries and $1,995,000 of which is included in non-operating income in the consolidated statements of income.
Assisted Living Concepts, Inc. Convertible Debentures - During 1999 and 2001, NHI purchased approximately $29,707,000 face amount of certain convertible debentures issued by Assisted Living Concepts, Inc. ("ALC") at a discount of approximately $13,771,000. As a result of ALC declaring bankruptcy on October 1, 2001, we, in accordance with the provisions of SFAS 115, measured and recorded an other-than-temporary decline in value of our investment of $5,709,000 at December 31, 2001.
During 2002, in order to protect our status as a REIT, we sold a portion of our investments in ALC convertible debentures to an employee of our investment advisor, NHC. Proceeds included a note receivable of $5,818,000 after a cash payment of $650,000 received in 2001. No gain or loss was realized on this sale during 2002. Our collateral on the note consisted of the underlying securities. As a result, the note receivable was subject to a risk of accounting loss if the underlying value of the collateral declined below the carrying value of the note receivable. The note was a non-recourse promissory note which bore interest at a variable rate (LIBOR plus .5% at December 31, 2003) and provided for periodic escalation of the rate. The note matured June 30, 2012, and had a balance of $4,593,000 at December 31, 2003, after payments of $1,225,000 during 2003. The note was collected in the six months ended June 30, 2004 for proceeds of $4,593,000.
The carrying value but not the face amount of the ALC debentures owned by us was reduced by $72,000 and $659,000 related to a securities litigation settlement during 2003 and 2002, respectively. ALC debentures with a face amount of $126,000 and a carrying value of $114,000 were called by ALC in May 2003. ALC debentures with a face amount of $406,000 and carrying value of $372,000 were called by ALC in October 2002. The remaining ALC debentures with a face amount of $4,655,000 and a carrying value of $4,013,000 were called during the six months ended June 30, 2004 for proceeds of $4,700,000 resulting in a gain of $687,000 which is included in security recoveries discussed above.
Eldertrust Common Stock - During the six months ended June 30, 2004, 316,900 shares of Eldertrust common stock with a carrying amount of $3,293,000 were called for $12.50 cash per share resulting in cash proceeds of $3,961,000 and a gain of $668,000, which is included in non-operating income discussed above.
LTC Properties, Inc. Common Stock - During 1998 and 1999, NHI purchased 774,800 shares of LTC common stock for $10,762,000. As a result of an other than temporary impairment in value of its investment and in accordance with the provision of SFAS 115, NHI recognized a $5,555,000 realized loss on this investment during the year ended December 31, 2002. NHI believes that the carrying value of this investment of $12,862,000 at June 30, 2004 is realizable.
Note 7: DEBT, PREFERRED STOCK AND RELATED GUARANTEES
NHI had certain letters of credit of $10,835,000 that matured during 2001. As a result, NHI purchased at face value all of the outstanding first mortgage tax exempt bonds that were secured by the letters of credit. In regard to its investment in and liability under these first mortgage bonds, NHI has a legal right of offset. Therefore, the first mortgage bonds purchased, having a balance of $330,000 and $460,000 at June 30, 2004 and December 31, 2003, respectively, offset NHI's debt obligations in the consolidated balance sheet. Mortgage bonds with a principal balance of $9,110,000 were remarketed during 2003 at no gain or loss.
1997 Debentures - On January 29, 1997, NHI issued $60,000,000 of 7% convertible subordinated debentures (the "1997 debentures") due on February 1, 2004. We redeemed the remaining $39,917,000 of these 1997 debentures during the quarter ended March 31, 2003.
Preferred Stock Conversion - On April 30, 2004, 100% of NHI's 8.5% cumulative convertible preferred stock, with a balance of 747,994 shares or $18,700,000, was called by NHI for redemption into common stock of NHI at a conversion rate of .905 shares of common stock for each share of preferred stock. This resulted in an additional 676,922 shares of common stock issued and outstanding. Dividends on the preferred stock were accrued and paid through April 30, 2004.
Note 8. COMMITMENTS, CONTINGENCIES AND GUARANTEES:
At June 30, 2004, we were committed, subject to due diligence and financial performance goals, to fund approximately $739,000 in health care real estate projects, none of which is expected to be funded within the next 12 months. The commitments include mortgage loans or purchase leaseback agreements for one long-term health care center and one assisted living facility, at rates ranging from 10.0% to 10.5%.
We have also guaranteed bank loans in the amount of $229,165 to key employees utilized for the exercise of stock options. The loan guarantees, which are limited to $100,000 per individual per year, are with full recourse and are collateralized by marketable securities equal to at least 125% of the loan amount outstanding. The individual borrowers also personally guarantee the loans. None of the outstanding loans are to or for any director or executive officer. Our potential accounting loss related to these guaranteed bank loans, if all collateral failed, is the face amount of the guaranteed loans outstanding. We have not accrued a liability for our potential obligation under these guarantees.
We believe that we have operated our business so as to qualify as a REIT under Section 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code") and we intend to continue to operate in such a manner, but no assurance can be given that we will be able to qualify at all times. If we qualify as a REIT, we will generally not be subject to federal corporate income taxes on our net income that is currently distributed to our stockholders. This treatment substantially eliminates the "double taxation" (at the corporate and stockholder levels) that typically applies to corporate dividends. Our 2001 and 2000 federal tax returns are currently under audit by the Internal Revenue Service. Our failure to continue to qualify under the applicable REIT qualification rules and regulations would cause us to owe state and federal income taxes and would have a material adverse impact on our financial position, results of operations and cash flows.
Contingency related to damaged property
One of our owned nursing home properties, leased to a subsidiary of NHC and located in Nashville, Tennessee, was damaged by a tragic fire on September 25, 2003 which resulted in the loss of life or critical injury to a number of patients. The building has been closed to patient care while NHI and NHC assess damages. NHC is NHI's largest lessee, operating 39 of NHI's 162 properties.
Under the terms of NHI's lease with NHC, NHC is required to restore the leased property so as to make it at least equal in value to that which existed prior to the damage. The lease also requires NHC to indemnify and hold harmless NHI from any and all demands and claims arising from the use of the property, including any negligence or violation by NHC.
NHI is a loss payee and additional named insured under the terms of NHC's property and casualty insurance policy. The policy includes business interruption insurance and NHI believes it will receive 100% of any rent due on the facility through the expected reconstruction process or until NHC elects to terminate the lease on this facility as described below. Currently, rental income from the center totals approximately $250,000 annually.
Furthermore, NHI is an additional named insured on NHC's professional and general liability insurance policy. NHC has stated that the lessee, NHC HealthCare/Nashville, LLC and its parent NHC collectively have liability coverage of $1,000,000 per occurrence and $3,000,000 in the aggregate per location and annual aggregate excess coverage of $7,500,000 that is attributable to all of NHC's operated centers.
A provision of the lease allows that if substantial damage occurs during the lease term, NHC may terminate the lease with respect to the damaged property. If the lease is so terminated, NHC will have no obligation to repair the property and NHI will receive the entire insurance proceeds related to the building damage. NHC is obligated to continue to indemnify and hold harmless NHI from any and all demands arising from the use of the property. NHI retains the right to license the beds under any lease termination.
NHI has been named as a defendant in thirty-two lawsuits filed by patients and/or representatives of patients arising out of the fire. Eleven of these cases have been settled at no cost to NHI. These cases have been consolidated with all other lawsuits arising out of the fire in the Third Circuit Court for Davidson County, Tennessee. Discovery is ongoing. NHI plans to vigorously defend against the allegations in these lawsuits. As of June 30, 2004, management believes it is too early to make any assessment of any potential liability or cost to NHI.
At June 30, 2004, NHI has not accrued any liability for this contingent matter but will continue to closely monitor the situation. There can be no assurance that claims will not exceed the limits of the insurance coverage or that additional claims will not be asserted against NHI. NHI's potential liability from this incident or NHC's ability to meet any indemnification obligation to NHI cannot be determined at this time. If NHC were unable to meet its obligations to NHI either as to indemnification, if required, or as to the payment of rent, it may have a material adverse impact on our financial position, results of operations and cash flows.
Note 9. EARNINGS PER COMMON SHARE:
Basic earnings per share is based on the weighted average number of common shares outstanding during the period. Net income is reduced by dividends to holders of cumulative convertible preferred stock.
Diluted earnings per common share assumes, if dilutive, the conversion of cumulative convertible preferred stock, the conversion of convertible subordinated debentures, and the exercise of stock options using the treasury stock method. Net income is increased for interest expense on the convertible subordinated debentures, if dilutive.
The following table summarizes the average number of common shares and common equivalent shares
and the net income used in the calculation of basic and diluted earnings per share.
Three Months Ended Six Months Ended 2003 2004 2003 27,267,605 26,720,197 27,021,602 26,704,594 In accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share", the
above 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 10. DISCONTINUED OPERATIONS During the year ended December 31, 2003, we sold a medical office building with a carrying amount of
$2,113,000 for proceeds of $4,045,000, resulting in a $1,932,000 net gain on the sale of this facility. We
also sold during 2003 two nursing facilities with a carrying amount of $5,597,000 for proceeds of
$5,200,000 resulting in a net loss of $397,000 on these facilities. Additionally, we designated one
additional nursing facility as "held for sale", consistent with the provisions of SFAS 144. During the
second quarter of 2004, this facility was sold for proceeds of $1,034,000 resulting in a loss of $345,000,
which is included in discontinued operations. A nursing facility in Dawson Springs, Kentucky with a carrying value of $158,000 was sold on April 1,
2004 for proceeds of $1,755,000 resulting in a $1,597,000 net gain on the sale of this facility. For 2004 and 2003 we have reclassified the operations, including the net gain on the sale of these
facilities, as discontinued operations in accordance with SFAS 144. Income from discontinued operations related to these facilities are as follows: Three Months Ended Six Months Ended June 30 June 30
June 30
June 30
BASIC:
Weighted average common shares
Income from continuing operations
$11,008,000
$11,230,000
$24,591,000
$21,728,000 Dividends paid to preferred stockholders
(117,000)
(398,000)
(514,000)
(795,000) Income from continuing operations available to
common stockholders
10,891,000
10,832,000
24,077,000
20,933,000 Discontinued operations
953,000
(414,000)
805,000
1,208,000
Net income available to common stockholders
$11,844,000
$10,418,000
$24,882,000
$22,141,000
Income from continuing operations per
common share
$ .40
$ .41
$ .89
$ .78 Discontinued operations per common share
.03
(.02)
.03
.05 Net income per common share
$ .43
$ .39
$ .92
$ .83
DILUTED:
Weighted average common shares
27,267,605
26,720,197
27,021,602
26,704,594 Stock options
94,550
35,539
101,508
25,965 Convertible subordinated debentures
172,016
220,624
176,334
229,886 Average common shares outstanding
27,534,171
26,976,360
27,299,444
26,960,445
Income from continuing operations
$11,008,000
$11,230,000
$24,591,000
$21,728,000 Dividends paid to preferred stockholders
(117,000)
(398,000)
(514,000)
(795,000) Interest on convertible subordinated debentures
30,000
38,000
62,000
79,000 Income from continuing operations available to
common stockholders
$10,921,000
$10,870,000
$24,139,000
$21,012,000
Discontinued operations
953,000
(414,000)
805,000
1,208,000 Net income available to common stockholders
assuming conversion of convertible
subordinated debentures to common stock,
if dilutive
$11,874,000
$10,456,000
$24,944,000
$22,220,000
Income from continuing operations per
common share
$ .40
$ .40
$ .88
$ .78
Discontinued operations per common share
.03
(.01)
.03
.04 Net income per common share
$ .43
$ .39
$ .91
$ .82
Incremental Shares Excluded Since Anti-dilutive:
Convertible subordinated debentures
---
---
---
481,581 8.5% Preferred Stock
215,722
676,918
446,320
676,918 Stock options
---
30,000
---
90,000
(in thousands, except per share amounts)
2004
2003
2004
2003 Revenues:
Rental income
$ (5)
$ 35
$ 29
$ 71 Facility operating revenue
35
3,480
707
6,978
30
3,515
736
7,049 Expenses:
Depreciation
9
120
42
238 Facility operating expenses
320
3,809
1,141
7,535
329
3,929
1,183
7,773 Operating loss
(299)
(414)
(447)
(724) Gain on sale of assets
1,252
---
1,252
1,932 Total Discontinued Operations
$ 953
$ (414)
$ 805
$1,208
Discontinued operations per common share:
Basic
$ .03
$ (.02)
$ .03
$ .05 Diluted
$ .03
$ (.01)
$ .03
$ .04
Note 11. 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 that is used in providing long-term nursing care and certain other assets.
Pursuant to SFAS 115, NHI has classified its investments in the certificates as held to maturity debt securities. Accordingly, the investments in the certificates were recorded at the amortized cost in our consolidated financial statements. The effective yields, as calculated, were used to accrue income based on actual and projected future cash flows that reflect actual and assumed mortgage prepayments and interest rates.
1993 REMIC - During 2000, we were informed by the servicer of the 1993 REMIC that Mariner Health Care ("Mariner" and one of the borrowers within the 1993 REMIC) had declared bankruptcy and was not making the required debt service payments. As a result, we wrote off $2,246,000 of the 1993 REMIC value.
During 2003 we collected $21,032,000 on the 1993 REMIC and extended the due date of the three remaining mortgages until December 31, 2004. During 2003, we recognized additional interest income to increase our carrying value of the 1993 REMIC by $709,000 to begin amortization of our carrying value to the amount ultimately expected to be collected in December 2004.
During the first six months of 2004 we recognized additional interest income to continue amortizing our carrying value of the 1993 REMIC by $1,182,000 to the amount ultimately expected to be collected in December 2004. As a result of the early payoff of the three extended mortgages, the 1993 REMIC was paid off in June 2004. Collections of $13,126,000 were received during the first six months of 2004, of which $2,246,000 (the amount recognized as a writedown in 2000) is included in REMIC recoveries, and resulting in no balance outstanding at June 30, 2004.
1995 REMIC - At December 31, 2003 and 2002, the net carrying value of the 1995 REMIC was $6,346,000. We have from time to time received advances from the servicer of the 1995 REMIC that we did not record as interest income because of an obligation to repay the amounts to the servicer. We received $3,000,000 of such advances prior to 2002 and $1,319,000 of such advances during 2002. The obligation to repay $2,671,000 of the advances was removed during 2002, and we recorded that amount as interest income. As of December 31, 2002, we had a remaining repayment obligation of $1,648,000 to the servicer. At December 31, 2003, we had a repayment obligation of $3,006,000 after a reduction in interest income for 2003 of $1,358,000.
During the first six months of 2004 we applied the repayment obligation accrued of $3,006,000 against the carrying value of the 1995 REMIC, and recorded a writedown of $3,339,000 in value, resulting in no balance outstanding at June 30, 2004. The loans in the 1995 REMIC pool have a value which is not expected to result in any additional payments to us. No interest income was recognized on the 1995 REMIC during the first six months of 2004.
Item 2. 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 ("REIT") that invests primarily in income producing health care properties with emphasis on the long-term care sector. As of June 30, 2004, we had interests in owned real estate, and investments in mortgages, preferred stock and marketable securities resulting in total invested assets of $483,467,000. Our mission is to invest in health care real estate which generates current income that will be distributed to stockholders. We have pursued this mission by making mortgage loans and acquiring properties to lease nationwide primarily in the long-term health care industry.
As of June 30, 2004, we were diversified with investments in 162 health care facilities located in 18 states consisting of 117 long-term care facilities, 1 acute care hospital, 4 medical office buildings, 17 assisted living facilities, 6 retirement centers and 17 residential projects for the developmentally disabled. These investments consisted of approximately $143,019,000 aggregate principal amount of loans to 16 borrowers, and $281,677,000 of purchase leaseback transactions with 12 lessees. Of these 162 facilities, 17 were acquired through foreclosure and are owned (of which 9 are operated by us) and 39 are leased to National HealthCare Corporation ("NHC"). The 9 facilities operated by us and 8 facilities operated by others are managed by subsidiaries of NHC. NHC is our investment advisor. Consistent with our strategy of diversification, we have reduced the portion of our portfolio operated or managed by NHC from 100.0% of total invested assets on October 17, 1991 to 11.8% of total invested assets on June 30, 2004.
At June 30, 2004, 29.1% of the total invested assets of the health care facilities were operated by public operators, 67.9% by regional operators, and 3.0% by small operators.
Areas of Focus
Coinciding with the implementation of the Prospective Payment System for Medicare Payments to nursing homes in 1999 and the resulting decrease in revenues to health care providers, we significantly curtailed our new investments. Instead, we focused our attention on returning our non-performing loans to performing status. Although our efforts are not complete, we continue to make progress in this regard. We also focused on lowering our debt. Our debt to capitalization ratio on June 30, 2004 was 27.6%, the lowest level in our 12 year history. Our liquidity is also strong. Our cash and marketable securities totaled 92.2% of total debt outstanding at June 30, 2004.
Reflecting this progress and our improving outlook for the healthcare industry, we anticipate making some new investments beginning in 2004 while continuing to monitor and improve our existing properties. Even as we make new investments, however, we expect to maintain a relatively low level of debt vs. equity compared to our historical levels.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us 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 and cause our reported net income to vary significantly from period to period.
Our significant accounting policies and the associated estimates, judgments and the issues which impact these estimates are as follows:
1) Valuations and impairments to our investments - Since 1999 the long-term health care industry has experienced material reductions in government and private insurance reimbursements. While some legislative relief was granted in 2000 and 2001, additional reductions in reimbursement were imposed effective October 1, 2002 followed by only modest improvements implemented for the fiscal year beginning October 1, 2003. The long-term health care industry has also experienced a dramatic increase in professional liability claims and in the cost of insurance to cover such claims. These factors have combined to cause a number of bankruptcy filings, bankruptcy court rulings and court judgments about refinancing for our lessees and mortgagees. Based on events occurring during each of the last two years, we determined that impairment of certain of our investments had occurred.
Decisions about valuations and impairments of our investments require significant judgments and estimates on the part of management. For real estate properties, the need to recognize an impairment is evaluated on a property by property basis in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets" ("SFAS 144"). Recognition of an impairment is based upon estimated future cash flows from a property compared to the carrying amount of the property and may be affected by management's plans, if any, to dispose of the property. For notes receivable, impairment recognition is based upon an evaluation of the estimated collectibility of loan payments and general economic conditions on a specific loan basis in accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan - An Amendment of FASB Statements No. 5 and 15" ("SFAS 114"). We evaluate our marketable securities for other-than-temporary impairments consistent with the provisions of Statement of Financial Accountant Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). While we believe that the carrying amounts of our properties, notes receivable, marketable securities and other investments are realizable, it is possible that future events could require us to make significant adjustments or revisions to these estimates.
2) Revenue recognition - mortgage interest and rental income - We collect interest and rent from our customers. Generally our policy is to recognize revenues on an accrual basis as earned. However, there are certain of our customers for which we have determined, based on insufficient historical collections and the lack of expected future collections, that revenue for interest or rent is not realizable. For these nonperforming investments, our policy is to recognize interest or rental income when assured, which we consider to be the period the amounts are collected. We identify investments as nonperforming if a required payment is not received within 30 days of the date it is due. This policy could cause our revenues to vary significantly from period to period. Revenue from minimum lease payments under our leases is recognized on a straight-line basis as required under SFAS 13 to the extent that future lease payments are considered collectible. Lease payments that depend on a factor directly related to future use of the property, such as an increase in annual revenues over a base year revenues, are considered to be contingent rentals and are excluded from minimum lease payments in accordance with SFAS 13.
3) REIT status and taxes - We believe that we have operated our 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 we intend to continue to operate in such a manner, but no assurance can be given that we will be able to qualify at all times. If we qualify as a REIT, we will generally not be subject to federal corporate income taxes on our net income that is currently distributed to our stockholders. This treatment substantially eliminates the "double taxation" (at the corporate and stockholder levels) that typically applies to corporate dividends. Our failure to continue to qualify under the applicable REIT qualification rules and regulations would cause us to owe state and federal income taxes and would have a material adverse impact on our financial position, results of operations and cash flows.
4) Revenue recognition - third party payors - Approximately two-thirds of our facility operating revenues are derived from Medicare, Medicaid, and other government programs. Amounts earned under these programs are subject to review by the third party payors. In our opinion, adequate provision has been made for any adjustments that may result from these reviews. Any differences between our estimates of settlements and final determinations are reflected in operations in the year finalized.
Liquidity and Capital Resources
Sources and Uses of Funds
We have generated net cash from operating activities during the first six months of 2004 totaling $27,447,000, a decrease of $215,000 compared to $27,662,000 in the prior period. Net cash from operating activities generally includes net income plus non-cash expenses, such as depreciation and amortization, provision for investment losses, and working capital changes. The $27,447,000 net cash provided from operating activities for the first six months of 2004 is composed of increases due to net income of $25,396,000, depreciation of $7,058,000, and working capital decreases of $500,000. This was offset by net loan, REMIC and security recoveries of $896,000, gain on sale of real estate of $1,252,000, gain on sale of marketable securities of $1,995,000, and discount amortization of $1,364,000.
The $27,662,000 net cash provided from operating activities for the first six months of 2003 is composed of increases due to net income of $22,936,000, depreciation of $7,751,000 and loan losses of $1,500,000. This was offset by gain on sale of real estate of $1,932,000, discount amortization of $331,000, and working capital increases of $2,262,000.
Net cash provided by investing activities during the first six months of 2004 totaled $34,106,000 compared to $16,387,000 in the prior period. Cash flows provided from investing activities during the first six months of 2004 included collections on mortgage and other notes receivable of $9,049,000 compared to $14,429,000 for the prior period. Collections are down because of mortgage payoffs in the prior period. Collections on real estate mortgage investment conduits provided $13,126,000 during the first six months of 2004 as we collected in full the 1993 REMIC. Marketable securities were sold or called and converted to cash of $10,823,000 during the first six months of 2004. Disposition of property and equipment provided $2,789,000 and $4,045,000 of cash proceeds for the first six months of 2004 and 2003, respectively.
Cash flows used in investing activities during the first six months of 2004 included investments in real estate properties of $806,000 and in mortgage and other notes receivable of $875,000. Cash flows used in investing activities in the prior period included investments in real estate properties of $604,000 and in mortgage notes receivable of $1,681,000. While during 2003 we concentrated our efforts in monitoring and improving our existing properties, we expect during 2004 to begin making some new investments from our own available cash and cash flows.
Net cash used in financing activities during the first six months of 2004 totaled $30,464,000 compared to $56,382,000 in the prior period. Cash flows used in financing activities for the first six months of 2004 included principal payments on debt of $5,492,000 and dividends paid to stockholders of $25,285,000. This compares to prior period activity of principal payments on debt of $2,014,000, payments of convertible debentures of $39,917,000 and dividends paid to stockholders of $20,815,000.
Cash flows provided by financing activities during the first six months of 2003 included $6,215,000 from debt proceeds related to first mortgage tax exempt bonds owned which were sold and no longer offset the respective debt.
Preferred Stock Conversion
On April 30, 2004, 100% of NHI's 8.5% cumulative convertible preferred stock, with a balance of 747,994 shares or $18,700,000 was called by NHI for redemption into common stock of NHI at a conversion rate of .905 shares of common stock for each share of preferred stock. This resulted in an additional 676,922 shares of common stock issued and outstanding. Consequently, preferred dividends accrued and paid for the quarter ended June 30, 2004 decreased $281,000, to be offset by common dividends accrued of approximately $288,000 on the new common shares.
In the future, based upon the current quarterly dividend payout of 42.5 cents per common share, cash flows will be increased by approximately $109,000 per quarter due to the difference in total dividends paid on the newly issued common shares versus the dividends paid on the converted preferred stock.
Contractual Obligations and Contingent Liabilities
As of June 30, 2004, our contractual payment obligations and contingent liabilities were as follows:
Contractual Obligations | |||||
(in thousands) | 2004 | 2005-2006 | 2007-2008 | Thereafter | Total |
Debt | $ 2,169 | $12,425 | $134,174 | $7,840 | $156,608 |
Convertible debentures | --- | 1,185 | --- | --- | 1,185 |
Construction loan commitments | --- | 739 | --- | --- | 739 |
Management fees to NHC | 13,324 | --- | --- | --- | 13,324 |
$15,493 | $14,349 | $134,174 | $7,840 | $171,856 |
We have guaranteed additional debt obligations totaling approximately $229,000 which are not included in the table above because we do not expect to fund these commitments.
Interest expense has not been included in the above table due to the difficulty in projecting variable rate interest. In the first six months of 2004, our cash payments for interest were $3,890,000.
Liquidity
At the end of the first six months of 2004, our liquidity is strong, with cash and marketable securities totaling approximately 92.2% of total debt outstanding. Further, our debt to book capitalization ratio declined to 27.6%, the lowest level in our 12 year history.
In the first quarter of 2003, we redeemed ahead of schedule $39.9 million of convertible subordinated debentures that were due in February 2004.
Our next significant debt maturities (primarily related to our $100 million unsecured public notes) are in 2007.
We intend to comply with REIT dividend requirements that we distribute 90% of our taxable income for the year ended December 31, 2004 and thereafter. NHI declared a dividend of 42.5 cents per common share to shareholders of record on March 31, 2004 payable on May 10, 2004 and a dividend of 42.5 cents per common share to shareholders of record June 30, 2004 payable on August 10, 2004.
Commitments
At June 30, 2004, we were committed, subject to due diligence and financial performance goals, to fund approximately $739,000 in health care real estate projects, none of which is expected to be funded within the next 12 months. The commitments include additional investments for one long-term health care center, and one assisted living facility, at rates ranging from 10.0% to 10.5%.
NHI is currently limited in its ability to make new investments due to the unstable environment in which we operate and a lack of availability of reasonably priced capital. We will continue to review our investment opportunities as we generate cash from our operating, investing and financing activities. We anticipate making some new investments beginning in 2004. Furthermore, we believe we have sufficient liquidity to finance current investments for which we are committed as well as to repay or refinance borrowings at or prior to their maturity.
Debt and Related Guarantees and Contingencies
See contingency related to damaged property in Note 8 of Notes to Condensed Consolidated Financial Statements.
Foreclosures, Troubled Real Estate Properties, Borrower Bankruptcies, and Non-Performing Loans
Our borrowers, tenants and the properties we operate as foreclosure properties have experienced financial pressures and difficulties similar to those experienced by the health care industry in general since 1997. Governments at both the federal and state levels have enacted legislation to lower or at least slow the growth in payments to health care providers. Furthermore, the costs of professional liability insurance have increased significantly during this same period.
A number of our real estate property operators and mortgage loan borrowers have experienced bankruptcy. Others have been forced to surrender properties to us in lieu of foreclosure and have otherwise failed to make timely payments on their obligations to us.
Of our $281,677,000 net investment in real estate properties at June 30, 2004, approximately $151,751,000 have been identified as impaired investments. Impaired properties include properties which we operate and which are identified as foreclosure properties for federal income tax purposes.
Of our $143,019,000 total net investment in mortgage and other notes receivable at June 30, 2004, approximately $56,289,000 of receivables have been involved in borrower bankruptcies or have otherwise been identified as non-performing loans.
The following table summarizes our writedowns and recoveries for the six months ended June 30, 2004 and 2003 which are based upon the provisions of SFAS 114 and SFAS 144:
Six Months Ended See Notes 4 and 5 to the financial statements for details of the properties identified as impaired real
estate investments and non-performing loans. We believe that the carrying amounts of our real estate properties and notes receivable, including those
identified as impaired or non-performing, are realizable and supported by the value of the underlying
collateral. However, it is possible that future events could require us to make significant adjustments to
these carrying amounts. Security Losses (Recoveries) The following table summarizes our security writedowns and recoveries for the six months ended June
30, 2004 and 2003 which are based on the provisions of SFAS 115:
Six Months Ended June 30 2004 2003 We believe that the carrying amounts of our investments in securities are realizable. However, future
events could require us to make significant adjustments to our carrying amounts ($20,639,000 at June 30,
2004). Investment in REMICs During the first six months of 2004 we recognized additional interest income to continue amortizing our
carrying value of the 1993 REMIC by $1,182,000 to the amount ultimately expected to be collected in
December 2004. As a result of the early payoff of the three extended mortgages, the 1993 REMIC was
paid off in June 2004. Collections of $13,126,000 were received during the first six months of 2004, of
which $2,246,000 (the amount recognized as a writedown in 2000) is included in REMIC recoveries, and
resulting in no balance outstanding at June 30, 2004. During the first six months of 2004 we applied the repayment obligation accrued of $3,006,000 against
the carrying value of the 1995 REMIC, and recorded a writedown of $3,339,000 in value, resulting in no
balance outstanding at June 30, 2004. The loans in the 1995 REMIC pool have a value which is not
expected to result in any additional payments to us. No interest income was recognized on the 1995
REMIC during the first six months of 2004. The following table summarizes our REMIC writedowns and recoveries for the six months ended June
30, 2004 and 2003: Results of Operations Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003 Net income for the three months ended June 30, 2004 is $11,961,000 versus net income of $10,816,000
for the same period in 2003, an increase of 10.6%. Diluted earnings per common share increased 4 cents
or 10.3% to 43 cents in the 2004 period from 39 cents in the 2003 period. Total revenues for three months ended June 30, 2004 increased $305,000 or 1% to $37,887,000 from
$37,582,000 for the three months ended June 30, 2003. Revenues from mortgage interest income
increased $113,000, or 2.4%, when compared to the same period in 2003. Revenues from rental income
decreased $744,000, or 5.7% in 2004 as compared to 2003. Facility operating revenue increased
$936,000 or 4.7% in 2004 compared to 2003. Of the $113,000 increase in mortgage interest income, decreases were due to $302,000 related to
previous mortgage payoffs and $340,000 is related to the repurchase of the National Health Realty, Inc.
note by NHR in December 2003. This is offset by a $533,000 increase in income from REMICs. The decrease in rental income in 2004 resulted primarily from termination of leases in July 2003 with
Marriott International on four Brighton Gardens assisted living facilities offset partially by $595,000 of
rental income from the four new lessees in 2004. The increase in facility operating revenues is due primarily to the improved government payment rates
and census at our foreclosure properties in Massachusetts, New Hampshire, Kansas and Missouri for the
three months ended June 30, 2004. Total expenses for the three months ended June 30, 2004 increased $2,164,000 or 7.9% to $29,673,000
from $27,509,000 for 2003. Interest expense decreased $93,000 or 2.9% in 2004 as compared to 2003.
Facility operating expense increased by $582,000 or 3.0% in 2004 compared to 2003. Interest expense for the three months ended June 30, 2004 decreased primarily due to conversion of
debentures of $25,000 and payment of debt of $696,000. The increase in facility operating expense relates to the improved facility census in Massachusetts, New
Hampshire, Kansas and Missouri discussed above. REMIC recoveries were $2,246,000, and REMIC writeoffs were $3,339,000 for the three months ended
June 30, 2004. Non-Operating Income - Investment interest and other income for the three months ended June 30, 2004 increased $1,637,000 or
141% compared to the same period in 2003. Investment interest and other income for the three months
ended June 30, 2004 includes $1,071,000 of dividend and interest income from marketable securities and
a gain of $1,326,000 on the sale of American Retirement common stock. Discontinued Operations - During the year ended December 31, 2003, we sold a medical office building with a carrying amount of
$2,113,000 for proceeds of $4,045,000, resulting in a $1,932,000 net gain on the sale of this facility and
sold two nursing facilities with a carrying amount of $5,597,000 for proceeds of $5,200,000 resulting in a
net loss of $397,000 on these facilities. Additionally, we designated one additional nursing facility as
"held for sale", consistent with the provisions of SFAS 144. During the second quarter of 2004 this
facility was sold for proceeds of $1,034,000 resulting in a loss of $345,000. A nursing facility in
Dawson Springs, Kentucky with a carrying value of $158,000 was sold on April 1, 2004 for proceeds of
$1,755,000 resulting in a $1,597,000 net gain on the sale of this facility. For the three months ended
June 30, 2004 and 2003, we have reclassified the operations, including the net gain on the sale of these
facilities, as discontinued operations in accordance with SFAS 144. Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 Net income for the six months ended June 30, 2004 is $25,396,000 versus net income of $22,936,000 for
the same period in 2003, an increase of 10.7%. Diluted earnings per common share increased 3 cents or
11.0% to 91 cents in the 2004 period from 82 cents in the 2003 period. Total revenues for six months ended June 30, 2004 decreased $251,000 or .3% to $75,317,000 from
$75,568,000 for the six months ended June 30, 2003. Revenues from mortgage interest income
decreased $579,000, or 5.7%, when compared to the same period in 2003. Revenues from rental income
decreased $1,887,000, or 7.2% in 2004 as compared to 2003. Facility operating revenue increased
$2,215,000 or 5.7% in 2004 compared to 2003. Of the $579,000 decrease in mortgage interest income, $565,000 is related to previous mortgage payoffs
and $680,000 is related to the repurchase of the National Health Realty, Inc. note by NHR in December
2003. This is partially offset by a $685,000 increase in income from REMICs. The decrease in rental income in 2004 resulted primarily from termination of leases in July 2003 with
Marriott International on four Brighton Gardens assisted living facilities offset partially by $1,160,000 of
rental income from the four new lessees in 2004. The increase in facility operating revenues is due primarily to the improved government payment rates
and census at our foreclosure properties in Massachusetts, New Hampshire, Kansas and Missouri for the
six months ended June 30, 2004. Total expenses for the six months ended June 30, 2004 decreased $988,000 or 1.7% to $55,653,000 from
$56,641,000 for 2003. Interest expense decreased $961,000 or 13.4% in 2004 as compared to 2003.
Facility operating expense increased by $2,122,000 or 5.6% in 2004 compared to 2003. Loan recoveries
were $1,302,000, REMIC recoveries were $2,246,000, security recoveries were $687,000 in 2004, and
REMIC writeoffs were $3,339,000 in 2004. There was $1,500,000 of loan losses in 2003, attributable to
non-performing loans. Interest expense for the six months ended June 30, 2004 decreased primarily due to the March, 2003
payment of convertible debentures in the amount of $39,917,000, conversion of debentures of $166,000
and payment of debt of $5,492,000. The increase in facility operating expense relates to the improved facility census in Massachusetts, New
Hampshire, Kansas and Missouri discussed above. Non-Operating Income - Investment interest and other income for the six months ended June 30, 2004 increased $2,126,000 or
75.9% compared to the same period in 2003. Investment interest and other income for the six months
ended June 30, 2004 includes $2,202,000 of dividend and interest income from marketable securities, a
gain of $668,000 on the call of Eldertrust common stock for cash, and a gain of $1,326,000 on the sale of
American Retirement common stock. Discontinued Operations - During the year ended December 31, 2003, we sold a medical office building with a carrying amount of
$2,113,000 for proceeds of $4,045,000, resulting in a $1,932,000 net gain on the sale of this facility and
sold two nursing facilities with a carrying amount of $5,597,000 for proceeds of $5,200,000 resulting in a
net loss of $397,000 on these facilities. Additionally, we designated one additional nursing facility as
"held for sale", consistent with the provisions of SFAS 144. During the second quarter of 2004 this
facility was sold for proceeds of $1,034,000, resulting in a loss of $345,000. A nursing facility in
Dawson Springs, Kentucky with a carrying value of $158,000 was sold on April 1, 2004 for proceeds of
$1,755,000 resulting in a $1,597,000 net gain on the sale of this facility. For the six months ended June
30, 2004 and 2003, we have reclassified the operations, including the net gain on the sale of these
facilities, as discontinued operations in accordance with SFAS 144. Funds From Operations Our funds from operations ("FFO") for the six months ended June 30, 2004, on a diluted basis was
$29,645,000, an increase of $3,083,000 as compared to $26,562,000 for the same period in 2003. FFO
represents net earnings available to common stockholders, excluding the effects of asset dispositions,
plus depreciation associated with real estate investments. Diluted FFO assumes, if dilutive, the
conversion of convertible subordinated debentures, the conversion of cumulative convertible preferred
stock and the exercise of stock options using the treasury stock method. We believe that funds from operations is an important supplemental measure of operating performance
for a real estate investment trust. Because the historical cost accounting convention used for real estate
assets requires straight-line depreciation (except on land), such accounting presentation implies that the
value of real estate assets diminishes predictably over time. Since real estate values instead have
historically risen and fallen with market conditions, presentations of operating results for a real estate
investment trust that use historical cost accounting for depreciation could be less informative, and should
be supplemented with a measure such as FFO. The term FFO was designed by the real estate investment
trust industry to address this issue. Our measure may not be comparable to similarly titled measures used
by other REITs. Consequently, our funds from operations may not provide a meaningful measure of our
performance as compared to that of other REITs. Since other REITs may not use our definition of FFO,
caution should be exercised when comparing our Company's FFO to that of other REITs. Funds from
operations in and of itself does not represent cash generated from operating activities in accordance with
GAAP (funds from operations does not include changes in operating assets and liabilities) and therefore
should not be considered an alternative to net earnings as an indication of operating performance, or to
net cash flow from operating activities as determined by GAAP in the United States, as a measure of
liquidity and is not necessarily indicative of cash available to fund cash needs. The following table reconciles net income to funds from operations: Three Months Ended Six Months Ended June 30 June 30
Writedowns (Recoveries)
June 30 (in thousands)
2004
2003 Real estate
$ ---
$ --- Mortgages
(1,302)
1,500
$ (1,302)
$1,500
Writedowns (Recoveries)
(in thousands)
Securities
$(687)
$ ---
Writedowns (Recoveries)
(in thousands)
2004
2003 REMICs
$1,093
$ --
2004
2003
2004
2003 (in thousands, except share and per share amounts)
Net Income
$11,961
$10,816
$25,396
$22,936 Dividends to preferred stockholders
(117)
(398)
(514)
(795) Net income applicable to common stockholders
11,844
10,418
24,882
22,141 Elimination of non-cash items in net income:
Real estate depreciation
2,972
3,063
5,941
6,153 Real estate depreciation in discontinued operations
3
61
12
121 Gain on sale of real estate
(1,252)
---
(1,252)
(1,932)
Basic funds from operations applicable
to common stockholders
13,567
13,542
29,583
26,483 Interest on convertible subordinated debentures
30
38
62
79
Diluted funds from operations applicable
to common stockholders
$13,597
$13,580
$29,645
$26,562
Basic funds from operations per share
$ .50
$ .51
$ 1.09
$ .99 Diluted funds from operations per share
$ .49
$ .50
$ 1.09
$ .99
Shares for basic funds from operations per share
27,267,605
26,720,197
27,021,602
26,704,594 Shares for diluted funds from operations per share
27,534,171
26,976,360
27,299,444
26,960,445
Impact of Inflation
Inflation may affect us in the future by changing the underlying value of our real estate or by impacting our cost of financing our operations.
Our revenues are generated primarily from long-term investments and the operation of long term care facilities. Inflation has remained relatively low during recent periods. There can be no assurance that future Medicare, Medicaid or private pay rate increases will be sufficient to offset future inflation increases. Certain of our leases require increases in rental income based upon increases in the revenues of the tenants.
New Accounting Pronouncements
New Accounting Pronouncements - In August 2001, the FASB issued SFAS 144. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes 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"), and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB 30"), for the disposal of a segment of a business (as previously defined in APB 30). SFAS 144 retains the fundamental provisions of SFAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS 121. SFAS 144 also broadens the scope of defining discontinued operations. NHI adopted SFAS 144 on January 1, 2002. As the result of the adoption of SFAS 144, NHI has reported as discontinued operations in its consolidated statements of income, the revenues and expenses of one medical office building that NHI sold during the first quarter of 2003, two nursing facilities sold and one nursing facility designated for sale during the third quarter of 2003 (and sold during the second quarter of 2004), another nursing facility sold in the second quarter of 2004, and the related gains or losses on the sales.
In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds Statement of Financial Accounting Standards No. 4, "Reporting Gains and Losses From Extinguishment of Debt" ("SFAS 4"), which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in APB 30 will now be used to classify those gains and losses. SFAS 145 amends SFAS 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. As permitted, NHI elected to adopt SFAS 145 effective January 1, 2002. As a result, gains of $65,000 on the retirement of convertible subordinated debentures during the first quarter of 2003 have been included in investment interest and other income.
On December 31, 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 amends Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of transition to SFAS 123's fair value method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, "Interim Financial Reporting", to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS 148 does not amend SFAS 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for the compensation using the fair value method of SFAS 123 or the intrinsic value method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). See Note 3.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 was generally effective for NHI July 1, 2003. The adoption of SFAS 150 has not had a material effect on NHI's financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantees. FIN 45 also requires additional disclosure requirements about the guarantor's obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for financial statement periods ending after December 15, 2002. Through June 30, 2004, adoption of FIN 45 has not had a material effect on the Company's financial statements. The future effect of FIN 45 on the Company's financial statements will depend on whether the Company enters into new or modifies existing guarantees.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which requires the consolidation of variable interest entities by the primary beneficiary of such variable interest entities. FIN 46, as revised by the FASB, generally requires that variable interest entities must be consolidated by their primary beneficiary effective March 31, 2004. The Company adopted FIN 46 at March 31, 2004. The Company is not the primary beneficiary of any variable interest entity and, therefore, has not consolidated any additional entities as the result of adoption of FIN 46. The Company has five first mortgage loans with five variable interest entities (total outstanding balances of $19,439,000 at June 30, 2004) that operate five skilled nursing facilities. However, the Company is not the primary beneficiary of these variable interest entities. The Company's maximum exposure to loss as a result of its involvement with these variable interest entities is the outstanding balance of the first mortgage notes receivable.
Forward Looking Statements
References throughout this document to the Company include National Health Investors, Inc. and its wholly-owned subsidiaries. In accordance with the Securities and Exchange Commission's "Plain English" guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words "we", "our", "ours" and "us" refer only to National Health Investors, Inc. and its wholly-owned subsidiaries and not any other person.
This Quarterly Report on Form 10-Q and other information we provide from time to time, contains certain "forward-looking" statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations, cash flows, funds from operations, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, and similar statements including, without limitations, those containing words such as "believes", "anticipates", "expects", "intends", "estimates", "plans", and other similar expressions are forward-looking statements.
Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements as a result of, but not limited to, the following factors:
* national and local economic conditions, including their effect on the availability and cost of labor, utilities and materials;
* the effect of government regulations and changes in regulations governing the healthcare industry, including compliance with such regulations by us and our borrowers and/or lessees;
* changes in Medicare and Medicaid payment levels and methodologies and the application of such methodologies by the government and its fiscal intermediaries to our borrowers and/or lessees;
* the ability to pay when due or refinance certain debt obligations maturing within the next 12 months;
* the availability and terms of capital to fund investments;
* the competitive environment in which we operate;
See the notes to the Annual Financial Statement, and "Item 1. Business" as is found in our 2003 Annual Report on Form 10-K for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. You should carefully consider these risks before making any investment decisions in the Company. These risks and uncertainties are not the only ones facing the Company. There may be additional risks that we do not presently know of or that we currently deem immaterial. If any of the risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our shares of stock could decline, and you may lose all or part of your investment. Given these risks and uncertainties, we can give no assurances that these forward-looking statements will, in fact, occur and, therefore, caution investors not to place undue reliance on them.
Item 3. Quantitative and Qualitative Information About Market Risk
Interest Rate Risk
Our cash and cash equivalents consist of highly liquid investments with a maturity of less than three months when purchased. All of our mortgage and other notes receivable bear interest at fixed interest rates. Our 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%. As a result of the short-term nature of our cash instruments and because the interest rates on our investments in notes receivable and preferred stock are fixed, a hypothetical 10% change in interest rates has no impact on our future earnings and cash flows related to these instruments.
As of June 30, 2004, $125,744,000 of our debt bears interest at fixed interest rates. Because the interest rates of these instruments are fixed, a hypothetical 10% change in interest rates has no impact on our future earnings and cash flows related to these instruments. The remaining $30,864,000 of our debt and $1,185,000 of our convertible subordinated debentures bear interest at variable rates. A hypothetical 10% increase in interest rates would reduce our future earnings and cash flows related to these instruments by $50,000. A hypothetical 10% decrease in interest rates would increase our future earnings and cash flows related to these instruments by $50,000.
We do not use derivative instruments to hedge interest rate risks. The future use of such instruments will be subject to strict approvals by our senior officers.
Equity Price Risk
We consider our investments in marketable securities as available for sale securities and unrealized gains and losses are recorded in stockholders' equity in accordance with SFAS 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 $2,064,000 change in the fair value of our investments in marketable securities. In addition, a hypothetical 10% change in the quoted market prices of our subordinated convertible debentures would result in a related $458,000 change in the fair value of the debenture instruments.
Item 4. Controls and Procedures
As of June 30, 2004, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Principal Accounting Officer ("PAO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and PAO, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2004. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls during the quarter ended or subsequent to June 30, 2004.
Item 1. Legal Proceedings. None other than in the normal course of business.
Item 2. Changes in Securities. Not applicable
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of the shareholders was held on April 20, 2004.
(b) Matters voted upon at the meeting are as follows:
PROPOSAL NO. 1: Re-election of Richard F. LaRoche and Ted H. Welch to serve as directors for a term of three years or until their successors have been fully elected and qualified .
Withholding | |||
Nominee | Voting For | Authority | Percent For |
Richard F. LaRoche, Jr. | 24,089,074 | 273,281 | 99.0% |
Ted H. Welch | 24,198,846 | 214,579 | 99.3% |
PROPOSAL NO. 2. To ratify the Audit Committee's selection of Ernst & Young LLP as independent auditors for the year ending December 31, 2004.
Voting For | Voting Against | Abstaining | Percent For |
24,321,437 | 21,342 | 45,111 | 99.8% |
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) List of exhibits
Exhibit No. |
Description | |
31 |
Rule 13a-14(a)/15d-14(a) Certifications | |
302 Certification of W. Andrew Adams | ||
302 Certification of Donald K. Daniel | ||
99 |
Additional Exhibits | |
906 Certification of W. Andrew Adams and Donald K. Daniel |
(b) Reports on Form 8-K
Form 8-K filed May 6, 2004 regarding first quarter earnings announcement.
Form 8-K filed June 15, 2004 regarding announcement of second quarter common dividend.
Form 8-K filed June 16, 2004 regarding change in registrant's certifying accountants.
Form 8-K filed August 6, 2004 regarding second quarter earnings announcement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NATIONAL HEALTH INVESTORS, INC. | |
(Registrant) | |
Date August 9, 2004 | /s/W. Andrew Adams |
W. Andrew Adams | |
Chief Executive Officer | |
Date August 9, 2004 | /s/Donald K. Daniel |
Donald K. Daniel | |
Principal Accounting Officer |
EXHIBIT 31
CERTIFICATION
I, W. Andrew Adams, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Health Investors, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function);
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 9, 2004
/s/W. Andrew Adams | |
W. Andrew Adams | |
Chairman and President | |
Chief Executive Officer |
CERTIFICATION
I, Donald K. Daniel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Health Investors, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function);
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 9, 2004
/s/Donald K. Daniel | |
Donald K. Daniel | |
Vice President and Controller | |
Principal Accounting Officer |
Exhibit 99
Certification of Quarterly Report on Form 10-Q
of National Health Investors, Inc.
For The Quarter Ended June 30, 2004
The undersigned hereby certify, pursuant to 18 U.S.C. Section 906 of the Sarbanes-Oxley Act of 2002, that, to the undersigned's best knowledge and belief, the Quarterly Report on Form 10-Q for National Health Investors, Inc. ("Issuer") for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"):
(a) | fully complies with the requirements of section 13(a) or 15(d) of the Securities |
Exchange Act of 1934; and | |
(b) |
the information contained in the Report fairly presents, in all material respects, |
the financial condition and results of operations of the Issuer. | |
This Certification accompanies the Quarterly Report on Form 10-Q of the Issuer for the quarterly period ended June 30, 2004.
This Certification is executed as of August 9, 2004.
/s/W. Andrew Adams | |
W. Andrew Adams | |
Chief Executive Officer | |
/s/Donald K. Daniel | |
Donald K. Daniel | |
Principal Accounting Officer |
A signed original of this written statement required by Section 906 has been provided to National Health Investors, Inc. and will be retained by National Health Investors, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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