SHARE-BASED COMPENSATION

We recognize share-based compensation for all stock options granted over the requisite service period using the fair value of these grants as estimated at the date of grant using the Black-Scholes pricing model over the requisite service period using the market value of our publicly-traded common stock on the date of grant.

Share-Based Compensation Plans

The Compensation Committee of the Board of Directors (the “Committee”) has the authority to select the participants to be granted options; to designate whether the option granted is an incentive stock option (“ISO”), a non-qualified option, or a stock appreciation right; to establish the number of shares of common stock that may be issued upon exercise of the option; to establish the vesting provision for any award; and to establish the term any award may be outstanding. The exercise price of any ISO’s granted will not be less than 100% of the fair market value of the shares of common stock on the date granted and the term of an ISO may not be more than ten years. The exercise price of any non-qualified options granted will not be less than 100% of the fair market value of the shares of common stock on the date granted unless so determined by the Committee.

In May 2012, our stockholders approved the 2012 Stock Incentive Plan (the “2012 Plan”) pursuant to which 1,500,000 shares of our common stock were made available to grant as share-based payments to employees, officers, directors or consultants. Through a vote of our shareholders in May 2015, we increased the maximum number of shares under the plan from 1,500,000 shares to 3,000,000 shares; increased the automatic annual grant to non-employee directors from 15,000 shares to 20,000 shares; and limited the Company’s ability to re-issue shares under the Plan. Through a second amendment approved on May 4, 2018, our shareholders voted to increase the maximum number of shares under the plan to 3,500,000 and to increase the automatic annual grant to non-employee directors to 25,000. The individual restricted stock and option grant awards may vest over periods up to five years. The term of the options under the 2012 Plan is up to ten years from the date of grant. As of December 31, 2018, there were 921,669 shares available for future grants under the 2012 Plan.

In May 2005, our stockholders approved the NHI 2005 Stock Option Plan (“the 2005 Plan”) pursuant to which 1,500,000 shares of our common stock were made available to grant as share-based payments to employees, officers, directors or consultants. The 2005 Plan has expired and no additional shares may be granted under the 2005 Plan. The individual restricted stock and option grant awards vest over periods up to ten years. The term of the options outstanding under the 2005 Plan is up to ten years from the date of grant.

Compensation expense is recognized only for the awards that ultimately vest. Accordingly, forfeitures that were not expected may result in the reversal of previously recorded compensation expense. We consider the historical employee turnover rate in our estimate of the number of stock option forfeitures. Our compensation expense reported for the years ended December 31, 2018, 2017 and 2016 was $2,490,000, $2,612,000 and $1,732,000, respectively, and is included in general and administrative expense in the Consolidated Statements of Income.

Determining Fair Value of Option Awards

The fair value of each option award was estimated on the grant date using the Black-Scholes option valuation model with the weighted average assumptions indicated in the following table. Each grant is valued as a single award with an expected term based upon expected employee and termination behavior. Compensation cost is recognized on the graded vesting method over the requisite service period for each separately vesting tranche of the award as though the award were, in substance, multiple awards. The expected volatility is derived using daily historical data for periods preceding the date of grant. The risk-free interest rate is the approximate yield on the United States Treasury Strips having a life equal to the expected option life on the date of grant. The expected life is an estimate of the number of years an option will be held before it is exercised.

Stock Options

The weighted average fair value per share of options granted was $4.49, $5.76 and $3.65 for 2018, 2017 and 2016, respectively.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:



	2018	2017	2016
Dividend yield	6.5%	5.3%	6.2%
Expected volatility	19.4%	19.8%	19.1%
Expected lives	2.9 years	2.9 years	2.9 years
Risk-free interest rate	2.39%	1.49%	0.91%

Stock Option Activity

The following tables summarize our outstanding stock options:



				Weighted Average
	Number		Weighted Average	Remaining	Aggregate
	of Shares		Exercise Price	Contractual Life (Years)	Intrinsic Value
Outstanding December 31, 2015	741,676		$60.43
Options granted under 2012 Plan	470,000		$60.78
Options exercised under 2005 Plan	(61,666	)	$52.36
Options exercised under 2012 Plan	(608,331	)	$65.18
Outstanding December 31, 2016	541,679		$65.84
Options granted under 2012 Plan	495,000		$74.90
Options exercised under 2005 Plan	(15,000	)	$47.52
Options exercised under 2012 Plan	(155,829	)	$65.73
Options canceled under 2012 Plan	(6,668	)	$60.52
Outstanding December 31, 2017	859,182		$70.11
Options granted under 2012 Plan	560,000		$64.33
Options exercised under 2005 Plan	(6,668	)	$72.11
Options exercised under 2012 Plan	(462,167	)	$65.03
Options canceled under 2012 Plan	(30,001	)	$66.73
Outstanding December 31, 2018	920,346		$69.24	3.35	$	5,798,000

Exercisable December 31, 2018	476,992		$70.93	2.88	$	2,204,000



				Remaining
Grant	Number	Exercise		Contractual
Date	of Shares	Price		Life in Years
2/25/2014	15,000	$	61.31	0.15
2/20/2015	50,002	$	72.11	1.14
2/22/2016	36,668	$	60.52	2.15
3/8/2016	26,667	$	63.63	2.19
2/22/2017	399,170	$	74.78	3.15
9/1/2017	10,000	$	80.55	3.68
2/20/2018	382,839	$	64.33	4.14
Outstanding December 31, 2018	920,346

The weighted average remaining contractual life of all options outstanding at December 31, 2018 is 3.35 years. Including outstanding stock options, our stockholders have authorized an additional 1,842,015 shares of common stock that may be issued under the share-based payments plans.

The following table summarizes our outstanding non-vested stock options:



	Number of Shares		Weighted Average Grant Date Fair Value
Non-vested December 31, 2017	400,019		$5.10
Options granted under 2012 Plan	560,000		$4.49
Options vested under 2012 Plan	(494,996	)	$4.62
Options vested under 2005 Plan	(6,668	)	$4.91
Non-vested options canceled under 2012 Plan	(15,001	)	$4.99
Non-vested December 31, 2018	443,354		$4.87

At December 31, 2018, we had, net of expected forfeitures, $586,000 of unrecognized compensation cost related to unvested stock options which is expected to be expensed over the following periods: 2019 - $528,000 and 2020 - $58,000. Stock-based compensation is included in general and administrative expense in the Consolidated Statements of Income.

The intrinsic value of the total options exercised for the years ended December 31, 2018, 2017 and 2016 was $6,105,000 or $13.02 per share; $2,314,000 or $13.55 per share, and $4,730,000 or $7.06 per share, respectively.