-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WrcDrWKfK2o5qSVQAIML8LJe02vNRygn7uW4q+VfDr63T93LZgtOrCcy+7BtOzCK uNcgK3xhO+W+jgm3I5n6sg== 0000877860-99-000008.txt : 19990817 0000877860-99-000008.hdr.sgml : 19990817 ACCESSION NUMBER: 0000877860-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL HEALTH INVESTORS INC CENTRAL INDEX KEY: 0000877860 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 621470956 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10822 FILM NUMBER: 99690563 BUSINESS ADDRESS: STREET 1: 100 VINE ST STE 1402 CITY: MURFREESBORO STATE: TN ZIP: 37130 BUSINESS PHONE: 6158909100 MAIL ADDRESS: STREET 1: P.O. BOX 1102 CITY: MURFREESBORO STATE: TN ZIP: 37133 10-Q 1 6/30/99 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 of 15(d) of the Securities Exchange Act of 1934 For quarter ended June 30, 1999 Commission file number 33-41863 NATIONAL HEALTH INVESTORS, INC. (Exact name of registrant as specified in its Charter) Maryland 62-1470956 (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 100 Vine Street Murfreesboro, TN 37130 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code (615) 890-9100 Indicate by check mark whether the registrant (1) Has filed all reports required to be filed by Section 13 or 15(d), of the Securities Exchange Act of 1934 during the preceding 12 months. Yes x No (2) Has been subject to such filing requirements for the past 90 days. Yes x No 24,364,888 shares of common stock were outstanding as of July 31, 1999. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. NATIONAL HEALTH INVESTORS, INC. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
June 30 Dec. 31 1999 1998 ASSETS (unaudited) Real estate properties: Land $ 27,783 $ 22,649 Buildings and improvements 277,135 267,962 Construction in progress 667 798 305,585 291,409 Less accumulated depreciation (51,257) (45,871) Real estate properties, net 254,328 245,538 Mortgage and other notes receivable, net 397,715 394,174 Investment in preferred stock 38,132 38,132 Investment in real estate mortgage investment conduits 37,207 36,861 Cash and cash equivalents 3,250 20,407 Marketable securities 59,303 26,797 Interest and rent receivable 7,807 4,542 Deferred costs and other assets 3,364 2,747 Total Assets $801,106 $769,198 LIABILITIES AND DEFERRED INCOME Long-term debt $150,242 $151,559 Credit facilities 98,000 58,500 Convertible subordinated debentures 98,286 100,096 Accounts payable and other accrued expenses 3,924 1,696 Accrued interest 6,454 6,463 Dividends payable 18,030 18,030 Deferred income 7,767 8,194 Total Liabilities and Deferred Income 382,703 344,538 Commitments, contingencies and guarantees STOCKHOLDERS' EQUITY Cumulative convertible preferred stock, $.01 par value; 10,000,000 shares authorized; 768,694 and 768,894 shares, respectively, issued and outstanding; stated at liquidation preference of $25 per share 19,217 19,222 Common stock, $.01 par value: 40,000,000 shares authorized; 24,364,888 and 24,364,391 shares, respectively, issued and outstanding 244 244 Capital in excess of par value of common stock 425,463 425,449 Cumulative net income 372,743 340,547 Cumulative dividends (394,403) (357,518) Unrealized gains (losses) on securities (4,861) (3,284) Total Stockholders' Equity 418,403 424,660 Total Liabilities and Stockholders' Equity $801,106 $769,198
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, 1998 is taken from the audited financial statements at that date. 2 NATIONAL HEALTH INVESTORS, INC. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 1999 1998 1999 1998 (in thousands, except share amounts) REVENUES: Mortgage interest income $ 11,104 $ 13,811 $ 23,492 $ 28,041 Rental income 11,451 10,461 22,603 20,914 Facility operating revenue 2,149 --- 6,272 --- Investment interest and other income 2,831 1,585 5,124 2,982 27,535 25,857 57,491 51,937 EXPENSES: Interest 6,091 4,638 12,219 9,508 Depreciation of real estate 2,852 2,197 5,354 4,379 Amortization of loan and organization costs 181 168 348 354 Facility operating expense 1,568 --- 5,623 --- General and administrative 890 965 1,751 1,961 11,582 7,968 25,295 16,202 NET INCOME 15,953 17,889 32,196 $ 35,735 DIVIDENDS TO PREFERRED STOCKHOLDERS 409 421 817 852 NET INCOME APPLICABLE TO COMMON STOCK $ 15,544 $ 17,468 $ 31,379 $ 34,883 NET INCOME PER COMMON SHARE: Basic $ .64 $ .69 $ 1.29 $ 1.39 Diluted $ .64 $ .68 $ 1.28 $ 1.37 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 24,364,888 25,370,530 24,364,796 25,149,282 Diluted 27,906,229 29,020,920 27,919,439 29,014,925 Common dividends per share declared $ .74 $ .74 $ 1.48 $ 1.48
The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements. 3 NATIONAL HEALTH INVESTORS, INC. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30 1999 1998 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 32,196 $ 35,735 Depreciation of real estate 5,354 4,379 Provision for loan losses 1,706 600 Amortization of loan and organization costs 348 354 Interest on debenture conversion --- 317 Deferred income 167 695 Amortization of bond discount (670) --- Amortization of deferred income (594) (1,448) (Increase) decrease in interest & rent receivable (3,265) 804 Increase in other assets (965) (50) Increase in accounts payable and accrued liabilities 2,218 1,658 NET CASH PROVIDED BY OPERATING ACTIVITIES 36,495 43,044 CASH FLOWS FROM INVESTING ACTIVITIES: Investment in mortgage notes receivable (17,834) (43,916) Collection of mortgage notes receivable 11,876 2,154 Prepayment of mortgage notes receivable --- 63,261 Acquisition of property and equipment, net (14,144) (4,278) Investment in marketable securities (33,413) (21,647) NET CASH USED IN INVESTING ACTIVITIES (53,515) (4,426) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from credit facilities 39,500 --- Proceeds from long-term debt --- 229 Principal payments on long-term debt (1,952) (1,855) Payments of subordinated convertible debentures (800) (40) Dividends paid to shareholders (36,885) (37,912) Sale of stock and exercise of options --- 858 NET CASH USED IN FINANCING ACTIVITIES (137) (38,720) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (17,157) (102) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,407 64,915 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,250 $ 64,813
4 NATIONAL HEALTH INVESTORS, INC. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30 1999 1998 (in thousands) Supplemental Information: Cash payments for interest expense $ 10,134 $ 8,580 During the six months ended June 30, 1999 and June 30, 1998, $10,000 and $18,367,000 respectively, of Senior Subordinated Convertible Debentures were converted into 316 shares and 589,952 shares, respectively, of NHI's common stock: Senior subordinated convertible debentures $ (10) $(18,367) Financing costs $ --- $ 227 Accrued interest $ (1) $ (317) Common stock $ --- $ 6 Capital in excess of par $ 9 $ 18,451
The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements. 5 NATIONAL HEALTH INVESTORS, INC. INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Cumulative Convertible Capital in Unrealized Total Preferred Stock Common Stock Excess of Cumulative Cumulative Gains(Losses) Stock. (dollars in thousands) Shares Amount Shares Amount Par Value Net Income Dividends on Securities Equity BALANCE AT 12/31/98 768,894 $ 19,222 24,364,391 $244 $425,449 $340,547 $(357,518) $ (3,284) $424,660 Net income --- --- --- --- --- 32,196 --- --- 32,196 Unrealized gains (losses) on securities --- --- --- --- --- --- --- (1,577) (1,577) Total Comprehensive Income 30,619 Shares sold --- --- --- --- --- --- --- --- --- Common shares repurchased --- --- --- --- --- --- --- --- --- Shares issued in con- version of converti- ble debentures to common stock --- --- 316 --- 9 --- --- --- 9 Shares issued in con- version of preferred stock to common stock (200) (5) 181 --- 5 --- --- --- --- Dividends to common shareholders (1.48 per share) --- --- --- --- --- --- (36,068) --- (36,068) Dividends to preferred shareholders ($1.0625 per share) --- --- --- --- --- --- (817) --- (817) BALANCE AT 6/30/99 768,694 $ 19,217 24,364,888 $ 244 $425,463 $372,743 $(394,403) $ (4,861) $418,403 BALANCE AT 12/31/97 833,664 $ 20,842 24,753,570 $ 248 $434,135 $270,902 $(282,047) $ --- $444,080 Net income --- --- --- --- --- 35,735 --- --- 35,735 Unrealized gains (losses) on securities --- --- --- --- --- --- --- (883) (883) Total Comprehensive Income 34,852 Shares sold --- --- 25,102 --- 858 --- --- --- 858 Shares issued in con- version of convertible debentures to common stock --- --- 589,951 6 18,451 --- --- --- 18,457 Shares issued in con- version of preferred stock to common stock (43,570) (1,090) 39,418 --- 1,090 --- --- --- --- Dividends to common shareholders ($1.48 per share) --- --- --- --- --- --- (37,543) --- (37,543) Dividends to preferred shareholders ($1.0625 per share) --- --- --- --- --- --- (852) --- (852) BALANCE AT 6/30/98 790,094 $ 19,752 25,408,041 $ 254 $454,534 $306,637 $(320,442) $ (883) $459,852
6 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (Unaudited) Note 1. SIGNIFICANT ACCOUNTING POLICIES: The unaudited financial statements furnished herein in the opinion of management include all adjustments which are necessary to fairly present the financial position, results of operations and cash flows of National Health Investors, Inc. ("NHI" or the "Company"). NHI assumes that users of the interim financial statements herein have read or have access to the audited financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in NHI's Form 10-K for the year ended December 31, 1998 and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate the disclosure contained in the Company's most recent annual report to stockholders have been omitted. The interim financial information contained herein is not necessarily indicative of the results that may be expected for a full year because of various reasons including changes in interest rates, rents and the timing of debt and equity financings. Note 2. NET INCOME PER COMMON SHARE: Basic earnings per share is based on the weighted average number of common and common equivalent shares outstanding. Net income is reduced by dividends to holders of cumulative convertible preferred stock. Diluted earnings per common share assumes the conversion of convertible subordinated debentures, the conversion of cumulative convertible preferred stock and the exercise of stock options using the treasury stock method. Net income is increased for interest expense on the convertible subordinated debentures. The following table summarizes the earnings and the average number of common shares and common equivalent shares used in the calculation of basic and diluted earnings per share. 7 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 1999 1998 1999 1998 BASIC: Weighted average common shares 24,364,888 25,370,530 24,364,796 25,149,282 Net income $15,953,000 $17,889,000 $32,196,000 $35,735,000 Dividends paid to pre- ferred shareholders (409,000) (421,000) (817,000) (852,000) Net income available to common stockholders $15,544,000 $17,468,000 $31,379,000 $34,883,000 Net income per common share $ .64 $ .69 $ 1.29 $ 1.39 DILUTED: Weighted average common shares 24,364,888 25,370,530 24,364,796 25,149,282 Stock options --- 10,885 1 24,302 Convertible subordinated debentures 2,845,690 2,913,794 2,858,967 3,104,517 Cumulative convertible pre- ferred stock 695,651 725,711 695,675 736,824 Average common shares outstanding 27,906,229 29,020,920 27,919,439 29,014,925 Net income $15,953,000 $17,889,000 $32,196,000 $35,735,000 Interest expense on convertible sub- ordinated debentures 1,813,000 1,856,000 3,641,000 3,937,000 Net income assuming con- version of subordinated convertible debentures to common stock $17,766,000 $19,745,000 $35,837,000 $39,672,000 Net income per common share $ .64 $ .68 $ 1.28 $ 1.37
8 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (Unaudited) Note 3. INVESTMENTS IN MARKETABLE SECURITIES: NHI's investments in marketable securities include available for sale securities and held to maturity securities. Unrealized gains and losses on available for sale securities are recorded in stockholders' equity in accordance with SFAS 115. Realized gains and losses from securities sales are determined on the specific identification of the securities. Proceeds from the sale of investments in available for sale securities during the period ended June 30, 1999 were $538,000. Gross investment gains of $60,000 were realized on these sales during the period ended June 30, 1999. Note 4. COMMITMENTS AND GUARANTEES: At June 30, 1999, NHI was committed, subject to due diligence and financial performance goals, to fund approximately $15,300,000 in health care real estate projects of which approximately $12,000,000 is eligible to be funded within the next 12 months. The commitments include mortgage loans or purchase leaseback agreements for five long-term care centers, one medical office building, and three assisted living facilities, all at rates ranging from 9% to 11.5%. NHI has recorded deferred income for commitment fees related to these loans where applicable. In order to obtain the consent of appropriate lenders to National HealthCare Corporation's ("NHC"'s) transfer of assets to NHI, NHI guaranteed certain debt ($15,999,000 at June 30, 1999) of NHC. The debt is at fixed rates with a weighted average interest rate of 8.3% at June 30, 1999. NHI receives from NHC compensation of approximately $80,000 per annum for the guarantees which is credited against NHC's base rent requirements. In management's opinion, these guarantee fees approximate the guarantee fees that NHI would currently charge to enter into similar guarantees. All of the guaranteed indebtedness discussed above is secured by first mortgages and rights which may be enforced if either party is required to pay under their respective guarantees. NHC has agreed to indemnify and hold harmless NHI against any and all loss, liability or harm incurred by NHI as a result of having to perform under its guarantee of any or all of the guaranteed debt. Additionally, NHI has also guaranteed bank loans in the amount of $1,549,000 to key employees and directors which amount was utilized for the exercise of NHI stock options. Shares of NHI stock are held as security by NHI and the loans are limited to $100,000 per individual per year. NHI's bank credit facility (outstanding balance $20,956,000 at June 30, 1999) was financed through National HealthCare Corporation, National Health Corporation ("National") and through National Health Corporation Leveraged Employee Stock Ownership Plan and Trust before being transferred to NHI with the creation of NHI in 1991. 9 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (Unaudited) On July 30, 1999, National was notified by SunTrust Bank of Nashville, N.A., the Agent for itself and certain other lenders for the above-referenced loan, that as Agent it disputes the allocation of certain collateral between itself and another lending institution. National is actively negotiating for resolution of this dispute. In the event the dispute is not resolved, the Agent may call the loan into default. If the loan is called into default, payments by NHI to repay the loan may have a material adverse impact upon NHI's cash flows and liquidity. Note 5. CONVERTIBLE SUBORDINATED DEBENTURES: At June 30, 1999, $56,286,000 of 7% convertible subordinated debentures (the "1997 debentures"), due on February 1, 2004, remain outstanding. The 1997 debentures are convertible at the option of the holder into common stock at a conversion price of $37.50, subject to adjustment. During the six months ended June 30, 1999, none of the 1997 debentures were converted into common stock. NHI has reserved 1,500,960 shares of common stock for conversions of 1997 debentures. At June 30, 1999, $38,060,000 of 7.75% convertible subordinated debentures (the "1995 debentures"), due on January 1, 2001, remain outstanding. The 1995 debentures are convertible at the option of the holder into the common stock of NHI at a conversion price of $31.625, subject to adjustment. During the six months ended June 30, 1999, $10,000 of the 1995 debentures have been converted into 316 shares of common stock. NHI has reserved 1,203,478 shares of common stock for conversions of 1995 debentures. At June 30, 1999, $3,735,000 of 7% convertible subordinated debentures due on January 1, 2006, remain outstanding related to "1995 debt service debentures" issued to mortgagees or lessees to satisfy debt service escrow requirements. The debentures are convertible at the option of the holder into common stock of the Company at a conversion price of 110% of the market price on the date of issuance of the debentures, subject to adjustment. During the six months ended June 30, 1999, $1,800,000 of the debentures were redeemed and none of the debentures were converted into common stock. NHI has reserved 102,747 shares of common stock for conversion of 1995 debt service debentures. At June 30, 1999, $205,000 of the 10% senior convertible subordinated debentures (the "senior debentures"), due 2006 remain outstanding. The senior debentures are convertible into the common stock of the Company at $20 per share. During the six months ended June 30, 1999, none of the senior debentures were converted. The Company has reserved 10,250 shares of common stock for conversion of the senior debentures. 10 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (Unaudited) Note 6. CUMULATIVE CONVERTIBLE PREFERRED STOCK: In February and March 1994, NHI issued $109,558,000 of 8.5% Cumulative Convertible Preferred Stock ("Preferred Stock") with a liquidation preference of $25 per share. Dividends at an annual rate of $2.125 are cumulative from the date of issuance and are paid quarterly. At June 30, 1999, $19,217,350 of the preferred stock remains outstanding. The Preferred Stock is convertible into NHI common stock at the option of the holder at any time at a conversion price of $27.625 per share of common stock, which is equivalent to a conversion rate of 0.905 per share of common stock for each share of Preferred Stock, subject to adjustment in certain circumstances. The Preferred Stock is redeemable by NHI for common stock only if the trading price of the Common Stock on the New York Stock Exchange (NYSE) exceeds $27.625 per share for 20 trading days within a period of 30 trading days prior to the exercise. NHI has reserved 695,651 shares of common stock for Preferred Stock conversions. The Preferred Stock is listed on the NYSE under the symbol "NHIPr." Note 7. NEW ACCOUNTING PRONOUNCEMENT: In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133, as amended, is effective for fiscal quarters beginning after June 15, 2000. The impact of the adoption of SFAS 133 is not expected to have a material impact on NHI's results of operations or financial position. Note 8. FORECLOSURE ON MORTGAGES RECEIVABLE In 1993, NHI funded a mortgage loan for Stockbridge Investment Partners, Inc. and its subsidiary York Hannover Nursing Centers, Inc. in the original principal amount of $29,500,000. Collateral for the loan includes first mortgages on six long-term healthcare centers located in the state of Florida, the personal guarantee of certain of the owners, certain accounts receivable balances above another creditor's $2,000,000 loan, and the corporate guarantee of NHC for up to $5,000,000 of principal and interest. After demand, on June 30, NHC collateralized its guarantee with marketable securities having a then fair market value of approximately $4.8 million. 11 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (Unaudited) On March 22, 1999 and April 1, 1999, NHI declared the borrowers in default under the terms of the loan agreements. The events of default included the violation of the financial covenants contained in the loan agreement and the failure to make timely payments of principal and interest. After expiration of the applicable grace period, NHI filed a foreclosure action against the borrowers, and also joined with two other creditors to place the borrowers in involuntary bankruptcy. The debtors converted this into a voluntary bankruptcy on June 10, 1999, and the court, after a July, 1999, hearing appointed a trustee for the debtor. The balance due on the loan (after the application of certain debt service reserves) is approximately $25,771,000. NHI is currently evaluating the healthcare center portion of the collateral given the recent changes in reimbursement by Medicare and other circumstances affecting the centers. However, NHI does believe that all of the combined collateral (including the personal and corporate guarantees as collateralized) will be sufficient to recover its loan balance and accrued interest. In 1996, NHI funded mortgage loans for Heartland Healthcare Corporation in the original principal amount of $25,805,500. In 1997, NHI funded mortgage loans for Buckley Nursing Home, Inc. and Greenfield Associates Real Estate Trust in the original principal amount of $10,000,000, and to OHI Realty Limited Partnership I and OHI Corporation d/b/a/ Oasis Healthcare in the original principal amount of $8,300,000. Phoenix Healthcare Corp. (formerly Iatros Health Network) and its subsidiary, OHI Corporation, which does business as Oasis Healthcare, is the manager and guarantor of all facilities securing these loans. Collateral for the loans include first mortgages on seven long-term healthcare facilities and one retirement center located in the states of Massachusetts and New Hampshire, the corporate guarantee of Phoenix Healthcare Corp., and certain accounts receivable. In May 1999, NHI declared the borrowers in default under the terms of the loan agreements. The events of default include the violation of the financial covenants contained in the loan agreement and the failure to make timely payments of principal and interest. The aggregate balance due on these loans is approximately $44,100,000. NHI is currently evaluating the healthcare center portion of the collateral given the changes in reimbursement by Medicare and other circumstances affecting the centers. Effective August 10, 1999, NHI's subsidiary designee was deeded or otherwise transferred all of the various debtor's rights in the collateral. New Hampshire has licensed NHI's subsidiary as the provider effective August 11, 1999, and Massachusetts' approval should occur shortly. At this time, NHI is not certain that all of the combined collateral will be sufficient to recover its entire loan balance or that it will find a long-term operator which can purchase, lease, or otherwise operate the facilities at the debt service levels paid by the prior owner. 12 NATIONAL HEALTH INVESTORS, INC. June 30, 1999 (Unaudited) Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations Overview National Health Investors, Inc. ("NHI" or the "Company") is a real estate investment trust which invests primarily in income producing health care properties with emphasis on the long-term care sector. As of June 30, 1999, NHI had interests in net real estate owned, and investments in mortgages, REMICs, preferred stock and marketable securities resulting in total invested assets of $786.7 million. NHI's strategy is to invest in health care real estate which generates current income which will be distributed to stockholders. NHI intends to implement this strategy by making mortgage loans and acquiring properties to lease to operators on a nationwide basis with an emphasis on primarily the long-term health care industry. As of June 30, 1999, the Company was diversified with investments in 203 health care facilities located in 26 states consisting of 149 long-term care facilities, two acute care hospitals, eight medical office buildings, 21 assisted living facilities, six retirement centers and 17 residential projects for the developmentally disabled. These investments consisted of approximately $397.7 million aggregate principal amount of loans to 33 borrowers, $254.3 million of purchase leaseback transactions with seven lessees and $37.2 million invested in REMIC pass through certificates backed by first mortgage loans to 14 operators. Of these 203 facilities, 43 are leased to National HealthCare Corporation ("NHC") and nine additional facilities are managed by NHC. NHC is the Company's investment advisor. Consistent with its strategy of diversification, the Company has reduced the portion of its portfolio operated or managed by NHC from 100.0% of total invested assets on October 17, 1991 to 19.8% of total invested assets on June 30, 1999. At June 30, 1999, 61.0% of the total invested assets of the health care facilities were operated by public operators, 23.0% by regional operators, and 16.0% by small operators. Liquidity and Capital Resources Sources and Uses of Funds NHI has generated net cash from operating activities during the first six months of 1999 totaling $36.5 million compared to $43.0 million in the prior period. The primary reason for this year to year decline was a reduction in net income and an increase in interest and rent receivable. Net cash from operating activities generally includes net income plus non-cash expenses, such as depreciation and amortization and provision for loan losses, and working capital changes. 13 NATIONAL HEALTH INVESTORS, INC. June 30, 1999 (Unaudited) Cash flows from investing activities during the first six months of 1999 included collection on mortgage notes receivable of $11.9 million compared to $2.2 million for the prior period, along with prepayment of $63.3 million of mortgage notes receivable in the prior period. Cash flows used in investing activities during the first six months of 1999 included investment in mortgage notes receivable of $17.8 million, real estate properties of $14.1 million, and marketable securities of $33.4 million. Cash flows used in investing activities of the prior period included investment in mortgage notes receivable of $43.9 million and real estate properties of $4.3 million, and marketable securities of $21.6 million. Cash flows from financing activities for the first six months of 1999 included $39.5 million from credit facility proceeds, compared to proceeds from long term debt for the prior period of $.2 million. Cash flows used in financing activities for the first six months of 1999 included principal payments on long-term debt of $2.0 million and dividends paid to shareholders of $36.9 million. This compares to principal payments on long term debt of $1.9 million and dividends paid to shareholders of $37.9 million in the prior period. NHI expects to maintain the current quarterly dividend of 74 cents per common share in 1999, assuming continued success in the Company's investment program. The amount available to be drawn on NHI's $100 million revolving line of credit was $2.0 million at June 30, 1999. NHI's nonconvertible debt as a percentage of total capitalization is 31.0% at June 30, 1999. Commitments At June 30, 1999, the Company was committed, subject to due diligence and financial performance goals, to fund approximately $15.3 million in health care real estate projects, of which approximately $12.0 million is expected to be funded within the next 12 months. The commitments include mortgage loans or purchase leaseback agreements for five long-term health care centers, one medical office building, and three assisted living facilities all at rates ranging from 9% to 11.5%. Financing for current commitments and future commitments to others may be provided by cash balances, by borrowings under the Company's bank credit facilities, new lines of credit, private placements or public offerings of debt or equity, the assumption of secured or unsecured indebtedness, or by the sale of all or a portion of certain currently held investments. 14 NATIONAL HEALTH INVESTORS, INC. June 30, 1999 (Unaudited) The Company believes it has sufficient liquidity and financing capability to finance future investments as well as to repay borrowings at or prior to their maturity. Results of Operations Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 Net income for the three months ended June 30, 1999 is $16.0 million versus $17.9 million for the same period in 1998, a decrease of 10.7%. Diluted earnings per common share decreased 4 cents or 5.9%, to $.64 in the 1999 period from $.68 in the 1998 period. Earnings for the prior year three month ended June 30, 1998 included $1.9 million or $.08 per share basic or $.07 per share diluted of nonrecurring net income. This nonrecurring income is primarily from the receipt of commitment fees and prepayment penalties from early loan repayments in the three months ended June 30, 1998. Total revenues for the three months ended June 30, 1999 increased $1.6 million to $27.5 million from $25.9 million for the three months ended June 30, 1998. Revenues from mortgage interest income decreased $2.7 million, or 19.6%, when compared to the same period in 1998. Revenues from rental income increased $1.0 million, or 9.5% in 1999 as compared to the same period in 1998. Facility operating revenue was $2.1 million in 1999 compared to $0.0 million in 1998. Revenues from investment interest, dividends and other income increased $1.2 million or 78.6% compared to the 1998 period. The decrease in mortgage interest income is due to a decline in the average amount of mortgage investments outstanding. Furthermore, mortgage interest income included no prepayment penalties and unamortized commitment fees applicable to early loan repayments in the three months ended June 30, 1999 as compared to $1.9 million in the 1998 period. The increase in rental income resulted primarily from the increase in investments in real estate properties of $50.6 million during the last 12 months. The increase in investment interest and other income is due to the investment in September, 1998 of $38.1 million in the preferred stock of LTC Properties, Inc. and in $41.8 million in marketable securities during the last 12 months. The increase in facility operating revenue is due to the purchase, in lieu of foreclosure, of four long-term health care centers previously owned by All Seasons Living Centers on October 16, 1998. Total expenses for the 1999 three month period increased $3.6 million or 45.4% to $11.6 million from $8.0 million for the 1998 three month period. Interest expense increased $1.5 million or 31.3% in the 1999 three month period as compared to the 1998 period. Depreciation of real estate increased $.7 million or 29.8%. Facility operating expense increased to $1.6 million in 1999 compared to $0.0 million in 1998. General and administrative costs decreased 7.8%. 15 NATIONAL HEALTH INVESTORS, INC. June 30, 1999 (Unaudited) Interest expense increased due to increased borrowing on credit facilities compared to the quarter a year ago. Depreciation increased as a result of the Company placing newly constructed assets in service and property acquisitions. Facility operating expense increased due to the purchase, in lieu of foreclosure, of four long-term health care centers previously owned by All Seasons Living Centers on October 16, 1998. The 1998 repurchase of 1,122,000 shares of common stock for $31.3 million resulted in a reduction of weighted average basic and diluted common shares outstanding in the three months ended June 30, 1999 of 1,122,000. The repurchase resulted in an increase in the 1999 period net income per share of 3 cents basic and 2 cents diluted. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Net income for the six months ended June 30, 1999 is $32.2 million versus $35.7 million for the same period in 1998, a decrease of 9.9%. Diluted earnings per common share decreased 9 cents or 6.6%, to $1.28 in the 1999 period from $1.37 in the 1998 period. Earnings for the prior year six months ended June 30, 1998 included $3.8 million or $.15 per share basic or $.13 per share diluted of nonrecurring net income. This nonrecurring income is primarily from the receipt of commitment fees and prepayment penalties from early loan repayments in the six months ended June 30, 1998. Total revenues for the six months ended June 30, 1999 increased $5.6 million to $57.5 million from $51.9 million for the six months ended June 30, 1998, an increase of 10.7%. Revenues from mortgage interest income decreased $4.5 million, or 16.2%, when compared to the same period in 1998. Revenues from rental income increased $1.7 million, or 8.1% in 1999 as compared to the same period in 1998. Facility operating revenue was $6.3 million in 1999 compared to $0.0 million in 1998. Revenues from investment interest, dividends and other income increased $2.1 million or 71.8% compared to the 1998 period. The decrease in mortgage interest income is due to a decline in the average amount of mortgage investments outstanding. Furthermore, mortgage interest income included no prepayment penalties and unamortized commitment fees applicable to early loan repayments in the six months ended June 30, 1999 as compared to $3.8 million in the 1998 period. The increase in rental income resulted primarily from the increase in investments in real estate properties of $50.6 million during the last 12 months. The increase in investment interest and other income is due to the investment in September, 1998 of $38.1 million in the preferred stock of LTC Properties, Inc. and $41.8 million in marketable securities during the last 12 months. The increase in facility operating revenue is due to the purchase, in lieu of foreclosure, of four long-term health care centers previously owned by All Seasons Living Centers on October 16, 1998. 16 NATIONAL HEALTH INVESTORS, INC. June 30, 1999 (Unaudited) Total expenses for the 1999 six month period increased $9.1 million or 56.1% to $25.3 million from $16.2 million for the 1998 six month period. Interest expense increased $2.7 million or 28.5% in the 1999 six month period as compared to the 1998 period. Depreciation of real estate increased $1.0 million or 22.3%. Facility operating expense increased to $5.6 million in 1999 compared to $0.0 million in 1998. General and administrative costs decreased 10.7%. Interest expense increased due to increased borrowings on credit facilities compared to a year ago. Depreciation increased as a result of the Company placing newly constructed assets in service and property acquisitions. Facility operating expense increased due to the purchase, in lieu of foreclosure, of four long-term health care centers previously owned by All Seasons Living Centers on October 16, 1998. The 1998 repurchase of 1,122,000 shares of common stock for $31.3 million resulted in a reduction of weighted average basic and diluted common shares outstanding in the six months ended June 30, 1999 of 1,122,000. The repurchase resulted in an increase in the 1999 period net income per share of 6 cents basic and 5 cents diluted. Future Growth If capital is available, the Company expects to make new investments in health care facilities or marketable securities that would increase interest and rental revenues as well as interest and depreciation expense. Increases in revenues are expected to more than offset increases in associated expenses. Impact of Inflation Inflation may affect the Company in the future by changing the underlying value of the Company's real estate or by impacting the Company's cost of financing its operations. Revenues of the Company are primarily from long-term investments. Certain of the Company's leases require increases in rental income based upon increases in the revenues of the tenants. The Company has negotiated similar provisions in many of its mortgage notes receivable. 17 NATIONAL HEALTH INVESTORS, INC. June 30, 1999 (Unaudited) Health Care Legislation Rental income revenues are believed by management to be secure. Excluding the possibility of mortgage prepayments or defaults as described in Note 8 of the financial statements, interest income revenues are also believed by management to be secure. However, a significant portion of NHI's rental income and interest income are derived from lessees and mortgagees that participate in the Medicare and Medicaid programs. During 1997, the federal government enacted the Balanced Budget Act of 1997 (BBA) which contains numerous Medicare Nd Medicaid cost-saving measures. As part of these cost savings measures, BBA requires that nursing homes transition to a prospective payment system over a three year transition period. The BBA also contains certain measures which have or will lead to reductions in Medicare payments for home health agency services and therapy services. NHI is unable to predict the ultimate effect the enactment of the BBA will have on the mortgagees' ability to make their lease and debt service payments to NHI. New Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either as asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133, as amended, is effective for fiscal quarters beginning after June 15, 2000. The impact of the adoption of SFAS 133 is not expected to have a material impact on NHI's results of operations or financial position. Year 2000 Compliance and Related Risks The Year 2000 issue generally relates to computer programs that were written using two digits rather than four to define the applicable year. In those programs, the year 2000 may be incorrectly identified as the year 1900, which can result in a system failure or miscalculations causing a disruption of operations, including a temporary inability to process transactions, prepare financial statements or engage in other normal business activities. The following discussion identifies the actions taken by NHI to assess and address its Year 2000 issues. 18 NATIONAL HEALTH INVESTORS, INC. June 30, 1999 (Unaudited) State of Readiness-- NHI has developed a plan to address its Year 2000 issues, and is utilizing its internal resources to assess, remediate and test its systems. As a result of its advisory agreement with NHC, NHI is reliant upon NHC for much of its information technology systems and embedded technology. NHC is currently performing an evaluation of its information technology and embedded technology that are utilized in the operations of NHI. The Year 2000 readiness plan developed by NHI and NHC includes an inventory and review of all core application systems, networks, desktop systems, infrastructure and critical supply chains. NHI's Year 2000 readiness plan is focused on addressing Year 2000 readiness in the following four categories: (1) mainframe computer operations, critical applications and related networks, (2) personal computer hardware and software, (3) third party mortgagees and lessees, and (4) other third party vendors that provide such services as telecommunications and electrical power. For each of the above categories, NHI, through its advisor (NHC), will perform or has performed the phases of assessment, remediation and testing of the applicable hardware, software or equipment, as applicable. The assessment phase has been completed for category 1. The remediation phase is underway and modifications of noncompliant application programs have begun. NHI has historically developed the majority of its application programs internally. All internally developed systems have been assessed and inventoried and plans have been made to modify or replace them, if necessary, in order to make them Year 2000 compliant. Purchased applications are either being modified, replaced or upgraded. Most critical applications, whether internally developed or purchased externally, have been tested and are already Year 2000 compliant. All server hardware, dumb terminals and printers have also been assessed, repaired as necessary and tested and are now Year 2000 compliant. It is expected that the remediation and testing phases related to category 1 will be completed by October 1, 1999. NHI is currently in the assessment phase for categories 2, 3 and 4. For personal computer software vendors, NHI is aware of the packages that will not be Year 2000 compliant and is currently in the process of assessing the types of packages utilized by each personal computer. This assessment is expected to be completed by October 1, 1999 with remediation and testing to be completed by December 31, 1999. NHI has also requested all mortgages, lessees and other third party vendors (financial institutions, electrical providers, etc.) to disclose their current Year 2000 readiness and their plan for achieving Year 2000 readiness. Responses have been received from most vendors and third parties. For those vendors and third parties that have not yet responded, NHI is in the process of sending out additional requests. Although most third party vendors have indicated that they are currently Year 2000 compliant or expect to be compliant prior to January 1, 2000, there can be no assurance that such third parties will achieve Year 2000 compliance by January 1, 2000. 19 NATIONAL HEALTH INVESTORS, INC. June 30, 1999 (Unaudited) NHI's largest lessee, NHC, is currently in the process of evaluating its Year 2000 issues. NHC has developed a detailed plan to assess, remediate and test its Year 2000 compliance. NHC has formed an internal task force and is utilizing its internal resources to assess, remediate and test its systems. NHC's Year 2000 readiness plan is focused on addressing Year 2000 readiness in the following five categories: (1) mainframe computer operations, critical application and related networks, (2) personal computer hardware and software, (3) other internal equipment such as infusion pumps, phone systems, monitoring devices and smoke/fire alarms which rely on embedded technology (microchips) or telecommunications, (4) third party payors, and (5) other third party vendors utilized by NHC's healthcare centers such as financial institutions, electrical providers, and food services suppliers. NHC has completed the assessment phase related to its mainframe computer operations and related networks. Although the majority of NHC's information technology applications are already Year 2000 compliant, NHC is currently modifying or replacing applications and hardware as necessary. NHC is expected to complete the remediation and testing of any noncompliant applications and hardware by October 1, 1999. NHC is currently in the assessment phase of its plan for personal computer applications and hardware, internal equipment utilizing embedded technology, third party payors and other third party vendors. NHC is expected to complete the assessment phase for its personal computer applications and hardware and for its internal equipment by October 1, 1999 and to complete remediation and testing by December 31, 1999. It is expected that the assessments of third party payors and third party vendors will be an ongoing process that will continue through December 31, 1999. The majority of NHI's mortgagees and lessees participate in the Medicare and Medicaid programs. The lessees and mortgagees are reimbursed under these programs through fiscal intermediaries. The Health Care Financing Administration ("HCFA"), the government agency that administers the Medicare program, had previously publicly stated that it would be Year 2000 compliant by December 31, 1998. HCFA announced that it required all fiscal intermediaries to be Year 2000 compliant by December 31, 1998 and that it expected state Medicaid agencies to be Year 2000 compliant by March 31, 1999. While HCFA has made no public announcement as to whether the fiscal intermediaries and state Medicaid agencies have met this schedule, recent reports by the General Accounting Office report that the various states may not currently be in compliance. With respect to itself, HCFA recently issued a Provider Correspondence Letter dated January 12, 1999 indicating that they have not met their schedule. This letter states that HCFA's systems will function on January 1, 2000 and will be able to process "acceptable" claims. The mortgages and lessees have little or no control over the Year 2000 compliance of governmental payors and fiscal intermediaries and it is expected that NHI's assessment of the third party payors will be an ongoing process throughout 1999. NHI will continue to request and seek information through all sources available related to the Year 2000 readiness of the mortgages, lessees, governmental payors and fiscal intermediaries. 20 NATIONAL HEALTH INVESTORS, INC. June 30, 1999 (Unaudited) Year 2000 Costs-- As a result of its advisory agreement with NHC, costs related to NHI's Year 2000 readiness plan have not been material and are not expected to be material in future periods. No additional advisory fees have been charged to NHI related to the assessment, remediation or testing of NHI's Year 2000 compliance. Year 2000 Risks-- The failure of NHI or third parties to be fully Year 2000 compliant for essential systems and equipment by January 1, 2000 could result in interruptions of normal business operations. Based on all available information as of June 30, 1999, management's estimate of NHI's most reasonably likely worst case scenario includes: (i) delayed collection of rent, mortgage principal payments and interest payments, (ii) the disruption of capital flows from banks or other lenders resulting in liquidity stress, and (iii) the disruption of important services upon which NHI depends, such as telecommunications and electrical power. Each of these events could have a material adverse impact on NHI's business, results of operations and financial condition. Contingency Plans-- Contingency plans for NHI's Year 2000 issues continue to be developed and include, but are not limited to, the identification of alternate suppliers, alternate technologies and alternate manual systems and processes. NHI's contingency plans are expected to be completed by October 1, 1999. NHI's Year 2000 efforts are ongoing and its overall plan and cost estimations will continue to evolve as new information becomes available. The costs of NHI's Year 2000 compliance plan and the date on which NHI expects to complete it are based on current estimates, which reflect numerous assumptions about future events, including the continued availability of certain resources, the timing and effectiveness of third party remediation plans and other factors. NHI can give no assurance that these estimates will be achieved, and actual results could differ materially from NHI's plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct relevant computer source codes and embedded technology, the results of internal assessments, remediation and testing and the timeliness and effectiveness of remediation efforts of third parties. In addition, NHI's analysis of its Year 2000 issues is based in part on information from third parties. There can be no assurance that such information is accurate or complete. 21 NATIONAL HEALTH INVESTORS, INC. June 30, 1999 (Unaudited) Item 3. Quantitative and Qualitative Information About Market Risk INTEREST RATE RISK The Company's cash and cash equivalents consist of highly liquid investments with a maturity of less than three months. All of the Company's mortgage and other notes receivable bear interest at fixed interest rates. The Company's investments in preferred stock and corporate bonds also bear interest at fixed rates. The underlying mortgages included in the Company's investments in real estate mortgage investment conduits (REMIC's) also bear interest at fixed rates. As a result of the short-term nature of the Company's cash instruments and because the interest rates on the Company's investments in notes receivable, preferred stock, corporate bonds and REMIC's are fixed, a hypothetical 10% change in interest rates would have no impact on the Company's future earnings and cash flows related to these instruments. A hypothetical 10% change in interest rates would also have an immaterial impact on the fair values of these instruments. As of June 30, 1999, $113,987,000 of the Company's long-term debt bears interest at fixed interest rates. All of the Company's convertible subordinated debentures bear interest at fixed rates. Because the interest rates on these instruments are fixed, a hypothetical 10% change in interest rates would have no impact on the Company's future earnings and cash flows related to these instruments. A hypothetical 10% change in interest rates would also have an immaterial impact on the fair values of these instruments. The remaining $36,255,000 of the Company's long-term debt and $98,000,000 line of credit bear interest at variable rates. However, in order to mitigate the impact of fluctuations in interest rates on its variable rate debt, the Company has entered into interest rate swap agreements whereby the Company has exchanged certain variable interest rates on a $50,000,000 notional principal amount for a fixed rate of interest. Therefore, after including the mitigating impact of the interest rate swaps, a hypothetical 10% change in interest rates would have an immaterial impact on the Company's future earnings and cash flows related to these instruments. A hypothetical 10% change in interest rates would also have an immaterial impact on the fair values of these instruments. The Company's use of derivative instruments is limited to the interest rate swaps discussed above. The Company does use derivative instruments for trading purposes and the use of such instruments is subject to strict approvals by the Company's senior officers. The Company's exposure related to such derivative instruments is not material to the Company's financial position, results of operations or cash flows. 22 NATIONAL HEALTH INVESTORS, INC. June 30, 1999 (Unaudited) EQUITY PRICE RISK The Company's investments in marketable securities include available for sale securities and held to maturity securities. Unrealized gains and losses on available for sale securities are recorded in stockholders' equity in accordance with Statement of Financial Accounting Standards No. 115. The investments in marketable securities classified as available for sale are recorded at their fair market value based on quoted market prices. Thus, there is exposure to equity price risk, which is the potential change in fair value due to a change in quoted market prices. Hypothetically, a 10% change in quoted market prices would result in a related 10% change in the fair value of the Company's investments in marketable securities classified as available for sale. PART II. OTHER INFORMATION Item 1. Legal Proceedings. None, other than as disclosed in Note 8. Item 2. Changes in Securities. Not applicable Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) List of exhibits - none required (b) Reports on Form 8-K - none required SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL HEALTH INVESTORS, INC. (Registrant) Date August 13, 1999 /s/ Richard F. LaRoche, Jr. Richard F. LaRoche, Jr. Secretary Date August 13, 1999 /s/ Donald K. Daniel Donald K. Daniel Principal Accounting Officer 23 EX-27 2
5 6-MOS DEC-31-1999 JUN-30-1999 3,250,000 59,303,000 442,729,000 0 0 0 305,585,000 (51,257,000) 801,106,000 0 0 0 19,217,000 244,000 398,942,000 801,106,000 0 57,491,000 0 0 1,751,000 0 12,219,000 0 0 0 0 0 0 32,196,000 1.29 1.28
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