NHI

Business Context and Reporting Period

Company: National Health Investors, Inc. (NHI)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: NHI is a Real Estate Investment Trust (REIT) investing primarily in income-producing health care properties, with a focus on the long-term care industry. As of December 31, 2002, the company held total invested assets of approximately $596 million across 186 facilities in 23 states. The portfolio includes long-term care facilities, acute care hospitals, medical office buildings, assisted living facilities, and retirement centers. Due to market conditions and industry distress, NHI suspended material new investments for 2003 to focus on monitoring and improving its existing portfolio, including 13 facilities it operates directly following foreclosure.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Reversal: The company returned to profitability in 2002 with $30.8 million in net income, compared to a net loss of $0.1 million in 2001. This was driven by a 23.4% increase in total revenues and a significant reduction in impairment charges.
• Revenue Growth: Total revenues increased by $32.6 million. Facility operating revenue rose 37.0% to $87.0 million, primarily due to the assumption of operational control of nine long-term care centers in Kansas and Missouri following foreclosure. Mortgage interest income increased 17.0% due to the recognition of previously deferred interest on REMIC investments.
• Reduced Impairments: Loan, realty, and security losses decreased by 35.2% to $23.1 million in 2002, down from $35.6 million in 2001. This reduction reflects fewer new non-performing loan write-downs compared to the prior year.
• Discontinued Operations: NHI sold two medical office buildings in 2002, recognizing a net gain of $5.1 million. These operations were reclassified as discontinued operations.
• Debt Reduction: The company reduced its debt load by paying off credit facilities and redeeming convertible debentures, resulting in a decrease in interest expense of $3.1 million.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management stated it is unlikely that material new investments will occur in 2003 due to unstable market conditions and a lack of reasonably priced capital. The focus remains on monitoring existing investments and managing foreclosure properties.
• Industry Risks: The long-term care industry faces significant headwinds from reduced Medicare and Medicaid reimbursement rates (specifically the expiration of temporary increases from the Balanced Budget Refinement Act and Benefits Improvement and Protection Act effective October 1, 2002). This is expected to materially adversely affect the cash flows of borrowers and lessees.
• Non-Performing Loans: Approximately $79.1 million of the $201.2 million in mortgage and other notes receivable were identified as non-performing or involved in borrower bankruptcies. Significant write-downs occurred in 2002 related to borrowers such as Autumn Hills, American Medical Associates, and Allgood HealthCare.
• Foreclosure Properties: NHI operates 13 long-term care facilities acquired through foreclosure. While these properties generate operating revenue, they carry risks related to occupancy and reimbursement rates.
• REMIC Investments: The company holds investments in two REMICs (1993 and 1995). While some repayment obligations were resolved in 2002, a remaining obligation of $1.6 million exists for the 1995 REMIC.
• Accounting Change: NHI dismissed its independent auditor, Arthur Andersen LLP, in August 2002 and appointed Ernst & Young LLP. No disagreements were reported regarding accounting principles.

Key Facts for Investor Verification

• Concentration Risk: Verify the financial stability of National HealthCare Corporation (NHC), which operates or manages a significant portion of NHI's portfolio (38 facilities leased to NHC) and serves as the investment advisor.
• Reimbursement Sensitivity: Assess the impact of the October 2002 expiration of Medicare reimbursement increases on the cash flows of NHI's borrowers and lessees, particularly those in the long-term care sector.
• Non-Performing Asset Quality: Review the specific details of the $79.1 million in non-performing loans and the $112.3 million in impaired real estate properties to understand the likelihood of further write-downs.
• Liquidity Position: Confirm the company's ability to service its debt obligations ($161.8 million long-term debt) without access to new equity or debt markets, given the stated inability to raise capital.
• Foreclosure Operations: Evaluate the operating performance of the 13 facilities NHI manages directly, as these are now a primary source of facility operating revenue.