NHI

Business Context and Reporting Period

Company: National Health Investors, Inc. (NHI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2004
Business Overview: NHI is a Real Estate Investment Trust (REIT) investing primarily in income-producing health care properties, with a focus on long-term care facilities. As of June 30, 2004, the company held interests in 162 health care facilities across 18 states, including 117 long-term care facilities, 4 medical office buildings, and 17 assisted living facilities. The portfolio consists of owned real estate, mortgage loans, and investments in preferred stock and marketable securities.

Key Financial Metrics

Note: Total Debt calculated as Unsecured public notes ($100,000) + Debt ($56,608) + Convertible subordinated debentures ($1,185).

Material Changes vs. Prior Period

• Net Income: Increased 10.7% to $25.4 million for the six months ended June 30, 2004, compared to $22.9 million in the prior year period. This was driven by higher facility operating revenues and significant non-operating gains.
• Revenue Composition: Total revenues decreased slightly (0.3%) to $75.3 million. Mortgage interest income fell 5.7% due to payoffs and the repurchase of a note from National Health Realty, Inc. Rental income decreased 7.2% following lease terminations with Marriott International, partially offset by new lessees. Facility operating revenue increased 5.7% due to improved census and government payment rates at foreclosure properties.
• Expenses: Total expenses decreased 1.7% to $55.7 million. Interest expense dropped 13.4% due to the redemption of $39.9 million in convertible debentures in early 2003 and subsequent debt payments. Facility operating expenses rose 5.6% correlating with higher occupancy at owned facilities.
• Liquidity: Cash and cash equivalents increased significantly from $93.7 million at year-end 2003 to $124.8 million at June 30, 2004. The company reported strong liquidity with cash and marketable securities totaling 92.2% of total debt outstanding.
• Capital Structure: On April 30, 2004, NHI called and converted 100% of its 8.5% cumulative convertible preferred stock ($18.7 million) into common stock, eliminating preferred dividend obligations.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management anticipates making new investments beginning in 2004 while maintaining a low debt-to-equity ratio. The company expects to continue monitoring and improving existing properties. The debt-to-capitalization ratio of 27.6% is the lowest in the company's 12-year history.

Unusual Items and Discontinued Operations

• Discontinued Operations: Included a net gain of $805,000 for the six months ended June 30, 2004, primarily from the sale of a nursing facility in Dawson Springs, Kentucky ($1.6 million gain) and a medical office building, offset by a loss on the sale of the Sehome center in Washington State.
• REMIC Activity: The 1993 REMIC was paid off in June 2004 with collections of $13.1 million, including a $2.2 million recovery of a prior writedown. The 1995 REMIC was written down by $3.3 million as it is not expected to yield further payments.
• Security Gains: Non-operating income included a $687,000 gain on the call of Assisted Living Concepts debentures and a $668,000 gain on the call of Eldertrust common stock.

Risks and Contingencies

• Fire Contingency: A Nashville, Tennessee nursing home leased to NHC was damaged by fire in September 2003. NHI is named as a defendant in 32 lawsuits. While 11 cases were settled at no cost, discovery is ongoing. NHI believes it is covered by insurance and indemnification clauses but has not accrued a liability as the potential cost is indeterminable.
• Impaired Assets: Approximately $151.8 million of the $281.7 million net investment in real estate is identified as impaired. Approximately $56.3 million of mortgage receivables are non-performing or involved in borrower bankruptcies. Management believes carrying amounts are realizable based on collateral value.
• REIT Status: The company relies on its REIT status to avoid federal corporate income tax. Failure to qualify would have a material adverse impact on financial position.

Investor Verification Checklist

• Asset Realizability: Verify the valuation assumptions for the $151.8 million in impaired real estate and $56.3 million in non-performing loans, particularly given the history of borrower bankruptcies.
• Fire Litigation Exposure: Monitor the status of the 32 lawsuits related to the Nashville fire and confirm that insurance coverage and NHC indemnification remain sufficient to cover potential liabilities.
• REMIC Write-downs: Confirm the finality of the $3.3 million write-down on the 1995 REMIC and the full collection of the 1993 REMIC.
• Dividend Sustainability: Assess the ability to maintain the $0.425 per share quarterly dividend given the reduction in rental income from Marriott lease terminations and the reliance on facility operating revenues.
• Debt Maturities: Review the schedule for the $100 million unsecured public notes maturing in 2007 and the company's refinancing strategy.