Attached files

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EX-32 - CERTIFICATION OF CEO AND PFO AND PAO - NATIONAL HEALTH INVESTORS INCnhi-12312012x10kex32.htm
EX-3.3 - RESTATED BYLAWS AS AMENDED NOVEMBER 5, 2012 - NATIONAL HEALTH INVESTORS INCnhi-12312012x10kex33.htm
EX-13 - FINANCIAL STATEMENT SCHEDULES - NATIONAL HEALTH INVESTORS INCnhi-12312012x10kex13.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - NATIONAL HEALTH INVESTORS INCnhi-12312012x10kex311.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER - NATIONAL HEALTH INVESTORS INCnhi-12312012x10kex312.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - NATIONAL HEALTH INVESTORS INCnhi-12312012x10kex231.htm
EX-10.22 - EXTENSION OF MASTER AGREEMENT TO LEASE DATED DECEMBER 28, 2012. - NATIONAL HEALTH INVESTORS INCnhi-12312012x10kex1022.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-K
(Mark One)
[ x ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended December 31, 2012
 
 
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _____________ to _____________

Commission File Number  001-10822
National Health Investors, Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
62-1470956
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
222 Robert Rose Drive, Murfreesboro, Tennessee
 
37129
(Address of principal executive offices)
 
(Zip Code)
(615) 890-9100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
 
Name of each exchange on which registered
Common stock, $.01 par value
 
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ x ] No [ ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ x ]

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ x ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [ x ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer          [ x ]
 
Accelerated filer                      [ ]
Non-accelerated filer            [ ]
 
Smaller reporting company     [ ]
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ x ]

The aggregate market value of shares of common stock held by non-affiliates on June 30, 2012 (based on the closing price of these shares on the New York Stock Exchange) was approximately $1,333,619,000. There were 27,862,217 shares of the registrant’s common stock outstanding as of February 14, 2013.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its 2013 annual meeting of stockholders are incorporated by reference into Part III, Items 10, 11, 12, 13, and 14 of this Form 10-K.



Table of Contents

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I.

Forward Looking Statements

References throughout this document to NHI or the Company include National Health Investors, Inc. and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s “Plain English” guidelines, this Annual Report on Form 10-K 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 consolidated subsidiaries and not any other person. Unless the context indicates otherwise, references herein to “the Company” include all of our consolidated subsidiaries.

This Annual Report on Form 10-K and other materials we have filed or may file with the Securities and Exchange Commission, as well as information included in oral statements made, or to be made, by our senior management contain 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 “may”, “will”, “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. Such risks and uncertainties include, among other things, the following risks described in more detail under the heading “Risk Factors” under Item 1A:

*
We depend on the operating success of our customers (facility operators) for collection of our revenues during this time of uncertain economic conditions in the U.S.;

*
We are exposed to the risk that our tenants and borrowers may become subject to bankruptcy or insolvency proceedings;

*
We are exposed to risks related to governmental regulations and payors, principally Medicare and Medicaid, and the effect that lower reimbursement rates will have on our tenants’ and borrowers’ business;

*
We are exposed to the risk that the cash flows of our tenants and borrowers will be adversely affected by increased liability claims and general and professional liability insurance costs;

*
We are exposed to risks related to environmental laws and the costs associated with the liability related to hazardous substances;

*
We are exposed to the risk that we may not be indemnified by our lessees and borrowers against future litigation;

*
We depend on the success of future acquisitions and investments;

*
We depend on the ability to reinvest cash in real estate investments in a timely manner and on acceptable terms;

*
We may need to incur more debt in the future, which may not be available on terms acceptable to the Company;

*
We are exposed to the risk that the illiquidity of real estate investments could impede our ability to respond to adverse changes in the performance of our properties;

*
We are exposed to risks associated with our investments in unconsolidated entities, including our lack of sole decision-making authority and our reliance on the financial condition of other interests;

*
We depend on revenues derived mainly from fixed rate investments in real estate assets, while our debt capital used to finance those investments is primarily at variable rates. This circumstance creates interest rate risk to the Company;

*
We are exposed to the risk that our assets may be subject to impairment charges;

*
We depend on the ability to continue to qualify as a real estate investment trust;

*
We have ownership limits in our charter with respect to our common stock and other classes of capital stock which may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or might otherwise be in the best interests of our stockholders;

3



*
We are subject to certain provisions of Maryland law and our charter and bylaws that could hinder, delay or prevent a change in control transaction, even if the transaction involves a premium price for our common stock or our stockholders believe such transaction to be otherwise in their best interests.

See the notes to the annual audited consolidated financial statements, and “Business” and “Risk Factors” under Item 1 and Item 1A herein for a discussion of various governmental regulations and other operating factors relating to the health care 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 we face. 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 part or all of your investment. Given these risks and uncertainties, we can give no assurance that these forward-looking statements will, in fact, occur and, therefore, caution investors not to place undue reliance on them.

ITEM 1. BUSINESS.

General

National Health Investors, Inc., a Maryland corporation incorporated in 1991, is a real estate investment trust ("REIT") which invests in income-producing health care properties primarily in the long-term care and senior housing industries. As of December 31, 2012, our portfolio consisted of real estate (excluding the corporate office and assets held for sale) and mortgage and other note investments with a carrying value totaling $618,926,000 and other investments in the preferred stock and marketable securities of other REITs with a carrying value of $51,016,000, resulting in total invested assets of $669,942,000. We are a self-managed REIT with our own management reporting directly to our Board of Directors. Our mission is to invest in health care real estate or in the operations thereof through independent third-party managers which generates current income that will be distributed to stockholders. We have pursued this mission by investing primarily in leased properties, mortgage loans and RIDEA transactions. These investments include assisted living facilities, senior living campuses, independent living, skilled nursing facilities, medical office buildings and hospitals, all of which are collectively referred to herein as "Health Care Facilities." We have historically funded these investments through three sources of capital: (1) current cash flow, (2) the sale of equity securities, and (3) debt offerings, including bank lines of credit, the issuance of convertible debt instruments, and the issuance of ordinary term debt.

At December 31, 2012, our continuing operations consisted of investments in real estate and mortgage notes receivable in 134 health care facilities located in 25 states consisting of 41 assisted living facilities, 6 senior living campuses, 3 independent living facilities, 78 skilled nursing facilities, 2 medical office buildings, 4 hospitals and other notes receivable. These investments consisted of approximately $534,676,000 of net real estate investments in 107 health care facilities with 19 lessees and $84,250,000 aggregate carrying value of mortgage and other notes receivable from 16 borrowers related to 27 health care facilities.

All of our investments in real estate and mortgage loans secured by real estate are located within the United States. We are managed as one reporting unit, rather than multiple reporting units, for internal reporting purposes and for internal decision making. Therefore, we have concluded that we operate as a single segment. Information about revenues from our tenants and borrowers, a measure of our income, and total assets for this segment can be found in Item 8 of this Form 10-K.

Types of Health Care Facilities

Assisted living facilities. As of December 31, 2012, our portfolio included 39 assisted living facilities (“ALF”) leased to operators and mortgage loans secured by 2 ALFs. ALFs are free-standing facilities that provide basic room and board functions for elderly residents. They may also provide assistance to elderly residents with activities of daily living such as bathing, grooming, memory care services and administering medication. On-site staff personnel are available to assist in minor medical needs on an as-needed basis. Operators of ALFs are typically paid from private sources without assistance from government programs.

Skilled nursing facilities. As of December 31, 2012, our portfolio included 55 skilled nursing facilities (“SNF”) leased to operators and mortgage loans secured by 23 SNFs. SNFs provide some combination of skilled and intermediate nursing and rehabilitative care, including speech, physical and occupational therapy. The operators of the SNFs receive payment from a combination of private pay sources and government programs such as Medicaid and Medicare. SNFs are required to obtain state licenses and are highly regulated at the federal, state and local level. Most SNFs must obtain a Certificate of Need (“CON”) from the state before opening or expanding such facilities. Some SNFs include assisted living beds.

Independent living facilities. As of December 31, 2012, our portfolio included 3 independent living facilities (“ILF”) leased to operators. ILFs offer specially designed residential units for the active and ambulatory elderly and provide various ancillary

4


services for their residents including restaurants, activity rooms and social areas. Services provided by ILF operators are generally paid from private sources without assistance from government programs. ILFs may be licensed and regulated in some states, but do not require the issuance of a CON as required for SNFs.

Senior living campuses. As of December 31, 2012, our portfolio included 5 senior living campuses ("SLC") leased to operators and a mortgage loan secured by 1 SLC. SLCs are either freestanding or multi-site campuses that include skilled nursing beds combined with an ILF and/or an ALF that provide basic room and board functions for elderly residents. They may also provide assistance to elderly residents with activities of daily living such as bathing, grooming and administering medication. On-site staff personnel are available to assist in minor medical needs on an as-needed basis. Operators of SLCs are typically paid from private sources and from government programs such as Medicare and Medicaid for skilled nursing residents.

Medical office buildings. As of December 31, 2012, our portfolio included 2 medical office buildings (“MOB”) leased to operators. MOBs are specifically configured office buildings whose tenants are primarily physicians and other medical practitioners. MOBs differ from conventional office buildings due to the special requirements of the tenants. Each of our MOBs is leased to one lessee, and is either physically attached to or located on an acute care hospital campus. The lessee then sub-leases individual office space to the physicians or other medical practitioners. The lessee is responsible to us for the lease obligations of the entire building, regardless of its ability to sub-lease the individual office space.

Hospitals. As of December 31, 2012, our portfolio included 3 hospitals (“HOSP”) leased to operators and a mortgage loan secured by 1 hospital. Hospitals provide a wide range of inpatient and outpatient services, including acute psychiatric and rehabilitation services, and are subject to extensive federal, state and local legislation and regulation. Hospitals undergo periodic inspections regarding standards of medical care, equipment and hygiene as a condition of licensure. Services provided by hospitals are generally paid for by a combination of private pay sources and government programs.

Nature of Investments

Our investments are typically structured as acquisitions of properties through purchase-leaseback transactions, acquisitions of properties from other real estate investors, as mortgage loans or, in operations, through structures allowed by the REIT Investment Diversification Empowerment Act of 2007 (“RIDEA”). We have also provided construction loans for facilities for which we were already committed to provide long-term financing or for which the operator agreed to enter into a lease with us upon completion of the construction. The annual lease rates on our leases and the annual interest rates on our mortgage and construction loans ranged between 7.5% and 10% during 2012. We normally charge a commitment fee of 1% based on the purchase price of the property or the total principal amount of a mortgage or construction loan. We believe our lease and loan terms are competitive within our peer group. Typical characteristics of these transactions are as follows:

Leases. Our leases generally have an initial leasehold term of 10 to 15 years with one or more 5-year renewal options. The leases are "triple net leases" under which the tenant is responsible for the payment of all taxes, utilities, insurance premium costs, repairs and other charges relating to the ownership and operation of the Health Care Facilities, including required levels of capital expenditure each year. The tenant is obligated at its expense to keep all improvements, fixtures and other components of the Health Care Facilities covered by "all risk" insurance in an amount equal to at least the full replacement cost thereof and to maintain specified minimal personal injury and property damage insurance. Our leases require the tenant to name us as an additional insured party on the tenant’s insurance policy. The leases also require the tenant to indemnify and hold us harmless from all claims resulting from the use and occupancy of each Health Care Facility by the tenant and related activities, and to indemnify us against all costs related to any release, discovery, clean-up and removal of hazardous substances or materials on, or other environmental responsibility with respect to each Health Care Facility.

Most of our existing leases contain annual escalators in rent payments. For financial statement purposes, rental income is recognized on a straight-line basis over the term of the lease. The acute care hospital and MOB's which we own and lease give the lessee an option to purchase the underlying property at the greater of i) our acquisition costs; ii) the then fair market value as established by independent appraisers or iii) the sum of the land costs, construction costs and any additional capital improvements made to the property by us. In addition, the acute care hospital and MOB leases contain a right of first refusal for the lessee if we receive an offer to buy the underlying leased property.

Some of the obligations under the leases are guaranteed by the parent corporation of the lessee, if any, or affiliates or individual principals of the lessee. In some leases, the third party operator will also guarantee some portion of the lease obligations. Some obligations are backed further by other collateral such as machinery, equipment, furnishings and other personal property.


5


We monitor our triple-net lessee tenant credit quality and identify any material changes in credit quality by performing the following activities:

Obtaining financial statements on a monthly, quarterly and/or annual basis to assess the operational trends of our tenants and the financial position and capability of those tenants
Calculating the operating cash flow for each of our tenants
Calculating the lease service coverage ratio and other ratios pertinent to our tenants
Obtaining property-level occupancy rates for our tenants
Verifying the payment of taxes by our tenants
Obtaining certificates of insurance for each tenant
Obtaining financial statements of our lessee guarantors on an annual basis
Conducting a periodic inspection of our properties to ascertain proper maintenance, repair and upkeep
Monitoring those tenants with indications of continuing and material deteriorating credit quality through discussions with our executive management and Board of Directors

RIDEA Transactions. Our arrangement with Bickford is structured to be compliant with the provisions of RIDEA which permits NHI to receive rent payments through a triple-net lease between a property company and an operating company and gives NHI the opportunity to capture additional value on the improving performance of the operating company through distributions to a Taxable REIT Subsidiary ("TRS"). Accordingly, the TRS holds our 85% equity interest in an unconsolidated operating company, which we do not control, and provides an organizational structure that will allow the TRS to engage in a broad range of activities and share in revenues that would otherwise be non-qualifying income under the REIT gross income tests.

Construction loans. From time to time, we also provide construction loans that by their terms convert to mortgage loans upon the completion of the construction of the facility. We may also obtain a purchase option to acquire the facility at a future date and lease the facility back to the operator. The terms of such construction loans are for a period which commences upon the closing of such loans and terminates upon the earlier of (a) the completion of the construction of the applicable facility or (b) a specific date. During the term of the construction loan, funds are usually advanced pursuant to draw requests made by the borrower in accordance with the terms and conditions of the loan. Interest is typically assessed on these loans at rates equivalent to the eventual mortgage rate upon conversion. In addition to the security of the lien against the property, we will generally require additional security and collateral in the form of either payment and performance completion bonds or completion guarantees by the borrower's parent, affiliates of the borrower or one or more of the individuals who control the borrower.

Mortgage loans. In general, our mortgage loans have a maturity of at least 10 years with the principal amortized over 20 to 25 years and a balloon payment due at maturity. Most of the loans are at a fixed interest rate; however, some interest rates increase based on scheduled fixed rate increases. In most cases, the owner of the facility is committed to make minimum annual capital expenditures for the purpose of maintaining or upgrading their respective facility. Additionally, most of our loans are collateralized by first mortgage liens and corporate or personal guarantees.
   
We have made mortgage loans to borrowers secured by a second deed-of-trust where there is a process in place for the borrower to obtain long-term financing, primarily with a U.S. government agency, and where the historical financial performance of the underlying health care facility meets our loan underwriting criteria. The interest rate on our second mortgage loans are currently 12% to 14.5% per annum.

Other notes receivable. We have provided a revolving credit facility to a borrower whose business is to provide bridge loans to owner-operators who are qualifying for long-term HUD financing secured by health care facilities. Our interest rate on the credit facility is 13.5%.

Investment in preferred stock and marketable securities of other healthcare REITs. We have invested a portion of our funds in the preferred and common shares of other publicly-held healthcare REITs to ensure the substantial portion of our assets are invested for real estate purposes.

Competition and Market Conditions

We compete with other REITs, private equity funds and other investors (including, but not limited to, banks, insurance companies, and investment banks who market securities in mortgage funds) in the acquisition, leasing and financing of health care-related properties primarily on the basis of price and flexibility of financing structure.

Operators of the Health Care Facilities compete on a local and regional basis with operators of facilities that provide comparable services. Operators compete for residents and/or patients and staff based on quality of care, reputation, physical appearance of

6


facilities, services offered, family preference, physicians, staff and price. Competition is with independent operators as well as companies managing multiple facilities, some of which are substantially larger and have greater resources than the operators of our Health Care Facilities. Some of these facilities are operated for profit while others are owned by governmental agencies or tax exempt not-for-profit organizations.

The SNFs which either secure our mortgage loans or we lease to operators receive the majority of their revenues from Medicare, Medicaid and other government programs. From time to time, these facilities have experienced Medicare and Medicaid revenue reductions brought about by the enactment of legislation to reduce government costs. In particular, the establishment of a Medicare Prospective Payment System (“PPS”) for SNF services to replace the cost-based reimbursement system significantly reduced Medicare reimbursement to SNF providers. While Congress subsequently took steps to mitigate the impact of PPS on SNFs, other federal legislative policies have been adopted and continue to be proposed that would reduce Medicare and/or Medicaid payments to SNFs. State Medicaid funding is not expected to keep pace with inflation according to industry studies. Any changes in government reimbursement methodology that reduce reimbursement to levels that are insufficient to cover the operating costs of our borrowers and lessees could adversely impact us. The ALF industry generally relies on private-pay residents who may be negatively impacted in an economic downturn. The success of these facilities is often impacted by the existence of comparable, competing facilities in a local market.

Operator Diversification

The majority of our Health Care Facilities are operated by the owner or lessee. For the year ended December 31, 2012, 46% of our portfolio revenue was from publicly-owned companies, 47% was from regional operators, and 7% was from smaller operators. As a percent of total investments at net book value, approximately 12% of the Health Care Facilities are operated by publicly-owned companies, 77% are operated by regional health care entities and 11% are operated by smaller entities. We consider the operator to be an important factor in determining the creditworthiness of the investment, and we generally have the right to approve any changes in operators.

For the year ended December 31, 2012, operators of facilities which provided more than 3% of our total revenues were (in alphabetical order): Bickford Senior Living; Emeritus Senior Living; Fundamental Long Term Care Holdings, LLC; Health Services Management, Inc.; Landmark Senior Living; Legend Healthcare, LLC; National HealthCare Corp.; Senior Living Management Corporation, LLC; SeniorHealth of Rutherford, LLC; SeniorTrust of Florida, Inc; SP Silverdale, LLC; and White Pine Senior Living.

Major Customer - NHC

National HealthCare Corporation (“NHC”), is a publicly-held company and our largest customer. Under a Master Lease Agreement dated October 17, 1991, we lease 41 health care facilities to NHC, six of which are included among our discontinued operations as discussed below. The 35 properties included in continuing operations are comprised of 3 independent living facilities and 32 SNFs (4 of which are subleased to other parties for whom the lease payments are guaranteed to us by NHC under the Master Lease Agreement). A 15-year renewal term began January 1, 2007, and included 3 additional 5-year renewal options, each at fair rental value of such leased property as negotiated between the parties and determined without including the value attributable to any improvements to the leased property voluntarily made by the tenant at its expense. In December 2012, we entered into an extension to the Master Lease Agreement with NHC through December 2026. Under the terms of the lease, rent escalates by 4% of the increase, if any, in each facility’s revenue over a 2007 base year. We refer to this additional rent component as “percentage rent.”

The Master Lease Agreement is a "triple net lease" under which NHC is responsible for all taxes, utilities, insurance premium costs, repairs (including structural portions of the buildings) and other charges relating to the ownership and operation of the Health Care Facilities. NHC is obligated at its expense to keep all improvements and fixtures and other components of the Health Care Facilities covered by "all risk" insurance in an amount equal to the full replacement costs thereof, insurance against boiler explosion and similar insurance, flood insurance if the land constituting the Health Care Facility is located within a designated flood plain area and to maintain specified property damage insurance, protecting us as well as NHC at such Health Care Facility. NHC is also obligated to indemnify and hold us harmless from all claims resulting from the use and occupancy of each Health Care Facility by NHC or persons claiming under NHC and related activities, as well as to indemnify us against all costs related to any release, discovery, cleanup and removal of hazardous substances or materials on, or other environmental responsibility, with respect to each Health Care Facility leased by NHC.

Our revenues from continuing operations were $96,953,000, $87,213,000 and $82,579,000 in 2012, 2011 and 2010, respectively. Of these amounts, $33,056,000 (34%), $32,619,000 (37%) and $31,985,000 (39%) in 2012, 2011 and 2010, respectively, were derived from our master lease with NHC.

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In December 2012, we entered into a letter of agreement for the sale of six older skilled nursing facilities to the current lessee, NHC, for $21,000,000 in cash. The sale is to be completed on December 31, 2013. Effective January 1, 2014, NHI’s annual base rent of $33,700,000 will be reduced to $30,750,000. Accordingly, we have reclassified those assets to be sold to NHC as held-for-sale as of December 31, 2012, and the results of operation of the facilities held for sale were classified as discontinued operations for all periods presented in our Consolidated Statements of Income.

NHC owned 1,630,462 shares of our common stock at December 31, 2012. The chairman of our board of directors is also a director on NHC’s board.

Commitments and Contingencies

The following table summarizes information related to our outstanding commitments and contingencies as of December 31, 2012, which are more fully described in the notes to the consolidated financial statements.
 
Asset Class
 
Type
 
Total
 
Funded To Date
 
Remaining
Commitments:
 
 
 
 
 
 
 
 
 
Bickford Senior Living
AL/ALZ
 
Development
 
$
27,000,000

 
$
(4,016,000
)
 
$
22,984,000

Kentucky River Medical Center
Hospital
 
Renovation
 
$
8,000,000

 
$

 
$
8,000,000

Santé Partners
SLC
 
Renovation
 
$
3,500,000

 
$

 
$
3,500,000

Bickford Senior Living
AL/ALZ
 
Revolving Credit
 
$
3,000,000

 
$
(36,000
)
 
$
2,964,000

Santé Mesa
Hospital
 
Development
 
$
13,870,000

 
$
(11,870,000
)
 
$
2,000,000

Capital Funding Group
N/A
 
Revolving Credit
 
$
15,000,000

 
$
(15,000,000
)
 
$

 
 
 
 
 
 
 
 
 
 
Contingencies:
 
 
 
 
 
 
 
 
 
Legend Healthcare
SNF
 
Purchase Consideration
 
$
5,478,000

 
$
(2,222,000
)
 
$
3,256,000

Helix Healthcare
Hospital
 
Purchase Consideration
 
$
12,500,000

 
$
(11,500,000
)
 
$
1,000,000


Sources of Revenues

General. Our revenues are derived primarily from rental income, mortgage interest income and income from our other investments, substantially all of which are in the securities of other healthcare REITs. During 2012, rental income was $85,115,000 (88%), interest income from mortgages and other notes was $7,426,000 (8%) and income from our other investments was $4,412,000 (4%) of total revenue from continuing operations of $96,953,000. Our revenues depend on the operating success of our facility operators whose source and amount of revenues are determined by (i) the licensed beds or other capacity of the Health Care Facilities, (ii) the occupancy rate of the Health Care Facilities, (iii) the extent to which the services provided at each Health Care Facility are utilized by the patients, (iv) the mix of private pay, Medicare and Medicaid patients at the Health Care Facilities, and (v) the rates paid by private paying patients and by the Medicare and Medicaid programs.

Governmental and other concerns regarding health care costs have and may continue to result in significant reductions in payments to health care facilities, and there can be no assurance that future payment rates for either governmental or private health care plans will be sufficient to cover cost increases in providing services to patients. Any changes in reimbursement policies which reduce reimbursement to levels that are insufficient to cover the cost of providing patient care have and could continue to adversely affect revenues of our lessees and borrowers and thereby adversely affect those lessees' and borrowers' abilities to make their lease or debt payments to us. Failure of the lessees or borrowers to make their lease or debt payments would have a direct and material adverse impact on us.

Medicare and Medicaid. A significant portion of the revenue of our SNF lessees and borrowers is derived from government funded reimbursement programs, such as Medicare and Medicaid. Reimbursement under these programs is subject to periodic payment review and other audits by federal and state authorities. Medicare is uniform nationwide and reimburses skilled nursing centers under a Prospective Payment System (“PPS”) which is based on a predetermined, fixed amount. PPS was instituted as mandated by the Balanced Budget Act of 1997 and became effective July 1, 1998. PPS is an acuity based classification system that uses nursing and therapy indexes adjusted by geographical wage indexes to calculate per diem rates for each Medicare patient. Payment rates are updated annually and are generally adjusted each October when the federal fiscal year begins. The current acuity classification system is named Resource Utilization Groups IV (“RUGs IV”) and was effective October 1, 2010. PPS as implemented in 1998 had an adverse impact on the healthcare industry and our lessees’ and borrowers’ business by decreasing

8


payments materially, which adversely impacted our business. Refinements in the form of temporary add-ons provided some relief until October 1, 2002. Since then, annual market basket (inflationary) increases have continued to improve payments; however, other federal legislative policies have been adopted and continue to be proposed that could reduce Medicare payments to nursing facilities. For example, in July 2011, the Centers for Medicare and Medicaid Services (CMS) announced the Skilled Nursing Facilities – PPS final rule for fiscal year 2012 which cut Medicare payments to SNF operators by a net 11.1% beginning October 1, 2011. In July 2012, CMS announced the final rule for fiscal 2013 that increased Medicare payments to SNF operators by a net 1.8% for the fiscal year beginning October 1, 2012. The final rule for 2013 does not take into account the ongoing attempt by Congress to reduce the federal deficit by $1.5 trillion over the next decade as required by the Budget Control Act of 2011. The failure of Congress to agree on spending reductions to meet deficit goals would trigger automatic spending cuts of 2% to Medicare.

RUGs IV incorporates changes to PPS that significantly altered how SNFs are paid for rendering care. Operators of our SNFs who are not well versed in the new regulations will be at risk for reductions in revenue. Some examples are as follows:

A shift to 66 payment categories from 53 payment categories;

Changes related to assessment reference dates and qualifiers that will significantly reduce utilization of rehabilitation and extensive service categories;

Modification to therapy services related to estimating treatments and utilization of concurrent therapy that will likely result in RUG classifications at much lower levels of therapy than previous results; and

Adjustments related to assistance with activities of daily living (ADLs) and an increased emphasis on ADL scores in the nursing case mix indices and related RUG payment rates.

Medicaid is a joint federal and state program designed to provide medical assistance to “eligible needy persons.” Medicaid programs are operated by state agencies that adopt their own medical reimbursement methodology and standards. Payment rates and covered services vary from state to state. In many instances, revenues from Medicaid programs are insufficient to cover the actual costs incurred in providing care to those patients. State Medicaid plans subject to budget constraints are of particular concern to us given the repeal of the Boren Amendment by the Balanced Budget Act of 1997. The Boren Amendment provided fair reimbursement protection to nursing facilities. Changes in federal funding coupled with state budget problems have produced an uncertain environment. Industry studies predict the Medicaid crisis will continue with states’ required contribution to Medicare Part D and anticipated budget deficits. States will more than likely be unable to keep pace with nursing center inflation. States are under pressure to pursue other alternatives to long term care such as community and home-based services. Furthermore, several of the states in which we have investments have actively sought to reduce or slow the increase of Medicaid spending for nursing home care.

Medicare and Medicaid programs are highly regulated and subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations and administrative and judicial interpretations of existing law. Moreover, as health care facilities have experienced increasing pressure from private payors attempting to control health care costs, reimbursement from private payors has in many cases effectively been reduced to levels approaching those of government payors. Healthcare reimbursement will likely continue to be of significant importance to federal and state authorities. We cannot make any assessment as to the ultimate timing or the effect that any future legislative reforms may have on our lessees’ and borrowers’ costs of doing business and on the amount of reimbursement by government and other third-party payors. There can be no assurance that future payment rates for either government or private payors will be sufficient to cover cost increases in providing services to patients. Any changes in reimbursement policies which reduce reimbursement to levels that are insufficient to cover the cost of providing patient care could adversely affect the operating revenues of our SNF and hospital lessees and borrowers, and thereby adversely affect their ability to make their lease or debt payments to us. Failure of our lessees and borrowers to make their scheduled lease and loan payments to us would have a direct and material adverse impact on us.

Government Regulation

Licensure and Certification. The health care industry is highly regulated by federal, state and local law and is directly affected by state and local licensing requirements, facility inspections, state and federal reimbursement policies, regulations concerning capital and other expenditures, certification requirements and other such laws, regulations and rules. Sanctions for failure to comply with these regulations and laws include (but are not limited to) loss of licensure, fines and loss of certification to participate in the Medicare and Medicaid programs, as well as potential criminal penalties. The failure of any lessee or borrower to comply with such laws, requirements and regulations could affect its ability to operate the facility or facilities and could adversely affect such lessee's or borrower's ability to make lease or debt payments to us.


9


In the past several years, due to rising health care costs, there has been an increased emphasis on detecting and eliminating fraud and abuse in the Medicare and Medicaid programs. Payment of any consideration in exchange for referral of Medicare and Medicaid patients is generally prohibited by federal statute, which subjects violators to severe penalties, including exclusion from the Medicare and Medicaid programs, fines and even prison sentences. In recent years, both federal and state governments have significantly increased investigation and enforcement activity to detect and punish wrongdoers. In addition, legislation has been adopted at both state and federal levels which severely restrict the ability of physicians to refer patients to entities in which they have a financial interest.

It is anticipated that the trend toward increased investigation and enforcement activity in the area of fraud and abuse, as well as self-referral, will continue in future years. Certain of our investments are with lessees or borrowers which are partially or wholly owned by physicians. In the event that any lessee or borrower were to be found in violation of laws regarding fraud and abuse or self-referral, that lessee's or borrower's ability to operate the facility as a health care facility could be jeopardized, which could adversely affect the lessee's or borrower's ability to make lease or debt payments to us and thereby adversely affect us.

Certificates of Need. The SNFs and hospitals in which we invest are also generally subject to state statutes which may require regulatory approval in the form of a CON prior to the construction or expansion of facilities to accommodate new beds (or addition of new beds to existing facilities), the addition of services or certain capital expenditures. CON requirements are not uniform throughout the United States and are subject to change. We cannot predict the impact of regulatory changes with respect to CONs on the operations of our lessees and borrowers; however, in our primary market areas, a significant reduction in new construction of long-term care beds has occurred.

Investment Policies

Our investment objectives are (i) to provide consistent and growing current income for distribution to our stockholders through investments primarily in health care related facilities or in the operations thereof through independent third-party management, (ii) to provide the opportunity to realize capital growth resulting from appreciation, if any, in the residual value of our portfolio properties, and (iii) to preserve and protect stockholders' capital through a balance of diversity, flexibility and liquidity. There can be no assurance that these objectives will be realized. Our investment policies include making investments in real estate, mortgage and other notes receivable and securities of other publicly-held REITs.

As described in the notes to the consolidated financial statements, we funded or made commitments to fund new investments in real estate and loans during 2012 totaling $178,457,000, and we anticipate making additional investments in 2013 that meet our underwriting criteria. In making new investments, we consider such factors as (i) the geographic area and type of property, (ii) the location, construction quality, condition and design of the property, (iii) the current and anticipated cash flow and its adequacy to meet operational needs, and lease or mortgage obligations to provide a competitive income return to our investors, (iv) the growth, tax and regulatory environments of the communities in which the properties are located, (v) occupancy and demand for similar health care facilities in the same or nearby communities, (vi) the quality, experience and creditworthiness of the management operating the facilities located on the property and (vii) the mix of private and government-sponsored residents. There can be no assurances that investments meeting our standards regarding these attributes will be found or closed.

We will not, without the approval of a majority of the Board of Directors, enter into any joint venture relationships with or acquire from or sell to any director, officer or employee of NHI, or any affiliate thereof, as the case may be, any of our assets or other property.

The Board of Directors, without the approval of the stockholders, may alter our investment policies if it determines that such a change is in our best interests and our stockholders’ best interests. The methods of implementing our investment policies may vary as new investment and financing techniques are developed or for other reasons.

Future investments in health care related facilities or businesses may utilize borrowed funds when it is advisable in the opinion of the Board of Directors. We may negotiate lines of credit or arrange for other short or long-term borrowings from lenders. We may arrange for long-term borrowings from institutional investors or through public offerings. We have previously invested and may in the future invest in properties subject to existing loans or secured by mortgages, deeds of trust or similar liens with favorable terms or in mortgage investment pools.



Executive Officers of the Company


10


The table below sets forth the name, position and age of each of our executive officers. Each executive officer is appointed by the Board of Directors, serves at its pleasure and holds office for a term of one year. There is no “family relationship” among any of the named executive officers or with any director. All information is given as of February 14, 2013:

Name
Position
Age
J. Justin Hutchens
President and Chief Executive Officer
38
Roger R. Hopkins
Chief Accounting Officer
51
Kristin S. Gaines
Chief Credit Officer
41

J. Justin Hutchens joined NHI in February 2009 as President and COO. Pursuant to a succession plan, in March 2011 he was appointed CEO. Prior to joining NHI, Mr. Hutchens acquired 15 years of senior care operations experience. His background includes multi-site management with assisted living and skilled nursing facilities (1997 - 2003). He has national operating experience (2003 -2009) as the Senior Vice-President and COO of Summerville Senior Living and Executive Vice-President and COO of Emeritus Senior Living (NYSE: ESC). Mr. Hutchens holds a Master of Science in Management from Regis University and a Bachelor of Science in Human Services from the University of Northern Colorado. He was awarded Executive Certificates in Measurement and Control of Organizational Performance from the University of Michigan, and Strategy and Innovation from the MIT Sloan School of Management.

Roger R. Hopkins joined NHI in 2006 and was named Chief Accounting Officer in December 2006. He has over 30 years of public accounting and financial management experience. Until 2006, he was a partner in the Tennessee regional accounting firm of Rodefer Moss & Co, PLLC. He was previously a senior manager in the Nashville, Tennessee office of Deloitte & Touche. Mr. Hopkins received a Bachelor of Science degree in Accounting from Tennessee Technological University in 1982 and is a Certified Public Accountant.

Kristin S. Gaines was appointed NHI’s Chief Credit Officer in February 2010. She joined NHI in 1998 as a Credit Analyst. During her tenure with NHI, Ms. Gaines has had a progressive career in the areas of finance and operations. Her experience has resulted in a breadth of expertise in underwriting, portfolio oversight and real estate finance. Ms. Gaines holds an MBA and a BBA in Accounting from Middle Tennessee State University.

We have a staff of 10, all serving in our corporate office in Murfreesboro, TN. Essential services such as internal auditing, tax compliance, information technology, legal services, and investor relations are outsourced to third-party professional firms.

Investor Information

We maintain a web site at www.nhireit.com. We publish to this web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and press releases. We have a policy of publishing these on the website within two (2) business days after public release or filing with the SEC.

We also maintain the following documents on our web site:

The NHI Code of Ethics and Standards of Conduct.  This has been adopted for all employees, officers and directors of the Company.  The website will also disclose whether there have been any amendments or waivers to the Code of Ethics and Standards of Conduct.  To date there have been none.

Information on our “NHI Valuesline” which allows all interested parties unrestricted access to our Internal Auditor, executive officers and directors.  The toll free number is 877-880-2974 and the communications may be made anonymously, if desired.

The NHI Restated Audit Committee Charter.

The NHI Compensation Committee Charter.

The NHI Nomination and Corporate Governance Committee Charter.

We will furnish, free of charge, a copy of any of the above documents to any interested investor upon receipt of a written request.

Our transfer agent is Computershare. Computershare will assist registered owners with the NHI Dividend Reinvestment plan, change of address, transfer of ownership, payment of dividends, replacement of lost checks or stock certificates. Computershare’s

11


contact information is: Computershare Trust Company, N.A., P.O. Box 43078, Providence, RI 02940-3078. The toll free number is 800-942-5909 and the website is www.computershare.com.

The Annual Stockholders’ meeting will be held at noon local time on Monday, April 29, 2013 at our corporate office at 222 Robert Rose Drive, Murfreesboro, TN.

ITEM 1A. RISK FACTORS.

We depend on the operating success of our customers (facility operators) for collection of our revenues during this time of uncertain economic conditions in the U.S.

Revenues to operators of our Health Care Facilities are primarily driven by occupancy, Medicare and Medicaid reimbursement and private pay rates. Revenues from government reimbursement have, and may continue to, come under pressure due to reimbursement cuts and from widely-publicized federal and state budget shortfalls and constraints. Overall weak economic conditions in the U.S. which affect housing sales, investment returns and personal incomes may adversely affect occupancy rates of ALFs that generally rely on private pay residents. Expenses for the Health Care Facilities are driven by the costs of labor, food, utilities, taxes, insurance and rent or debt service. Liability insurance and staffing costs continue to increase for our operators. To the extent any decrease in revenues and/or any increase in operating expenses results in a facility not generating enough cash to make scheduled payments to us, our revenues, net income and funds from operations would be adversely affected. Such events and circumstances would cause us to evaluate whether there was an impairment of the real estate or mortgage loan that should be charged to earnings. Such impairment would be measured as the amount by which the carrying amount of the asset exceeded its fair value. Consequently, we might be unable to maintain or increase our current dividend and the market price of our stock may decline.

We are exposed to the risk that our tenants and borrowers may not be able to meet the rent, principal and interest or other payments due us, which may result in an operator bankruptcy or insolvency, or that an operator might become subject to bankruptcy or insolvency proceedings for other reasons.

Although our operating lease agreements provide us the right to evict an operator, demand immediate payment of rent and exercise other remedies, and our mortgage loans provide us the right to terminate any funding obligations, demand immediate repayment of principal and unpaid interest, foreclose on the collateral and exercise other remedies, the bankruptcy laws afford certain rights to a party that has filed for bankruptcy or reorganization. An operator in bankruptcy may be able to limit or delay our ability to collect unpaid rent in the case of a lease or to receive unpaid principal and/or interest in the case of a mortgage loan and to exercise other rights and remedies. We may be required to fund certain expenses (e.g. real estate taxes, maintenance and capital improvements) to preserve the value of a facility, avoid the imposition of liens on a facility and/or transition a facility to a new operator. In some instances, we have terminated our lease with an operator and leased the facility to another operator. In some of those situations, we provided working capital loans to, and limited indemnification of, the new operator. If we cannot transition a leased facility to a new operator, we may take possession of that facility, which may expose us to certain successor liabilities. Should such events occur, our revenue and operating cash flow may be adversely affected.

We are exposed to risks related to governmental regulations and payors, principally Medicare and Medicaid, and the effect that lower reimbursement rates will have on our tenants’ and borrowers’ business.

Our operators’ businesses are affected by government reimbursement and private payor rates. To the extent that any of our Health Care Facilities receive a significant portion of its revenues from governmental payors, primarily Medicare and Medicaid, such revenues may be subject to statutory and regulatory changes, retroactive rate adjustments, recovery of program overpayments or set-offs, administrative rulings, policy interpretations, payment or other delays by fiscal intermediaries, government funding restrictions (at a program level or with respect to specific facilities) and interruption or delays in payments due to any ongoing governmental investigations and audits at such facilities. In recent years, governmental payors have frozen or reduced payments to health care providers due to budgetary pressures. Such reductions in Medicare reimbursement will have an adverse effect on the financial operations of our borrowers and lessees who operate SNFs. Changes in health care reimbursement will likely continue to be of paramount importance to federal and state authorities. We cannot make any assessment as to the ultimate timing or effect any future legislative reforms may have on the financial condition of the health care industry. There can be no assurance that adequate reimbursement levels will continue to be available for services provided by any facility operator, whether the facility receives reimbursement from Medicare, Medicaid or private payors. Significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse effect on an operator’s liquidity, financial condition and results of operations, which could adversely affect the ability of an operator to meet its obligations to us. In addition, the replacement of an operator that has defaulted on its lease or loan could be delayed by the approval process of any federal, state or local agency necessary for the transfer of the facility or the replacement of the operator licensed to manage the facility.

12



We are exposed to the risk that the cash flows of our tenants and borrowers will be adversely affected by increased liability claims and general and professional liability insurance costs.

ALF and SNF operators have experienced substantial increases in both the number and size of patient care liability claims in recent years, particularly in the states of Texas and Florida. As a result, general and professional liability costs have increased and may continue to increase. Nationwide, long-term care liability insurance rates are increasing because of large jury awards in states like Texas and Florida. Both Texas and Florida have now adopted SNF liability laws that modify or limit tort damages. Despite some of these reforms, the long-term care industry overall continues to experience very high general and professional liability costs. Insurance companies have responded to this claims crisis by severely restricting their capacity to write long-term care general and professional liability policies. No assurance can be given that the climate for long-term care general and professional liability insurance will improve in any of the foregoing states or any other states where the facility operators conduct business. Insurance companies may continue to reduce or stop writing general and professional liability policies for ALFs and SNFs. Thus, general and professional liability insurance coverage may be restricted, very costly or not available, which may adversely affect the facility operators’ future operations, cash flows and financial condition and may have a material adverse effect on the facility operators’ ability to meet their obligations to us.

We are exposed to risks related to environmental laws and the costs associated with the liability related to hazardous substances.

Under various federal and state laws, owners or operators of real property may be required to respond to the release of hazardous substances on the property and may be held liable for property damage, personal injuries or penalties that result from environmental contamination. These laws also expose us to the possibility that we may become liable to reimburse the government for damages and costs it incurs in connection with the contamination.  Generally, such liability attaches to a person based on the person’s relationship to the property.  Our tenants or borrowers are primarily responsible for the condition of the property and since we are a passive landlord, we do not “participate in the management” of any property in which we have an interest.  Moreover, we review environmental site assessment of the properties that we own or encumber prior to taking an interest in them.  Those assessments are designed to meet the “all appropriate inquiry” standard, which qualifies us for the innocent purchaser defense if environmental liabilities arise.  Based upon such assessments, we do not believe that any of our properties are subject to material environmental contamination.  However, environmental liabilities, including mold, may be present in our properties and we may incur costs to remediate contamination, which could have a material adverse effect on our business or financial condition.

We are exposed to the risk that we may not be indemnified by our lessees and borrowers against future litigation.

Our leases require that the lessee name us as an additional insured party on the tenant’s insurance policy in regard to claims made for professional liability or personal injury.  The leases also require the tenant to indemnify and hold us harmless for all claims resulting from the occupancy and use of each Health Care Facility.  We cannot give any assurance that these protective measures will completely eliminate any risk to us related to future litigation, the costs of which could have a material adverse impact on us.

We depend on the success of future acquisitions and investments.

We are exposed to the risk that our future acquisitions may not prove to be successful.  We could encounter unanticipated difficulties and expenditures relating to any acquired properties, including contingent liabilities, and newly acquired properties might require significant management attention that would otherwise be devoted to our existing business.  If we agree to provide construction funding to an operator and the project is not completed, we may need to take steps to ensure completion of the project or we could lose the property.  Moreover, if we issue equity securities or incur additional debt, or both, to finance future acquisitions, it may reduce our per share financial results.  These costs may negatively affect our results of operations.  

We depend on the ability to reinvest cash in real estate investments in a timely manner and on acceptable terms.

From time to time, we will have cash available from (1) the proceeds of sales of our securities, (2) principal payments on our notes receivable and (3) the sale of properties, including non-elective dispositions, under the terms of master leases or similar financial support arrangements.  We must reinvest these proceeds, on a timely basis, in health care investments or in qualified short-term investments.  We compete for real estate investments with a broad variety of potential investors.  This competition for attractive investments may negatively affect our ability to make timely investments on terms acceptable to us.  Delays in acquiring properties may negatively impact revenues and the amount of distributions to stockholders.

We may need to incur more debt in the future, which may not be available on terms acceptable to the Company.

13



We operate with a policy of incurring debt when, in the opinion of our Board of Directors, it is advisable. Currently, we believe that our low debt levels, availability under our unsecured credit facility and current liquidity will enable us to meet our obligations, including dividends, and continue to make investments in healthcare real estate. While we currently have a very low debt ratio, in the future, we may increase our borrowings. We may incur additional debt by borrowing under our unsecured credit facility, mortgaging properties we own and/or issuing debt securities in a public offering or in a private transaction.  We believe we will be able to raise additional debt and equity capital at reasonable costs to refinance our credit facility at or prior to its maturity.  Our ability to raise reasonably priced capital is not guaranteed; we may be unable to raise reasonably priced capital because of reasons related to our business or for reasons beyond our control, such as market conditions.  If our access to capital becomes limited, it could have an impact on our ability to refinance our debt obligations, fund dividend payments, acquire properties and fund acquisition activities.

We are exposed to the risk that the illiquidity of real estate investments could impede our ability to respond to adverse changes in the performance of our properties.

Real estate investments are relatively illiquid and, therefore, our ability to quickly sell or exchange any of our properties in response to changes in economic and other conditions may be limited.  All of our properties are "special purpose" properties that cannot be readily converted to general residential, retail or office use. Health Care Facilities that participate in Medicare or Medicaid must meet extensive program requirements, including physical plant and operational requirements, which are revised from time to time. Transfers of operations of Health Care Facilities are subject to regulatory approvals not required for transfers of other types of commercial operations and other types of real estate. Thus, if the operation of any of our properties becomes unprofitable due to competition, age of improvements or other factors such that our lessee or borrower becomes unable to meet its obligations on the lease or mortgage loan, the liquidation value of the property may be less than the net book value or the amount owed on any related mortgage loan, because the property may not be readily adaptable to other uses. The sale of the property or the replacement of an operator that has defaulted on its lease or loan could also be delayed by the approval process of any federal, state or local agency necessary for the transfer of the property or the replacement of the operator with a new operator licensed to manage the facility.   No assurances can be given that we will recognize full value for any property that we are required to sell for liquidity reasons. Should such events occur, our income and cash flows from operations could be adversely affected.

We are exposed to risks associated with our investments in unconsolidated entities, including our lack of sole decision-making authority and our reliance on the financial condition of other interests.

Our investments in unconsolidated entities could be adversely affected by our lack of sole decision-making authority regarding major decisions, our reliance on the financial condition of other interests, any disputes that may arise between us and other partners, and our exposure to potential losses from the actions of partners. Risks of dealing with parties outside NHI include limitations on unilateral major decisions opposed by other interests, the prospect of divergent goals of ownership including the likelihood of disputes regarding management, ownership or disposition of a property, or limitations on the transfer of our interests without the consent of our partners. Risks of the unconsolidated entity extend to areas in which the financial health of our partners may impact our plans. Our partners might become bankrupt or fail to fund their share of required capital contributions, which may hinder significant action in the entity. We may disagree with our partners about decisions affecting a property or the entity itself, which could result in litigation or arbitration that increases our expenses, distracts our officers and directors and disrupts the day-to-day operations of the property, including by delaying important decisions until the dispute is resolved; and finally, we may suffer losses as a result of actions taken by our partners with respect to our investments.

We depend on revenues derived mainly from fixed rate investments in real estate assets, while our debt capital used to finance those investments is primarily at variable rates. This circumstance creates interest rate risk to the Company.

Our business model assumes that we can earn a spread between the returns earned from our investments in real estate as compared to our cost of capital, including debt and/or equity. Current interest rates on our debt are at historically low levels, and, as a result, the spread and our profitability on our investments have been at high levels. We are exposed to interest rate risk in the potential for a narrowing of our spread and profitability if interest rates increase in the future. Certain of our debt obligations are floating rate obligations with interest rates that vary with the movement of LIBOR or other indexes. Our revenues are derived mainly from fixed rate investments in real estate assets. Although our leases generally contain escalating rent clauses that provide a partial hedge against interest rate fluctuations, if interest rates rise, our interest costs for our existing floating rate debt and any new debt we incur would also increase. This increasing cost of debt could reduce our profitability by increasing the cost of financing our existing portfolio and our investment activity. Rising interest rates could limit our ability to refinance existing debt upon maturity or cause us to pay higher rates upon refinancing. We manage a portion of our exposure to interest rate risk by accessing debt with staggered maturities and through the use of derivative instruments, primarily interest rate swap agreements

14


with major financial institutions. Increased interest rates may also negatively affect the market price of our common stock and increase the cost of new equity capital.

We are exposed to the risk that our assets may be subject to impairment charges.

We periodically, but not less than quarterly, evaluate our real estate investments and other assets for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions, operator performance and legal structure. If we determine that a significant impairment has occurred, we would be required to make an adjustment to the net carrying value of the asset, which could have a material adverse affect on our reported results of operations in the period in which the impairment charge occurs.

We depend on the ability to continue to qualify as a REIT.

We intend to operate as a REIT under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) and believe we have and will continue to operate in such a manner.  Since REIT qualification requires us to meet a number of complex requirements, it is possible that we may fail to fulfill them, and if we do, our earnings will be reduced by the amount of federal taxes owed.  A reduction in our earnings would affect the amount we could distribute to our stockholders.

We have ownership limits in our charter with respect to our common stock and other classes of capital stock which may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or might otherwise be in the best interests of our stockholders.

Our charter, subject to certain exceptions, contains restrictions on the ownership and transfer of our common stock and preferred stock that are intended to assist us in preserving our qualification as a REIT.  Our charter, provides that any transfer that would cause NHI to be beneficially owned by fewer than 100 persons or would cause NHI to be “closely held” under Internal Revenue Code would be void, which, subject to certain exceptions, results in no person or entity being allowed to own, actually or constructively, more than 9.9% of the outstanding shares of our stock. Our Board of Directors, in its sole discretion, may exempt a proposed transferee from the ownership limit and such an exemption has been granted through Excepted Holder Agreements to members of the Carl E. Adams family.  Based on the Excepted Holder Agreements currently outstanding, the individual ownership limit for all other stockholders is approximately 7.5%.  Our charter gives our Board of Directors broad powers to prohibit and rescind any attempted transfer in violation of the ownership limits.  These ownership limits may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or might otherwise be in the best interests of our stockholders.

We are subject to certain provisions of Maryland law and our charter and bylaws that could hinder, delay or prevent a change in control transaction, even if the transaction involves a premium price for our common stock or our stockholders believe such transaction to be otherwise in their best interests.

Certain provisions of Maryland law, our charter and our bylaws have the effect of discouraging, delaying or preventing transactions that involve an actual or threatened change in control, even if these transactions involve a premium price for our common stock or our stockholders believe such transaction to be otherwise in their best interests. The Maryland Business Combination Act provides that, unless exempted, a Maryland corporation may not engage in business combinations, including mergers, dispositions of 10% or more of its assets, issuances of shares of stock and other specified transactions with an "interested stockholder" or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder became an interested stockholder, and thereafter, unless specified criteria are met. An interested stockholder is generally a person owning or controlling, directly or indirectly, 10% or more of the voting power of the outstanding stock of a Maryland corporation. Unless our Board of Directors takes action to exempt us, generally or with respect to certain transactions, from this statute in the future, the Maryland Business Combination Act will be applicable to business combinations between us and other persons.  The Company’s Charter and Bylaws also contain certain provisions that could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for the common stock. These provisions include a staggered board of directors, blank check preferred stock, and the application of Maryland corporate law provisions on business combinations and control shares.  The foregoing matters may, together or separately, have the effect of discouraging or making more difficult an acquisition or change of control of the Company.

Other risks.

See the notes to the consolidated financial statements, “Business” under Item 1 and “Legal Proceedings” under Item 3 herein for a discussion of various governmental regulations and operating factors relating to the health care industry and other factors

15


and the risks inherent in them.  You should carefully consider each of the foregoing risks before making any investment decisions in the Company.  These risks and uncertainties are not the only ones facing us.  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 assurance that these forward-looking statements will, in fact, occur and, therefore, caution investors not to place undue reliance on them.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.


16


ITEM 2.  PROPERTIES OWNED OR ASSOCIATED WITH MORTGAGE LOAN INVESTMENTS
 AS OF DECEMBER 31, 2012

SKILLED NURSING
 
Lease (L)/
Licensed

Center
City
Mortgage (M)
Beds

ALABAMA
 
 
 
NHC HealthCare, Anniston
Anniston
L
151

NHC HealthCare, Moulton
Moulton
L
136

 
 
 
 
ARIZONA
 
 
 
Sunbridge Estrella Care & Rehabilitation
Avondale
L
161

 
 
 
 
FLORIDA
 
 
 
Ayers Health & Rehabilitation Center
Trenton
L
120

Bayonet Point Health & Rehabilitation Center
Hudson
L
180

Bear Creek Nursing Center
Hudson
L
120

Brooksville Healthcare Center
Brooksville
L
180

Cypress Cove Care Center
Crystal River
L
120

Heather Hill Healthcare Center
New Port Richey
L
120

Parkway Health & Rehabilitation Center
Stuart
L
177

Royal Oak Nursing Center
Dade City
L
120

The Health Center of Merritt Island
Merritt Island
L
180

The Health Center of Plant City
Plant City
L
180

 
 
 
 
GEORGIA
 
 
 
Ashton Woods Rehabilitation Center
Atlanta
M
157

NHC HealthCare, Rossville*
Rossville
L
112

The Place at Deans Bridge
Augusta
M
100

The Place at Martinez
Augusta
M
100

The Place at Pooler
Pooler
M
122

 
 
 
 
IDAHO
 
 
 
Grangeville Health and Rehabilitation Center
Grangeville
L
60

 
 
 
 
KANSAS
 
 
 
Chanute HealthCare Center
Chanute
M
77

Council Grove HealthCare Center
Council Grove
M
80

Haysville HealthCare Center
Haysville
M
119

Larned HealthCare Center
Larned
M
83

Sedgwick HealthCare Center
Sedgwick
M
62

 
 
 
 
KENTUCKY
 
 
 
NHC HealthCare, Glasgow
Glasgow
L
206

NHC HealthCare, Madisonville*
Madisonville
L
94

 
 
 
 
MASSACHUSETTS
 
 
 
Buckley HealthCare Center
Greenfield
M
120

Holyoke Health Care Center
Holyoke
M
102

John Adams HealthCare Center
Quincy
M
71

Longmeadow of Taunton
Taunton
M
100


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SKILLED NURSING
 
Lease (L)/
Licensed

Center
City
Mortgage (M)
Beds

MISSOURI
 
 
 
Charlevoix HealthCare Center
St. Charles
M
142

Columbia HealthCare Center
Columbia
M
97

Joplin HealthCare Center
Joplin
M
92

NHC Healthcare, Desloge
Desloge
L
120

NHC Healthcare, Joplin
Joplin
L
126

NHC Healthcare, Kennett
Kennett
L
170

NHC Healthcare, Maryland Heights
Maryland Heights
L
220

NHC HealthCare, St. Charles
St. Charles
L
120

 
 
 
 
NEW HAMPSHIRE
 
 
 
Epsom HealthCare Center
Epsom
M
108

Maple Leaf HealthCare Center
Manchester
M
114

Villa Crest HealthCare Center
Manchester
M
165

 
 
 
 
SOUTH CAROLINA
 
 
 
NHC Healthcare, Anderson
Anderson
L
290

NHC Healthcare, Greenwood
Greenwood
L
152

NHC HealthCare, Laurens
Laurens
L
176

UniHealth Post-Acute Care-Orangeburg
Orangeburg
L
88

 
 
 
 
TENNESSEE
 
 
 
NHC Healthcare, Athens
Athens
L
98

NHC Healthcare, Chattanooga
Chattanooga
L
207

NHC HealthCare, Columbia*
Columbia
L
106

NHC HealthCare, Dickson
Dickson
L
211

NHC HealthCare, Franklin
Franklin
L
80

NHC Healthcare, Hendersonville
Hendersonville
L
122

NHC Healthcare, Hillview*
Columbia
L
92

NHC Healthcare, Johnson City
Johnson City
L
160

NHC Healthcare, Knoxville*
Knoxville
L
139

NHC Healthcare, Lewisburg
Lewisburg
L
102

NHC HealthCare, McMinnville
McMinnville
L
150

NHC HealthCare, Milan
Milan
L
122

NHC Healthcare, Oakwood
Lewisburg
L
60

NHC HealthCare, Pulaski
Pulaski
L
102

NHC Healthcare, Scott
Lawrenceburg
L
62

NHC HealthCare, Sequatchie
Dunlap
L
120

NHC HealthCare, Smithville
Smithville
L
120

NHC Healthcare, Somerville
Somerville
L
84

NHC Healthcare, Sparta
Sparta
L
120

NHC HealthCare, Springfield*
Springfield
L
107

 
 
 
 
TEXAS
 
 
 
Heritage Manor of Canton
Canton
L
110

Heritage Oaks
Arlington
L
204

Heritage Place
Mesquite
L
149

Legend Healthcare & Rehabilitation
Paris
L
120


18


SKILLED NURSING
 
Lease (L)/
Licensed

Center
City
Mortgage (M)
Beds

Legend Oaks Healthcare and Rehabilitation Center (East)
Houston
L
125

Legend Oaks Healthcare and Rehabilitation Center (Northwest)
Houston
L
125

Legend Oaks Healthcare and Rehabilitation Center
San Antonio
L
125

Legend Oaks Healthcare and Rehabilitation Center - Ennis
Ennis
L
124

Legend Healthcare & Rehabilitation
Greenville
L
125

Legend Oaks Healthcare and Rehabilitation Center
Houston
L
124

Legend Oaks Healthcare and Rehabilitation Center
Houston
L
125

Park Place Care Center
Georgetown
M
164

The Village at Richardson
Richardson
L
280

Winterhaven Healthcare Center
Houston
L
160

 
 
 
 
VIRGINIA
 
 
 
Heritage Hall - Brookneal
Brookneal
M
60

Heritage Hall - Grundy
Grundy
M
120

Heritage Hall - Laurel Meadows
Laurel Fork
M
60

Heritage Hall - Virginia Beach
Virginia Beach
M
90

Heritage Hall - Front Royal
Front Royal
M
60

Heritage Hall - Lexington
East Lexington
M
60

NHC HealthCare, Bristol
Bristol
L
120

 
 
 
 
ASSISTED LIVING
 
 
 
ARIZONA
 
 
 
The Place at Gilbert
Gilbert
L
40

The Place at Glendale
Glendale
L
38

The Place at Tanque Verde
Tucson
L
42

The Place at Tucson
Tucson
L
60

 
 
 
 
FLORIDA
 
 
 
Brentwood at Fore Ranch
Ocala
M
120

Indigo Palms at Maitland
Maitland
L
116

Savannah Court of Bartow
Bartow
L
30

Savannah Court of St. Cloud
St. Cloud
L
30

Savannah Court of Lakeland
Lakeland
L
30

 
 
 
 
GEORGIA
 
 
 
Savannah Court at Lake Oconee
Greensboro
L
64

 
 
 
 
IDAHO
 
 
 
Indianhead Estates
Weiser
L
25

 
 
 
 
ILLINOIS
 
 
 
Bickford of Peoria
Peoria
L
32

 
 
 
 
INDIANA
 
 
 
Bickford of Carmel**
Carmel
L
60

Bickford of Crown Point**
Crown Point
L
60

Bickford of Greenwood**
Greenwood
L
60

Bickford of Lafayette
LaFayette
L
28


19


ASSISTED LIVING
 
Lease (L)/
Licensed

Center
City
Mortgage (M)
Beds

IOWA
 
 
 
Bickford of Clinton
Clinton
L
37

Bickford of Iowa City
Iowa City
L
37

 
 
 
 
KANSAS
 
 
 
Bickford of Mission Springs
Mission
L
91

Bickford of Overland Park
Overland Park
L
79

 
 
 
 
LOUISIANA
 
 
 
West Monroe Arbors
West Monroe
L
59

Bossier Arbors
Bossier City
L
60

Bastrop Arbors
Bastrop
L
38

Minden Arbors
Minden
L
26

 
 
 
 
MICHIGAN
 
 
 
Bickford of Battle Creek
Battle Creek
L
46

Bickford of Lansing
Lansing
L
46

Bickford of Midland
Midland
L
46

Bickford of Saginaw
Saginaw
L
46

 
 
 
 
MINNESOTA
 
 
 
Traditions
Owatonna
M
70

Gracewood Champlin
Champlin
L
30

Gracewood Hugo
Hugo
L
24

Gracewood Maplewood
Maplewood
L
42

Gracewood North Branch
North Branch
L
30

 
 
 
 
OREGON
 
 
 
Dorian Place
Ontario
L
44

Wellsprings
Ontario
L
32

 
 
 
 
PENNSYLVANIA
 
 
 
Heritage Hill Senior Community
Weatherly
L
143

 
 
 
 
SOUTH CAROLINA
 
 
 
The Place at Conway
Conway
L
52

 
 
 
 
TENNESSEE
 
 
 
The Place at Gallatin
Gallatin
L
49

The Place at Kingsport
Kingsport
L
49

The Place at Tullahoma
Tullahoma
L
49

 
 
 
 
WISCONSIN
 
 
 
Charleston House
Beaver Dam
L
120

 
 
 
 
CALIFORNIA
 
 
 
Linda Valley Care Center
Loma Linda
L
181

 
 
 
 

20


SENIOR LIVING CAMPUS
 
Lease (L)/
Licensed

Center
City
Mortgage (M)
Beds

IDAHO
 
 
 
Sunbridge Retirement & Rehab for Nampa
Nampa
L
183

 
 
 
 
FLORIDA
 
 
 
Savannah Court of Maitland
Maitland
L
151

Savannah Court of Palm Beaches
W. Palm Beach
L
144

 
 
 
 
OREGON
 
 
 
East Cascade Retirement Community
Madras
M
76

 
 
 
 
WASHINGTON
 
 
 
Sante Silverdale
Silverdale
L
138

 
 
 
 
HOSPITALS
 
 
 
ARIZONA
 
 
 
Santé Mesa
Mesa
M
70

 
 
 
 
CALIFORNIA
 
 
 
Alvarado Parkway Institute
La Mesa
L
66

 
 
 
 
KENTUCKY
 
 
 
Kentucky River Hospital
Jackson
L
55

 
 
 
 
TENNESSEE
 
 
 
TrustPoint Hospital (Polaris)
Murfreesboro
L
60

 
 
 
 
INDEPENDENT LIVING
 
 
 
MISSOURI
 
 
 
Lake St. Charles Retirement Center
St. Charles
L
180

 
 
 
 
TENNESSEE
 
 
 
Colonial Hill Retirement Center
Johnson City
L
63

Parkwood Retirement Apartments
Chattanooga
L
30

 
 
 
 
MEDICAL OFFICE
 
 
Sq. Ft.
FLORIDA
 
 
 
North Okaloosa
Crestview
L
27,017

 
 
 
 
TEXAS
 
 
 
Pasadena Bayshore
Pasadena
L
61,500

 
 
 
 
CORPORATE OFFICE
 
 
 
TENNESSEE
Murfreesboro
N/A
7,000

 
 
 
 
* Facility was classified as held for sale at December 31, 2012 and in discontinued operations for all periods presented in the consolidated financial statements
** Under construction
 
 
 



21


10-YEAR LEASE EXPIRATIONS

The following table provides additional information on our leases which are scheduled to expire based on the maturity date contained in the most recent lease agreement or extension.  Leases associated with facilities held for sale at December 31, 2012 are not considered below.  We expect that, prior to maturity, we will negotiate new terms of a lease to either the current tenant or another qualified operator.
 
 
 
 
 
 
 
 
Annualized

 
Percentage of

 
 
Leases
 
Rentable
 
Number
 
Gross Rent**

 
Annualized

Year
 
 Expiring
 
Square Feet*
 
 of Units/Beds
 
 (in thousands)

 
 Gross Rent

2013
 
2
 
27,017
 
60
 
$
711

 
.78
%
2014
 
6
 
 
780
 
6,444

 
7.08
%
2015
 
 
 
 

 
%
2016
 
7
 
 
1,198
 
7,184

 
7.90
%
2017
 
14
 
 
778
 
7,564

 
8.31
%
2018
 
2
 
61,500
 
88
 
1,080

 
1.19
%
2019
 
1
 
 
143
 
403

 
.44
%
2020
 
4
 
 
154
 
1,672

 
1.84
%
2021
 
2
 
 
344
 
1,781

 
1.96
%
2022
 
4
 
 
156
 
3,082

 
3.39
%
Thereafter
 
65
 
 
7,268
 
61,048

 
67.11
%
*Rentable Square Feet represents total square footage in two MOB investments.
**Annualized Gross Rent refers to the amount of lease revenue that our portfolio would generate if all leases were in effect for the twelve-month calendar year, regardless of the commencement date, maturity date, or renewals.

ITEM 3. LEGAL PROCEEDINGS.

The Health Care Facilities are subject to claims and suits in the ordinary course of business.  Our lessees and borrowers have indemnified, and are obligated to continue to indemnify us against all liabilities arising from the operation of the Health Care Facilities, and are further obligated to  indemnify us against environmental or title problems affecting the real estate underlying such facilities. While there may be lawsuits pending against certain of the owners and/or lessees of the Health Care Facilities, management believes that the ultimate resolution of all such pending proceedings will have no material adverse effect on our financial condition, results of operations or cash flows.

As previously disclosed, in November 2008, the Company was served with a Civil Investigative Demand by the Office of the Tennessee Attorney General (“OTAG”), which indicated that the OTAG was investigating transactions between the Company and three Tennessee nonprofit corporations.  NHI has provided the OTAG with requested information and documents and has been working with the OTAG with respect to this investigation. The investigation has been resolved with respect to one of the nonprofit corporations. A receiver has been appointed for each of the other two nonprofit corporations, SeniorTrust of Florida, Inc. ("SeniorTrust") and ElderTrust of Florida, Inc ("ElderTrust"). The receiver of each of SeniorTrust and ElderTrust is charged with winding-up the affairs of those entities, which will include the sale of those assets that secure the financing provided to each entity by NHI. As disclosed in our Form 8-K filed September 7, 2012, the receiver of SeniorTrust has caused SeniorTrust to bring a lawsuit against NHI and another party (Davidson Co. Chancery Court Case No. 12-1275-III). As part of the complaint, SeniorTrust asserts claims that primarily arise from an allegation that the terms of a 2004 transaction in which NHI sold a group of nursing homes in Kansas and Missouri to SeniorTrust, with NHI providing 100% financing of the purchase price, were unfair to SeniorTrust. SeniorTrust also alleges that NHI caused SeniorTrust to enter into other transactions on terms adverse to SeniorTrust. SeniorTrust seeks compensatory and punitive damages and other relief. NHI has denied SeniorTrust's claims and intends to vigorously defend against SeniorTrust's complaint. NHI also has asserted a counterclaim seeking payment in full of SeniorTrust's outstanding debt to NHI upon the receiver's sale of the assets that secure that debt.

As disclosed in our Form 8-K filed January 18, 2013, the receiver of ElderTrust has caused ElderTrust to bring a lawsuit against NHI and another party (Davidson Co., Tenn. Chancery Court Case No. 13-0060-IV). ElderTrust asserts claims that primarily arise from an allegation that the terms of the 2001 transaction in which NHI sold seven nursing homes in New Hampshire and Massachusetts to ElderTrust, with NHI providing 100% of the financing of the purchase price, were unfair to ElderTrust and that NHI caused ElderTrust to enter into other transactions on adverse terms. ElderTrust seeks compensatory and punitive damages and other relief. NHI denies ElderTrust's claims and intends to vigorously defend against ElderTrust's complaint. In addition, ElderTrust had been making timely principal and interest payments to NHI in the amount of $308,333.33 per month for the last

22


five years. However, the payments NHI received from ElderTrust in January and February 2013 were for interest only. NHI filed a motion in (Davidson Co., Tenn. Chancery Court Case No. 12-1283-IV(III)) asserting that ElderTrust's receiver has put ElderTrust in breach of its obligation to NHI by reducing its monthly payment and requested that the Court authorize NHI to declare ElderTrust and its affiliated LLCs in default of their debt obligation and to pursue the default remedies provided for in the loan documents. On February 13, 2013, the Court denied this motion.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

PART II.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The Company’s charter contains certain provisions which are designed to ensure that the Company’s status as a REIT is protected for federal income tax purposes. One of these provisions provides that any transfer that would cause NHI to be beneficially owned by fewer than 100 persons or would cause NHI to be “closely held” under the IRS Code would be void, which, subject to certain exceptions, results in no stockholder being allowed to own, either directly or indirectly pursuant to certain tax attribution rules, more than 9.9% of the Company’s stock. In 1991, the Board created an exception to this ownership limitation for Dr. Carl E. Adams, his spouse, Jennie Mae Adams, and their lineal descendants. Effective May 12, 2008, we entered into Excepted Holder Agreements with W. Andrew Adams and certain members of his family. These written agreements are intended to restate and replace the parties’ prior verbal agreement. Based on the Excepted Holder Agreements currently outstanding, the individual ownership limit for all other stockholders is approximately 7.5%. Our charter gives our Board of Directors broad powers to prohibit and rescind any attempted transfer in violation of the ownership limits. These agreements were entered into in connection with the Company’s announcement in 2008 of a stock purchase program pursuant to which the Company subsequently purchased 194,100 shares of its common stock in the public market from its stockholders.

A separate agreement was entered into with each of the spouse and children of Dr. Carl E. Adams and others within Mr. W. Andrew Adams’ family.  We needed to enter into such an agreement with each family member because of the complicated ownership attribution rules under the Internal Revenue Code.  The agreement permits the Excepted Holders to own stock in excess of 9.9% up to the limit specifically provided in the individual agreement and not lose rights with respect to such shares.  However, if the stockholder’s stock ownership exceeds the limit, then such shares in excess of the limit become “Excess Stock” and lose voting rights and entitlement to receive dividends.  The Excess Stock classification remains in place until the stockholder no longer exceeds the threshold limit specified in the Agreement.  The purpose of these agreements is to ensure that the Company does not violate the prohibition against a REIT being closely held.

W. Andrew Adams’ Excess Holder Agreement also provides that he will not own shares of stock in any tenant of the Company if such ownership would cause the Company to constructively own more than a 9.9% interest in such tenant. Again, this prohibition is designed to protect the Company’s status as a REIT for tax purposes.

In order to qualify for the beneficial tax treatment accorded to a REIT, we must make distributions to holders of our common stock equal on an annual basis to at least 90% of our REIT taxable income (excluding net capital gains), as defined in the Internal Revenue Code.  Cash available for distribution to our stockholders is primarily derived from interest payments received on our notes and from rental payments received under our leases.  All distributions will be made by us at the discretion of the Board of Directors and will depend on our cash flow and earnings, our financial condition, bank covenants contained in our financing documents and such other factors as the Board of Directors deems relevant.  Our REIT taxable income is calculated without reference to our cash flow.  Therefore, under certain circumstances, we may not have received cash sufficient to pay our required distributions.

Common Stock Market Prices and Dividends

Our common stock is traded on the New York Stock Exchange under the symbol “NHI”. As of February 14, 2013, there were approximately 21,900 holders of record of shares and approximately 900 beneficial owners of shares.


23


High and low stock prices of our common stock on the New York Stock Exchange and dividends declared for the last two years were:
 
 
2012
 
2011
 
 
Sales Price
 
Cash Dividends Declared
 
Sales Price
 
Cash Dividends Declared
Quarter Ended
 
High
 
Low
 
 
High
 
Low
 
March 31
 
$
51.29

 
$
43.37

 
$.65
 
$48.48
 
$44.55
 
$.615
June 30
 
51.63

 
47.16

 
.65
 
49.55
 
42.52
 
.615
September 30
 
54.81

 
51.00

 
.67
 
48.03
 
37.90
 
.615
December 31
 
57.30

 
51.00

 
.891
 
46.16
 
39.81
 
.871
1Includes a special dividend of $0.22 per share

The closing price of our stock on February 13, 2013 was $64.68.

We currently maintain two equity compensation plans: the 2005 Stock Option, Restricted Stock and Stock Appreciation Rights Plan (“the 2005 Plan”) and the 2012 Stock Incentive Plan ("the 2012 Plan").  These plans have been approved by our stockholders.  The following table provides information as of December 31, 2012 about our common stock that may be issued upon grants of restricted stock and the exercise of options under our existing equity compensation plans.

 
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
Weighted-average exercise price of outstanding options, warrants and rights

 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved
 
 
 
 
 
 
by security holders
 
211,675
 
$46.60
 
1,520,6351
1These shares remain available for grant under the 2005 Plan and the 2012 Plan.

The following graph demonstrates the performance of the cumulative total return to the stockholders of our common stock during the previous five years in comparison to the cumulative total return on the FTSE NAREIT All REITs Index and the Standard & Poor’s 500 Stock Index. The FTSE NAREIT All REITs Index is comprised of all tax-qualified REITs that are listed on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market List. The FTSE NAREIT All REITs Index is not free float adjusted, and constituents are not required to meet minimum size and liquidity criteria.

 
2007
2008
2009
2010
2011
2012
NHI
$100.00
$108.84
$159.16
$205.67
$212.40
$288.48
NAREIT
$100.00
$62.75
$64.02
$65.30
$70.05
$84.13
S&P 500
$100.00
$63.00
$79.67
$91.67
$93.60
$108.58

24


ITEM 6. SELECTED FINANCIAL DATA.

The following table represents our financial information for the five years ended December 31, 2012.  This financial information has been derived from our historical financial statements including those for the most recent three years included elsewhere in this Annual Report on Form 10-K and should be read in conjunction with those consolidated financial statements, accompanying footnotes and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7. Prior period financial information has been reclassified for presentation of operations discontinued in 2012 as described in the notes to the consolidated financial statements. These reclassifications had no impact on previously reported net income.

(dollars in thousands, except share and per share amounts)
 
Years Ended December 31,
STATEMENT OF INCOME DATA:
2012
 
2011
 
2010
 
2009
 
2008
Revenues
$
96,953

 
$
87,213

 
$
82,579

 
$
68,454

 
$
64,194

 
 
 
 
 
 
 
 
 
 
Income from continuing operations
74,663

 
73,192

 
61,786

 
56,255

 
49,620

Discontinued operations:
 
 
 
 
 
 
 
 
 
Income from operations - discontinued
4,269

 
4,592

 
5,631

 
7,974

 
7,890

Gain on sales of real estate
11,966

 
3,348

 
2,004

 

 

Net income
90,898

 
81,132

 
69,421

 
64,229

 
57,510

Net income attributable to noncontrolling interest
(167
)
 

 

 

 

Net income attributable to common stockholders
$
90,731

 
$
81,132

 
$
69,421

 
$
64,229

 
$
57,510

 
 
 
 
 
 
 
 
 
 
PER SHARE DATA:
 
 
 
 
 
 
 
 
 
Basic earnings per common share:
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
2.68

 
$
2.64

 
$
2.23

 
$
2.04

 
$
1.79

Discontinued operations
.58

 
.29

 
.28

 
.29

 
.29

Net income attributable to common stockholders
$
3.26

 
$
2.93

 
$
2.51

 
$
2.33

 
$
2.08

 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share:
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
2.68

 
$
2.63

 
$
2.23

 
$
2.03

 
$
1.79

Discontinued operations
.58

 
.29

 
.27

 
.29

 
.28

Net income attributable to common stockholders
$
3.26

 
$
2.92

 
$
2.50

 
$
2.32

 
$
2.07

 
 
 
 
 
 
 
 
 
 
OTHER DATA:
 
 
 
 
 
 
 
 
 
Common shares outstanding
27,857,217

 
27,751,208

 
27,689,392

 
27,629,505

 
27,580,319

Weighted average common shares:
 
 
 
 
 
 
 
 
 
Basic
27,811,813

 
27,719,096

 
27,664,482

 
27,586,338

 
27,706,106

Diluted
27,838,720

 
27,792,592

 
27,732,959

 
27,618,300

 
27,731,951

 
 
 
 
 
 
 
 
 
 
Regular dividends declared per common share
$
2.64

 
$
2.495

 
$
2.36

 
$
2.20

 
$
2.20

Special dividends declared per common share
$
.22

 
$
.22

 
$

 
$
.10

 
$
.22

 
 
 
 
 
 
 
 
 
 
BALANCE SHEET DATA: (at year end)
 
 
 
 
 
 
 
 
 
Mortgages and other notes receivable, net
$
84,250

 
$
78,672

 
$
75,465

 
$
94,588

 
$
108,640

Real estate properties, net
$
535,390

 
$
394,795

 
$
327,654

 
$
223,861

 
$
181,332

Preferred stock and marketable securities
$
51,016

 
$
49,496

 
$
60,608

 
$
59,454

 
$
64,726

Assets held for sale, net
$
1,611

 
$
29,381

 
$
36,853

 
$
33,420

 
$
200

Total assets
$
705,981

 
$
579,563

 
$
509,341

 
$
459,360

 
$
457,106

Debt
$
203,250

 
$
97,300

 
$
37,765

 
$

 
$
3,987

Total equity
$
468,047

 
$
443,485

 
$
442,500

 
$
434,612

 
$
429,615



25


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis is based primarily on the consolidated financial statements of National Health Investors, Inc. for the periods presented and should be read together with the notes thereto contained in this Annual Report on Form 10-K. Other important factors are identified in “Item 1. Business” and “Item 1A. Risk Factors” above.

Executive Overview

National Health Investors, Inc., a Maryland corporation incorporated in 1991, is a real estate investment trust ("REIT") which invests in income-producing health care properties primarily in the long-term care and senior housing industries. As of December 31, 2012, our portfolio consisted of real estate (excluding the corporate office and assets held for sale) and mortgage and other note investments with a carrying value totaling $618,926,000 and other investments in the preferred stock and marketable securities of other REITs with a carrying value of $51,016,000, resulting in total invested assets of $669,942,000. We are a self-managed REIT with our own management reporting directly to our Board of Directors. Our mission is to invest in health care real estate or in the operations thereof through independent third-party managers which generates current income that will be distributed to stockholders. We have pursued this mission by investing primarily in leased properties, loans and RIDEA transactions. These investments include assisted living facilities and their operations, senior living campuses, independent living, skilled nursing facilities, medical office buildings and hospitals, all of which are collectively referred to herein as "Health Care Facilities." We have historically funded these investments through three sources of capital: (1) current cash flow, (2) the sale of equity securities, and (3) debt offerings, including bank lines of credit, the issuance of convertible debt instruments, and the issuance of ordinary term debt.

Portfolio

At December 31, 2012, our continuing operations consisted of investments in real estate and mortgage notes receivable in 134 health care facilities located in 25 states consisting of 41 assisted living facilities, 6 senior living campuses, 3 independent living facilities, 78 skilled nursing facilities, 2 medical office buildings, 4 hospitals and other notes receivable. These investments consisted of approximately $534,676,000 of net real estate investments in 107 health care facilities with 19 lessees and $84,250,000 aggregate carrying value of mortgage and other notes receivable from 16 borrowers related to 27 health care facilities.

National HealthCare Corporation (“NHC”), is a publicly-held company and our largest customer. Under a Master Lease Agreement dated October 17, 1991, we lease 41 health care facilities to NHC, six of which are included among our discontinued operations as discussed below. The 35 properties included in continuing operations are comprised of 3 independent living facilities and 32 SNFs (4 of which are subleased to other parties for whom the lease payments are guaranteed to us by NHC under the Master Lease Agreement). A 15-year renewal term began January 1, 2007, and included 3 additional 5-year renewal options, each at fair rental value of such leased property as negotiated between the parties and determined without including the value attributable to any improvements to the leased property voluntarily made by the tenant at its expense. In December 2012, we entered into an extension to the Master Lease Agreement with NHC through December 2026. Under the terms of the lease, rent escalates by 4% of the increase, if any, in each facility’s revenue over a 2007 base year. We refer to this additional rent component as “percentage rent.”

The following table summarizes the percentage rent received and recognized from NHC (in thousands):
 
Year Ended December 31,
 
2012
 
2011
 
2010
Current year
$
1,243

 
$
1,234

 
$
750

Prior year final certification1
1,063

 
635

 
485

Total percentage rent
$
2,306

 
$
1,869

 
$
1,235


1For purposes of the percentage rent calculation described in the Master Lease Agreement, NHC’s annual revenue by facility for a given year is certified to NHI by March 31st of the following year.


26


Our revenue from continuing operations was $96,953,000, $87,213,000 and $82,579,000 in 2012, 2011 and 2010, respectively. Of these amounts, $33,056,000 (34%), $32,619,000 (37%) and $31,985,000 (39%) in 2012, 2011 and 2010, respectively, were derived from our master lease with NHC.

In December 2012, we entered into a letter of agreement for the sale of six older skilled nursing facilities to the current lessee, NHC, for $21,000,000 in cash. The sale is to be completed on December 31, 2013. Effective January 1, 2014, NHI’s annual base rent of $33,700,000 will be reduced to $30,750,000. Accordingly, we have reclassified those assets to be sold to NHC as held-for-sale as of December 31, 2012, and the results of operation of the facilities held for sale were classified as discontinued operations for all periods presented in our Consolidated Statements of Income.

NHC owned 1,630,462 shares of our common stock at December 31, 2012. The chairman of our board of directors is also a director on NHC’s board.

27


The following tables summarize our investments in real estate (excluding corporate office and assets held for sale) and mortgage and other notes receivable as of December 31, 2012 (dollars in thousands):
Real Estate Properties
Properties

 
Beds/Sq. Ft.*

 
Net Investment


Skilled Nursing Facilities
55

 
7,734

 
$
252,566


Assisted Living Facilities
39

 
1,984

 
187,486

 
Senior Living Campuses
5

 
797

 
49,909


Hospitals
3

 
181

 
36,707


Independent Living Facilities
3

 
273

 
3,587


Medical Office Buildings
2

 
88,517

*
4,421



Total Real Estate Properties
107

 

 
$
534,676





 

 

Mortgage and Other Notes Receivable

 

 


Skilled Nursing Facilities
23

 
2,605

 
$
49,279


Assisted Living Facilities
2

 
190

 
6,265

 
Senior Living Campus
1

 
76

 
800


Hospital
1

 
70

 
11,870

 
Other Notes Receivable

 

 
16,036



Total Mortgage and Other Notes Receivable
27

 
2,941

 
$
84,250



Total Portfolio
134

 

 
$
618,926

 



 

 

 



 

 

 



 
Investment

 

Portfolio Summary
Properties

 
Percentage

 
Net Investment

 
Real Estate Properties
107

 
86.4
%
 
$
534,676

 
Mortgage and Other Notes Receivable
27

 
13.6
%
 
84,250

 

Total Portfolio
134

 
100.0
%
 
$
618,926

 



 

 
 
Summary of Facilities by Type

 

 
 
 
Skilled Nursing Facilities
78

 
48.8
%
 
$
301,845

 
Assisted Living Facilities
41

 
31.3
%
 
193,751

 
Senior Living Campuses
6

 
8.2
%
 
50,709

 
Hospitals
4

 
7.8
%
 
48,577

 
Independent Living Facilities
3

 
0.6
%
 
3,587

 
Medical Office Buildings
2

 
0.7
%
 
4,421

 
Other

 
2.6
%
 
16,036

 

Total Real Estate Portfolio
134

 
100.0
%
 
$
618,926

 



 

 

Portfolio by Operator Type

 

 

 
Public
47

 
11.9
%
 
$
73,650

 
Regional
75

 
77.1
%
 
476,960

 
Small
12

 
11.0
%
 
68,316

 

Total Real Estate Portfolio
134

 
100.0
%
 
$
618,926

 



 

 

Public Operators

 

 

 
National HealthCare Corp.
35

 
6.7
%
 
$
41,344

 
Emeritus Senior Living
8

 
3.0
%
 
18,868

 
Community Health Systems, Inc.
2

 
1.1
%
 
6,608

 
Sun Healthcare Group, Inc.
2

 
1.1
%
 
6,830

 

Total Public Operators
47

 
11.9
%
 
$
73,650



28


For the year ended December 31, 2012, operators of facilities which provided more than 3% of our total revenues were (in alphabetical order): Bickford Senior Living; Emeritus Senior Living; Fundamental Long Term Care Holdings, LLC; Health Services Management, Inc.; Landmark Senior Living; Legend Healthcare, LLC; National HealthCare Corp.; SeniorHealth of Rutherford, LLC; SeniorTrust of Florida, Inc; Senior Living Management Corporation, LLC; SP Silverdale, LLC; and White Pine Senior Living.

As of December 31, 2012, our average effective annual rental income was $7,522 per bed for SNFs, $7,577 per unit for ALFs, $4,401 per unit for ILFs, $29,310 per bed for hospitals, and $12 per square foot for MOBs.

We invest a portion of our funds in the preferred and common shares of other publicly-held healthcare REITs to ensure a substantial portion of our assets are invested for real estate purposes.  At December 31, 2012, such investments were $51,016,000.

Areas of Focus

We are evaluating and will potentially make investments in 2013 while continuing to monitor and improve our existing properties. Even as we make new investments, we expect to maintain a relatively low level of debt compared to the value of our assets and relative to our peers in the industry. Approximately 65% of our revenue from continuing operations is from operators of our skilled nursing facilities that receive a significant portion of their revenue from governmental payors, primarily Medicare and Medicaid.  Such revenues are subject annually to statutory and regulatory changes, and in recent years, have been reduced due to federal and state budgetary pressures.  As a result, in 2009 we began to diversify our portfolio by focusing a significant portion of our investments into private-pay assisted living, memory care and other properties which do not rely primarily on Medicare and Medicaid reimbursement.

According to a recent estimate by the U.S. Department of Health and Human Services, the number of Americans 65 and older is expected to grow 36% between 2010 and 2020, compared to a 9% growth rate for the general population.  An increase in this age demographic is expected to increase the demand for senior housing properties in the coming decades.

Our new investments in real estate and mortgage notes in 2013 are expected to be funded by our liquid investments and by debt financing. We intend to make new investments that meet our underwriting criteria and where we believe the spreads over our cost of capital will generate sufficient returns to our shareholders.

Critical Accounting Policies

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These accounting principles require 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. If actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations, liquidity and/or financial condition.

We consider an accounting estimate or assumption critical if:

1.
the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and
2.
the impact of the estimates and assumptions on financial condition or operating performance is material.

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 - The majority of our tenants and borrowers are in the long-term health care industry (SNFs and ALFs) where SNFs derive their revenues primarily from Medicare, Medicaid and other government programs. Amounts paid under these government programs are subject to legislative and government budget constraints. From time to time, there may be material changes in government reimbursement. In the past, SNFs have experienced material reductions in government reimbursement.

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 combined to cause a number of bankruptcy filings, bankruptcy court rulings and

29


court judgments affecting our lessees and borrowers. In prior years, we have determined that impairment of certain of our investments had occurred as a result of these events.

We evaluate the recoverability of the carrying values of our properties on a property-by-property basis. On a quarterly basis, we review our properties for recoverability when events or circumstances, including significant physical changes in the property, significant adverse changes in general economic conditions and significant deteriorations of the underlying cash flows of the property, indicate that the carrying amount of the property may not be recoverable. The need to recognize an impairment charge is based on estimated undiscounted future cash flows from a property compared to the carrying value of that property. If recognition of an impairment charge is necessary, it is measured as the amount by which the carrying amount of the property exceeds the fair value of the property.

For notes receivable, impairment recognition is based upon an evaluation of the estimated collectibility of contractual loan payments and general economic conditions on a specific loan basis. On a quarterly basis, we review our notes receivable for ability to realize on such notes when events or circumstances, including the non-receipt of contractual principal and interest payments, significant deteriorations of the financial condition of the borrower and significant adverse changes in general economic conditions, indicate that the carrying amount of the note receivable may not be recoverable. If necessary, impairment is measured as the amount by which the carrying amount exceeds the fair value as measured by the discounted cash flows expected to be received under the note receivable or, if foreclosure is probable, the fair value of the collateral securing the note receivable.

We evaluate our marketable equity securities for other-than-temporary impairments. An impairment of a marketable equity security would be considered “other-than-temporary” unless we have the ability and intent to hold the investment for a period of time sufficient for a forecasted market price recovery up to (or beyond) the cost of the investment and evidence indicates the cost of the investment is recoverable within a reasonable period of time.

For our arrangement with Bickford discussed below, our initial allocation of the purchase price reflects estimated cash flows resulting from the separate activities and sources of cash resulting from the venture, using discounted cash flow methods in accordance with our policies. As with our real estate investments, we evaluate the recoverability of the carrying values of our properties on an individual basis. On a quarterly basis, we review our properties for recoverability when events or circumstances, including significant physical changes in the property or deterioration of the operations, significant adverse changes in general economic conditions and significant deteriorations of the underlying cash flows of the entities, indicate that the carrying amount of the entities may not be recoverable. The need to recognize an impairment charge is based on estimated undiscounted future cash flows from a source compared to the carrying value of that property or, for the operating company, its operations. If recognition of an impairment charge is necessary, it is measured as the amount by which the carrying amount of the investment exceeds the fair value of the estimated undiscounted future cash flows from that source.

While we believe that the carrying amounts of our properties and arrangement with Bickford are recoverable and our 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 - 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 whom we have determined, based on insufficient historical collections and the lack of expected future collections, that revenue for interest or rent is not probable of collection until received. For these 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 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, are included in rental income when they are determinable and earned, and are excluded from future minimum lease payments.

3) As part of the process of preparing our consolidated financial statements, significant management judgment is required to evaluate our compliance with REIT requirements. Our determinations are based on interpretation of tax laws, and our conclusions may have an impact on the income tax expense recognized. 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. Effective October 1, 2012, we began to record income tax expense or benefit with respect to our subsidiary which will be taxed as a Taxable REIT Subsidiary ("TRS") under provisions similar to those applicable to regular corporations. Aside from such income taxes that may be applicable to the taxable income in our TRS, we will not be subject to U.S. federal income tax, provided that we continue to qualify as a REIT and make distributions to stockholders equal to or in excess of our taxable income. This treatment substantially eliminates

30


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) The consolidated financial statements include our accounts, the accounts of our wholly-owned subsidiaries and the accounts of joint ventures in which we own a majority voting interest with the ability to control operations and where no substantive participating rights or substantive kick-out rights have been granted to the noncontrolling interests. In addition, we consolidate those entities deemed to be variable interest entities ("VIE") in which we are determined to be the primary beneficiary. All material inter-company transactions and balances have been eliminated in consolidation.

We apply Financial Accounting Standards Board ("FASB") guidance for our arrangements with variable interest entities ("VIEs") which requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of the VIE. A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity's activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. We consolidate investments in VIEs when we are determined to be the primary beneficiary of the VIE. We may change our original assessment of a VIE due to events such as modifications of contractual arrangements that affect the characteristics or adequacy of the entity's equity investments at risk and the disposal of all or a portion of an interest held by the primary beneficiary.

5) Real property developed by us is recorded at cost, including the capitalization of interest during construction. The cost of real property investments acquired is allocated to net tangible and identifiable intangible assets based on their respective fair values. Tangible assets primarily consist of land, buildings and improvements. The remaining purchase price is allocated among identifiable intangible assets, if any.

We make estimates as part of our allocation of the purchase price of acquisitions to the various components of the acquisition based upon the relative fair value of each component. The most significant components of our allocations are typically the allocation of fair value to land, equipment, buildings and other improvements, and intangible assets, if any. Our estimates of the values of these components will affect the amount of depreciation and amortization we record over the estimated useful life of the property acquired or the remaining lease term.

New Real Estate Investments

During 2012, we made real estate investments and commitments totaling $159,457,000 which are listed below and more fully described in the notes to the consolidated financial statements.

 
Asset Class
 
Amount
 
WAIY1
RIDEA Structure
 
ALF
 
$
52,667,000

 
8.39%
Purchase and lease
 
ALF
 
29,200,000

 
7.75%
Construction commitment
 
ALF
 
27,000,000

 
9.00%
Purchase and lease
 
SLC
 
37,120,000

 
8.19%
Purchase and lease
 
SNF
 
13,470,000

 
9.00%
 
 
 
 
$
159,457,000

 
8.38%
 
 
 
 
 
 
 
1 Weighted Average Investment Yield (Cash Yield) at time of investment

Bickford

On September 30, 2012, we acquired two assisted living/memory care facilities in Kansas totaling 170 units from our current tenant, Bickford. The real estate properties are held in our consolidated subsidiary ("PropCo"), of which we retain an 85% ownership interest with eight other assisted living/memory care facilities that we own. The previous master lease with Bickford was renegotiated so that effective October 1, 2012, the ten facilities are now leased to an unconsolidated operating entity ("OpCo") of which we acquired an 85% ownership interest. For accounting purposes, we treated the arrangement as an asset acquisition which included the purchase of two properties in PropCo and the acquisition of an 85% ownership interest in OpCo which is controlled

31


by Bickford, or its affiliates. The master lease between PropCo and OpCo is for an initial term of five years, plus renewal options, at an initial annual lease amount of $7,750,000, of which $6,008,000 is a guaranteed annual distribution to NHI, plus a 3% annual escalator. The previous master lease to Bickford covering eight facilities provided lease revenue of $3,660,000 per year at the time of the transaction. We structured our arrangement with Bickford to be compliant with the provisions of the REIT Investment Diversification and Empowerment Act of 2007 ("RIDEA") which permits NHI to receive rent payments through a triple-net lease between PropCo and OpCo, and to give NHI the opportunity to capture additional value on the improving performance of the operating company through distributions to a Taxable REIT Subsidiary ("TRS"). Accordingly, the TRS holds our 85% equity interest in OpCo in order to provide an organizational structure that will allow the TRS to engage in a broad range of activities and share in revenues that would otherwise be non-qualifying income under the REIT gross income tests. Our description of the consideration given to Bickford and the fair value received by NHI is provided in Note 2 to the consolidated financial statements.

In conjunction with the transaction described above, Bickford granted us the exclusive right to their future acquisitions, development projects and refinancing transactions. At December 31, 2012, we had purchased land and begun construction on three assisted living facilities having a maximum cost of $27,000,000. Our costs incurred to date were $4,016,000.

PropCo and OpCo were established to grant an 85% and 15% equity interest in each entity to NHI and Bickford, respectively. At PropCo, all operations encompassing ordinary-course-of-business activities are under NHI's management as the managing member. OpCo's activities are managed through an "eligible independent contractor" affiliated with, appointed under, and subject to the oversight of Bickford. This organizational structure is designed to meet the requirements of Internal Revenue Code regulations for TRS entities. At PropCo, certain major business decisions require Bickford's consent in order to protect its interests, therefore leaving control with NHI. Bickford is the managing member of OpCo, although NHI has retained certain noncontrolling rights. As a result of Bickford's retention of operations oversight and control over all day-to-day business matters, our participative influence at OpCo does not amount to control of the entity. Because of our control of ordinary-course-of-business activities in PropCo, we include its assets, liabilities, and operations in our consolidated financial statements. We report our investment in OpCo, over whose operating and financial policies we have the ability to exercise significant influence, but not control, under the equity method of accounting. For the year ended December 31, 2012, OpCo made lease payments to PropCo of $1,937,500 and our equity in the earnings of OpCo was $45,000.

We believe that this TRS structure will facilitate certain future acquisitions of senior housing assets and permit us to share in revenues that would otherwise be non-qualifying income under the REIT gross income tests. However, our decision to acquire future assisted living or skilled nursing assets using the TRS structure will depend upon our ability to negotiate purchase terms and structure our involvement in a way that complies with the rules governing REITs and that is economically beneficial to our shareholders.

Other Lease Activity

In June 2012, due to material noncompliance with our lease terms, we terminated our lease with a former tenant of four assisted living and memory care facilities in Minnesota and transitioned the lease to a new tenant. The unplanned transition to a new tenant resulted in a write-off for accounting purposes of $963,000 in straight-line rent receivables, $126,000 in billed receivables and $171,000 in legal and other expenses. The former lease provided for a current annual lease amount of $2,204,000. The facilities contain a total of 126 units, are four to eight years old, and are now being leased to affiliates of White Pine Senior Living ("White Pine") for an initial term of 13 years at an annual lease amount of $2,338,000 plus annual fixed escalators. The first six months of the lease contains additional supplemental rent payments totaling $410,000. Our rental income, regardless of the timing of scheduled payments, is recognized on a straight-line basis over the term of the lease and amounted to $1,643,000 through December 31, 2012.

Our leases are typically structured as "triple net leases" on single-tenant properties having an initial leasehold term of 10 to 15 years with one or more 5-year renewal options. As such, there may be interim or annual reporting periods in which we do not experience a lease renewal or expiration. During the year ended December 31, 2012, we renewed one lease. The expiring lease on a hospital facility had an original term of 15 years and an annual lease payment of $53,138 per bed. The new lease agreement is for an initial period of 10 years, plus one 5-year renewal option and, based on current market and property specific factors, requires an annual lease payment of $46,364 per bed. In December 2012, we entered into an extension to the Master Lease Agreement with NHC through December 2026.



Planned or Completed Dispositions of Certain Real Estate


32


In December 2012, our tenant, Sunrise Senior Living, exercised its purchase option to acquire for $23,000,000 in cash our assisted living facility in Edison, NJ which had a carrying value of $11,009,000. We deferred recognition of the tax gain on the sale of this facility by utilizing the like-kind exchange rules under Section 1031 of the Internal Revenue Code.

In December 2012, we entered into a letter of agreement with our tenant and major customer, NHC, to sell six older skilled nursing facilities for $21,000,000 in cash. The sale is to be completed on December 31, 2013. Effective January 1, 2014, NHI's annual base rent of $33,700,000 will be reduced to $30,750,000.

In January 2011, we completed the sale of a skilled nursing facility in Texas having a carrying value of $4,039,000 for cash proceeds of $4,500,000. In February 2011, we completed the sale of two medical office buildings having a carrying value of $3,433,000 for cash proceeds of $5,271,000. In August 2011, we completed the sale of a 60-unit assisted living facility located in Daytona Beach, Florida with a carrying value of $2,152,000 for cash proceeds of $3,200,000.

In September 2012, we canceled our agreement to sell five skilled nursing facilities in Texas to our current tenant. This portfolio no longer meets accounting criteria as being held for sale, and we have reclassified to the land and buildings accounts $29,381,000 previously reported in our Consolidated Balance Sheet as assets held for sale. In the third quarter of 2012, we recorded $2,398,000 in depreciation expense, which is the expense that would have been recognized as depreciation on these properties had the disposal group been continuously classified as held and used. We recorded no impairment.

We have reclassified the results of operations of facilities sold or held for sale at December 31, 2012 as discontinued operations for all periods presented in our Consolidated Statements of Income.

Investments in Mortgage and Other Notes Receivable

In April 12, 2012, we entered into a three-year loan to provide Capital Funding Group, Inc. (CFG) up to $15,000,000 to be used as mezzanine financing for its bridge-to-HUD lending program. Outstanding borrowings were $15,000,000 at December 31, 2012. This loan requires monthly payments of interest only at an annual rate of 13.5%.

During 2012, we committed loans to other borrowers of $4,000,000 of which the outstanding balance was $1,036,000 at December 31, 2012.

Real Estate and Mortgage Notes Receivable Write-downs and Recoveries

Our borrowers and tenants experience periods of significant financial pressures and difficulties similar to other health care providers. 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.

Since inception, a number of our facility operators and mortgage loan borrowers have experienced bankruptcy. Others have been forced to surrender properties to us in lieu of foreclosure or for certain periods have failed to make timely payments on their obligations to us.

The following table summarizes our write-downs and recoveries for the last three years for both continuing and discontinued operations (in thousands):

Years ended December 31,

2012
 
2011
 
2010
Mortgage Notes:
 
 
 
 
 
Impairments
$
2,300

 
$

 
$

Recoveries
(4,495
)
 
(99
)
 
(573
)

$
(2,195
)
 
$
(99
)
 
$
(573
)

In December 2012, we received from our current borrower a payment of $13,830,000 in full settlement of our note receivable secured by three skilled nursing facilities in Georgia formerly owned by Allgood Healthcare, Inc. The payment consisted of note principal of $4,650,000, accrued interest of $80,000, a recovery of a previous writedown of $4,495,000, and a note gain of $4,605,000 related to an equity participation in the loan. The recovery and gain are included in separate components of our income from continuing operations in our Consolidated Statements of Income. These facilities had previously been involved in bankruptcy proceedings with the former owner, Allgood.

33



In the third quarter of 2012, we recorded a $2,300,000 impairment on a note receivable from SeniorTrust of Florida, Inc. which had a carrying value of $19,037,000 at December 31, 2012. The impairment was based on NHI's continuing collection history with SeniorTrust and was estimated consistently with our policy of using discounted cash flow techniques at an interest rate explicit in the note. See our discussion below, under Potential Effects of Reductions in Medicare Reimbursement, for additional information on this write-down.

During 2011, we received a payment of $99,000 as a recovery of a previous note write-down.  The payment resulted from the full payoff of a note receivable related to a SNF in Oklahoma.

During 2010, we received payments totaling $573,000 as a recovery of previous mortgage note write-downs.  The payments resulted from the settlement of bankruptcy proceedings related to our former borrower Algood to whom we had originally provided mortgage note financing for five SNFs in Georgia.

We believe that the carrying amounts of our real estate properties are recoverable and our mortgage notes receivable 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 Writedowns and Recoveries

A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in an impairment to reduce the carrying amount to fair value.  The impairment is charged to operations and a new cost basis for the security is established.  To determine whether an impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until a market price recovery and consider whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.  Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to a reporting date and forecasted performance of the investment.

At December 31, 2012, we concluded there were no other-than-temporary impairments of our marketable securities.

During 2011, we sold 381,000 shares of LTC Properties, Inc. (“LTC”) for an average price of $29.00 per share.  As a result, we recorded $8,655,000 as a gain on the sale, $2,732,000 of which was a recovery of a previously recorded other-than-temporary impairment.

Potential Effects of Reductions in Medicare Reimbursement

In July 2012, CMS announced the final rule for fiscal 2013 that increased Medicare payments to SNF operators by a net 1.8% for the fiscal year beginning October 1, 2012. The final rule for 2013 does not take into account the ongoing attempt by Congress to reduce the federal deficit by $1.5 trillion over the next decade as required by the Budget Control Act of 2011. The failure of Congress to agree on spending reductions to meet deficit goals would trigger automatic spending cuts of 2% to Medicare. We currently estimate the majority of our borrowers and lessees will be able to withstand the potential Medicare cut described above due to their credit quality, profitability and their debt or lease coverage ratios, although no assurances can be given as to what the ultimate effect such Medicare cuts will have on each of our borrowers and lessees. However, as discussed in the notes to the consolidated financial statements, our not-for-profit borrowers SeniorTrust of Florida, Inc. and ElderTrust of Florida, Inc. have appointed receivers to effect the sale of their assets and the winding up of the affairs of those entities. These two mortgage borrowers have been adversely impacted by previous Medicare cuts due to their payor mix, their current payment coverage ratios and limited net equity. The impact of further reduction in Medicare reimbursement could negatively affect their ability to make full scheduled payments to us and could have an adverse effect on the value of the underlying real estate assets. We have been in discussions with these borrowers regarding the possible sale of their real estate assets. The mortgage notes receivable from the borrowers have an aggregate principal balance of $33,029,000 at December 31, 2012 and interest income amounted to $2,067,000 for the year then ended.

We evaluate the carrying value of our mortgage notes receivable on an instrument-by-instrument basis.  On a quarterly basis, we review our notes receivable for the effects of events or circumstances, including the non-receipt of contractual principal and interest payments, significant deterioration of the financial condition of the borrower or significant adverse changes in general economic conditions, that indicate the carrying value of a note receivable may not be recoverable.  If necessary, an impairment is measured as the amount by which the carrying value exceeds the discounted cash flows expected to be received under the note receivable or, if foreclosure is probable, the fair value of the collateral securing the note receivable.

34


As we have continued to receive interest-only payments on the SeniorTrust mortgage note receivables, we have based our cash flow analysis on probability-weighted alternatives ranging from continuation of the status quo to partial collection with cessation of interest. Accordingly, as described above under “Real Estate and Mortgage Notes Receivable Write-downs and Recoveries,” we recognized the impairment to the carrying value of the SeniorTrust note in the amount of $2,300,000. As discussed in the notes to our consolidated financial statements, representatives of SeniorTrust and ElderTrust have filed lawsuits against NHI. The company has denied these claims and intends to vigorously defend against these complaints.

We evaluate the recoverability of the carrying value of our real estate properties on a property-by-property basis.  On a quarterly basis, we review our properties for events or circumstances that indicate the carrying value of the property may not be recoverable.  The need to recognize an impairment is based on estimated undiscounted future cash flows from a property compared to the carrying value of that property.  If recognition of an impairment is necessary, it is measured as the amount by which the carrying amount of the property exceeds the fair value of the property.

We believe that the carrying amounts of our real estate properties are recoverable and that mortgage notes receivable 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. We recognize interest income in the period in which cash is received on certain mortgage notes receivable which were previously classified as non-performing. These notes have an aggregate carrying value of $1,258,000 at December 31, 2012.


35


Results of Operations

The results of operations for facilities included in assets held for sale or sold, including the gain or loss on such sales, have been reported in the current and prior periods as discontinued operations. The reclassifications to retrospectively reflect the disposition of these facilities had no impact on previously reported net income.

The significant items affecting revenues and expenses are described below (in thousands):
 
Years ended December 31,
 
Period Change
 
2012
 
2011
 
$
 
%
Revenues:
 
 
 
 
 
 
 
Rental income
 
 
 
 
 
 
 
SNFs leased to Legend Healthcare
$
11,099

 
$
6,512

 
$
4,587

 
70.4
 %
ALFs leased to Bickford Senior Living
4,646

 
3,485

 
1,161

 
33.3
 %
SLCs leased to SP Silverdale
744

 

 
744

 
NM

ALFs leased to Senior Living Management
3,703

 
3,239

 
464

 
14.3
 %
ALFs leased to Selah Management Group
1,391

 
843

 
548

 
65.0
 %
Other new and existing leases
59,707

 
58,141

 
1,566

 
2.7
 %
 
81,290

 
72,220

 
9,070

 
12.6
 %
Straight-line rent adjustments, new and existing leases
3,825

 
3,858

 
(33
)
 
(0.9
)%
Total Rental Income
85,115

 
76,078

 
9,037

 
11.9
 %
Interest from mortgage and other notes
 
 
 
 
 
 
 
Capital Funding Group
626

 
70

 
556

 
NM

Other new and existing mortgages
6,800

 
6,582

 
218

 
3.3
 %
Total Interest Income from Mortgage and Other Notes
7,426

 
6,652

 
774

 
11.6
 %
Investment income and other
4,412

 
4,483

 
(71
)
 
(1.6
)%
Total Revenue
96,953

 
87,213

 
9,740

 
11.2
 %
Expenses:
 
 
 
 
 
 
 
Depreciation
 
 
 
 
 
 
 
SNFs leased to Fundamental reclassified to continuing operations
2,616

 

 
2,616

 
NM

SNFs leased to Legend Healthcare
1,923

 
277

 
1,646

 
NM

Other new and existing assets
12,040

 
11,272

 
768

 
6.8
 %
Total Depreciation
16,579

 
11,549

 
5,030

 
43.6
 %
Interest expense:
 
 
 
 
 
 
 
Change in fair value of interest rate swap agreement

 
1,197

 
(1,197
)
 
NM

Interest expense and amortization of loan costs
3,492

 
2,651

 
841

 
31.7
 %
Total Interest Expense
3,492

 
3,848

 
(356
)
 
(9.3
)%
Loan and realty losses (recoveries)
(2,195
)
 
(99
)
 
(2,096
)
 
NM

Share-based compensation expense
2,168

 
3,087

 
(919
)
 
(29.8
)%
Salaries, wages & benefits
3,334

 
2,863

 
471

 
16.5
 %
Other expenses
3,834

 
3,034

 
800

 
26.4
 %
 
27,212

 
24,282

 
2,930

 
12.1
 %
Income before unconsolidated entity, gains on sales of marketable securities, discontinued operations and noncontrolling interest
69,741

 
62,931

 
6,810

 
10.8
 %
Income from unconsolidated entity
45

 

 
45

 
NM

Investment and other gains
4,877

 
10,261

 
(5,384
)
 
(52.5
)%
Income from continuing operations
74,663

 
73,192

 
1,471

 
2.0
 %
Income from discontinued operations
4,269

 
4,592

 
(323
)
 
(7.0
)%
Net gain on sale of real estate
11,966

 
3,348

 
8,618

 
NM

Net income
90,898

 
81,132

 
9,766

 
12.0
 %
Net income attributable to noncontrolling interest
(167
)
 

 
(167