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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - NATIONAL HEALTH INVESTORS INCnhi-3312014x10qex311.htm
EX-10.2 - AMENDED AND RESTATED EMPLOYMENT AGREEMENT - NATIONAL HEALTH INVESTORS INCnhi-3312014x10qex102.htm
EX-32 - CERTIFICATION OF CEO AND PFO AND PAO - NATIONAL HEALTH INVESTORS INCnhi-3312014x10qex32.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER - NATIONAL HEALTH INVESTORS INCnhi-3312014x10qex312.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
[ x ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended March 31, 2014
 
 
[ ]
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)

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 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 ]

There were 33,051,999 shares of common stock outstanding of the registrant as of May 1, 2014.



Table of Contents



2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

 
March 31,
2014
 
December 31,
2013
 
(unaudited)
 
 
Assets:
 
 
 
Real estate properties:
 
 
 
Land
$
93,290

 
$
91,770

Buildings and improvements
1,363,727

 
1,320,567

Construction in progress
11,198

 
9,665

 
1,468,215

 
1,422,002

Less accumulated depreciation
(183,488
)
 
(174,262
)
Real estate properties, net
1,284,727

 
1,247,740

Mortgage and other notes receivable, net
60,871

 
60,639

Investment in preferred stock, at cost
38,132

 
38,132

Cash and cash equivalents
6,245

 
11,312

Marketable securities
13,438

 
12,650

Straight-line rent receivable
22,886

 
18,691

Equity-method investment and other assets
46,903

 
66,656

Total Assets
$
1,473,202

 
$
1,455,820

 
 
 
 
Liabilities and Equity:
 
 
 
Debt
$
629,033

 
$
617,080

Real estate purchase liabilities
4,000

 
2,600

Accounts payable and accrued expenses
7,058

 
8,011

Dividends payable
25,450

 
24,293

Lease deposit liabilities
22,775

 
22,775

Deferred income
1,701

 
3,901

Total Liabilities
690,017

 
678,660

 
 
 
 
Commitments and Contingencies
 
 
 
 
 
 
 
National Health Investors Stockholders' Equity:
 
 
 
Common stock, $.01 par value; 40,000,000 shares authorized;
 
 
 
33,051,999 and 33,051,176 shares issued and outstanding, respectively
330

 
330

Capital in excess of par value
762,483

 
753,635

Cumulative dividends in excess of net income
1,126

 
3,043

Accumulated other comprehensive income
8,741

 
9,538

Total National Health Investors Stockholders' Equity
772,680

 
766,546

Noncontrolling interest
10,505

 
10,614

Total Equity
783,185

 
777,160

Total Liabilities and Equity
$
1,473,202

 
$
1,455,820


The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. The Condensed Consolidated Balance Sheet at December 31, 2013 was derived from the audited consolidated financial statements at that date.

3


NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)

 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(unaudited)
Revenues:
 
 
 
Rental income
$
40,313

 
$
24,105

Interest income from mortgage and other notes
1,756

 
1,969

Investment income and other
1,067

 
1,052

 
43,136

 
27,126

Expenses:
 
 
 
Depreciation
9,237

 
4,248

Interest, including amortization of debt discount and issuance costs
6,887

 
1,123

Legal
73

 
277

Franchise, excise and other taxes
306

 
144

General and administrative
2,935

 
3,089

Loan and realty losses

 
4,037

 
19,438

 
12,918

 
 
 
 
 Income before equity-method investee, discontinued operations and noncontrolling interest
23,698

 
14,208

Income from equity-method investee
158

 
22

Income from continuing operations
23,856

 
14,230

Income from discontinued operations

 
1,693

Net income
23,856

 
15,923

Less: net income attributable to noncontrolling interest
(323
)
 
(180
)
Net income attributable to common stockholders
$
23,533

 
$
15,743

 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic
33,051,415

 
27,876,176

Diluted
33,085,232

 
27,911,584

Earnings per common share:
 
 
 
Basic:
 
 
 
Income from continuing operations attributable to common stockholders
$
.71

 
$
.50

Discontinued operations

 
.06

Net income per common share attributable to common stockholders
$
.71

 
$
.56

Diluted:
 
 
 
Income from continuing operations attributable to common stockholders
$
.71

 
$
.50

Discontinued operations

 
.06

Net income per common share attributable to common stockholders
$
.71

 
$
.56



The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

4


NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(unaudited)
Net income
$
23,856

 
$
15,923

Other comprehensive income:
 
 
 
Change in unrealized gains on securities
787

 
1,961

Less: reclassification adjustment for gains in net income

 

Increase (decrease) in fair value of cash flow hedge
(1,056
)
 
399

Less: reclassification adjustment for amounts recognized in net income
(528
)
 
(129
)
Total other comprehensive income (loss)
(797
)
 
2,231

Comprehensive income
23,059

 
18,154

Less: comprehensive income attributable to noncontrolling interest
(323
)
 
(180
)
Comprehensive income attributable to common stockholders
$
22,736

 
$
17,974



The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

5


NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
23,856

 
$
15,923

Adjustments to reconcile net income to net cash provided by
 
 
 
operating activities:
 
 
 
Depreciation
9,237

 
4,415

Amortization
343

 
82

Straight-line rental income
(4,195
)
 
(1,283
)
Write-off of debt issuance costs
2,145

 

Loan and realty losses

 
4,037

Share-based compensation
1,349

 
1,580

Income from equity-method investee
(158
)
 
(22
)
Change in operating assets and liabilities:
 
 
 
Equity-method investment and other assets
(352
)
 
(406
)
Accounts payable and accrued expenses
(1,149
)
 
(440
)
Deferred income
(2,200
)
 
(40
)
Net cash provided by operating activities
28,876

 
23,846

Cash flows from investing activities:
 
 
 
Investment in mortgage and other notes receivable
(1,131
)
 

Collection of mortgage and other notes receivable
899

 
154

Investment in real estate
(16,307
)
 

Investment in real estate development
(2,572
)
 
(1,463
)
Investment in renovations of existing real estate
(1,311
)
 
(836
)
Payment of real estate purchase liability
(1,600
)
 

Net cash used in investing activities
(22,022
)
 
(2,145
)
Cash flows from financing activities:
 
 
 
Net change in borrowings under revolving credit facilities
(60,000
)
 

Proceeds from convertible senior notes
200,000

 

Borrowings on term loan
130,000

 

Payments on term loans
(250,275
)
 

Debt issuance costs
(6,921
)
 

Proceeds from exercise of stock options

 
146

Distributions to noncontrolling interest
(432
)
 
(176
)
Dividends paid to stockholders
(24,293
)
 
(24,793
)
Net cash used in financing activities
(11,921
)
 
(24,823
)
 
 
 
 
Decrease in cash and cash equivalents
(5,067
)
 
(3,122
)
Cash and cash equivalents, beginning of period
11,312

 
9,172

Cash and cash equivalents, end of period
$
6,245

 
$
6,050


The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

6


NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)

 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(unaudited)
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
4,383

 
$
1,010

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Tax deferred exchange funds applied to investment in real estate
$
23,813

 
$

Conditional consideration in asset acquisition
$
3,000

 
$

Accounts payable related to investments in real estate
$
2,296

 
$



The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

7


NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands except share and per share amounts)

 
Common Stock
 
Capital in Excess of Par Value
 
Cumulative Net Income in Excess of Dividends
 
Accumulated Other Comprehensive Income
 
Total National Health Investors Stockholders' Equity
 
Noncontrolling Interest
 
Total Equity
 
Shares
 
Amount
 
 
 
 
 
 
Balances at December 31, 2013
33,051,176

 
$
330

 
$
753,635

 
$
3,043

 
$
9,538

 
$
766,546

 
$
10,614

 
$
777,160

Total comprehensive income

 

 

 
23,533

 
(797
)
 
22,736

 
323

 
23,059

Distributions to noncontrolling interest

 

 

 

 

 

 
(432
)
 
(432
)
Shares issued on stock options exercised
823

 

 

 

 

 

 

 

Share-based compensation

 

 
1,349

 

 

 
1,349

 

 
1,349

Equity component of convertible debt

 

 
7,499

 

 

 
7,499

 

 
7,499

Dividends declared, $.77 per common share

 

 

 
(25,450
)
 

 
(25,450
)
 

 
(25,450
)
Balances at March 31, 2014
33,051,999

 
$
330

 
$
762,483

 
$
1,126

 
$
8,741

 
$
772,680

 
$
10,505

 
$
783,185


The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

8


NATIONAL HEALTH INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
(unaudited)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

We, the management of National Health Investors, Inc., ("NHI" or the "Company") believe that the unaudited condensed consolidated financial statements of which these notes are an integral part include all normal, recurring adjustments which are necessary to fairly present the condensed consolidated financial position, results of operations and cash flows of NHI in all material respects. The Condensed Consolidated Balance Sheet at December 31, 2013 has been derived from the audited consolidated financial statements at that date. We assume that users of these condensed consolidated financial statements have read or have access to the audited December 31, 2013 consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate those contained in our most recent Annual Report on Form 10-K for the year ended December 31, 2013 have been omitted. This condensed consolidated financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons including, but not limited to, acquisitions and dispositions, changes in interest rates, rents and the timing of debt and equity financings. For a better understanding of NHI and its condensed consolidated financial statements, we recommend reading these condensed consolidated financial statements in conjunction with the audited consolidated financial statements for the year ended December 31, 2013, which are included in our 2013 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, a copy of which is available at our web site: www.nhireit.com.

Principles of Consolidation - The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries and the joint venture entity over which we exercise control. All inter-company transactions and balances have been eliminated in consolidation. Net income is reduced by the portion of net income attributable to noncontrolling interests.

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 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.

We identify the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity's economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. We perform this analysis on an ongoing basis. At March 31, 2014, we held an interest in one unconsolidated VIE, of which we were not the primary beneficiary.

We also apply FASB guidance related to investments in joint ventures based on the type of controlling rights held by the members' interests in limited liability companies that may preclude consolidation by the majority equity owner in certain circumstances in which the majority equity owner would otherwise consolidate the joint venture.

We structure our joint ventures 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 a property company and an operating company and is designed 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 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.


9


Equity-Method Investment - We report our TRS' investment in an unconsolidated entity, over whose operating and financial policies we have the ability to exercise significant influence but not control, under the equity method of accounting. Under this method of accounting, our pro rata share of the entity's earnings or losses is included in our Condensed Consolidated Statements of Income. Additionally, we adjust our investment carrying amount to reflect our share of changes in an equity-method investee's capital resulting from its capital transactions.

The initial carrying value of our equity-method investment is based on the fair value of the net assets of the entity at the time we acquired our interest. We estimate fair values of the net assets of our equity-method investee based on discounted cash flow models. The inputs we use in these models are based on assumptions that we believe to be within a reasonable range of current market rates for the respective investments.

We evaluate our equity-method investment for impairment whenever events or changes in circumstances indicate that the carrying value of our investment may exceed the fair value. If it is determined that a decline in the fair value of our investment is not temporary, and if such reduced fair value is below its carrying value, an impairment is recorded. The determination of the fair value of our equity-method investments involves significant judgment. Our estimates consider all available evidence including the present value of the expected future cash flows discounted at market rates, general economic conditions and other relevant factors.

Noncontrolling Interest - We present the portion of any equity that we do not own in entities that we control (and thus consolidate) as noncontrolling interest and classify such interest as a component of consolidated equity, separate from total NHI stockholders' equity, in our Condensed Consolidated Balance Sheets. In addition, we include net income attributable to the noncontrolling interest in net income in our Condensed Consolidated Statements of Income.

Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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.

Earnings Per Share - The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assume the exercise of stock options using the treasury stock method, to the extent dilutive. Diluted earnings per share incorporate the potential dilutive impact of our 3.25% convertible senior notes due 2021, and stock options outstanding during the periods presented, unless their effect is anti-dilutive. In addition, we apply the if-converted method to our convertible debt instruments, the effect of which is that conversion will not be assumed for purposes of computing diluted earnings (loss) per share if the effect would be anti-dilutive.

New Accounting Pronouncements - In the first quarter of 2014, we adopted ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under ASU 2014-08, disposals will be reported as discontinued operations only when the disposal represents a strategic shift that will have a major effect on our operations and financial results. Previously, we reported the disposition of components that were either reporting units, subsidiaries, or asset groups as discontinued operations. ASU 2014-08 is effective for all disposals (or classifications as held for sale) of components that occur on or after December 15, 2014. We have elected early adoption, under which terms we will prospectively apply ASU 2014-08 and report as discontinued operations only those disposals (or classifications as held for sale) that have not been previously reported.

We have reclassified for 2013 the operations of facilities meeting the accounting criteria as either being sold or held for sale as discontinued operations in the Condensed Consolidated Statements of Income. Long-lived assets classified as held for sale are reported separately in the Condensed Consolidated Balance Sheets. There is no change to reported net income for the prior periods as a result of this reclassification.

NOTE 2. REAL ESTATE

As of March 31, 2014, we owned 161 health care real estate properties located in 30 states and consisting of 92 senior housing communities, 64 skilled nursing facilities, 3 hospitals and 2 medical office buildings. Our senior housing properties include assisted living facilities, independent living facilities, and senior living campuses. These investments (excluding our corporate office of $887,000) consisted of properties with an original cost of approximately $1,467,328,000, rented under triple-net leases to 24 lessees.





10


Acquisition and New Lease of Real Estate

In March 2014 we completed the purchase of 3 skilled nursing facilities in Oregon totaling 196 beds and a 105-unit assisted living facility in Idaho from Prestige Senior Living ("Prestige"). The purchase price includes $40,115,000 in cash and a commitment to fund contingent earn out payments up to a maximum of $6,390,000 based on the achievement of certain financial metrics as measured periodically through December 31, 2015. Because the facilities were owner-occupied, we accounted for the acquisition as an asset purchase. At acquisition, we estimated probable contingent payments of $3,000,000 to be likely and have, accordingly, reflected that amount in the condensed consolidated financial statements.

We have leased the 4 facilities to Prestige with a 15-year term at an initial rate of 8.4% plus fixed annual escalators. In addition, at 2 of the Oregon facilities we have committed to fund $2,000,000 for capital improvements which are expected to be completed by June 30, 2015.

Holiday

In December 2013 we acquired 25 independent living facilities from Holiday Acquisition Holdings LLC (“Holiday”), an affiliate of Holiday Retirement. We have leased this portfolio to NH Master Tenant, LLC, a subsidiary of Holiday. Our tenant continues to operate the facilities pursuant to a management agreement with a Holiday-affiliated manager. The master lease term of 17 years began in December 2013 and provides for initial base rent of $31,915,000 plus annual escalators of 4.5% in the first 3 years and a minimum of 3.5% each year thereafter.

Of our total revenue from continuing operations, $10,954,000 (25%) was derived from Holiday for the three months ended March 31, 2014, consisting of $7,979,000 in billed rent and $2,975,000 in straight-line rent.

NHC

As of March 31, 2014, we leased 42 health care facilities under two master leases to National HealthCare Corporation (“NHC”), a publicly-held company and the lessee of our legacy properties. The facilities leased to NHC consist of 3 independent living facilities and 39 skilled nursing facilities (4 of which are subleased to other parties for whom the lease payments are guaranteed to us by NHC). These facilities are leased to NHC under the terms of an amended master lease agreement originally dated October 17, 1991 ("the 1991 lease") which includes our 35 remaining legacy properties and a master lease agreement dated August 30, 2013 ("the 2013 lease") which includes 7 skilled nursing facilities acquired from ElderTrust of Florida, Inc. on August 31, 2013.

The 1991 lease has been amended to extend the lease expiration to December 31, 2026. There are two 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 NHC at its expense. Under the terms of the lease, the base annual rental is $30,750,000 and rent escalates by 4% of the increase, if any, in each facility's revenue over a 2007 base year. The 2013 lease provides for a base annual rental of $3,450,000 and has a lease expiration of August 2028. Under the terms of the lease, rent escalates 4% of the increase in each facility's revenue over the 2014 base year. For both the 1991 lease and the 2013 lease, we refer to this additional rent component as “percentage rent.” During the last three years of the 2013 lease, NHC will have the option to purchase the facilities for $49,000,000.

The following table summarizes the percentage rent income from NHC (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Current year
$
566

 
$
569

Prior year final certification1
15

 
746

Total percentage rent income
$
581

 
$
1,315

1 For 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.

Of our total revenue from continuing operations, $9,118,000 (21%) and $8,947,000 (33%) were derived from NHC for the three months ended March 31, 2014 and 2013, respectively.





11


Bickford

As of March 31, 2014, we owned an 85% equity interest and an affiliate of Bickford Senior Living ("Bickford") owned a 15% equity interest in our consolidated subsidiary ("PropCo") which owns 29 assisted living/memory care facilities and also has 1 facility under construction. The facilities are leased to an operating company, ("OpCo"), in which we also retain an 85/15 ownership interest with an affiliate of Bickford, who controls the entity. This joint venture is structured to comply with the provisions of RIDEA.

For the stabilized portfolio of 27 properties, the current annual contractual rent from OpCo to PropCo is $19,108,000, plus fixed annual escalators. OpCo is continuing the lease-up of 2 assisted living facilities which opened in the fourth quarter of 2013. Under the terms of the current development lease agreement, PropCo receives rent from OpCo on the total amount of development costs, including land, which totaled $19,254,000 at March 31, 2014. Of these costs, $15,296,000 relate to the 2 facilities currently in lease-up. As of March 31, 2014, PropCo had purchased land and begun construction on one assisted living/memory care facility having a maximum cost of $9,000,000. Our costs incurred to date, including land, were $3,958,000. Once the facilities stabilize, an annual rental amount will be determined between the parties. Rent income received from the development projects was $366,000 and $146,000 for the three months ended March 31, 2014 and 2013, respectively. NHI has an exclusive right to Bickford's future acquisitions, development projects and refinancing transactions.

Of our total revenues from continuing operations, $5,263,000 (12%) and $2,081,000 (8%) were recorded as rental income from Bickford for the three months ended March 31, 2014 and 2013, respectively.

In June 2013 PropCo acquired 14 properties from Care Investment Trust in a transaction we accounted for as a business combination. The unaudited pro forma revenue, net income and net income available to common stockholders of the combined entity is provided below had the acquisition date been January 1, 2012 (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Revenue
$
43,136

 
$
29,714

Net income
$
23,899

 
$
16,341

Net income available to common stockholders
$
23,576

 
$
16,161

Basic earnings per common share
$
.71

 
$
.58

Diluted earnings per common share
$
.71

 
$
.58


Supplemental pro forma information above includes revenues from the Care lease with OpCo, recognized on a straight-line basis, depreciation, and appropriate interest costs.

Our revenue from continuing operations and our net income include $2,588,000 and $409,000, respectively, from the 14 Care properties for the three months ended March 31, 2014.

NOTE 3. EQUITY-METHOD INVESTMENT AND OTHER ASSETS

Our equity-method investment in OpCo and other assets consist of the following (in thousands):
 
March 31,
2014
 
December 31,
2013
Equity-method investment in OpCo
$
9,652

 
$
9,494

Debt issuance costs
11,526

 
7,366

Accounts receivable and other assets
2,242

 
2,502

Replacement reserve and tax escrows - Fannie Mae
708

 
706

Lease escrow deposits
22,775

 
22,775

Escrow deposit for tax deferred exchange

 
23,813

 
$
46,903

 
$
66,656


Upon the acquisition of our equity method investment in OpCo in 2012, our purchase price was allocated to the assets acquired based upon their estimated relative fair values. Accounting guidance for equity method investments requires that we account for the difference between the cost basis of our investment in OpCo and our pro rata share of the amount of underlying equity in the

12


net assets of OpCo as though OpCo were a consolidated subsidiary. Accordingly, the excess of the original purchase price over the fair value of identified tangible assets at acquisition of $8,986,000 is treated as implied goodwill and is subject to periodic review for impairment in conjunction with our equity method investment. When we acquired 17 properties leased or managed by Bickford in June 2013, an assignment was entered into whereby the operations of the related facilities were conveyed by an affiliate of Bickford to OpCo. The transaction mandated the effective cut-off of operating revenues and expenses and the settlement of operating assets and liabilities as of the acquisition date. Specified remaining net tangible assets were assigned to OpCo at the transferor's carryover basis resulting in an adjustment, through NHI's capital in excess of par value to our equity method investment in OpCo, of $817,000. We monitor and periodically review our equity method investment in OpCo for impairment to determine whether a decline, if any, in the value of the investment is other-than temporary. We noted no decline in value as of March 31, 2014.

OpCo is intended to be self-financing, and aside from initial investments therein, no direct support has been provided by NHI to OpCo since inception on September 30, 2012. While PropCo's rental revenues associated with the related properties are sourced from OpCo, a decision to furnish additional direct support would be at our discretion and not obligatory. As a result, we believe our maximum exposure to loss at March 31, 2014, due to our investment in OpCo, would be limited to our equity interest. We have concluded that OpCo meets the accounting criteria to be considered a VIE. However, because we do not control the entity, nor do we have any role in the day-to-day management, we are not the primary beneficiary of the entity, and we account for our investment using the equity method. There were no distributions declared during the three months ended March 31, 2014 and 2013.

At March 31, 2014, we held lease escrow deposits of $22,775,000 in regard to our lease with Holiday. The Holiday deposits include $21,275,000 as a lease security deposit which remains for the term of the 17-year lease commencing in December 2013 and is payable to Holiday at the end of the lease term. The remaining $1,500,000 is reserved for specified capital improvements.

In March 2014 we utilized $23,813,000 held with a qualified intermediary to provide a portion of the funding for the Prestige acquisition discussed in Note 2.

NOTE 4. MORTGAGE AND OTHER NOTES RECEIVABLE

At March 31, 2014, we had investments in mortgage notes receivable with a carrying value of $35,158,000 secured by real estate and UCC liens on the personal property of 11 health care properties and other notes receivable with a carrying value of $25,713,000 guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. No allowance for doubtful accounts was considered necessary at March 31, 2014.

Due to non-receipt of contractual payments, in March 2013 we evaluated the recoverability of the SeniorTrust notes and recognized an impairment to the carrying value in the total amount of $4,037,000.

NOTE 5. INVESTMENT IN PREFERRED STOCK, AT COST

We recognized $818,000 in preferred dividend income from LTC (a publicly-traded REIT) for the three months ended March 31, 2014 on our investment in 2,000,000 shares of their cumulative preferred stock carried at its original cost of $38,132,000. The preferred stock, which was purchased in September 1998, is not listed on a stock exchange, is considered a non-marketable security and is recorded at cost in our Condensed Consolidated Balance Sheets. The non-voting preferred stock is convertible into 2,000,000 shares of LTC common stock whose closing price at March 31, 2014 was $37.63 per share. The preferred stock has an annual cumulative coupon rate of 8.5% payable quarterly and a liquidation preference of $19.25 per share. While not the fair value of our preferred stock investment, we provide the above information as pertinent to the reader's estimation of the fair value of our investment. In accordance with ASC Topic 825 Financial Instruments, paragraph 10-50 Disclosure-Overall, we have determined that due to excessive costs, it is not practicable to estimate the fair value of our cost basis investment in preferred stock because of inherent subjectivities in refining the estimate to a degree that is likely to materially augment the information provided above. Further, we have identified no events that may have had an adverse effect on its fair value which would have required revisiting the instrument's carrying value.

NOTE 6. INVESTMENTS IN MARKETABLE SECURITIES

Our investments in marketable securities include available-for-sale securities which are reported at fair value. Unrealized gains and losses on available-for-sale securities are presented as a component of accumulated other comprehensive income. Realized gains and losses from securities sales are determined based upon specific identification of the securities.



13


Marketable securities consist of the following (in thousands):
 
March 31, 2014
 
December 31, 2013
 
Amortized Cost

 
Fair Value

 
Amortized Cost

 
Fair Value

Common stock of other healthcare REITs
$
4,088

 
$
13,438

 
$
4,088

 
$
12,650


Gross unrealized gains related to available-for-sale securities were $9,350,000 at March 31, 2014 and $8,562,000 at December 31, 2013.

NOTE 7. DEBT

Debt consists of the following (in thousands):
 
March 31,
2014
 
December 31,
2013
Convertible senior notes - unsecured (net of discount of $7,747)
$
192,253

 
$

Revolving credit facility - unsecured
107,000

 
167,000

Bank term loans - unsecured
250,000

 
370,000

Fannie Mae term loans - secured (including a premium of $1,732)
79,780

 
80,080

 
$
629,033

 
$
617,080


In March 2014 we issued $200,000,000 of 3.25% senior unsecured convertible notes due April 2021 (the "Notes"). Interest is payable April 1st and October 1st of each year. The Notes are convertible at an initial conversion rate of 13.926 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $71.81 per share for a total of approximately 2,785,200 underlying shares. The conversion rate is subject to adjustment upon the occurrence of certain events, as defined in the indenture governing the Notes, but will not be adjusted for any accrued and unpaid interest except in limited circumstances. Upon conversion, NHI's conversion obligation may be satisfied, at our option, in cash, shares of common stock or a combination of cash and shares of common stock. Because the conversion price is in excess of the average stock price for the quarter, the impact of the conversion option is currently anti-dilutive to the earnings per share calculation and as such has no effect on our earnings per share.

The Notes are split into a debt component and an equity component since they may be settled in cash upon conversion. The value of the debt component is based upon the estimated fair value of a similar debt instrument without the conversion feature at the time of issuance and was estimated to be approximately $192,238,000. The $7,762,000 difference between the contractual principal on the debt and the value allocated to the debt was recorded as an equity component and represents the estimated value of the conversion feature of the instrument. The excess of the contractual principal amount of the debt over its estimated fair value, the original issue discount, is amortized to interest expense using the effective interest method over the term of the Notes. The effective interest rate used to amortize the debt discount and the liability component of the debt issue costs was approximately 3.9% based on our estimated non-convertible borrowing rate at the date the Notes were issued.

The total cost of issuing the Notes was $5,969,000, of which $5,706,000 was allocated to the debt component and $263,000 to the equity component.

On March 27, 2014, we entered into an amended $700,000,000 senior unsecured credit facility. The facility can be expanded, subject to certain conditions, up to an additional $130,000,000. At closing, the new facility amended a smaller credit facility that provided for $620,000,000 of total commitments.

The amended credit facility provides for: (1) a $450,000,000 unsecured, revolving credit facility that matures in March 2019 (inclusive of an embedded 1-year extension option) with interest at 150 basis points over LIBOR; (2) a $130,000,000 unsecured term loan that matures in June 2020 with interest at 175 basis points over LIBOR of which interest of 3.91% is fixed with an interest rate swap agreement; and (3) two existing term loans which remain in place totaling $120,000,000, maturing in June 2020 and bearing interest at 175 basis points over LIBOR, a notional amount of $40,000,000 being fixed at 3.29% until 2019 and $80,000,000 being fixed at 3.86% until 2020.

At March 31, 2014, we had $343,000,000 available to draw on the revolving portion of the credit facility. The unused commitment fee is 40 basis points per annum. The unsecured credit facility requires that we maintain certain financial ratios within limits set by our creditors. To date, these ratios, which are calculated quarterly, have been within the limits required by the credit facility agreements.

14


As part of the Care acquisition, we assumed Fannie Mae mortgage loans, with principal balances of $70,840,000 and $7,208,000 on March 31, 2014, which have interest at rates of 6.85% and 7.17%, respectively, and mature on July 1, 2015 (prepayable without penalty after December 31, 2014).

The following table summarizes interest expense (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Interest expense
$
4,374

 
$
1,041

Debt issuance costs expensed due to credit facility modifications
2,145

 

Amortization of debt issuance costs
368

 
82

Total interest expense
$
6,887

 
$
1,123


Interest Rate Swap Agreements

To mitigate our exposure to interest rate risk, we have entered into the following interest rate swap contracts on our bank term loans as of March 31, 2014 (dollars in thousands):
Date Entered
 
Maturity Date
 
Fixed Rate
 
Rate Index
 
Notional Amount
 
Fair Value
May 2012
 
April 2019
 
3.29%
 
1-month LIBOR
 
$
40,000

 
$
377

June 2013
 
June 2020
 
3.86%
 
1-month LIBOR
 
$
80,000

 
$
(247
)
March 2014
 
June 2020
 
3.91%
 
1-month LIBOR
 
$
130,000

 
$
(739
)

See Note 12 for fair value disclosures about our Fannie Mae mortgage loan and interest rate swap agreements.

NOTE 8. COMMITMENTS AND CONTINGENCIES

Bickford

As of March 31, 2014, our subsidiary PropCo had purchased land and begun construction on one assisted living facility having a maximum cost of $9,000,000. Our costs incurred to date, including land, were $3,958,000. The facility is expected to open by the end of the third quarter of 2014. In February 2014 NHI entered into a commitment of $2,785,000 on a letter of credit for the benefit of our joint venture partner, an affiliate of Bickford, which holds a minority interest in PropCo.

Chancellor

In October 2013, we entered into a $7,500,000 commitment to build a 46-unit free-standing assisted living and memory care community, expanding our Linda Valley senior living campus in Loma Linda, California. We began construction during the first quarter of 2014 and had funded $521,000 as of March 31, 2014. The initial lease term is for 15 years at an annual rate of 9% plus a fixed annual escalator. NHI purchased the Linda Valley campus in 2012 and leased it to Chancellor Health Care, who has been operating the campus since 1993. We also committed to provide up to $500,000 for renovations and improvements related to our recent acquisition of a 63-unit senior housing community in Baltimore, Maryland which we have leased to Chancellor Health Care. We began renovations during the first quarter of 2014 and had funded $109,000 as of March 31, 2014. We receive rent income on funds advanced for both construction projects.

Discovery

As a lease inducement, we have a contingent commitment to fund a series of payments up to $2,500,000 in connection with our September 2013 lease to Discovery of a senior living campus in Rainbow City, Alabama. Discovery would earn the contingent payments upon obtaining and maintaining a specified lease coverage ratio. As earned, the payments would be due in installments of $750,000 in each of years two and three of the lease with the residual due in year four. As of March 31, 2014, the likelihood that we would incur the contingent payments was not considered probable. Accordingly, no provision for these payments is reflected in the condensed consolidated financial statements.



15


Fundamental

In April 2013, we completed the purchase of two skilled nursing facilities located in Canton and Corinth, Texas for a purchase price of $26,150,000 in cash, plus consideration related to the Corinth facility of $1,600,000 conditional upon the achievement of certain operating metrics. In March 2014 upon satisfactory achievement of the required operating metrics, we made the full $1,600,000 payment to Fundamental.

Kentucky River

In March 2012, we entered into a long-term lease extension and construction commitment to Jackson Hospital Corporation, an affiliate of Community Health Systems, to provide up to $8,000,000 for extensive renovations and additions to our Kentucky River Medical Center, a general acute care hospital in Jackson, Kentucky. This investment will be added to the basis on which the lease amount is calculated. The construction project commenced during the first quarter of 2013 and is expected to continue over two years. Total construction costs incurred as of March 31, 2014 were $6,468,000. The 10-year lease extension began July 1, 2012, with an additional 5-year renewal option.

Prestige

We have agreed to fund capital improvements of up to $2,000,000 in connection with our lease of facilities to Prestige. The capital improvements will be an addition to our investment in the properties when funded and will be included in the lease base. Additionally, we have committed to fund contingent earn out payments up to a maximum of $6,390,000 based on the achievement of certain financial metrics as measured periodically through December 31, 2015. At acquisition, we estimated probable contingent payments of $3,000,000 to be likely and have reflected that amount in the condensed consolidated financial statements.

Santé

We have a $2,000,000 supplemental construction commitment to our borrower, Santé Partners, LLC (“Santé”). This additional loan amount becomes available to the borrower when the 70-bed transitional rehabilitation hospital, completed in March 2011, achieves certain operating metrics. NHI also has the option to purchase and lease back the hospital when it achieves a predetermined level of stabilized net operating income.

In connection with our Silverdale, Washington senior living campus, we have a contingent commitment to fund two lease inducement payments of $1,000,000 each. Santé would earn the payments upon obtaining and maintaining a specified lease coverage ratio. If earned, the first payment would be due after the second lease year and the second payment would be due after the third lease year. At acquisition, the likelihood that we would incur the contingent payments was not considered probable. Accordingly, no provision for these payments is reflected in the condensed consolidated financial statements.

Helix Healthcare

In March 2010, we completed a purchase/leaseback transaction with Helix Healthcare (“Helix”) for $12,500,000. The purchase price includes a conditional payment of $1,000,000, which is recorded as a purchase liability.

Litigation

Our 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 both 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.

NOTE 9. SHARE-BASED COMPENSATION

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




16


Share-Based Compensation Plans

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

In May 2012, our stockholders approved the 2012 Stock Incentive Plan ("the 2012 Plan") pursuant to which 1,500,000 shares of our common stock were made available to grant as share-based payments to employees, officers, directors or consultants. As of March 31, 2014, there were 740,000 shares available for future grants under the 2012 Plan. The individual restricted stock and option grant awards vest over periods up to five years. The term of the options under the 2012 Plan is up to five years from the date of grant.

In May 2005, our stockholders approved the NHI 2005 Stock Option Plan ("the 2005 Plan") pursuant to which 1,500,000 shares of our common stock were made available to grant as share-based payments to employees, officers, directors or consultants. As of March 31, 2014, there were 20,635 shares available for future grants under the 2005 Plan. The individual restricted stock and option grant awards vest over periods up to ten years. The term of the options outstanding under the 2005 Plan is up to ten years from the date of grant.

Compensation expense is recognized only for the awards that ultimately vest. Accordingly, forfeitures that were not expected may result in the reversal of previously recorded compensation expense. The compensation expense reported for the three months ended March 31, 2014 and 2013 was $1,349,000 and $1,580,000, respectively.

At March 31, 2014, we had, net of expected forfeitures, $1,037,000 of unrecognized compensation cost related to unvested stock options which is expected to be expensed over the following periods: 2014 - $670,000, 2015 - $331,000 and 2016 - $36,000. Stock-based compensation is included in general and administrative expense in the Condensed Consolidated Statements of Income.

The following table summarize our outstanding stock options:
 
Three Months Ended
 
March 31,
 
2014
 
2013
Options outstanding January 1,
516,674

 
211,675

Options granted under 2012 Plan
400,000

 
360,000

Options exercised under 2005 Plan
(3,334
)
 
(55,001
)
Options outstanding, March 31,
913,340

 
516,674

 
 
 
 
Exercisable at March 31,
686,659

 
323,330


NOTE 10. DISCONTINUED OPERATIONS

We have reclassified, for periods before adoption of ASU 2014-08, the operations of facilities meeting the accounting criteria for properties being sold or held for sale as discontinued operations.

In December 2013, we sold three older skilled nursing facilities to affiliates of our current tenant, Fundamental, for $18,500,000 and recorded a gain of $1,269,000 for financial statement purposes. Our lease revenue from these facilities was $844,000 for the three months ended March 31, 2013. Pursuant to the purchase option, rents associated with the two remaining properties will be fixed at $250,000 per month, without escalation, through the first renewal term in February 2016.

In October 2013, our tenant, Weatherly Associates, LLC, exercised their option to purchase a senior housing facility in Pennsylvania for $5,315,000. The sale was completed in December 2013, and we recorded a gain of $1,619,000 for financial statement purposes. Our lease revenue from the facility was $101,000 for the three months ended March 31, 2013.


17


In August 2013 we sold six older skilled nursing facilities to NHC for $21,000,000 and recorded a gain of $19,370,000 for financial statement purposes. Our lease revenue from the facilities was $915,000 for the three months ended March 31, 2013.

Income from discontinued operations is summarized below (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Revenues:
 
 
 
Rental income
$

 
$
1,859

Other income

 
1

Expenses:
 
 
 
Depreciation

 
167

Total discontinued operations
$

 
$
1,693

 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic
33,051,415

 
27,876,176

Diluted
33,085,232

 
27,911,584

 
 
 
 
Discontinued operations income per share:
 
 
 
Basic
$

 
$
.06

Diluted
$

 
$
.06


18


NOTE 11. EARNINGS AND DIVIDENDS PER SHARE

The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assume the exercise of stock options and vesting of restricted shares using the treasury stock method, to the extent dilutive.

The following table summarizes the average number of common shares and the net income used in the calculation of basic and diluted earnings per common share (in thousands, except share and per share amounts):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Income from continuing operations attributable to common stockholders
$
23,533

 
$
14,050

Discontinued operations

 
1,693

Net income attributable to common stockholders
$
23,533

 
$
15,743

 
 
 
 
BASIC:
 
 
 
Weighted average common shares outstanding
33,051,415

 
27,876,176

 
 
 
 
Income from continuing operations per common share
$
.71

 
$
.50

Discontinued operations per common share

 
.06

Net income per common share
$
.71

 
$
.56

 
 
 
 
DILUTED:
 
 
 
Weighted average common shares outstanding
33,051,415

 
27,876,176

Stock options
33,817

 
35,408

Average dilutive common shares outstanding
33,085,232

 
27,911,584

 
 
 
 
Income from continuing operations per common share
$
.71

 
$
.50

Discontinued operations per common share

 
.06

Net income per common share
$
.71

 
$
.56

 
 
 
 
Incremental shares excluded since anti-dilutive:
 
 
 
Stock options with an exercise price in excess of the average market price for our common shares
40,153

 
11,964

 
 
 
 
Regular dividends declared per common share
$
.77

 
$
.695

 
 
 
 

NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS

Our financial assets and liabilities measured at fair value (based on the hierarchy of the three levels of inputs described in Note 1 to the consolidated financial statements contained in our most recent Annual Report on Form 10-K) on a recurring basis include marketable securities, derivative financial instruments and contingent consideration arrangements. Marketable securities consist of common stock of other healthcare REITs. Derivative financial instruments include our interest rate swap agreements. Contingent consideration arrangements relate to certain provisions of recent real estate purchase agreements involving both business combinations.

Marketable securities. We utilize quoted prices in active markets to measure debt and equity securities; these items are classified as Level 1 in the hierarchy and include the common and preferred stock of other healthcare REITs.

Derivative financial instruments. Derivative financial instruments are valued in the market using discounted cash flow techniques. These techniques incorporate Level 1 and Level 2 inputs. The market inputs are utilized in the discounted cash flow calculation considering the instrument's term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation model for interest rate swaps are observable in active markets and are classified as Level 2 in the hierarchy.

19


Contingent consideration. Contingent consideration arrangements are classified as Level 3 and are valued using unobservable inputs about the nature of the contingent arrangement and the counter-party to the arrangement, as well as our assumptions about the probability of full settlement of the contingency.

Assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):
 
 
 
Fair Value Measurement
 
Balance Sheet Classification
 
March 31,
2014
 
December 31,
2013
Level 1
 
 
 
 
 
Common stock of other healthcare REITs
Marketable securities
 
$
13,438

 
$
12,650

 
 
 
 
 
 
Level 2
 
 
 
 
 
Interest rate swap asset
Other assets
 
$
377

 
$
975

Interest rate swap liability
Accrued expenses
 
$
986

 
$

 
 
 
 
 
 
Level 3
 
 
 
 
 
Contingent consideration
Real estate purchase liabilities
 
$
4,000

 
$
2,600


The following table presents a reconciliation of Level 3 liabilities measured at fair value on a recurring basis for the three months ended March 31, 2014 and 2013 (in thousands):
 
Fair Value Beginning of Period

 
Transfers Into Level 3

 
Realized Gains and (Losses)

 
Purchases, Issuances and Settlements, net

 
Fair Value at End of Period

 
Total Period Losses Included in Earnings Attributable to the Change in Unrealized Losses Relating to Assets Held at End of Year

2014
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration
$
2,600

 
$

 
$

 
$
1,400

 
$
4,000

 
$

 
 
 
 
 
 
 
 
 
 
 
 
2013
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration
$
4,256

 
$

 
$

 
$

 
$
4,256

 
$


Carrying values and fair values of financial instruments that are not carried at fair value at March 31, 2014 and December 31, 2013 in the Consolidated Balance Sheets are as follows (in thousands):
 
Carrying Amount
 
Fair Value Measurement
 
2014
 
2013
 
2014
 
2013
Level 2
 
 
 
 
 
 
 
Variable rate debt
$
357,000

 
$
537,000

 
$
357,000

 
$
537,000

Fixed rate debt
$
279,778

 
$
80,080

 
$
279,903

 
$
79,365

 
 
 
 
 
 
 
 
Level 3
 
 
 
 
 
 
 
Mortgage and other notes receivable
$
60,871

 
$
60,639

 
$
68,484

 
$
67,201


The fair value of mortgage and other notes receivable is based on credit risk and discount rates that are not observable in the marketplace and therefore represents a Level 3 measurement.

Fixed rate debt. Fixed rate debt is classified as Level 2 and its value is based on quoted prices for similar instruments or calculated utilizing model derived valuations in which significant inputs are observable in active markets.

Carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature. The fair value of our borrowings under our credit facility are reasonably estimated at their carrying value at March 31, 2014 and December 31, 2013, due to the predominance of floating interest rates, which generally reflect market conditions.


20


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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 limitation, 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 as a result of, but not limited to, the following 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.;

*
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;

*
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 have covenants related to our indebtedness which impose certain operational limitations and a breach of those covenants could materially adversely affect our financial condition and results of operations;

*
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;


21


*
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;

*
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 in our most recent Annual Report on Form 10-K for the year ended December 31, 2013, and “Business” and “Risk Factors” under Item 1 and Item 1A therein for a further discussion of these and of various governmental regulations and other operating factors relating to the healthcare 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 facing the Company. 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, results of operations, or cash flows 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.


Executive Overview

National Health Investors, Inc., a Maryland corporation incorporated and publicly listed in 1991, is a healthcare real estate investment trust (“REIT”) specializing in financing healthcare real estate by purchase and leaseback transactions, RIDEA transactions and by mortgage loans. Our portfolio consists of investments in real estate, mortgage and other notes and in the preferred and common stock of other REITs. For the three months ended March 31, 2014, our investment portfolio generated $43,136,000 of income. We are a self-managed REIT investing in health care real estate or in the operations thereof through independent third-party managers that generate current income to be distributed to stockholders. Our investments include senior housing (independent living, assisted living & senior living campuses), skilled nursing facilities, medical office buildings, and hospitals. We typically fund these investments through three sources of capital: (1) debt offerings, including bank lines of credit and ordinary term debt, (2) the sale of equity securities, and (3) current cash flow.

Portfolio

At March 31, 2014, our continuing operations were comprised of investments in real estate and mortgage and other notes receivable in 172 health care facilities located in 30 states consisting of 95 senior housing communities, 71 skilled nursing facilities, 4 hospitals, 2 medical office buildings and other notes receivable. These investments (excluding our corporate office of $887,000) consisted of properties with an original cost of approximately $1,467,328,000, rented under triple-net leases to 24 lessees, and $60,872,000 aggregate carrying value of mortgage and other notes receivable due from 14 borrowers.


22


The following tables summarize our investments in real estate and mortgage and other notes receivable as of March 31, 2014 (dollars in thousands):

Real Estate Properties
Properties

 
Beds/Sq. Ft.*

 
Revenue

 
Assisted Living
59

 
2,962

 
$
9,554

 
Senior Living Campus
5

 
797

 
1,743

 
Independent Living
28

 
3,114

 
11,287

 
Senior Housing Communities
92

 
6,873

 
22,584

 
Skilled Nursing Facilities
64

 
8,370

 
15,621

 
Hospitals
3

 
181

 
1,872

 
Medical Office Buildings
2

 
88,517

*
236

 
 
Total Real Estate Properties
161

 
 
 
$
40,313

 
 
 
 
 
 
 
 
Mortgage and Other Notes Receivable
 
 
 
 
 
 
Assisted Living
3

 
310

 
$
246

 
Senior Living Campus

 
76

 
30

 
Senior Housing Communities
3

 
386

 
276

 
Skilled Nursing Facilities
7

 
594

 
349

 
Hospital
1

 
70

 
297

 
Other Notes Receivable

 

 
834

 
 
Total Mortgage and Other Notes Receivable
11

 
 
 
$
1,756

 
 
Total Portfolio
172

 
 
 
$
42,069


Portfolio Summary
Properties

 
Investment %

 
Revenue
 
Real Estate Properties
161

 
95.8
%
 
$
40,313

 
Mortgage and Other Notes Receivable
11

 
4.2
%
 
1,756

 
 
Total Portfolio
172

 
100.0
%
 
$
42,069

 
 
 
 
 
 
 
 
Summary of Facilities by Type
 
 
 
 
 
 
Assisted Living
62

 
23.3
%
 
$
9,801

 
Independent Living
28

 
26.8
%
 
11,287

 
Senior Living Campus
5

 
4.2
%
 
1,773

 
Senior Housing Communities
95

 
54.3
%
 
22,861

 
Skilled Nursing Facilities
71

 
38.0
%
 
15,970

 
Hospitals
4

 
5.2
%
 
2,169

 
Medical Office Buildings
2

 
0.5
%
 
235

 
Other

 
2.0
%
 
834

 
 
Total Real Estate Portfolio
172

 
100.0
%
 
$
42,069

 
 
 
 
 
 
 
 
Portfolio by Operator Type
 
 
 
 
 
 
Public
53

 
27.1
%
 
$
11,400

 
National Chain (Privately-Owned)
29

 
29.4
%
 
12,357

 
Regional
80

 
38.2
%
 
16,089

 
Small
10

 
5.3
%
 
2,223

 
 
Total Real Estate Portfolio
172

 
100.0
%
 
$
42,069


For the year ended March 31, 2014, 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; Health Services Management; Holiday Retirement; Legend Healthcare; and National HealthCare Corp.

As of March 31, 2014, our average effective annualized rental income was $7,831 per bed for skilled nursing facilities, $13,213 per unit for assisted living facilities, $14,498 per unit for independent living facilities, $41,377 per bed for hospitals, and $11 per square foot for medical office buildings.


23


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 March 31, 2014, such investments had a carrying value of $51,570,000.

Areas of Focus

We are evaluating and will potentially make additional investments during 2014 while we continue to monitor and improve our existing properties. We seek tenants who will become mission-oriented partners in relationships where our business goals are aligned. This approach fuels steady, and thus, enduring growth for NHI and our tenants. While deal flow among the largest in our peer group may be slowing, there are smaller portfolio assets in secondary markets with prospective yields that justify our attention. Our investment focus, regardless of asset type, is on high quality opportunities - defined by us to mean (a) the tenant has a track record of successful operations, (b) the tenant has the necessary credit to meet its lease obligation to us; (c) the facility is in good physical condition; and (d) the facility is positioned in a local market that offers the potential to achieve excellent financial results.

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 37% of our revenue from continuing operations has come 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 directing a significant portion of our investments into properties which do not rely primarily on Medicare and Medicaid reimbursement, but rather on private pay sources. While we will occasionally acquire skilled nursing facilities in good physical condition with a proven operator and strong local market fundamentals, our current investment focus is on acquiring senior housing assets (including assisted living and memory care facilities, independent living facilities and senior living campuses).

With the acquisition of the 25 independent living properties from Holiday in December 2013, our contractual revenue for 2014 from skilled nursing facilities is expected to continue to decline. With this acquisition, we have further diversified across asset types and have achieved a concentration of revenue from large national tenants who are recognized leaders in their industries. Bickford Senior Living is our largest assisted living/memory care tenant, an affiliate of Holiday Retirement is our largest independent living tenant and National HealthCare Corporation is our largest skilled nursing tenant, as measured by annual contractual lease revenue from these tenants as a percentage of total revenue from continuing operations.

If longer term borrowing rates increase as anticipated, there will be pressure on the spread between our cost of capital and the returns we earn. We expect that pressure to be partially mitigated by market forces that lead to an increase in lease rates. We expect our cost of capital will increase as a result of our plan to transition some of our short term revolving borrowings into debt instruments with longer maturities and increased overall interest rates. Managing risk involves trade-offs with the competing goal of maximizing short-term profitability. Our intention is to strike an appropriate balance between these competing interests within the context of our investor profile.

We are continuing to explore additional funding resources including bank term loans, convertible debt, debt private placement and secured government agency financing.

We manage our business with a goal of increasing the regular annual dividends paid to shareholders. Our Board of Directors approves a regular quarterly dividend which is reflective of expected taxable income on a recurring basis. Our transactions that are infrequent and non-recurring that generate additional taxable income have been distributed to shareholders in the form of special dividends. Taxable income is determined in accordance with the Internal Revenue Code and differs from net income for financial statements purposes determined in accordance with U.S. generally accepted accounting principles. Our goal of increasing annual dividends requires a careful balance between identification of high-quality lease and mortgage assets in which to invest and the cost of our capital with which to fund such investments. We consider the competing interests of short and long-term debt (interest rates, maturities and other terms) versus the higher cost of new equity. We accept some level of risk associated with leveraging our investments. We intend to continue 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.









24


Our regular and special dividends for the last five years are as follows:
 
YTD 2014
 
2013
 
2012
 
2011
 
2010
Regular
$
0.77

 
$
2.90

 
$
2.64

 
$
2.50

 
$
2.36

Special

 
$

 
$
0.22

1 
$
0.22

 
$

 
$
0.77

 
$
2.90

 
$
2.86

 
$
2.72

 
$
2.36

 
 
 
 
 
 
 
 
 


1 Paid to shareholders of record in January 2013

Our increased investments in healthcare real estate beginning in 2009 have been partially accomplished by our ability to effectively leverage our balance sheet. However, we continue to maintain a relatively low leverage balance sheet compared with the value of our assets and with many in our peer group. We believe that our fixed charge coverage ratio, which is the ratio of Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, including amounts in discontinued operations, excluding real estate asset impairments and gains on dispositions) to fixed charges (interest expense and principal payments on debt), and the ratio of consolidated debt to Adjusted EBITDA are meaningful measures of our ability to service our debt. We use these two measures as a useful basis to compare the strength of our balance sheet with those in our peer group.

We calculate our fixed charge coverage ratio as approximately 8:1 for the three months ended March 31, 2014 (see page 38 for a discussion of Adjusted EBITDA and a reconciliation to our net income). On an annualized basis, our consolidated debt-to-Adjusted EBITDA ratio is approximately 4:1.

Annual dividend growth, a low leverage balance sheet, a portfolio of diversified, high-quality assets, and prioritizing business relationships with experienced tenants and borrowers continue to be the key drivers of our business plan.

In December 2012, the U.S. Census Bureau released its projection of future population growth. According to the projections, the population age 65 and older is expected to more than double between 2012 and 2060, from 43.1 million to 92.0 million. The older population would represent just over one in five U.S. residents by the end of the period, up from one in seven today. The increase in the population age 85 and older is projected to more than triple from 5.9 million to 18.2 million, reaching 4.3% of the total population. An increase in these age demographics is expected to increase the demand for senior housing properties of all types in the coming decades.

There is increasing demand for private-pay senior housing properties in countries outside the U.S. We will consider real estate and note investments with U.S. entities who seek to expand their senior housing operations into countries where local-market demand is sufficiently demonstrated. We have a current investment of $1,500,000 in such ventures.

We expect to fund any new investments in real estate and mortgage notes in 2014 using our liquid investments and debt financing unless the size of an acquisition leads us to consider issuing equity securities to fund some or all of such acquisition in order to maintain a relatively low level of debt in comparison to the value of our assets.

Critical Accounting Policies

See our most recent Annual Report on Form 10-K for a discussion of critical accounting policies including those concerning revenue recognition, our status as a REIT, principles of consolidation, evaluation of impairments and allocation of property acquisition costs.

In the first quarter of 2014, we elected early adoption of Accounting Standards Update 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”), which is generally effective for public companies in periods beginning after December 15, 2014. ASU 2014-08 addresses concerns that too many small disposals that were recurring in nature qualified for discontinued operations presentation under the present standards. The impact of ASU 2014-08 is that only those disposals that represent a strategic shift which has a major effect on our operations and financial results will be reported as discontinued operations in our financial statements in future periods. Discontinued operations previously reported will not be affected by our early implementation of the new standard.

Because application of this standard will result in financial statements with less disclosure related to same-store comparability, we anticipate that, when disposals are significant but not of strategic proportion, our discussion and analysis will appropriately evolve to address those issues.



25


Investment Highlights

Prestige

In March 2014 we completed the purchase of 3 skilled nursing facilities in Oregon totaling 196 beds and a 105-unit assisted living facility in Idaho from Prestige Senior Living ("Prestige"). The purchase price includes $40,115,000 in cash and a commitment to fund contingent earn out payments up to a maximum of $6,390,000 based on the achievement of certain financial metrics as measured periodically through December 31, 2015. Because the facilities were owner-occupied, we accounted for the acquisition as an asset purchase. At acquisition, we estimated probable contingent payments of $3,000,000 to be likely and have, accordingly, reflected that amount in the condensed consolidated financial statements.

We have leased the 4 facilities to Prestige with a 15-year term at an initial rate of 8.4% plus fixed annual escalators. In addition we have committed to fund $2,000,000 for capital improvements at 2 of the Oregon facilities which are expected to be completed by June 30, 2015.

Significant Operators

We have three operators, Bickford Senior Living ("Bickford"), Holiday Acquisition Holdings LLC (“Holiday”) and National HealthCare Corporation (“NHC”), from whom we individually derive at least 10% of our income from operations.

Holiday

In December 2013 we acquired 25 independent living facilities from Holiday, an affiliate of Holiday Retirement. We have leased this portfolio to NH Master Tenant, LLC, a subsidiary of Holiday. Our tenant continues to operate the facilities pursuant to a management agreement with a Holiday-affiliated manager. The master lease term of 17 years began in December 2013 and provides for initial base rent of $31,915,000 plus annual escalators of 4.5% in the first 3 years and a minimum of 3.5% each year thereafter.

Of our total revenue from continuing operations, $10,954,000 (25%) was derived from Holiday for the three months ended March 31, 2014, consisting of $7,979,000 in billed rent and $2,975,000 in straight-line rent.

NHC

As of March 31, 2014, we leased 42 health care facilities under two master leases to NHC, a publicly-held company and the lessee of our legacy properties. The facilities leased to NHC consist of 3 independent living facilities and 39 skilled nursing facilities (4 of which are subleased to other parties for whom the lease payments are guaranteed to us by NHC). These facilities are leased to NHC under the terms of an amended master lease agreement originally dated October 17, 1991 ("the 1991 lease") which includes our 35 remaining legacy properties and a master lease agreement dated August 30, 2013 ("the 2013 lease") which includes 7 skilled nursing facilities acquired from ElderTrust of Florida, Inc. on August 31, 2013.

The 1991 lease has been amended to extend the lease expiration to December 31, 2026. There are two 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 NHC at its expense. Under the terms of the 1991 lease, the base annual rental is $30,750,000 and rent escalates by 4% of the increase, if any, in each facility's revenue over a 2007 base year. The 2013 lease provides for a base annual rental of $3,450,000 and has a lease expiration of August 2028. Under the terms of the 2013 lease, rent escalates 4% of the increase in each facility's revenue over the 2014 base year. For both the 1991 lease and the 2013 lease, we refer to this additional rent component as “percentage rent.” During the last three years of the 2013 lease, NHC will have the option to purchase the facilities for $49,000,000.

The following table summarizes the percentage rent income from NHC (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Current year
$
566

 
$
569

Prior year final certification1
15

 
746

Total percentage rent income
$
581

 
$
1,315

1 For 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



Of our total revenue from continuing operations, $9,118,000 (21%) and $8,947,000 (33%) were derived from NHC for the three months ended March 31, 2014 and 2013, respectively.

Bickford

As of March 31, 2014, we owned an 85% equity interest and an affiliate of Bickford owned a 15% equity interest in our consolidated subsidiary ("PropCo") which owns 29 assisted living/memory care facilities and also has 1 facility under construction. The facilities are leased to an operating company, ("OpCo"), in which we also retain an 85/15 ownership interest with an affiliate of Bickford, who controls the entity. This joint venture is structured to comply with the provisions of RIDEA.

For the stabilized portfolio of 27 properties, the current annual contractual rent from OpCo to PropCo is $19,108,000, plus fixed annual escalators. OpCo is continuing the lease-up of 2 assisted living facilities which opened in the fourth quarter of 2013. Under the terms of the current development lease agreement, PropCo receives rent from OpCo on the total amount of development costs, including land, which totaled $19,254,000 at March 31, 2014. Of these costs, $15,296,000 relate to the 2 facilities currently in lease-up. As of March 31, 2014, PropCo had purchased land and begun construction on one assisted living/memory care facility having a maximum cost of $9,000,000. Our costs incurred to date, including land, were $3,958,000. Once the facilities stabilize, an annual rental amount will be determined between the parties. Rent income received from the development projects was $366,000 and $146,000 for the three months ended March 31, 2014 and 2013, respectively. NHI has an exclusive right to Bickford's future acquisitions, development projects and refinancing transactions.

Of our total revenue from continuing operations, $5,263,000 (12%) and $2,081,000 (8%) were recorded as rental income from Bickford for the three months ended March 31, 2014 and 2013, respectively.

As of March 31, 2014, the carrying value of our investment in the operating company, OpCo, was $9,652,000. The excess of the original purchase price over the fair value of identified tangible assets at acquisition of $8,986,000 is treated as implied goodwill and is subject to periodic review for impairment in conjunction with our equity method investment as a whole.

With PropCo’s acquisition of 17 properties leased or managed by Bickford in June 2013, an assignment was entered into whereby the operations of the 17 newly acquired facilities were conveyed by an affiliate of Bickford to OpCo. The transaction mandated the effective cut-off of operating revenues and expenses and the settlement of operating assets and liabilities at the acquisition date. Specified remaining net tangible assets were assigned to OpCo at the transferor's carryover basis resulting in an adjustment, through NHI's capital in excess of par value to our equity method investment in OpCo, of $817,000.

Unaudited summarized income statements for OpCo are presented below (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Revenues
$
15,876

 
$
6,189

 
 
 
 
Operating expenses, including management fees
10,303

 
4,056

Lease expenses
5,263

 
2,081

Depreciation and amortization
125

 
27

Net Income
$
185

 
$
25


In July 2013, we extended a $9,200,000 loan to Bickford to fund a portion of their acquisition of six senior housing communities consisting of 342 units. The loan is guaranteed by principals of Bickford and has a two-year maturity plus a one-year extension option with 12% annual interest. As a result of this transaction and existing agreements governing our business relationship with Bickford, PropCo has acquired a $97,000,000 purchase option on the properties which is exercisable over the term of the loan.

Leases

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 reporting periods in which we experience few, if any, lease renewals or expirations. During the three months ended March 31, 2014, we did not have any renewing or expiring leases.


27


Real Estate and Mortgage Write-downs

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 cost of professional liability insurance has increased significantly during this same period.

Since inception, a number of our facility operators and mortgage loan borrowers have undergone 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.

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.

Potential Effects of Medicare Reimbursement

Our tenants who operate skilled nursing facilities receive a significant portion of their revenues from governmental payors, primarily Medicare (federal) and Medicaid (states). Changes in reimbursement rates and limits on the scope of services reimbursed to skilled nursing facilities could have a material impact on the operators' liquidity and financial condition. On May 1, 2013, the Centers for Medicare & Medicaid Services ("CMS") released a proposed rule outlining a 1.4% increase in their Medicare reimbursement for fiscal 2014 beginning on October 1, 2013. We currently estimate that our borrowers and lessees will be able to withstand this nominal Medicare increase 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 that similar Medicare increases on an annual basis would have on each of our borrowers and lessees. According to industry studies, state Medicaid funding is not expected to keep pace with inflation. Federal legislative policies have been adopted and continue to be proposed that would reduce Medicare and/or Medicaid payments to skilled nursing facilities. Accordingly, for the near-term, we are treating as cautionary the Federal Government’s recent re-commitment, after debating a ‘chained CPI’ indexing, to fully index Social Security to inflation. In this cautious approach, any near-term acquisitions of skilled nursing facilities are planned on a selective basis, with emphasis on operator quality and newer construction.

28


Results of Operations

The significant items affecting revenues and expenses are described below (in thousands):
 
Three Months Ended
 
 
 
 
 
March 31,
 
Period Change
 
2014
 
2013
 
$
 
%
Revenues:
 
 
 
 
 
 
 
Rental income
 
 
 
 
 
 
 
ILFs leased to an affiliate of Holiday Retirement
$
7,979

 
$

 
$
7,979

 
NM

ALFs leased to RIDEA joint venture with Bickford
5,150

 
2,085

 
3,065

 
147.0
 %
SNFs leased to Fundamental Long Term Care
1,344

 
451

 
893

 
198.0
 %
SNFs newly leased to NHC (7 ElderTrust facilities)
863

 

 
863

 
NM

ALFs leased to Emeritus Senior Living
1,224

 
911

 
313

 
34.4
 %
Other new and existing leases
19,558

 
19,410

 
148

 
0.8
 %
 
36,118

 
22,857

 
13,261

 
58.0
 %
Straight-line rent adjustments, new and existing leases
4,195

 
1,248

 
2,947

 
NM

Total Rental Income
40,313

 
24,105

 
16,208

 
67.2
 %
Interest income from mortgage and other notes
 
 
 
 
 
 
 
Bickford Senior Living
276

 

 
276

 
NM

ElderTrust

 
241

 
(241
)
 
NM

SeniorTrust

 
246

 
(246
)
 
NM

Other new and existing mortgages
1,480

 
1,482

 
(2
)
 
(0.1
)%
Total Interest Income from Mortgage and Other Notes
1,756

 
1,969

 
(213
)
 
(10.8
)%
Investment income and other
1,067

 
1,052

 
15

 
1.4
 %
Total Revenue
43,136

 
27,126

 
16,010

 
59.0
 %
Expenses:
 
 
 
 
 
 
 
Depreciation
 
 
 
 
 
 
 
ILFs leased to an affiliate of Holiday Retirement
3,227

 

 
3,227

 
NM

ALFs leased to RIDEA joint venture with Bickford
1,643

 
582

 
1,061

 
182.3
 %
SNFs leased to Fundamental Long Term Care
302

 
76

 
226

 
NM

SNFs newly leased to NHC (7 ElderTrust facilities)
224

 

 
224

 
NM

Other new and existing assets
3,841

 
3,590

 
251

 
7.0
 %
Total Depreciation
9,237

 
4,248

 
4,989

 
117.4
 %
Interest expense and amortization of debt issuance costs
4,742

 
1,123

 
3,619

 
322.3
 %
Debt issuance costs expensed due to credit facility modifications
2,145

 

 
2,145

 
NM

Franchise, excise and other taxes
306

 
144

 
162

 
112.5
 %
Loan and realty losses

 
4,037

 
(4,037
)
 
NM

Other expenses
3,008

 
3,366

 
(358
)
 
(10.6
)%
 
19,438

 
12,918

 
6,520

 
50.5
 %
Income before equity-method investee, discontinued operations and noncontrolling interest
23,698

 
14,208

 
9,490

 
66.8
 %
Income from equity-method investee
158

 
22

 
136

 
NM

Income from continuing operations
23,856

 
14,230

 
9,626

 
67.6
 %
Income from discontinued operations

 
1,693

 
(1,693
)
 
(100.0
)%
Net income
23,856

 
15,923

 
7,933

 
49.8
 %
Net income attributable to noncontrolling interest
(323
)
 
(180
)
 
(143
)
 
NM

Net income attributable to common stockholders
$
23,533

 
$
15,743

 
$
7,790

 
49.5
 %
 
 
 
 
 
 
 
 
NM - not meaningful
 
 
 
 
 
 
 

29


Financial highlights of the three months ended March 31, 2014, compared to the same period in 2013 were as follows:

Rental income increased $16,208,000 primarily as a result of new real estate investments of $748,939,000 funded during 2013. The increase in rental income included a $2,947,000 increase in straight-line rent adjustments. Generally accepted accounting principles require rental income to be recognized on a straight-line basis over the term of the lease to give effect to scheduled rent escalators. Future increases in rental income depend on our ability to make new investments which meet our underwriting criteria.

Interest income from mortgage and other notes decreased $213,000 primarily due to the settlement of outstanding notes receivable balances from ElderTrust and SeniorTrust, partially mitigated by interest income on the note receivable due from Bickford Senior Living beginning in July 2013. Unless we continue to make new investments in loans in 2014 and future years, our interest income will continue to decrease due to the normal amortization and scheduled maturities of our loans.

Depreciation expense recognized in continuing operations increased $4,989,000 compared to the prior year primarily due to new real estate investments completed during 2013.

Interest expense relates to borrowings on our credit facility, the convertible senior notes offered in March 2014 and debt assumed in the acquisition of real estate. During the first quarter of 2014, we made modifications to our credit facility and as a result have written off $2,145,000 of previously unamortized debt issuance costs. Upfront fees and other debt-related costs are amortized over the term of the credit facility. The increase in interest expense and amortization of debt issuance costs of $3,619,000 resulted from expanded borrowings used to fund new real estate investments in 2013. We expect to fund additional healthcare real estate investments in 2014 with borrowings from our bank credit facility and longer-term debt, both secured and unsecured, which will increase our interest expense.

During 2013 we recorded an impairment of $4,037,000 related to a mortgage note due from SeniorTrust.

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 for periods prior to the adoption of ASU 2014-08 as discontinued operations. The reclassifications to retrospectively reflect the disposition of these facilities had no impact on previously reported net income.

30


Liquidity and Capital Resources

Sources and Uses of Funds

Our primary sources of cash include rent payments, principal and interest payments on mortgage and other notes receivable, dividends received on our investments in the common and preferred shares of other REITs, proceeds from the sales of real property and borrowings from our term loans and revolving credit facility. Our primary uses of cash include dividend distributions to our shareholders, debt service payments (both principal and interest), new investments in real estate and notes and general corporate overhead.

These sources and uses of cash are reflected in our Condensed Consolidated Statements of Cash Flows as summarized below (dollars in thousands):
 
Quarter Ended
 
One Year Change
 
March 31, 2014
 
March 31, 2013
 
$
 
%
Cash and cash equivalents at beginning of period
$
11,312

 
$
9,172

 
$
2,140

 
23.3
%
Net cash provided by operating activities
28,876

 
23,846

 
5,030

 
21.1
%
Net cash used in investing activities
(22,022
)
 
(2,145
)
 
(19,877
)
 
926.7
%
Net cash used in financing activities
(11,921
)
 
(24,823
)
 
12,902

 
NM

Cash and cash equivalents at end of period
$
6,245

 
$
6,050

 
$
195

 
3.2
%

Operating Activities – Net cash provided by operating activities for the three months ended March 31, 2014 increased primarily as a result of the collection of lease payments on new real estate investments completed during 2013.

Investing Activities – Net cash used in investing activities for the three months ended March 31, 2014 increased as compared to 2013 primarily due to an increase in real estate investment activity completed during 2014.

Financing Activities – Net cash used in financing activities for the three months ended March 31, 2014 decreased as compared to the same period in 2013. During the first quarter of 2014, cash flows related to financing activities included $310,275,000 used to reduce outstanding borrowings which was provided by $200,000,000 in proceeds from the issuance of convertible senior notes and $130,000,000 in proceeds from a new term loan. Cash flows used in financing activities for the quarter ended March 31, 2014 also included $24,293,000 in dividends paid to stockholders.

Liquidity

At March 31, 2014, our liquidity was strong, with $362,683,000 available in cash, highly-liquid marketable securities and borrowing capacity on our revolving credit facility. In addition, our investment in LTC preferred stock is convertible into 2,000,000 shares of common stock whose per share price ranged between $35 and $39 during the quarter ended March 31, 2014. Cash proceeds from lease and mortgage collections, loan payoffs and the recovery of previous write-downs have been distributed as dividends to stockholders, used to retire our indebtedness, and accumulated in bank deposits for the purpose of making new real estate and mortgage loan investments.

In March 2014 we issued $200,000,000 of 3.25% senior unsecured convertible notes due April 2021 (the "Notes"). Interest is payable April 1st and October 1st of each year. The Notes are convertible at an initial conversion rate of 13.926 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $71.81 per share for a total of approximately 2,785,200 underlying shares. The conversion rate is subject to adjustment upon the occurrence of certain events, as defined in the indenture governing the Notes, but will not be adjusted for any accrued and unpaid interest except in limited circumstances. Upon conversion, NHI's conversion obligation may be satisfied, at our option, in cash, shares of common stock or a combination of cash and shares of common stock. Because the conversion price is in excess of the average stock price for the quarter, the impact of the conversion option is currently anti-dilutive to the earnings per share calculation and as such has no effect on our earnings per share.

The Notes are split into a debt component and an equity component since they may be settled in cash upon conversion. The value of the debt component is based upon the estimated fair value of a similar debt instrument without the conversion feature at the time of issuance and was estimated to be approximately $192,238,000. The $7,762,000 difference between the contractual principal on the debt and the value allocated to the debt was recorded as an equity component and represents the estimated value of the conversion feature of the instrument. The excess of the contractual principal amount of the debt over its estimated fair value is amortized to interest expense using the effective interest method, with 3.9% as the effective interest rate, over the term of the Notes.


31


The total cost of issuing the Notes was $5,969,000, of which $5,706,000 was allocated to the debt component and $263,000 to the equity component.

On March 27, 2014, we entered into an amended $700,000,000 senior unsecured credit facility. The facility can be expanded, subject to certain conditions, up to an additional $130,000,000. At closing, the new facility amended a smaller credit facility that provided for $620,000,000 of total commitments.

The amended credit facility provides for: (1) a $450,000,000 unsecured, revolving credit facility that matures in March 2019 (inclusive of an embedded 1-year extension option) with interest at 150 basis points over LIBOR; (2) a $130,000,000 unsecured term loan that matures in June 2020 with interest at 175 basis points over LIBOR of which interest of 3.91% is fixed with an interest rate swap agreement; and (3) two existing term loans which remain in place totaling $120,000,000, maturing in June 2020 and bearing interest at 175 basis points over LIBOR, a notional amount of $40,000,000 being fixed at 3.29% until 2019 and $80,000,000 being fixed at 3.86% until 2020.

At March 31, 2014, we had $343,000,000 available to draw on the revolving portion of the credit facility. The unused commitment fee is 40 basis points per annum. The unsecured credit facility requires that we maintain certain financial ratios within limits set by our creditors. To date, these ratios, which are calculated quarterly, have been within the limits required by the credit facility agreements.

Our decision to amend our credit facility was made for the purpose of extending the maturity of a portion of our terms loans to over six years and to expand the amount of funds available to draw on our revolving credit facility.

As part of the Care acquisition, we assumed Fannie Mae mortgage loans, with principal balances of $70,840,000 and $7,208,000 on March 31, 2014, which have interest at rates of 6.85% and 7.17%, respectively, and mature on July 1, 2015 (prepayable without penalty after December 31, 2014).

To mitigate our exposure to interest rate risk, we have entered into the following interest rate swap contracts on two of our term loans as of March 31, 2014 (dollars in thousands):

Date Entered
 
Maturity Date
 
Fixed Rate
 
Rate Index
 
Notional Amount
 
Fair Value
May 2012
 
April 2019
 
3.29%
 
1-month LIBOR
 
$
40,000

 
$
377

June 2013
 
June 2020
 
3.86%
 
1-month LIBOR
 
$
80,000

 
$
(247
)
March 2014
 
June 2020
 
3.91%
 
1-month LIBOR
 
$
130,000

 
$
(739
)

We plan to refinance the borrowings on our revolving credit facility into longer-term debt instruments. We will consider secured debt from U.S. Govt. agencies, including HUD, private placements of unsecured debt, and public offerings of debt and equity. We anticipate that our historically low cost of debt capital will rise in the near to mid-term, as the federal government transitions away from quantitative easing.

If we modify or replace existing debt, we would incur debt issuance costs. These fees would be subject to amortization over the term of the new debt instrument and may result in the write-off of fees associated with debt which has been replaced or modified. Sustaining long-term dividend growth will require that we consider all forms of capital mentioned above, with the goal of maintaining a low-leverage balance sheet as mitigation against potential adverse changes in the business of our tenants and borrowers.

We intend to comply with REIT dividend requirements that we distribute at least 90% of our annual taxable income for the year ending December 31, 2014 and thereafter. During the first three months of 2014, we declared a quarterly dividend of $.77 per common share to shareholders of record on March 31, 2014, payable on May 9, 2014.

Off Balance Sheet Arrangements

We currently have no outstanding guarantees. For a discussion of our letter of credit with an affiliate of Bickford, see our discussion in this section under Contractual Obligations below. Our equity method investment in OpCo is intended to be self-financing, and aside from initial investments therein, no direct support has been provided by NHI to OpCo since inception on September 30, 2012. We have concluded that OpCo meets the accounting criteria to be considered a VIE. However, because we do not control the entity, nor do we have any role in the day-to-day management, we are not the primary beneficiary of the entity,

32


and we account for our investment using the equity method. We have no material obligation arising from our investment in OpCo, and we believe our maximum exposure to loss at March 31, 2014, due to this involvement, would be limited to our equity interest.

Our $200,000,000 convertible senior notes (the “Notes”) issued in March 2014 qualify as off-balance sheet instruments. When we issue convertible notes we do so in order to obtain more advantageous interest rates on our debt. Upon conversion, NHI's obligation may be satisfied, at our option, in cash, shares of common stock or a combination of cash and shares of common stock. As long as the conversion price is in excess of our current stock price, the impact of the conversion option would be anti-dilutive to the earnings per share calculation and as such would have no effect on our earnings per share disclosure.

If our stock price should exceed the conversion rate, currently about $71.81 per share, the conversion feature would have a dilutive effect on our reported earnings. The conversion rate is subject to adjustment upon the occurrence of certain events, as defined in the indenture governing the Notes.

We have classified the conversion feature as a component of our equity as long as NHI retains the option, under various tests, as to means of settlement. Should we be required to reclassify into liabilities the portion, currently $7,499,000, included in equity, there could be a significant negative impact on our financial statements.

Contractual Obligations and Contingent Liabilities

As of March 31, 2014, our contractual payment obligations and contingent liabilities are more fully described in the notes to the consolidated financial statements and were as follows (in thousands):
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Debt, including interest1
$
762,868

 
$
19,334

 
$
118,536

 
$
38,591

 
$
586,407

Real estate purchase liabilities
4,000

 
4,000

 

 

 

Construction commitments
16,648

 
16,648

 

 

 

Loan commitments
2,000

 
2,000

 

 

 

 
$
785,516

 
$
41,982

 
$
118,536

 
$
38,591

 
$
586,407

1 Interest is calculated based on the interest rate at March 31, 2014 through maturity of the term loans, the revolving credit facility, convertible senior notes and the mortgages assumed in our arrangement with Bickford, based on the balances outstanding as of March 31, 2014. The calculation also includes an unused commitment fee of .40%.

Commitments and Contingencies

Bickford

As of March 31, 2014, our subsidiary PropCo had purchased land and begun construction on one assisted living facility having a maximum cost of $9,000,000. Our costs incurred to date, including land, were $3,958,000. The facility is expected to open by the end of the third quarter of 2014. In February 2014 NHI entered into a commitment of $2,785,000 on a letter of credit for the benefit of our joint venture partner, an affiliate of Bickford which holds a minority interest in PropCo.

Chancellor

In October 2013, we entered into a $7,500,000 commitment to build a 46-unit free-standing assisted living and memory care community, expanding our Linda Valley senior living campus in Loma Linda, California. We began construction during the first quarter of 2014 and had funded $521,000 as of March 31, 2014. The initial lease term is for 15 years at an annual rate of 9% plus a fixed annual escalator. NHI purchased the Linda Valley campus in 2012 and leased it to Chancellor Health Care, who has been operating the campus since 1993. We also committed to provide up to $500,000 for renovations and improvements related to our recent acquisition of a 63-unit senior housing community in Baltimore, Maryland which we have leased to Chancellor Health Care. We began renovations during the first quarter of 2014 and had funded $109,000 as of March 31, 2014. We receive rent income on funds advanced for both construction projects.

Discovery

As a lease inducement, we have a contingent commitment to fund a series of payments up to $2,500,000 in connection with our September 2013 lease to Discovery of a senior living campus in Rainbow City, Alabama. Discovery would earn the contingent payments upon obtaining and maintaining a specified lease coverage ratio. As earned, the payments would be due in installments of $750,000 in each of years two and three of the lease with the residual due in year four. As of March 31, 2014, the likelihood

33


that we would incur the contingent payments was not considered probable. Accordingly, no provision for these payments is reflected in the condensed consolidated financial statements.

Fundamental

In April 2013, we completed the purchase of two skilled nursing facilities located in Canton and Corinth, Texas for a purchase price of $26,150,000 in cash, plus consideration related to the Corinth facility of $1,600,000 conditional upon the achievement of certain operating metrics. In March 2014 upon satisfactory achievement of the required operating metrics, we made the full $1,600,000 payment to Fundamental.

Kentucky River

In March 2012, we entered into a long-term lease extension and construction commitment to Jackson Hospital Corporation, an affiliate of Community Health Systems, to provide up to $8,000,000 for extensive renovations and additions to our Kentucky River Medical Center, a general acute care hospital in Jackson, Kentucky. This investment will be added to the basis on which the lease amount is calculated. The construction project commenced during the first quarter of 2013 and is expected to continue over two years. Total construction costs incurred as of March 31, 2014 were $6,468,000. The 10-year lease extension began July 1, 2012, with an additional 5-year renewal option.

Prestige

We have agreed to fund capital improvements of up to $2,000,000 in connection with our lease of facilities to Prestige. The capital improvements will be an addition to our investment in the properties when funded and will be included in the lease base. Additionally, we have committed to fund contingent earn out payments up to a maximum of $6,390,000 based on the achievement of certain financial metrics as measured periodically through December 31, 2015. At acquisition, we estimated probable contingent payments of $3,000,000 to be likely and have reflected that amount in the condensed consolidated financial statements.

Santé

We have a $2,000,000 supplemental construction commitment to our borrower, Santé Partners, LLC (“Santé”). This additional loan amount becomes available to the borrower when the 70-bed transitional rehabilitation hospital, completed in March 2011, achieves certain operating metrics. NHI also has the option to purchase and lease back the hospital when it achieves a predetermined level of stabilized net operating income.

In connection with our Silverdale, Washington senior living campus, we have a contingent commitment to fund two lease inducement payments of $1,000,000 each. Santé would earn the payments upon obtaining and maintaining a specified lease coverage ratio. If earned, the first payment would be due after the second lease year and the second payment would be due after the third lease year. At acquisition, the likelihood that we would incur the contingent payments was not considered probable. Accordingly, no provision for these payments is reflected in the condensed consolidated financial statements.

Helix Healthcare

In March 2010, we completed a purchase/leaseback transaction with Helix Healthcare (“Helix”) for $12,500,000. The purchase price includes a conditional payment of $1,000,000, which is recorded as a purchase liability.

Litigation

Our 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.

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FFO, AFFO & FAD

These supplemental operating performance measures may not be comparable to similarly titled measures used by other REITs. Consequently, our Funds From Operations ("FFO"), Normalized FFO, Normalized Adjusted Funds From Operations ("AFFO") and Normalized Funds Available for Distribution ("FAD") may not provide a meaningful measure of our performance as compared to that of other REITs. Since other REITs may not use our definition of these operating performance measures, caution should be exercised when comparing our Company's FFO, Normalized FFO, Normalized AFFO and Normalized FAD to that of other REITs. These financial performance measures do not represent cash generated from operating activities in accordance with generally accepted accounting principles ("GAAP") (these measures do not include changes in operating assets and liabilities) and therefore should not be considered an alternative to net earnings as an indication of operating performance, or to net cash flow from operating activities as determined by GAAP as a measure of liquidity, and is not necessarily indicative of cash available to fund cash needs.

Funds From Operations - FFO

Our FFO for the three months ended March 31, 2014 increased $12,453,000, or 62.0%, over the same period in 2013. Our normalized FFO for the three months ended March 31, 2014 increased $10,561,000, or 43.8%, over the same period in 2013, primarily as the result of our new real estate investments in 2013. FFO, as defined by the National Association of Real Estate Investment Trusts ("NAREIT") and applied by us, is net income (computed in accordance with GAAP), excluding gains (or losses) from sales of real estate property, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures, if any. The Company’s computation of FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or have a different interpretation of the current NAREIT definition from that of the Company; therefore, caution should be exercised when comparing our Company’s FFO to that of other REITs. Diluted FFO assumes the exercise of stock options and other potentially dilutive securities. Normalized FFO excludes from FFO certain items which, due to their infrequent or unpredictable nature, may create some difficulty in comparing FFO for the current period to similar prior periods, and may include, but are not limited to, impairment of non-real estate assets, gains and losses attributable to the acquisition and disposition of assets and liabilities, and recoveries of previous write-downs.

We believe that FFO and normalized FFO are important supplemental measures of operating performance for a REIT. Because the historical cost accounting convention used for real estate assets requires depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen and fallen with market conditions, presentations of operating results for a REIT that uses historical cost accounting for depreciation could be less informative, and should be supplemented with a measure such as FFO. The term FFO was designed by the REIT industry to address this issue.

Adjusted Funds From Operations - AFFO

Our normalized AFFO for the three months ended March 31, 2014 increased $7,952,000, or 34.7%, over the same period in 2013 due primarily to the impact of real estate investments completed during 2013. In addition to the adjustments included in the calculation of normalized FFO, normalized AFFO excludes the impact of any straight-line rent revenue, amortization of the original issue discount on our convertible senior notes and amortization of debt issuance costs.

We believe that normalized AFFO is an important supplemental measure of operating performance for a REIT. GAAP requires a lessor to recognize contractual lease payments into income on a straight-line basis over the expected term of the lease. This straight-line adjustment has the effect of reporting lease income that is significantly more or less than the contractual cash flows received pursuant to the terms of the lease agreement. GAAP also requires the original issue discount of our convertible senior notes and debt issuance costs to be amortized as non-cash adjustments to earnings. Normalized AFFO is useful to our investors as it reflects the growth inherent in the contractual lease payments of our real estate portfolio.

Funds Available for Distribution - FAD

Our normalized FAD for the three months ended March 31, 2014 increased $7,721,000, or 31.5%, over the same period in 2013 due primarily to the impact of real estate investments completed during 2013. In addition to the adjustments included in the calculation of normalized AFFO, normalized FAD excludes the impact of non-cash stock based compensation.

We believe that normalized FAD is an important supplemental measure of operating performance for a REIT as a useful indicator of the ability to distribute dividends to shareholders.

35


The following table reconciles net income attributable to common stockholders, the most directly comparable GAAP metric, to FFO, Normalized FFO, Normalized AFFO and Normalized FAD and is presented for both basic and diluted weighted average common shares (in thousands, except share and per share amounts):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Net income attributable to common stockholders
$
23,533

 
$
15,743

Elimination of certain non-cash items in net income:
 
 
 
Depreciation in continuing operations
9,237

 
4,248

Depreciation related to noncontrolling interest
(246
)
 
(87
)
Depreciation in discontinued operations

 
167

Funds from operations
32,524

 
20,071

Debt issuance costs expensed due to credit facility modifications
2,145

 

Loan impairment

 
4,037

Normalized FFO
34,669

 
24,108

Straight-line lease revenue, net
(4,195
)
 
(1,283
)
Straight-line lease revenue, net, related to noncontrolling interest
17