| UNITED STATES | |
| SECURITIES AND EXCHANGE COMMISSION | |
| WASHINGTON, D.C. 20549 | |
FORM 10-Q | |
| (Mark One) | |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE | |
| SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended September 30, 2005 | |
| OR | |
| 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 001-13487 | |
NATIONAL HEALTH REALTY, INC. | |
(Exact name of registrant as specified in its charter) | |
| Maryland | 52-2059888 |
(State or other jurisdiction of incorporation | (I.R.S. Employer Identification No.) |
| or organization) | |
100 Vine Street | |
| Murfreesboro, TN | |
| 37130 | |
| (Address of principal executive offices) | |
| (Zip Code) | |
(615) 890-2020 | |
| 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 No | |
| Indicate by check mark whether the registrant is an accelerated filer. | |
| Yes No | |
| Indicate by check mark whether the registrant is a shell company (as is defined in Rule 12b-2 | |
| of the Exchange Act). | |
| Yes No | |
| 9,939,463 shares of common stock were outstanding as of October 27, 2005 | |
| Item 1. Financial Statements. | ||
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES | ||
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS | ||
| (in thousands, except share amounts) | ||
| September 30, | December 31, | |
| 2005 | 2004 | |
| (unaudited) | ||
| ASSETS | ||
| Real estate properties: | ||
| Land | $ 19,464 | $ 19,464 |
| Buildings and improvements | 147,768 | 147,768 |
| 167,232 | 167,232 | |
| Less accumulated depreciation | (50,710) | (46,306) |
| Real estate properties, net | 116,522 | 120,926 |
| Mortgage and other notes receivable | 13,336 | 13,553 |
| Interest and rent receivable | 227 | 367 |
| Cash and cash equivalents | 11,432 | 8,384 |
| Marketable securities | 6,212 | 6,565 |
| Deferred costs and other assets | 272 | 237 |
| Total Assets | $148,001 | $150,032 |
| LIABILITIES | ||
| Debt | $ 14,875 | $ 16,150 |
| Minority interest in consolidated subsidiaries | 13,702 | 13,888 |
| Accounts payable and other accrued expenses | 1,452 | 1,441 |
| Accrued interest | 64 | 53 |
| Dividends payable | 3,305 | 4,001 |
| Distributions payable to minority interest partners | 404 | 501 |
| Total Liabilities | 33,802 | 36,034 |
| Commitments, contingencies and guarantees | ||
| STOCKHOLDERS' EQUITY | ||
| Cumulative convertible preferred stock, | ||
| $.01 par value; 5,000,000 shares | ||
| authorized; none issued and outstanding | -- | -- |
| Common stock, $.01 par value; | ||
| 75,000,000 shares authorized; 9,939,463 and | ||
| 9,699,108 shares, respectively, issued and outstanding | 99 | 97 |
| Capital in excess of par value of common stock | 138,468 | 136,460 |
| Cumulative net income | 74,057 | 65,641 |
| Cumulative dividends | (101,154) | (91,282) |
| Unrealized gains on marketable securities | 2,729 | 3,082 |
| Total Stockholders' Equity | 114,199 | 113,998 |
| Total Liabilities and Stockholders' Equity | $148,001 | $150,032 |
The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements.
The interim condensed balance sheet at December 31, 2004 is derived from the audited financial statements at that date.
| NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES | ||||
| INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME | ||||
| (unaudited) | ||||
| Three Months Ended | Nine Months Ended | |||
| September 30 | September 30, | |||
| 2005 | 2004 | 2005 | 2004 | |
| (in thousands,except share amounts) | ||||
| REVENUES: | ||||
| Rental income | $ 4,339 | $ 4,305 | $ 12,984 | $ 12,950 |
| Mortgage interest income | 609 | 587 | 1,802 | 2,238 |
| 4,948 | 4,892 | 14,786 | 15,188 | |
| EXPENSES: | ||||
| Interest | 195 | 131 | 539 | 631 |
| Depreciation of real estate | 1,468 | 1,491 | 4,405 | 4,474 |
| Amortization of loan costs | -- | -- | -- | 8 |
| General and administrative | 297 | 194 | 816 | 813 |
| 1,960 | 1,816 | 5,760 | 5,926 | |
| INCOME BEFORE MINORITY INTEREST | ||||
| IN CONSOLIDATED SUBSIDIARIES | ||||
| AND NON-OPERATING INCOME | 2,988 | 3,076 | 9,026 | 9,262 |
| NON-OPERATING INCOME (investment | ||||
| and interest income) | 156 | 106 | 417 | 311 |
| MINORITY INTEREST IN | ||||
| CONSOLIDATED SUBSIDIARIES | (339) | (357) | (1,027) | (1,074) |
| NET INCOME | $ 2,805 | $ 2,825 | $ 8,416 | $ 8,499 |
| NET INCOME PER COMMON SHARE: | ||||
| Basic | $ .28 | $ .29 | $ .86 | $ .89 |
| Diluted | $ .28 | $ .29 | $ .85 | $ .87 |
| WEIGHTED AVERAGE COMMON | ||||
| SHARES OUTSTANDING: | ||||
| Basic | 9,885,231 | 9,595,588 | 9,824,517 | 9,593,471 |
| Diluted | 9,892,227 | 9,817,726 | 9,859,813 | 9,808,542 |
| Common dividends per share declared | $ .3325 | $ .3325 | $ .9975 | $ .9975 |
The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements.
| NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES | ||
| INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||
| (unaudited) | ||
| Nine Months Ended | ||
| September 30, | ||
| 2005 | 2004 | |
| (in thousands) | ||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||
| Net income | $ 8,416 | $ 8,499 |
| Depreciation of real estate | 4,405 | 4,474 |
| Amortization of loan costs | -- | 8 |
| Minority interest in consolidated subsidiaries | 1,027 | 1,074 |
| Decrease in interest and rent receivable | 140 | 201 |
| (Increase) decrease in deferred costs and other assets | (35) | 49 |
| Increase in accounts payable and accrued liabilities | 22 | 79 |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 13,975 | 14,384 |
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||
| Proceeds from disposal of property and equipment | -- | 40 |
| Collection of mortgage notes receivable | 217 | 30,945 |
| Distribution from unconsolidated investment | -- | 67 |
| NET CASH PROVIDED BY INVESTING ACTIVITIES | 217 | 31,052 |
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||
| Proceeds from long-term debt | -- | 17,000 |
| Payments on long-term debt | (1,275) | (48,245) |
| Dividends paid to stockholders | (10,568) | (11,103) |
| Distributions paid to minority interest partners | (1,310) | (1,408) |
| Issuance of common shares | 2,009 | 58 |
| NET CASH USED IN FINANCING ACTIVITIES | (11,144) | (43,698) |
| INCREASE IN CASH AND CASH EQUIVALENTS | 3,048 | 1,738 |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 8,384 | 4,982 |
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ 11,432 | $ 6,720 |
| Supplemental Information: | ||
| Cash payments for interest expense | $ 528 | $ 598 |
The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements.
| NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES | |||||||||
| INTERIM CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | |||||||||
| FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 | |||||||||
| (dollars in thousands) | |||||||||
Unrealized | |||||||||
| Cumulative Convertible | Capital in | Gains | Total | ||||||
| Preferred Stock | Common Stock | Excess of | Cumulative | Cumulative | on Marketable | Stockholders' | |||
| Shares | Amount | Shares | Amount | Par Value | Net Income | Dividends | Securities | Equity | |
| BALANCE AT 12/31/03 | -- | $ -- | 9,590,588 | $ 96 | $135,536 | $ 54,206 | $ (77,711) | $ 2,115 | $114,242 |
| Net income | -- | -- | -- | -- | -- | 8,499 | -- | -- | 8,499 |
| Unrealized gains on market- | |||||||||
| able securities | -- | -- | -- | -- | -- | -- | -- | 801 | 801 |
| Total comprehensive income | 9,300 | ||||||||
| Shares sold | -- | -- | 5,000 | -- | 58 | -- | -- | -- | 58 |
| Dividends to common share- | |||||||||
| holders ($.9975 per share) | -- | -- | -- | -- | -- | -- | (9,571) | -- | (9,571) |
| BALANCE AT 9/30/04 | -- | $ -- | 9,595,588 | $ 96 | $135,594 | $ 62,705 | $ (87,282) | $ 2,916 | $114,029 |
| BALANCE AT 12/31/04 | -- | $ -- | 9,699,108 | $ 97 | $136,460 | $ 65,641 | $ (91,282) | $ 3,082 | $113,998 |
| Net income | -- | -- | -- | -- | -- | 8,416 | -- | -- | 8,416 |
| Unrealized losses on marketable | |||||||||
| securities | -- | -- | -- | -- | -- | -- | -- | (353) | (353) |
| Total comprehensive income | 8,063 | ||||||||
| Shares sold | -- | -- | 240,355 | 2 | 2,008 | -- | -- | -- | 2,010 |
| Dividends to common share- | |||||||||
| holders ($.9975 per share) | -- | -- | -- | -- | -- | -- | (9,872) | -- | (9,872) |
| BALANCE AT 9/30/05 | -- | $ -- | 9,939,463 | $ 99 | $138,468 | $ 74,057 | $(101,154) | $ 2,729 | $114,199 |
The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements.
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements to which these notes are attached include, in our opinion, all adjustments which are necessary to fairly present the financial position, results of operations and cash flows of National Health Realty, Inc. ("NHR" or "the Company") and its majority owned subsidiaries. We assume that users of these interim financial statements have read or have access to the audited December 31, 2004, 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. See our web page at www.nationalhealthrealty.com. Accordingly, footnotes and other disclosures which would substantially duplicate the disclosure contained in our most recent annual report to stockholders have been omitted. This quarter's interim 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, changes in interest rates, rents, operations and the timing of debt and equity financings.
NOTE 2. RELATIONSHIP WITH NATIONAL HEALTHCARE CORPORATION
Leases Extended -On August 1, 2005, NHC elected to exercise its option to extend the term of its leases of properties from us for two additional five year terms until December 31, 2017. The leases are for the real estate of seven long-term care centers, six assisted living centers and one retirement center. The currently running initial term of the leases expires on December 31, 2007. The leases were further amended to grant NHC an option to renew the leases at fair market value for a second extended term of ten years until December 31, 2027, assuming no defaults. We account for the leases as operating leases.
Under the terms of the master lease, NHC continues to guarantee to us the lease payments of nine Florida long-term care facilities, as discussed below. This requirement is unchanged from our original lease as amended.
The lease payments for the extended ten-year term of the leases that begin on January 1, 2008 are the same lease payments that were required in the initial term of the lease, including an annual inflator for percentage rent as described below. The lease payments for the second extended ten-year term that begins on January 1, 2018, if renewed, will be at fair market value as determined at the time of the lease renewal.
During the remaining initial term and the extended renewal term, NHC is obligated to pay NHR annual base rent on the facilities. In addition to base rent, in each quarter of each year after 1999, NHC is obligated to pay percentage rent to NHR equal to 3% of the amount by which gross revenues of each NHR leased health care facility in such later quarter exceed the gross revenues of such health care facility in the applicable quarter of 1999. During 2004, 2003 and 2002, we recognized $1,295,000, $1,128,000, and $805,000 of percentage rent from NHC. Each lease with NHR is a "triple net lease" under which NHC is responsible for paying all taxes, utilities, insurance premium costs, repairs and other charges relating to the operation of the facilities. NHC is obligated at its expense to maintain adequate insurance on the facilities' assets. Total rental income from NHC (including the nine Florida healthcare facilities referred to below) was $17,255,000, $17,088,000, and $16,822,000 during 2004, 2003, and 2002, respectively. During 2004, 2003 and 2002, rent derived from the nine Florida facilities totaled approximately $3,366,000 per year.
On October 1, 2000, NHC terminated its individual leases on nine Florida long term care facilities. However, NHC remains obligated under its master lease agreement and continues to remain obligated to make the lease payments to NHR on the nine Florida long term care facilities. Also effective October 1, 2000, the facilities were leased by NHR under a five year term to nine separate limited liability corporations, none of which are owned or operated by NHC. The leases have been extended through December 31, 2010. Lease payments to NHR from the new lessees offset NHC's lease obligations pursuant to the master operating lease. Since October 1, 2000, the nine separate limited liability corporations have made all required lease payments to NHR, and NHC has not been required to make any lease payments with respect to those nine properties.
NHC has a right of first refusal with us to purchase any of the properties transferred from NHC should we receive an offer from an unrelated party during the term of the lease or up to 180 days after termination of the related lease.
At December 31, 2004, the approximate future minimum base rent commitments (which exclude percentage rents) to be received by us on non-cancelable operating leases (including the nine Florida healthcare facilities referred to above) are as follows:
| 2005 | 15,960,000 |
| 2006 | 15,960,000 |
| 2007 | 15,960,000 |
| 2008 | 15,960,000 |
| 2009 | 15,960,000 |
| Thereafter | 127,680,000 |
The leases have also been amended to provide that if NHC pays for the construction of a bed addition, then the existing annual rent for that center will be increased by .75% of the cost paid by NHC for the construction of the addition. Revenues produced within the addition shall be excluded from any percentage rent calculation. At such time as NHC is no longer a tenant by virtue of lease terminations then NHR shall purchase the additional beds paid for by NHC but un-reimbursed by NHR for the lesser of (1) the appraised value of the addition or (2) the construction cost incurred by NHC plus 50% of any appraised value increase over cost. In addition, NHC agrees at NHR's request to finance NHR's purchase of the addition with a floating rate interest only note at the prime rate of interest for a period of up to two years. NHC has submitted a listing of certain NHR owned properties expected to be expanded by NHC for which the construction cost is expected to total approximately $23,325,000.
Advisory Agreement -We have entered into an Advisory Agreement with NHC whereby services related to investment activities and day-to-day management and operations are provided to us by NHC as Advisor. The Advisor is subject to the supervision of and policies established by our Board of Directors. The Advisory Agreement expired December 31, 2003 and thereafter is renewed from year to year unless earlier terminated. Either party may terminate the Advisory Agreement at any time on 90 days written notice, and we may terminate the Advisory Agreement for cause at any time.
On August 1, 2005, concurrent with the lease extensions described above, the Advisory Agreement was restated to provide that beginning for the year 2005 for its services under the Advisory Agreement, NHC is entitled to annual compensation equal to the greater of (1) 2.5% of our gross consolidated revenues or (2) $500,000. It was also clarified that we (and not NHC) are to bear all of our own corporate costs.
Prior to the August 1, 2005 restatement, the Advisory Agreement had provided that for its services under the Advisory Agreement, NHC was entitled to annual compensation of the greater of 2% of our gross consolidated revenues or the actual expenses incurred by NHC. During 2004, 2003, and 2002, our compensation to NHC under the Advisory Agreement was $411,000, $476,000, and $493,000, respectively.
We increased our general and administrative expenses in the Interim Condensed Consolidated Statements of Income by approximately $75,000 during the third quarter of 2005 to increase the accrual for the year-to-date advisory fee expense from an annual estimated amount of $400,000 per year to an estimated annual amount of $500,000 per year.
NOTE 3. EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common shares outstanding during the year.
Diluted earnings per share assumes the exercise of stock options using the treasury stock method.
The following table summarizes the earnings and the average number of common shares and common equivalent shares used in the calculation of basic and diluted earnings per share.
| Three Months Ended | Nine Months Ended | |||
| September 30 | September 30 | |||
2005 | 2004 | 2005 | 2004 | |
| BASIC: | ||||
| Weighted average common shares | 9,885,231 | 9,595,588 | 9,824,517 | 9,593,471 |
| Net income available to common | ||||
| stockholders | $2,805,000 | $ 2,825,000 | $8,416,000 | $ 8,499,000 |
| Net income per common share | $ .28 | $ .29 | $ .86 | $ .89 |
| DILUTED: | ||||
| Weighted average common shares | 9,885,231 | 9,595,588 | 9,824,517 | 9,593,471 |
| Stock options | 6,996 | 222,138 | 35,296 | 215,071 |
| Adjusted weighted-average common | ||||
| shares outstanding | 9,892,227 | 9,817,726 | 9,859,813 | 9,808,542 |
| Net income available to common | $2,805,000 | $ 2,825,000 | $8,416,000 | $ 8,499,000 |
| stockholders | ||||
| Net income per common share | $ .28 | $ .29 | $ .85 | $ .87 |
NOTE 4. COMMITMENTS, CONTINGENCIES AND GUARANTEES
NHR began operating on December 31, 1997 after the exchange of NHR common stock for certain assets of National HealthCare Corporation (NHC) including mortgage notes receivable and real property. In order to protect the Real Estate Investment Trust ("REIT") status of NHR, certain NHC unitholders received limited partnership units of NHR/OP, L.P. rather than shares of common stock of NHR. As a result of certain unitholders' involuntary acceptance of NHR/OP, L.P. partnership units to benefit all other unitholders, we have indemnified those certain unitholders for any tax consequence resulting from any involuntary conversion of NHR/OP, L.P. partnership units into shares of NHR common stock. The indemnification expires at such time as the NHR/OP, L.P. unitholders are in a position to voluntarily convert their partnership units into NHR common stock on a tax free basis without violating applicable REIT requirements.
We believe that we have operated our business so as to qualify as a REIT under Sections 856 through 860 of the Internal Code of 1986, as amended (the "Code") and we intend to continue to operate in such a manner, but no assurance can be given that we will be able to qualify at all times. If we qualify as a REIT, we will generally not be subject to federal corporate income taxes on our net income that is currently distributed to stockholders. This treatment substantially eliminates the "double taxation" (at the corporate and stockholder levels) that typically applies to corporate dividends. Our failure to continue to qualify under the applicable REIT qualification rules and regulations would cause us to owe state and federal income taxes and would have a material adverse impact on our financial position, results of operations and cash flows.
NOTE 5. MORTGAGE AND OTHER NOTES RECEIVABLE
The following is a summary of the terms and amounts of mortgage and other notes receivable:
| Final | Interest Rate | Principal Amount | |
| 2016 | Monthly payments of $43,318, which | ||
| includes interest at the prime rate plus 2% | $ 4,617 | ||
| 2014 | Monthly payments of $38,250, which | ||
| includes interest at 8.5% | 4,260 | ||
| 2016 | Monthly payments of $7,845, which includes | ||
| interest at the prime rate plus 2% | 535 | ||
| 2014 | Monthly payments of $5,396, which includes | ||
| interest at 9.0% | 49 | ||
| 2005 | Monthly payments of $72,800, which | ||
| includes interest at 10.5%, plus balance | |||
| due December 31, 2005 | 10.50% | 2,088 | |
| 2005 | Monthly payments of $10,400, which | ||
| includes interest at 10.5%, plus balance | |||
| due December 31, 2005 | 10.50% | 434 | |
| 2005 | Monthly payments of $46,800, which | ||
| includes interest at 10.5%, plus balance | |||
| due December 31, 2005 | 10.50% | 1,353 | |
| Weighted Average Interest and Total | $13,336 | ||
FCC Notes Receivable Prepayments
On February 27, 2004, we received prepayments of the balance (approximately $30,384,000) of our 10.25% notes receivable from Florida Convalescent Centers, Inc. or affiliates (FCC) of Sarasota, Florida. The notes were scheduled to mature on October 31, 2004.
The proceeds of the prepayments plus cash on hand were used to pay 100% (approximately $31,175,000) of the then outstanding credit facility debt, which had a then current interest rate of 3.10%.
NOTE 6. INVESTMENT IN MARKETABLE SECURITIES
On September 17, 2002, we purchased 225,000 shares of National Health Investors, Inc. ("NHI") common stock for approximately $3,483,000. At September 30, 2005, the fair value of the shares is $6,212,000. This investment in marketable securities is classified as an investment in securities available for sale. Unrealized gains and losses on available for sale securities are recorded in stockholders' equity in accordance with SFAS No. 115.
NOTE 7. STOCK OPTION PLAN
Our stockholders have approved the 1997 Stock Option and Appreciation Rights Plan and the 2005 Stock Option, Restricted Stock and Stock Appreciation Rights Plan under which options to purchase shares of our common stock are available for grant to our consultants, advisors, directors and employees at a price no less than the market value of the stock on the date the option is granted. The vesting period and term of the options is five years. The following table summarizes option activity:
Weighted | ||
| Number | Average | |
| of Shares | Exercise Price | |
| Outstanding December 31, 2001 | 412,000 | 8.51 |
| Options granted | 10,000 | 16.95 |
| Outstanding December 31, 2002 | 422,000 | 8.71 |
| Options granted | 15,000 | 14.80 |
| Options exercised | (25,000) | 11.67 |
| Outstanding December 31, 2003 | 412,000 | 8.75 |
| Options granted | 20,000 | 16.50 |
| Options exercised | (108,520) | 8.52 |
| Options forfeited | (20,000) | 11.42 |
| Outstanding December 31, 2004 | 303,480 | 9.17 |
| Options granted | 25,000 | 19.25 |
| Options exercised | (244,480) | 6.11 |
| Options forfeited | (29,000) | 8.38 |
| Outstanding September 30, 2005 | 55,000 | 17.11 |
| Options exercisable September 30, 2005 | 55,000 | $17.11 |
At September 30, 2005, options to purchase 55,000 shares of common stock are outstanding and exercisable. Exercise prices on the options range from $10.74 to $19.25 per share. The weighted average remaining contractual life of options outstanding at September 30, 2005 is 3.51 years. At September 30, 2005, options to purchase 1,011,802 additional shares of common stock may be issued under the stock option plans. We have reserved 1,066,802 shares of common stock for issuance under the stock option plan.
We have adopted the disclosure-only provisions of SFAS 123, as amended. As a result, no compensation cost has been recognized in the consolidated statements of income for our stock-based compensation plans. Had compensation cost for our stock option plans been determined based on the fair value at the grant date of awards in 2005 and 2004, consistent with the provisions of SFAS 123, our net income and earnings per share would have been as follows:
| Three Months Ended | Nine Months Ended | |||
| September 30 | September 30 | |||
2005 | 2004 | 2005 | 2004 | |
(dollars in thousands, except per share amounts) | ||||
| Net income - as reported | $2,805 | $2,825 | $8,416 | $8,499 |
| Net income - pro forma | 2,802 | 2,822 | 8,347 | 8,448 |
| Net earnings per share - as reported | ||||
| Basic | $ .28 | $ .29 | $ .86 | $ .89 |
| Diluted | $ .28 | $ .29 | $ .85 | $ .87 |
| Net earnings per share - pro forma | ||||
| Basic | $ .28 | $ .29 | $ .85 | $ .88 |
| Diluted | $ .28 | $ .29 | $ .85 | $ .86 |
The weighted average fair value per share of options granted was $1.99 per share and $2.06 per share for 2005 and 2004, respectively. For purposes of pro forma disclosures of net income and earnings per share as required by SFAS 123, as amended, the estimated fair value of the options is amortized to expense over the options' vesting period. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2005 and 2004:
| Grant Date | 5/03/05 | 4/20/04 |
| Dividend yield | 7.79% | 9.03% |
| Expected volatility | 24.4% | 32.9% |
| Expected lives | 5 years | 5 years |
| Risk-free interest rate | 3.81% | 3.58% |
NOTE 8. TERM NOTE PAYABLE
In May 2004, we entered into a $17,000,000 bank term loan agreement ($14,875,000 outstanding at September 30, 2005). The proceeds of the loan were used to repay a note payable to NHC in the approximate amount of $14,922,000 (interest rate of LIBOR +2.25% with a floor of 4%) and a senior secured note payable to NHC in the approximate amount of $1,723,000 (interest rate of 8.4%). The term note payable requires monthly interest payments at the interest rate of 30 day LIBOR plus 1.50%. Quarterly principal payments in the amount of $425,000 are required until maturity (May 14, 2007) at which time the entire outstanding principal balance shall be due.
NOTE 9. NEW ACCOUNTING PRONOUNCEMENTS
In December of 2004, the FASB issued FASB Statement No. 153,Exchanges of Nonmonetary Assets-An Amendment of APB Opinion No. 29("Statement 153"). Statement 153 amends APB Opinion No. 29,Accounting for Non-monetary Transactions, that was issued in 1973. The amendments made by Statement 153 are based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for non-monetary exchanges of similar productive assets and replace it with a broader exception for exchanges of non-monetary assets that do not have "commercial substance". Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The provisions in Statement 153 are effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply the standard prospectively. The Company has adopted Statement 153 effective July 1, 2005. The future effect of Statement 153 on the Company's financial statements will depend on whether the Company enters into certain non-monetary transactions. The Company, however, does not expect the adoption of Statement 153 to have a significant impact on its financial statements.
In December 2004, the FASB issued SFAS No. 123(R),Share-Based Payment.SFAS No. 123(R) replaces SFAS No. 123,Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees. SFAS No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award. SFAS No. 123(R) is effective for the Company beginning January 1, 2006. The Company does not expect the adoption of this pronouncement to have a significant impact on the Company's financial statements.
In May 2005, the FASB issued FASB Statement No. 154,Accounting for Changes and Error Corrections. This new standard replaces APB Opinion No. 20,Accounting Changes and FASB Statement No. 3,Reporting Accounting Changes in Interim Financial Statements. Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a "restatement". The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of this pronouncement to have a significant impact on the Company's financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
National Health Realty, Inc. (NHR or the Company) is a real estate investment trust (REIT) that began operations on January 1, 1998. Currently our assets, through our subsidiary NHR/OP, L.P. (the Operating Partnership), include the real estate of 23 health care facilities, including 16 licensed skilled nursing facilities, six assisted living facilities and one independent living center (the Health Care Facilities). We also own seven first and second mortgage promissory notes with principal balances totaling $13,336,000 (the Notes) at September 30, 2005 and secured by the real property of health care facilities. Our revenues are derived primarily from rent and interest income from these real estate properties and mortgages receivable. Our primary lessee is National HealthCare Corporation (NHC) which leases 14 of our 23 properties and guarantees the lease payments on the remaining nine properties.
Areas of Focus
Management is currently focusing upon our capacities as landlord and note holder. Our objectives are to (1) provide current income for distribution to stockholders, (2) to provide the opportunity for additional returns to investors by participating in any increase in the operating revenues of our leased properties; (3) to provide the opportunity to realize capital growth resulting from appreciation, if any, in the value of our portfolio properties; and (4) to preserve and protect stockholder's capital. We can offer no assurance that these objectives will be realized.
NHR's quarterly common stock dividend of 33.25 cents per share is expected to remain unchanged for the near future except for any adjustments required to reduce federal income taxes and/or to assure that we qualify to be taxed as a REIT under the Internal Revenue Code.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and cause our reported net income to vary significantly from period to period.
Our significant accounting policies and the associated estimates and the issues that impact these estimates are as follows:
Revenue Recognition - Mortgage Interest and Rental Income
We collect interest and rent from our customers. Generally our policy is to recognize revenues on an accrual basis as earned. However, we may in the future determine that, based on insufficient historical collections and the lack of expected future collections, revenue for interest or rent is not realizable. For any such nonperforming investments, our policy is to recognize interest or rental income only in the period when payments are received. If conclusions as to the realizibility of revenue change, our revenues could vary significantly from period to period.
Valuations of and Impairments to Our Investments
Decisions about valuations and impairments of our investments require significant judgements and estimates on the part of management. We monitor the liquidity and credit worthiness of our tenants and borrowers on an ongoing basis. For real estate properties, the need to recognize an impairment is evaluated on a property by property basis in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). Recognition of an impairment is based upon estimated future cash flows from a property compared to the carrying value of the property. For notes receivable, impairment recognition is based upon an evaluation of the estimated collectibility of loan payments on a specific loan basis in accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan - An Amendment of FASB Statements No. 5 and 15". While we believe that the carrying amounts of our properties and notes receivable are realizable, it is possible that future events could require us to make significant adjustments or revisions to these estimates.
REIT Status and Taxes
We believe that we have operated our business so as to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code") and we intend to continue to operate in such a manner, but no assurance can be given that we will be able to qualify at all times. If we qualify as a REIT, we will generally not be subject to federal corporate income taxes on our net income that is currently distributed to our stockholders. This treatment substantially eliminates the "double taxation" (at the corporate and stockholder levels) that typically applies to corporate dividends. Our failure to continue to qualify under the applicable REIT qualification rules and regulations would cause us to owe state and federal income taxes and would have a material adverse impact on our financial position, results of operations and cash flows.
CAPITAL RESOURCES AND LIQUIDITY
Term Note Payable
In May 2004, we borrowed $17,000,000 ($14,875,000 outstanding at September 30, 2005) under a bank term loan with an interest rate of 30 day LIBOR plus 1.5% and a three year term. The proceeds of the loan were used to repay a note payable to NHC in the approximate amount of $14,922,000 (interest rate of LIBOR + 2.25% with a floor of 4%) and a senior secured note payable to NHC in the approximate amount of $1,723,000 (interest rate of 8.4%). The new term note payable requires monthly interest payments plus quarterly principal payments in the amount of $425,000 until maturity on May 14, 2007 at which time the entire outstanding principal balance is due.
FCC Notes and Bank Credit Facility Prepayments
On February 27, 2004, we received prepayment of the balance (approximately $30,384,000) of our 10.25% notes receivable from Florida Convalescent Centers, Inc. or affiliates (FCC) of Sarasota, Florida. The notes were scheduled to mature on October 31, 2004.
The proceeds of the prepayments plus cash on hand were used to pay 100% (approximately $31,175,000) of the then outstanding credit facility debt, which had a current interest rate of 3.10%.
Leases
We lease our 23 health care facilities to various lessees: 14 properties are leased to NHC, and nine properties that were previously leased to NHC are leased to nine separate lessees not related to NHC. With respect to these nine properties, NHC remains obligated under its master lease agreement and continues to remain obligated to make the lease payments to us. Lease payments made to us from the new lessees are credited against NHC's overall rent obligation. At September 30, 2005, all payments are current.
Leases Extended
On August 1, 2005, NHC elected to exercise its option to extend the term of its leases of properties from us for two additional five year terms until December 31, 2017. The currently running initial term of the leases expires on December 31, 2007. The leases were also amended to grant NHC an option to renew the leases at fair market value for a second extended term of ten years until December 31, 2027, assuming no defaults.
The lease payments for the extended ten-year term of the leases that begin on January 1, 2008 are the same lease payments that were required in the initial term of the lease, including an annual inflator for percentage rent. The lease payments for the second extended ten-year term that begins on January 1, 2018, if renewed, will be at fair market value as determined at the time of the lease renewal.
Contractual Cash Obligations
Our contractual cash obligations for periods subsequent to September 30, 2005 are as follows:
| Less than | |||||
| (in thousands) | Total | 1 Year | 2-3 Years | 4-5 Years | After 5 Years |
| Long-term debt | $14,875 | $1,700 | $13,175 | $ -- | $ -- |
| Total Contractual Cash Obligations | $14,875 | $1,700 | $13,175 | $ -- | $ -- |
Interest expense has not been included in the above table due to the difficulty in projecting variable rate interest. During the nine months ended September 30, 2005, our cash payments for interest were $528,000.
We expect that current cash on hand, marketable securities, short-term notes receivable, operating cash flows, and as needed, our borrowing capacity will be adequate to finance our operating and financing requirements for 2005 and 2006.
Sources and Uses of Funds
Our leasing and mortgage services generated net cash from operating activities during the nine months ended September 30, 2005, in the amount of $13,975,000 compared to $14,384,000 in the prior period. Net cash from operating activities generally includes net income plus non-cash expenses, such as depreciation and amortization and provision for loan losses, if any, and working capital changes. The period to period decrease is due primarily to reduced mortgage interest income offset in part by reduced interest expense.
Cash flows provided by investing activities totaled $217,000 during the nine months ended September 30, 2005, compared to $31,052,000 in the prior period. Collection of mortgage notes receivable provided $217,000 of cash flow in the current period compared to $30,945,000 in the same period last year. Prior year collections include the prepayment of $30,384,000 of notes receivable from FCC. There are no distributions from an unconsolidated investment in the current period compared to $67,000 in the prior period.
Cash flows used in financing activities totaled $11,144,000 ($43,698,000 last year) and included payments on long-term debt of $1,275,000 ($48,245,000 last year), payments for dividends to stockholders of $10,568,000 ($11,103,000 last year), and payments for cash distributions to minority interest partners of $1,310,000 ($1,408,000 last year) offset in part by $2,009,000 in proceeds from issuance of common shares ($58,000 last year). The prior year payments on long-term debt include the prepayment of 100% of our credit facility debt of $31,175,000.
Dividends
We intend to pay quarterly distributions to our stockholders in an amount at least sufficient to satisfy the distribution requirements of a real estate investment trust. Such requirements necessitate that at least 90% of our taxable income be distributed annually. The primary source for distributions will be rental and interest income we earn on the real property and mortgage notes receivable.
Debt to Equity Ratio
At September 30, 2005, our debt as a percentage of total liabilities and capital was 10.0%.
Our current cash on hand, marketable securities, collections on leases and notes receivable, operating cash flows and, as needed, our borrowing capacity is expected to be adequate to pay or finance any scheduled debt reduction, plus our operating requirements for 2005 and into 2006.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004
Net income for the three months ended September 30, 2005, is $2,805,000 versus $2,825,000 for the same period in 2004, a decrease of .7%. Diluted earnings per common share is 28 cents in the 2005 period, compared to 29 cents in the 2004 period.
Total revenues for the three months ended September 30, 2005, increased $56,000 to $4,948,000 from $4,892,000 for the three months ended September 30, 2004. Revenues from rental income increased $34,000 or .7% when compared to the same period in 2004. Revenues from mortgage interest increased $22,000 or 3.7% in 2005 as compared to the same period in 2004.
The increase in rental income is due to increased percentage rent. Percentage rent is calculated at 3% of the amount by which gross revenues of each leased health care center in each quarter of each year after 1999 exceed the gross revenues of such health care facility in the applicable quarter of 1999.
The increase in mortgage interest income is the result of increased interest rates due to variable rate notes receivable offset in part because of the reductions in the principal of mortgage notes receivable due to regular monthly amortization.
Total expenses for the 2005 three month period increased $144,000 or 7.9% to $1,960,000 from $1,816,000 for the 2004 three month period. Interest expense increased $64,000 or 48.9% in the 2005 three month period as compared to the 2004 period. Depreciation of real estate decreased $23,000 or 1.5%. General and administrative costs increased $103,000 or 53.1%.
Interest expense increased because the interest rate on variable rate debt is greater in the 2005 three month period. The increase in interest expense is partially offset because of regular quarterly payments that reduced the balance of our bank term loan.
General and administrative expenses increased due primarily to increases in advisory fees and in indemnification insurance. The increase was offset in part due to decreased legal fees.
Non-operating income, which is composed of net revenues from investment and interest income, increased $50,000 or 47.2% for the three months ended September 30, 2005 compared to the same period in 2004. Investment and interest income for the three months ended September 30, 2005 includes $101,000 of dividend income and $55,000 of bank interest income.
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
Net income for the nine months ended September 30, 2005, is $8,416,000 versus $8,499,000 for the same period in 2004, a decrease of 1.0%. Diluted earnings per common share is 85 cents in the 2005 period, compared to 87 cents in the 2004 period.
Total revenues for the nine months ended September 30, 2005, decreased $402,000 to $14,786,000 from $15,188,000 for the nine months ended September 30, 2004. Revenues from rental income increased $34,000 to $12,984,000 when compared to the same period in 2004. Revenues from mortgage interest decreased $436,000 or 19.5% in 2005 as compared to the same period in 2004.
Rental income increased due to increased percentage rent for 2005, which amount was offset due to a downward adjustment to 2004 percentage rent that was reported in the first quarter of 2005. The adjustment could not be previously determined. Percentage rent is calculated at 3% of the amount by which gross revenues of each leased health care center exceed the gross revenues of such health care facility in the applicable quarter of a prior base year.
The decrease in mortgage interest income is the result of lower balances of notes receivable. We received prepayments on mortgages receivable totaling $30,384,000 in February 2004. Mortgage interest decreased also because of the reductions in the principal of mortgage notes receivable due to regular monthly amortization. The decrease is offset in part due to increased interest rates due to variable rate notes receivable.
Total expenses for the 2005 nine month period decreased $166,000 or 2.8% to $5,760,000 from $5,926,000 for the 2004 nine month period. Interest expense decreased $92,000 or 14.6% in the 2005 nine month period as compared to the 2004 period. Depreciation of real estate decreased $70,000 or 1.6%. General and administrative costs increased $4,000 or .5%.
Interest expense declined due to the paydown of our $31,175,000 credit facility in the first quarter of 2004. Interest expense also decreased because of regular quarterly payments on our bank term loan. The decline in interest expense is offset in part due to the interest rate on variable rate debt being greater in the 2005 period.
General and administrative expenses increased primarily due to increases in advisory fees, indemnification insurance, audit fees and expenses related to the cashless exercise of directors' stock options in the current nine month period. The increase was offset in part due primarily to a writeoff of previously capitalized costs for a transaction that did not materialize in the prior period.
Non-operating income, which is composed of net revenues from investment and interest income increased $106,000 or 34.1% for the nine months ended September 30, 2005 compared to the same period in 2004. Investment and interest income for the nine months ended September 30, 2005 includes $304,000 of dividend income and $113,000 of bank interest income.
Funds From Operations
Our funds from operations ("FFO") for the nine months ended September 30, 2005, on a diluted basis was $12,325,000, a decrease of $145,000 as compared to $12,470,000 for the same period in 2004. FFO represents net earnings available to common stockholders, excluding the effects of asset dispositions, plus depreciation associated with real estate investments. Diluted FFO assumes, if dilutive, the conversion of cumulative convertible preferred stock and the exercise of stock options using the treasury stock method.
We believe that funds from operations is an important supplemental measure of operating performance for a real estate investment trust. Because the historical cost accounting convention used for real estate assets requires straight-line 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 real estate investment trust that use 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 real estate investment trust industry to address this issue. Our measure may not be comparable to similarly titled measures used by other REITs. Consequently, our funds from operations 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 FFO, caution should be exercised when comparing our Company's FFO to that of other REITs. Funds from operations in and of itself does not represent cash generated from operating activities in accordance with GAAP (funds from operations does 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 in the United States, as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs.
The following table reconciles net income to funds from operations:
| Nine Months Ended | ||||
| September 30 | ||||
| 2005 | 2004 | |||
| Net income applicable to common stockholders | $2,805 | $2,825 | $ 8,416 | $ 8,499 |
| Adjustments: | ||||
| Real estate depreciation | 1,468 | 1,491 | 4,404 | 4,474 |
| Minority interest in NHR/OP, L.P. share | ||||
| of add back for real estate depreciation | (165) | (168) | (495) | (503) |
| Funds from operations | $4,108 | $4,148 | $12,325 | $12,470 |
| Weighted average shares: | ||||
| Basic | 9,885,231 | 9,595,588 | 9,824,517 | 9,593,471 |
| Diluted | 9,892,227 | 9,817,726 | 9,859,813 | 9,808,542 |
FUTURE RENTAL AND MORTGAGE INTEREST INCOME UNCERTAINTIES
Our rental and mortgage interest income revenues are believed by management to be secure. However, the majority of the income of our lessees and borrowers is derived from the lessees' participation in the Medicare and Medicaid programs. Adverse changes in these programs or the inability of our lessees and borrowers to participate in these programs would have a material adverse impact on the financial position, results of operations and cash flows of our lessees and borrowers and their resultant ability to service their obligations to us. Additionally, prepayment by our borrowers of their mortgage notes to us would reduce our future income.
INCOME TAXES
We intend at all times to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. Therefore, we will not be subject to federal income tax provided we distribute at least 90% of our annual REIT taxable income to our stockholders and meet other requirements to continue to qualify as a REIT. Accordingly, no provision for federal income taxes has been made in the consolidated financial statements. Our failure to continue to qualify under the applicable REIT qualification rules and regulations would have a material adverse impact on our financial position, results of operations and cash flows.
IMPACT OF INFLATION
Inflation may affect us in the future by changing the underlying value of our real estate or by impacting our cost of financing operations.
Our revenues are primarily from long-term investments. Our leases with NHC require increases in rent income based on increases in the revenues of the leased facilities.
FORWARD-LOOKING STATEMENTS
References throughout this document to the Company, "we" or "us" include National Health Realty, Inc. and its 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 Realty, Inc. and its subsidiaries and not any other person.
This Quarterly Report on Form 10-Q and other information we provide from time to time, contains certain "forward-looking" statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations, cash flows, funds from operations, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, and similar statements including, without limitations, those containing words such as "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:
* national and local economic conditions, including their effect on the availability and cost of labor, utilities and materials;
* the effect of government regulations and changes in regulations governing the healthcare industry, including compliance with such regulations by us and our borrowers and/or lessees;
* changes in Medicare and Medicaid payment levels and methodologies and the application of such methodologies by the government and its fiscal intermediaries;
* the ability to pay when due or refinance certain debt obligations when they mature;
* the competitive environment in which we operate.
See the notes to the quarterly financial statement, and "Item 1. Business" as is found in our 2004 Annual Report on Form 10-K for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. The Annual Report and Form 10-Q's are available on our web site atwww.nationalhealthrealty.com. You should carefully consider those 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 or results of operations could be materially adversely affected. In that case, the trading price of our Common Stock could decline, and you may lose all or part of your investment. Given these risks and uncertainties, we can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
INTEREST RATE RISK
Our cash and cash equivalents consist of highly liquid investments with a maturity of less than three months. Approximately $8,184,000 of our notes receivable bear interest at fixed interest rates. As the interest rates on these notes receivable are fixed, a hypothetical 10% change would have no impact on our future earnings and cash flows related to these instruments. Approximately $5,152,000 of our notes receivable bear interest at variable rates (generally at prime plus 2%). Because the interest rate of these instruments are variable, a hypothetical 10% change in interest rates would result in a related increase or decrease in annual interest income of approximately $45,000.
As of September 30, 2005, all of our long-term debt ($14,825,000) bears interest at variable interest rates. Because the interest rates of these instruments are variable, a hypothetical 10% increase in interest rates would result in additional annual interest expense of $77,000 and a 10% reduction in interest rates would result in annual interest expense declining $77,000.
We currently do not use any derivative instruments to hedge our interest rate expense or for trading purposes. The use of such instruments would be subject to strict approvals by our senior officers. Therefore, our exposure related to such derivative instruments is not material to our financial position, results of operations or cash flows.
EQUITY PRICE RISK
We consider our investments in marketable securities as available for sale securities and unrealized gains and losses are recorded in stockholders' equity in accordance with Statement of Financial Accounting Standards No. 115. The investments in marketable securities are recorded at their fair market value based on quoted market prices. Thus, there is exposure to equity price risk, which is the potential change in fair value due to a change in quoted market prices. Hypothetically, a 10% increase in quoted market prices would result in a related 10% increase in the fair value of our investments in marketable securities of approximately $621,000 and 10% reduction in quoted market prices would result in a related 10% decrease in the fair value of our investments in marketable securities of approximately the same amount.
Item 4. Controls and Procedures
As of September 30, 2005, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Principal Accounting Officer ("PAO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and PAO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2005. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls during the quarterly period ended or subsequent to September 30, 2005.PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Unregistered sales of Equity Securities and Use of Proceeds. Not applicable
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits.
(a) List of exhibits
| Exhibit No. | Description |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Principal Accounting Officer |
32 | Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive |
| Officer and Principal Accounting Officer |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NATIONAL HEALTH REALTY, INC. | |
| (Registrant) | |
| Date November 1, 2005 | /s/Robert G. Adams |
| Robert G. Adams | |
| President | |
| Date November 1, 2005 | /s/Donald K. Daniel |
| Donald K. Daniel | |
| Principal Accounting Officer | |