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MarketScreener Homepage  >  Equities  >  Nyse  >  National Health Investors, Inc.    NHI

NATIONAL HEALTH INVESTORS, INC.

(NHI)
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NATIONAL HEALTH INVESTORS : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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11/07/2019 | 06:09am EST

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
factors including, but not limited to, the following:

*      We depend on the operating success of our tenants and borrowers for
       collection of our lease and note payments;



*      We depend on the success of property development and construction

activities, which may fail to achieve the operating results we expect;



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


* Certain tenants in our portfolio account for a significant percentage of

the rent we expect to generate from our portfolio, and the failure of any

of these tenants to meet their obligations to us could materially and

adversely affect our business, financial condition and results of

operations and our ability to make distributions to our stockholders.

* 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 related to governmental regulations and payors,

principally Medicare and Medicaid, and the effect that lower reimbursement

       rates would have on our tenants' and borrowers' business;


* Legislative, regulatory, or administrative changes could adversely affect

       us or our security holders.



*      We are exposed to the risk that the cash flows of our tenants and

borrowers would be adversely affected by increased liability claims and

       liability insurance costs;



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


* We are exposed to the risk that we may not be fully indemnified by our

lessees and borrowers against future litigation;

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



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



*      We may need to refinance existing debt or incur additional debt in the
       future, which may not be available on terms acceptable to us;



*      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;

* When interest rates increase, our common stock may decline in price;

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*      We depend on revenues derived mainly from fixed rate investments in real
       estate assets, while a portion of our debt capital used to finance those
       investments bears interest at variable rates;


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

       charges;



*      We depend on the ability to continue to qualify for taxation as a Real
       Estate Investment Trust;



*      Complying with REIT requirements may cause us to forego otherwise

attractive acquisition opportunities or liquidate otherwise attractive

       investments, which could materially hinder our performance;


* 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.


* If our efforts to maintain the privacy and security of Company information

are not successful, we could incur substantial costs and reputational

damage, and could become subject to litigation and enforcement actions.




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, 2018, 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 and 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 and 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., established in 1991 as a Maryland corporation,
is a self-managed real estate investment trust ("REIT") specializing in
sale-leaseback, joint-venture, mortgage and mezzanine financing of need-driven
and discretionary senior housing and medical facility investments. Our portfolio
consists of real estate investments in independent living facilities, assisted
living facilities, entrance-fee communities, senior living campuses, skilled
nursing facilities, specialty hospitals and medical office buildings. We fund
our real estate investments primarily through: (1) operating cash flow, (2) debt
offerings, including bank lines of credit and term debt, both unsecured and
secured, and (3) the sale of equity securities.

Portfolio


As of September 30, 2019, we had investments in real estate and mortgage and
other notes receivable involving 236 facilities located in 34 states. These
investments involve 155 senior housing properties, 76 skilled nursing
facilities, 3 hospitals, 2 medical office buildings and other notes receivable.
These investments (excluding our corporate office of $2,508,000) consisted of
properties with an original cost of approximately $3,057,775,000, rented under
triple-net leases to 31 lessees, and $315,316,000 aggregate net carrying value
of mortgage and other notes receivable due from 11 borrowers.

Our investments in real estate are located within the United States and our
investments in mortgage loans are secured by real estate located within the
United States. We are managed as one unit for internal reporting and decision
making. Therefore, our reporting reflects our financial position and operations
as a single segment.

We classify all of the properties in our portfolio as either senior housing or
medical properties. Because our leases represent different underlying revenue
sources and result in differing risk profiles, we further classify our senior
housing communities as either need-driven (assisted living and memory care
communities and senior living campuses) or discretionary (independent living and
entrance-fee communities.)


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Senior Housing - Need-Driven includes assisted living and memory care
communities ("ALF") and senior living campuses ("SLC") which primarily attract
private payment for services from residents who require assistance with
activities of daily living. Need-driven properties are subject to regulatory
oversight.

Senior Housing - Discretionary includes independent living ("ILF") and
entrance-fee communities ("EFC") which primarily attract private payment for
services from residents who are making the lifestyle choice of living in an
age-restricted multi-family community that offers social programs, meals,
housekeeping and in some cases access to healthcare services. Discretionary
properties are subject to limited regulatory oversight. There is a correlation
between demand for this type of community and the strength of the housing
market.

Medical Facilities within our portfolio receive payment primarily from Medicare,
Medicaid and health insurance. These properties include skilled nursing
facilities ("SNF"), medical office buildings ("MOB") and hospitals that attract
patients who have a need for acute or complex medical attention, preventative
medicine, or rehabilitation services. Medical properties are subject to state
and federal regulatory oversight and, in the case of hospitals, Joint Commission
accreditation.

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The following tables summarize our investments in real estate and mortgage and
other notes receivable as of and for the nine months ended September 30, 2019
(dollars in thousands):

                                      Properties     Beds/Sq. Ft.*       Revenue       %       Investment
Real Estate Properties

Senior Housing - Need-Driven

     Assisted Living                          89             4,892     $  

57,097 24.2 % $ 899,261

     Senior Living Campus                     14             1,976        

14,801 6.3 % 303,847

Total Senior Housing -

     Need-Driven                             103             6,868        

71,898 30.5 % 1,203,108

Senior Housing - Discretionary

     Independent Living                       32             3,703        

34,787 14.7 % 599,271

     Entrance-Fee Communities                 10             2,306        

38,385 16.3 % 604,465

Total Senior Housing -

     Discretionary                            42             6,009        

73,172 31.0 % 1,203,736

     Total Senior Housing                    145            12,877       

145,070 61.5 % 2,406,844

Medical Facilities

     Skilled Nursing Facilities               72             9,433        

59,721 25.3 % 584,473

     Hospitals                                 3               207        

5,993 2.5 % 55,971

     Medical Office Buildings                  2            88,517   *     

500 0.2 % 10,487

     Total Medical Facilities                 77                          

66,214 28.0 % 650,931

     Total Real Estate Properties            222                         

211,284 89.5 % $ 3,057,775

     Held for Sale                                                        

3,288

Escrow Funds Received From

     Tenants                                                               4,205
     Total Rental Income                                                 218,777

Mortgage and Other Notes Receivable

  Senior Housing - Need-Driven                 7               439         

3,126 1.3 % $ 62,758

  Senior Housing - Discretionary               3             1,105         

9,363 4.0 % 199,696

  Medical Facilities                           4               270          

498 0.2 % 7,264

  Other Notes Receivable                       -                 -         

3,159 1.3 % 45,598

Total Mortgage and Other Notes

     Receivable                               14             1,814        

16,146 6.8 % $ 315,316

     Income from notes paid off                                            
 863
     Other Income                                                            100
     Total Revenue                                                     $ 235,886



Portfolio Summary                       Properties         Revenue        %       Investment
  Real Estate Properties                       222        $ 211,284     92.9 %   $ 3,057,775
  Mortgage and Other Notes Receivable           14           16,146      7.1 %       315,316
       Total Portfolio                         236        $ 227,430    100.0 %   $ 3,373,091

Portfolio by Operator Type
  Public                                        66        $  52,857     23.2 %   $   511,294
  National Chain (Privately-Owned)              29           39,076     17.2 %       701,598
  Regional                                     135          132,185     58.1 %     2,083,511
  Small                                          6            3,312      1.5 %        76,688
       Total Portfolio                         236        $ 227,430    100.0 %   $ 3,373,091



For the nine months ended September 30, 2019, operators of facilities which
provided more than 3% of our total revenues were (in alphabetical order):
Bickford Senior Living; Chancellor Health Care; Discovery Senior Living; The
Ensign Group; Health Services Management; Holiday Retirement; Life Care
Services; National HealthCare Corporation; Senior Living Communities; and Senior
Living Management.

As of September 30, 2019, our average effective annualized rental income was
$8,429 per bed for skilled nursing facilities, $12,281 per unit for senior
living campuses, $16,562 per unit for assisted living facilities, $12,689 per
unit for independent living facilities, $22,216 per unit for entrance-fee
communities, $38,604 per bed for hospitals, and $8 per square foot for medical
office buildings.


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Areas of Focus


We are evaluating and will likely make real estate and note investments during
the remainder of 2019 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 aims to fuel
steady, and thus, enduring growth for those partners and for NHI. Within the
context of our growth model, we rely on cost-effective access to debt and equity
capital to finance acquisitions that will drive our earnings. There is
significant competition for healthcare assets from other REITs, both public and
private, and from private equity sources. Large-scale portfolios continue to
command premium pricing, due to the continued abundance of private and foreign
buyers seeking to invest in healthcare real estate. This combination of
circumstances places a premium on our ability to execute acquisitions and
negotiate leases which generate meaningful earnings growth for our shareholders.
We emphasize growth with our existing tenants and borrowers as a way to insulate
us from other competition.

With lower capitalization rates for existing healthcare facilities, there has
been increased interest in constructing new facilities in hopes of generating
better returns on invested capital. Using our relationship-driven model, we
continue to look for opportunities to support new and existing tenants and
borrowers with the capital needed to expand existing facilities and to initiate
ground-up development of new facilities. We concentrate our efforts in those
markets where there is both a demonstrated demand for a particular product type
and where we perceive we have a competitive advantage. The projects we agree to
finance have attractive upside potential and are expected to provide
above-average returns to our shareholders to mitigate the risks inherent with
property development and construction.

Following three 25 basis-point increases in 2017, the Federal Open Market
Committee of the Federal Reserve announced four further interest rate increases
during 2018. On July 31, 2019, the Federal Reserve lowered its benchmark
interest rate 25 bps and on September 19, 2019, lowered it an additional 25 bps.
On October 30, 2019, the Federal Reserve lowered its benchmark interest rate
another 25 bps and indicated a target range for the federal funds rate of 1.50%
to 1.75% percent. The actual path the federal funds rate takes will depend on
the changing economic outlook as informed by incoming data. Considering that the
vote approving the rate cut was split with two committee members voting to
maintain the target range, we do not see this as the beginning of a rate-cutting
cycle. Previous changes in the federal funds rate have been a primary source of
much volatility in REIT equity markets. As a result, there has been 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 would tend to result in
higher capitalization rates for healthcare assets and higher lease rates
indicative of historical levels. Managing long-term risk involves trade-offs
with the competing alternative 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. If interest rates rise, our share
price may decline as investors adjust prices to reflect a dividend yield that is
sufficiently in excess of a risk-free rate.

For the nine months ended September 30, 2019, approximately 26% of our revenue
was derived 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. Over the past few years, we have selectively
diversified 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 (assisted living and memory
care facilities, senior living campuses, independent living facilities and
entrance-fee communities). We will occasionally acquire skilled nursing
facilities in good physical condition with a proven operator and strong local
market fundamentals, because diversification implies a periodic rebalancing, but
our recent investment focus has been on acquiring need-driven and discretionary
senior housing assets.

For individual tenant revenue as a percentage of total lease revenue, Bickford
is our largest assisted living tenant, an affiliate of Holiday is our largest
independent living tenant, NHC is our largest skilled nursing tenant and Senior
Living Communities is our largest entrance-fee community tenant. Our shift
toward private payor facilities, as well as our expansion into the discretionary
senior housing market, has further resulted in a portfolio whose current
composition is relatively balanced between medical facilities, need-driven and
discretionary senior housing.

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

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leveraging our investments. We intend to continue to make new investments that
meet our underwriting criteria and where the spreads over our cost of capital
will generate sufficient returns to our shareholders.

In February 2019, we announced an increase in our quarterly dividend to $1.05
per common share ($4.20 on an annual basis). Our dividends per share for the
last two years are as follows:
 2018      2017
$ 4.00$ 3.80



Our investments in healthcare real estate have been partially accomplished by
our ability to effectively leverage our balance sheet. However, we continue to
maintain a lower-leverage balance sheet when compared 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 at
contractual rates net of capitalized interest and principal payments on debt),
and the ratio of consolidated net 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 also believe this gives us a competitive advantage when accessing debt
markets.

We calculate our fixed charge coverage ratio as approximately 5.3x for the nine
months ended September 30, 2019 (see our discussion under the heading Adjusted
EBITDA including a reconciliation to our net income). Giving effect to our
acquisitions and financings on an annualized basis, our consolidated net debt to
Annualized Adjusted EBITDA ratio is approximately 4.5x for the three months
ended September 30, 2019 (in thousands):

Consolidated Total Debt                             $ 1,449,360
Less: cash and cash equivalents                          (5,882 )
Consolidated Net Debt                               $ 1,443,478

Adjusted EBITDA                                     $    77,232
Annualizing Adjustment                                  231,696
Annualized impact of recent investments                  10,189
                                                    $   319,117

Consolidated Net Debt to Annualized Adjusted EBITDA 4.5 x




According to the Administration on Aging ("AoA") of the US Department of Health
and Human Services, in 2017, the latest year for which data is available, 50.9
million people were age 65 or older in the United States (a 34% increase over
the last ten years). Census estimates showed that, by 2040, those 65 or older
are expected to constitute 21.6% of the population. The population aged 85 and
above is projected to rise from 6.4 million in 2016 to 14.4 million in the US by
2040 (a 123% increase). The median value of homes owned by older homeowners age
75 and over was $175,000 (with a median purchase price of $65,000). In
comparison, the median home value of all homeowners was $200,000. Of the 12.9
million households headed by persons age 75 and over in 2017, 76% were owners.

Equipped with the basics of financial security, many will be economically able
to enter the market for senior housing. These strong demographic trends provide
the context for continued growth in senior housing in 2019 and the years ahead.
We plan to fund any new real estate and mortgage investments during 2019 using
our liquid assets and debt financing. As the weight of additional debt resulting
from new acquisitions suggests the need to rebalance our capital structure, we
would then expect to access the capital markets through an at-the-market ("ATM")
or other equity offering. Our disciplined investment strategy implemented
through measured increments of debt and equity sets the stage for access to
capital at the lowest possible rates, annual dividend growth, continued low
leverage, a portfolio of diversified, high-quality assets, and business
relationships with experienced operators whom we make our priority, continue to
be the key drivers of our business plan.


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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.

Major Tenants


As discussed in Note 2 to the consolidated financial statements, we have four
lessees (including their affiliated entities, which are the legal tenants) from
whom we individually derive at least 10% of our rental income as follows
(dollars in thousands):
                                                                 Rental Income
                                       Investment       Nine Months Ended September 30,            Lease
                        Asset Class      Amount             2019                  2018            Renewal
Senior Living
Communities                 EFC       $   573,003$       35,001   16%    $   34,374   16%     2029
Holiday Retirement          ILF           531,378             30,283   14%        32,863   16%     2035
Bickford Senior Living      ALF           540,676             39,796   19%        36,792   18%    Various
National HealthCare
Corporation                 SNF           171,297             28,670   13%        28,453   13%     2026
All others                Various       1,241,421             80,822   38%        78,327   37%    Various
                                      $ 3,057,775$      214,572$  210,809



The table above, for the nine months ended September 30, 2019, excludes
$4,205,000 of property tax and insurance costs covered by our tenants through
escrow reimbursement. Straight-line rent of $4,958,000 and $4,591,000 was
recognized from the Holiday lease for the nine months ended September 30, 2019
and 2018, respectively. Straight-line rent of $3,519,000 and $4,076,000 was
recognized from the Senior Living Communities lease for the nine months ended
September 30, 2019 and 2018, respectively. Straight-line rent of $3,812,000 and
$3,541,000 was recognized from the Bickford leases for the nine months ended
September 30, 2019 and 2018, respectively. For NHC, rent escalations are based
on a percentage increase in revenue over a base year and do not give rise to
non-cash, straight-line rental income.

Bickford


We are closely monitoring the occupancy and financial performance of our major
customer Bickford. Their management is focused on improving occupancy in the
Company's facilities and they have been successful so far in 2019. Bickford is
also an active developer of new facilities in underserved markets.

The following table summarizes the average portfolio occupancy for the periods
indicated, excluding development properties in operation less than 24 months,
notes receivable, assets held for sale and the four Minnesota properties
recently transitioned to a new operator. Same-store (SS) occupancy excludes
properties that have been operated by Bickford for less than 24 months.
              3Q18  4Q18  1Q19  2Q19  3Q19  Sep 2019

Bickford 85.6% 84.0% 82.6% 84.0% 85.4% 85.8% Bickford (SS) 87.3% 85.7% 84.1% 85.9% 87.9% 88.2%




In addition to closely monitoring the occupancy and financial performance of
Bickford, NHI has either completed or is currently undertaking certain measures
which we believe will improve the financial and operational strength of
Bickford. Examples of these measures include:

• The contemplated sale of two assisted living communities to Bickford. NHI

expects to sell the buildings, which are currently classified as held for

sale, to Bickford by the end of Q1 2020. NHI will in turn provide a senior

       note to Bickford for the purchase of these facilities which largely
       preserves cash flow generated from these communities until they are
       refinanced.



•      The transition of four properties in Minnesota to another existing NHI
       operator. NHI transitioned the operations of these four properties on
       October 1, 2019 which were outside of Bickford's existing geographic
       footprint. Bickford has agreed to provide income support on these
       facilities through 2020 which preserves NHI's rental income through that

time frame. We believe this transition better aligns Bickford with markets

       in which they have deeper experience and improves their



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longer term cash flow. NHI will have a fair market value rent reset on the Minnesota communities after 2020 and the transition eliminates Bickford's purchase option while extending the lease by seven years with renewal options.

• The amendment to lease escalators on certain Bickford properties.

Effective September 1, 2019, NHI amended a master lease covering 14

Bickford properties. Included in the amendment, NHI changed the annual

escalator from a fixed percentage to a CPI-based escalator with a floor of

2% and a ceiling of 3%.

• NHI's purchase option price on the Gurnee community was reduced to $15

million while the initial yield was reduced to 8.0%. As noted in Note 2,

NHI exercised the purchase option on the Gurnee, IL facility on September

       10, 2019. NHI holds a similar purchase option on a 60-unit
       Bickford-developed community in Shelby, MI.

• As of October 1, 2019, NHI amended a lease on the Bickford communities

which are secured by HUD financing down to fair market value, a change of

approximately $100,000 per quarter or 0.1% of our total quarterly

revenues. Included in the amendment, NHI changed the annual escalator from

       a fixed percentage to a CPI-based escalator with a floor of 2% and a
       ceiling of 3%.



Tenant Monitoring

Our operators report to us the results of their operations on a periodic basis,
which we in turn subject to further analysis as a means of monitoring potential
concerns within our portfolio. We have identified EBITDARM (earnings before
interest, taxes, depreciation, amortization, rent and management fees) as the
most elemental barometer of success for our tenants, based on results they have
reported to us. We believe EBITDARM is useful in our most fundamental analyses,
as it is a property-level measure of our operators' success, by eliminating the
effects of the operator's method of acquiring the use of its assets (interest
and rent), its non-cash expenses (depreciation and amortization), expenses that
are dependent on its level of success (income taxes), and also excluding the
effect of the operator's payment of its management fees, as typically those fees
are contractually subordinate to our lease payment. For operators of our
entrance-fee communities, our calculation of EBITDARM includes other cash flow
adjustments typical of the industry which may include, but are not limited to,
net cash flows from entrance fees; amortization of deferred entrance fees;
adjustments for tenant rent obligations, depreciation and amortization; and
management fee true-ups. The eliminations and adjustments reflect covenants in
our leases and provide a comparable basis for assessing our various
relationships.

We believe that EBITDARM is a useful way to analyze the cash potential of a
group of assets. From EBITDARM we calculate a lease coverage ratio
(EBITDARM/Cash Rent), measuring the ability of the operator to meet its monthly
rental obligation. In addition to EBITDARM and the lease coverage ratio, we rely
on, a careful balance sheet analysis, and other analytical procedures to help us
identify potential areas of concern relative to our operators' ability to
generate sufficient liquidity to meet their obligations, including their
obligation to continue to pay the rent due to us. Typical among our operators is
a varying lag in reporting to us the results of their operations. Across our
portfolio, however, our operators report their results, at the latest, within
ninety days of month's end. For computational purposes, we exclude development
and lease-up properties that have been in operation less than 24 months and
selected immaterial properties identified in 2019 as available for sale. For
stabilized acquisitions in the portfolio less than 24 months and renewing leases
with changes in scheduled rent, we include pro forma cash rent.

The results by asset type are presented below on a trailing twelve-month basis, as of June 30, 2019 and 2018 (the most recent periods available):

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Total Portfolio

                      SHO        SNF         HOSP           MOB        TOTAL
       Properties     127         74           3             2          206
             2Q18    1.23x      2.49x        1.90x         3.48x       1.64x
             2Q19    1.15x      2.80x        1.99x         5.14x       1.69x

                                 Need                  Discretionary
                  Need Driven   Driven   Discretionary  excl. SLC &   Medical    Medical
                                excl.                     Holiday               excl. NHC
                               Bickford
       Properties     89          45          38             3           79         37
             2Q18    1.18x      1.19x        1.29x         2.22x       2.45x      1.59x
             2Q19    1.11x      1.14x        1.20x         1.97x       2.75x      1.87x

                      NHC        SLC       Bickford       Holiday
       Properties     42          9           44            26
             2Q18    3.59x      1.27x        1.16x         1.18x
             2Q19    3.95x      1.10x        1.07x         1.20x


Same-Store Portfolio

                      SHO        SNF         HOSP           MOB        Total
       Properties     116         74           2             2          194
             2Q18    1.24x      2.49x        1.53x         3.48x       1.65x
             2Q19    1.18x      2.80x        1.69x         5.14x       1.71x

                                 Need                  Discretionary
                  Need Driven   Driven   Discretionary  excl. SLC &   Medical    Medical
                                excl.                     Holiday               excl. NHC
                               Bickford
       Properties     79          40          37             2           78         36
             2Q18    1.20x      1.19x        1.29x         2.34x       2.45x      1.53x
             2Q19    1.15x      1.17x        1.20x         2.09x       2.76x      1.83x

                      NHC        SLC       Bickford       Holiday
       Properties     42          9           39            26
             2Q18    3.59x      1.27x        1.20x         1.18x
             2Q19    3.95x      1.10x        1.12x         1.20x

1 NHC based on corporate-level FCCR and includes 3 independent living facilities 2 Brookdale


Fluctuations in portfolio coverage are a result of market and economic trends,
local market competition, and regulatory factors as well as the operational
success of our tenants. We use the results of individual leases to inform our
decision making with respect to specific tenants, but trends described above by
property type and operator bear analysis. Our Need-Driven SHO portfolio shows a
decline brought about primarily by a softening in occupancy within particular
markets, as well as rising wage pressures. For many of the affected operators,
as is typical of our portfolio in general, NHI has significant security deposits
in place and/or corporate guarantees should actual cash rental shortfalls
eventually materialize. In certain instances, our operators may elect to
increase their security deposits with us in an amount equal to the coverage
shortfall, and, upon subsequent compliance with the required lease coverage
ratio, the operator would then be entitled to a full refund. The metrics
presented in the tables above give no effect to the presence of these security
deposits. For Skilled Nursing, coverage in the Medical category of our portfolio
has improved due to a better operating environment, as a whole, and for the
Ensign portfolio transition, in particular. Each MOB's coverage is driven by the
underlying performance of its on-campus hospital as the tenant or guarantor
under the lease. As a result, it is typical for MOB operations to have large
fluctuations in coverage resulting from hospital operations.

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Potential Effects of Medicare Reimbursement


Our SNF operators 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 August 1, 2018, the Centers for Medicare and Medicaid
Services ("CMS") announced the CMS Skilled Nursing Prospective Payment System
("PPS") final rule whereby, effective October 1, 2019, its Patient-Driven
Payment Model ("PDPM") will replace Resource Utilization Groups ("RUGs")-IV.
Facilities will have one year to transition to PDPM from RUGs-IV by the October
1, 2019 implementation date. PDPM is designed as a more simplified payment model
than RUGs-IV and is projected to reduce administrative costs and foster
innovation to improve care to patients. Regulators forecast a $2 billion
reduction in provider costs over 10 years as a result of simplified paperwork
requirements for resident assessments. The new model shifts care delivery under
Medicare away from fee-for-service, which in the past has based reimbursement on
the amount of care provided, to focus on value-based care, which will base
reimbursement on clinical complexity and the resident's conditions and care
needs. The final rule also established a 2.4% market basket increase beginning
October 1, 2018. On April 19, 2019, CMS proposed a net 2.5% increase to Medicare
skilled nursing payments for the fiscal year beginning October 1, 2019.  We
believe a rate increase in line with inflation, along with general demographic
growth among the oldest seniors, will help to stabilize lease coverages among
our skilled nursing tenants at a time when they are implementing the PDPM
payment model.

We currently estimate that our borrowers and lessees will find these Medicare
increases to be adequate in the near term 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 PDPM increases on an annual
basis will have on each of our borrowers and lessees. According to industry
studies, state Medicaid funding is not expected to keep pace with inflation. Any
future acquisitions by NHI of skilled nursing facilities are planned on a
selective basis, with emphasis on operator quality and newer construction.

Investment Highlights

Since January 1, 2019, we have made or announced the following investments and related commitments ($ in thousands):

                                  Date        Properties   Asset Class     Amount
Lease Investments
Wingate Healthcare            January 2019        1            SHO       $  52,200
Holiday Retirement            January 2019        1            SHO          38,000
Comfort Care Senior Living     April 2019         1            SHO          10,800
Comfort Care Senior Living      May 2019          1            SHO          13,500
Discovery Senior Living         May 2019          6            SHO         127,917
Cappella Living Solutions      July 2019          1            SHO           7,600
Bickford Senior Living       September 2019       1            SHO          15,100

Note Investments
Senior Living Communities      June 2019          1            SHO          32,700
41 Management                  June 2019          1            SHO          10,800
Discovery Senior Living        July 2019          1            SHO             750
Discovery Senior Living      September 2019       1            SHO           6,423
                                                                         $ 315,790



Wingate

On January 15, 2019, we acquired a 267-unit senior living campus in
Massachusetts for a purchase price of $50,300,000, including closing costs of
$300,000. The facility is being leased to Wingate Healthcare, Inc. ("Wingate")
for a term of 10 years, with three five-year renewal options, at an initial
lease rate of 7.5% plus annual fixed escalators. We have committed to the
additional funding of up to $1,900,000 in capital improvements, and the lease
provides for incentive payments up to $5,000,000 to become available beginning
in 2020 upon the attainment of certain operating metrics. NHI has a right of
first offer on two additional Wingate-operated facilities. We accounted for the
transaction as an asset purchase.


Holiday


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In November 2018, we entered into a lease amendment and guaranty release ("the
Agreement") with an affiliate of Holiday Retirement ("Holiday"). Among other
provisions, the Agreement decreased base rent beginning in 2019 from $39,000,000
to $31,500,000, extended the term of the original lease through 2035, improved
the credit position of the tenant and increased required minimum capital
expenditure per unit. As consideration for amending provisions included in the
original 2013 lease, Holiday agreed to pay NHI $55,125,000 in cash or real
estate and forfeit $10,637,000 of their original $21,275,000 security deposit.

On January 31, 2019, we acquired a senior housing facility in Vero Beach,
Florida from Holiday consisting of 157 independent living and 71 assisted living
units in exchange for $38,000,000 toward the $55,125,000 receivable arising from
the lease amendment, discussed above. The property was added to the master lease
at a 6.71% lease rate. Under the restructured master lease, annual lease
escalators ranging from 2% to 3%, based on portfolio revenue growth, will go
into effect on November 1, 2020. Holiday settled the remaining commitment to NHI
with cash of $17,125,000 at closing. Initial lease payments from Holiday for
2019 under the amended lease are scheduled to be $33,838,000, while
straight-line rent income is scheduled to be $40,459,000.

Comfort Care


On April 30, 2019, we acquired a newly-constructed 60-unit assisted living
facility in Shelby, Michigan which has 14 memory care units under construction.
The total commitment of $10,800,000 includes $9,282,000 funded at closing with
the remaining amount to be funded as construction progresses. On May 20, 2019,
we acquired a property in Brighton, Michigan, consisting of 73 assisted
living/memory care units. The purchase price for the Brighton acquisition was
$13,500,000, inclusive of closing costs. We leased the properties to Comfort
Care Senior Living ("Comfort Care"), under leases which provide for initial
lease rate of 7.75%, with annual fixed escalators beginning in year three over
the term of ten years plus two five-year renewal options. The lease each include
a $3,000,000 earnout incentive which will be added to the lease base if funded.
We accounted for the acquisitions as asset purchases.

Discovery


On May 31, 2019, we invested $25,028,000 in cash for a 97.5% equity interest in
a consolidated subsidiary ("Discovery PropCo"), which simultaneously acquired
from a third party six senior housing facilities comprising 145
independent-living units, 356 assisted-living units and 95 memory-care units,
for a total of 596 units. Discovery Senior Housing Investor XXIV, LLC,
("Discovery") contributed $631,000, as adjusted, for its non-controlling 2.5%
equity interest. After adjustment for the re-purposing of $433,000 that had been
initially reserved for working capital purposes, we invested an additional
$102,258,000 as a preferred equity contribution, for a total NHI investment of
$127,286,000. The additional equity contribution of $102,258,000 carries a
preference in liquidation as well as in the distribution of operating cash flow.
Final total cash of $127,917,000 invested in Discovery PropCo included
approximately $1,067,000 in closing costs. The $433,000 set aside at June 30,
2019, for working capital was distributed to NHI and Discovery in their
proportionate shares.

The facilities were leased by Discovery PropCo to an affiliate of Discovery for
a term of ten years with two five-year renewal periods at an initial lease rate
of 6.5% with fixed annual escalators through the fifth year of the initial lease
term followed by CPI-based escalators, subject to floor and ceiling, thereafter.
The total purchase price for the properties acquired, as discussed above, was
allocated to the tangible assets based upon their relative fair values
consisting of $6,301,000 to the land and $121,616,000 to the buildings and
improvements. Based upon the contribution agreement between the parties, NHI and
Discovery estimated the value of the six facilities owned by Discovery PropCo at
May 31, 2019 to be $127,917,000. Discovery's 2.5% noncontrolling interest also
reflects its estimated fair value as of the acquisition date.

NHI as the managing member manages Discovery PropCo, subject to certain consent
rights of Discovery for significant business decisions. Because of our control
of Discovery PropCo, we include its assets, liabilities, noncontrolling interest
and operations in our condensed consolidated financial statements.

Effective July 1, 2019 we transitioned an Indiana, independent living/assisted
living facility to Discovery, as discussed in Note 2 in conjunction with our
other properties in transition. The triple-net lease matures in June 2024 with
two five-year options to extend. Rent is initially based on net operating
income. Beginning in 2022, rent is to reset to the greater of $1,400,000 or fair
value as provided by formula. For the duration of the lease, the rent, as reset,
is subject to a 2.5% escalator. Concurrent with Discovery's entrance into the
lease, NHI provided a working capital loan for amounts up to $750,000 at an
interest rate of 6.50%. The loan extends during the term of the lease.

NHI extended a senior mortgage loan of $6,423,000 at 7% annual interest to
affiliates of Discovery for an additional property in Indiana for which
Discovery PropCo will have the option to purchase at stabilization. The facility
consists of 52 assisted living units and 22 memory care units. The loan closed
on September 6, 2019.


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Cappella Living Solutions


On July 23, 2019, for $7,600,000 including $100,000 of closing costs, we
acquired a 54-unit assisted living facility in Pueblo, Colorado. We leased the
facility to Christian Living Services, Inc., d/b/a Cappella Living Solutions,
for a term of fifteen years at an initial lease rate of 7.25%, with CPI
escalators subject to a floor and ceiling. We accounted for this transaction as
an asset purchase.

Bickford

On September 10, 2019, we acquired the Gurnee, Illinois location which was
developed by Bickford using a construction loan we provided. The acquisition
price was $15,100,000, including $100,000 in closing costs, for the 60-unit
assisted living/memory care facility. In the exchange, we cancelled the
outstanding note receivable of $14,035,000, including interest. The balance was
used to fund an agreed-upon escrow. We leased the building for a term of twelve
years at an initial lease rate of 8%, with CPI escalators subject to a floor and
ceiling.

41 Management

On June 14, 2019 we committed to providing first mortgage financing to 41
Management, LLC (d/b/a as Matthews Senior Living) for up to $10,800,000 to fund
the construction of a 51-unit assisted living facility in Wisconsin. The loan
carries an interest rate of 8.50% for its five-year term, subject to two
one-year renewals. The agreement provides for a 1% commitment fee as well as an
exit fee that is subject to waiver should we exercise our purchase option, which
is to open upon stabilization of the facility. Additional security on the loan
includes personal and corporate guarantees and the funding of a working capital
escrow.

Senior Living Communities

On June 25, 2019, we provided a mortgage loan of $32,700,000 to Senior Living
for the acquisition of a 248-unit continuing care retirement community in
Columbia, South Carolina. The financing is for a term of five years with two
one-year extensions and carries an interest rate of 7.25%. Additionally, the
loan conveys to NHI a purchase option at a stated minimum price of $38,250,000,
subject to adjustment for market conditions.

Other Portfolio Activity

Tenant Transitioning

41 Management

As part of a geographical realignment by Bickford, we transitioned four
Minnesota properties on October 1, 2019, to 41 Management. We believe that the
transition is a benefit to 41 Management as they are building on an existing
base in neighboring Wisconsin. At the same time, Bickford is expected to benefit
from narrowing its geographic footprint, a move that will enable it to focus on
its core mid-western business. The lease calls for first-year rent of $906,000
and Bickford has agreed to fund $734,000. The lease runs for 15 years and
includes two five-year renewal options. Annual escalators are fixed at 2.5%. We
have committed to the additional funding of up to $400,000 in capital
improvements.

Other - Three Portfolios


As of September 30, 2019, we have completed the contractual transition of three
lease portfolios to new tenants following a period of non-compliance by the
former operators, background for which is provided in the audited financial
statements included in our 2018 Annual Report on Form 10-K. The portfolios
consist of three former SH-Regency Leasing, LLC ("Regency") buildings, five
former LaSalle Group buildings and one facility formerly leased to Landmark
Senior Living ("Landmark").. To expedite stabilization of the facilities, we
committed to specified income-generating capital expenditures for the
re-branding and refurbishment of certain of these properties. The new leases
each specify initial periods during which rental income to NHI shall be based on
net operating income ("NOI"), after deduction of management fees. Following the
initial periods, each lease converts to a structured payment based on a
fair-value calculation.

The former Regency buildings have been leased to three operators, Senior Living,
Discovery, and Vitality MC TN, LLC ("Vitality"). Of our total revenues, $515,000
and $1,367,000 (2%) in rental income were derived from the three former Regency
buildings for the three months ended September 30, 2019 and 2018, respectively.
Of our total revenues, $660,000 and $4,100,000 (3%) in rental income were
derived from the three former Regency buildings for the nine months ended
September 30, 2019 and 2018, respectively.

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Effective July 1, 2019 we transitioned an Indiana, independent living/assisted
living facility to Discovery in conjunction with our other properties in
transition. The triple-net lease matures in June 2024 with two five-year options
to extend. Rent is initially based on net operating income. Beginning in 2022,
rent is to reset to the greater of $1,400,000 or fair value as provided by
formula. For the duration of the lease, the rent, as reset, is subject to a 2.5%
escalator. Concurrent with Discovery's entrance into the lease, NHI provided a
working capital loan for amounts up to $750,000 at an interest rate of 6.5% and
a $900,000 capital improvement commitment to fund improvements to the facility.
The loan extends during the term of the lease.

On April 16, 2019, Chancellor Health Care leased the five former LaSalle Group
buildings. Our lease agreement with Chancellor provides for NHI to receive 100%
of net operating cash flow generated by the facilities, after management fees,
pending stabilization of the operations of the facility. During the first
quarter of 2019, we also commenced litigation for the recovery of certain funds
owed by LaSalle Group under the lease and against the principal executive
personally under the guaranty agreement. Of our total revenues, $437,000 and
$1,317,000 (2%) in rental income were derived from the five former LaSalle Group
buildings for the three months ended September 30, 2019 and 2018, respectively.
Of our total revenues, $725,000 and $3,950,000 (3%) in rental income were
derived from the five former LaSalle Group buildings for the nine months ended
September 30, 2019 and 2018, respectively.

At December 31, 2018, we had a single-property lease in Wisconsin with Landmark
that was non-performing. In February 2019, we transitioned the lease to BAKA
Enterprises, temporarily acting under a management agreement with Landmark.
Under terms of the new lease, NHI receives 95% of net operating cash flow, after
management fees, as generated by the facilities. Upon the establishment of an
operational baseline, beginning in year two, the agreement calls for a rent
reset to fair value. The agreement provides for a term of 8 years, with renewal
options. Of our total revenues, $150,000 and $247,000 were derived from the
former Landmark property for the three months ended September 30, 2019 and 2018,
respectively. Of our total revenues, $925,000 (0%) and $1,041,000 (1%) were
derived from the former Landmark property for the nine months ended September
30, 2019 and 2018, respectively, including $625,000 received during 2019 as a
settlement payment.

As we seek to stabilize the operations of these facilities, if our resulting
tenants or operating partners do not have adequate liquidity to accept the risks
and rewards of a tenant-lessee, NHI might be deemed the primary beneficiary of
the operations and might be required to consolidate those statements of
financial position and results of operations of the managers or operating
partners into our consolidated financial statements.

The following table summarizes the transition properties during the nine months ended September 30, 2019:

                                                                 Occupancy
Former Tenant / Facility Name
(New Tenant)                      Units Location March 20191   June 20191  September 20191
SH-Regency Leasing, LLC
  The Cypress of College Park
(Discovery)                        148     IN       19.6%        18.9%          16.2%
  The Charlotte (SLC)              98      NC         -%           -%           13.0%
  Maybelle Carter (Vitality)       135     TN       73.3%        77.6%          78.5%
LaSalle Autumn Leaves
(Chancellor)                       196   IL/TX      73.5%        66.1%      

66.0%

Landmark Senior Living (BAKA) 120 WI 67.6% 72.2%

    68.3%
                                   697              50.7%        50.1%          50.8%


1 Monthly Average

Assets Held For Sale

In September 2019, we classified a portfolio of eight assisted living properties
located in Arizona (4), Tennessee (3) and South Carolina (1) as held for sale,
after the current tenant expressed an intention to exercise its purchase option
on the properties. The purchase option provides for an even split of the excess
of fair value over NHI's acquisition costs. Based on preliminary discussions, we
expect the eventual selling price to exceed the portfolio's current carrying
value. Of our total revenues, $1,062,000 (1.3%) and $3,187,000 (1.4%) in rental
income were derived from this eight property portfolio for the three and nine
months ended September 30, 2019, respectively. We expect the transaction to be
finalized during the first quarter of 2020.

We have identified two assisted living properties for disposal and began active
marketing of the properties. The buildings are smaller than are typical of our
portfolio and are no longer considered to be an appropriate investment for NHI.
In January 2019 we ceased recording depreciation on the properties, and we
booked an adjustment to lease revenues to write off the associated $124,000 in
straight-line receivables. We recognized an impairment loss of $2,500,000 to
write down the properties to their estimated net realizable value. We have
classified the assets as available for sale on the Condensed Consolidated
Balance Sheet at September 30, 2019.

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Other

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
five-year renewal options. As such, there may be reporting periods in which we
experience few, if any, lease renewals or expirations. During the nine months
ended September 30, 2019, we did not have any significant renewing or expiring
leases.
Most of our existing leases contain annual escalators in rent payments. For
financial statement purposes, rental income on our operating leases is
recognized on a straight-line basis over the term of the lease. Certain of our
operators hold purchase options allowing them to acquire properties they
currently lease from NHI. We regularly engage in negotiations with these tenants
to continue as lessor or in some other capacity.

We adjust rental income for the amortization of lease inducements paid to our
tenants. Current outstanding commitments and contingencies are listed under our
discussion of liquidity and capital resources. Amortization of these payments
against revenues was $607,000 and $240,000 for the nine months ended September
30, 2019 and 2018, respectively.

Real Estate and Mortgage Write-downs


Our borrowers and tenants experience periods of significant financial pressures
and difficulties similar to those encountered by 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 and other 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.

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Results of Operations


The significant items affecting revenues and expenses are described below (in
thousands):
                                                  Three Months Ended
                                                     September 30,              Period Change
                                                   2019          2018          $             %
Revenues:
Rental income
SHOs leased to Discovery Senior Living         $    2,958$  1,370$ 1,588        115.9  %
SLC leased to Wingate Healthcare                      945            -         945           NM
ALFs leased to Bickford Senior Living              12,168       11,767         401          3.4  %
ALFs leased to Comfort Care Senior Living             754          310         444        143.2  %
ALFs leased to Brookdale Senior Living1               340        1,408      (1,068 )      (75.9 )%
ILFs leased to an affiliate of Holiday
Retirement                                          8,513        9,424        (911 )       (9.7 )%
SHOs leased to Chancellor Health Care               2,441        3,065        (624 )      (20.4 )%
SLC leased to Vitality Senior Living                  (40 )        440        (480 )     (109.1 )%
Other new and existing leases                      38,646       38,185         461          1.2  %
Assets held for sale                                1,194            -       1,194           NM
                                                   67,919       65,969       1,950          3.0  %
Straight-line rent adjustments, new and
existing leases                                     5,720        5,719           1            -  %
Escrow funds received from tenants for
property taxes and insurance                        1,608            -       1,608           NM
                           Total Rental Income     75,247       71,688       3,559          5.0  %
Interest income and other
Life Care Services mortgages and construction
loans                                               3,123          992       2,131           NM
Senior Living Communities mortgage and other
notes                                               1,029          386         643           NM
Bickford construction loans                           705          293         412        140.6  %
Bickford construction loan (Gurnee, IL)2              252          300         (48 )      (16.0 )%
Other existing mortgages and notes                  1,293        1,226      

67 5.5 %

Total Interest Income from Mortgage and Other

                                         Notes      6,402        3,197       3,205        100.3  %
Other income                                           33           30           3         10.0  %
                                Total Revenues     81,682       74,915       6,767          9.0  %
Expenses:
Depreciation
SHOs leased to Discovery Senior Living              1,377          311       1,066           NM
SLC leased to Wingate Healthcare                      349            -         349           NM
ALFs leased to Bickford Senior Living               3,744        3,622         122          3.4  %
ILFs leased to an affiliate of Holiday
Retirement                                          3,493        3,229         264          8.2  %
Other new and existing assets                      10,732       10,990        (258 ) 2     (2.3 )%
                            Total Depreciation     19,695       18,152       1,543   3      8.5  %
Interest                                           14,661       12,374       2,287         18.5  %
Payroll and related compensation expenses           1,451        1,567        (116 )       (7.4 )%
Non-cash stock-based compensation expense             477          337         140         41.5  %
Property taxes and insurance on leased
properties                                          1,608            -       1,608           NM
Other expenses                                      1,035        1,506        (471 )      (31.3 )%
                                Total Expenses     38,927       33,936       4,991         14.7  %
Net income                                         42,755       40,979       1,776          4.3  %
Less: net loss attributable to noncontrolling
interest                                                3            -           3           NM

Net income attributable to common stockholders $ 42,758$ 40,979$ 1,779 4.3 %


NM - not meaningful
1 excludes held for sale properties
2 construction loan cancelled as part of property purchase transaction discussed at Note 2



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Financial highlights of the quarter ended September 30, 2019, compared to the same quarter of 2018 were as follows:

• The rental income received from our tenants increased by $1,950,000 primarily

due to the impact of new investments since September 2018. This impact was

partially offset by a decline in rental income received from Holiday as a

result of the lease amendment described in Note 2. Rental income was also

    offset by lease defaults which resulted in transitions to new tenants
    described herein under the heading Tenant Transitioning.


• Interest income from mortgage and other notes increased $3,205,000 primarily

due to interest income received on loans to Life Care Services and Senior

    Living Communities.



• Depreciation expense increased $1,543,000 primarily due to new real estate

investments completed since September 2018.

• Interest expense, including amortization of debt discount and issuance costs,

increased $2,287,000 primarily as a result of the September 2018 conversion

of $300,000,000 of debt initially drawn on our revolving facility into a

five-year term loan and the impact of additional borrowings on our revolving

    credit facility.



• Escrow funds received from tenants totaling $1,608,000 were used to pay

property taxes and insurance, which is typical of triple net leases.

Narrow-Scope Improvements for Lessors under ASU 2018-20 requires these items

to be included as revenue and expense in our condensed consolidated financial

statements for the 2019 period.




•   The following table summarizes our real estate under lease to transitioning
    tenants (in thousands):


                                           Three Months Ended
                                             September 30,             Period Change
                                           2019          2018          $            %
Revenues:
Rental income
SHOs leased to Chancellor Health Care   $    437$  1,317$   (880 )    (66.8 )%
SHO leased to Senior Living Communities      366            372          (6 )     (1.6 )%
SHO leased to Discovery Senior Living        189            534        (345 )    (64.6 )%
SLC leased to Vitality Senior Living         (40 )          460        (500 )   (108.7 )%
ALF leased to BAKA Enterprises               150            247         (97 )    (39.3 )%
                    Total Rental income    1,102          2,930      (1,828 )    (62.4 )%
Expenses:
Depreciation
SHOs leased to Chancellor Health Care        406            406           -          -  %
SHO leased to Senior Living Communities      132            123           9        7.3  %
SHO leased to Discovery Senior Living        171            173          (2 )     (1.2 )%
SLC leased to Vitality Senior Living         154            156          (2 )     (1.3 )%
ALF leased to BAKA Enterprises               145            145           -          -  %
                     Total Depreciation    1,008          1,003           5        0.5  %
Net income                              $     94$  1,927$ (1,833 )       NM




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The significant items affecting revenues and expenses are described below (in
thousands):
                                                    Nine Months Ended
                                                      September 30,             Period Change
                                                   2019          2018           $           %
Revenues:
Rental income
ALFs leased to Bickford Senior Living           $  35,984$  33,251$ 2,733        8.2  %
SLC leased to Wingate Healthcare                    2,694             -       2,694         NM
SHOs leased to Discovery Senior Living              5,399         4,074       1,325       32.5  %
ALFs leased to Comfort Care Senior Living           1,612           352       1,260         NM
SNFs leased to Ensign Group                        17,745        16,501       1,244        7.5  %
ALFs leased to Brookdale Senior Living1             1,001         4,204      (3,203 )    (76.2 )%
ILFs leased to an affiliate of Holiday
Retirement                                         25,325        28,271      (2,946 )    (10.4 )%
SHOs leased to Chancellor Health Care               6,705         9,137      (2,432 )    (26.6 )%
SLC leased to Vitality Senior Living                  105         1,289      (1,184 )    (91.9 )%
Other new and existing leases                      98,165        96,214       1,951        2.0  %
Assets held for sale                                3,582             -       3,582         NM
                                                  198,317       193,293       5,024        2.6  %
Straight-line rent adjustments, new and
existing leases                                    16,255        17,516      (1,261 )     (7.2 )%
Escrow funds received from tenants for property
taxes and insurance                                 4,205             -     

4,205 NM

                            Total Rental Income   218,777       210,809       7,968        3.8  %
Interest income and other
Life Care Services mortgages and construction
loans                                               8,732         3,391       5,341         NM
Bickford construction loans                         1,790           636       1,154         NM
Senior Living Communities mortgage and other
notes                                               1,913         1,134         779       68.7  %
Bickford construction loan (Gurnee, IL)2              863           870          (7 )     (0.8 )%
Other existing mortgages and notes                  3,711         3,682     

29 0.8 %

Total Interest income from mortgage and other

                                          notes    17,009         9,713       7,296       75.1  %
Other income                                          100            94           6        6.4  %
                                 Total Revenues   235,886       220,616      15,270        6.9  %
Expenses:
Depreciation
SLC leased to Wingate Healthcare                    1,047             -       1,047         NM
ALFs leased to Bickford Senior Living              11,139        10,482         657        6.3  %
ILFs leased to an affiliate of Holiday
Retirement                                         10,391         9,688         703        7.3  %
ALFs leased to Comfort Care Senior Living             611           116         495         NM
SNFs leased to Ensign Group                         5,496         5,067         429        8.5  %
Other new and existing assets                      28,522        27,929         593        2.1  %
                             Total Depreciation    57,206        53,282       3,924        7.4  %
Interest                                           41,925        36,207       5,718       15.8  %
Payroll and related compensation expenses           4,050         4,926        (876 )    (17.8 )%
Non-cash stock-based compensation expense           2,955         2,131         824       38.7  %
Loan and realty losses                              2,500         1,849         651       35.2  %
Property taxes and insurance on leased
properties                                          4,205             -       4,205         NM
Other expenses                                      4,632         4,233         399        9.4  %
                                 Total Expenses   117,473       102,628      14,845       14.5  %
Income before loss on convertible note
retirement                                        118,413       117,989         424        0.4  %
Loss on convertible note retirement                     -          (738 )       738         NM
Net income                                        118,413       117,251       1,162        1.0  %
Less: net loss attributable to noncontrolling
interest                                                4             -     

4 NM Net income attributable to common stockholders $ 118,417$ 117,251$ 1,166 1.0 %


NM - not meaningful
1 excludes held for sale properties
2 construction loan cancelled as part of
property purchase transaction discussed at Note
2



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Financial highlights of the nine months ended September 30, 2019, compared to the same period in 2018 were as follows:

• Rental income received from our tenants increased $5,024,000, or 2.6%,

       primarily as a result of new investments funded since September 2018.



•      The increase in rental income includes a $1,261,000 decrease in

straight-line rent adjustments. Generally, 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 increased $7,296,000,

primarily due to interest income received on loans to Life Care Services

       and Senior Living Communities.


• Depreciation expense increased $3,924,000 primarily due to new real estate

       investments completed since September 2018.


• Interest expense, including amortization of debt discount and issuance

       costs, increased $5,718,000 primarily as a result of the September 2018
       conversion of $300,000,000 of debt initially drawn on our revolving
       facility into a five-year term loan and the impact of additional
       borrowings on our revolving credit facility.


• Payroll and related compensation expenses decreased $876,000 due primarily

to the timing and amount of incentive compensation related to achieving

       certain company goals.


• Non-cash stock-based compensation expense increased $824,000 due primarily

to fluctuations in the valuation assumptions used in the Black-Scholes

       pricing model.


• Loan and realty losses of $2,500,000 represent a writedown related to two

facilities classified as held for sale with an estimated net realizable

       value of $3,745,000 at September 30, 2019. Loan and realty losses
       of $1,849,000 for the nine moths ended September 30, 2018 includes
       $1,436,000 which resulted from our decision to transition one of our
       single-property leases to a new tenant and a $413,000 writedown of a loan
       to a development company.


• Escrow funds received from tenants totaling $4,205,000 were used to pay

property taxes and insurance, which is typical of triple net leases.

Narrow-Scope Improvements for Lessors under ASU 2018-20 requires these

items to be included as revenue and expense in our condensed consolidated

       financial statements for the 2019 period.



•      The following table summarizes our real estate under lease to
       transitioning tenants (in thousands):


                                                Nine Months Ended
                                                  September 30,               Period Change
                                                2019          2018           $            %
Revenues:
Rental income
SHOs leased to Chancellor Health Care       $      725$   3,950$ (3,225 )     (81.6 )%
SHO leased to Senior Living Communities            366         1,117         (751 )     (67.2 )%
SHO leased to Discovery Senior Living              189         1,602       (1,413 )     (88.2 )%
SLC leased to Vitality Senior Living               105         1,380       (1,275 )     (92.4 )%
ALF leased to BAKA Enterprises1                    925         1,041         (116 )     (11.1 )%
                             Total Revenues      2,310         9,090       (6,780 )     (74.6 )%
Expenses:
Depreciation
SHOs leased to Chancellor Health Care            1,217         1,217            -           -  %
SHO leased to Senior Living Communities            374           369            5         1.4  %
SHO leased to Discovery Senior Living              513           519           (6 )      (1.2 )%
SLC leased to Vitality Senior Living               462           468           (6 )      (1.3 )%
ALF leased to BAKA Enterprises                     436           436            -           -  %
                         Total Depreciation      3,002         3,009           (7 )      (0.2 )%
Legal                                              133             -          133          NM
Franchise, excise and other taxes                  828             -          828          NM
                                                 3,963         3,009          954        31.7  %
Net income (loss)                           $   (1,653 )$   6,081$ (7,734 )        NM

1 includes $625,000 received during 2019 as
a settlement payment



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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, proceeds from the sales of real
property, net proceeds from offerings of equity securities and borrowings from
our term loans and revolving credit facility. Our primary uses of cash include
debt service payments (both principal and interest), new investments in real
estate and notes receivable, dividend distributions to our shareholders 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):

                                          Nine Months Ended September 30,   

One Year Change

                                             2019                 2018               $              %
Cash and cash equivalents and
restricted cash, January 1            $         9,912       $         8,075     $    1,837         22.7  %
Net cash provided by operating
activities                                    184,809               156,312         28,497         18.2  %
Net cash used in investing activities        (304,902 )            (149,474 )     (155,428 )      104.0  %
Net cash provided by (used in)
financing activities                          126,462                (6,949 )      133,411     (1,919.9 )%
Cash and cash equivalents and
restricted cash, September 30         $        16,281       $         7,964 

$ 8,317 104.4 %




Operating Activities - Net cash provided by operating activities for the nine
months ended September 30, 2019 was favorably impacted by new real estate
investments in 2018 and 2019, an increase in lease payment collections arising
from escalators on existing leases and previously funded lease incentives.

Investing Activities - Net cash used in investing activities for the nine months
ended September 30, 2019 was comprised primarily of $307,468,000 of investments
in real estate and notes, and was partially offset by the collection of
principal on mortgage and other notes receivable of $2,566,000.

Financing Activities - Net cash provided by financing activities for the nine
months ended September 30, 2019 compared to the same period in 2018 is primarily
the result of (1) net proceeds of $95,802,000 from the issuance of common shares
in 2019, (2) $29,985,000 used to complete targeted repurchases of a portion of
our outstanding convertible notes during 2018 and (3) dividend payments which
increased $10,425,000 over the same period in 2018.

Liquidity


Apart from operations, the main source of our liquidity is our unsecured bank
credit facility. At September 30, 2019, we had $300,000,000 available to draw on
our revolving credit facility.

Our bank credit facility derives from the Credit Agreement dated as of August 3,
2017 (the "2017 Agreement"), and the Term Loan Agreement dated as of September
17, 2018 (the "2018 Agreement"). Together these agreements establish our
unsecured $1,100,000,000 bank credit facility, which consists of $250,000,000
and $300,000,000 term loans and a $550,000,000 revolving credit facility. The
$250,000,000 term loan and $550,000,000 revolving facility mature in August
2022, and the $300,000,000 term loan is to mature in September 2023. With the
2018 Agreement, we converted $300,000,000 of debt initially drawn on our
revolving facility into a five-year term loan.

The revolving facility fee is currently 20 basis points per annum, and based on
our current leverage ratios, the facility presently provides for floating
interest on the revolver and the term loans at 30-day LIBOR plus 120 bps and a
blended 132 bps, respectively. At September 30, 2019 and December 2018, 30-day
LIBOR was 202 and 250 bps, respectively. Within the facility, the employment of
interest rate swaps for a portion of our fixed term debt leaves only
$190,000,000 of our revolving credit facility exposed to interest rate risk
through June 2020, when our $80,000,000 and $130,000,000 swaps expire. Our swaps
and the financial instruments to which they relate are described in the table
below, under the caption "Interest Rate Swap Agreements." The current interest
spreads and facility fee reflect our leverage-ratio compliance based on the
applicable margin for LIBOR loans, measuring debt to "Total Asset Value," at
Level 3 in the Interest Rate Schedule provided below in abridged format:






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Interest Rate Schedule

                                    LIBOR Margin

Level Leverage Ratio Revolver $300m Term Loan $250m Term Loan Facility Fee

  1       < 0.35       1.10%        1.20%           1.25%         0.15%
  2   ? 0.35 & < 0.40  1.15%        1.25%           1.30%         0.20%
  3   ? 0.40 & < 0.45  1.20%        1.30%           1.35%         0.20%
  4   ? 0.45 & < 0.50  1.25%        1.40%           1.45%         0.25%


Beyond the applicable ratios detailed above, increasing levels of leverage (not shown) will subject our debt to defined increases in interest rates and fees.


LIBOR is scheduled for discontinuation by December 2021. In the United States,
the Alternative Reference Rates Committee, a group convened by the Federal
Reserve Board and the Federal Reserve Bank of New York has identified the
Secured Overnight Financing Rate as its preferred alternative rate for USD
LIBOR. The Company continues to monitor the establishment of a new replacement
index with the assistance of its banking advisors.

If a suitable replacement to LIBOR is not identified, the bank facilities
provide for rate alternatives which have historically been disadvantageous. Upon
the discontinuation of LIBOR, interest expense and the credit spread determined
in the Company's bank facilities using a new index rate may materially change
interest expense relative to what it would have been if LIBOR had not been
discontinued.

The Company will continue to monitor the progress of a LIBOR replacement index
rate and will seek to modify its existing bank facilities once the new index
rate is sufficiently established within the capital markets.

The 2017 Agreement requires that we calculate specified financial statement metrics and meet or exceed a variety of financial ratios, which are usual and customary in nature. These ratios are calculated quarterly and as of September 30, 2019 were within required limits.


Aside from a more favorable rate, the 2018 Agreement generally calls for the
same covenants and financial statement metrics required for compliance with
terms of the 2017 Agreement. Although we are currently eligible under the 2017
and 2018 Agreements to transact in our unsecured bank credit facilities at the
respective scheduled rates represented by Level 3, the movement of our leverage
ratio into Level 4 at current levels of debt would result in additional annual
costs from $375,000 to $1,300,000, respectively, assuming an average revolver
balance of approximately $200,000,000. Further movement of our leverage ratio
beyond levels currently contemplated by management would be subject to
escalating increases in interest. If, in addition to changes in the leverage
ratio, certain qualitative indicators of our risk profile were to materially
change, further interest-rate escalations may result.

In November 2015, Fitch Ratings issued to us a private monitored credit rating
of BBB- with a 'Stable' rating outlook. In December 2018 and again on October
31, 2019, Fitch Ratings affirmed their BBB- rating and 'Stable' rating outlook.
NHI has elected to make this rating public and to that effect, on November 4,
2019, Fitch Ratings announced a public issuer credit rating of BBB- with an
outlook of 'Stable'. On the same day, S&P Global Ratings announced our public
issuer credit rating of BBB- with an outlook of 'Stable'. The ratings from both
agencies were provided on NHI as an issuer as well as on our senior unsecured
debt. Our unsecured bank credit facility includes an option to shift from the
leverage-based LIBOR margin schedule described above to a ratings-based LIBOR
margin schedule. Our unsecured private placement term loan agreements include a
rate increase provision that is effective if any rating agency lowers our credit
rating below investment grade and our compliance leverage increases to 50% or
more. Shifting to a ratings-based LIBOR margin schedule potentially reduces
volatility of our interest cost during periods of time when our leverage may
fluctuate modestly. Our decision to move to a ratings-based margin schedule will
be based on several factors including the relative cost of the ratings-based
versus leverage-based margin schedules, and our desire to have a more stable
interest cost if our leverage modestly changes as compared to the existing
leverage-based margin schedule.

Our at-the-market ("ATM") offering represents an additional source of liquidity.
Through the program in 2019, we issued 1,209,522 common shares, with an average
price for shares sold of $80.58, resulting after commissions in net proceeds of
$95,802,000. Cash from these issuances was initially used to pay down our
revolving credit facility.

As we continue our activity in the ATM program in 2019, we intend to use the
proceeds for general corporate purposes, which may include future acquisitions
and repayment of indebtedness, including borrowings under our credit facility.
Acquisitions, if any, whose magnitude would entail an equity match unable to be
efficiently sourced through the ATM would likely trigger a prospectus supplement
and an underwritten or overnight offering of NHI common stock, rather than
placement through the ATM.

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Offerings under the ATM program are made pursuant to a prospectus dated February 22, 2017, which constitutes a part of NHI's effective shelf registration statement that was previously filed with the Securities and Exchange Commission.


Traditionally, debt financing and operating and financing cash flows derived
from proceeds of lease and mortgage collections, loan payoffs and the recovery
of previous write-downs, have been used to satisfy our operational and investing
needs and to provide a return to our shareholders. We expect to continue to
access these sources of capital to meet those operational and investing needs,
which are necessary to maintain and cultivate our funding sources and have
generally fallen into three categories: debt service, REIT operating expenses,
and new real estate investments.

The following table summarizes the share issuances since inception of our ATM as of September 30, 2019:

       Shares    Weighted Average Share Price    Net Proceeds
2015   830,506  $                        60.33  $  49,389,000
2016 1,395,642  $                        75.79    104,190,000
2017 1,661,161  $                        74.87    122,500,000
2018 1,112,363  $                        74.84     82,001,000
2019 1,209,522  $                        80.58     95,999,000
     6,209,194                                  $ 454,079,000

The table above does not include indirect legal and accounting costs associated with updating and maintaining our shelf registration statement.


The use of funds from our ATM program effects a rebalancing of our leverage in
response to our acquisitions and has kept our options flexible for further
expansion. We continue to explore various other funding sources including bank
term loans, convertible debt, traditional equity placement, unsecured bonds and
senior notes, debt private placement and secured government agency financing. We
view our ATM program as an effective way to match-fund our smaller acquisitions
by exercising control over the timing and size of transactions and achieving a
more favorable cost of capital as compared to larger follow-on offerings.

We anticipate continued use of proceeds from the ATM program for general
corporate purposes, which may include future acquisitions and repayment of
indebtedness, including borrowings under our credit facility. Acquisitions, if
any, whose magnitude would entail an equity match unable to be efficiently
sourced through the ATM would likely trigger a prospectus supplement and an
underwritten or overnight offering of NHI common stock, rather than placement
through the ATM.

We expect that borrowings on our revolving credit facility, borrowings on term
loans, and our ATM program will allow us to continue to make real estate
investments for the remainder of 2019. Recent actions by the federal government
to reduce the federal funds rate may temporarily reduce anticipated upward
pressure on our historically low cost of debt capital. If the federal government
decides to reverse this trend as it seeks to hold inflation to acceptable
levels, we can expect that our cost of debt capital will increase in the
mid-term.

Concurrent with the amendments to our credit facility and with the exception of
specific debt-coverage ratios, covenants pertaining to our private placement
term loans were generally conformed with those governing the credit facility.

As of September 30, 2019, our $120,000,000 of senior unsecured convertible notes
were convertible at a rate of 14.57 shares of common stock per $1,000 principal
amount, representing a conversion price of approximately $68.63 per share for a
total of 1,748,616 remaining underlying shares. For the nine months ended
September 30, 2019, dilution resulting from the conversion option within our
convertible debt is 275,824 shares. If NHI's current share price increases above
the adjusted $68.63 conversion price, further dilution will be attributable to
the conversion feature. On September 30, 2019, the value of the convertible
debt, computed as if the debt were immediately eligible for conversion, exceeded
its face amount by $24,068,000.

We may continue from time to time to seek to retire or purchase some of our
outstanding convertible notes through cash open market purchases,
privately-negotiated transactions or otherwise. As with our 2018 repurchases,
amounts and timing of further repurchases or exchanges, if any, will be
dependent on prevailing market conditions, liquidity requirements, contractual
restrictions and other factors.

When we take on new debt or when we modify or replace existing debt, we incur
debt issuance costs. These costs are 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 sources of capital mentioned

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above, with the goal of maintaining a low-leverage balance sheet as mitigation
against potential adverse changes in the business of our industry, tenants and
borrowers.

Interest Rate Swap Agreements

To mitigate our exposure to interest rate risk, we have in place the following
interest rate swap contracts in place to hedge against floating rates on our
bank term loans and a portion of our revolving credit facility as of
September 30, 2019 (dollars in thousands):
Date Entered   Maturity Date   Fixed Rate      Rate Index        Notional Amount      Fair Value (Liability)
June 2013        June 2020       3.46%       1-month LIBOR     $      80,000,000     $                (238 )
March 2014       June 2020       3.51%       1-month LIBOR     $     130,000,000     $                (431 )
March 2019     December 2021     3.51%       1-month LIBOR     $     100,000,000     $              (1,691 )
March 2019     December 2021     3.52%       1-month LIBOR     $     100,000,000     $              (1,720 )
June 2019      December 2021     2.89%       1-month LIBOR     $     150,000,000     $                (538 )
June 2019      December 2021     2.93%       1-month LIBOR     $      50,000,000     $                (193 )



For instruments that are designated and qualify as cash flow hedges, the
effective portion of the gain or loss on the derivative has been reported as a
component of other comprehensive income (loss), and reclassified into earnings
in the same period, or periods, during which the hedged transaction affects
earnings. Gains and losses on the derivative representing either hedge
ineffectiveness or hedge components excluded from the assessment of
effectiveness have been recognized in earnings.

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, 2019 and
thereafter. Dividends declared for the fourth quarter of each fiscal year are
paid by the end of the following January and are, with some exceptions, treated
for tax purposes as having been paid in the fiscal year just ended as provided
in IRS Code Sec. 857(b)(8). We declare special dividends when we compute our
REIT taxable income in an amount that exceeds our regular dividends for the
fiscal year.

Off Balance Sheet Arrangements


We currently have no outstanding guarantees. As described in Note 1 to the
condensed consolidated financial statements, our leases, mortgages and other
notes receivable with certain entities represent variable interests in those
enterprises. However, because we do not control these entities, nor do we have
any role in their day-to-day management, we are not their primary beneficiary
and therefore do not consolidate their financial statements. Except as discussed
in our Annual Report on Form 10-K for the year ended December 31, 2018, under
Contractual Obligations and Contingent Liabilities, we have no further material
obligations arising from our transactions with these entities, and we believe
our maximum exposure to loss at September 30, 2019, due to this involvement
would be limited to our contractual commitments and contingent liabilities and
the amount of our current investments with them, as detailed further in Notes 1,
2, 3 and 6 to the condensed consolidated financial statements. As of
September 30, 2019, we furnished no direct support to any of these entities.

In March 2014 we issued $200,000,000 of convertible notes, the conversion
feature being intended to broaden the Company's credit profile and as a means to
obtain a more favorable coupon rate. For this feature we calculate the dilutive
effect using market prices prevailing over the reporting period. Because the
dilution calculation is market-driven, and per share guidance we provide is
based on diluted amounts, the theoretical effects of the conversion feature
result in per share unpredictability.

Additional disclosure requirements also give widely ranging results depending on
market price variability. The notes will be freely convertible in the last six
months of their contractual life, beginning in the fourth quarter of 2020;
however, generally accepted accounting principles require us to periodically
report the amount by which the notes' convertible value exceeds their principal
amount, without regard to the current availability of the conversion feature.
Further, the mechanics of the calculation require the use of an end-of-period
stock price, so that using that amount for the remaining notes outstanding of
$120,000,000 at September 30, 2019, delivers an excess of $24,068,000, whereas
the use of another price point would give a different result.

The conversion feature is generally available to the noteholders entering the
last six months of the notes' term but may also become actionable if the market
price of NHI's common stock should, for 20 of 30 consecutive trading days within
a calendar quarter, sustain a level in excess of 130% of the adjusted conversion
price, or $90.44 per share, down from $93.55 per share, initially. The notes are
"optional net-share settlement" instruments, meaning that NHI has the ability
and intent to settle the principal amount of the indebtedness in cash, with
possible dilutive share issuances for any excess, at NHI's option. Settlement of
the notes requires management to allocate the consideration we ultimately pay
between the debt component and the equity conversion feature as though they were
separate instruments. The allocation is effected by valuing the debt component
first, with any remainder

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allocated to the conversion feature. Amounts expended to settle the notes will
be recognized first as a settlement of the notes at par and then will be
recognized in income to the extent the portion allocated to the debt instrument
differs from par value. The remainder of the allocation, if any, will be treated
as settlement of equity and adjusted through our paid in capital account.

Contractual Obligations and Contingent Liabilities

For our contractual obligations as of December 31, 2018, see our Management's Discussion and Analysis contained in our Form 10-K for the year ended December 31, 2018.

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