| NATIONAL HEALTH REALTY INC Item 1A Risk Factors We depend on the operating success of our tenants, who operate in the skilled nursing and assisted living industry for collection of our rent revenues |
| Our skilled nursing facility operators’ revenues are primarily driven by occupancy, Medicare and Medicaid reimbursement and private pay rates |
| Our assisted living facility operators’ revenues are primarily driven by occupancy and private pay rates |
| Expenses for these facility types are driven by the costs of labor, food, utilities, taxes, insurance and rent or debt service |
| Revenues from government reimbursement have, and may continue, to come under pressure due to reimbursement cuts and federal and state budget shortfalls |
| Liability insurance and staffing costs continue to increase for our operators |
| To the extend that any decrease in revenues and/or any increase in operating expenses result in a facility not generating enough cash to make payments to us, the credit of our operator and the value of other collateral would have to be relied upon |
| We are exposed to the risk that our operators may not be able to meet the rent, principal and interest or other payments due us, which may result in an operator bankruptcy or insolvency, or that an operator might become subject to bankruptcy or insolvency proceedings for other reasons |
| Although our operating lease agreements provide us the right to evict an operator, demand immediate payment of rent and exercise other remedies, and our mortgage loans provide us the right to terminate any funding obligations, demand immediate repayment of principal and unpaid interest, foreclose on the collateral and exercise other remedies, the bankruptcy laws afford certain rights to a party that has filed for bankruptcy or reorganization |
| An operator in bankruptcy may be able to limit or delay our ability to collect unpaid rent in the case of a lease or to receive unpaid principal and/or interest in the case of a mortgage loan, and to exercise other rights and remedies |
| We may be required to fund certain expenses (eg, real estate taxes, maintenance and capital improvements) to preserve the value of a facility, avoid the imposition of liens on a facility and/or transition a facility to a new operator |
| In some instances, we have terminated our lease with an operator and relet the facility to another operator |
| In some of 6 _________________________________________________________________ [45]Table of Contents those situations, we provided working capital loans to and limited indemnification of the new operator |
| If we cannot transition a leased facility to a new operator, we may take possession of that facility, which may expose us to certain successor liabilities |
| Should such events occur, our revenue and operating cash flow may be adversely affected |
| We are exposed to risk as a result of approximately two-thirds of our revenue (66dtta8prca in 2005) is being generated from a lease with NHC Additionally, 14 of our 23 owned properties are leased to NHC In the event NHC experiences a decline in profitability from their operations, NHC’s ability to pay our rent could be adversely affected |
| If NHC defaults in its obligation to pay our rent timely, such event would have a material adverse effect on our financial results, carrying value of our assets and on our ability to pay dividends |
| We are exposed to risks related to government regulations and the effect they have on our operators’ business |
| Our operators’ businesses are affected by government reimbursement and private payor rates |
| To the extend that any skilled nursing facility receives a significant portion of its revenues from governmental payors, primarily Medicare and Medicaid, such revenues may be subject to statutory and regulatory changes, retroactive rate adjustments, recovery of program overpayments or set-offs, administrative rulings, policy interpretations, payment or other delays by fiscal intermediaries, government funding restrictions (at a program level or with respect to specific facilities) and interruption or delays in payments due to any ongoing governmental investigations and audits at such facility |
| In recent years, governmental payors have frozen or reduced payments to health care providers due to budgetary pressures |
| Changes in health care reimbursement will likely continue to be of paramount importance to federal and state authorities |
| We cannot make any assessment as to the ultimate timing or effect any future legislative reforms may have on the financial condition of the health care industry |
| There can be no assurance that adequate reimbursement levels will continue to be available for services provided by any facility operator, whether the facility receives reimbursement from Medicare, Medicaid or private payors |
| Significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse effect on an operator’s liquidity, financial condition and results of operations, which could adversely affect the ability of an operator to meet its obligations to us |
| In addition, the replacement of an operator that has defaulted on its lease or loan could be delayed by the approval process of any federal, state or local agency necessary for the transfer of the facility or the replacement of the operator licensed to manage the facility |
| We are exposed to the risk that the cash flows of our tenants and mortgages will be affected by increased liability claims and increased general and professional liability insurance costs |
| Long-term care facility operators (assisted living and skilled nursing facilities) have experienced substantial increases in both the number and size of patient care liability claims in recent years, particularly in the state of Florida |
| As a result, general and professional liability costs have increased and may continue to increase |
| Nationwide, long-term care liability insurance rates are increasing because of large jury awards in states like Texas and Florida |
| Over the past two years, both Texas and Florida have adopted skilled nursing facility liability laws that modify or limit tort damages |
| Despite some of these reforms, the long-term care industry overall continues to experience very high general and professional liability costs |
| Insurance companies have responded to this claims crisis by severely restricting their capacity to write long-term care general and professional liability policies |
| No assurances can be given that the climate for long-term care general and professional liability insurance will improve in any of the foregoing states or any other states where the facility operators conduct business |
| Insurance companies may continue to reduce or stop writing general and professional liability policies for assisted living and skilled nursing facilities |
| Thus, general professional liability insurance coverage may be restricted, very costly, or not available, which may adversely affect the facility operators’ future operations, cash flows and financial condition, and may have a material adverse effect on the facility operators’ ability to meet their obligations to us |
| We depend on the success of future acquisitions |
| We could encounter unanticipated difficulties and expenditures relating to any acquired properties, including contingent liabilities, and newly acquired properties might require significant management attention that would otherwise be devoted to our ongoing business |
| If we agree to provide construction funding to an operator and the project is not completed, we may need to take steps to ensure completion of the project or we could lose the property |
| Moreover, if we issue equity securities or incur additional debt, or both, to finance future acquisitions, it may reduce our per share financial results |
| These costs may negatively affect our results of operations |
| 7 _________________________________________________________________ [46]Table of Contents We are exposed to risks related to environmental laws and the costs associated with the liability related to hazardous substances |
| Under various federal and state laws, owners or operators of real property may be required to respond to the release of hazardous substances on the property and may be held liable for property damage, personal injuries or penalties that result from environmental contamination |
| These laws also expose us to the possibility that we may become liable to reimburse the government for damages and costs it incurs in connection with the contamination |
| Generally, such liability attaches to a person based on the person’s relationship to the property |
| Our tenants or borrowers are primarily responsible for the condition of the property and since we are a passive landlord, we do not “participate in the management” of any property in which we have an interest |
| Moreover, we review environmental site assessment of the properties that we own or encumber prior to taking an interest in them |
| Those assessments are designed to meet the “all appropriate inquiry” standard, which qualifies us for the innocent purchaser defense if environmental liabilities arise |
| Based upon such assessments, we do not believe that any of our properties are subject to material environmental contamination |
| However, environmental liabilities, including mold, may be present in our properties and we may incur costs to remediate contamination, which could have a material adverse effect on our business or financial condition |
| We depend on the ability to reinvest cash from our operating, investing and financing activities in a timely manner and on acceptable terms |
| From time to time, we will have cash available from (1) the proceeds of sales of our securities, (2) principal payments on our loans receivable, and (3) the sale of properties, including non-elective dispositions, under the terms of master leases or similar financial support arrangements |
| We must re-invest these proceeds, on a timely basis, in health care investments or in qualified short-term investments |
| We compete for real estate investments with a broad variety of potential investors |
| This competition for attractive investments may negatively affect our ability to make timely investments on terms acceptable to us |
| Delays in acquiring properties may negatively impact revenues and perhaps our ability to make distributions to stockholders |
| We depend on the ability to qualify or remain qualified as a REIT We intend to operate as a REIT under the Internal Revenue Code and believe we have and will continue to operate in such a manner |
| Since REIT qualification requires us to meet a number of complex requirements, it is possible that we may fail to fulfill them, and if we do, our earnings will be reduced by the amount of federal taxes owed |
| A reduction in our earnings would affect the amount we could distribute to our stockholders |
| Also, if we were not a REIT, we would not be required to make distributions to stockholders since a non-REIT is not required to pay dividends to stockholders amounting to at least 90prca of its annual taxable income |
| We are subject to risks associated with our obligation to purchase leasehold improvements and additions made by NHC as tenant to our real estate properties |
| Our lease of fourteen properties to NHC has currently been extended until December 31, 2017 |
| Under the terms of the lease, at such time as NHC is no longer a tenant by virtue of lease terminations, then NHR shall purchase the bed additions paid for by NHC but unreimbursed by NHR for the lesser of (1) the appraised value of the addition or (2) the construction cost incurred by NHC plus 50prca of any appraised value increase over cost |
| Also under the terms of the lease, NHC agrees at NHR’s request to finance NHR’s purchase of the addition with a floating rate interest only note at the prime rate of interest for a period of up to two years |
| NHC has submitted a listing of certain NHR owned properties expected to be expanded by NHC for which the construction cost is expected to total approximately dlra26cmam225cmam000 |
| Therefore, we would be required at that time of termination of our leases with NHC (or, if NHC financing is utilized, within two years after termination of our leases with NHC) to obtain financing or to use our own capital resources to purchase these bed additions |
| The terms of such financing or the availability of our own capital at the time of such lease terminations cannot be determined at this time |
| We are dependent upon NHC for services related to investment activities and day-to-day management |
| Processes such as accounting, monitoring of investments, finance activities, etc are performed for us by NHC under an advisory agreement that may be cancelled upon 90 days notice or upon demand in some circumstances |
| The cancellation of this agreement would, at least temporarily, have a material adverse impact on our business activities and upon our ability to comply with government regulations |