UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-10822

NATIONAL HEALTH INVESTORS, INC.

(Exact name of registrant as specified in its charter)

Maryland (State or other jurisdiction of incorporation or organization)		62-1470956 (I.R.S. Employer Identification Number)

100 Vine Street, Suite 1202, Murfreesboro, Tennessee 37130 (Address of principal executive offices)		37130 (Zip Code)

Company’s telephone number, including area code: (615) 890-9100

Securities registered pursuant to Section 12(g) of the Act: Same

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

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  o  

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K.  o  

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filer   o            Accelerated filer   þ            Non-accelerated filer   o  

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  þ  

     The aggregate market value of voting stock held by nonaffiliates on June 30, 2005 (based on the closing price of such shares on the New York Stock Exchange) was approximately $591 million. For purposes of the foregoing calculation only, all directors, named executive officers and persons knows to the Registrant to be holders of 5% or more of the Registrant’s Common Stock have been deemed affiliates of the Registrant. The number of shares of Common Stock outstanding as of February 28, 2006 was 27,830,439.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s definitive proxy statement for its 2006 annual meeting of stockholders are incorporated by reference into Part III, Items 10, 11, 12, 13, and 14 of this Form 10-K .

 

 

TABLE OF CONTENTS

      Acute and long term care hospitals. As of December 31, 2005, we owned and leased one acute care hospital. Acute care hospitals provide a wide range of inpatient and outpatient services and are subject to extensive federal, state and local legislation and regulation. Acute and long term care hospitals undergo periodic inspections regarding standards of medical care, equipment and hygiene as a condition of licensure. Services provided by acute and long term care hospitals are generally paid for by a combination of private pay sources and governmental programs.

      Medical office buildings. As of December 31, 2005, we owned and leased four medical office buildings. Medical office buildings are specifically configured office buildings whose tenants are primarily physicians and other medical practitioners. Medical office buildings differ from conventional office buildings due to the special requirements of the tenants and their patients. Each of our owned medical office buildings is leased to one lessee, and is either physically attached to or located on an acute care hospital campus. The lessee then leases individual office space to the physicians or other medical practitioners. The lessee is responsible to us for the lease obligations of the entire building, regardless of its ability to lease the individual office space.

      Assisted Living Facilities. We own 15 assisted living facilities which are leased to individual operators. Assisted living unit facilities are free standing facilities or facilities which are attached to long term care facilities or retirement facilities and provide basic room and board functions for the elderly. Some assisted living projects include licensed long term care (nursing home) beds. On-site staff are available to assist in minor medical needs on an as needed basis.

      Retirement Centers. We own five retirement centers, three of which are leased to NHC, one to Sun Healthcare, and one to ElderTrust and have a first mortgage on one other center. Retirement centers offer specially designed residential units for the active and ambulatory elderly and provide various ancillary services for their residents including restaurants, activity rooms and social areas. Charges for services are paid from private sources without assistance from government programs. Retirement centers may be licensed and regulated in some states, but do not require the issuance of a certificate of need such as is required for long-term care facilities.

      Residences for the developmentally disabled. As of December 31, 2005, we had outstanding first mortgage notes on 17 residences for the developmentally disabled. Residences for the developmentally disabled are generally small home-like environments which accommodate six to eight mentally and developmentally disabled persons. These persons obtain custodial care which includes food, lodging, education and transportation services. These community based services are replacing the large state institutions which have historically provided care to the developmentally disabled. Services to the developmentally disabled are primarily paid for by state Medicaid programs.

Nature of Investments

     Our investments are typically structured as either purchase leaseback transactions or mortgage loans. We also provide construction loans for facilities for which we have already committed to provide long-term financing or which agree to enter into a lease with us upon completion of the construction. The lease rates of our leases and the interest rates on the mortgage loans and construction loans have historically ranged between 9% and 12% per annum. We typically charge a commitment fee of 1% based on the purchase price of the property of a purchase leaseback or the total principal loan amount of a mortgage loan. In instances where construction financing has also been supplied, there is generally an additional 1% commitment fee for the construction financing. We believe our lease terms, mortgage loan and construction loan terms are competitive in the market place. Except for certain properties, as described under the heading “Real Estate and Mortgage Writedowns (Recoveries)”, all of the operating Health Care Facilities are currently performing under their mortgage loans or leases. Typical characteristics of these transactions are as follows:

      Mortgage Loans. In general, the term of our mortgage loans is 10 years with the principal amortized over 20 to 25 years and a balloon payment due at the end of the 10 year term. Substantially all mortgage loans have an additional interest component which is based on the escalation of gross revenues at the project level or fixed rate increases. In certain of our mortgage loans, we have received an equity participation which allows us to share in a portion of any appreciation of the equity value of the underlying property. We do not expect the equity participations to constitute a

significant or frequent source of income. Most mortgage loans have prepayment penalties starting at 10% during the first year and decreasing by 1% each year thereafter. In most cases, the owner of the property has committed to make minimum annual capital improvements for the purpose of maintenance or upgrading the facility.

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

     Our existing leases contain annual escalators in rent payments. All of the acute care and medical office building properties which we own and lease give the lessee an option to purchase the underlying property at the greater of i) our acquisition costs; ii) the then fair market value as established by independent appraisers or iii) the sum of the land costs, construction costs and any additional capital improvements made to the property by us. In addition, the acute care and medical office building leases contain a right of first refusal for the lessee if we receive an offer to buy the underlying leased property.

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

      Construction loans. From time to time, although none are currently outstanding, we also provide construction loans that by their terms convert either into purchase leaseback transactions or mortgage loans upon the completion of the construction of the facility. The term of such construction loans are for a period which commences upon the closing of such loan and terminates upon the earlier of (a) the completion of the construction of the applicable facility or (b) a specific date. During the term of the construction loan, funds are usually advanced pursuant to draw requests made by the borrower in accordance with the terms and conditions of the loan. In addition to the security of the lien against the property, we will generally require additional security and collateral in the form of either payment and performance completion bonds or completion guarantees by the borrower’s parent, affiliates of the borrower or one or more of the individuals who control the borrower. No such loans are currently outstanding.

      Operating Facilities . We owned and operated 17 long-term health care facilities that we acquired through foreclosure or through the acceptance of deeds in lieu of foreclosure and subsequently sold the facilities to an unrelated not-for-profit entity, providing 100% financing. The operating revenues and expenses of these facilities continue to be recorded in the consolidated statements of income until such time as the down payment and continuing investment criteria of Statement of Financial Accounting Standards No. 66, “Accounting for Sales of Real Estate” (“SFAS 66”) are met at which time we will account for the sale under the full accrual method.

Competition and Market Conditions

     We compete, primarily on the basis of price, available capital, knowledge of the industry, and flexibility of financing structure, with real estate partnerships, other REITs and other investors (including, but not limited to, banks, insurance companies, and investment bankers marketing securities in mortgage funds) in the acquisition, leasing and financing of health care related entities.

     The operators of the Health Care Facilities compete on a local and regional basis with operators of facilities that provide comparable services. Operators compete for patients and staff based on quality of care, reputation, physical appearance of facilities, services offered, family preference, physicians, staff and price. They compete with independent operators as well as companies managing multiple facilities, some of which are substantially larger and have greater resources than the operators of the Health Care Facilities. Some of these facilities are operated for profit while others are owned by governmental agencies or tax-exempt non-profit organizations.

     The long term care facilities to which we provide mortgage loans and which we rent to others or operate ourselves receive the majority of their revenues from Medicare, Medicaid and other government programs. From time to time, these facilities have experienced Medicare and Medicaid revenue reductions brought about by the enactment of legislation to reduce government costs. Beginning January 1, 2006, CMS (Centers for Medicare and Medicaid Services) implemented major changes to the SNF PPS payment methodology (See Sources of Revenue) that will reduce payments to facilities by about 5%. State Medicaid funding is not expected to keep pace with inflation according to industry studies. Additionally, the assisted living industry experienced slower fill-up rates on new projects and more competition for their mature projects as overbuilding occurred in certain markets. Any changes in reimbursement methodology that reduces reimbursement to levels that are insufficient to cover the operating costs of our borrowers, lessees and the facilities we operate could adversely impact us.

Operators

     The majority of the Health Care Facilities are operated by the owner or lessee. As a percent of total investments, 24.82% of the Health Care Facilities are operated by publicly-owned companies, while 67.62% are operated by regional health care operators and 7.56% are operated by smaller operators. We consider the operator to be an important factor in determining the creditworthiness of the investment and we generally have the right to approve any changes in operators. Operators who collectively operate more than 3% of our total real estate investments are as follows: NHC, Health Services Management of Texas, LLC, THI of Baltimore, Inc., Sunrise Senior Living Services, Inc., Health Services Management, Inc., Community Health Systems, Inc., ElderTrust of Florida, RGL Development, LLC, Southeast Health Services, Regal Holdings, LLC, American HealthCare, LLC, and SeniorTrust of Florida, Inc. For additional information about these and other NHI operators, see “Real Estate and Mortgage Writedowns (Recoveries)”.

NHC Master Agreement to Lease

     On December 27, 2005, under an amendment to the master lease, NHC exercised its option to extend the existing lease on 41 properties for the second renewal term. These 41 properties include 38 skilled nursing homes, four of which are leased to other parties, the lease payments of which are guaranteed to us by NHC under the Master Lease, and three retirement centers. The 15-year lease extension begins January 1, 2007, and includes three additional five-year renewal options, each at fair market value. Under the terms of the lease, base rent for 2007 will total $33,700,000 (compared to $33,328,000; $32,836,000; and $33,267,000 in 2005, 2004, and 2003, respectively) with rent thereafter escalating by 4% of the increase in facility revenue over a 2007 base year. The lease was scheduled to expire on December 31, 2006 unless extended by NHC. The terms of the existing lease remain in place for 2006, as discussed below.

     Before amendment on December 27, 2005 and before termination of one lease each in 2004 and 2005, the Master Agreement to Lease (the “Master Agreement”) with NHC covered 40 nursing homes and three retirement centers and contained terms and conditions applicable to all leases entered into by and between NHC and the Company (the “Leases”). The Leases were for an initial term expiring on December 31, 2001 with two five year renewal options at the election of NHC which allow for the renewal of the leases on an omnibus basis only. During 2000, NHC exercised its option to extend the lease term for the first five-year renewal term under the same terms and conditions as the initial term. During 2000, individual facility leases for four centers, all in Florida, were terminated and NHI re-leased the properties

to third parties. Although NHC’s rent obligations pursuant to the master lease are unchanged, NHC receives a credit for rents paid to NHI by the new operators of the four Florida centers.

     During the initial term and the first renewal term ending on December 31, 2006 (which renewal term has been exercised by NHC), NHC is obligated to pay three types of rent for the respective Health Care Facilities: (1) base rent, (2) debt service rent, and (3) percentage rent. Base rent (which includes rent on property additions since inception) totaled $19,827,000 in 2005. Debt service rent varies from year to year and is the amount of interest and principal on the mortgages to which the Health Care Facilities were subject when they were transferred to us in 1991. Debt service rent has been adjusted for refinancings from time to time and totaled $9,776,000 in 2005.

     In addition to base rent and debt service rent, NHC must pay percentage rent to us equal to 3% of the increase in the gross revenue of each facility. Effective January 1, 2000, we amended our lease agreements with NHC to provide for the calculation of percentage rent based on quarterly revenue increases rather than annual revenue increases. NHC paid $4,525,000 as percentage rent for 2005.

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

Commitments

     We have commitments to third parties to make loans to fund projects totaling $2,770,000 as of December 31, 2005.

     The following table sets forth certain information regarding our commitments as of December 31, 2005.

Sources of Revenues

      General. Our revenues are derived primarily from mortgage interest income, rental income and the operation of Foreclosure Properties. During 2005, mortgage interest income equaled $18,226,000 of which all except $250,000 was from non-NHC borrowers. Rental income totaled $45,791,000, $33,328,000 of which was from properties operated by NHC. The interest and rental payments are primarily derived from the operations of the Health Care Facilities. The source and amount of revenues from such operations are determined by (i) the licensed bed or other capacity of the Health Care Facilities, (ii) the occupancy rate of the Health Care Facilities, (iii) the extent to which the services provided at each Health Care Facility are utilized by the patients, (iv) the mix of private pay, Medicare and Medicaid patients at

the Health Care Facilities, and (v) the rates paid by private paying patients and by the Medicare and Medicaid programs. Facility operating revenues are derived from the operations of the Foreclosure Properties and are determined by similar factors.

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

      Medicare and Medicaid. A significant portion of the revenue of our Foreclosure Properties and our lessees and borrowers is derived from governmental-funded reimbursement programs, such as Medicare and Medicaid.

     Medicare is uniform nationwide and reimburses nursing centers under a fixed payment methodology named the Prospective Payment System (SNF PPS). PPS was instituted as mandated by the Balanced Budget Act of 1997. PPS became effective July 1, 1998. PPS is an acuity based classification system that uses nursing and therapy indexes adjusted by geographical wage indexes to calculate per diem rates for each Medicare patient. Payment rates are updated annually and generally increased each October when the federal fiscal year begins. The acuity classification system is named RUGs (Resource Utilization Groups III). SNF PPS as implemented had an adverse impact on our industry and our business by decreasing payments materially. Refinements in the form of temporary add-ons provided some relief until October 1, 2002. Annual market basket (inflationary) increases have continued to improve payments.

     On July 28, 2005, the Centers for Medicare and Medicaid Services (CMS) issued a final rule updating SNF PPS and consolidated billing provisions. The rule updates the per-diem payment rates under the SNF PPS for federal fiscal year (FY) 2006.

     Effective October 1, 2005, PPS rates were increased by a 3.1% annual inflation update factor. Payments to facilities for the fourth quarter of 2005 will reflect the continuation of the temporary add-on payments.

     Including inflation, total projected payments to providers in FY 2006 will be the same as total payments made to providers in FY 2005. However, the final rule will cause a redistribution of payments among providers. This is accomplished by expanding the Resource Utilization Groups (RUGs) from 44 RUG groups to 53 RUG groups, and eliminating temporary rate add-ons. The elimination of temporary add-ons has always been tied to the long awaited RUG refinement. RUG refinement modifies case mix weights and indexes. This is a permanent change in the PPS methodology. Excluding the 3.1% annual inflation update factor, RUG refinement is expected to reduce Medicare payment rates beginning January 1, 2006 by 5%, thereby reducing 2006 revenues for operators of long term care facilities.

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

     Medicare and Medicaid programs are highly regulated and subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing law. Moreover, health care facilities have experienced increasing pressure from private payors attempting to control health care costs, reimbursement from private payors has in many cases effectively been reduced to levels approaching of government payors.

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

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

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

      Certificates of Need. Certain Health Care Facilities in which we invest are also generally subject to state statutes which may require regulatory approval, in the form of a certificate of need (“CON”) prior to the addition or construction of new beds, the addition of services or certain capital expenditures. CON requirements are not uniform throughout the United States and are subject to change. We cannot predict the impact of regulatory changes with respect to CON’s on the operations of our lessees and mortgagees; however, in our primary market areas, a significant reduction in new construction of long term care beds has occurred.

Investment Policies

     Our investment objectives are (i) to provide current income for distribution to our stockholders through investments primarily in health care related facilities, (ii) to provide the opportunity to realize capital growth resulting from appreciation, if any, in the residual value of our portfolio properties, and (iii) to preserve and protect stockholders’ capital. There can be no assurance that these objectives will be realized.

     We anticipate making more new investments in 2006. In making new investments, we would consider such factors, as (i) the geographic area and type of property, (ii) the location, construction quality, condition and design of the property, (iii) the current and anticipated cash flow and its adequacy to meet operational needs and lease or mortgage obligations and to provide a competitive market return on equity to our investors, (iv) the growth, tax and regulatory environments of the communities in which the properties are located, (v) occupancy and demand for similar health care facilities in the same or nearby communities, (vi) the quality, experience and creditworthiness of the management operating the facilities located on the property; and (vii) the mix of private and government sponsored patients. There can be no assurances that investments containing these attributes will be found or closed.

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

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

     We may incur additional indebtedness in the future to make investments in health care related facilities or business when it is advisable in the opinion of the Board of Directors. We may negotiate other lines of credit, or arrange for other short or long term borrowings from banks, NHC or otherwise. We have and may arrange for long term borrowings from institutional investors or through public offerings. We have invested and may in the future invest in properties subject to existing loans or secured by mortgages, deeds of trust or similar liens with favorable terms or REMIC investments.

Advisory Agreement

      Management Advisory Source, LLC — Effective November 1, 2004, we assigned our Advisory Agreement with National HealthCare Corporation to a new company, Management Advisory Source, LLC, formed by NHI’s President and Board Chairman, W. Andrew Adams. NHI has no ownership in Management Advisory Source, LLC. In 2005, the annual compensation expensed under the Advisory Agreement was approximately $3,599,000. We believe it to be in the best interest of NHI to accentuate its independence from NHC, its largest tenant. Therefore, Mr. Adams, through his company, has assumed the responsibilities of the Advisory Agreement. To assure independence from NHC, Mr. Adams resigned as CEO of NHC in 2004 and terminated his managerial responsibilities with NHC. He has outsourced non-managerial functions of the Advisory Agreement such as payroll processing, accounting and the like to NHC. During the immediate future, Mr. Adams will remain on the NHC Board as Chairman, focusing on strategic planning, but will have no management involvement with NHC.

      NHC — We entered into the Advisory Agreement on October 17, 1991 with NHC as “Advisor” under which NHC provided management and advisory services to us through November 30, 2004. Under the Advisory Agreement, we engaged NHC to use its best efforts (a) to present to us a continuing and suitable investment program consistent with our investment policies adopted by the Board of Directors from time to time; (b) to manage our day-to-day affairs and operations; and (c) to provide administrative services and facilities appropriate for such management. In performing its obligations under the Advisory Agreement, NHC was subject to the supervision of and policies established by our Board of Directors.

     The Advisory Agreement was initially for a stated term which expired December 31, 1997. Since then, the Agreement was on a year to year term, but terminable on 90 days notice, and terminable for cause at any time. For 1993 and later years, the Advisor was entitled to annual compensation which was calculated on a formula related to the increase in Funds from Operations per common share (as defined in the Advisory Agreement).

     Pursuant to the Advisory Agreement, the advisor manages all of our day-to-day affairs and provides all such services through its personnel or contractual agreements. The Advisory Agreement provides that without regard to the amount of compensation received by the Advisor under the Advisory Agreement, the Advisor shall pay all expenses in performing its obligations including the employment expenses of the personnel providing services to us. The Advisory Agreement further provides that NHI shall pay the expenses incurred with respect to and allocable to the prudent operation and business of NHI including any fees, salaries, and other employment costs, taxes and expenses paid to our directors, officers and employees who are not also employees of the Advisor.

Investor Information

     We maintain a worldwide web site at www.nhinvestors.com. We publish to this web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and press releases. We do not necessarily have these filed the same day as they are filed with the SEC or released to the public, but rather have a policy of placing these on the web site within two (2) business days of public release or SEC filing.

     We also maintain the following documents on the web site:

	•		The NHI Code of Ethics and Standards of Conduct. This has been adopted for all employees of our Administrative Services Contractor, officers and directors of the Company. The website will also disclose whether there have been any amendments or waivers to the Code of Ethics and Standards of conduct. To date there have been none.
	•		Information on our “NHI Valuesline”, which allows our staff and investors unrestricted access to our Corporate Compliance Officer, executive officers and directors. The toll free number is 800-526-4064 and the communications may be made anonymously, if desired.
	•		The NHI Restated Audit Committee Charter.
	•		The NHI Compensation Committee Charter.
	•		The NHI Nomination and Corporate Governance Committee Charter

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

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, hospital and projects for the developmentally disabled 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 from federal and state budget shortfalls. Liability insurance and staffing costs continue to increase for our operators. To the extent 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 (e.g., real estate taxes, maintenance and capital improvements) to preserve the value of a facility, avoid the imposition of liens on a facility and/or transition a facility to a new operator. In some instances, we have terminated our lease with an operator and relet the facility to another operator. In some of

those situations, we provided working capital loans to and limited indemnification of the new operator. If we cannot transition a leased facility to a new operator, we may take possession of that facility, which may expose us to certain successor liabilities. Should such events occur, our revenue and operating cash flow may be adversely affected.

      We are exposed to risks related to 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, hospital or project for the developmentally disabled 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 states of Texas and Florida. As a result, general and professional liability costs have increased and may continue to increase. Nationwide, long-term care liability insurance rates are increasing because of large jury awards in states like Texas and Florida. 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 are exposed to the risk that our future acquisitions may not prove to be successful. We could encounter unanticipated difficulties and expenditures relating to any acquired properties, including contingent liabilities, and newly acquired properties might require significant management attention that would otherwise be devoted to our 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.

      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 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 90% of its annual taxable income.

      We are dependent upon Management Advisory Source, LLC (“MAS”) for services related to investment activities and day-to-day management. MAS, which was formed by our President and Board Chairman, W. Andrew Adams, has outsourced most functions of the advisory agreement such as accounting, monitoring of investments, finance activities, etc. to NHC. Our advisory agreement with MAS and MAS’s outsourcing agreement with NHC may be cancelled upon 90 days notice or upon demand in some circumstances. The cancellation of either or these agreements could, at least temporarily, have a material adverse impact on our business and upon our ability to comply with government regulations.

     See the notes to the Annual Financial Statement, and “Item 1. Business” herein for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. You should carefully consider these risks before making any investment decisions in the Company. These risks and uncertainties are not the only ones facing the Company. There may be additional risks that we do not presently know of or that we currently deem immaterial. If any of the risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our shares of stock could decline, and you may lose all or part of your investment. Given these risks and uncertainties, we can give no assurances that these forward-looking statements will, in fact, occur and, therefore, caution investors not to place undue reliance on them.

Item 1B. Unresolved Staff Comments.

     None

Item 2. Properties.

As described in Note 3 to the Company’s financial statements, certain of NHI’s real estate properties are pledged as collateral on individual mortgage notes payable.

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

Common Stock Market Prices and Dividends

     Our common stock is traded on the New York Stock Exchange under the symbol NHI. The closing price for NHI stock on February 28, 2006 was $26.62. As of December 31, 2005, there were approximately 1,100 holders of record of shares and we estimate that as of such date there were in addition in excess of 12,300 beneficial owners of the shares.

High and low stock prices and dividends for the last two years were:

No Equity Purchase Plans

     We did not purchase any of our equity securities in 2005, nor do we have any publicly announced plans or programs to do so.

Item 6. Selected Financial Data.

     The following table represents our financial information for the five years ended December 31, 2005. This financial information has been derived from our historical financial statements including those for the most recent three years included elsewhere in this Form 10-K and should be read in conjunction with those financial statements and accompanying footnotes.

NATIONAL HEALTH INVESTORS, INC.
SELECTED FINANCIAL DATA
(dollars in thousands, except share and per share amounts)

Year Ended December 31		2005				2004 (a)				2003 (a)				2002 (a)				2001 (a)
Net revenues		$	157,382			$	155,559			$	154,234			$	149,129			$	117,784
Non-Operating Income			17,309				11,694				5,931				6,655				4,081
Income (Loss) from Continuing Operations			53,708				55,426				41,693				24,438				(2,197	)
Discontinued Operations:
Operating income (loss) — discontinued			(73	)			(590	)			580				1,266				2,134
Net gain on sales of real estate			773				1,543				1,535				5,083				—
Net income (loss)			54,408				56,379				43,808				30,787				(63	)
Earnings per share:
Basic:
Income (loss) from Continuing Operations per common share		$	1.94			$	2.02			$	1.50			$	.86			$	(.17	)
Discontinued Operations per common share			.02				.03				.08				.24				.09
Net income (loss) per common share			1.96				2.05				1.58				1.10				(0.08	)
Diluted:
Income (loss) from Continuing Operations per common share		$	1.93			$	2.00			$	1.49			$	.86			$	(.17	)
Discontinued Operations per common share			.03				.03				.08				.24				.09
Net income (loss) per common share			1.96				2.03				1.57				1.10				(0.08	)
BALANCE SHEET DATA:
Mortgages and other notes receivable, net		$	118,800			$	112,072			$	149,892			$	201,236			$	324,230
Real estate properties, net			263,129				278,170				289,465				304,394				323,266
Total assets			587,932				631,371				624,366				651,064				672,630
Debt			117,252				154,432				162,100				161,763				164,464
Convertible subordinated debentures			201				1,116				1,351				41,633				62,643
Total stockholders’ equity			424,968				425,539				409,644				400,429				397,793
OTHER DATA:
Common shares outstanding			27,830,439				27,545,018				26,770,123				26,682,994				26,004,318
Weighted average common shares:
Basic			27,699,887				27,257,826				26,727,814				26,453,053				24,466,850
Diluted			27,830,886				27,531,084				26,985,571				26,853,420				24,466,850
Common dividends declared per share		$	1.80			$	1.85			$	1.70			$	1.40			$	0.45

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Executive Overview

     National Health Investors, Inc. (“NHI” or the “Company”), a Maryland corporation, is a real estate investment trust (“REIT”) that invests primarily in income producing health care properties with emphasis on the long-term health care sector. As of December 31, 2005, we had interests in real estate owned, and investments in mortgages, preferred stock and marketable securities resulting in total invested assets of $493,614,000. Founded in 1991, our mission is to invest in health care real estate which generates current income that will be distributed to stockholders. We have pursued this mission by making mortgage loans and acquiring properties to lease nationwide primarily in the long-term health care industry.

Portfolio

     As of December 31, 2005, we had investments in 158 health care facilities located in 18 states consisting of 115 long-term care facilities, one acute care hospital, four medical office buildings, 15 assisted living facilities, six retirement centers and 17 residential projects for the developmentally disabled. These investments consisted of approximately $118,800,000 aggregate carrying value amount of loans to 16 borrowers and $263,129,000 of real estate investments with 16 lessees. Of these 158 facilities, 17 were acquired through foreclosure and are operated by us. These 17 facilities have been sold, but we have not yet met the accounting criteria to record the sales.

     Our largest customer is National HeatlhCare Corporation (“NHC”). Of our 158 facilities, 41 are leased to NHC. These 41 facilities include four centers leased to other parties, the lease payments of which are guaranteed to us by NHC. Also, the 17 properties operated by us are managed by subsidiaries of NHC. NHC was our investment advisor until November 1, 2004. Consistent with our strategy of diversification, we have increased our portfolio so that the portion of our portfolio operated by NHC has been reduced from 100% of our total portfolio on October 17, 1991 (the date we began operations) to 13.3% of total portfolio on December 31, 2005.

     The following tables summarize our portfolio as of December 31, 2005:

     Operators who collectively operate more than 3% of our total real estate investments are as follows: NHC, Health Services Management of Texas, LLC, THI of Baltimore, Inc., Sunrise Senior Living Services, Inc., Health Services Management, Inc., Community Health Systems, Inc., ElderTrust of Florida, Inc., RGL Development, LLC, Southeast Health Services, Regal Holdings, LLC, American HealthCare, LLC, and SeniorTrust of Florida, Inc.

Areas of Focus

     Reflecting our improving outlook for the healthcare industry, we anticipate making new investments in 2006 while continuing to monitor and improve our existing properties. Even as we make new investments, however, we expect to maintain a relatively low level of debt vs. equity compared to our historical levels. New investments may be funded by our liquid investments and, if needed, by external financing. We will make new investments where we believe the spreads over our cost of capital will generate returns to our investors.

     We have focused on lowering our debt. Our debt to capitalization ratio on December 31, 2005 was 21.7%, the lowest level in our 14 year history. Our liquidity is also strong with cash and marketable securities of $152,022,000 exceeding our total debt outstanding of $117,453,000 at the end of 2005.

     On December 27, 2005, we reached an agreement with NHC to extend through December 31, 2021 our current lease on 41 of our real estate properties. These 41 facilities include four centers leased to other parties, and three retirement centers. This extension assures an ongoing relationship with our largest customer.

Critical Accounting Policies

     We prepare our financial statements in conformity with accounting principles generally accepted in the United States. These accounting principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and cause our reported net income to vary significantly from period to period. If actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations, liquidity and/or financial condition.

     We consider an accounting estimate or assumption critical if:

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

     Please refer to Note 1 of our audited consolidated financial statements for further information on significant accounting policies that impact us. There have been no material changes to these policies in 2005.

     Our significant accounting policies and the associated estimates, judgments and the issues which impact these estimates are as follows:

     1) Valuations and impairments to our investments — The majority of our tenants and borrowers are in the long-term health care industry and derive their revenues primarily from Medicare, Medicaid and other government programs. Amounts paid under these government programs are subject to legislative and government budget constraints. From time to time, there may be material changes in government reimbursement. In the past, the long-term health care industry has at times experienced material reductions in government reimbursement.

     The long-term health care industry has also experienced a dramatic increase in professional liability claims and in the cost of insurance to cover such claims. These factors have combined to cause a number of bankruptcy filings, bankruptcy court rulings and court judgments about refinancing for our lessees and mortgagees. We have determined that impairment of certain of our investments have occurred as the result of these events.

     Decisions about valuations and impairments of our investments require significant judgments and estimates on the part of management. For real estate properties, the need to recognize an impairment is evaluated on a property by property basis in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets” (“SFAS 144”). Recognition of an impairment is based upon estimated future cash flows from a property compared to the carrying amount of the property and may be affected by management’s plans, if any, to dispose of the property.

     For notes receivable, impairment recognition is based upon an evaluation of the estimated collectibility of loan payments and general economic conditions on a specific loan basis in accordance with Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan — An Amendment of FASB Statements No. 5 and 15” (“SFAS 114”). On a quarterly basis, NHI reviews its notes receivable for recoverability when events or circumstances, including the non-receipt of principal and interest payments, significant deteriorations of the financial condition of the borrower and significant adverse changes in general economic conditions, indicate that the carrying amount of the note receivable may not be recoverable. If necessary, an impairment is measured as the amount by which the carrying amount exceeds the discounted cash flows expected to be received under the note receivable or, if foreclosure is probable, the fair value of the collateral securing the note receivable.

     We evaluate our marketable securities for other-than-temporary impairments consistent with the provisions of Statement of Financial Accountant Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”) as amended by EITF 03-01 “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”. An impairment of a marketable security would be considered “other-than-temporary” unless we have the ability and intent to hold the investment for a period of time sufficient for a forecasted market price recovery up to (or beyond) the cost of the investment and evidence indicates the cost of the investment is recoverable within a reasonable period of time.

     While we believe that the carrying amounts of our properties, notes receivable, marketable securities and other investments are realizable, it is possible that future events could require us to make significant adjustments or revisions to these estimates.

     2) Revenue recognition — mortgage interest and rental income — We collect interest and rent from our customers. Generally our policy is to recognize revenues on an accrual basis as earned. However, there are certain of our customers for which we have determined, based on insufficient historical collections and the lack of expected future collections, that revenue for interest or rent is not realizable. For these nonperforming investments, our policy is to recognize interest or rental income when assured, which we consider to be the period the amounts are collected. We identify investments as nonperforming if a required payment is not received within 30 days of the date it is due. This policy could cause our revenues to vary significantly from period to period. Revenue from minimum lease payments under our leases is recognized on a straight-line basis as required under SFAS 13 to the extent that future lease payments are considered collectible. Lease payments that depend on a factor directly related to future use of the property, such as an increase in annual revenues over a base year revenues, are considered to be contingent rentals and are excluded from minimum lease payments in accordance with SFAS 13.

     3) REIT status and taxes — We believe that we have operated our business so as to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”) and we intend to continue to operate in such a manner, but no assurance can be given that we will be able to qualify at all times. If we qualify as a REIT, we will generally not be subject to federal corporate income taxes on our net income that is currently distributed to our stockholders. This treatment substantially eliminates the “double taxation” (at the corporate and stockholder levels) that typically applies to corporate dividends. Our failure to continue to qualify under the applicable REIT qualification rules and regulations would cause us to owe state and federal income taxes and would have a material adverse impact on our financial position, results of operations and cash flows.

     4) Revenue recognition — third party payors — Approximately two-thirds of our facility operating revenues are derived from Medicare, Medicaid, and other government programs. Amounts earned under these programs are subject to review by the third party payors. In our opinion, adequate provision has been made for any adjustments that

may result from these reviews. Any differences between our estimates of settlements and final determinations are reflected in operations in the year finalized.

Liquidity and Capital Resources

Sources and Uses of Funds

     Our primary sources of cash include rent and interest receipts, the revenues of facilities we operate, proceeds from the sales of real property and principal payments on loans receivable. Our primary uses of cash include dividend distributions, the expenses of facilities we operate, debt service payments (including principal and interest), real property acquisitions and general and administrative expenses. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows and are discussed in further detail below. The following is a summary of our sources and uses of cash flows (dollars in thousands):

      Operating Activities — We have generated net cash from operating activities during 2005 totaling $59,010,000, an increase of $1,918,000 compared to $57,092,000 in the prior year. Net cash from operating activities generally includes net income adjusted for non-cash items, such as depreciation and amortization, working capital changes, investment writedowns and recoveries, and gain on asset disposals. The $59,010,000 net cash provided from operating activities for 2005 is composed of net income of $54,408,000, depreciation of $12,855,000, and net loan, realty and security writedowns of $2,963,000. The net loan, realty and security writedowns of $2,963,000 are attributable to real estate of $2,550,000 and mortgages of $5,435,000, reduced by security recoveries of $5,022,000, discussed in Notes 3, 4 and 7 of the Consolidated Financial Statements. This was offset by a gain on sale of real estate of $2,552,000, gain on sale of marketable securities of $4,050,000, discount and deferred income amortization of $252,000, and working capital increases of $4,655,000. The net gain on sale of real estate of $2,552,000 is composed of a gain of $1,624,000 attributable to a Charlotte, North Carolina facility, a loss of $851,000 attributable to a Dallas, Texas facility, and a gain of $1,871,000 attributable to a Nashville, Tennessee facility, discussed in Notes 3, 19, and 20 of the Consolidated Financial Statements. Net cash provided by operating activities increased from $57,092,000 in 2004 to $59,010,000 in 2005 due primarily to $3,918,000 of items affecting net income, offset by a $2,000,000 increase in working capital change, driven primarily by the timing of vendor payments and collections of patient receivables at operating facilities.

     The $57,092,000 net cash provided from operating activities for 2004 is composed of increases due to net income of $56,379,000 and depreciation of $14,453,000. This was offset by the following: (1) net loan, realty, REMIC, and security recoveries of $2,896,000 discussed in Notes 4, 7, and 8, (2) gain on sale of real estate of $1,543,000 discussed in Note 19, (3) gain on sale of marketable securities of $1,995,000 discussed in Note 7, (4) discount and deferred income amortization of $1,511,000, and (5) working capital increases of $2,645,000.

      Investing Activities — Net cash provided by investing activities during 2005 totaled $333,000 compared to $65,742,000 in the prior year. Cash flows provided from investing activities during 2005 included collections on

mortgage and other notes receivable of $4,492,000 compared to $13,944,000 for 2004. The collections for 2004 were substantially higher due to mortgages and other notes receivable which matured or were settled in 2004. Prepayment of mortgage notes receivable were $5,424,000 in 2005 compared to $4,461,000 in 2004. Collections on real estate mortgage investment conduits provided $13,126,000 during the prior period of 2004 as we collected in full the 1993 REMIC. Marketable securities were called and converted to cash of $10,308,000 during 2005. The $10,308,000 cash proceeds related to the sale, as a result of merger, of the Assisted Living Concepts, Inc. common stock discussed in Note 7 of the Consolidated Financial Statements. Disposition of property and equipment provided $14,452,000 and $4,389,000 of cash proceeds for 2005 and 2004, respectively. The $14,452,000 cash proceeds in 2005 relate to the sale of the following properties: (1) Charlotte, North Carolina assisted living facility for $3,570,000; (2) Dallas, Texas assisted living facility for $7,911,000; and (3) Nashville, Tennessee facility for $2,971,000, as discussed above.

     Cash flows used in investing activities during 2005 included investments in real estate properties of $12,264,000 and in mortgage and other notes receivable of $22,079,000. The $12,264,000 investment in real estate properties includes the following: (1) the purchase for $5,000,000 of two Texas facilities as a part of our plan to expand our core business, (2) $4,400,000 related to a Pennsylvania assisted living facility; and (3) $2,864,000 related to improvements of current operating facilities. The $22,079,000 investment in mortgage notes receivable includes the following: (1) an $18,931,000 purchase of seven first mortgages on seven skilled nursing facilities (Heritage Hall) in Virginia, (2) a $2,500,000 first mortgage loan on two skilled nursing facilities (Legend HealthCare) in Texas, and (3) $648,000 applicable to various working capital loans to skilled nursing facilities. Cash flows used in investing activities in 2004 included investments in real estate properties of $1,678,000, in mortgage notes receivable of $2,419,000, and in marketable securities of $1,024,000.

      Financing Activities — Net cash used in financing activities during 2005 totaled $88,089,000 compared to $55,306,000 in 2004. Cash flows used in financing activities for 2005 included principal payments on debt of $37,180,000 and dividends paid to stockholders of $53,259,000. The $37,180,000 principal payments on debt includes the following: (1) $25,637,000 applicable to the early payoff of 6% non-recourse debt due in 2007 to SouthTrust Bank as discussed in Note 7 of Notes to Consolidated Financial Statements, (2) $8,224,000 applicable to the early payoff of 5% first mortgage notes due in 2006 through 2021, and (3) $3,319,000 of routine principal payments. This debt was repaid with cash that was earning less than the cost of the repaid debt and as a result was immediately accretive to earnings. This compares to the corresponding prior year activity of principal payments on debt of $7,670,000, and dividends paid to stockholders of $48,650,000.

Preferred Stock Conversion

     On April 30, 2004, 100% of NHI’s 8.5% cumulative convertible preferred stock, with a balance of 747,994 shares or $18,700,000 was called by NHI for redemption into common stock of NHI at a conversion rate of .905 shares of common stock for each share of preferred stock. This resulted in an additional 676,922 shares of common stock issued and outstanding. Consequently, preferred dividends for the first four months of 2004 totaling $514,000 was replaced with increased common dividends on the new common shares.

Liquidity

     At December 31, 2005, our liquidity is strong, with cash and marketable securities of $152,022,000 exceeding $117,453,000 of total debt outstanding. Further, our debt to book capitalization ratio declined to 21.7%, the lowest level in our 14 year history.

     In the first quarter of 2003, we redeemed ahead of schedule $39.9 million of convertible subordinated debentures that were due in February 2004.

     Our next significant debt maturity of our $100 million 7.3% unsecured public notes is on July 16, 2007.

     We declared and paid total annual dividends of $1.70 to shareholders of record in 2003, $1.85 to shareholders of record in 2004 and $1.80 to shareholders of record in 2005. The 2003 fourth quarter dividend of $.50 per share was

paid on January 30, 2004 and included a $.10 per share special dividend. The 2004 fourth quarter dividend of $.5750 per share was paid on January 10, 2005 and included a $.15 per share special dividend. The 2005 fourth quarter dividend of $.45 per share was paid on January 10, 2006. We did not declare a special dividend for the fourth quarter of 2005 because our 2005 annual dividends to holders of our Common Stock exceeded our REIT taxable income.

Contractual Obligations and Contingent Liabilities

     As of December 31, 2005, our contractual payment obligations and contingent liabilities were as follows:

     First mortgage notes totaling $8,224,000 at December 31, 2004, with a weighted average interest rate of 5.0% and maturing in 2006 and 2021 were paid off in January 2005. A non-recourse mortgage bank note of $25,637,000 at December 31, 2004, with a weighted average interest rate of 6.0%, and maturing in 2007 was paid off in January 2005. (See Note 9 of Notes to Consolidated Financial Statements).

Off Balance Sheet Arrangements

     We currently have no outstanding guarantees or letters of credit. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. At December 31, 2005, we did not participate in any such financial instruments.

Commitments

     At December 31, 2005, we were committed, subject to due diligence and financial performance goals, to fund approximately $2,770,000 in health care real estate projects, all of which is expected to be funded within the next 12 months. The commitments include additional mortgage investments for five long-term health care centers, and one assisted living facility, at interest rates ranging from 6.0% to prime plus 2.0%. We currently have sufficient liquidity to finance current investments for which we are committed to repay or refinance borrowings at or prior to their maturity, and to pay dividends required to maintain our REIT status.

     A contingency related to damaged property is more fully described in Note 11 of notes to Consolidated Financial Statements.

Real Estate and Mortgage Writedowns (Recoveries)

     Our borrowers, tenants and the properties we operate as foreclosure properties have experienced financial pressures and difficulties similar to those experienced by the health care industry in general since 1997. Governments at both the federal and state levels have enacted legislation to lower or at least slow the growth in payments to health care providers. Furthermore, the costs of professional liability insurance have increased significantly during this same period.

     A number of our real estate property operators and mortgage loan borrowers have experienced bankruptcy. Others have been forced to surrender properties to us in lieu of foreclosure and have otherwise failed to make timely payments on their obligations to us.

     The following table summarizes our writedowns and recoveries for the last three years, recorded in accordance with the provisions of SFAS 114 and SFAS 144:

Writedowns (Recoveries)
(in thousands)		2005				2004				2003
Real estate		$	2,550			$	—			$	5,400
Mortgages (net)			5,435				(3,302	)			3,734
		$	7,985			$	(3,302	)		$	9,134

     Further deferred maintenance analysis resulted in the recording of an additional $2,852,000 of deferred maintenance expense in the third quarter of 2005 on two Florida assisted living facilities, discussed in Note 3.

     See Notes 3 and 4 to the financial statements for details of the properties identified as impaired real estate investments and non-performing loans.

     We believe that the carrying amounts of our real estate properties and notes receivable, including those identified as impaired or non-performing, are realizable and supported by the value of the underlying collateral. However, it is possible that future events could require us to make significant adjustments to these carrying amounts.

Security Losses (Recoveries)

     The following table summarizes our security writedowns and recoveries for the last three years, recorded in accordance with the provisions of SFAS 115:

Writedowns (Recoveries)
(in thousands)		2005				2004				2003
Securities		$	(5,022	)		$	(687	)		$	—

     Assisted Living Concepts, Inc. (ALC) common stock was called in January 2005 resulting in a gain of $9,072,000 ($5,022,000 of which is included in recoveries). These securities were previously identified as impaired in 2001.

     Assisted Living Concepts, Inc. Convertible Debentures were called in January 2004 resulting in a gain of $687,000 which we included in recoveries. These securities were previously identified as impaired in 2001.

REMIC Writedowns

     We have no REMIC investments at December 31, 2005. During 2005, interest income of $997,000 was recognized on a REMIC purchased in 1995 and written down to no balance outstanding at December 31, 2004.

     The following table summarizes our REMIC writedowns for the last three years:

     See Note 8 to the financial statements for details of the investments in real estate mortgage investment conduits.

Results of Operations

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

     Certain 2004 financial information has been restated for the presentation of operations discontinued during 2005. Such changes had no impact on the Company’s reported earnings.

     Net income for the year ended December 31, 2005 is $54,408,000 versus net income of $56,379,000 for the same period in 2004, a decrease of 3.5%. Diluted earnings per common share decreased $.07 or 3.4% to $1.96 in 2005 from $2.03 in 2004.

     Total revenues for the year ended December 31, 2005 increased $1,823,000 or 1.2% to $157,382,000 from $155,559,000 for the year ended December 31, 2004. Revenues from mortgage interest income increased $110,000, or 0.6%, when compared to the same period in 2004. Revenues from rental income decreased $2,213,000, or 4.6% in 2005 as compared to 2004. Facility operating revenue increased $3,926,000 or 4.4% in 2005 compared to 2004.

     Of the $110,000 net increase in mortgage interest income, increases totaling $5,862,000 are related to the following: (1) $1,856,000 increased income from new loans, (2) $1,855,000 income from legal and bankruptcy settlements attributable to interest income unrecorded in earlier years, and (3) $2,151,000 increase in income from other mortgage loans due to improved performance of the operations of our mortgagors. Decreases in mortgage interest income totaling $5,752,000 relate primarily to prior period payoffs of mortgage and REMIC investments.

     The $2,213,000 decrease in rental income in 2005 resulted primarily from decreases of $840,000 because of terminated leases and $2,962,000 because of delinquent leases, offset in part by increases of $788,000 from new leases, and $801,000 from improved paying leases and increased percentage rent from fully paying leases.

     The $3,926,000 increase in facility operating revenues is due primarily to the improved government payment rates and census at our foreclosure properties in Massachusetts, New Hampshire, Kansas and Missouri for the year ended December 31, 2005. The increase in facility operating revenues is attributable to a $1,514,000 increase in our Massachusetts and New Hampshire operating facilities and a $2,412,000 increase in our Kansas and Missouri operating facilities. The New Hampshire facilities experienced a one-time $4,228,000 state Medicaid retroactive rate adjustment in 2004 applicable to 2004 and 2003, which increased 2004 revenue as compared to 2005.

     Total expenses for the year ended December 31, 2005 increased $9,156,000 or 8.2% to $120,983,000 from $111,827,000 for 2004. Interest expense decreased $3,883,000 or 31.2% in 2005 as compared to 2004. Loan, REMIC, realty and security losses increased $8,711,000. Facility operating expense increased by $5,117,000 or 6.2% in 2005 compared to 2004.

     Interest expense for the year ended December 31, 2005 decreased primarily due to the payment of debt of $37,180,000 since December 2004. This debt was repaid with cash that was earning less than the cost of the repaid debt and as a result, was immediately accretive to earnings.

     Loan, REMIC, realty and security losses netted $5,815,000 in 2005. Security recoveries of $5,022,000 were recorded in 2005 related to the sale of Assisted Living Concepts, Inc. common stock as a result of the acquisition of all the outstanding shares of ALC by Extendicare, Inc. by merger, discussed in Note 6. Realty impairments of $2,550,000 were recorded during the first quarter of 2005 on two Florida assisted living facilities previously leased to Marriott Senior Living Services, as a result of further defaults of covenants in the facility leases and continued maintenance of the facilities, discussed in Note 3. Further maintenance analysis resulted in the recording of an additional $2,852,000 of accrued maintenance expense in the third quarter of 2005 on these two Florida assisted living facilities attributable to mold remediation.

     Loan writedowns of $6,000,000 were recorded during 2005 as follows: (1) $2,000,000 on two loans held by Algood HealthCare, Inc., (2) $2,000,000 on mortgage loans with purchasers of three Florida-based nursing homes

formerly owned by American Medical Associates, Inc., and (3) $2,000,000 on a Miracle Hill nursing home loan. All these impairments are as a result of declines in past, current and anticipated cash flow from the facilities collateralizing the loans, discussed in Note 5. Loan recoveries of $565,000 were recorded in 2005.

     The $5,120,000 increase in facility operating expense relates primarily to the improved facility census in Massachusetts, New Hampshire, Kansas and Missouri facilities. The increase in facility operating expense is attributable to an increase of $2,846,000 in our Massachusetts and New Hampshire operating facilities and in increase of $2,274,000 in our Kansas and Missouri operating facilities. The New Hampshire facilities experienced a one-time $1,811,000 state Medicaid retroactive bed tax fee in 2004 applicable to 2004 and 2003 which increased 2004 expenses as compared to 2005. Expenses at these facilities increased also because of inflation and service improvements to enhance census.

Non-Operating Income —

     Non-operating income in 2005 and 2004 includes dividends, interest income, and gains and losses on the sale of marketable securities. In 2005, $4,525,000 of fire insurance proceeds and gains from the sale of real estate damaged in a fire is also included in non-operating income. Furthermore, a gain of $4,050,000 on the sale, as a result of merger, of ALC common stock for cash (after $5,022,000 of the ALC common sale proceeds is treated as a recovery) is included in non-operating income in 2005.

Discontinued Operations —

     During the year ended December 31, 2005, we sold two assisted living facilities with carrying amounts totaling $10,709,000 for proceeds of $11,482,000. We recognized a $773,000 gain on the sale of these facilities. The net gain on the sale of real estate of $773,000 is composed of a $1,624,000 gain from a Charlotte, North Carolina assisted living facility sale and an $851,000 loss from a Dallas, Texas assisted living facility sale. Both of these assisted living facilities were sold as a result of never achieving their expected profitability, discussed in Note 4.

     During the prior year ended December 31, 2004, we sold three nursing facilities (one previously designated as “held for sale”) with carrying amounts totaling $2,846,000 for proceeds of $4,389,000. We recognized a gain of $1,543,000 on the sale of these facilities.

     For 2005 and 2004, we have reclassified the operations, including the net gain on the sale of these facilities, as discontinued operations in accordance with SFAS 144.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

     Certain 2004 and 2003 financial information has been restated for the presentation of operations discontinued during 2005.

     Net income for the year ended December 31, 2004 is $56,379,000 versus net income of $43,808,000 for the same period in 2003, an increase of 28.7%. Diluted earnings per common share increased 46 cents or 29.3% to $2.03 in 2004 from $1.57 in 2003.

     Total revenues for the year ended December 31, 2004 increased $1,325,000 or .1% to $155,559,000 from $154,234,000 for the year ended December 31, 2003. Revenues from mortgage interest income decreased $2,930,000, or 13.9%, when compared to the same period in 2003. Revenues from rental income decreased $5,912,000, or 11.0% in 2004 as compared to 2003. Facility operating revenue increased $10,167,000 or 12.8% in 2004 compared to 2003.

     Of the $2,930,000 decrease in mortgage interest income, $1,627,000 is related to previous REMIC payoffs, $488,000 is related to previous mortgage payoffs and $1,344,000 is related to the repurchase of the National Health Realty, Inc. note by NHR in December 2003. This is partially offset by a $465,000 increase in income from other mortgage loans due to improved performance.

     The $5,912,000 decrease in rental income in 2004 (after restatement of discontinued operations for a Brighton Gardens facility sold in 2005) resulted primarily from termination of leases in July 2003 with Marriott International on three Brighton Gardens assisted living facilities and a related settlement resulting in $2,976,000 recognized as rental income in 2003. Furthermore, rental income from the three remaining Marriott properties declined $2,077,000 in 2004 compared to the prior year. Furthermore, $859,000 of additional rental income was recognized in 2003 from other leases.

     The increase in facility operating revenues is due primarily to the improved government payment rates and census at our foreclosure properties in Massachusetts, New Hampshire, Kansas and Missouri for the year ended December 31, 2004. The improved government payment rates exceed any related increase in facility operating expenses, resulting in more profitable operations.

     Total expenses for the year ended December 31, 2004 decreased $6,645,000 or 5.6% to $111,827,000 from $118,472,000 for 2003. Interest expense decreased $1,401,000 or 10.1% in 2004 as compared to 2003. Facility operating expense increased by $6,895,000 or 9.1% in 2004 compared to 2003. Loan recoveries were $3,302,000, REMIC recoveries were $2,246,000, security recoveries were $687,000, and REMIC writeoffs were $3,339,000 in 2004. There was $3,734,000 of loan losses in 2003, attributable to non-performing loans, and a realty impairment loss of $5,400,000 to reflect the lower rent expected on one of the Brighton Gardens assisted living facilities.

     Interest expense for the year ended December 31, 2004 decreased primarily due to the March, 2003 payment of convertible debentures in the amount of $39,917,000, conversion of debentures of $235,000 and payment of debt of $7,669,000 since December 2003.

     The increase in facility operating expense relates to the improved facility census in Massachusetts, New Hampshire, Kansas and Missouri discussed above. Facility operating expense has not increased in proportion to facility operating revenue from improved government payment rates, resulting in more profitable operations.

Non-Operating Income —

     Non-operating income for the year ended December 31, 2004 increased $5,763,000 or 97.2% compared to the same period in 2003. Non-operating income for the year ended December 31, 2004 includes (1) $4,408,000 of dividend and interest income from marketable securities, (2) a gain of $668,000 on the call of ElderTrust common stock for cash, (3) a gain of $1,326,000 on the sale of American Retirement common stock, and (4) a gain of $3,308,000 from the sale of a mortgage notes receivable with Colonial Care (after $2,000,000 of the Colonial Care sale proceeds is treated as a recovery). Non-operating income for the year ended December 31, 2003 included $4,701,000 of dividend and interest income from marketable securities.

Discontinued Operations —

     During the year ended December 31, 2005, we sold two assisted living facilities with carrying amounts totaling $10,709,000 for proceeds of $11,482,000. We recognized a $773,000 gain on the sale of these facilities.

     During the year ended December 31, 2004, we sold three nursing facilities (one previously designated as “held for sale”) with carrying amounts totaling $2,846,000 for proceeds of $4,389,000. We recognized a gain of $1,543,000 on the sale of these facilities.

     During the year ended December 31, 2003, we sold a medical office building with a carrying amount of $2,113,000 for proceeds of $4,045,000, resulting in a $1,932,000 net gain on the sale of this facility and sold two nursing facilities with a carrying amount of $5,597,000 for proceeds of $5,200,000 resulting in a net loss of $397,000 on these facilities. Additionally, we designated one additional nursing facility as “held for sale”, consistent with the provisions of SFAS 144.

     For 2004 and 2003, we have reclassified the operations, including the net gain on the sale of these facilities, as discontinued operations in accordance with SFAS 144.

Funds From Operations

     Our funds from operations (“FFO”) for the year ended December 31, 2005, on a diluted basis was $63,453,000, a decrease of $3,282,000 as compared to $66,735,000 for the same period in 2004. FFO represents net earnings available to common stockholders, excluding the effects of asset dispositions, plus depreciation associated with real estate investments. Diluted FFO assumes, if dilutive, the conversion of convertible subordinated debentures, the conversion of cumulative convertible preferred stock and the exercise of stock options using the treasury stock method.

     We believe that funds from operations is an important supplemental measure of operating performance for a real estate investment trust. Because the historical cost accounting convention used for real estate assets requires straight-line depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen and fallen with market conditions, presentations of operating results for a real estate investment trust that uses historical cost accounting for depreciation could be less informative, and should be supplemented with a measure such as FFO. The term FFO was designed by the real estate investment trust industry to address this issue. Our measure may not be comparable to similarly titled measures used by other REITs. Consequently, our funds from operations may not provide a meaningful measure of our performance as compared to that of other REITs. Since other REITs may not use our definition of FFO, caution should be exercised when comparing our Company’s FFO to that of other REITs. Funds from operations in and of itself does not represent cash generated from operating activities in accordance with GAAP (funds from operations does not include changes in operating assets and liabilities) and therefore should not be considered an alternative to net earnings as an indication of operating performance, or to net cash flow from operating activities as determined by GAAP in the United States, as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs.

     We have complied with the SEC’s interpretation that recurring impairments taken on real property may not be added back to net income in the calculation of FFO. The SEC’s position is that recurring impairments on real property are not an appropriate adjustment.

     The following table reconciles net income to funds from operations:

Impact of Inflation

     During the past three years, inflation has not significantly affected our earnings because of relatively moderate inflation rates. Inflation may affect us in the future by changing the underlying value of our real estate or by impacting our cost of financing its operations.

     Our revenues are generated primarily from long-term investments with fixed rates of return. These investments are financed through a combination of equity, long-term borrowings, and, as needed, line of credit arrangements. During periods of rising interest rates, our ability to grow may be adversely affected because yields on new investments may increase more slowly than new borrowing costs. Certain of our leases offer some degree of inflation protection by requiring increases in rental income based upon increases in the revenues of the tenants.

New Accounting Pronouncements

     In December of 2004, the FASB issued FASB Statement No. 153, Exchanges of Nonmonetary Assets-An Amendment of APB Opinion No. 29 (“Statement 153”). Statement 153 amends APB Opinion No. 29, Accounting for Non-monetary Transactions , that was issued in 1973. The amendments made by Statement 153 are based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for non-monetary exchanges of similar productive assets and replace it with a broader exception for exchanges of non-monetary assets that do not have “commercial substance”. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The provisions in Statement 153 are effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply the standard prospectively. The Company adopted Statement 153 beginning July 1, 2005. The future effect of Statement 153 on the Company’s financial statements will depend on whether the Company enters into certain non-monetary transactions. The adoption of Statement 153 has not had a material effect on its financial statements.

     In December 2004, the FASB has issued FASB Statement No. 123 (Revised 2004), Share-Based Payment (“Statement 123R”). The new FASB rule requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. The Company will be required to apply Statement 123R beginning January 1, 2006. The scope of Statement 123R includes a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company does not expect the adoption of Statements 123R to have a significant impact on its financial statements other than the recording of compensation charges for option holders.

     In May 2005, the FASB issued FASB Statement No. 154, Accounting for Changes and Error Corrections . This new standard replaces APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements . Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement”. The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of this pronouncement to have a significant impact on the Company’s financial statements.

Forward Looking Statements

     References throughout this document to the Company include National Health Investors, Inc. and its wholly-owned subsidiaries. In accordance with the Securities and Exchange Commission’s “Plain English” guidelines, this Annual Report on Form 10-K has been written in the first person. In this document, the words “we”, “our”, “ours” and “us” refer only to National Health Investors, Inc. and its wholly-owned subsidiaries and not any other person.

     This Annual Report on Form 10-K and other information we provide from time to time, contains certain “forward-looking” statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations, cash flows, funds from operations, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, and similar statements including, without limitations, those containing words such as “believes”, anticipates”, “expects”, “intends”, “estimates”, “plans”, and other similar expressions are forward-looking statements.

     Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements as a result of, but not limited to, the following factors:

•		national and local economic conditions, including their effect on the availability and cost of labor, utilities and materials;
•		the status of capital markets, including prevailing interest rates and changes in financing terms;
•		the effect of government regulations and changes in regulations governing the healthcare industry, including compliance with such regulations by us and our borrowers and/or lessees;
•		operator bankruptcies;
•		changes in Medicare and Medicaid payment levels and methodologies and the application of such methodologies by the government and its fiscal intermediaries to our borrowers and/or lessees;
•		changes in health care operators’ difficulty in obtaining and maintaining adequate liability and other insurance and the liability and insurance claims of our operators;
•		the ability to pay when due or refinance certain debt obligations maturing within the next 12 months;
•		the Company’s ability to transition or sell facilities with a profitable result and the Company’s ability to collect receivables from such sales;
•		the availability and terms of capital to fund investments;
•		the Company’s ability to find and complete future acquisitions;
•		delays in reinvestment of sale proceeds;
•		the Company’s ability to maintain its advisory agreement and properly maintain financial reporting under government regulations;
•		the competitive environment in which we operate and competition within the health care and senior housing industries;
•		the risk factors described in Item 1A.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk.

Interest Rate Risk

     Our cash and cash equivalents consist of highly liquid investments with a maturity of less than three months when purchased. All of our mortgage and other notes receivable bear interest at fixed interest rates. Our investment in preferred stock represents an investment in the preferred stock of another real estate investment trust and bears interest at a fixed rate of 8.5%. As a result of the short-term nature of our cash instruments and because the interest rates on our investments in notes receivable and preferred stock are fixed, a hypothetical 10% change in interest rates has no impact on our future earnings and cash flows related to these instruments.

     As of December 31, 2005, $100,096,000 of our debt bears interest at fixed interest rates. Because the interest rates of these instruments are fixed, a hypothetical 10% change in interest rates has no impact on our future earnings and cash flows related to these instruments. The remaining $17,156,000 of our debt and $201,000 of our convertible subordinated debentures bear interest at variable rates. A hypothetical 10% increase in interest rates would reduce our future earnings and cash flows related to these instruments by $82,000. A hypothetical 10% decrease in interest rates would increase our future earnings and cash flows related to these instruments by $82,000.

     We are subject to risks associated with debt financing, including the risk that our existing indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the terms of existing indebtedness. Certain of our loan agreements require the maintenance of specified financial ratios. Accordingly, in the event that we are unable to raise additional equity or borrow money because of those limitations, our ability to make additional investments may be limited.

     We do not use derivative instruments to hedge interest rate risks. The future use of such instruments will be subject to strict approvals by our senior officers.

Equity Price Risk

     We consider our investments in marketable securities as available for sale securities and unrealized gains and losses are recorded in stockholders’ equity in accordance with SFAS 115. The investments in marketable securities are recorded at their fair market value based on quoted market prices. Thus, there is exposure to equity price risk, which is the potential change in fair value due to a change in quoted market prices. Hypothetically, a 10% change in quoted market prices would result in a related $1,955,000 change in the fair value of our investments in marketable securities.

Item 8. Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of National Health Investors, Inc.:

We have audited the accompanying consolidated statements of income, stockholders’ equity and cash flows of National Health Investors, Inc. and Subsidiaries for the year ended December 31, 2003. Our audit also included the 2003 information in the financial statement schedules listed in the Index of Exhibit 13. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of National Health Investors, Inc. and Subsidiaries for the year ended December 31, 2003, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related 2003 financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

Nashville, Tennessee
January 26, 2004

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