NATIONAL HEALTHCARE CORP – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

National HealthCare Corporation, which we also refer to as NHC or the Company,
is a leading provider of post-acute care and senior health care services. At
December 31, 2021, we operate or manage 75 skilled nursing facilities with 9,473
1icensed beds, 24 assisted living facilities, five independent living
facilities, one behavioral health hospital, 34 homecare agencies, and 28 hospice
agencies located in 10 states. These operations are provided by separately
funded and maintained subsidiaries. In addition, we provide management services,
accounting and financial services, and insurance services to third party
operators of healthcare properties. We also own the real estate of 13 healthcare
properties and lease these properties to third party operators.



Impact of COVID-19



In early March 2020, COVID-19, a disease caused by the novel strain of the
coronavirus, was characterized as a pandemic by the World Health Organization.
As a provider of healthcare services, we are significantly exposed to the public
health and economic effects of the COVID-19 pandemic.  NHC's primary objective
has remained the same throughout the COVID-19 pandemic: that is to protect the
health and safety of our patients, residents, and partners (employees). We
continue to follow all guidance from the Centers for Medicare and Medicaid
Services ("CMS"), the Centers for Disease Control and Prevention ("CDC"), and
state and local health departments to prevent the spread of the disease within
our operations.



We began our first vaccination clinics in our skilled nursing facilities around
the middle of December 2020. As the vaccination clinics progressed and as the
vaccine became more accessible, we began to see a significant decline in
COVID-19 cases among our operations. With the COVID-19 cases significantly
declining during the first and second quarters of 2021, the census in our
skilled nursing facilities began to increase. Although our census continued to
increase in the third and fourth quarters of 2021, the trajectory of our census
was slowed due to the spike in the Delta and Omicron variants during the second
half of 2021.



The pandemic continues to have a material impact on the Company's loss of
revenues, operating expenses, and the labor and workforce environment.  Our
operating expenses remain elevated with incentive compensation being paid to our
frontline partners, as well as increased costs of personal protective equipment
("PPE"), sanitizers and cleaning supplies, and COVID-19 testing of our patients
and partners. Despite the continued disruption of COVID-19 to our operations,
our capital and financial resources, including our overall liquidity, remain
strong. Our liquidity provides us with significant flexibility to maintain the
strength of our balance sheet in periods of uncertainty or stress.



At this time, we are not able to quantify the impact that the COVID-19 pandemic
will have on our future financial results, but the developments related to
COVID-19 have adversely affected our financial performance in 2021. The ultimate
impact of the pandemic on our financial results will depend on, among other
factors, the duration and severity of the pandemic, the volume of acute and
post-acute healthcare patients cared for across the broader health care systems,
the timing and availability of effective medical treatments and vaccines, and
the impact of government actions and administrative regulations on our industry
and broader economy, including future government stimulus efforts. We have
received and may continue to receive payments and advances from the various
federal and state initiatives. These legislative initiatives have been
beneficial to partially mitigate the impact of the COVID-19 pandemic on our
results of operations and financial position to date. The federal and state
governments may consider additional stimulus and relief efforts, but we are
unable to predict whether any of the additional stimulus measures will be
enacted or their impact.

Legislation and Government Stimulus Due to COVID-19

The U.S. government enacted several laws beginning in March 2020 designed to
help the nation respond to the COVID-19 pandemic. The new laws impacted
healthcare providers in a variety of ways, but the largest legislation from a
monetary relief perspective is the CARES Act. Through the CARES Act, as well as
the PPPCHE, the federal government allocated $178 billion to the Public Health
and Social Services Emergency Fund, which is referred to as the Provider Relief
Fund. The Provider Relief Fund is administered through grants and other
mechanisms to skilled nursing providers, home health providers, hospitals, and
other Medicare and Medicaid enrolled providers to cover any unreimbursed health
care related expenses or lost revenue attributable to the public health
emergency resulting from COVID-19.



The Provider Relief Fund grants come with terms and condition certifications in
which all providers are required to submit documents to ensure the funds will be
used for healthcare-related expenses or lost revenue attributable to COVID-19.
The Company recorded $63,360,000 and $47,505,000 of government stimulus income
from the Provider Relief Funds for the years ended December 31, 2021 and 2020,
respectively.  The grant income was determined on a systemic basis in line with
the recognition of specific expenses and lost revenues for which the grants are
intended to compensate. The Company's assessment of whether the terms and
conditions for amounts received have been met for income recognition and the
Company's related income calculation considered all frequently asked questions
and other interpretive guidance issued to date by HHS.



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As of December 31, 2021 and 2020, amounts not recognized as income are
$9,443,000 and $16,068,000, respectively, and are reflected in the current
liability section of our consolidated balance sheet (provider relief funds). We
anticipate incurring additional COVID-19 related expenses or lost revenues in
the future; therefore, at this time, we believe we will fully utilize the
remaining $9,443,000 of provider relief funds before the reporting requirement
deadline that is required by the U.S. HHS.



Additionally, as part of the CARES Act, the legislation included an expansion of
the Medicare Accelerated and Advance Payment Program. We received approximately
$51,253,000 as part of this program. These funds are applied against claims for
services provided to Medicare patients after approximately one year from the
date we received the funds. Recoupment of the accelerated payments began in the
second quarter of 2021. As of December 31, 2021, $15,022,000 of the accelerated
payments remain and is reflected within contract liabilities in the consolidated
balance sheet.



The CARES Act and subsequent related legislation temporarily suspended Medicare
sequestration beginning May 1, 2020 through March 31, 2022. The Medicare
sequestration policy reduces fee-for-service Medicare payments by 2 percent.
Beginning April 1, 2022, the sequestration reductions will then be 1% from April
1, 2022 through June 30, 2022.  The full 2% reduction is scheduled to go back
into effect July 1, 2022. The CARES Act extends the sequestration policy through
2030 in exchange for this temporary suspension, which the sequestration
reduction for 2030 has been increased up to 3%.



The CARES Act also temporarily permitted employers to defer the deposit and
payment of the employer's portion of the social security taxes (6.2% of employee
wages) that otherwise would have been due between March 27, 2020 and December
31, 2020. The provision requires that the deferred taxes be paid over a two-year
period with half the amount required to be paid by December 31, 2021, and the
other half by December 31, 2022. At December 31, 2021, we have deferred
$10,545,000 of the Company's share of the social security taxes.



We have also received from many of the states in which we operate a supplemental
Medicaid payment to help mitigate the incremental costs resulting from the
COVID-19 public health emergency. For the years ended December 31, 2021 and
2020, we have recorded $20,482,000 and $26,179,000, respectively, in net patient
revenues in our consolidated statements of operations for these supplemental
Medicaid payments.





Executive Summary



Earnings



To monitor our earnings, we have developed budgets and management reports to
monitor labor, census, and the composition of revenues. Inflationary increases
in our costs may cause net earnings from patient services to decline.



Occupancy



A primary area of management focus continues to be the rates of occupancy within
our skilled nursing facilities. The overall census in owned and leased skilled
nursing facilities for 2021 was 80.6% compared to 83.6% in 2020 and 90.3% in
2019.



With the average length of stay decreasing for a skilled nursing patient, as
well as the increased availability of assisted living facilities and home and
community-based services, the challenge of maintaining desirable patient census
levels has been amplified. Management has undertaken a number of steps in order
to best position our current and future health care facilities. This includes
working internally to examine and improve systems to be most responsive to
referral sources and payors. Additionally, NHC is in various stages of
partnerships with hospital systems, payors, and other post-acute alliances to
better position ourselves so we are an active participant in the delivery of
post-acute healthcare services.



Quality of Patient Care



CMS introduced the Five-Star Quality Rating System to help consumers, their
families and caregivers compare skilled nursing facilities more easily. The
Five-Star Quality Rating System gives each skilled nursing operation a rating of
between one and five stars in various categories (five stars being the best).
The Company has always strived for patient-centered care and quality outcomes as
precursors to outstanding financial performance.



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The tables below summarize NHC's overall performance in these Five-Star ratings
versus the skilled nursing industry as of December 31, 2021:

                                                            NHC Ratings     

Industry Ratings
Total number of skilled nursing facilities, end of
period

                                                            75
Number of 4 and 5-star rated skilled nursing facilities           55
Percentage of 4 and 5-star rated skilled nursing
facilities                                                        73%       

45%

Average rating for all skilled nursing facilities, end
of period                                                         4.0                 3.2






Development and Growth



We are undertaking to expand our post-acute and senior health care operations
while protecting our existing operations and markets. The following table lists
our recent construction and purchase activities.



    Type of
   Operation        Description          Size           Location      Placed in Service
  Memory Care       New Facility       60 beds        Farragut, TN       January 2019
  Memory Care       Acquisition        60 beds       St. Peters, MO       June 2019
Skilled Nursing     Acquisition        166 beds      Knoxville, TN      February 2020
Assisted Living     Bed Addition       20 beds        Gallatin, TN      September 2020
Skilled Nursing     Bed Addition       30 beds       Kingsport, TN      December 2020
    Hospice         Acquisition      28 agencies        Various           June 2021
   Behavioral
Health Hospital     New Facility       16 beds        St Louis, MO    Under Construction
Behavior Health
    Hospital        New Facility       64 beds       Knoxville, TN    Under Construction

For the two behavioral health hospitals under construction, the two facilities
are expected to begin operations late in the first quarter of 2022 or the
beginning of the second quarter of 2022.

Accrued Risk Reserves



Our accrued professional liability and workers' compensation reserves totaled
$98,048,000 and $99,537,000 at December 31, 2021 and 2020, respectively, and are
a primary area of management focus. We have set aside restricted cash and
restricted marketable securities to fund our professional liability and workers'
compensation reserves.



As to exposure for professional liability claims, we have developed performance
measures to bring focus to the patient care issues most likely to produce
professional liability exposure, including in-house acquired pressure ulcers,
significant weight loss and numbers of falls. These programs for certification,
which we regularly modify and improve, have produced measurable improvements in
reducing these incidents. Our experience is that achieving goals in these
patient care areas improves both patient and employee satisfaction.



Segment Reporting



The Company has two reportable operating segments: (1) inpatient services, which
includes the operation of skilled nursing facilities, assisted and independent
living facilities, and one behavioral health hospital, and (2) homecare and
hospice services. These reportable operating segments are consistent with
information used by the Company's Chief Executive Officer, as Chief Operating
Decision Maker ("CODM"), to assess performance and allocate resources.



The Company also reports an "all other" category that includes revenues from
rental income, management and accounting services fees, insurance services, and
costs of the corporate office. For additional information on these reportable
segments see Note 1 - "Summary of Significant Accounting Policies".



The Company's CODM evaluates performance and allocates capital resources to each
segment based on an operating model that is designed to improve the quality of
patient care and profitability of the Company while enhancing long-term
shareholder value. The CODM does not review assets by segment in his resource
allocation and therefore, assets by segment are not disclosed below.



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The following tables set forth the Company's consolidated statements of
operations by business segment (in thousands):

                                                          Year Ended December 31, 2021
                                           Inpatient        Homecare
                                            Services       and Hospice      All Other         Total
Revenues:
Net patient revenues                       $  868,687     $      96,855     $        -     $   965,542
Other revenues                                    386                 -         45,014          45,400
Government stimulus income                     63,360                 -              -          63,360
Net operating revenues and grant income       932,433            96,855         45,014       1,074,302

Costs and Expenses:
Salaries, wages and benefits                  525,756            54,683         49,233         629,672
Other operating                               270,202            20,596         12,347         303,145
Facility rent                                  32,819             2,064          5,935          40,818
Depreciation and amortization                  36,890               443          3,339          40,672
Interest                                          845                 -              -             845
Impairment of assets                            4,497                 -          3,728           8,225
Total costs and expenses                      871,009            77,786         74,582       1,023,377

Income (loss) before non-operating
income                                         61,424            19,069        (29,568 )        50,925
Non-operating income                                -                 -         17,774          17,774
Gain on acquisition of equity method
investment                                          -                 -         95,202          95,202
Unrealized losses on marketable equity
securities                                          -                 -        (13,863 )       (13,863 )

Income before income taxes                 $   61,424     $      19,069     $   69,545     $   150,038






                                                          Year Ended December 31, 2020
                                           Inpatient        Homecare
                                            Services       and Hospice      All Other         Total
Revenues:
Net patient revenues                       $  879,693     $      52,102     $        -     $   931,795
Other revenues                                  3,403                 -         45,514          48,917
Government stimulus income                     47,505                 -              -          47,505
Net operating revenues and grant income       930,601            52,102         45,514       1,028,217

Costs and Expenses:
Salaries, wages and benefits                  538,775            33,104         37,427         609,306
Other operating                               261,643            14,689         10,513         286,845
Facility rent                                  33,090             1,802          5,602          40,494
Depreciation and amortization                  38,217               377          3,424          42,018
Interest                                        1,374                 -             25           1,399
Total costs and expenses                      873,099            49,972         56,991         980,062

Income (loss) before non-operating
income                                         57,502             2,130        (11,477 )        48,155
Non-operating income                                -                 -         26,527          26,527
Gain on acquisition of equity method
investment                                          -                 -          1,707           1,707
Unrealized losses on marketable equity
securities                                          -                 -     

(23,966 ) (23,966 )

Income (loss) before income taxes $ 57,502 $ 2,130 $ (7,209 ) $ 52,423

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                                                          Year Ended December 31, 2019
                                           Inpatient        Homecare
                                            Services       and Hospice       All Other        Total
Revenues:
Net patient revenues                       $  893,201     $      54,671     $         -     $ 947,872
Other revenues                                    910                 -          47,601        48,511
Net operating revenues                        894,111            54,671          47,601       996,383

Costs and Expenses:
Salaries, wages and benefits                  526,430            33,037          33,364       592,831
Other operating                               242,435            17,003           9,004       268,442
Facility rent                                  32,748             1,854           5,916        40,518
Depreciation and amortization                  38,731               250           3,438        42,419
Interest                                        1,578                 -           1,557         3,135
Total costs and expenses                      841,922            52,144          53,279       947,345

Income (loss) before non-operating
income                                         52,189             2,527          (5,678 )      49,038
Non-operating income                                -                 -          24,772        24,772
Gain on acquisition of equity method
investment                                          -                 -           1,975         1,975
Unrealized gains on marketable equity
securities                                          -                 -          12,230        12,230

Income before income taxes                 $   52,189     $       2,527     $    33,299     $  88,015

Non-GAAP Financial Presentation

The Company is providing certain non-GAAP financial measures as the Company
believes that these figures are helpful in allowing investors to more accurately
assess the ongoing nature of the Company's operations and measure the Company's
performance more consistently across periods. Therefore, the Company believes
this information is meaningful in addition to the information contained in the
GAAP presentation of financial information. The presentation of this additional
non-GAAP financial information is not intended to be considered in isolation or
as a substitute for the financial information prepared and presented in
accordance with GAAP.



Specifically, the Company believes the presentation of non-GAAP financial
information should exclude the following items: the unrealized gains or losses
on our marketable equity securities, operating results for the newly constructed
healthcare facilities not at full capacity, any gains on the acquisition of
equity method investments, gains on the sale of healthcare facilities,
stock-based compensation expense, and impairments of long-lived assets and notes
receivable.



The operating results for the newly constructed healthcare facilities not at
full capacity for the year ended December 31, 2021 include facilities that began
operations from 2019 to 2021 (one memory care facility and two behavioral health
hospitals that have incurred expenses and expected to open during 2022). The
operating results for the newly constructed healthcare facilities not at full
capacity for the year ended December 31, 2020 include facilities that began
operations from 2018 to 2020 (one memory care facility). The operating results
for the newly constructed healthcare facilities not at full capacity for the
year ended December 31, 2019 include facilities that began operations from 2017
to 2019 (one skilled nursing facility, two assisted living facilities, and one
memory care facility).



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The table below provides reconciliations of GAAP to non-GAAP items (dollars in
thousands, except per share data):

                                                         Year Ended December 31,
                                                  2021            2020            2019
Net income attributable to National
HealthCare Corporation                         $   138,590     $    41,871     $    68,211
Non-GAAP adjustments:
Unrealized losses (gains) on marketable
equity securities                                   13,863          23,966         (12,230 )
Gain on sale of real estate/healthcare
facilities                                               -          (2,784 )             -
Gain on acquisitions of equity method
investments                                        (95,202 )        (1,707 )        (1,975 )
Stock-based compensation expense                     2,620           2,453  

1,878

Operating results for newly opened
facilities not at full capacity                        922             602             712
Impairment of assets                                 8,225               -               -
Income tax (benefit) provision on non-GAAP
adjustments                                         (6,373 )        (5,858 )         3,020
Non-GAAP Net Income                            $    62,645     $    58,543     $    59,616

GAAP diluted earnings per share                $      8.99     $      2.72     $      4.44
Non-GAAP adjustments:
Unrealized losses (gains) on marketable
equity securities                                     0.67            1.15           (0.59 )
Gain on sale of real estate/healthcare
facilities                                               -           (0.13 )             -
Gain on acquisitions of equity method
investments                                          (6.16 )         (0.08 )         (0.09 )
Stock-based compensation expense                      0.13            0.12  

0.09

Operating results for newly opened
facilities not at full capacity                       0.04            0.03  

0.03

Impairment of assets                                  0.39               -               -
Non-GAAP diluted earnings per share            $      4.06     $      3.81     $      3.88




Results of Operations

The following table and discussion set forth items from the consolidated
statements of operations as a percentage of net operating revenues and grant
income for the years ended December 31, 2021, 2020 and 2019.

                      Percentage of Net Operating Revenues



                                                         Year Ended December 31,
                                                   2021            2020            2019
Revenues:
Net patient revenues                                   89.9 %          90.6 %          95.1 %
Other revenues                                          4.2             4.8             4.9
Government stimulus income                              5.9             4.6             0.0
Net operating revenues and grant income               100.0           100.0 

100.0

Costs and Expenses:
Salaries, wages and benefits                           58.6            59.3            59.5
Other operating                                        28.2            27.9            26.9
Facility rent                                           3.8             3.9             4.1
Depreciation and amortization                           3.8             4.1             4.3
Interest                                                0.1             0.1             0.3
Impairment of assets                                    0.8               -               -
Total costs and expenses                               95.3            95.3            95.1
Income from operations                                  4.7             4.7             4.9
Non-operating income                                    1.7             2.6             2.5
Gain on acquisitions of equity method
investments                                             8.8             0.1             0.2
Unrealized gains (losses) on marketable
equity securities                                      (1.3 )          (2.3 )           1.2
Income before income taxes                             13.9             5.1             8.8
Income tax provision                                   (1.0 )          (1.0 )          (2.0 )
Net income                                             12.9             4.1             6.8
Net (income) loss attributable to
noncontrolling interest                                 0.0             0.0             0.0
Net income attributable to common
stockholders of NHC                                    12.9 %           4.1 %           6.8 %




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The following table sets forth the increase or (decrease) in certain items from
the consolidated statements of operations as compared to the prior period
(dollars in thousands).

                      Period to Period Increase (Decrease)



                                               2021 vs. 2020               2020 vs. 2019
                                           Amount        Percent       Amount        Percent
Revenues:
Net patient revenues                      $  33,747           3.6 %   $ (16,077 )        (1.7 )%
Other revenues                               (3,517 )        (7.2 )         406           0.8
Government stimulus income                   15,855          33.4        47,505         100.0
Net operating revenues and grant income      46,085           4.5        31,834           3.2
Costs and Expenses:
Salaries, wages and benefits                 20,366           3.3        16,475           2.8
Other operating                              16,300           5.7        18,403           6.9
Facility rent                                   324           0.8           (24 )        (0.1 )
Depreciation and amortization                (1,346 )        (3.2 )        (401 )        (0.9 )
Interest                                       (554 )       (39.6 )      (1,736 )       (55.4 )
Impairment of assets                          8,225         100.0             -             -
Total costs and expenses                     43,315           4.4        32,717           3.5
Income from operations                        2,770           0.1          (883 )        (1.8 )
Non-operating income                         (8,753 )       (33.0 )       1,755           7.1
Gain on acquisitions of equity method
investments                                  93,495       5,477.2          (268 )       (13.6 )
Unrealized gains/losses on marketable
equity securities                            10,103          42.2       (36,196 )      (296.0 )
Income before income taxes                   97,615         186.2       (35,592 )       (40.4 )
Income tax provision                           (518 )        (5.0 )       9,606         (47.9 )
Net income                                   97,097         231.2       (25,986 )       (38.2 )
Net income attributable to
noncontrolling interest                        (378 )      (317.6 )        (354 )      (150.6 )
Net income attributable to common
stockholders of NHC                       $  96,719         231.0 %   $ (26,340 )       (38.6 )%






2021 Compared to 2020



Results for the year ended December 31, 2021 compared to 2020 include a 4.5%
increase in net operating revenues and grant income, a 0.1% increase in income
from operations, and a 231.0% increase in net income attributable to NHC. In
2021, if you exclude the $8,225,000 impairment of assets, income from operations
would have increased 22.8% compared to 2020.  The large increase in our reported
GAAP net income attributable to NHC compared to 2020 is primarily due to the
gain recorded from the acquisition of Caris, a hospice provider.



Excluding the gain on the Caris acquisition, as well as the unrealized losses in
our marketable equity securities portfolio and the other non-GAAP adjustments,
non-GAAP net income for the year ended December 31, 2021 was $62,645,000
compared to $58,543,000 for the year ended December 31, 2020, which is an
increase of 7.0%.

Net operating revenues and grant income

Net patient revenues totaled $965,542,000, an increase of $33,747,000, or 3.6%,
compared to the prior year. Included in net patient revenues for the year end
December 31, 2021 and 2020, respectively, is $20,482,000 and $26,179,000 of
COVID-19 supplemental Medicaid payments that were received to help mitigate the
incremental costs in fighting the public health emergency.



The overall average census in owned and leased skilled nursing facilities for
2021 was 80.6% compared to 83.6% in 2020. The decline in census is due
to COVID-19 and the lack of new admissions from our acute care providers and
referral partners, and the difficult workforce and labor environment that
has limited our admissions during phases of 2021. The composite skilled nursing
facility per diem increased 2.4% in 2021 compared to 2020. Medicare and managed
care per diem rates increased 2.0% and 1.3%, respectively, in 2021 compared to
2020. Medicaid and private pay per diem rates increased 2.2% and 2.4%,
respectively, in 2021 compared to 2020.



In June 2021, the Company acquired the remaining ownership interest in Caris,
which resulted in net patient revenues increasing $39,746,000 for the year ended
December 31, 2021 compared to 2020. Our homecare operations had an increase in
net patient revenues of approximately $5,007,000 for the year ended December 31,
2021 compared to 2020. In November 2020, the Company sold a skilled nursing
facility located in Town & Country, Missouri. For the year ended December 31,
2021, the sale of this facility decreased net patient revenue by $7,323,000
compared to 2020.



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Other revenues in 2021 were $45,400,000, a decrease of $3,517,000, or 7.2%, as
further detailed in Note 5 of the consolidated financial statements. Other
revenues in 2021 include rental revenues of $22,717,000 ($22,768,000 in 2020),
management and accounting service fees of $17,139,000 ($17,147,000 in 2020), and
insurance services revenue of $5,019,000 ($5,447,000 in 2020). In November 2020,
we sold a skilled nursing facility in Town & Country, Missouri, and recorded a
gain on the sale of the transaction of $2,748,000.



For the years ended December 31, 2021 and 2020, respectively, we recorded
$63,360,000 and $47,505,000 in government stimulus income related to funds
received from the Provider Relief Fund. At December 31, 2021, we have not
recognized as income $9,443,000 of Provider Relief Funds that are reflected in
the current liability section of our consolidated balance sheet (provider relief
funds) and anticipate using these funds in 2022. See Note 2 for additional
information.



Total costs and expenses



Total costs and expenses for 2021 increased $43,315,000, or 4.4%, to
$1,023,377,000 from $980,062,000 in 2020. In total, we incurred $21,555,000 and
$47,674,000 of COVID-19 related expenses for the years ended December 31, 2021
and 2020, respectively. The COVID-19 related expenses primarily consisted of:
(1) personal protective equipment and sanitizers/infection control supplies; (2)
incentive compensation paid to our frontline partners/employees; and (3)
COVID-19 testing of our patients and partners/employees.  In 2021, we also
incurred asset impairment expenses of $8,225,000 for the impairment and
write-down of long-lived assets (leasehold improvements) and a credit impairment
on a note receivable.  Both of these impairment of assets items are due to the
operating environment caused by COVID-19.



Salaries, wages and benefits, the largest operating costs of the company,
increased $20,366,000, or 3.3%, to $629,672,000 from $609,306,000. Our salaries
and wages were 58.6% and 59.3% of net operating revenues and grant income for
2021 and 2020, respectively. Our Caris acquisition in June 2021 increased
salaries, wages, and benefits $20,754,000 for the year ended December 31, 2021
compared to 2020. We incurred COVID-related incentive pay (or combat pay) in the
amount of $11,010,000 for the year ended December 31, 2021 compared to
$15,224,000 for 2020. We continue to face tremendous workforce and labor
shortages within all of our operations, which increases wage pressure and
inflation in regards to retaining and attracting qualified healthcare partners
(employees). With the workforce environment being so challenging, the largest
expense increase from a labor standpoint is in our agency nurse staffing. But,
since the agency nurse staffing personnel are not our employees (partners), this
expense is categorized below in "other operating expenses".



Other operating expenses increased $16,300,000, or 5.7%, to $303,145,000 for
2021 compared to $286,845,000 in 2020. These costs were 28.2% and 27.9% of net
operating revenues and grant income for 2021 and 2020, respectively. For the
years ended December 31, 2021 and 2020, respectively, we incurred $10,545,000
and $32,450,000 in COVID-19 related expenses in purchasing personal protective
equipment, sanitizers and infection control supplies, and lab and testing
supplies. As mentioned in the previous paragraph, we continue to use additional
agency nurse staffing due to the challenging workforce environment. For the year
ended December 31, 2021, our agency nurse staffing expenses were $35,533,000
compared to $11,479,000 for the 2020 year. Our Caris acquisition increased other
operating expenses $8,368,000 for the year ended December 31, 2021 compared to
2020.

Facility rent expense decreased $324,000, or 0.8%, to $40,818,000. Depreciation
and amortization decreased 3.2% to $40,672,000.

Interest expense decreased $554,000 to $845,000 in 2021 from $1,399,000 in 2020.
At December 31, 2021, we have no outstanding long-term debt.

Other income



Non-operating income in 2021 decreased $8,753,000, or 33.0% to $17,744,000, as
further detailed in Note 6 of the consolidated financial statements. The
decrease is due to our June 2021 acquisition of Caris. From the respective
acquisition date, we no longer record any equity in earnings from our Caris
investment. Caris' financial information (revenues and expenses) is now included
in the Company's consolidated financial statements.



In June 2021, a gain of $95,202,000 was recorded on the acquisition of the
remaining ownership interest of Caris. We previously held a noncontrolling
interest in the partnership. Upon acquiring the remaining ownership interest in
Caris, we valued the business and our previously held equity position (75.1%)
based upon Caris' fair value at the acquisition date.  In February 2020, a gain
of $1,707,000 was recorded on the acquisition of the remaining ownership
interest of a 166-bed skilled nursing facility in Knoxville, Tennessee. We
previously held a noncontrolling interest (25%) in the facility. Upon acquiring
the remaining ownership interest, we valued our previously held equity position
based upon the facility's fair value.



We recorded unrealized losses in the amount of $13,863,000 for the decrease in
fair value of our marketable equity securities portfolio for the year ended
December 31, 2021. The marketable equity securities portfolio consists of
publicly traded healthcare REIT's, with NHI comprising approximately 67% of the
market value of the portfolio at December 31, 2021.



Income taxes



The income tax provision for 2021 is $10,951,000 (an effective income tax rate
of 7.3%). The income tax provision and effective tax rate for 2021 were
favorably impacted by the nontaxable revaluation gain related to the Caris
acquisition resulting in a benefit to the provision of $19,758,000 or 12.5% of
income before income taxes. The income tax provision and effective tax rate for
2021 were also favorably impacted by the statute of limitation expirations
resulting in a benefit to the provision of $1,901,000 or 1.3% of income before
taxes in 2021.



The income tax provision for 2020 is $10,433,000 (an effective income tax rate
of 19.9%). The income tax provision and effective tax rate for 2020 were also
favorably impacted by statute of limitation expirations resulting in a benefit
to the provision of $2,366,000 or 4.5% of income before taxes in 2020.



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2020 Compared to 2019



Results for the year ended December 31, 2020 compared to 2019 include a 3.2%
increase in net operating revenues and grant income and a 38.6% decrease in net
income attributable to NHC. In 2020, the decrease in net income attributable to
NHC is primarily driven by the unrealized losses in our marketable equity
securities portfolio. Excluding the unrealized losses in our marketable equity
securities portfolio and the other non-GAAP adjustments, non-GAAP net income for
the year ended December 31, 2020 was $58,543,000 compared to $59,616,000 for the
2019 year.

Net operating revenues and grant income

Net patient revenues totaled $931,795,000, a decrease of $16,077,000, or 1.7%,
compared to the prior year. Included in net patient revenues for the year end
December 31, 2020, is $26,179,000 of COVID-19 supplemental Medicaid payments
that were received to help mitigate the incremental costs in fighting the public
health emergency.



The overall average census in owned and leased skilled nursing facilities for
2020 was 83.6% compared to 90.3% in 2019. The decline in census is due to
COVID-19 and the lack of new admissions from our acute care providers and
referral partners. The composite skilled nursing facility per diem increased
7.0% in 2020 compared to 2019. Medicare per diem rates increased 10.1% in 2020
compared to 2019 and Managed Care per diem rates increased 3.2% in 2020 compared
to 2019. Medicaid and private pay per diem rates increased 11.4% and 2.7%,
respectively, in 2020 compared to 2019.



Our Medicare per diem rates have benefited from the new case-mix reimbursement
model of PDPM, which was implemented on October 1, 2019. The CARES Act also
temporarily suspended Medicare sequestration beginning May 1, 2020 through
December 31, 2020. The Medicare sequestration policy reduces fee-for-service
Medicare payments by 2 percent. Since March 2020, our Medicaid per diem rates
benefited from many of the states paying a supplemental Medicaid payment to help
mitigate the incremental costs resulting from the COVID-19 public health
emergency.



In February 2020, the Company acquired the remaining 75% ownership interest in a
166-bed skilled nursing facility in Knoxville, Tennessee. For the year ended
December 31, 2020, this skilled nursing facility increased net patient revenues
approximately $11,299,000 compared to 2019. Our homecare operations had a
decline in net patient revenues of approximately $2,569,000 for the year ended
December 31, 2020 as compared to 2019. Our homecare net patient revenue decline
was primarily due to volume declines in the first and second quarter due to
COVID-19.



Other revenues in 2020 were $48,917,000, an increase of $406,000, or 0.8%, as
further detailed in Note 5 of the consolidated financial statements. Other
revenues in 2020 include rental revenues of $22,768,000 ($22,641,000 in 2019),
management and accounting service fees of $17,147,000 ($18,533,000 in 2019), and
insurance services revenue of $5,447,000 ($6,209,000 in 2019). In November 2020,
we sold a skilled nursing facility in Town & Country, Missouri, and recorded a
gain on the sale of the transaction of $2,748,000.

For the year ended December 31, 2020, we recorded $47,505,000 in government
stimulus income related to funds received from the Provider Relief Fund. At
December 31, 2020, we had not recognized as income $16,068,000 of Provider
Relief Funds that are reflected in the current liability section of our
consolidated balance sheet (provider relief funds).

Total costs and expenses



Total costs and expenses for 2020 increased $32,717,000, or 3.5%, to
$980,062,000 from $947,345,000 in 2019. In total, we incurred $47,674,000 of
COVID-19 related expenses for the year ended December 31, 2020. The COVID-19
related expenses primarily consisted of: (1) personal protective equipment and
sanitizers/infection control supplies; (2) incentive compensation paid to our
frontline partners/employees; and (3) COVID-19 testing of our patients and
partners/employees.



Salaries, wages and benefits, the largest operating costs of the company,
increased $16,475,000, or 2.8%, to $609,306,000 from $592,831,000. Our salaries
and wages were 59.3% and 59.5% of net operating revenues and grant income for
2020 and 2019, respectively. The primary reason for salaries and wages
increasing is due to the incentive compensation, or "combat pay", paid to our
frontline partners in fighting the COVID-19 pandemic. For the year ended
December 31, 2020, we incurred approximately $15,224,000 in incentive
compensation paid to our employees/partners related to COVID-19. For the year
ended December 31, 2020, we also incurred approximately $6,094,000 in salaries
and wages from the skilled nursing facility that we acquired in February 2020,
compared to the same period of 2019.



Other operating expenses increased $18,403,000, or 6.9%, to $286,845,000 for
2020 compared to $268,442,000 in 2019. These costs were 27.9% and 26.9% of net
operating revenues and grant income for 2020 and 2019, respectively. For the
year ended December 31, 2020, we incurred $32,450,000 in COVID-19 related
expenses in purchasing personal protective equipment, sanitizers and infection
control supplies, and lab and testing supplies. Excluding the COVID-19 related
expenses, other operating expenses have decreased $14,047,000, or 5.2%, for the
year ended December 31, 2020 compared to 2019.



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Facility rent expense decreased $24,000, or 0.1%, to $40,494,000. Depreciation
and amortization decreased 0.9% to $42,018,000.

Interest expense decreased $1,736,000 to $1,399,000 in 2020 from $3,135,000 in
2019. The decrease in interest expense is due from our long-term debt being paid
off in the second quarter of 2020. At December 31, 2020, we have no outstanding
long-term debt.



Other income

Non-operating income in 2020 increased $1,755,000, or 7.1% to $26,527,000, as
further detailed in Note 6 of the consolidated financial statements. The
majority of the increase was the result of increased earnings from our
investment in Caris HealthCare.

In February 2020, a gain of $1,707,000 was recorded on the acquisition of the
remaining ownership interest of a 166-skilled nursing facility in Knoxville,
Tennessee. We previously held a noncontrolling interest (25%) in the facility.
Upon acquiring the remaining ownership interest, we valued our previously held
equity position based upon the facility's fair value.



We recorded unrealized losses in the amount of $23,966,000 for the decrease in
fair value of our marketable equity securities portfolio for the year ended
December 31, 2020. The marketable equity securities portfolio consists of
publicly traded healthcare REIT's, with NHI comprising approximately 85% of the
market value of the portfolio at December 31, 2020.



Income taxes



The income tax provision for 2020 is $10,433,000 (an effective income tax rate
of 19.9%). The income tax provision and effective tax rate for 2020 were also
favorably impacted by statute of limitation expirations resulting in a benefit
to the provision of $2,366,000 or 4.5% of income before taxes in 2020.



The income tax provision for 2019 is $20,039,000 (an effective income tax rate
of 22.8%). The income tax provision and effective tax rate for 2019 were also
favorably impacted by statute of limitation expirations resulting in a benefit
to the provision of $2,064,000 or 2.3% of income before taxes in 2019.

Liquidity, Capital Resources and Financial Condition

Sources and Uses of Funds



Our primary sources of cash include revenues from the healthcare and senior
living facilities we operate, homecare and hospice services, rental income,
management and accounting services and insurance services. Our primary uses of
cash include salaries, wages and benefits, operating costs of the healthcare
facilities, the cost of additions and improvements to our real property, rent
expenses, and dividend distributions. 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):



                           Year Ended                One Year Change               Year Ended               One Year Change
                     12/31/21      12/31/20            $           %         12/31/20      12/31/19           $           %
Cash, cash
equivalents,
restricted cash,
and restricted
cash equivalents
at beginning of
period               $ 158,502     $  61,010     $   97,492        159.8   

$ 61,010 $ 54,920 $ 6,090 11.1

Cash provided by
operating
activities              62,394       203,259       (140,865 )      (69.3 )     203,259       100,103       103,156        103.1

Cash used in
investing
activities             (65,889 )     (63,878 )       (2,011 )       (3.1 )     (63,878 )     (14,265 )     (49,613 )     (347.8 )

Cash used in
financing
activities             (35,264 )     (41,889 )        6,625         15.8       (41,889 )     (79,748 )      37,859         47.5

Cash, cash
equivalents,
restricted cash,
and restricted
cash equivalents
at end of period     $ 119,743     $ 158,502     $  (38,759 )      (24.5 )   $ 158,502     $  61,010     $  97,492        159.8




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Operating Activities



Net cash provided by operating activities for the year ended December 31, 2021
was $62,394,000 as compared to $203,259,000 and $100,103,000 for the years ended
December 31, 2020 and 2019, respectively. Cash provided by operating activities
consisted of net income of $139,087,000 and adjustments for non-cash items of
$42,269,000. There was cash used for working capital in the amount of
$40,738,000 for the year ended December 31, 2021 compared to cash provided by
working capital needs of $110,403,000 in 2020. The large swings in working
capital between 2021 and 2020 are primarily from the liquidity that we received
from the CARES Act/Provider Relief Fund payments and the Medicare Accelerated
Payment Program in 2020. In April 2021, the government began recouping the
Medicare Accelerated Payments and we repaid $36,231,000 during 2021. We also
received less cash funding from the Provider Relief Fund in 2021.
We received cash distributions from our unconsolidated investments of $6,314,000
for the year ended December 31, 2021 compared to $10,050,000 for 2020.



Included in the adjustments for non-cash items are depreciation expense, equity
in earnings of unconsolidated investments, unrealized losses on our marketable
equity securities, deferred taxes, stock compensation, gain on the sale of a
skilled nursing facility, gains on the acquisition of equity method investments,
and impairments of long-lived assets and notes receivable.



Investing Activities



Cash used in investing activities totaled $65,889,000 for the year ended
December 31, 2021, as compared to $63,878,000 and $14,265,000 for the years
ended December 31, 2020 and 2019, respectively. Cash used for property and
equipment additions was $39,399,000, $21,873,000, and $26,400,000 for the years
ended December 31, 2021, 2020 and 2019, respectively. Purchases of marketable
securities, net of sales, resulted in a net use of cash of $6,267,000 and
$43,860,000 in 2021 and 2020, respectively. The acquisition of Caris resulted in
cash used of $28,713,000 in 2021. In 2020, the acquisition of the 166-bed
skilled nursing facility in Knoxville, Tennessee resulted in cash used of
$6,648,000 and proceeds from the sale of a skilled nursing facility resulted in
cash proceeds of $6,750,000. The company collected notes receivable of
$8,840,000 and $2,483,000 for the years ended December 31, 2021 and 2020,
respectively.



Financing Activities



Net cash used in financing activities totaled $35,264,000, $41,889,000, and
$79,748,000 for the years ended December 31, 2021, 2020, and 2019, respectively.
Principal payments made under finance lease obligations was $4,423,000 and
$4,166,000 for the years ended December 31, 2021 and 2020, respectively.
Dividends paid to common stockholders was $32,030,000, $31,921,000, and
$31,208,000 for the years ended December 31, 2021, 2020 and 2019, respectively.
Proceeds from the issuance of common stock totaled $3,440,000 in 2021 compared
to $1,756,000 and $2,346,000 for 2020 and 2019, respectively. Cash used for
repayments on the Company's credit facility was a net $10,000,000 for the year
ended December 31, 2020. During 2019, $45,000,000 of cash was used for principal
payments on long-term debt.



Contractual Obligations



The Company has certain contractual obligations, primarily operating leases,
finance leases, and construction obligations. See Note 8 - Long Term Leases for
details regarding our operating and finance leases.  See Note 12 - Property and
Equipment for details regarding our construction obligations.



Short-term liquidity



We expect to meet our short-term liquidity requirements primarily from our cash
flows from operating activities. In addition to cash flows from operations, our
current cash on hand of $107,607,000 and marketable securities of $148,418,000
are expected to be adequate to meet our contractual obligations, operating
liquidity, and our growth and development plans in the next twelve months.



Long-term liquidity



We expect to meet our long-term liquidity requirements primarily from our cash
flows from operating activities, our current cash on hand of $107,607,000, and
marketable securities of $148,418,000. We also have substantial value in our
unencumbered real estate assets which could potentially be used as collateral in
future borrowing opportunities. At December 31, 2021, we do not have any
long-term debt.



Our ability to obtain long-term debt to meet our long-term contractual
obligations and to finance our operating requirements, growth and development
plans will depend upon our future performance, which will be affected by
business, economic, financial and other factors, including potential changes in
state and federal government payment rates for health care, customer demand,
success of our marketing efforts, pressures from competitors, and the state of
the economy, including the state of financial and credit markets.



Given the uncertainty in the rapidly changing market and economic conditions
related to COVID-19, we will continue to evaluate the nature and extent of the
impact to our business and financial position.



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Contingencies

See Note 18 to the consolidated financial statements for additional information
on pending litigation and other contingencies.

Guarantees

At December 31, 2021, we have no agreements to guarantee the debt obligations of
other parties.

We have no outstanding letters of credit. We may or may not in the future elect
to use financial derivative instruments to hedge interest rate exposure in the
future. At December 31, 2020, we did not participate in any such financial
investments.

New Accounting Pronouncements

See Note 1 to the consolidated financial statements for the impact of new
accounting standards.

Application of Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and cause our
reported net income to vary significantly from period to period.



Our critical accounting policies that are both important to the portrayal of our
financial condition and results and require our most difficult, subjective or
complex judgments are as follows:

Net Patient Revenues and Accounts Receivable

Net patient revenues are derived from services rendered to patients for skilled
and intermediate nursing, rehabilitation therapy, assisted living and
independent living, home health care services and hospice services. Net patient
revenue is reported at the amount that reflects the consideration to which the
Company expects to be entitled in exchange for providing patient services. These
amounts are due from patients, governmental programs, and other third-party
payors, and include variable consideration for retroactive revenue adjustments
due to settlement of audits, reviews, and investigations.



The Company recognizes revenue as its performance obligations are completed.
Routine services are treated as a single performance obligation satisfied over
time as services are rendered. These routine services represent a bundle of
services that are not capable of being distinct. The performance obligations are
satisfied over time as the patient simultaneously receives and consumes the
benefits of the healthcare services provided. Additionally, there may be
ancillary services which are not included in the daily rates for routine
services, but instead are treated as separate performance obligations satisfied
at a point in time when those services are rendered.



The Company determines the transaction price based on established billing rates
reduced by contractual adjustments provided to third party payors.  Contractual
adjustments are based on contractual agreements and historical experience.  The
Company considers the patient's ability and intent to pay the amount of
consideration upon admission. Subsequent changes resulting from a patient's
ability to pay are recorded as bad debt expense, which is included as a
component of other operating expenses in the consolidated statements of
operations.

Revenue Recognition - Third Party Payors

Medicare and Medicaid program revenues, as well as certain Managed Care program
revenues, are subject to audit and retroactive adjustment by government
representatives or their agents. The Medicare PPS methodology requires that
patients be assigned based on the acuity level of the patient to determine the
amount that is paid to us for patient services. The assignment of patients to
the various categories is subject to post-payment review by Medicare and Managed
Care intermediaries or their agents. Settlements with third-party payors for
retroactive adjustments due to audits, reviews or investigations are considered
variable consideration and are included in the determination of the estimated
transaction price for providing patient care. These settlements are estimated
based on the terms of the payment agreement with the payor, correspondence from
the payor and the Company's historical settlement activity, including an
assessment to ensure that it is probable that a significant reversal in the
amount of cumulative revenue recognized will not occur when the uncertainty
associated with the retroactive adjustment is subsequently resolved.



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In our opinion, adequate provision has been made for any adjustments that may
result from these reviews. Any differences between our original estimates of
reimbursements and subsequent revisions are reflected in operations in the
period in which the revisions are made often due to final determination or the
period of payment no longer being subject to audit or review.



Accrued Risk Reserves



We are self-insured for risks related to health insurance and have wholly owned
limited purpose insurance companies that insure risks related to workers'
compensation and general and professional liability insurance claims. The
accrued risk reserves include a liability for reported claims and estimates for
incurred but unreported claims. Our policy is to engage an external, independent
actuary to assist in estimating our exposure for claims obligations (for both
asserted and unasserted claims). We reassess our accrued risk reserves on a
quarterly basis.



Professional liability remains an area of particular concern to us. The
long-term care industry has seen an increase in personal injury/wrongful death
claims based on alleged negligence by skilled nursing facilities and their
employees in providing care to residents. It remains possible that those pending
matters plus potential unasserted claims could exceed our reserves, which could
have a material adverse effect on our consolidated financial position, results
of operations and cash flows. It is also possible that future events could cause
us to make significant adjustments or revisions to these reserve estimates and
cause our reported net income to vary significantly from period to period.



We are principally self-insured for incidents occurring in all centers owned or
leased by us. The coverages include both primary policies and excess policies.
In all years, settlements, if any, in excess of available insurance policy
limits and our own reserves would be expensed by us.