NOTE 11. SHARE-BASED COMPENSATION

We recognize share-based compensation (1) for all stock options granted over the requisite service period using the fair value for these grants as estimated at the date of grant using the Black-Scholes pricing model, and (2) all restricted stock granted over the requisite service period using the market value of our publicly-traded common stock on the date of grant.

The 1997 and 2005 Share-Based Compensation Plans

The Compensation Committee of the Board of Directors ("the Committee") has the authority to select the participants to be granted options; to designate whether the option granted is an incentive stock option ("ISO"), a non-qualified option, or a stock appreciation right; to establish the number of shares of common stock that may be issued upon exercise of the option; to establish the vesting provision for any award; and to establish the term any award may be outstanding. The exercise price of any ISO's granted will not be less than 100% of the fair market value of the shares of common stock on the date granted and the term of an ISO may not be more than ten years. The exercise price of any non-qualified options granted will not be less than 100% of the fair market value of the shares of common stock on the date granted unless so determined by the Committee.

In May 2005, our stockholders approved the 2005 Plan pursuant to which 1,500,000 shares of our common stock were available to grant as share-based payments to employees, officers, directors or consultants. As of December 31, 2011, 360,635 shares were available for future grants under the 2005 plan. The individual restricted stock and option grant awards vest over periods up to ten years. The term of the options outstanding under the 2005 Plan is up to ten years from the date of grant.

The NHI 1997 Stock Option Plan ("the 1997 Plan") provides for the granting of options to key employees and directors of NHI to purchase shares of common stock at a price no less than the market value of the stock on the date the option is granted. As of December 31, 2011, no shares were available for future grants under this plan. The term of the options outstanding under the 1997 Plan is five years from the date of the grant.

Compensation expense is recognized only for the awards that ultimately vest. Accordingly, forfeitures that were not expected may result in the reversal of previously recorded compensation expense. The compensation expense reported for share-based compensation related to the 2005 Plan and the 1997 Plan totaled $3,087,000, $2,368,000 and $853,000 for the years ended December 31, 2011, 2010 and 2009, respectively, consisting of $10,000, $25,000 and $52,000 for restricted stock and $3,077,000 $2,343,000 and $801,000 for stock options and is included in general and administrative expense in the Consolidated Statements of Income.

Determining Fair Value of Option Awards

The fair value of each option award was estimated on the grant date using the Black-Scholes option valuation model with the weighted average assumptions indicated in the following table. Generally, awards are subject to cliff vesting. Each grant is valued as a single award with an expected term based upon expected employee and termination behavior. Compensation cost is recognized on the graded vesting method over the requisite service period for each separately vesting tranche of the award as though the award were, in substance, multiple awards. The expected volatility is derived using daily historical data for periods preceding the date of grant. The risk-free interest rate is the approximate yield on the United States Treasury Strips having a life equal to the expected option life on the date of grant. The expected life is an estimate of the number of years an option will be held before it is exercised.

Stock Options

The weighted average fair value per share of options granted was $9.91, $6.26 and $3.20 for 2011, 2010 and 2009, respectively. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2011	2010	2009
Dividend yield	5.90%	6.52%	9.09%
Expected volatility	45.71%	37.56%	36.69%
Expected lives	3.9 years	4.9 years	3.4 years
Risk-free interest rate	1.11%	2.22%	1.57%

Stock Option Activity


The following table summarizes our outstanding stock options:
			Weighted Average
	Number	Weighted Average	Remaining	Aggregate
	of Shares	Exercise Price	Contractual Life (Years)	Intrinsic Value

Outstanding December 31, 2008	159,668	$ 29.03
Options granted under 2005 Plan	275,000	$ 25.29
Options exercised under 1997 Plan	(15,000)	$ 23.90
Options exercised under 2005 Plan	(165,832)	$ 25.18
Outstanding December 31, 2009	253,836	$ 27.72
Options granted under 2005 Plan	395,000	$ 36.18
Options exercised under 1997 Plan	(48,717)	$ 31.56
Options exercised under 2005 Plan	(215,612)	$ 31.78
Outstanding December 31, 2010	384,507	$ 33.24
Options granted under 2005 Plan	340,000	$ 46.11
Options exercised under 1997 Plan	(15,000)	$ 23.79
Options exercised under 2005 Plan	(183,417)	$ 32.69
Options forfeited under 2005 Plan	(16,668)	$ 41.52
Outstanding December 31, 2011	509,422	$ 42.03	4.69	$ 993,000

Exercisable December 31, 2011	335,830	$ 41.92	4.35	$ 692,000

			Remaining
Grant	Options	Exercise	Contractual
Date	Outstanding	Price	Life in Years

5/16/2007	15,000	$ 34.25	0.01
2/4/2008	7,750	$ 29.24	0.02
4/29/2008	15,000	$ 30.30	0.04
2/25/2009	15,000	$ 25.29	0.03
2/25/2010	15,000	$ 35.99	0.09
3/2/2010	48,338	$ 34.48	0.78
3/19/2010	50,000	$ 37.33	0.81
5/28/2010	13,334	$ 41.18	0.22
2/22/2011	60,000	$ 45.58	0.49
2/25/2011	270,000	$ 46.22	2.20

	509,422		4.69

The weighted average remaining contractual life of all options outstanding at December 31, 2011 is 4.7 years. Including outstanding stock options, our stockholders have authorized an additional 870,057 shares of common stock that may be issued under the share-based payments plans.

The following table summarizes our outstanding non-vested stock options:

	Number of Shares	Weighted Average Grant Date Fair Value

Non-vested December 31, 2010	182,175	$ 4.92
Options granted under 2005 Plan	340,000	$ 9.91
Options vested under 2005 Plan	(331,915)	$ 8.06
Options forfeited under 2005 Plan	(16,668)	$ 8.15

	173,592	$ 8.37

As of December 31, 2011, we had $453,000 of total unrecognized compensation cost related to unvested options, net of expected forfeitures, which is expected to be recognized over the following periods: 2012-$406,000 and 2013-$47,000.

The intrinsic value of total options outstanding at December 31, 2011 was $1.95 per share or $993,000. The intrinsic value of options exercisable at December 31, 2011 was $2.06 per share or $692,000. The intrinsic value of the total options exercised for the years ended December 31, 2011, 2010 and 2009 was $12.94 per share or $2,567,000; $13.28 per share or $3,510,000, and $11.81 per share or $2,136,000, respectively.

Restricted Stock Activity

The following table summarizes our restricted stock activity:

		Weighted Average
		Remaining
	Number	Vesting Period	Aggregate
	of Shares	(Years)	Intrinsic Value
Non-vested at December 31, 2008	7,025	1.511	$ 193,000
Vested during the period	(1,925)	-	-
Non-vested at December 31, 2009	5,100	1.026	189,000
Vested during the period	(1,925)	-	-
Non-vested at December 31, 2010	3,175	0.540	143,000
Vested during the period	(1,925)	-	-
Non-vested at December 31, 2011	1,250	0.095	$ 55,000

			Remaining
Grant	Shares	Grant	Vesting
Date	Non-vested	Price	Period
2/4/08	1,250	$29.24	0.095

The closing market price of our common stock at December 31, 2011 was $43.98 per share, which is the implied intrinsic value of the restricted stock. At December 31, 2011, we had $1,000 of total unrecognized compensation cost related to unvested restricted stock issued which is expected to be recognized during 2012.