OMEGA
HEALTHCARE INVESTORS, INC.
Unaudited
June
30, 2009
NOTE
1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business
Overview
We have one reportable segment
consisting of investments in healthcare related real estate
properties. Our core business is to provide financing and capital to
the long-term healthcare industry with a particular focus on skilled nursing
facilities located in the United States. Our core portfolio consists
of long-term leases and mortgage agreements. All of our leases are
“triple-net” leases, which require the tenants to pay all property-related
expenses. Our mortgage revenue derives from fixed-rate mortgage
loans, which are secured by first mortgage liens on the underlying real estate
and personal property of the mortgagor. In July 2008, we assumed
operating responsibilities for 15 of our facilities due to the bankruptcy of one
of our former operator/tenants. In September 2008, we entered into an
agreement to lease these facilities to a new operator/tenant. The new
operator/tenant assumed operating responsibility for 13 of the 15 facilities
effective September 1, 2008. We continue to be
responsible for the two remaining facilities as of June 30, 2009 that are in the
process of being transitioned to the new operator pending approval by state
regulators. Substantially all depreciation expenses reflected in the
consolidated statements of income relate to the ownership of our investment in
real estate.
Basis
of Presentation
The accompanying unaudited consolidated
financial statements for Omega Healthcare Investors, Inc. (“Omega” or the
“Company”) have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles (“GAAP”) in the
United States for complete financial statements. In our opinion, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. We have evaluated all
subsequent events through August 6, 2009, the date the financial statements were
issued. These
unaudited consolidated financial statements should be read in conjunction with
the financial statements and the footnotes thereto included in our latest Annual
Report on Form 10-K.
Our
consolidated financial statements include the accounts of Omega, all direct and
indirect wholly owned subsidiaries; as well as TC Healthcare I, LLC. (“TC
Healthcare”), an entity and interim operator created to operate the 15
facilities we assumed as a result of the bankruptcy of one of our former
tenant/operators. We consolidate the financial results of TC
Healthcare into our financial statements based on the applicable consolidation
accounting literature. We include the operating results and assets
and liabilities of these facilities for the period of time that TC Healthcare
was responsible for the operations of the facilities. Thirteen of
these facilities were transitioned from TC Healthcare to a new tenant/operator
on September 1, 2008, however, TC Healthcare continues to be responsible for two
remaining facilities as of June 30, 2009 that are in the process of being
transitioned to the new operator/tenant pending approval by state
regulators. The operating revenues and expenses and related operating
assets and liabilities of the two remaining owned and operated facilities are
shown on a gross basis in our Consolidated Statements of Income and Consolidated
Balance Sheets, respectively. All inter-company accounts and
transactions have been eliminated in consolidation of the financial
statements.
Reclassifications
Certain amounts in the prior year have
been reclassified to conform to the current year presentation and to reflect the
results of discontinued operations. See Note 11 – Discontinued Operations for a
discussion of discontinued operations. Such reclassifications have no
effect on previously reported earnings or equity.
Accounts
Receivable
Accounts
receivable includes: contractual receivables, straight-line rent receivables,
lease inducements, net of an estimated provision for losses related to
uncollectible and disputed accounts. Contractual receivables relate
to the rents currently owed to us under the terms of the lease
agreement. Straight-line receivables relates to the difference
between the rental revenue recognized on a straight-line basis and the amounts
due to us contractually. Lease inducements result from value provided
by us to the lessee of the lease and will be amortized as a reduction of rental
revenue over the lease term. On a quarterly basis, we review the
collection of our contractual payments and determine the appropriateness of our
allowance for uncollectible contractual rents. In the case of a lease
recognized on a straight-line basis, we generally provide an allowance for
straight-line accounts receivable when certain conditions or indicators of
adverse collectibility are present.
A summary
of our net receivables by type is as follows:
|
|
|
June
30,
2009
|
|
|
December
31, 2008
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Contractual
receivables
|
|
$ |
2,381 |
|
|
$ |
2,358 |
|
|
Straight-line
receivables
|
|
|
48,306 |
|
|
|
43,636 |
|
|
Lease
inducements
|
|
|
30,161 |
|
|
|
30,561 |
|
|
Allowance
|
|
|
(1,620 |
) |
|
|
(1,518 |
) |
|
Accounts
receivable –
net
|
|
$ |
79,228 |
|
|
$ |
75,037 |
|
We
continuously evaluate the payment history and financial strength of our
operators and have historically established allowance reserves for straight-line
rent adjustments for operators that do not meet our requirements. We
consider factors such as payment history, the operator’s financial condition as
well as current and future anticipated operating trends when evaluating whether
to establish allowance reserves.
Accounts receivable from owned and
operated assets consist of amounts due from Medicare and Medicaid programs,
other government programs, managed care health plans, commercial insurance
companies and individual patients. Amounts recorded include estimated provisions
for loss related to uncollectible accounts and disputed items. For
additional information, see Note 3 – Owned and Operated Assets.
Implementation
of New Accounting Pronouncements
EITF
03-6-1 Evaluation
In June 2008, the FASB issued FSP EITF
03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating
Securities. In this FSP, the FASB concluded that all
outstanding unvested share-based payment awards that contain rights to
non-forfeitable dividends or dividend equivalents that participate in
undistributed earnings with common shareholders and, accordingly, are considered
participating securities that shall be included in the two-class method of
computing basic and diluted EPS. The FSP does not address awards that contain
rights to forfeitable dividends. We adopted this standard on January 1, 2009,
and retrospectively adjusted basis EPS data for all periods presented to reflect
the two-class method of computing EPS. The provisions of FSP EITF
03-6-1 impact on earnings per share was less than $0.01 per share for the
periods presented.
FSP
157-4 Evaluation
In April 2009, the FASB issued FSP No.
FAS 157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly. This FSP provides additional guidance for estimating
fair value in accordance with SFAS No. 157, Fair Value Measurements, when
the volume and level of activity for the asset or liability have significantly
decreased. This FSP also includes guidance on identifying circumstances that
indicate a transaction is not orderly. This FSP emphasizes that even
if there has been a significant decrease in the volume and level of activity for
the asset or liability and regardless of the valuation technique(s) used, the
objective of a fair value measurement remains the same. Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants at the measurement date under current market
conditions. We adopted the standard in the second quarter of 2009 and
determined that the adoption of FSP 157-4 had no material effect on our
financial position or results of operations.
FSP
107-1 Evaluation
In April 2009, the FASB issued FSP No.
107-1 and Accounting Principles Board (“APB”) Opinion No. 28-1, Interim Disclosures about Fair Value
of Financial Instruments. This FSP amends SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, to require an entity to provide disclosures about
fair value of financial instruments in interim financial
information. This FSP also amends APB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in summarized financial information at interim
reporting periods. Under this FSP, a publicly traded company shall include
disclosures about the fair value of its financial instruments whenever it issues
summarized financial information for interim reporting periods. In addition, an
entity shall disclose in the body or in the accompanying notes of its summarized
financial information for interim reporting periods and in its financial
statements for annual reporting periods the fair value of all financial
instruments for which it is practicable to estimate that value, whether
recognized or not recognized in the statement of financial position, as required
by FAS No. 107. We adopted the standard in the second quarter of 2009 and such
disclosures are provided in Note 9 – Financial Instruments.
FAS
157 Evaluation
On January 1, 2008, we adopted FASB
Statement No. 157, Fair Value
Measurements (“FAS No. 157”). This standard defines fair
value, establishes a methodology for measuring fair value and expands the
required disclosure for fair value measurements. FAS No. 157
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement, and states that a fair value measurement should be determined based
on the assumptions that market participants would use in pricing the asset or
liability. This statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those pronouncements that fair value is the relevant
measurement attribute. Accordingly, this statement does not require
any new fair value measurements. The standard applies prospectively
to new fair value measurements performed after the required effective dates,
which are as follows: (i) on January 1, 2008, the standard applied to our
measurements of the fair values of financial instruments and recurring fair
value measurements of non-financial assets and liabilities; and (ii) on January
1, 2009, the standard applied to all remaining fair value measurements,
including non-recurring measurements of non-financial assets and liabilities
such as measurement of potential impairments of goodwill, other intangible
assets and other long-lived assets. It also applies to fair value measurements
of non-financial assets acquired and liabilities assumed in business
combinations. We evaluated FAS No. 157 and determined that the
adoption of FAS No. 157 had no impact on our consolidated financial
statements.
FAS
141(R) Evaluation
On December 4, 2007, the FASB issued
Statement No. 141(R), Business
Combinations (“FAS No.
141(R)”). The new standard will significantly change the accounting
for and reporting of business combination transactions. FAS No.
141(R) requires companies to recognize, with certain exception, 100 percent of
the fair value of the assets acquired, liabilities assumed and non-controlling
interest in acquisitions of less than a 100 percent controlling interest when
the acquisition constitutes a change in control; measure acquirer shares issued
as consideration for a business combination at fair value on the date of the
acquisition; recognize contingent consideration arrangements at their
acquisition date fair value, with subsequent change in fair value generally
reflected in earnings; recognition of reacquisition loss and gain contingencies
at their acquisition date fair value; and expense as incurred, acquisition
related transaction costs. FAS No. 141(R) is effective for fiscal
years beginning after December 15, 2008 and early adoption is
prohibited. We adopted the standard on January 1, 2009, which will
impact the accounting only for acquisitions occurring
prospectively.
FAS
165 Evaluation
In the second quarter of 2009, we
adopted FASB Statement No. 165, Subsequent Events (“FAS No.
165”) FAS No. 165 establishes the accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date, that is, whether that date represents the date the financial statements
were issued or were available to be issued. The adoption of FAS No. 165 did
not have a material impact on our financial statements.
NOTE
2 –PROPERTIES
In the ordinary course of our business
activities, we periodically evaluate investment opportunities and extend credit
to customers. We also regularly engage in lease and loan extensions
and modifications. Additionally, we actively monitor and manage our investment
portfolio with the objectives of improving credit quality and increasing
investment returns. In connection with portfolio management, we may
engage in various collection and foreclosure activities.
If we acquire real estate pursuant to a
foreclosure, lease termination or bankruptcy proceeding and do not immediately
re-lease or sell the properties to new operators, the assets will be included on
the consolidated balance sheet at the lower of cost or estimated fair value (see
Note 3– Owned
and Operated Assets).
Leased
Property
Our leased real estate properties,
represented by 228 skilled nursing facilities (“SNFs”), seven assisted living
facilities (“ALFs”), two rehabilitation hospitals and two independent living
facilities (“ILFs”) at June 30, 2009, are leased under provisions of single
leases and master leases with initial terms typically ranging from 5 to 15
years, plus renewal options. Substantially all of our leases contain
provisions for specified annual increases over the rents of the prior year and
are generally computed in one of three methods depending on specific provisions
of each lease as follows: (i) a specific annual percentage increase over the
prior year’s rent, generally 2.5%; (ii) an increase based on the change in
pre-determined formulas from year to year (i.e., such as increases in the
Consumer Price Index (“CPI”)); or (iii) specific dollar increases over prior
years. Under the terms of the leases, the lessee is responsible for
all maintenance, repairs, taxes and insurance on the leased
properties.
Assets
Sold or Held for Sale
Assets
Sold
On April 24, 2009, we sold our
held-for-sale SNF in Iowa for approximately $0.1 million resulting in a loss of
approximately $24 thousand.
Held
for Sale
On June 30, 2009, we classified one SNF
in Connecticut as held-for-sale with a net book value of approximately $0.7
million.
Mortgage
Notes Receivable
Mortgage notes receivable relate to 15
long-term care facilities. The mortgage notes are secured by first
mortgage liens on the borrowers' underlying real estate and personal
property. The mortgage notes receivable relate to facilities located
in four (4) states, operated by four (4) independent healthcare operating
companies. We monitor compliance with mortgages and when necessary
have initiated collection, foreclosure and other proceedings with respect to
certain outstanding loans. As of June 30, 2009, none of our mortgages
were in foreclosure proceedings. The mortgage properties are
cross-collateralized with the master lease agreement.
Mortgage interest income is recognized
as earned over the terms of the related mortgage notes. Allowances
are provided against earned revenues from mortgage interest when collection of
amounts due becomes questionable or when negotiations for restructurings of
troubled operators lead to lower expectations regarding ultimate
collection. When collection is uncertain, mortgage interest income on
impaired mortgage loans is recognized as received after taking into account
application of security deposits.
NOTE
3 – OWNED AND OPERATED ASSETS
At June 30, 2009, we owned and operated
two facilities with a total of 275 operating beds that were previously recovered
from a bankrupt operator/tenant.
Since November 2007, affiliates of
Haven Healthcare (“Haven”), one of our operators/lessees/mortgagors, operated
under Chapter 11 bankruptcy protection. Commencing in February 2008,
the assets of the Haven facilities were marketed for sale via an auction process
to be conducted through proceedings established by the bankruptcy
court. The auction process failed to produce a qualified
buyer. As a result, and pursuant to our rights as ordered by the
bankruptcy court, Haven moved the bankruptcy court to authorize us to credit bid
certain of the indebtedness that it owed to us in exchange for taking ownership
of and transitioning certain of its assets to a new entity in which we have a
substantial ownership interest, all of which was approved by the bankruptcy
court on July 4, 2008. Effective as of July 7, 2008, we took
ownership and/or possession of 15 facilities previously operated by Haven and TC
Healthcare, a new entity and an interim operator, in which we have a substantial
economic interest, began operating these facilities on our behalf through an
independent contractor.
On August 6, 2008, we entered into a
Master Transaction Agreement (“MTA”) with affiliates of Formation Capital
(“Formation”) whereby Formation agreed (subject to certain closing conditions,
including the receipt of licensure) to lease 14 SNFs and one ALF facility under
a master lease. These facilities were formerly leased to
Haven.
Effective September 1, 2008, we
completed the operational transfer of 12 SNFs and one ALF to affiliates of
Formation, in accordance with the terms of the MTA. The 13 facilities
are located in Connecticut (5), Rhode Island (4), New Hampshire (3) and
Massachusetts (1). As part of the transaction, Genesis Healthcare
(“Genesis”) has entered into a long-term management agreement with Formation to
oversee the day-to-day operations of each of these facilities. The two remaining
facilities in Vermont, which are currently being operated by TC Healthcare, will
transfer to Formation/Genesis upon the appropriate regulatory approvals expected
sometime in the near future. Our consolidated financial statements
include the financial position and results of operations of TC Healthcare from
July 7, 2008 to June 30, 2009. As of June 30, 2009, our gross
investment in land and buildings for the two properties operated by TC
Healthcare was approximately $14.6 million.
Nursing home revenues and expenses,
included in our consolidated financial statements that relate to such owned and
operated assets are set forth in the tables below.
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
Nursing
home
revenues
|
|
$ |
4,363 |
|
|
$ |
— |
|
|
$ |
8,787 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nursing
home
expenses
|
|
|
5,498 |
|
|
|
— |
|
|
|
10,851 |
|
|
|
— |
|
|
Loss
from nursing home operations
|
|
$ |
(1,135 |
) |
|
$ |
— |
|
|
$ |
(2,064 |
) |
|
$ |
— |
|
NOTE
4 – CONCENTRATION OF RISK
As of June 30, 2009, our portfolio of
investments consisted of 255 healthcare facilities, located in 28 states and
operated by 25 third-party operators. Our gross investment in these
facilities, net of impairments and before reserve for uncollectible loans,
totaled approximately $1.5 billion at June 30, 2009, with approximately 99% of
our real estate investments related to long-term care
facilities. This portfolio is made up of 226 SNFs, seven ALFs, two
rehabilitation hospitals, two ILFs, fixed rate mortgages on 15 SNFs, two SNFs
that are owned and operated and one SNF that is currently held for
sale. At June 30, 2009, we also held miscellaneous investments of
approximately $29.7 million, consisting primarily of secured loans to
third-party operators of our facilities.
At June 30, 2009, approximately 24% of
our real estate investments were operated by two public companies: Sun
Healthcare Group, Inc (“Sun”) (14%) and Advocat Inc. (“Advocat”)
(10%). Our largest private company operators (by investment) were
CommuniCare Health Services (“CommuniCare”) (21%) and Signature Holding II, LLC
(“Signature”) (10%). No other operator represents more than 9% of our
investments. The three states in which we had our highest
concentration of investments were Ohio (23%), Florida (12%) and Pennsylvania
(10%) at June 30, 2009.
For the three-month period ended June
30, 2009, our revenues from operations totaled $49.2 million, of which
approximately $8.8 million were from CommuniCare (18%), $7.7 million from Sun
(16%) and $5.4 million from Advocat (11%). Our owned and operated
assets generated $4.4 million (9%) of revenue in June 30, 2009. No
other operator generated more than 9% of our revenues from operations for the
three-month period ended June 30, 2009.
For the six-month period ended June 30,
2009, our revenues from operations totaled $98.3 million, of which approximately
$17.6 million were from CommuniCare (18%), $15.4 million from Sun (16%) and
$10.9 million from Advocat (11%). Our owned and operated assets
generated $8.8 million (9%) of revenue in June 30, 2009. No other
operator generated more than 9% of our revenues from operations for the
six-month period ended June 30, 2009.
Sun and Advocat are subject to the reporting
requirements of the Securities and Exchange Commission (“SEC”) and are required
to file with the SEC annual reports containing audited financial information and
quarterly reports containing unaudited interim financial
information. Sun and Advocat’s filings with the SEC can be found at
the SEC’s website at www.sec.gov. We are providing this data for
information purposes only, and you are encouraged to obtain Sun’s and Advocat’s
publicly available filings from the SEC.
NOTE
5 –DIVIDENDS
Common
Dividends
On July 15, 2009, the Board of
Directors declared a common stock dividend of $0.30 per share, to be paid August
17, 2009 to common stockholders of record on July 31, 2009.
On April 15, 2009, the Board of
Directors declared a common stock dividend of $0.30 per share that was paid May
15, 2009 to common stockholders of record on April 30, 2009.
On January 15, 2009, the Board of
Directors declared a common stock dividend of $0.30 per share that was paid on
February 17, 2009 to common stockholders of record on January 30,
2009.
Series
D Preferred Dividends
On July 15, 2009, the Board of
Directors declared the regular quarterly dividends for the 8.375% Series D
Cumulative Redeemable Preferred Stock (“Series D Preferred Stock”) to
stockholders of record on July 31, 2009. The stockholders of record
of the Series D Preferred Stock on July 31, 2009 will be paid dividends in the
amount of $0.52344 per preferred share on August 17, 2009. The
liquidation preference for our Series D Preferred Stock is $25.00 per share.
Regular quarterly preferred dividends for the Series D Preferred Stock represent
dividends for the period May 1, 2009 through July 31, 2009.
On April 15, 2009, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D Preferred Stock that were paid May 15, 2009 to
preferred stockholders of record on April 30, 2009.
On January 15, 2009, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D Preferred Stock that were paid February 17, 2009
to preferred stockholders of record on January 30, 2009.
NOTE
6 – TAXES
So long as we qualify as a real estate
investment trust (“REIT”) under the Internal Revenue Code (the “Code”), we
generally will not be subject to federal income taxes on the REIT taxable income
that we distribute to stockholders, subject to certain exceptions. On
a quarterly and annual basis, we test our compliance within the REIT taxation
rules to ensure that we were in compliance with the rules.
Subject to the limitation under the
REIT asset test rules, we are permitted to own up to 100% of the stock of one or
more taxable REIT subsidiary (“TRSs”). Currently, we have one TRS
that is taxable as a corporation and that pays federal, state and local income
tax on its net income at the applicable corporate rates. The TRS had
a net operating loss carry-forward as of June 30, 2009 of $1.1
million. The loss carry-forward was fully reserved with a valuation
allowance due to uncertainties regarding realization.
NOTE
7 – STOCK-BASED COMPENSATION
The following is a summary of our stock
based compensation expense for the three- and six- month periods ended June 30,
2009 and 2008, respectively:
|
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock expense
|
|
$ |
479 |
|
|
$ |
525 |
|
|
$ |
959 |
|
|
$ |
1,051 |
|
2007
Stock Awards
In May 2007, we granted 286,908 shares
of restricted stock and 247,992 performance restricted stock units (“PRSU”) to
five executive officers under the 2004 Plan Stock Incentive Plan (the “2004
Plan”).
Restricted
Stock Award
The
restricted stock award vests one-seventh on December 31, 2007 and two-sevenths
on December 31, 2008, December 31, 2009, and December 31, 2010, respectively,
subject to continued employment on the vesting date (as defined in the
agreements filed with the SEC on May 8, 2007). As of June 30, 2009,
122,961 shares of restricted stock have vested under the restricted stock
award.
Performance
Restricted Stock Units
We awarded two types of PRSUs (annual
and cliff vesting awards) to the five executives. One half of the
PRSU awards vest annually in equal increments on December 31, 2008, December 31,
2009, and December 31, 2010, respectively. The other half of the PRSU
awards cliff vest on December 31, 2010. Vesting on both types of
awards requires achievement of total shareholder return (as defined in the
agreements filed with the SEC on May 8, 2007).
The following table summarizes our
total unrecognized compensation cost associated with the restricted stock awards
and PRSUs awarded in May 2007 as of June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares/
Units
|
|
|
Grant
Date Fair Value Per Unit/ Share
|
|
|
Total
Compensation Cost
|
|
|
Weighted
Average Period of Expense Recognition (in months)
|
|
|
Unrecognized
Compensation Cost
|
|
|
|
|
(in
thousands, except share and per share amounts)
|
|
|
Restricted
stock
|
|
|
286,908 |
|
|
$ |
17.06 |
|
|
$ |
4,895 |
|
|
|
44 |
|
|
$ |
2,002 |
|
|
2008
Annual performance restricted stock units
|
|
|
41,332 |
|
|
|
8.78 |
|
|
|
363 |
|
|
|
20 |
|
|
|
- |
|
|
2009
Annual performance restricted stock units
|
|
|
41,332 |
|
|
|
8.25 |
|
|
|
341 |
|
|
|
32 |
|
|
|
64 |
|
|
2010
Annual performance restricted stock units
|
|
|
41,332 |
|
|
|
8.14 |
|
|
|
336 |
|
|
|
44 |
|
|
|
138 |
|
|
3
year cliff vest performance restricted stock units
|
|
|
123,996 |
|
|
|
6.17 |
|
|
|
765 |
|
|
|
44 |
|
|
|
313 |
|
|
Total
|
|
|
534,900 |
|
|
|
|
|
|
$ |
6,700 |
|
|
|
|
|
|
$ |
2,517 |
|
As of June
30, 2009, we had 23,664 stock options and 20,401 shares of restricted stock
outstanding to directors. The stock options were fully vested as of
January 1, 2007 and the restricted shares are scheduled to vest over the next
three years. As of June 30, 2009, the unrecognized compensation cost
associated with the directors is $0.2 million.
NOTE
8 – FINANCING ACTIVITIES AND BORROWING ARRANGEMENTS
Bank
Credit Agreements
On June 30, 2009, we entered into a new
$200 million revolving senior secured credit facility (the “New Credit
Facility”). The New Credit Facility is being provided by Bank of
America, N.A., Deutsche Bank Trust Company Americas, UBS Loan Finance LLC and
General Electric Capital Corporation pursuant to a Credit Agreement, dated as of
June 30, 2009 (the “New Credit Agreement”), among the Omega subsidiaries named
therein (“Borrowers”), the lenders named therein, and Bank of America, N.A., as
administrative agent. At June 30, 2009, we had $46.0 million
outstanding under the New Credit Facility and no letters of credit outstanding,
leaving availability of $154.0 million. The $46.0 million of
outstanding borrowings had a blended interest rate of 6% at June 30, 2009, and
is currently priced at LIBOR plus 400 basis points. The New Credit
Facility will be used for acquisitions and general corporate purposes.
The New Credit Facility replaces our
previous $255 million senior secured credit facility (the “Prior Credit
Facility”), that was terminated on June 30, 2009. The New Credit
Facility matures on June 30, 2012, and includes an “accordion feature” that
permits us to expand our borrowing capacity to $300 million in certain
circumstances during the first two years.
For the three-month period ended June
30, 2009, we recorded a one-time, non-cash charge of approximately $0.5 million
relating to the write-off of unamortized deferred financing costs associated
with the replacement of the Prior Credit Facility. We incurred
approximately $4.4 million in deferred financing cost related to establishing
the New Credit Facility.
The
interest rates per annum applicable to the New Credit Facility are the
reserve-adjusted LIBOR Rate, with a floor
of 200 basis points (the “Eurodollar
Rate”), plus the applicable margin (as defined below) or, at our option, the
base rate, which will be the highest of (i) the rate of interest publicly
announced by the administrative agent as its prime rate in effect, (ii) the
federal funds effective rate from time to time plus 0.50% and (iii) the
Eurodollar Rate for a Eurodollar Loan with an interest period of one month plus
1.25%, in each case, plus the applicable margin. The applicable
margin with respect to the New Credit Facility is determined in accordance with
a performance grid based on our consolidated leverage ratio. The
applicable margin may range from 4.75% to 3.7% in the case of Eurodollar Rate
advances, from 3.5% to 2.5% in the case of base rate advances, and from 4.75% to
3.75% in the case of letter of credit fees. The default rate on the
New Credit Facility is 3.00% above the interest rate otherwise applicable to
base rate loans. We are also obligated to pay a commitment fee of
0.50% on the unused portion of our New Credit Facility. In certain
circumstances set forth in the New Credit Agreement, we may prepay the New
Credit Facility at any time in whole or in part without fees or
penalty.
Omega and
its subsidiaries that are not Borrowers under the New Credit Facility guarantee the
obligations of our Borrower subsidiaries under the New Credit
Facility. All obligations under the New Credit Facility and the
related guarantees are secured by a perfected first priority lien on certain
real properties and all improvements, fixtures, equipment and other personal
property relating thereto of the Borrower
subsidiaries under the New
Credit Facility, and an assignment of leases, rents, sale/refinance proceeds and
other proceeds flowing from the real properties.
The New Credit Facility contains
customary affirmative and negative covenants, including, without limitations,
limitations on investments; limitations on liens; limitations on mergers,
consolidations, and transfers of assets; limitations on sales of assets;
limitations on transactions with affiliates; and limitations on our transfer of
ownership and management. In addition, the New Credit Facility
contains financial covenants including, without limitation, with respect to
maximum leverage ratio, minimum fixed charge coverage ratio, minimum tangible
net worth and maximum distributions. As of June 30, 2009, we were in
compliance with all affirmative and negative covenants, including financial
covenants.
Equity
Distribution Agreement
On June 12, 2009, we entered into
separate Equity Distribution Agreements (collectively, the "Equity Distribution
Agreements") with each of UBS Securities LLC, Deutsche Bank Securities Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, each as sales agents
and/or principal (the "Managers"). Under the terms of the Equity
Distribution Agreements, we may sell shares of our common stock, from time to
time, through or to the Managers having an aggregate gross sales price of
up to $100,000,000 (the “Equity Shelf Program”). Sales of the shares,
if any, will be made by means of ordinary brokers’ transactions on the New York
Stock Exchange at market prices, or as otherwise agreed with the
applicable Manager. We will pay each Manager compensation
for sales of the shares equal to 2% of the gross sales price per share of shares
sold through such Manager, as sales agent, under the applicable Equity
Distribution Agreement. During the three months ended June
30, 2009, 700 shares of the Company’s common stock were issued through the
Equity Shelf Program for net proceeds of
approximately $11,000.
Amendment
to Charter to Increase Authorized Common Stock
On May 28, 2009, we amended our
Articles of Incorporation to increase the number of authorized shares of our
common stock from 100,000,000 to 200,000,000 shares. The Board of
Directors previously approved the amendment, subject to stockholder approval,
and the amendment was approved by our stockholders at the Annual Meeting of
Stockholders held on May 21, 2009.
Dividend
Reinvestment and Common Stock Purchase Plan
We have a
Dividend Reinvestment and Common Stock Purchase Plan (the “DRSPP”) that allows
for the reinvestment of dividends and the optional purchase of our common
stock. Effective May 15, 2009, we reinstated the optional cash
purchase component of our DRSPP, which we had temporarily suspended in October
2008.
For the six month period ended June 30,
2009, we issued 476,051 shares of common stock for approximately $7.0 million in
net proceeds.
NOTE
9 - FINANCIAL INSTRUMENTS
At June 30, 2009 and December 31, 2008,
the carrying amounts and fair values of our financial instruments were as
follows:
|
|
|
June
30,
2009
|
|
|
December
31,
2008
|
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Assets:
|
|
(in
thousands)
|
|
|
Cash and cash
equivalents
|
|
$ |
4,923 |
|
|
$ |
4,923 |
|
|
$ |
209 |
|
|
$ |
209 |
|
|
Restricted cash
|
|
|
6,602 |
|
|
|
6,602 |
|
|
|
6,294 |
|
|
|
6,294 |
|
|
Mortgage notes receivable –
net
|
|
|
100,630 |
|
|
|
98,527 |
|
|
|
100,821 |
|
|
|
93,892 |
|
|
Other
investments
|
|
|
29,744 |
|
|
|
26,562 |
|
|
|
29,864 |
|
|
|
25,343 |
|
|
Totals
|
|
$ |
141,899 |
|
|
$ |
136,614 |
|
|
$ |
137,188 |
|
|
$ |
125,738 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving lines of
credit
|
|
$ |
46,000 |
|
|
$ |
46,000 |
|
|
$ |
63,500 |
|
|
$ |
59,550 |
|
|
7.00% Notes due
2014
|
|
|
310,000 |
|
|
|
301,224 |
|
|
|
310,000 |
|
|
|
268,712 |
|
|
7.00% Notes due
2016
|
|
|
175,000 |
|
|
|
162,557 |
|
|
|
175,000 |
|
|
|
137,285 |
|
|
(Discount)/Premium on 7.00%
Notes – net
|
|
|
(311 |
) |
|
|
(174 |
) |
|
|
(303 |
) |
|
|
(37 |
) |
|
Totals
|
|
$ |
530,689 |
|
|
$ |
509,607 |
|
|
$ |
548,197 |
|
|
$ |
465,510 |
|
Fair value estimates are subjective in
nature and are dependent on a number of important assumptions, including
estimates of future cash flows, risks, discount rates and relevant comparable
market information associated with each financial instrument (see Note 2 –
Summary of Significant Accounting Policies of our 2008 Annual Report on Form
10-K). The use of different market assumptions and estimation
methodologies may have a material effect on the reported estimated fair value
amounts. Accordingly, the estimates presented above are not
necessarily indicative of the amounts we would realize in a current market
exchange.
The following methods and assumptions
were used in estimating fair value disclosures for financial
instruments.
|
·
|
Cash
and cash equivalents: The carrying amount of cash and cash
equivalents and restricted cash reported in the balance sheet approximates
fair value because of the short maturity of these instruments (i.e., less
than 90 days).
|
|
·
|
Mortgage
notes receivable: The fair values of the mortgage notes
receivables are estimated using a discounted cash flow analysis, using
interest rates being offered for similar loans to borrowers with similar
credit ratings.
|
|
·
|
Other
investments: Other investments are primarily comprised of: (i)
notes receivable; and (ii) an investment in redeemable non-convertible
preferred security of an unconsolidated business accounted for using the
cost method of accounting under APB No. 18. The fair values of
notes receivable are estimated using a discounted cash flow analysis,
using interest rates being offered for similar loans to borrowers with
similar credit ratings. The fair value of the investment in the
unconsolidated business is estimated using discounted cash flow and
volatility assumptions or, if available, quoted market
value.
|
|
·
|
Revolving
lines of credit: The fair value of our borrowings under
variable rate agreements are estimated using an expected present value
technique based on expected cash flows discounted using the current
credit-adjusted risk-free rate.
|
|
·
|
Senior
notes and other long-term borrowings: The fair value of our
borrowings under fixed rate agreements are estimated based on open market
trading activity provided by a third
party.
|
NOTE
10 – LITIGATION
We are subject to various legal
proceedings, claims and other actions arising out of the normal course of
business. While any legal proceeding or claim has an element of uncertainty,
management believes that the outcome of each lawsuit, claim or legal proceeding
that is pending or threatened, or all of them combined, will not have a material
adverse effect on our consolidated financial position or results of
operations.
In 1999, we filed suit against a former
tenant seeking damages based on claims of breach of contract. The
defendants denied the allegations made in the lawsuit. In June 2008,
we were awarded damages in a jury trial. The case was then settled
prior to appeal. In settlement of our claim against the defendants,
we agreed in January 2009 to accept a lump sum cash payment of $6.8
million. The cash proceeds were offset by related expenses incurred
of $2.3 million, resulting in a net gain of $4.5 million paid in January
2009. We recorded this gain during the first quarter of
2009.
NOTE
11 – DISCONTINUED OPERATIONS
Statement of Financial Accounting
Standards (“SFAS”) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, requires the presentation of the net
operating results of facilities classified as discontinued operations for all
periods presented.
The following table summarizes the
results of discontinued operations for facilities sold or held-for-sale during
the three- and six- month periods ended June 30, 2009 and 2008,
respectively.
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before gain on sale of assets
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
|
Gain
on assets sold – net
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
431 |
|
|
Discontinued
operations
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
446 |
|
No revenue or expense generated from
discontinued operations during the three months ended June 30, 2009 and 2008,
respectively.
For the six months ended June 30, 2009,
no revenue or expense was generated from discontinued operations. For
the six months ended June 30, 2008, discontinued operations includes revenue of
$15 thousand for one SNF located in California that was sold during the first
quarter of 2008, generating a gain of $0.4 million.
NOTE
12– EARNINGS PER SHARE
We calculate basic and diluted earnings
per common share (“EPS”) in accordance with FAS No. 128, Earnings Per
Share. The computation of basic EPS is computed by dividing
net income available to common stockholders by the weighted-average number of
shares of common stock outstanding during the relevant
period. Diluted EPS is computed using the treasury stock method,
which is net income divided by the total weighted-average number of common
outstanding shares plus the effect of dilutive common equivalent shares during
the respective period. Dilutive common shares reflect the assumed
issuance of additional common shares pursuant to certain of our share-based
compensation plans, including stock options, restricted stock and performance
restricted stock units.
The following tables set forth the
computation of basic and diluted earnings per share:
|
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands, except per share amounts)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$ |
19,822 |
|
|
$ |
17,122 |
|
|
$ |
44,734 |
|
|
$ |
33,910 |
|
|
Preferred stock
dividends
|
|
|
(2,272 |
) |
|
|
(2,481 |
) |
|
|
(4,543 |
) |
|
|
(4,962 |
) |
|
Numerator for income available
to common shareholders from continuing operations - basic and
diluted
|
|
|
17,550 |
|
|
|
14,641 |
|
|
|
40,191 |
|
|
|
28,948 |
|
|
Discontinued
operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
446 |
|
|
Numerator for net income
available to common per share - basic and diluted
|
|
$ |
17,550 |
|
|
$ |
14,641 |
|
|
$ |
40,191 |
|
|
$ |
29,394 |
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings
per share
|
|
|
82,573 |
|
|
|
72,942 |
|
|
|
82,485 |
|
|
|
70,811 |
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock
|
|
|
90 |
|
|
|
84 |
|
|
|
80 |
|
|
|
70 |
|
|
Stock option incremental
shares
|
|
|
11 |
|
|
|
12 |
|
|
|
11 |
|
|
|
12 |
|
|
Deferred stock
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
Denominator for diluted
earnings per share
|
|
|
82,674 |
|
|
|
73,038 |
|
|
|
82,578 |
|
|
|
70,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share – basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
shareholders from continuing operations
|
|
$ |
0.21 |
|
|
$ |
0.20 |
|
|
$ |
0.49 |
|
|
$ |
0.41 |
|
|
Discontinued
operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.01 |
|
|
Net income –
basic
|
|
$ |
0.21 |
|
|
$ |
0.20 |
|
|
$ |
0.49 |
|
|
$ |
0.42 |
|
|
Earnings
per share – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
shareholders from continuing operations
|
|
$ |
0.21 |
|
|
$ |
0.20 |
|
|
$ |
0.49 |
|
|
$ |
0.41 |
|
|
Discontinued
operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net income –
diluted
|
|
$ |
0.21 |
|
|
$ |
0.20 |
|
|
$ |
0.49 |
|
|
$ |
0.41 |
|
Note
13– SUBSEQUENT EVENT
On July 1, 2009, we issued 180,588
shares of our common stock under our Equity Shelf Program for net proceeds of
approximately $2.8 million.
Forward-looking
Statements, Reimbursement Issues and Other Factors Affecting Future
Results
The following discussion should be read
in conjunction with the financial statements and notes thereto appearing
elsewhere in this document. This document contains forward-looking
statements within the meaning of the federal securities laws, including
statements regarding potential financings and potential future changes in
reimbursement. These statements relate to our expectations, beliefs,
intentions, plans, objectives, goals, strategies, future events, performance and
underlying assumptions and other statements other than statements of historical
facts. In some cases, you can identify forward-looking statements by
the use of forward-looking terminology including, but not limited to, terms such
as “may,” “will,” “anticipates,” “expects,” “believes,” “intends,” “should” or
comparable terms or the negative thereof. These statements are based
on information available on the date of this filing and only speak as to the
date hereof and no obligation to update such forward-looking statements should
be assumed. Our actual results may differ materially from those
reflected in the forward-looking statements contained herein as a result of a
variety of factors, including, among other things:
|
(i)
|
those
items discussed under “Risk Factors” in Item 1A to our annual report on
Form 10-K for the year ended December 31, 2008 and in Part II, Item 1A of
this report;
|
|
(ii)
|
uncertainties
relating to the business operations of the operators of our assets,
including those relating to reimbursement by third-party payors,
regulatory matters and occupancy
levels;
|
|
(iii)
|
the
ability of any operators in bankruptcy to reject unexpired lease
obligations, modify the terms of our mortgages and impede our ability to
collect unpaid rent or interest during the process of a bankruptcy
proceeding and retain security deposits for the debtors’
obligations;
|
|
(iv)
|
our
ability to sell closed or foreclosed assets on a timely basis and on terms
that allow us to realize the carrying value of these
assets;
|
|
(v)
|
our
ability to manage, re-lease or sell any owned and operated
facilities;
|
|
(vi)
|
the
availability and cost of capital;
|
|
(vii)
|
our
ability to maintain our credit
ratings;
|
|
(viii)
|
competition
in the financing of healthcare
facilities;
|
|
(ix)
|
regulatory
and other changes in the healthcare
sector;
|
|
(x)
|
the
effect of economic and market conditions generally and, particularly, in
the healthcare industry;
|
|
(xi)
|
changes
in the financial position of our
operators;
|
|
(xii)
|
changes
in interest rates;
|
|
(xiii)
|
the
amount and yield of any additional
investments;
|
|
(xiv)
|
changes
in tax laws and regulations affecting real estate investment
trusts;
|
|
(xv)
|
our
ability to maintain our status as a real estate investment
trust;
|
|
(xvi)
|
changes
in our credit ratings and the ratings of our debt and preferred
securities;
|
|
(xvii)
|
the
potential impact of a general economic slowdown on governmental budgets
and healthcare reimbursement expenditures;
and
|
|
(xviii)
|
the
effect of the recent financial crisis and severe tightening in the global
credit markets.
|
Overview
We have one reportable segment
consisting of investments in healthcare related real estate
properties. Our core business is to provide financing and capital to
the long-term healthcare industry with a particular focus on skilled nursing
facilities (“SNFs”) located in the United States. Our core portfolio
consists of long-term leases and mortgage agreements. All of our
leases are “triple-net” leases, which require the tenants to pay all
property-related expenses. Our mortgage revenue derives from
fixed-rate mortgage loans, which are secured by first mortgage liens on the
underlying real estate and personal property of the mortgagor. In
July 2008, we assumed operating responsibilities for 15 of our facilities due to
the bankruptcy of one of our former operator/tenants. In September
2008, we entered into an agreement to lease these facilities to a new
operator/tenant. The new operator/tenant assumed operating
responsibility for 13 of the 15 facilities effective September 1,
2008. We continue to be responsible for the two remaining facilities
as of June 30, 2009 that are in the process of being transitioned to the new
tenant/operator pending approval by state regulators.
Our
consolidated financial statements include the accounts of Omega, all direct and
indirect wholly owned subsidiaries as well as TC Healthcare I, LLC (“TC
Healthcare”), a new entity and interim operator created to operate the 15
facilities we assumed as a result of the bankruptcy of one of our former
tenant/operators. We consolidate the financial results of TC
Healthcare into our financial statements based on the applicable consolidation
accounting literature. We include the operating results and assets
and liabilities of these facilities for the period of time that TC Healthcare
was responsible for the operations of the facilities. Thirteen of
these facilities were transitioned from TC Healthcare to a new tenant/operator
on September 1, 2008; however, TC Healthcare continues to be responsible for two
remaining facilities as of June 30, 2009 that are in the process of being
transitioned to the new operator/tenant pending approval by state
regulators. The operating revenues and expenses and related operating
assets and liabilities of the two remaining owned and operated facilities are
shown on a gross basis in our Consolidated Statements of Income and Consolidated
Balance Sheets, respectively. All inter-company accounts and
transactions have been eliminated in consolidation of the financial
statements.
Our
portfolio of investments at June 30, 2009, consisted of 255 healthcare
facilities, located in 28 states and operated by 25 third-party
operators. Our gross investment in these facilities totaled
approximately $1.5 billion at June 30, 2009, with 99% of our real estate
investments related to long-term healthcare facilities. This
portfolio is made up of (i) 226 SNFs, (ii) seven assisted living facilities
(“ALFs”), (iii) two rehabilitation hospitals owned and leased to third parties,
(iv) two independent living facilities (“ILFs”), (v) fixed rate mortgages on 15
SNFs, (vi) two SNFs that are owned and operated and (vii) one SNF that is
currently held for sale. At June 30, 2009, we also held other
investments of approximately $29.7 million, consisting primarily of secured
loans to third-party operators of our facilities.
Taxation
We have elected to be taxed as a Real
Estate Investment Trust (“REIT”), under Sections 856 through 860 of the Internal
Revenue Code (the “Code”), beginning with our taxable year ended December 31,
1992. We believe that we have been organized and operated in such a
manner as to qualify for taxation as a REIT. We intend to continue to operate in
a manner that will maintain our qualification as a REIT, but no assurance can be
given that we have operated or will be able to continue to operate in a manner
so as to qualify or remain qualified as a REIT. Under the Code, we
generally are not subject to federal income tax on taxable income distributed to
stockholders if certain distribution, income, asset and stockholder tests are
met, including a requirement that we must generally distribute at least 90% of
our annual taxable income, excluding any net capital gain, to
stockholders. If we fail to qualify as a REIT in any taxable year, we
may be subject to federal income taxes on our taxable income for that year and
for the four years following the year during which qualification is lost, unless
the Internal Revenue Service grants us relief under certain statutory
provisions. Such an event could materially adversely affect our net income and
net cash available for distribution to our stockholders. For further
information, see “Taxation” in Item 1 of our annual report on Form 10-K for the
year ended December 31, 2008.
Recent
Developments Regarding Government Regulation and Reimbursement
Reimbursement. The
recent downturn in the U.S. economy and other factors could result in
significant cost-cutting at both the federal and state levels, resulting in a
reduction of reimbursement rates and levels to our operators under both the
Medicare and Medicaid programs. In addition, Congress currently is
considering options for health care reform legislation, and some of the options
under consideration could result in decreases in payments to SNFs or otherwise
diminish the financial condition of individual SNFs. These
legislative options include potential changes in the reporting and measurement
of quality, the setting of payment levels and the enforcement of the laws and
rules governing federal health programs. It is currently uncertain
which health care reform options, if any, will be enacted by
Congress.
We
currently believe that our operator coverage ratios are adequate and that our
operators can absorb moderate reimbursement rate reductions under Medicaid and
Medicare and still meet their obligations to us. However, significant limits on
the scope of services reimbursed and on reimbursement rates and fees could have
a material adverse effect on an operator’s results of operations and financial
condition, which could adversely affect the operator’s ability to meet its
obligations to us.
Medicaid. Current
market and economic conditions will likely have a significant impact on state
budgets and health care spending. Fiscal conditions have continued to
deteriorate, and many states are experiencing significant budget
gaps. As a result, despite increases in Federal funding,
Medicaid spending from state funds is estimated to decline in both state fiscal
years 2009 and 2010. The budget deficits are exacerbated by increased
enrollment in Medicaid during 2008 and anticipated increased enrollment in
fiscal years 2009 and 2010. Since the profit margins on
Medicaid patients are generally relatively low, substantial reductions in
Medicaid reimbursement could adversely affect our operators’ results of
operations and financial condition, which in turn could negatively impact
us.
The
American Recovery and Reinvestment Act of 2009 (“ARRA”), which was signed into
law on February 17, 2009, provides for enhanced federal Medicaid matching rates
that may provide some relief to states. Because states have
discretion with respect to their Medicaid programs, some states may address
budget shortfalls outside of Medicaid by reallocating state funds that otherwise
would have been spent on Medicaid expenditures. As a result, the
impact of the ARRA Medicaid funding on our operators will depend on how states
choose to use the funding.
In 2007
and early 2008, the Center for Medicare & Medicaid Services (“CMS”) issued a
number of Medicaid rules that have the potential to reduce the funding available
under state Medicaid programs to reimburse long-term care
providers. Several of these rules were rescinded on June 30, 2009
including rules related to specialized transportation to schools for children
covered by Medicaid, outpatient hospital services and certain provisions related
to targeted case management services. In addition, CMS proposed to delay until
June 30, 2010 the enforcement of certain provisions of a regulation related to
health care-related taxes. However, other regulatory provisions have been
implemented, including a reduction in the maximum allowable health care-related
taxes that states can impose on providers (reduced from 6 percent to 5.5
percent). This rule could result in lower taxes for providers, but
also could result in less overall funding for state Medicaid programs by
limiting the ability of states to fund the non-federal share of the Medicaid
program. As a result, the operators of our properties could
potentially experience reductions in Medicaid funding, which could adversely
impact their ability to meet their obligations to us.
Medicare. On
July 31, 2009, CMS announced a final rule on Medicare’s prospective payment
system for SNFs for fiscal year 2010. The final rule includes a
reduction in payments to nursing homes equal to $1.05 billion, or 3.3 percent,
resulting from a recalibration of the case-mix indices. However, CMS
estimates that the fiscal year 2010 market basket adjustment of 2.1 percent, or
$660 million, will offset the $1.05 billion adjustment, resulting in an
aggregate decrease in Medicare payments to SNFs during fiscal year 2010 of
approximately $360 million, or 1.1 percent. The changes may have different
impacts on individual SNFs, depending in part on the characteristics of the
patient populations of individual facilities. Our operators may
receive reduced Medicare payments as a result of the final rule, which could
have an adverse effect on their ability to satisfy their financial
obligations. The 2010 fiscal year begins on October 1, 2009 and ends
on September 30, 2010.
In
addition to the recalibration of the casemix indices and payment update, CMS
finalized a revised case-mix classification system, the RUG-IV, and
implementation schedule for fiscal year 2011. The change in case-mix
classification methodology has the potential to impact reimbursement, although
the ultimate impact of the RUG-IV classification model on reimbursement to the
individual operators of our facilities is unknown.
The 2009
fiscal year ends on September 30, 2009. On August 8, 2008, CMS
published a final rule on Medicare’s prospective payment system for SNFs for
fiscal year 2009. CMS estimated that these payment policies will increase
aggregate Medicare payments to SNFs during fiscal year 2009 by $780 million
(compared to fiscal year 2008).
The
Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”) became
law on July 15, 2008 and made a variety of changes to Medicare, some of which
may affect SNFs. For instance, MIPPA extended the therapy caps
exceptions process through December 31, 2009. The therapy caps limit
the physical therapy, speech-language therapy and occupational therapy services
that a Medicare beneficiary can receive during a calendar year. These
caps do not apply to therapy services covered under Medicare Part A in SNF,
although the caps apply in most other instances involving patients in SNFs or
long-term care facilities who receive therapy services covered under Medicare
Part B. Congress implemented a temporary therapy cap exceptions
process, which permits medically necessary therapy services to exceed the
payment limits. MIPPA retroactively extended the therapy caps
exceptions process through December 31, 2009. Expiration of the
therapy caps exceptions process in the future could have a material adverse
effect on our operators’ financial condition and operations, which could
adversely impact their ability to meet their obligations to us.
Quality of Care
Initiatives. CMS has implemented a number of initiatives
focused on the quality of care provided by nursing homes that could affect our
operators. For instance, in February 2008, CMS made publicly
available on its website the names of all 136 nursing homes targeted in its
Special Focus Facility program for underperforming nursing homes. CMS
plans to update the list regularly. As another example, in December
2008, CMS released quality ratings for all of the nursing homes that participate
in Medicare or Medicaid. Facility rankings, ranging from five stars
(“much above average”) to one star (“much below average”) will be updated on a
monthly basis. In the event any of our operators do not maintain the
same or superior levels of quality care as their competitors, patients could
choose alternate facilities, which could adversely impact our operators’
revenues. In addition, the reporting of such information could lead
to future reimbursement policies that reward or penalize facilities on the basis
of the reported quality of care parameters.
The
Office of Inspector General (“OIG”) of the Department of Health and Human
Services also has carried out a number of projects focused on the quality of
care provided by nursing homes. For example, in September 2008,
the OIG released a report based on an analysis of data from CMS’ Online Survey
and Certification Reporting System (“OSCAR”), which contains the results of all
state nursing home surveys. The report notes that over 91 percent of
nursing homes surveyed were cited for deficiencies and complaints between 2005
and 2007. The most common deficiencies cited involved quality of
care, resident assessments and quality of life. A greater percentage
of for-profit nursing homes were cited than not-for-profit and government
nursing homes. In addition, the OIG’s Work Plan for fiscal year 2009,
which describes projects that the OIG plans to address during the fiscal year,
includes a number of projects related to nursing homes.
Critical
Accounting Policies and Estimates
Our financial statements are prepared
in accordance with generally accepted accounting principles in the United States
of America (“GAAP”) and a summary of our significant accounting policies is
included in Note 2 – Summary of Significant Accounting Policies to our Annual
Report on Form 10-K for the year ended December 31, 2008. Our
preparation of the financial statements requires us to make estimates and
assumptions about future events that affect the amounts reported in our
financial statements and accompanying footnotes. Future events and
their effects cannot be determined with absolute
certainty. Therefore, the determination of estimates requires the
exercise of judgment. Actual results inevitably will differ from
those estimates, and such difference may be material to the consolidated
financial statements. We have described our most critical accounting
policies in our 2008 Annual Report on Form 10-K in Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Recent
Accounting Pronouncements:
EITF
03-6-1 Evaluation
In June 2008, the FASB issued FSP EITF
03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating
Securities. In this FSP, the FASB concluded that all outstanding unvested
share-based payment awards that contain rights to non-forfeitable dividends or
dividend equivalents that participate in undistributed earnings with common
shareholders and, accordingly, are considered participating securities that
shall be included in the two-class method of computing basic and diluted EPS.
The FSP does not address awards that contain rights to forfeitable dividends. We
adopted this standard on January 1, 2009, and retrospectively adjusted basis EPS
data for all periods presented to reflect the two-class method of computing
EPS. The provisions of FSP EITF 03-6-1 impact on earnings per share
was less than $0.01 per share for the periods presented.
FSP
157-4 Evaluation
In April 2009, the FASB issued FSP No.
FAS 157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly. This FSP provides additional guidance for estimating fair value
in accordance with SFAS No. 157, Fair Value Measurements, when
the volume and level of activity for the asset or liability have significantly
decreased. This FSP also includes guidance on identifying circumstances that
indicate a transaction is not orderly. This FSP emphasizes that even if there
has been a significant decrease in the volume and level of activity for the
asset or liability and regardless of the valuation technique(s) used, the
objective of a fair value measurement remains the same. Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants at the measurement date under current market
conditions. We adopted the standard in the second quarter of 2009 and determined
that the adoption of FSP 157-4 had no material effect on our financial position
or results of operations.
FSP
107-1 Evaluation
In April 2009, the FASB issued FSP No.
107-1 and Accounting Principles Board (“APB”) Opinion No. 28-1, Interim Disclosures about Fair Value
of Financial Instruments. This FSP amends SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, to require an entity to provide disclosures about
fair value of financial instruments in interim financial information. This FSP
also amends APB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in summarized financial information at interim
reporting periods. Under this FSP, a publicly traded company shall include
disclosures about the fair value of its financial instruments whenever it issues
summarized financial information for interim reporting periods. In addition, an
entity shall disclose in the body or in the accompanying notes of its summarized
financial information for interim reporting periods and in its financial
statements for annual reporting periods the fair value of all financial
instruments for which it is practicable to estimate that value, whether
recognized or not recognized in the statement of financial position, as required
by FAS No. 107. We adopted the standard in the second quarter of 2009 and such
disclosures are provided in Note 9 – Financial Instruments.
FAS
157 Evaluation
On January 1, 2008, we adopted
Financial Accounting Standards Board, (“FASB”), Statement No. 157, Fair Value Measurements (“FAS
No. 157”). This standard defines fair value, establishes a
methodology for measuring fair value and expands the required disclosure for
fair value measurements. FAS No. 157 emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and states that a
fair value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability. This
statement applies under other accounting pronouncements that require or permit
fair value measurements, the FASB having previously concluded in those
pronouncements that fair value is the relevant measurement
attribute. Accordingly, this statement does not require any new fair
value measurements. The standard applies prospectively to new fair
value measurements performed after the required effective dates, which are as
follows: (i) on January 1, 2008, the standard applied to our measurements of the
fair values of financial instruments and recurring fair value measurements of
non-financial assets and liabilities; and (ii) on January 1, 2009, the
standard applies to all remaining fair value measurements, including
non-recurring measurements of non-financial assets and liabilities such as
measurement of potential impairments of goodwill, other intangible assets and
other long-lived assets. It also will apply to fair value measurements of
non-financial assets acquired and liabilities assumed in business combinations.
We evaluated FAS No. 157 and determined that the adoption of FAS No. 157 had no
impact on our consolidated financial statements.
FAS
141(R) Evaluation
On December 4, 2007, the Financial
Accounting Standards Board issued Statement No. 141(R), Business Combinations (“FAS
No. 141(R)”). The new standard will significantly change the
accounting for and reporting of business combination
transactions. FAS No. 141(R) requires companies to recognize, with
certain exception, 100 percent of the fair value of the assets acquired,
liabilities assumed and non-controlling interest in acquisitions of less than a
100 percent controlling interest when the acquisition constitutes a change in
control; measure acquirer shares issued as consideration for a business
combination at fair value on the date of the acquisition; recognize contingent
consideration arrangements at their acquisition date fair value, with subsequent
change in fair value generally reflected in earnings; recognition of
reacquisition loss and gain contingencies at their acquisition date fair value;
and expense as incurred, acquisition related transaction costs. FAS
No. 141(R) is effective for fiscal years beginning after December 15, 2008 and
early adoption was prohibited. We adopted the standard on January 1,
2009, which will impact the accounting only for acquisitions occurring
prospectively.
FAS
165 Evaluation
In the second quarter of 2009, we
adopted FASB Statement No. 165, Subsequent Events (“FAS No.
165”) FAS No. 165 establishes the accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date, that is, whether that date represents the date the financial statements
were issued or were available to be issued. The adoption of FAS No. 165 did
not have a material impact on our financial statements.
Results
of Operations
The following is our discussion of the
consolidated results of operations, financial position and liquidity and capital
resources, which should be read in conjunction with our unaudited consolidated
financial statements and accompanying notes.
Three
Months Ended June 30, 2009 and 2008
Operating
Revenues
Our operating revenues for the three
months ended June 30, 2009 totaled $49.2 million, an increase of $5.4 million
over the same period in 2008. The $5.4 million increase relates
primarily to: (i) $4.4 million nursing home revenues of owned and operated
assets in 2009 compared to 2008, as a result of the July 2008 assumption of
operating responsibility for the facilities formerly operated by Haven
Healthcare (“Haven”), (ii) additional rental income as a result of the
acquisitions since March 2008, and (iii) additional mortgage income associated
with the mortgage financing of seven new facilities in April
2008. Miscellaneous revenue decreased by $0.7 million in
2009. In 2008, we received late fees of approximately $0.8
million.
Operating
Expenses
Operating expenses for the three
months ended June 30, 2009 totaled $19.6 million, an increase of approximately
$2.6 million over the same period in 2008. The increase was primarily
due to: (i) $5.5 million nursing home expenses in owned and operated assets in
2009 compared to 2008, as a result of the July 2008 assumption of operating
responsibility for the facilities formerly operated by Haven; and (ii) an
increase in depreciation expense of $1.3 million due to acquisitions since March
2008, partially offset by a decrease in provision for uncollectible accounts
receivable associated with Haven of $4.3 million in 2008. The
provision consisted of $3.3 million associated with straight-line receivables
and $1.0 million in pre-petition contractual receivables.
Other
Income (Expense)
For the three months ended June 30,
2009 and June 30, 2008, total other expenses were $9.7 million. For
the three months ended June 30, 2009 compared to June 30, 2008, interest expense
decreased by $1.0 million due to decrease borrowings outstanding and lower
rates. For the three months ended June 30, 2008, we received a
litigation settlement of $0.5 million. For the three months ended
June 30, 2009, we wrote off $0.5 million of unamortized deferred financing costs
related to replacing the former $255 million credit
facility. Interest rates on the new $200 million credit
facility are greater than they were under the former $255 credit facility, which
could increase future interest cost.
Income
from Continuing Operations
Income from continuing operations for
the three months ended June 30, 2009 was $19.8 million compared to $17.1 million
for the same period in 2008. The increase in income from continuing
operations is the result of the factors described above.
Discontinued
Operations
Discontinued operations generally
relate to properties we disposed of or plan to dispose of and have no continuing
involvement or cash flows with the operator. These assets are
included in assets held for sale – net in our consolidated balance sheet prior
to their sale/disposal. As of June 30, 2009 and June 30, 2008, we
have no assets from discontinued operations.
For the three months ended June 30,
2009 and 2008, no revenue or expense was generated from discontinued
operations.
Six
Months Ended June 30, 2009 and 2008
Operating
Revenues
Our operating revenues for the six
months ended June 30, 2009 totaled $98.3 million, an increase of $13.7 million
over the same period in 2008. The $13.7 million increase relates
primarily to: (i) $8.8 million nursing home revenues of owned and operated
assets in 2009 compared to 2008, as a result of the July 2008 assumption of
operating responsibility for the facilities formerly operated by Haven, (ii)
additional rental income as a result of the acquisitions since March 2008, and
(iii) additional mortgage income associated with the mortgage financing of seven
new facilities in April 2008. Miscellaneous revenue decreased by $1.9
million in 2009. In 2008, we received past due rent and late fees of
approximately $1.9 million.
Operating
Expenses
Operating expenses for the six months
ended June 30, 2009 totaled $39.1 million, an increase of approximately $8.1
million over the same period in 2008. The increase was primarily due
to: (i) $10.9 million nursing home expenses in owned and operated assets in 2009
compared to 2008, as a result of the July 2008 assumption of operating
responsibility for the facilities formerly operated by Haven, and (ii) an
increase in depreciation expense of $2.8 million due to acquisitions since March
2008, partially offset by a decrease in provision for impairment of $1.4 million
and a decrease in provision for uncollectible accounts receivable associated
with Haven of $4.3 million. The provision consisted of $3.3 million
associated with straight-line receivables and $1.0 million in pre-petition
contractual receivables.
Other
Income (Expense)
For the six months ended June 30,
2009, total other expenses were $14.5 million, as compared to $19.8 million for
the same period in 2008, a decrease of $5.3 million. The decrease was
due to: (i) lower average borrowings rates on our outstanding borrowings, and
(ii) an increase of $4.0 million associated with cash received for a legal
settlement in the first half of 2009 compared to the same period of 2008,
partially offset by $0.5 million associated with the write-off of unamortized
deferred financing costs related to replacing the former $255 million credit
facility during the second quarter of 2009.
Income
from Continuing Operations
Income from continuing operations for
the six months ended June 30, 2009 was $44.7 million compared to $33.9 million
for the same period in 2008. The increase in income from continuing
operations is the result of the factors described above.
Discontinued
Operations
Discontinued operations generally
relate to properties we disposed of or plan to dispose of and have no continuing
involvement or cash flows with the operator. These assets included in
assets held for sale – net in our consolidated balance sheet prior to their
sale/disposal.
For the six months ended June 30,
2009, no revenue or
expense generated from discontinued operations. For the six months ended June 30,
2008, discontinued
operations includes revenue of $15 thousand for one SNF located in California
that was sold during the first quarter of 2008, generating a gain of $0.4
million.
Funds
From Operations
Our funds
from operations available to common stockholders (“FFO”), for the three months
ended June 30, 2009, was $28.6 million, compared to $24.4 million, for the same
period in 2008.
We
calculate and report FFO in accordance with the definition and interpretive
guidelines issued by the National Association of Real Estate Investment Trusts
(“NAREIT”), and consequently, FFO is defined as net income available to common
stockholders, adjusted for the effects of asset dispositions and certain
non-cash items, primarily depreciation and amortization. We believe
that FFO is an important supplemental measure of our operating
performance. Because the historical cost accounting convention used
for real estate assets requires depreciation (except on land), such accounting
presentation implies that the value of real estate assets diminishes predictably
over time, while real estate values instead have historically risen or fallen
with market conditions. The term FFO was designed by the real estate
industry to address this issue. FFO herein is not necessarily
comparable to FFO of other REITs that do not use the same definition or
implementation guidelines or interpret the standards differently from
us.
We use
FFO as one of several criteria to measure operating performance of our
business. We further believe that by excluding the effect of
depreciation, amortization and gains or losses from sales of real estate, all of
which are based on historical costs and which may be of limited relevance in
evaluating current performance, FFO can facilitate comparisons of operating
performance between periods. We offer this measure to assist the
users of our financial statements in analyzing our financial performance;
however, this is not a measure of financial performance under GAAP and should
not be considered a measure of liquidity, an alternative to net income or an
indicator of any other performance measure determined in accordance with
GAAP. Investors and potential investors in our securities should not
rely on this measure as a substitute for any GAAP measure, including net
income.
The following table reconciles FFO to
net income available to common stockholders, as determined under GAAP, for the
three- and six- months ended June 30, 2009 and 2008:
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$ |
17,550 |
|
|
$ |
14,641 |
|
|
$ |
40,191 |
|
|
$ |
29,394 |
|
|
Add back loss (deduct gain)
from real estate dispositions
|
|
|
24 |
|
|
|
— |
|
|
|
24 |
|
|
|
(477 |
) |
|
Sub-total
|
|
|
17,574 |
|
|
|
14,641 |
|
|
|
40,215 |
|
|
|
28,917 |
|
|
Elimination of non-cash items
included in net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
10,990 |
|
|
|
9,713 |
|
|
|
21,921 |
|
|
|
19,109 |
|
|
Funds
from operations available to common stockholders
|
|
$ |
28,564 |
|
|
$ |
24,354 |
|
|
$ |
62,136 |
|
|
$ |
48,026 |
|
|
|
Portfolio
and Recent Developments
|
There were no significant re-leasing,
restructuring or new investment transactions that occurred during the six months
ended June 30, 2009.
Assets
Sold
On April 24, 2009, we sold our
held-for-sale SNF in Iowa for approximately $0.1 million resulting in a loss of
approximately $24 thousand.
Held
for Sale
On June 30, 2009, we classified one SNF
in Connecticut as held-for-sale with a net book value of approximately $0.7
million.
Liquidity
and Capital Resources
At June 30, 2009, we had total assets
of $1.3 billion, stockholders’ equity of $786.4 million and debt of $530.7
million, which represents approximately 40.3% of our total
capitalization.
The
following table shows the amounts due in connection with the contractual
obligations described below as of June 30, 2009.
|
|
|
Payments due by period
|
|
|
|
|
Total
|
|
|
Less
than
1
year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than
5
years
|
|
|
|
|
(in
thousands)
|
|
|
Debt
(1)
|
|
$ |
531,000 |
|
|
$ |
- |
|
|
$ |
46,000 |
|
|
$ |
310,000 |
|
|
$ |
175,000 |
|
|
Operating
lease obligations(2)
|
|
|
3,123 |
|
|
|
284 |
|
|
|
591 |
|
|
|
624 |
|
|
|
1,624 |
|
|
Total
|
|
$ |
534,123 |
|
|
$ |
284 |
|
|
$ |
46,591 |
|
|
$ |
310,624 |
|
|
$ |
176,624 |
|
|
(1)
|
The
$531.0 million includes $310 million aggregate principal amount of 7%
Senior Notes due April 2014, $175 million aggregate principal amount of 7%
Senior Notes due January 2016, and $46.0 million in borrowings under the
$200 million revolving senior secured credit facility (the “New Credit
Facility”) that matures in June 30,
2012.
|
|
(2)
|
Relates
primarily to the lease at the corporate
headquarters.
|
Financing
Activities and Borrowing Arrangements
Bank
Credit Agreements
On June 30, 2009, we entered into a new
$200 million revolving senior secured credit facility (the “New Credit
Facility”). The New Credit Facility is being provided by Bank of
America, N.A., Deutsche Bank Trust Company Americas, UBS Loan Finance LLC and
General Electric Capital Corporation pursuant to a Credit Agreement, dated as of
June 30, 2009 (the “New Credit Agreement”), among the Omega subsidiaries named
therein (“Borrowers”), the lenders named therein, and Bank of America, N.A., as
administrative agent. At June 30, 2009, we had $46.0 million
outstanding under the New Credit Facility and no letters of credit outstanding,
leaving availability of $154.0 million. The $46.0 million of
outstanding borrowings had an interest rate of 6% at June 30, 2009, and is
currently priced at LIBOR plus 400 basis points. The New Credit
Facility will be used for acquisitions and general corporate purposes.
The New Credit Facility replaces our
previous $255 million senior secured credit facility (the “Prior Credit
Facility”), that was terminated on June 30, 2009. The New Credit
Facility matures on June 30, 2012, and includes an “accordion feature” that
permits us to expand our borrowing capacity to $300 million in certain
circumstances during the first two years.
For the three-month period ended June
30, 2009, we recorded a one-time, non-cash charge of approximately $0.5 million
relating to the write-off of unamortized deferred financing costs associated
with the replacement of the Prior Credit Facility. We incurred
approximately $4.4 million in deferred financing cost related to establishing
the New Credit Facility.
The
interest rates per annum applicable to the New Credit Facility are the
reserve-adjusted LIBOR Rate, with a floor
of 200 basis points (the “Eurodollar
Rate”), plus the applicable margin (as defined below) or, at our option, the
base rate, which will be the highest of (i) the rate of interest publicly
announced by the administrative agent as its prime rate in effect, (ii) the
federal funds effective rate from time to time plus 0.50% and (iii) the
Eurodollar Rate for a Eurodollar Loan with an interest period of one month plus
1.25%, in each case, plus the applicable margin. The applicable
margin with respect to the New Credit Facility is determined in accordance with
a performance grid based on our consolidated leverage ratio. The
applicable margin may range from 4.75% to 3.7% in the case of Eurodollar Rate
advances, from 3.5% to 2.5% in the case of base rate advances, and from 4.75% to
3.75% in the case of letter of credit fees. The default rate on the
New Credit Facility is 3.00% above the interest rate otherwise applicable to
base rate loans. We are also obligated to pay a commitment fee of
0.50% on the unused portion of our New Credit Facility. In certain
circumstances set forth in the New Credit Agreement, we may prepay the New
Credit Facility at any time in whole or in part without fees or
penalty.
Omega and its subsidiaries that are not Borrowers under the
New Credit Facility guarantee the obligations of our Borrower
subsidiaries under the New Credit Facility. All obligations under the
New Credit Facility and the related guarantees are secured by a perfected first
priority lien on certain real properties and all improvements, fixtures,
equipment and other personal property relating thereto of the Borrower subsidiaries under the New
Credit Facility, and an assignment of leases, rents, sale/refinance proceeds and
other proceeds flowing from the real properties.
The New Credit Facility contains
customary affirmative and negative covenants, including, without limitations,
limitations on investments; limitations on liens; limitations on mergers,
consolidations, and transfers of assets; limitations on sales of assets;
limitations on transactions with affiliates; and limitations on our transfer of
ownership and management. In addition, the New Credit Facility
contains financial covenants including, without limitation, with respect to
maximum leverage ratio, minimum fixed charge coverage ratio, minimum tangible
net worth and maximum distributions. As of June 30, 2009, we were in
compliance with all affirmative and negative covenants, including financial
covenants.
Equity
Distribution Agreement
On June 12, 2009, we entered into
separate Equity Distribution Agreements (collectively, the "Equity Distribution
Agreements") with each of UBS Securities LLC, Deutsche Bank Securities Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, each as sales agents
and/or principal (the "Managers"). Under the terms of the Equity
Distribution Agreements, we may sell shares of our common stock, from time to
time, through or to the Managers having an aggregate gross sales price of
up to $100,000,000 (the “Equity Shelf Program”). Sales of the shares,
if any, will be made by means of ordinary brokers’ transactions on the New York
Stock Exchange at market prices, or as otherwise agreed with the
applicable Manager. We will pay each Manager compensation
for sales of the shares equal to 2% of the gross sales price per share of shares
sold through such Manager, as sales agent, under the applicable Equity
Distribution Agreement. During the three months ended June
30, 2009, 700 shares of the Company’s common stock were issued through the
Equity Shelf Program for net proceeds of $11,000.
Amendment
to Charter to Increase Authorized Common Stock
On May 28, 2009, we amended our
Articles of Incorporation to increase the number of authorized shares of our
common stock from 100,000,000 to 200,000,000 shares. The Board of
Directors previously approved the amendment, subject to stockholder approval,
and the amendment was approved by our stockholders at the Annual Meeting of
Stockholders held on May 21, 2009.
Dividend
Reinvestment and Common Stock Purchase Plan
We have a
Dividend Reinvestment and Common Stock Purchase Plan (the “DRSPP”) that allows
for the reinvestment of dividends and the optional purchase of our common
stock. Effective May 15, 2009, we reinstated the optional cash
purchase component of our DRSPP, which we had temporarily suspended in October
2008.
For the six month period ended June 30,
2009, we issued 476,051 shares of common stock for approximately $7.0 million in
net proceeds.
Dividends
In order to qualify as a REIT, we are
required to distribute dividends (other than capital gain dividends) to our
stockholders in an amount at least equal to (A) the sum of (i) 90% of our "REIT
taxable income" (computed without regard to the dividends paid deduction and our
net capital gain), and (ii) 90% of the net income (after tax), if any, from
foreclosure property, minus (B) the sum of certain items of non-cash income. In
addition, if we dispose of any built-in gain asset during a recognition period,
we will be required to distribute at least 90% of the built-in gain (after tax),
if any, recognized on the disposition of such asset. Such distributions must be
paid in the taxable year to which they relate, or in the following taxable year
if declared before we timely file our tax return for such year and paid on or
before the first regular dividend payment after such declaration. In addition,
such distributions are required to be made pro rata, with no preference to any
share of stock as compared with other shares of the same class, and with no
preference to one class of stock as compared with another class except to the
extent that such class is entitled to such a preference. To the extent that we
do not distribute all of our net capital gain or do distribute at least 90%, but
less than 100% of our "REIT taxable income," as adjusted, we will be subject to
tax thereon at regular ordinary and capital gain corporate tax
rates. In addition, our New Credit Facility has certain financial
covenants that limit the distribution of dividends paid during a fiscal quarter
to no more than 95% of our aggregate cumulative FFO as defined in the credit
agreement, unless a greater distribution is required to maintain REIT
status. The credit agreement defines FFO as net income (or loss) plus
depreciation and amortization and shall be adjusted for charges related to: (i)
restructuring our debt; (ii) redemption of preferred stock; (iii) litigation
charges up to $5.0 million; (iv) non-cash charges for accounts and notes
receivable up to $5.0 million; (v) non-cash compensation related expenses; (vi)
non-cash impairment charges;
and (vii) tax liabilities in an amount not to exceed $8.0
million.
For the three- and six- months ended
June 30, 2009, we paid total dividends of $27.0 million and $54.1 million,
respectively.
On July
15, 2009, the Board of Directors declared a common stock dividend of $0.30 per
share to be paid August 17, 2009 to common stockholders of record on July 31,
2009. On July 15, 2009, the Board of Directors also declared the
regular quarterly dividends for our 8.375% Series D Cumulative Redeemable
Preferred Stock to stockholders of record on July 31, 2009. The
stockholders of record of the Series D Preferred Stock on July 31, 2009 will be
paid dividends in the amount of $0.52344 per preferred share on August 17,
2009. The liquidation preference for our Series D Preferred Stock is
$25.00 per share.
Liquidity
We believe our liquidity and various
sources of available capital, including cash from operations, our existing
availability under our New Credit Facility and expected proceeds from mortgage
payoffs are more than adequate to finance operations, meet recurring debt
service requirements and fund future investments through the next twelve
months.
We
regularly review our liquidity needs, the adequacy of cash flow from operations,
and other expected liquidity sources to meet these needs. We believe
our principal short-term liquidity needs are to fund:
· normal
recurring expenses;
· debt
service payments;
· preferred
stock dividends;
· common
stock dividends; and
· growth
through acquisitions of additional properties.
The
primary source of liquidity is our cash flows from
operations. Operating cash flows have historically been determined
by: (i) the number of facilities we lease or have mortgages on; (ii) rental and
mortgage rates; (iii) our debt service obligations; and (iv) general and
administrative expenses. The timing, source and amount of cash flows
provided by financing activities and used in investing activities are sensitive
to the capital markets environment, especially to changes in interest
rates. Changes in the capital markets environment may impact the
availability of cost-effective capital and affect our plans for acquisition and
disposition activity. Current economic conditions reduced the
availability of cost-effective capital in recent quarters, and accordingly our
level of new investments has decreased. As economic conditions and
capital markets stabilize, we look forward to funding new investments as
conditions warrant. However, we cannot predict the timing or level of
future investments.
Cash and
cash equivalents totaled $4.9 million as of June 30, 2009, an increase of $4.7
million as compared to the balance at December 31, 2008. The
following is a discussion of changes in cash and cash equivalents due to
operating, investing and financing activities, which are presented in our
Consolidated Statements of Cash Flows.
Operating
Activities –
Net cash flow from operating activities generated $80.9 million for the six
months ended June 30, 2009, as compared to $54.6 million for the same period in
2008, an increase of $26.3 million.
Investing
Activities – Net cash flow from investing activities was an outflow of
$7.0 million for the six months ended June 30, 2009, as compared to an outflow
of $140.7 million for the same period in 2008. The decrease in cash
outflow from investing activities relates primarily to i) the change in
acquisition activity, and ii) the reduction in spending on capital
improvement projects. In addition, in 2009, other investments –net
generated net cash compared to a use of cash for other investment –net in
2008. In 2009, proceeds from the sale of real estate investment
decreased year-over-year by $2.9 million due to timing of
transactions. During 2008, we acquired one facility for $5.2 million
in the first quarter and the acquisition of nine facilities for $47.4 million in
the second quarter compared to no acquisitions in 2009. We also
acquired a $74.9 million mortgage loan with one of our operators in the second
quarter of 2008. During 2009, we made $7.5 million in capital
improvements and renovation compared to $9.0 million for the same period in
2008, the decrease relates primarily to the timing of projects.
Financing
Activities – Net cash flow from financing activities was an outflow of
$69.2 million for the six months ended June 30, 2009 as compared to an inflow of
$86.3 million for the same period in 2008. The $155.5 million change
in financing activities was primarily a result of: (i) a net payment of $17.5
million on our credit facilities and other borrowings in 2009 compared to net
proceeds of $15.0 million on our Prior Credit Facility and other borrowings in
2008, (ii) $4.4 million in payments of deferred financing costs associated with
the New Credit Facility in 2009, (iii) an increase in dividend payment of $8.3
million due to the issuance of common stock, primarily during the second and
third quarter of 2008, offset by (iv) a decrease in dividend reinvestment
proceeds of $13.3 million due to the temporary suspension of the optional cash
purchase component of our DRSPP and (v) $98.8 million net proceeds from the
common stock offering in the second quarter of 2008.
We are
exposed to various market risks, including the potential loss arising from
adverse changes in interest rates. We do not enter into derivatives
or other financial instruments for trading or speculative purposes, but we seek
to mitigate the effects of fluctuations in interest rates by matching the term
of new investments with new long-term fixed rate borrowing to the extent
possible.
The interest rate charged on our New
Credit Facility can vary based on the interest rate option we choose to utilize.
The interest rates per annum applicable to the New Credit Facility are the
reserve-adjusted LIBOR Rate, with a floor of 200 basis points (the “Eurodollar
Rate”), plus the applicable margin (as defined below) or, at our option, the
base rate, which will be the highest of (i) the rate of interest publicly
announced by the administrative agent as its prime rate in effect, (ii) the
federal funds effective rate from time to time plus 0.50% and (iii) the
Eurodollar Rate for a Eurodollar Loan with an interest period of one month plus
1.25%, in each case, plus the applicable margin. The applicable margin with
respect to the New Credit Facility is determined in accordance with a
performance grid based on our consolidated leverage ratio. The applicable margin
may range from 4.75% to 3.75% in the case of Eurodollar Rate advances, from 3.5%
to 2.5% in the case of base rate advances, and from 4.75% to 3.75% in the case
of letter of credit fees. As of June 30, 2009, the total amount of outstanding
debt subject to interest rate fluctuations was $46.0 million. A hypothetical 100
basis point change in short-term interest rates would result in an increase or
decrease in interest expense of $0.5 million per year, assuming a consistent
capital structure.
For additional information, refer to
Item 7A as presented in our annual report on Form 10-K for the year ended
December 31, 2008.
Disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) are controls and other procedures that are designed to
provide reasonable assurance that the information that we are required to
disclose in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
In connection with the preparation of
this Form 10-Q, we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of June 30, 2009. Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective at a
reasonable assurance level as of June 30, 2009.
There were no changes in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the period covered by this report identified in
connection with the evaluation of our disclosure controls and procedures
described above that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART
II – OTHER
INFORMATION
See Note 9 – Litigation to the
Consolidated Financial Statements in Item 1 hereto, which is hereby incorporated
by reference in response to this item.
We filed our Annual Report on Form 10-K
for the year ended December 31, 2008 with the Securities and Exchange Commission
on March 2, 2009, which sets forth our risk factors in Item 1A therein. We have
not experienced any material changes from the risk factors previously described
therein.
Our annual meeting of stockholders (the
“Annual Meeting”) was held on May 21, 2009. Total number of common
shares outstanding on April 19, 2009, was 82,408,075. Results of
votes with respect to proposals submitted at the Annual Meeting are set forth
below:
(a) To
elect two nominees to serve as directors and to hold office until the next
annual meeting of stockholders or until their successors have been elected and
qualified. Our stockholders voted to elect both nominees to serve as
directors. Votes recorded, by nominee, were as follows:
|
Nominee
|
|
For
|
|
Withheld
|
|
Thomas
F. Franke
|
|
73,467,792
|
|
1,398,605
|
|
Bernard
J. Korman
|
|
73,482,899
|
|
1,383,498
|
(b) To
approve an amendment to Articles of Incorporation to increase the numbers of
authorized shares of common stock from 100,000,000 to 200,000,000
shares. Votes recorded were as follows:
|
For
|
|
Against
|
|
Abstain
|
|
57,728,180
|
|
17,012,857
|
|
125,357
|
(c) To
consider and vote upon a proposal to ratify the selection of Ernst & Young
LLP as our independent auditor for the fiscal year 2009:
|
For
|
|
Against
|
|
Abstain
|
|
74,241,907
|
|
561,820
|
|
62,668
|
|
Exhibit
No.
|
|
Description
|
|
1.1
|
|
Equity
Distribution Agreement, dated June 12, 2009 between Omega Healthcare
Investors, Inc. and UBS Securities LLC (Incorporated by reference to
Exhibit 1.1 to the Company’s Current Report on Form 8-K, filed June 15,
2009).
|
|
1.2
|
|
Equity
Distribution Agreement, dated June 12, 2009 between Omega Healthcare
Investors, Inc. and Deutsche Bank Securities Inc. (Incorporated by
reference to Exhibit 1.2 to the Company’s Current Report on Form 8-K,
filed June 15, 2009).
|
|
1.3
|
|
Equity
Distribution Agreement, dated June 12, 2009 between Omega Healthcare
Investors, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated
(Incorporated by reference to Exhibit 1.3 to the Company’s Current Report
on Form 8-K, filed June 15, 2009).
|
|
3.1
|
|
Articles
of Incorporation of Omega Healthcare Investors, Inc., as
amended.
|
|
10.1
|
|
Credit
Agreement, dated as of June 30, 2009, among OHI Asset, LLC, OHI Asset
(ID), LLC, OHI Asset (LA), LLC, OHI Asset (CA), LLC, Delta Investors I,
LLC, Delta Investors II, LLC, Texas Lessor- Stonegate, LP, OHIMA, Inc.,
the lenders named therein, and Bank of America, N.A. (Incorporated by
reference to Exhibit 10.1 to the Company Current Report on Form 8-K, filed
July 6, 2009).
|
|
10.2
|
|
Second
Amendment to the Second Amended and Restated Master Lease, dated as of
February 26, 2009, by and among Omega Healthcare Investors, Inc., certain
of its subsidiaries as lessors, Sun Healthcare Group, Inc. and certain of
its affiliates as lessees, amending and restating prior master leases with
Sun Healthcare Group, its subsidiaries, and lessees and guarantors
acquired by Sun Healthcare Group. (Incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K, filed June 2,
2009).
|
|
10.3
|
|
Eighth
Amendment to Consolidated Amended and Restated Master Lease, dated as of
March 31, 2009, by and between Sterling Acquisition Corp. and Diversicare
Leasing Corp. (Incorporated by reference to Exhibit 10.2 to the Company’s
Current Report on Form 8-K, filed June 2, 2009).
|
|
10.4
|
|
First
Amendment to Loan Agreement, dated as of March 15, 2009, by and among OHI
Asset III (PA) Trust, as Lender, certain affiliated entities of
CommuniCare Health Services as Borrowers, and certain affiliated entities
of CommuniCare Health Services as Guarantors. (Incorporated by reference
to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed June 2,
2009).
|
|
31.1
|
|
Rule
13a-14(a)/15d-14(a) Certification of the Chief Executive
Officer.
|
|
31.2
|
|
Rule
13a-14(a)/15d-14(a) Certification of the Chief Financial
Officer.
|
|
32.1
|
|
Section
1350 Certification of the Chief Executive Officer.
|
|
32.2
|
|
Section
1350 Certification of the Chief Financial
Officer.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
OMEGA HEALTHCARE INVESTORS,
INC.
Registrant
Date: August
6,
2009 By: /S/ C. TAYLOR
PICKETT
C. Taylor Pickett
Chief Executive Officer
Date:
August 6,
2009 By: /S/ ROBERT O.
STEPHENSON
Robert O. Stephenson
Chief Financial
Officer