form_10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
______________
FORM
10-Q
(Mark
One)
X QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended September 30, 2009
or
___ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
For
the transition period from _______________ to _______________
Commission
file number 1-11316
OMEGA
HEALTHCARE
INVESTORS,
INC.
|
(Exact
name of Registrant as specified in its charter)
|
|
|
|
|
|
Maryland
|
|
38-3041398
|
|
(State
of incorporation)
|
|
(IRS
Employer
Identification
No.)
|
|
|
|
200
International Circle, Suite 3500, Hunt Valley, MD 21030
|
|
(Address
of principal executive offices)
|
|
|
|
(410)
427-1700
|
|
(Telephone
number, including area code)
|
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90
days.
Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes o No o [NOT
APPLICABLE]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or
non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one:)
Large accelerated
filer x Accelerated
filer o Non-accelerated
filer o Smaller reporting
company o
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes o No x
Indicate the number of shares
outstanding of each of the issuer's classes of common stock as of October 30,
2009.
Common Stock, $.10 par
value 85,112,754
(Class)
(Number
of shares)
OMEGA
HEALTHCARE INVESTORS, INC.
FORM
10-Q
September
30, 2009
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|
Page No.
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|
PART I
|
Financial Information
|
|
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|
Item
1.
|
Financial
Statements:
|
|
|
|
|
|
|
|
September 30, 2009 (unaudited)
and December 31,
2008
|
2
|
|
|
|
|
|
|
|
|
|
|
Three and nine months ended
September 30, 2009 and
2008
|
3
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 (unaudited)
and December 31,
2008
|
4
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
2009 and
2008
|
5
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
(unaudited)
|
6
|
|
|
|
|
|
Item
2.
|
|
19 |
|
|
|
|
|
|
|
|
|
Item
3.
|
|
32
|
|
|
|
|
|
Item
4.
|
|
32
|
|
|
|
|
|
PART II
|
Other Information
|
|
|
|
|
|
|
Item
1.
|
|
33
|
|
|
|
|
|
Item
1A.
|
|
33
|
|
|
|
|
|
Item
6.
|
|
33
|
|
|
|
|
PART
I – FINANCIAL INFORMATION
Item
1 - Financial Statements
OMEGA
HEALTHCARE INVESTORS, INC.
(in thousands, except per share
amounts)
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Real
estate properties
|
|
|
|
|
|
|
|
Land and buildings
|
|
$ |
1,385,625 |
|
|
$ |
1,372,012 |
|
|
Less accumulated
depreciation
|
|
|
(284,782 |
) |
|
|
(251,854 |
) |
|
Real estate properties –
net
|
|
|
1,100,843 |
|
|
|
1,120,158 |
|
|
Mortgage notes receivable –
net
|
|
|
100,531 |
|
|
|
100,821 |
|
|
|
|
|
1,201,374 |
|
|
|
1,220,979 |
|
|
Other
investments – net
|
|
|
29,440 |
|
|
|
29,864 |
|
|
|
|
|
1,230,814 |
|
|
|
1,250,843 |
|
|
Assets
held for sale – net
|
|
|
887 |
|
|
|
150 |
|
|
Total investments
|
|
|
1,231,701 |
|
|
|
1,250,993 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
646 |
|
|
|
209 |
|
|
Restricted
cash
|
|
|
6,678 |
|
|
|
6,294 |
|
|
Accounts
receivable – net
|
|
|
81,274 |
|
|
|
75,037 |
|
|
Other
assets
|
|
|
12,145 |
|
|
|
18,613 |
|
|
Operating
assets for owned and operated properties
|
|
|
3,949 |
|
|
|
13,321 |
|
|
Total assets
|
|
$ |
1,336,393 |
|
|
$ |
1,364,467 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Revolving
line of credit
|
|
$ |
9,000 |
|
|
$ |
63,500 |
|
|
Unsecured
borrowings – net
|
|
|
484,685 |
|
|
|
484,697 |
|
|
Accrued
expenses and other liabilities
|
|
|
27,106 |
|
|
|
25,420 |
|
|
Operating
liabilities for owned and operated properties
|
|
|
1,449 |
|
|
|
2,862 |
|
|
Total liabilities
|
|
|
522,240 |
|
|
|
576,479 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock issued and
outstanding – 4,340 shares Series D with an aggregate liquidation
preference of $108,488
|
|
|
108,488 |
|
|
|
108,488 |
|
|
Common stock $.10 par value
authorized – 200,000 shares issued and outstanding – 84,904 shares as of
September 30, 2009 and 82,382 as of December 31, 2008
|
|
|
8,490 |
|
|
|
8,238 |
|
|
Common
stock – additional paid-in-capital
|
|
|
1,095,578 |
|
|
|
1,054,157 |
|
|
Cumulative
net earnings
|
|
|
506,149 |
|
|
|
440,277 |
|
|
Cumulative
dividends paid
|
|
|
(904,552 |
) |
|
|
(823,172 |
) |
|
Total stockholders’ equity
|
|
|
814,153 |
|
|
|
787,988 |
|
|
Total liabilities and
stockholders’ equity
|
|
$ |
1,336,393 |
|
|
$ |
1,364,467 |
|
See notes
to consolidated financial statements.
OMEGA
HEALTHCARE INVESTORS, INC.
Unaudited
(in
thousands, except per share amounts)
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
income
|
|
$ |
41,226 |
|
|
$ |
37,265 |
|
|
$ |
123,626 |
|
|
$ |
115,052 |
|
|
Mortgage interest
income
|
|
|
2,915 |
|
|
|
3,007 |
|
|
|
8,686 |
|
|
|
6,536 |
|
|
Other investment income –
net
|
|
|
694 |
|
|
|
313 |
|
|
|
1,844 |
|
|
|
1,531 |
|
|
Miscellaneous
|
|
|
160 |
|
|
|
73 |
|
|
|
364 |
|
|
|
2,140 |
|
|
Nursing home revenues of owned
and operated assets
|
|
|
4,758 |
|
|
|
19,341 |
|
|
|
13,545 |
|
|
|
19,341 |
|
|
Total
operating
revenues
|
|
|
49,753 |
|
|
|
59,999 |
|
|
|
148,065 |
|
|
|
144,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
11,093 |
|
|
|
10,076 |
|
|
|
33,014 |
|
|
|
29,185 |
|
|
General and
administrative
|
|
|
2,675 |
|
|
|
2,925 |
|
|
|
8,920 |
|
|
|
8,990 |
|
|
Impairment loss on real estate
properties
|
|
|
89 |
|
|
|
170 |
|
|
|
159 |
|
|
|
1,684 |
|
|
Provision for uncollectible
accounts receivable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,268 |
|
|
Nursing home expenses of owned and
operated assets
|
|
|
4,899 |
|
|
|
20,833 |
|
|
|
15,750 |
|
|
|
20,833 |
|
|
Total
operating
expenses
|
|
|
18,756 |
|
|
|
34,004 |
|
|
|
57,843 |
|
|
|
64,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before other income and expense
|
|
|
30,997 |
|
|
|
25,995 |
|
|
|
90,222 |
|
|
|
79,640 |
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2 |
|
|
|
74 |
|
|
|
19 |
|
|
|
197 |
|
|
Interest
expense
|
|
|
(9,171 |
) |
|
|
(9,375 |
) |
|
|
(26,656 |
) |
|
|
(28,805 |
) |
|
Interest
– amortization of deferred financing and refinancing costs
|
|
|
(690 |
) |
|
|
(500 |
) |
|
|
(2,216 |
) |
|
|
(1,500 |
) |
|
Litigation
settlements
|
|
|
- |
|
|
|
- |
|
|
|
4,527 |
|
|
|
526 |
|
|
Total
other
expense
|
|
|
(9,859 |
) |
|
|
(9,801 |
) |
|
|
(24,326 |
) |
|
|
(29,582 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before gain (loss) on assets sold
|
|
|
21,138 |
|
|
|
16,194 |
|
|
|
65,896 |
|
|
|
50,058 |
|
|
Gain
(loss) on assets sold –
net
|
|
|
- |
|
|
|
11,806 |
|
|
|
(24 |
) |
|
|
11,852 |
|
|
Income
from continuing operations before income taxes
|
|
|
21,138 |
|
|
|
28,000 |
|
|
|
65,872 |
|
|
|
61,910 |
|
|
Income
taxes
|
|
|
- |
|
|
|
72 |
|
|
|
- |
|
|
|
72 |
|
|
Income
from continuing operations
|
|
|
21,138 |
|
|
|
28,072 |
|
|
|
65,872 |
|
|
|
61,982 |
|
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
446 |
|
|
Net
income
|
|
|
21,138 |
|
|
|
28,072 |
|
|
|
65,872 |
|
|
|
62,428 |
|
|
Preferred
stock
dividends
|
|
|
(2,271 |
) |
|
|
(2,480 |
) |
|
|
(6,814 |
) |
|
|
(7,442 |
) |
|
Net
income available to
common
|
|
$ |
18,867 |
|
|
$ |
25,592 |
|
|
$ |
59,058 |
|
|
$ |
54,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per common share available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$ |
0.23 |
|
|
$ |
0.33 |
|
|
$ |
0.71 |
|
|
$ |
0.75 |
|
|
Net
income
|
|
$ |
0.23 |
|
|
$ |
0.33 |
|
|
$ |
0.71 |
|
|
$ |
0.76 |
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$ |
0.22 |
|
|
$ |
0.33 |
|
|
$ |
0.71 |
|
|
$ |
0.75 |
|
|
Net
income
|
|
$ |
0.22 |
|
|
$ |
0.33 |
|
|
$ |
0.71 |
|
|
$ |
0.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared and paid per common share
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
$ |
0.90 |
|
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding, basic
|
|
|
83,740 |
|
|
|
76,590 |
|
|
|
82,903 |
|
|
|
72,737 |
|
|
Weighted-average
shares outstanding, diluted
|
|
|
83,858 |
|
|
|
76,702 |
|
|
|
83,004 |
|
|
|
72,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
21,138 |
|
|
$ |
28,072 |
|
|
$ |
65,872 |
|
|
$ |
62,428 |
|
|
Total
comprehensive
income
|
|
$ |
21,138 |
|
|
$ |
28,072 |
|
|
$ |
65,872 |
|
|
$ |
62,428 |
|
See notes to consolidated financial
statements.
OMEGA
HEALTHCARE INVESTORS, INC.
(in
thousands, except per share amounts)
|
|
|
Preferred
Stock
|
|
|
Common
Stock Par Value
|
|
|
Additional
Paid-in
Capital
|
|
|
Cumulative
Net
Earnings
|
|
|
Cumulative
Dividends
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008 (82,382 common shares)
|
|
$ |
108,488 |
|
|
$ |
8,238 |
|
|
$ |
1,054,157 |
|
|
$ |
440,277 |
|
|
$ |
(823,172 |
) |
|
$ |
787,988 |
|
|
Issuance of common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant of restricted stock (10
shares at $15.790 per share)
|
|
|
— |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Amortization of restricted
stock
|
|
|
— |
|
|
|
— |
|
|
|
1,430 |
|
|
|
— |
|
|
|
— |
|
|
|
1,430 |
|
|
Dividend reinvestment plan
(1,094 shares at $15.631 per share)
|
|
|
— |
|
|
|
109 |
|
|
|
16,964 |
|
|
|
— |
|
|
|
— |
|
|
|
17,073 |
|
|
Grant of stock as payment of
directors fees (5 shares at an average of $14.591 per
share)
|
|
|
— |
|
|
|
1 |
|
|
|
74 |
|
|
|
— |
|
|
|
— |
|
|
|
75 |
|
|
Equity Shelf Program (1,413
shares at $17.165 per share, net of issuance costs)
|
|
|
— |
|
|
|
141 |
|
|
|
22,954 |
|
|
|
— |
|
|
|
— |
|
|
|
23,095 |
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
65,872 |
|
|
|
— |
|
|
|
65,872 |
|
|
Common dividends paid ($0.90
per share).
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(74,566 |
) |
|
|
(74,566 |
) |
|
Preferred dividends paid
(Series D of $1.570 per share)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,814 |
) |
|
|
(6,814 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2009 (84,904 common shares)
|
|
$ |
108,488 |
|
|
$ |
8,490 |
|
|
$ |
1,095,578 |
|
|
$ |
506,149 |
|
|
$ |
(904,552 |
) |
|
$ |
814,153 |
|
See notes
to consolidated financial statements.
OMEGA
HEALTHCARE INVESTORS, INC.
Unaudited
(in thousands)
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
65,872 |
|
|
$ |
62,428 |
|
|
Adjustment to reconcile net
income to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
(including amounts in discontinued operations)
|
|
|
33,014 |
|
|
|
29,185 |
|
|
Impairment loss on real estate
properties (including amounts in discontinued operations)
|
|
|
159 |
|
|
|
1,684 |
|
|
Uncollectible accounts
receivable
|
|
|
— |
|
|
|
4,268 |
|
|
Refinancing
costs
|
|
|
526 |
|
|
|
— |
|
|
Amortization of deferred
financing costs
|
|
|
1,690 |
|
|
|
1,500 |
|
|
Loss (gain) on assets sold –
net
|
|
|
24 |
|
|
|
(12,283 |
) |
|
Restricted stock amortization
expense
|
|
|
1,439 |
|
|
|
1,577 |
|
|
Other
|
|
|
(129 |
) |
|
|
(296 |
) |
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
219 |
|
|
|
663 |
|
|
Straight-line
rent
|
|
|
(6,987 |
) |
|
|
(7,959 |
) |
|
Lease
inducement
|
|
|
532 |
|
|
|
(3,259 |
) |
|
Tax
liabilities
|
|
|
— |
|
|
|
(73 |
) |
|
Other
operating assets and liabilities
|
|
|
10,117 |
|
|
|
(3,988 |
) |
|
Operating
assets and liabilities for owned and operated properties
|
|
|
7,959 |
|
|
|
(13,303 |
) |
|
Net
cash provided by operating activities
|
|
|
114,435 |
|
|
|
60,144 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
Acquisition
of real estate
|
|
|
— |
|
|
|
(93,235 |
) |
|
Placement
of mortgage loans
|
|
|
— |
|
|
|
(74,928 |
) |
|
Proceeds
from sale of real estate investments
|
|
|
85 |
|
|
|
31,893 |
|
|
Capital
improvements and funding of other investments
|
|
|
(14,640 |
) |
|
|
(13,194 |
) |
|
Proceeds
from other investments
|
|
|
39,515 |
|
|
|
14,082 |
|
|
Investments
in other investments
|
|
|
(39,075 |
) |
|
|
(23,570 |
) |
|
Collection
of mortgage principal – net
|
|
|
403 |
|
|
|
681 |
|
|
Net
cash used in investing activities
|
|
|
(13,712 |
) |
|
|
(158,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
Proceeds
from credit facility borrowings
|
|
|
138,500 |
|
|
|
303,800 |
|
|
Payments
on credit facility borrowings
|
|
|
(193,000 |
) |
|
|
(317,800 |
) |
|
Payments
of other long-term borrowings
|
|
|
— |
|
|
|
(39,435 |
) |
|
Payment
of financing related costs
|
|
|
(4,574 |
) |
|
|
— |
|
|
Receipts
from dividend reinvestment plan
|
|
|
17,073 |
|
|
|
30,506 |
|
|
Net
proceeds from issuance of common stock
|
|
|
23,095 |
|
|
|
195,976 |
|
|
Payments
from exercised options and taxes on restricted stock – net
|
|
|
— |
|
|
|
(2,087 |
) |
|
Dividends
paid
|
|
|
(81,380 |
) |
|
|
(71,022 |
) |
|
Net
cash (used in) provided by financing activities
|
|
|
(100,286 |
) |
|
|
99,938 |
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
437 |
|
|
|
1,811 |
|
|
Cash
and cash equivalents at beginning of period
|
|
|
209 |
|
|
|
1,979 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
646 |
|
|
$ |
3,790 |
|
|
Interest
paid during the period, net of amounts capitalized
|
|
$ |
24,508 |
|
|
$ |
26,760 |
|
See notes
to consolidated financial statements.
OMEGA
HEALTHCARE INVESTORS, INC.
Unaudited
September
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 (“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 September 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 (“SEC”) 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 November 5, 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 September 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 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:
|
|
|
September
30,
2009
|
|
|
December
31, 2008
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Contractual
receivables
|
|
$ |
2,382 |
|
|
$ |
2,358 |
|
|
Straight-line
receivables
|
|
|
50,524 |
|
|
|
43,636 |
|
|
Lease
inducements
|
|
|
30,029 |
|
|
|
30,561 |
|
|
Allowance
|
|
|
(1,661 |
) |
|
|
(1,518 |
) |
|
Accounts
receivable –
net
|
|
$ |
81,274 |
|
|
$ |
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
Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities
In June 2008, the FASB issued guidance
on Determining Whether Instruments Granted in Share-Based Payment Transactions
are Participating Securities. In this new
guidance, 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 guidance does not
address awards that contain rights to forfeitable dividends. We adopted this
standard on January 1, 2009, and retrospectively adjusted basic EPS data for all
periods presented to reflect the two-class method of computing
EPS. The impact of the adoption of this guidance on earnings per
share was less than $0.01 per share for the periods presented.
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
In April 2009, the FASB issued guidance
on 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 new guidance provides additional guidance for
estimating fair value in accordance with Fair Value Measurements, when the
volume and level of activity for the asset or liability have significantly
decreased. This new guidance also includes guidance on identifying circumstances
that indicate a transaction is not orderly. It 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 had no material effect on our financial position or
results of operations.
Interim
Disclosures about Fair Value of Financial Instruments
In April 2009, the FASB issued guidance
on Interim Disclosures about Fair Value of Financial
Instruments. This new guidance amends rules for 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 new guidance also amends Interim Financial
Reporting, to require those disclosures in summarized financial information at
interim reporting periods. Under this guidance, 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 the guidance. We adopted the new guidance in the second quarter of
2009 and such disclosures are provided in Note 9 – Financial
Instruments.
Fair
Value Measurements
On January 1, 2008, we adopted new
guidance for Fair Value Measurements. This new guidance defines fair
value, establishes a methodology for measuring fair value and expands the
required disclosure for fair value measurements. It 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. The guidance 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 the guidance and determined that the adoption had no impact on our
consolidated financial statements.
Revised
Business Combinations
On December 4, 2007, the FASB issued
revised guidance on Business Combinations. The new guidance will
significantly change the accounting for and reporting of business combination
transactions. The guidance 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. The
guidance is effective for fiscal years beginning after December 15, 2008 and
early adoption is prohibited. We adopted the guidance on January 1,
2009, which will impact the accounting only for acquisitions occurring
prospectively.
Subsequent
Events
In the second quarter of 2009, we
adopted FASB new guidance on Subsequent
Events. The new guidance 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
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 or bankruptcy proceeding, 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 226 SNFs, seven assisted living facilities (“ALFs”), two
rehabilitation hospitals and two independent living facilities (“ILFs”) at
September 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
At September 30, 2009, we had two SNFs
classified as held-for-sale with a net book value of approximately $0.9
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 September 30, 2009, none of our
mortgages were in default or 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 September 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 September 30, 2009. As of September 30, 2009, our
gross investment in land and buildings for the two properties operated by TC
Healthcare was approximately $14.7 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
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
Nursing
home revenues
|
|
$ |
4,758 |
|
|
$ |
19,341 |
|
|
$ |
13,545 |
|
|
$ |
19,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nursing
home expenses
|
|
|
4,899 |
|
|
|
20,833 |
|
|
|
15,750 |
|
|
|
20,833 |
|
|
Loss
from nursing home operations
|
|
$ |
(141 |
) |
|
$ |
(1,492 |
) |
|
$ |
(2,205 |
) |
|
$ |
(1,492 |
) |
NOTE
4 – CONCENTRATION OF RISK
As of September 30, 2009, our portfolio
of investments consisted of 256 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 September 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 two SNFs that are currently held for
sale. At September 30, 2009, we also held miscellaneous investments
of approximately $29.4 million, consisting primarily of secured loans to
third-party operators of our facilities.
At September 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 (22%), Florida (12%) and Pennsylvania
(10%) at September 30, 2009.
For the three-month period ended
September 30, 2009, our revenues from operations totaled $49.8 million, of which
approximately $8.8 million were from CommuniCare (18%), $7.7 million from Sun
(16%) and $5.7 million from Advocat (11%). Our owned and operated
assets generated $4.8 million (10%) of revenue in September 30,
2009. No other operator generated more than 9% of our revenues from
operations for the three-month period ended September 30, 2009.
For the nine-month period ended
September 30, 2009, our revenues from operations totaled $148.1 million, of
which approximately $26.4 million were from CommuniCare (18%), $23.1 million
from Sun (16%) and $16.6 million from Advocat (11%). Our owned and
operated assets generated $13.5 million (9%) of revenue in September 30,
2009. No other operator generated more than 9% of our revenues from
operations for the nine-month period ended September 30, 2009.
Sun and Advocat are subject to the reporting
requirements of the 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 October 20, 2009, the Board of
Directors declared a common stock dividend of $0.30 per share, to be paid
November 16, 2009 to common stockholders of record on November 2,
2009.
On July 15, 2009, the Board of
Directors declared a common stock dividend of $0.30 per share that was 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 October 20, 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 November 2, 2009. The stockholders of
record of the Series D Preferred Stock on November 2, 2009 will be paid
dividends in the amount of $0.52344 per preferred share on November 16,
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 August 1, 2009 through
October 30, 2009.
On July 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 August 17, 2009
to preferred stockholders of record on 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 September 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 nine- month periods ended
September 30, 2009 and 2008, respectively:
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock expense
|
|
$ |
480 |
|
|
$ |
526 |
|
|
$ |
1,439 |
|
|
$ |
1,577 |
|
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.
Restricted
Stock Award
The
restricted stock awards 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 September 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 September 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 |
|
|
$ |
1,669 |
|
|
2008
Annual performance restricted stock units
|
|
|
41,332 |
|
|
|
8.78 |
|
|
|
363 |
|
|
|
20 |
|
|
|
- |
|
|
2009
Annual performance restricted stock units
|
|
|
41,332 |
|
|
|
8.25 |
|
|
|
341 |
|
|
|
32 |
|
|
|
32 |
|
|
2010
Annual performance restricted stock units
|
|
|
41,332 |
|
|
|
8.14 |
|
|
|
336 |
|
|
|
44 |
|
|
|
114 |
|
|
3
year cliff vest performance restricted stock units
|
|
|
123,996 |
|
|
|
6.17 |
|
|
|
765 |
|
|
|
44 |
|
|
|
261 |
|
|
Total
|
|
|
534,900 |
|
|
|
|
|
|
$ |
6,700 |
|
|
|
|
|
|
$ |
2,076 |
|
As of
September 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 September 30, 2009, the unrecognized
compensation cost associated with the directors is approximately $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 September 30, 2009, we had $9.0 million
outstanding under the New Credit Facility and no letters of credit outstanding,
leaving availability of $191.0 million. The $9.0 million of
outstanding borrowings had a blended interest rate of 6% at September 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.
In the second quarter of 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. At September 30, 2009, we
incurred approximately $4.6 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 September 30, 2009, we
were in compliance with all affirmative and negative covenants, including
financial covenants.
Equity
Shelf Program
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 September 30,
2009, 1,412,135 shares of our common stock were issued through the Equity
Shelf Program for net proceeds of approximately $23.1 million, net of $0.5
million of commissions.
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 nine month period ended
September 30, 2009, we issued 1.1 million shares of common stock for
approximately $17.1 million in net proceeds.
NOTE
9 - FINANCIAL INSTRUMENTS
At September 30, 2009 and December 31,
2008, the carrying amounts and fair values of our financial instruments were as
follows:
|
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Assets:
|
|
(in
thousands)
|
|
|
Cash and cash equivalents
|
|
$ |
646 |
|
|
$ |
646 |
|
|
$ |
209 |
|
|
$ |
209 |
|
|
Restricted cash
|
|
|
6,678 |
|
|
|
6,678 |
|
|
|
6,294 |
|
|
|
6,294 |
|
|
Mortgage notes receivable –
net
|
|
|
100,531 |
|
|
|
98,460 |
|
|
|
100,821 |
|
|
|
93,892 |
|
|
Other investments
|
|
|
29,440 |
|
|
|
27,017 |
|
|
|
29,864 |
|
|
|
25,343 |
|
|
Totals
|
|
$ |
137,295 |
|
|
$ |
132,801 |
|
|
$ |
137,188 |
|
|
$ |
125,738 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving lines of credit
|
|
$ |
9,000 |
|
|
$ |
9,000 |
|
|
$ |
63,500 |
|
|
$ |
59,550 |
|
|
7.00% Notes due 2014
|
|
|
310,000 |
|
|
|
309,547 |
|
|
|
310,000 |
|
|
|
268,712 |
|
|
7.00% Notes due 2016
|
|
|
175,000 |
|
|
|
167,116 |
|
|
|
175,000 |
|
|
|
137,285 |
|
|
(Discount)/Premium on 7.00%
Notes – net
|
|
|
(315 |
) |
|
|
(218 |
) |
|
|
(303 |
) |
|
|
(37 |
) |
|
Totals
|
|
$ |
493,685 |
|
|
$ |
485,445 |
|
|
$ |
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
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 nine- month periods ended September 30, 2009 and 2008,
respectively.
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
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 |
|
For the nine months ended September 30,
2008, discontinued operations includes revenue of $15,000 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
The computation of basic Earnings Per
Share (“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 September 30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands, except per share amounts)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$ |
21,138 |
|
|
$ |
28,072 |
|
|
$ |
65,872 |
|
|
$ |
61,982 |
|
|
Preferred stock dividends
|
|
|
(2,271 |
) |
|
|
(2,480 |
) |
|
|
(6,814 |
) |
|
|
(7,442 |
) |
|
Numerator for income available
to common shareholders from continuing operations - basic and
diluted
|
|
|
18,867 |
|
|
|
25,592 |
|
|
|
59,058 |
|
|
|
54,540 |
|
|
Discontinued operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
446 |
|
|
Numerator for net income
available to common per share - basic and diluted
|
|
$ |
18,867 |
|
|
$ |
25,592 |
|
|
$ |
59,058 |
|
|
$ |
54,986 |
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings
per share
|
|
|
83,740 |
|
|
|
76,590 |
|
|
|
82,903 |
|
|
|
72,737 |
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
|
107 |
|
|
|
100 |
|
|
|
89 |
|
|
|
80 |
|
|
Stock option incremental
shares
|
|
|
11 |
|
|
|
12 |
|
|
|
11 |
|
|
|
12 |
|
|
Deferred stock
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
Denominator for diluted
earnings per share
|
|
|
83,858 |
|
|
|
76,702 |
|
|
|
83,004 |
|
|
|
72,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share – basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
shareholders from continuing operations
|
|
$ |
0.23 |
|
|
$ |
0.33 |
|
|
$ |
0.71 |
|
|
$ |
0.75 |
|
|
Discontinued operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.01 |
|
|
Net income – basic
|
|
$ |
0.23 |
|
|
$ |
0.33 |
|
|
$ |
0.71 |
|
|
$ |
0.76 |
|
|
Earnings
per share – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
shareholders from continuing operations
|
|
$ |
0.22 |
|
|
$ |
0.33 |
|
|
$ |
0.71 |
|
|
$ |
0.75 |
|
|
Discontinued operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.01 |
|
|
Net income – diluted
|
|
$ |
0.22 |
|
|
$ |
0.33 |
|
|
$ |
0.71 |
|
|
$ |
0.76 |
|
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 September 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 September 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 September 30, 2009, consisted of 256 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 September 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) two SNFs that are
currently held for sale. At September 30, 2009, we also held other
investments of approximately $29.4 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 2009 and anticipated increased enrollment in
fiscal year 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 began 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 ended 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. At the time, CMS estimated that these payment policies would
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 2010,
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:
Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities
In June 2008, the FASB issued guidance
on Determining Whether Instruments Granted in Share-Based Payment Transactions
are Participating Securities. In this new
guidance, 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 guidance does not
address awards that contain rights to forfeitable dividends. We adopted this
standard on January 1, 2009, and retrospectively adjusted basic EPS data for all
periods presented to reflect the two-class method of computing
EPS. The impact of the adoption of this guidance on earnings per
share was less than $0.01 per share for the periods presented.
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
In April 2009, the FASB issued guidance
on 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 new guidance provides additional guidance for
estimating fair value in accordance with Fair Value Measurements, when the
volume and level of activity for the asset or liability have significantly
decreased. This new guidance also includes guidance on identifying circumstances
that indicate a transaction is not orderly. It 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 had no material effect on our financial position or
results of operations.
Interim
Disclosures about Fair Value of Financial Instruments
In April 2009, the FASB issued guidance
on Interim Disclosures about Fair Value of Financial
Instruments. This new guidance amends rules for 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 new guidance also amends, Interim Financial
Reporting, to require those disclosures in summarized financial information at
interim reporting periods. Under this guidance, 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 the guidance. We adopted the new guidance in the second quarter of
2009 and such disclosures are provided in Note 9 – Financial
Instruments.
Fair
Value Measurements
On January 1, 2008, we adopted new
guidance for Fair Value Measurements. This new guidance defines fair
value, establishes a methodology for measuring fair value and expands the
required disclosure for fair value measurements. It 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. The guidance 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 the guidance and determined that the adoption had no impact on our
consolidated financial statements.
Revised
Business Combinations
On December 4, 2007, the FASB issued
revised guidance on Business Combinations. The new guidance will
significantly change the accounting for and reporting of business combination
transactions. The guidance 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. The
guidance is effective for fiscal years beginning after December 15, 2008 and
early adoption is prohibited. We adopted the guidance on January 1,
2009, which will impact the accounting only for acquisitions occurring
prospectively.
Subsequent
Events
In the second quarter of 2009, we
adopted FASB new guidance on Subsequent
Events. The new guidance 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
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 September 30, 2009 and 2008
Operating
Revenues
Our operating revenues for the three
months ended September 30, 2009 totaled $49.8 million, a decrease of $10.2
million over the same period in 2008. The $10.2 million decrease
relates primarily to: (i) a decrease in nursing home
revenue of owned and operated facilities of $14.6 million; offset by (ii) an
increase in rental income of $4.0 million due to approximately $60.0 million of
new investments acquired in September and December of 2008. As of
September 1, 2008, we completed the operational transfer to a third party
operator of 13 of the 15 facilities that we had previously taken back in
connection with the Haven bankruptcy, thereby reducing the number of owned and
operated facilities from 15 facilities to 2 facilities.
Operating
Expenses
Operating expenses for the three months
ended September 30, 2009 totaled $18.8 million, a decrease of approximately
$15.2 million over the same period in 2008. The decrease was
primarily due to: (i) a decrease in nursing home expenses of owned and operated
facilities of $15.9 million reflecting the operational transfer of 13 of the 15
former Haven facilities as of September 1, 2008; offset by (ii) increase
depreciation and amortization expense of $1.0 million associated with the $60.0
million of new investments acquired in September and December of
2008.
Other
Income (Expense)
For the three months ended September
30, 2009, total other expenses were $9.9 million, an increase of approximately
$0.1 million over the same period in 2008. The increase was primarily
due to a $0.2 million increase of deferred financing costs related to replacing
the former $255 million credit facility and a reduction of $0.1 million of
interest income on our overnight investment, offset by a decrease of $0.2
million of interest expense due to decrease in borrowings outstanding and lower
rates.
Income
from Continuing Operations
Income from continuing operations for
the three months ended September 30, 2009 was $21.1 million compared to $28.1
million for the same period in 2008. The decrease 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 September 30, 2009 and September 30,
2008, we have no assets from discontinued operations.
For the three months ended September
30, 2009 and 2008, no revenue or expense was generated from discontinued
operations.
Nine
Months Ended September 30, 2009 and 2008
Operating
Revenues
Our operating revenues for the nine
months ended September 30, 2009 totaled $148.1 million, an increase of $3.5
million over the same period in 2008. The $3.5 million increase
relates primarily to: (i) additional rental income of $8.6 million primarily due
to acquisitions completed since March 2008, (ii) additional mortgage income of
$2.2 million associated with the mortgage financing of seven new facilities in
April 2008; offset by (iii) a decrease of $5.8 million nursing home revenues of
owned and operated assets due to the timing of ownership and a decrease of $1.8
million of miscellaneous revenue. As of September 1, 2008, we
completed the operational transfer to a third party operator of 13 of the 15
facilities that we had previously taken back in connection with the Haven
bankruptcy, thereby reducing the number of owned and operated facilities from 15
facilities to 2 facilities. In 2008, we received past due rent and
late fees of approximately $1.9 million.
Operating
Expenses
Operating expenses for the nine months
ended September 30, 2009 totaled $57.8 million, a decrease of approximately $7.1
million over the same period in 2008. The decrease was primarily due
to: (i) a decrease in nursing home expenses of owned and operated facilities of
$5.1 million reflecting the operational transfer of 13 of the 15 former Haven
facilities as of September 1, 2008; (ii) a decrease in provision for
uncollectible accounts receivable associated with Haven of $4.3 million and
(iii) a net change of $1.5 million provision for impairment charge, offset by
increased depreciation and amortization expense of $3.8 million associated with
new investments acquired or constructed since March 2008.
Other
Income (Expense)
For the nine months ended September
30, 2009, total other expenses were $24.3 million, as compared to $29.6 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 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 nine months ended September 30, 2009 was $65.9 million compared to $62.0
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.
For the nine months ended September 30,
2009, no revenue or
expense generated from discontinued operations. For the nine months ended September 30,
2008, discontinued
operations includes revenue of $15,000 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 September 30, 2009, was $30.0 million, compared to $23.9 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 nine- months ended September 30, 2009 and 2008:
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$ |
18,867 |
|
|
$ |
25,592 |
|
|
$ |
59,058 |
|
|
$ |
54,986 |
|
|
(Deduct gain) add back loss
from real estate dispositions
|
|
|
— |
|
|
|
(11,806 |
) |
|
|
24 |
|
|
|
(12,283 |
) |
|
Sub-total
|
|
|
18,867 |
|
|
|
13,786 |
|
|
|
59,082 |
|
|
|
42,703 |
|
|
Elimination of non-cash items
included in net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
11,093 |
|
|
|
10,076 |
|
|
|
33,014 |
|
|
|
29,185 |
|
|
Funds
from operations available to common stockholders
|
|
$ |
29,960 |
|
|
$ |
23,862 |
|
|
$ |
92,096 |
|
|
$ |
71,888 |
|
|
|
Portfolio
and Recent Developments
|
In August 2009, we completed
construction of a replacement facility in Texas. Annual rent is
expected to be approximately $0.7 million for this facility.
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
At September 30, 2009, we had two SNFs
classified as held-for-sale with a net book value of approximately $0.9
million.
Liquidity
and Capital Resources
At September 30, 2009, we had total
assets of $1.3 billion, stockholders’ equity of $814.2 million and debt of
$493.7 million, which represents approximately 37.8% of our total
capitalization.
The
following table shows the amounts due in connection with the contractual
obligations described below as of September 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)
|
|
$ |
494,000 |
|
|
$ |
- |
|
|
$ |
9,000 |
|
|
$ |
310,000 |
|
|
$ |
175,000 |
|
|
Operating
lease obligations(2)
|
|
|
3,052 |
|
|
|
286 |
|
|
|
595 |
|
|
|
628 |
|
|
|
1,543 |
|
|
Total
|
|
$ |
497,052 |
|
|
$ |
286 |
|
|
$ |
9,595 |
|
|
$ |
310,628 |
|
|
$ |
176,543 |
|
|
(1)
|
The
$494.0 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 $9.0 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 September 30, 2009, we had $9.0 million
outstanding under the New Credit Facility and no letters of credit outstanding,
leaving availability of $191.0 million. The $9.0 million of
outstanding borrowings had an interest rate of 6% at September 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.
In the second quarter of 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. At September 30, 2009, we
incurred approximately $4.6 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 September 30, 2009, we
were in compliance with all affirmative and negative covenants, including
financial covenants.
Equity
Shelf Program
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 September 30,
2009, 1,412,135 shares of our common stock were issued through the Equity Shelf
Program for net proceeds of $23.1 million, net of $0.5 million of
commissions.
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 nine month period ended
September 30, 2009, we issued 1.1 million shares of common stock for
approximately $17.1 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 nine- months ended
September 30, 2009, we paid total dividends of $27.3 million and $81.4 million,
respectively.
On
October 20, 2009, the Board of Directors declared a common stock dividend of
$0.30 per share to be paid November 16, 2009 to common stockholders of record on
November 2, 2009.
On
October 20, 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 November 2, 2009. The stockholders of
record of the Series D Preferred Stock on November 2, 2009 will be paid
dividends in the amount of $0.52344 per preferred share on November 16,
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 $0.6 million as of September 30, 2009, an increase of
$0.4 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 $114.4 million for the nine
months ended September 30, 2009, as compared to $60.1 million for the same
period in 2008, an increase of $54.3 million. The increase in
operating cash is primarily due to (i) income from new investments made since
March 2008, and (ii) in 2008, we used cash to operate the facilities we assumed
as a result of the bankruptcy of one of our former
tenant/operators.
Investing
Activities – Net cash flow from investing activities was an outflow of
$13.7 million for the nine months ended September 30, 2009, as compared to an
outflow of $158.3 million for the same period in 2008. The decrease
in cash outflow from investing activities relates primarily to the change in
acquisition activities. During 2008, we acquired one facility for
$5.2 million in the first quarter, nine facilities for $47.4 million in the
second quarter and six facilities for $40 million in the third
quarter. In 2009, we have not acquired any facilities. We
also originated a $74.9 million mortgage loan with one of our operators in the
second quarter of 2008. In 2009, proceeds from the sale of real
estate investment decreased year-over-year by $31.8 million. In
addition, in 2009, other investments –net generated net cash compared to a use
of cash for other investment –net in 2008.
Financing
Activities – Net cash flow from financing activities was an outflow of
$100.3 million for the nine months ended September 30, 2009 as compared to an
inflow of $99.9 million for the same period in 2008. The $200.2
million change in financing activities was primarily a result of: (i) an
increase in net payments of $1.1 million on our credit facilities and other
borrowings in 2009 compared to our Prior Credit Facility and other borrowings in
2008, (ii) $4.6 million in payments of deferred financing costs associated with
the New Credit Facility in 2009, (iii) an increase in dividend payment of $10.4
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 $13.4 million due to the temporary suspension of the optional cash
purchase component of our DRSPP in October 2008 and later reinstated in May
2009, (v) $23.1 million net proceeds from our common stocks issued through the
Equity Shelf Program and (vi) $196.0 million net proceeds from the common stock
offering in the second and third 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 September 30, 2009, the total amount of
outstanding debt subject to interest rate fluctuations was $9.0 million. A
hypothetical 100 basis point change in short-term interest rates would result in
an increase or decrease in interest expense of approximately $0.1 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 September 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 September 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 10 – 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.
|
Exhibit
No.
|
|
Description
|
|
10.1
|
|
Tenth
Amendment to Consolidated Amended and Restated Master Lease dated as of
September 8, 2009, by and between Sterling Acquisition Corp. and
Diversicare Leasing Corp., together with the Seventh Amendment thereto
dated October 24, 2008 and the Ninth Amendment thereto dated May 5,
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: November
5,
2009 By: /S/ C. TAYLOR
PICKETT
C. Taylor Pickett
Chief Executive Officer
Date: November
5,
2009 By: /S/ ROBERT O.
STEPHENSON
Robert O. Stephenson
Chief Financial Officer