10-K: Annual report pursuant to Section 13 and 15(d)
Published on February 18, 2005
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UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
[X] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2004.
[
] 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
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(State
or Other Jurisdiction
|
(I.R.S.
Employer Identification No.)
|
of
Incorporation or Organization)
|
|
9690
Deereco Road, Suite 100
|
|
Timonium,
MD
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21093
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: 410-427-1700
Securities
Registered Pursuant to Section 12(b)
of the Act:
Title
of Each Class
|
Name
of Exchange on
Which
Registered
|
Common
Stock, $.10 Par Value
and
associated stockholder protection rights
|
New
York Stock Exchange
|
8.625%
Series B Cumulative Preferred Stock, $1 Par Value
|
New
York Stock Exchange
|
8.375%
Series D Cumulative Redeemable Preferred Stock, $1
Par
Value
|
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g)
of the Act:
None.
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 and Exchange Act of 1934 during
the preceding twelve 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 [ ]
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The
aggregate market value of the voting stock of the registrant held by
non-affiliates was $466,072,452. The aggregate market value was computed using
the $10.04 closing price per share for such stock on the New York Stock Exchange
on June 30, 2004.
As of
February 14, 2005 there were 50,940,920 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Proxy
Statement for the registrant’s 2005 Annual Meeting of Stockholders, to be filed
with the Securities and Exchange Commission not later than 120 days after
December 31, 2004, is incorporated by reference in Part III herein.
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OMEGA
HEALTHCARE INVESTORS, INC.
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2004
FORM 10-K ANNUAL REPORT
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TABLE
OF CONTENTS
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PART
I
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Page
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Item
1 Business
of the Company
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1
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|
Overview
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1
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|
Summary
of Financial Information
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1
|
|
Description
of the Business
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2
|
|
Executive
Officers of Our Company
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4
|
|
Risk
Factors
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5
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|
Item
2. Properties
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15
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|
Item
3. Legal
Proceedings
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17
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Item
4 Submission
of Matters to a Vote of Security Holders
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17
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PART
II
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Item
5 Market
for the Registrant’s Common Equity and Related Stockholder
Matters
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18
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Item
6 Selected
Financial Data
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19
|
|
Item
7 Management’s
Discussion and Analysis of Financial Condition
and Results of Operations
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20
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Forward-Looking
Statements, Reimbursement Issues and
Other Factors Affecting Future Results
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20
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|
Overview
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20
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Critical
Accounting Policies and Estimates
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24
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|
Results
of Operations
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26
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Portfolio
Developments, New Investments and Recent
Developments
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31
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Liquidity
and Capital Resources
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34
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Item
7AQuantitative and Qualitative Disclosures About Market
Risk
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39
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Item
8. Financial
Statements and Supplementary Data
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39
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Item
9. Changes
in and Disagreements with Accountants on
Accounting and Financial Disclosure
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39
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Item
9A.Controls and Procedures
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39
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Item
9B.Other Information
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40
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PART
III
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Item
10.Directors and Executive Officers of the Registrant
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41
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Item
11.Executive Compensation
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41
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Item
12. Security Ownership of Certain Beneficial Owners and
Management
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Item
13. Certain Relationships and Related Transactions
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Item
14. Principal Accountant Fees and Services
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PART
IV
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Item
15. Exhibits, Financial Statements, Financial Statement
Schedules and Reports on Form 8-K
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42
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PART
I
Item
1 - Business of the Company
Overview
We were
incorporated in the State of Maryland on March 31, 1992. We are a
self-administered real estate investment trust, or REIT, investing in
income-producing healthcare facilities, principally long-term care facilities
located in the United States. We provide lease or mortgage financing to
qualified operators of skilled nursing facilities and, to a lesser extent,
assisted living and acute care facilities. We have historically financed
investments through borrowings under our revolving credit facilities, private
placements or public offerings of debt or equity securities, the assumption of
secured indebtedness, or a combination of these methods.
Our
portfolio of investments, as of December 31, 2004, consisted of 221 healthcare
facilities, located in 29 states and operated by 42 third-party operators. This
portfolio was made up of:
•
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173
long-term healthcare facilities and two rehabilitation hospitals owned and
leased to third parties; and
|
•
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fixed
rate mortgages on 46 long-term healthcare
facilities.
|
As of
December 31, 2004, our gross investments in these facilities, net of impairments
and before reserve for uncollectible loans, totaled approximately $927 million.
In addition, we also held miscellaneous investments of approximately $30 million
at December 31, 2004, consisting primarily of secured loans to third-party
operators to our facilities.
Our
filings with the Securities and Exchange Commission, including our annual report
on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports are accessible free of charge on our website at
www.omegahealthcare.com.
Summary
of Financial Information
The
following tables summarize our revenues and real estate assets by asset category
for 2004, 2003 and 2002. (See Item 7 - Management’s Discussion and Analysis of
Financial Condition and Results of Operations, Note 3 - Properties and Note 4 -
Mortgage Notes Receivable to our audited consolidated financial
statements).
Revenues
by Asset Category
(In
thousands)
Year
ended December 31,
|
||||||||||
2004
|
2003
|
2002
|
||||||||
Core
assets: |
||||||||||
Lease
rental income
|
$
|
73,982
|
$
|
64,653
|
$
|
60,233
|
||||
Mortgage
interest income
|
13,266
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14,656
|
20,351
|
|||||||
Total
core asset revenues
|
87,248
|
79,309
|
80,584
|
|||||||
Other
asset revenue |
2,372
|
2,982
|
5,302
|
|||||||
Miscellaneous
income
|
831
|
1,048
|
1,384
|
|||||||
Total
revenue before owned and operated assets
|
90,451
|
83,339
|
87,270
|
|||||||
Owned
and operated assets revenue
|
-
|
4,395
|
42,203
|
|||||||
Total
revenue
|
$
|
90,451
|
$
|
87,734
|
$
|
129,473
|
Real
Estate Assets by Asset Category
(In
thousands)
As
of December 31,
|
||||||||||
2004
|
2003
|
|||||||||
Core
assets: |
||||||||||
Leased
assets
|
$
|
808,574
|
$
|
687,159
|
||||||
Mortgaged
assets
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118,058
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119,784
|
||||||||
Total
core assets
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926,632
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806,943
|
||||||||
Other
assets
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29,699
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29,178
|
||||||||
Total
real estate assets before owned and operated assets
|
956,331
|
836,121
|
||||||||
Owned
and operated and held for sale assets
|
-
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5,295
|
||||||||
Total
real estate assets
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$
|
956,331
|
$
|
841,416
|
1
Description
of the Business
Investment
Strategy. We
maintain a diversified portfolio of long-term healthcare facilities and
mortgages on healthcare facilities located throughout the United States. In
making investments, we generally have focused on established, creditworthy,
middle-market healthcare operators that meet our standards for quality and
experience of management. We have sought to diversify our investments in terms
of geographic locations and operators.
In
evaluating potential investments, we consider such factors as:
•
|
the
quality and experience of management and the creditworthiness of the
operator of the facility;
|
•
|
the
facility's historical and forecasted cash flow and its ability to meet
operational needs, capital expenditure requirements and lease or debt
service obligations, providing a competitive return on investment to
us;
|
•
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the
construction quality, condition and design of the
facility;
|
•
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the
geographic area of the facility;
|
•
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the
tax, growth, regulatory and reimbursement environment of the jurisdiction
in which the facility is located;
|
•
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the
occupancy and demand for similar healthcare facilities in the same or
nearby communities; and
|
•
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the
payor mix of private, Medicare and Medicaid
patients.
|
One of
our fundamental investment strategies is to obtain contractual rent escalations
under long-term, non-cancelable, "triple-net" leases and fixed-rate mortgage
loans, and to obtain substantial liquidity deposits. Additional security is
typically provided by covenants regarding minimum working capital and net worth,
liens on accounts receivable and other operating assets, and various provisions
for cross-default, cross-collateralization and corporate/personal guarantees,
when appropriate.
We prefer
to invest in equity ownership of properties. Due to regulatory, tax or other
considerations, we sometimes pursue alternative investment structures, including
convertible participating and participating mortgages, which can achieve returns
comparable to equity investments. The following summarizes the primary
investment structures we typically use. Average annualized yields reflect
existing contractual arrangements. However, in view of the ongoing financial
challenges in the long-term care industry, we cannot assure you that the
operators of our facilities will meet their payment obligations in full or when
due. Therefore, the annualized yields as of January 1, 2005 set forth below are
not necessarily indicative of or a forecast of actual yields, which may be
lower.
Purchase/Leaseback. In
a Purchase/Leaseback transaction, we purchase the property from the
operator and lease it back to the operator over terms typically ranging
from 5 to 15 years, plus renewal options. The leases originated by us
generally provide for minimum annual rentals which are subject to annual
formula increases based upon such factors as increases in the Consumer
Price Index (“CPI”) or increases in the revenue streams generated by the
underlying properties, with certain fixed minimum and maximum levels. The
average annualized yield from leases was approximately 10.3% at January 1,
2005.
|
Convertible
Participating Mortgage.
Convertible participating mortgages are secured by first mortgage liens on
the underlying real estate and personal property of the mortgagor.
Interest rates are usually subject to annual increases based upon
increases in the CPI or increases in the revenues generated by the
underlying long-term care facilities, with certain maximum limits.
Convertible participating mortgages afford us the option to convert our
mortgage into direct ownership of the property, generally at a point six
to nine years from inception. If we exercise our purchase option, we are
obligated to lease the property back to the operator for the balance of
the originally agreed term and for the originally agreed participations in
revenues or CPI adjustments. This allows us to capture a portion of the
potential appreciation in value of the real estate. The operator has the
right to buy out our option at prices based on specified formulas. At
December 31, 2004, we did not have any convertible participating
mortgages.
|
Participating
Mortgage.
Participating mortgages are similar to convertible participating mortgages
except that we do not have a purchase option. Interest rates are usually
subject to annual increases based upon increases in the CPI or increases
in revenues of the underlying long-term care facilities, with certain
maximum limits. At December 31, 2004, we did not have any participating
mortgages.
|
Fixed-Rate
Mortgage.
These mortgages have a fixed interest rate for the mortgage term and are
secured by first mortgage liens on the underlying real estate and personal
property of the mortgagor. The average annualized yield on these
investments was approximately 11.3% at January 1,
2005.
|
2
The
following table identifies the years of expiration of the 2005 payment
obligations due to us under existing contractual obligations. This information
is provided solely to indicate the scheduled expiration of payment obligations
due to us, and is not a forecast of expected revenues.
Rent
|
Mortgage
Interest
|
Total
|
% | ||||||||||
(In
thousands)
|
|||||||||||||
2005 |
$
|
1,860
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$
|
-
|
$
|
1,860
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1.92
|
% |
|||||
2006 |
3,594
|
2,374
|
5,968
|
6.17
|
|||||||||
2007 |
360
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34
|
394
|
0.41
|
|||||||||
2008 |
765
|
-
|
765
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0.79
|
|||||||||
2009 |
198
|
-
|
198
|
0.20
|
|||||||||
Thereafter
|
76,567
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10,958
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87,525
|
90.51
|
|||||||||
Total
|
$
|
83,344
|
$
|
13,366
|
$
|
96,710
|
100.00
|
%
|
The table
set forth in Item 2 - Properties, contains information regarding our real estate
properties, their geographic locations, and the types of investment structures
as of December 31, 2004. In addition, please see Note 18 - Subsequent
Events.
Borrowing
Policies. We may
incur additional indebtedness and have historically sought to maintain a
long-term debt-to-total capitalization ratio in the range of 40% to 50%. Total
capitalization is total stockholders equity plus long-term debt. We intend to
periodically review our policy with respect to our debt-to-total capitalization
ratio and to modify the policy as our management deems prudent in light of
prevailing market conditions. Our strategy generally has been to match the
maturity of our indebtedness with the maturity of our investment assets, and to
employ long-term, fixed-rate debt to the extent practicable in view of market
conditions in existence from time to time.
We may
use proceeds of any additional indebtedness to provide permanent financing for
investments in additional healthcare facilities. We may obtain either secured or
unsecured indebtedness, and may obtain indebtedness which may be convertible
into capital stock or be accompanied by warrants to purchase capital stock.
Where debt financing is available on terms deemed favorable, we generally may
invest in properties subject to existing loans, secured by mortgages, deeds of
trust or similar liens on properties.
If we
need capital to repay indebtedness as it matures, we may be required to
liquidate investments in properties at times which may not permit realization of
the maximum recovery on these investments. This could also result in adverse tax
consequences to us. We may be required to issue additional equity interests in
our company, which could dilute your investment in our company. (See Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources).
Federal
Income Tax Considerations. We intend
to make and manage our investments, including the sale or disposition of
property or other investments, and to operate in such a manner as to qualify as
a REIT under the Internal Revenue Code of 1986, as amended (“Internal Revenue
Code”), unless, because of changes in circumstances or changes in the Internal
Revenue Code, our Board of Directors determines that it is no longer in our best
interest to qualify as a REIT. As a REIT, we generally will not pay federal
income taxes on the portion of our taxable income which is distributed to
stockholders.
Policies
With Respect To Certain Activities. If our
Board of Directors determines that additional funding is required, we may raise
such funds through additional equity offerings, debt financing, and retention of
cash flow (subject to provisions in the Internal Revenue Code concerning
taxability of undistributed REIT taxable income) or a combination of these
methods.
Borrowings
may be in the form of bank borrowings, secured or unsecured, and publicly or
privately placed debt instruments, purchase money obligations to the sellers of
assets, long-term, tax-exempt bonds or financing from banks, institutional
investors or other lenders, or securitizations, any of which indebtedness may be
unsecured or may be secured by mortgages or other interests in our assets. Such
indebtedness may be recourse to all or any part of our assets or may be limited
to the particular asset to which the indebtedness relates.
We have
authority to offer our common stock or other equity or debt securities in
exchange for property and to repurchase or otherwise reacquire our shares or any
other securities and may engage in such activities in the future.
Subject
to the percentage of ownership limitations and gross income and asset tests
necessary for REIT qualification, we may invest in securities of other REITs,
other entities engaged in real estate activities or securities of other issuers,
including for the purpose of exercising control over such entities.
We may
engage in the purchase and sale of investments. We do not underwrite the
securities of other issuers.
Our
officers and directors may change any of these policies without a vote of our
stockholders.
In the
opinion of our management, our properties are adequately covered by
insurance.
3
Executive
Officers of Our Company
At the
date of this report, the executive officers of our company are:
C.
Taylor Pickett (43) is the
Chief Executive Officer and has served in this capacity since June, 2001. Mr.
Pickett is also a Director and has served in this capacity since May 30, 2002.
Mr. Pickett’s term as a Director expires in 2005. Prior to joining our company,
Mr. Pickett served as the Executive Vice President and Chief Financial Officer
from January 1998 to June 2001 of Integrated Health Services, Inc., a public
company specializing in post-acute healthcare services. He also served as
Executive Vice President of Mergers and Acquisitions from May 1997 to December
1997 of Integrated Health Services, Inc. Prior to his roles as Chief Financial
Officer and Executive Vice President of Mergers and Acquisitions, Mr. Pickett
served as the President of Symphony Health Services, Inc. from January 1996 to
May 1997.
Daniel
J. Booth (41) is the
Chief Operating Officer and has served in this capacity since October, 2001.
Prior to joining our company, Mr. Booth served as a member of Integrated Health
Services’ management team since 1993, most recently serving as Senior Vice
President, Finance. Prior to joining Integrated Health Services, Mr. Booth was
Vice President in the Healthcare Lending Division of Maryland National Bank (now
Bank of America).
R.
Lee Crabill, Jr. (51) is the
Senior Vice President of Operations of our company and has served in this
capacity since July, 2001. Mr. Crabill served as a Senior Vice President of
Operations at Mariner Post-Acute Network, Inc. from 1997 through 2000. Prior to
that, he served as an Executive Vice President of Operations at Beverly
Enterprises.
Robert
O. Stephenson (41) is the
Chief Financial Officer and has served in this capacity since August, 2001.
Prior to joining our company, Mr. Stephenson served from 1996 to July 2001 as
the Senior Vice President and Treasurer of Integrated Health Services, Inc.
Prior to Integrated Health Services, Mr. Stephenson held various positions at
CSX Intermodal, Inc., Martin Marietta Corporation and Electronic Data
Systems.
Mariner
Post-Acute Network and Integrated Health Services, along with several other
long-term care operators, each filed voluntary petitions under Chapter 11 of the
United States Bankruptcy Code in January and February 2000,
respectively.
As of
December 31, 2004, we had 18 full-time employees, including the four executive
officers listed above.
4
Risk
Factors
You
should carefully consider the risks described below. These risks are not the
only ones that we may face. Additional risks and uncertainties that we are
unaware of, or that we currently deem immaterial, also may become important
factors that affect us. If any of the following risks occurs, our business,
financial condition or results of operations could be materially and adversely
affected.
Risks
Related to the Operators of Our Facilities
Our
financial position could be weakened if any of our major operators were unable
to meet their obligations to us or failed to renew or extend their relationship
with us as their lease terms expire, or if we were unable to lease or re-lease
our facilities or make mortgage loans on economically favorable terms. These
adverse developments could arise due to a number of factors, including those
listed below.
Our
recent efforts to restructure and stabilize our portfolio may not prove to be
successful.
In large
part as a result of the 1997 changes in Medicare reimbursement of services
provided by skilled nursing facilities and reimbursement cuts imposed under
state Medicaid programs, a number of operators of our properties have
encountered significant financial difficulties during the last several years. In
1999, our investment portfolio consisted of 216 properties and our largest
public operators (by investment) were Sun Healthcare Group, Inc. (“Sun”),
Integrated Health Services (“IHS”), Advocat, Inc. (“Advocat”) and Mariner Health
Care, Inc. (“Mariner”). Some of these operators, including Sun, IHS and Mariner,
subsequently filed for bankruptcy protection. Other operators of ours were
required to undertake significant restructuring efforts. We have restructured
our arrangements with many of our operators whereby we have renegotiated lease
and mortgage terms, re-leased properties to new operators and have closed and/or
disposed of properties. At December 31, 2004, our investment portfolio consisted
of 221 properties and our largest public operators (by investment) were Sun
(17%), Advocat (11%) and Mariner (6%). However, on February 1, 2005, Mariner
exercised its right to prepay its mortgages with us, and as a result, as of the
date of this filing we no longer hold mortgages on any facilities operated by
Mariner. Our largest private company operators (by investment) were Guardian LTC
Management, Inc. (“Guardian”) (9%), Seacrest Healthcare (6%) and Haven
Healthcare Management (“Haven”) (5%). We are also aware of four properties in
our portfolio located in Illinois where facility operations are currently
insufficient to meet rental payments due to us under our leases for these
facilities. These lease payments are currently being paid by the lessee from
funds other than those generated by the facilities. It is possible that we will
need to take steps to restructure this portion of our portfolio, or other
properties in our portfolio with respect to which our operators encounter
financial difficulty. We cannot assure you that our recent efforts to
restructure and stabilize our property portfolio will be
successful.
The
bankruptcy, insolvency or financial deterioration of our operators could delay
our ability to collect unpaid rents or require us to find new operators for
rejected facilities.
We are
exposed to the risk that our operators may not be able to meet their
obligations, which may result in their bankruptcy or insolvency. Although our
leases and loans provide us the right to terminate an investment, evict an
operator, demand immediate repayment and other remedies, the bankruptcy laws
afford certain protections to a party that has filed for bankruptcy that may
render these remedies unenforceable. In addition, an operator in bankruptcy may
be able to restrict our ability to collect unpaid rent or mortgage payments
during the bankruptcy case.
5
If one of
our lessees seeks bankruptcy protection, title 11 of the United States Code
(“Bankruptcy Code”), provides that a trustee in a liquidation or reorganization
case under the Bankruptcy Code, or a debtor-in-possession in a reorganization
case under the Bankruptcy Code, has the option to assume or reject the unexpired
lease obligations of a debtor-lessee. However, our lease arrangements with
operators who operate more than one of our facilities are generally made
pursuant to a single master lease covering all of that operator's facilities
leased from us. Subject to certain restrictions, a debtor-lessee under a master
lease agreement would generally be required to assume or reject a master lease
as a whole, rather than making the decision on a facility by facility basis,
thereby preventing the debtor-lessee from assuming only the better performing
facilities and terminating the leasing arrangement with respect to the poorer
performing facilities. Whether or not a court would require a master lease
agreement to be assumed or rejected as a whole would depend on a number of
factors, including applicable state law, the parties’ intent, whether the master
lease agreement and related documents were executed contemporaneously, the
nature and purpose of the relevant documents, whether there was separate and
distinct consideration for each lease, and the provisions contained in the
relevant documents, including whether the relevant documents are interrelated
and contain ample cross-references. Therefore, it is not possible to predict how
a bankruptcy court would decide this issue.
· |
Assumption
of Leases. In
the event that an unexpired lease is assumed by or on behalf of the
debtor-lessee, any defaults, other than those created by the financial
condition of the debtor-lessee, the commencement of its bankruptcy case or
the appointment of a trustee, would have to be cured and all the rental
obligations thereunder generally would be entitled to a priority over
other unsecured claims. Generally, unexpired leases must be assumed in
their totality, however, a bankruptcy court has the power to refuse to
enforce certain provisions of a lease, such as cross-default provisions or
penalty provisions, which would otherwise prevent or limit the ability of
a debtor-lessee from assuming or assuming and assigning to another party
the unexpired lease.
|
· |
Rejection
of Leases.
Generally, the debtor-lessee is required to make rent payments to us
during its bankruptcy unless and until it rejects the lease. The rejection
of a lease is deemed to be a pre-petition breach of the lease and the
lessor will be allowed a pre-petition general unsecured claim that will be
limited to any unpaid rent already due plus an amount equal to the rent
reserved under the lease, without acceleration, for the greater of (a) one
year and (b) fifteen percent (15%), not to exceed three years, of the
remaining term of such lease, following the earlier of (i) the petition
date and (ii) repossession or surrender of the leased property. Although
the amount of a lease rejection claim is subject to the statutory cap
described above, the lessor should receive the same percentage recovery on
account of its claim as other holders of allowed pre-petition unsecured
claims receive from the bankruptcy estate. If the debtor-lessee rejects
the lease, the facility would be returned to us. In that event, if we were
unable to re-lease the facility to a new operator on favorable terms or
only after a significant delay, we could lose some or all of the
associated revenue from that facility for an extended period of
time.
|
If an
operator defaults under one of our mortgage loans, we may have to foreclose on
the mortgage or protect our interest by acquiring title to the property and
thereafter making substantial improvements or repairs in order to maximize the
facility's investment potential. Operators may contest enforcement of
foreclosure or other remedies, seek bankruptcy protection against our exercise
of enforcement or other remedies and/or bring claims for lender liability in
response to actions to enforce mortgage obligations. If an operator seeks
bankruptcy protection, the automatic stay provisions of the federal bankruptcy
law would preclude us from enforcing foreclosure or other remedies against the
operator unless relief is obtained from the court. High "loan to value" ratios
or declines in the value of the facility may prevent us from realizing an amount
equal to our mortgage loan upon foreclosure.
The
receipt of liquidation proceeds or the replacement of an operator that has
defaulted on its lease or loan could be delayed by the approval and licensure
process of any federal, state or local agency necessary for the replacement of
the previous operator licensed to manage the facility. In some instances, we may
take possession of a property and such action could expose us to successor
liabilities. These events, if they were to occur, could reduce our revenue and
operating cash flow.
6
Operators
that fail to comply with the requirements of governmental reimbursement programs
such as Medicare or Medicaid, licensing and certification requirements, fraud
and abuse regulations or new legislative developments may be unable to meet
their obligations to us.
Our
operators are subject to numerous federal, state and local laws and regulations
that are subject to frequent and substantial changes (sometimes applied
retroactively) resulting from legislation, adoption of rules and regulations,
and administrative and judicial interpretations of existing law. The ultimate
timing or effect of these changes cannot be predicted. These changes may have a
dramatic effect on our operators' costs of doing business and the amount of
reimbursement paid by both government and other third-party payors. The failure
of any of our operators to comply with these laws, requirements and regulations
could adversely affect their ability to meet their obligations to us. In
particular:
· |
Medicare
and Medicaid. A
significant portion of our skilled nursing facility operators' revenue is
derived from governmentally-funded reimbursement programs, primarily
Medicare and Medicaid, and failure to maintain certification and
accreditation in these programs would result in a loss of funding from
such programs. Loss of certification or accreditation could cause the
revenues of our operators to decline, potentially jeopardizing their
ability to meet their obligations to us. In that event, our revenues from
those facilities could be reduced, which could in turn cause the value of
our affected properties to decline. State licensing and Medicare and
Medicaid laws also require operators of nursing homes and assisted living
facilities to comply with extensive standards governing operations.
Federal and state agencies administering those laws regularly inspect such
facilities and investigate complaints. Our operators and their managers
receive notices of potential sanctions and remedies from time to time, and
such sanctions have been imposed from time to time on facilities operated
by them. If they are unable to cure deficiencies which have been
identified or which are identified in the future, such sanctions may be
imposed and if imposed may adversely affect our operators' revenues,
potentially jeopardizing their ability to meet their obligations to
us.
|
· |
Licensing
and Certification.
Our operators and facilities are subject to regulatory and licensing
requirements of federal, state and local authorities and are periodically
audited by them to confirm compliance. Failure to obtain licensure or loss
or suspension of licensure would prevent a facility from operating or
result in a suspension of reimbursement payments until all licensure
issues have been resolved and the necessary licenses obtained or
reinstated. Our skilled nursing facilities require governmental approval,
in the form of a certificate of need that generally varies by state and is
subject to change, prior to the addition or construction of new beds, the
addition of services or certain capital expenditures. Some of our
facilities may be unable to satisfy current and future certificate of need
requirements and may for this reason be unable to continue operating in
the future. In such event, our revenues from those facilities could be
reduced or eliminated for an extended period of
time.
|
· |
Fraud
and Abuse Laws and Regulations.
There are various extremely complex and largely uninterpreted federal and
state laws governing a wide array of referrals, relationships and
arrangements and prohibiting fraud by healthcare providers, including
criminal provisions that prohibit filing false claims or making false
statements to receive payment or certification under Medicare and
Medicaid, or failing to refund overpayments or improper payments.
Governments are devoting increasing attention and resources to anti-fraud
initiatives against healthcare providers. The Health Insurance Portability
and Accountability Act of 1996 and the Balanced Budget Act of 1997
expanded the penalties for healthcare fraud, including broader provisions
for the exclusion of providers from the Medicare and Medicaid programs.
Furthermore, the Office of Inspector General of the U.S. Department of
Health and Human Services, or OIG, in cooperation with other federal and
state agencies, continues to focus on the activities of skilled nursing
facilities in certain states in which we have properties. In addition, the
federal False Claims Act allows a private individual with knowledge of
fraud to bring a claim on behalf of the federal government and earn a
percentage of the federal government's recovery. Because of these
incentives, these so-called "whistleblower" suits have become more
frequent. The violation of any of these laws or regulations by an operator
may result in the imposition of fines or other penalties that could
jeopardize that operator's ability to make lease or mortgage payments to
us or to continue operating its facility.
|
· |
Legislative
and Regulatory Developments.
Each year, legislative proposals are introduced or proposed in Congress
and in some state legislatures that would effect major changes in the
healthcare system, either nationally or at the state level. The Medicare
Prescription Drug Improvement and Modernization Act of 2003, which is one
example of such legislation, was enacted in late 2003. The Medicare
reimbursement changes for the long term care industry under this Act are
limited to a temporary increase in the per diem amount paid to skilled
nursing facilities for residents who have AIDS. The significant expansion
of other benefits for Medicare beneficiaries under this Act, such as the
expanded prescription drug benefit, could result in financial pressures on
the Medicare program that might result in future legislative and
regulatory changes with impacts for our operators. Other proposals under
consideration include efforts to control costs by decreasing state
Medicaid reimbursements, efforts to improve quality of care and reduce
medical errors throughout the health care industry and hospital
cost-containment initiatives by public and private payors. We cannot
accurately predict whether any proposals will be adopted or, if adopted,
what effect, if any, these proposals would have on operators and, thus,
our business.
|
Regulatory
proposals and rules are released on an ongoing basis that may have major impact
on the healthcare system generally and the skilled nursing and long-term care
industries in particular.
Our
operators depend on reimbursement from governmental and other third-party payors
and reimbursement rates from such payors may be
reduced.
Changes
in the reimbursement rate or methods of payment from third-party payors,
including the Medicare and Medicaid programs, or the implementation of other
measures to reduce reimbursements for services provided by our operators has in
the past, and could in the future, result in a substantial reduction in our
operators' revenues and operating margins. Additionally, net revenue realizable
under third-party payor agreements can change after examination and retroactive
adjustment by payors during the claims settlement processes or as a result of
post-payment audits. Payors may disallow requests for reimbursement based on
determinations that certain costs are not reimbursable or reasonable or because
additional documentation is necessary or because certain services were not
covered or were not medically necessary. There also continue to be new
legislative and regulatory proposals that could impose further limitations on
government and private payments to healthcare providers. In some cases, states
have enacted or are considering enacting measures designed to reduce their
Medicaid expenditures and to make changes to private healthcare insurance. We
cannot assure you that adequate reimbursement levels will continue to be
available for the services provided by our operators, which are currently being
reimbursed by Medicare, Medicaid or private third-party payors. Further limits
on the scope of services reimbursed and on reimbursement rates could have a
material adverse effect on our operators' liquidity, financial condition and
results of operations which could cause the revenues of our operators to decline
and potentially jeopardize their ability to meet their obligations to
us.
Our
operators may be subject to significant legal actions that could subject them to
increased operating costs and substantial uninsured liabilities, which may
affect their ability to pay their lease and mortgage payments to
us.
As is
typical in the healthcare industry, our operators are often subject to claims
that their services have resulted in resident injury or other adverse effects.
Many of these operators have experienced an increasing trend in the frequency
and severity of professional liability and general liability insurance claims
and litigation asserted against them. The insurance coverage maintained by our
operators may not cover all claims made against them nor continue to be
available at a reasonable cost, if at all. In some states, insurance coverage
for the risk of punitive damages arising from professional liability and general
liability claims and/or litigation may not, in certain cases, be available to
operators due to state law prohibitions or limitations of availability. As a
result, our operators operating in these states may be liable for punitive
damage awards that are either not covered or are in excess of their insurance
policy limits. We also believe that there has been, and will continue to be, an
increase in governmental investigations of long-term care providers,
particularly in the area of Medicare/Medicaid false claims, as well as an
increase in enforcement actions resulting from these investigations. Insurance
is not available to cover such losses. Any adverse determination in a legal
proceeding or governmental investigation, whether currently asserted or arising
in the future, could have a material adverse effect on an operator's financial
condition. If an operator is unable to obtain or maintain insurance coverage, if
judgments are obtained in excess of the insurance coverage, if an operator is
required to pay uninsured punitive damages, or if an operator is subject to an
uninsurable government enforcement action, the operator could be exposed to
substantial additional liabilities.
7
Increased
competition as well as increased operating costs have resulted in lower revenues
for some of our operators and may affect the ability of our tenants to meet
their payment obligations to us.
The
healthcare industry is highly competitive and we expect that it may become more
competitive in the future. Our operators are competing with numerous other
companies providing similar healthcare services or alternatives such as home
health agencies, life care at home, community-based service programs, retirement
communities and convalescent centers. We cannot be certain the operators of all
of our facilities will be able to achieve occupancy and rate levels that will
enable them to meet all of their obligations to us. Our operators may encounter
increased competition in the future that could limit their ability to attract
residents or expand their businesses and therefore affect their ability to pay
their lease or mortgage payments.
The
market for qualified nurses, healthcare professionals and other key personnel is
highly competitive and our operators may experience difficulties in attracting
and retaining qualified personnel. Increases in labor costs due to higher wages
and greater benefits required to attract and retain qualified healthcare
personnel incurred by our operators could affect their ability to pay their
lease or mortgage payments. This situation could be particularly acute in
certain states that have enacted legislation establishing minimum staffing
requirements.
Risks
Related to Us and Our Operations
In
addition to the operator related risks discussed above, there are a number of
risks directly associated with us and our operations.
We
rely on external sources of capital to fund future capital needs, and if we
encounter difficulty in obtaining such capital, we may not be able to make
future investments necessary to grow our business or meet maturing
commitments.
In order
to qualify as a REIT under the Internal Revenue Code, we are required, among
other things, to distribute each year to our stockholders at least 90% of our
REIT taxable income. Because of this distribution requirement, we may not be
able to fund, from cash retained from operations, all future capital needs,
including capital needs to make investments and to satisfy or refinance maturing
commitments. As a result, we may rely on external sources of capital. If we are
unable to obtain needed capital at all or only on unfavorable terms from these
sources, we might not be able to make the investments needed to grow our
business, or to meet our obligations and commitments as they mature, which could
negatively affect the ratings of our debt and even, in extreme circumstances,
affect our ability to continue operations. Our access to capital depends upon a
number of factors over which we have little or no control, including general
market conditions and the market's perception of our growth potential and our
current and potential future earnings and cash distributions and the market
price of the shares of our capital stock. Generally speaking, difficult capital
market conditions in our industry during the past several years and our need to
stabilize our portfolio have limited our access to capital. Our potential
capital sources include, but are not limited to:
8
Equity
Financing. As with
other publicly-traded companies, the availability of equity capital will depend,
in part, on the market price of our common stock which, in turn, will depend
upon various market conditions and other factors that may change from time to
time including:
· |
the
extent of investor interest;
|
· |
the
general reputation of REITs and the attractiveness of their equity
securities in comparison to other equity securities, including securities
issued by other real estate-based
companies;
|
· |
our
financial performance and that of our
operators;
|
· |
the
contents of analyst reports about us and the REIT
industry;
|
· |
general
stock and bond market conditions, including changes in interest rates on
fixed income securities, which may lead prospective purchasers of our
common stock to demand a higher annual yield from future
distributions;
|
· |
our
failure to maintain or increase our dividend, which is dependent, to a
large part, on growth of funds from operations which in turn depends upon
increased revenues from additional investments and rental increases;
and
|
· |
other
factors such as governmental regulatory action and changes in REIT tax
laws.
|
The
market value of the equity securities of a REIT is generally based upon the
market's perception of the REIT's growth potential and its current and potential
future earnings and cash distributions. Our failure to meet the market's
expectation with regard to future earnings and cash distributions would likely
adversely affect the market price of our common stock.
9
Debt
Financing/Leverage.
Financing for future investments and our maturing commitments may be provided by
borrowings under our bank line of credit, private or public offerings of debt,
the assumption of secured indebtedness, mortgage financing on a portion of our
owned portfolio or through joint ventures. We are subject to risks normally
associated with debt financing, including the risks that our cash flow will be
insufficient to make timely payments of interest, that we will be unable to
refinance existing indebtedness and that the terms of refinancing will not be as
favorable as the terms of existing indebtedness. If we are unable to refinance
or extend principal payments due at maturity or pay them with proceeds from
other capital transactions, our cash flow may not be sufficient in all years to
pay distributions to our stockholders and to repay all maturing debt.
Furthermore, if prevailing interest rates, changes in our debt ratings or other
factors at the time of refinancing result in higher interest rates upon
refinancing, the interest expense relating to that refinanced indebtedness would
increase, which could reduce our profitability and the amount of dividends we
are able to pay. Moreover, additional debt financing increases the amount of our
leverage. Our degree of leverage could have important consequences to
stockholders, including affecting our investment grade ratings, affecting our
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, development or other general corporate
purposes and making us more vulnerable to a downturn in business or the economy
generally.
Certain
of our operators account for a significant percentage of our
revenues.
Based on
existing contractual rent and lease payments regarding the restructuring of
certain existing investments, Advocat and Sun each account for over 10% of our
current contractual monthly revenues, with Sun accounting for approximately 20%
of our current contractual monthly revenues at December 31, 2004. Additionally,
our top five operators account for over 54% of our current contractual monthly
revenues. The failure or inability of any of these operators to pay their
obligations to us could materially reduce our revenues and net income, which
could in turn reduce the amount of dividends we pay and cause our stock price to
decline. For information regarding our agreement with Sun, see "Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Portfolio Developments; New Investment and Recent Developments; Sun
Healthcare Group, Inc."
Unforeseen
costs associated with the acquisition of new properties could reduce our
profitability.
Our
business strategy contemplates future acquisitions that may not prove to be
successful. For example, we might encounter unanticipated difficulties and
expenditures relating to any acquired properties, including contingent
liabilities, or newly acquired properties might require significant management
attention that would otherwise be devoted to our ongoing business. If we agree
to provide funding to enable healthcare operators to build, expand or renovate
facilities on our properties and the project is not completed, we could be
forced to become involved in the development to ensure completion or we could
lose the property. These costs may negatively affect our results of
operations.
Our
assets may be subject to impairment charges.
We
periodically but not less than annually evaluate our real estate investments and
other assets for impairment indicators. The judgment regarding the existence of
impairment indicators is based on several factors, including but not limited to,
market conditions, operator performance and legal structure. If we determine
that a significant impairment has occurred, we would be required to make an
adjustment to the net carrying value of the asset, which could have a material
adverse effect on our results of operations and funds from operations in the
period in which the write-off occurs.
We
may not be able to sell certain closed facilities for their book
value.
From time
to time, we close facilities and actively market such facilities for sale. To
the extent we believe we are unable to sell these properties for our book value,
we may be required to take an impairment charge or loss on the sale, either of
which would reduce our net income.
10
Our
substantial indebtedness could adversely affect our financial
condition.
We have
substantial indebtedness and we may increase our indebtedness in the future. As
of December 31, 2004, we had total debt of approximately $380 million, of which
$15 million consisted of borrowings under our senior revolving credit facility,
$100 million of which consisted of our 6.95% senior notes due 2007 and $260
million of which consisted of our 7% senior notes due 2014. Our level of
indebtedness could have important consequences to our stockholders. For example,
it could:
· |
limit
our ability to satisfy our obligations with respect to holders of our
capital stock;
|
· |
increase
our vulnerability to general adverse economic and industry
conditions;
|
· |
limit
our ability to obtain additional financing to fund future working capital,
capital expenditures and other general corporate requirements, or to carry
out other aspects of our business plan;
|
· |
require
us to dedicate a substantial portion of our cash flow from operations to
payments on indebtedness, thereby reducing the availability of such cash
flow to fund working capital, capital expenditures and other general
corporate requirements, or to carry out other aspects of our business
plan;
|
· |
require
us to pledge as collateral substantially all of our
assets;
|
· |
require
us to maintain certain debt coverage and financial ratios at specified
levels, thereby reducing our financial
flexibility;
|
· |
limit
our ability to make material acquisitions or take advantage of business
opportunities that may arise;
|
· |
expose
us to fluctuations in interest rates, to the extent our borrowings bear
variable rates of interests;
|
· |
limit
our flexibility in planning for, or reacting to, changes in our business
and industry; and
|
· |
place
us at a competitive disadvantage compared to our competitors that have
less debt.
|
Our
real estate investments are relatively illiquid.
Real
estate investments are relatively illiquid and, therefore, tend to limit our
ability to vary our portfolio promptly in response to changes in economic or
other conditions. All of our properties are "special purpose" properties that
could not be readily converted to general residential, retail or office use.
Healthcare facilities that participate in Medicare or Medicaid must meet
extensive program requirements, including physical plant and operational
requirements, which are revised from time to time. Such requirements may include
a duty to admit Medicare and Medicaid patients, limiting the ability of the
facility to increase its private pay census beyond certain limits. Medicare and
Medicaid facilities are regularly inspected to determine compliance, and may be
excluded from the programs—in some cases without a prior hearing—for failure to
meet program requirements. Transfers of operations of nursing homes and other
healthcare-related facilities are subject to regulatory approvals not required
for transfers of other types of commercial operations and other types of real
estate. Thus, if the operation of any of our properties becomes unprofitable due
to competition, age of improvements or other factors such that our lessee or
mortgagor becomes unable to meet its obligations on the lease or mortgage loan,
the liquidation value of the property may be substantially less, particularly
relative to the amount owing on any related mortgage loan, than would be the
case if the property were readily adaptable to other uses. The receipt of
liquidation proceeds or the replacement of an operator that has defaulted on its
lease or loan could be delayed by the approval process of any federal, state or
local agency necessary for the transfer of the property or the replacement of
the operator with a new operator licensed to manage the facility. In addition,
certain significant expenditures associated with real estate investment, such as
real estate taxes and maintenance costs, are generally not reduced when
circumstances cause a reduction in income from the investment. Should such
events occur, our income and cash flows from operations would be adversely
affected.
11
As
an owner or lender with respect to real property, we may be exposed to possible
environmental liabilities.
Under
various federal, state and local environmental laws, ordinances and regulations,
an owner of real property or a secured lender, such as us, may be liable in
certain circumstances for the costs of removal or remediation of certain
hazardous or toxic substances at, under or disposed of in connection with such
property, as well as certain other potential costs relating to hazardous or
toxic substances, including government fines and damages for injuries to persons
and adjacent property. Such laws often impose liability without regard to
whether the owner knew of, or was responsible for the presence or disposal of
such substances and liability may be imposed on the owner in connection with the
activities of an operator of the property. The cost of any required remediation,
removal, fines or personal or property damages and the owner's liability
therefore could exceed the value of the property, and/or the assets of the
owner. In addition, the presence of such substances, or the failure to properly
dispose of or remediate such substances, may adversely affect the owner's
ability to sell or rent such property or to borrow using such property as
collateral which, in turn, would reduce the owner's revenues.
Although
our leases and mortgage loans require the lessee and the mortgagor to indemnify
us for certain environmental liabilities, the scope of such obligations may be
limited, and we cannot assure you that any such mortgagor or lessee would be
able to fulfill its indemnification obligations.
The
industry in which we operate is highly competitive. This competition may prevent
us from raising prices at the same pace as our costs
increase.
We
compete for additional healthcare facility investments with other healthcare
investors, including other REITs. The operators of the facilities compete with
other regional or local nursing care facilities for the support of the medical
community, including physicians and acute care hospitals, as well as the general
public. Some significant competitive factors for the placing of patients in
skilled and intermediate care nursing facilities include quality of care,
reputation, physical appearance of the facilities, services offered, family
preferences, physician services and price. If our cost of capital should
increase relative to the cost of capital of our competitors, the spread that we
realize on our investments may decline if competitive pressures limit or prevent
us from charging higher lease or mortgage rates.
We
are named as defendants in litigation arising out of professional liability and
general liability claims relating to our previously owned and operated
facilities which if decided against us, could adversely affect our financial
condition.
We and
several of our wholly-owned subsidiaries have been named as defendants in
professional liability and general liability claims related to our owned and
operated facilities. Other third-party managers responsible for the day-to-day
operations of these facilities have also been named as defendants in these
claims. In these suits, patients of certain previously owned and operated
facilities have alleged significant damages, including punitive damages, against
the defendants. The lawsuits are in various stages of discovery and we are
unable to predict the likely outcome at this time. We continue to vigorously
defend these claims and pursue all rights we may have against the managers of
the facilities, under the terms of the management agreements. We have insured
these matters, subject to self-insured retentions of various amounts. There can
be no assurance that we will be successful in our defense of these matters or in
asserting our claims against various managers of the subject facilities or that
the amount of any settlement or judgment will be substantially covered by
insurance or that any punitive damages will be covered by
insurance.
We
are subject to significant anti-takeover provisions.
Our
articles of incorporation and bylaws contain various procedural and other
requirements which could make it difficult for stockholders to effect certain
corporate actions. Our Board of Directors is divided into three classes and our
Board members are elected for terms that are staggered. Our Board of Directors
also has the authority to issue additional shares of preferred stock and to fix
the preferences, rights and limitations of the preferred stock without
stockholder approval. We have also adopted a stockholders rights plan which
provides for share purchase rights to become exercisable at a discount if a
person or group acquires more than 9.9% of our common stock or announces a
tender or exchange offer for more than 9.9% of our common stock. These
provisions could discourage unsolicited acquisition proposals or make it more
difficult for a third party to gain control of us, which could adversely affect
the market price of our securities.
12
We
may change our investment strategies and policies and capital
structure.
Our Board
of Directors, without the approval of our stockholders, may alter our investment
strategies and policies if it determines in the future that a change is in our
stockholders' best interests. The methods of implementing our investment
strategies and policies may vary as new investments and financing techniques are
developed.
If
we fail to maintain our REIT status, we will be subject to federal income tax on
our taxable income at regular corporate rates.
We were
organized to qualify for taxation as a REIT under Sections 856 through 860 of
the Internal Revenue Code. We believe we have conducted, and we intend to
continue to conduct, our operations so as to qualify as a REIT. Qualification as
a REIT involves the satisfaction of numerous requirements, some on an annual and
some on a quarterly basis, established under highly technical and complex
provisions of the Internal Revenue Code for which there are only limited
judicial and administrative interpretations and involve the determination of
various factual matters and circumstances not entirely within our control. For
example, in order to qualify as a REIT, each year we must distribute to our
stockholders at least 90% of our REIT taxable income. We cannot assure you that
we will at all times satisfy these rules and tests.
If we
were to fail to qualify as a REIT in any taxable year, as a result of a
determination that we failed to meet the annual distribution requirement or
otherwise, we would be subject to federal income tax, including any applicable
alternative minimum tax, on our taxable income at regular corporate rates.
Moreover, unless entitled to relief under certain statutory provisions, we also
would be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. This treatment would
reduce our net earnings and cash flow available for investment, debt service or
distribution to stockholders because of our additional tax liability for the
years involved. In addition, distributions to stockholders would no longer be
required to be made.
We
depend upon our key employees and may be unable to attract or retain sufficient
numbers of qualified personnel.
Our
future performance depends to a significant degree upon the continued
contributions of our executive management team and other key employees.
Accordingly, our future success depends on our ability to attract, hire, train
and retain highly skilled management and other qualified personnel. Competition
for qualified employees is intense, and we compete for qualified employees with
companies that may have greater financial resources than we have. Our employment
agreements with our executive officers provide that their employment may be
terminated by either party at any time. Consequently, we may not be successful
in attracting, hiring, training and retaining the people we need, which would
seriously impede our ability to implement our business strategy.
Risks
Related to Our Stock
The
market value of our stock could be substantially affected by various
factors.
The share
price of our stock will depend on many factors, which may change from time to
time, including:
· |
the
market for similar securities issued by
REITs;
|
· |
changes
in estimates by analysts;
|
· |
our
ability to meet analysts' estimates;
|
· |
general
economic and financial market conditions;
and
|
· |
our
financial condition, performance and
prospects.
|
13
Our
issuance of additional capital stock, warrants or debt securities, whether or
not convertible, may reduce the market price for our
shares.
We cannot
predict the effect, if any, that future sales of our capital stock, warrants or
debt securities, or the availability of our securities for future sale, will
have on the market price of our shares, including our common stock. Sales of
substantial amounts of our common stock or preferred shares, warrants or debt
securities convertible into or exercisable or exchangeable for common stock in
the public market or the perception that such sales might occur could reduce the
market price of our stock and the terms upon which we may obtain additional
equity financing in the future.
In
addition, we may issue additional capital stock in the future to raise capital
or as a result of the following:
· |
The
issuance and exercise of options to purchase our common stock. As of
December 31, 2004, we had outstanding options to acquire approximately 0.9
million shares of our common stock. In addition, we may in the future
issue additional options or other securities convertible into or
exercisable for our common stock under our 2004 Stock Incentive Plan, our
2000 Stock Incentive Plan, as amended, or other remuneration plans. We may
also issue options or convertible securities to our employees in lieu of
cash bonuses or to our directors in lieu of director's
fees.
|
· |
The
issuance of shares pursuant to our dividend reinvestment and direct stock
purchase plan.
|
· |
The
issuance of debt securities exchangeable for our common
stock.
|
· |
The
exercise of warrants we may issue in the
future.
|
· |
Lenders
sometimes ask for warrants or other rights to acquire shares in connection
with providing financing. We cannot assure you that our lenders will not
request such rights.
|
There
are no assurances of our ability to pay dividends in the
future.
In 2001,
our Board of Directors suspended dividends on our common stock and all series of
preferred stock in an effort to generate cash to address then impending debt
maturities. In 2003, we paid all accrued but unpaid dividends on all series of
preferred stock and reinstated dividends on our common stock and all series of
preferred stock. However, our ability to pay dividends may be adversely affected
if any of the risks described above were to occur. Our payment of dividends is
subject to compliance with restrictions contained in our bank credit facility,
the indenture relating to our outstanding 7% senior notes due 2014 and our
preferred stock. All dividends will be paid at the discretion of our Board of
Directors and will depend upon our earnings, our financial condition,
maintenance of our REIT status and such other factors as our Board may deem
relevant from time to time. There are no assurances of our ability to pay
dividends in the future. In addition, our dividends in the past have included,
and may in the future include, a return of capital.
Holders
of our outstanding preferred stock have liquidation and other rights that are
senior to the rights of the holders of our common
stock.
Our Board
of Directors has the authority to designate and issue preferred stock that may
have dividend, liquidation and other rights that are senior to those of our
common stock. As of the
date of this filing, 2,000,000 shares of our 8.625% Series B cumulative
preferred stock and 4,739,500 shares of our 8.375% Series D cumulative
redeemable preferred stock were issued and outstanding. The aggregate
liquidation preference with respect to this outstanding preferred stock is
approximately $168.5 million, and annual dividends on our outstanding preferred
stock are approximately $14.2 million. Holders of our preferred stock are
generally entitled to cumulative dividends before any dividends may be declared
or set aside on our common stock. Upon our voluntary or involuntary liquidation,
dissolution or winding up, before any payment is made to holders of our common
stock, holders of our preferred stock are entitled to receive a liquidation
preference of $25 per share with respect to the Series B and Series D preferred
stock, plus any accrued and unpaid distributions. This
will reduce the remaining amount of our assets, if any, available to distribute
to holders of our common stock. In addition, holders of our preferred stock have
the right to elect two additional directors to our Board of Directors if six
quarterly preferred dividends are in arrears.
Legislative
or regulatory action could adversely affect purchasers of our
stock.
In recent
years, numerous legislative, judicial and administrative changes have been made
in the provisions of the federal income tax laws applicable to investments
similar to an investment in our stock. Changes are likely to continue to occur
in the future, and we cannot assure you that any of these changes will not
adversely affect our stockholder’s stock. Any of these changes could have an
adverse effect on an investment in our stock or on market value or resale
potential. Stockholders are urged to consult with their own tax advisor with
respect to the impact that recent legislation may have on their investment and
the status of legislative, regulatory or administrative developments and
proposals and their potential effect.
Recent
changes in taxation of corporate dividends may adversely affect the value of our
stock.
The Jobs
and Growth Tax Relief Reconciliation Act of 2003 that was enacted into law May
28, 2003, among other things, generally reduces to 15% the maximum marginal rate
of tax payable by individuals on dividends received from a regular C
corporation. This reduced tax rate, however, will not apply to dividends paid to
individuals by a REIT on its shares, except for certain limited amounts. While
the earnings of a REIT that are distributed to its stockholders still generally
will be subject to less combined federal income taxation than earnings of a
non-REIT C corporation that are distributed to its stockholders net of
corporate-level tax, this legislation could cause individual investors to view
the stock of regular C corporations as more attractive relative to the shares of
a REIT than was the case prior to the enactment of the legislation. Individual
investors could hold this view because the dividends from regular C corporations
will generally be taxed at a lower rate while dividends from REITs will
generally be taxed at the same rate as the individual's other ordinary income.
We cannot predict what effect, if any, the enactment of this legislation may
have on the value of the shares of REITs in general or on the value of our stock
in particular, either in terms of price or relative to other
investments.
14
Item
2 - Properties
At
December 31, 2004, our real estate investments included long-term care
facilities and rehabilitation hospital investments, either in the form of
purchased facilities which are leased to operators, mortgages on facilities
which are operated by the mortgagors or their affiliates and facilities owned
and operated for our account, including facilities subject to leasehold
interests. The facilities are located in 29 states and are operated by 42
unaffiliated operators. The following table summarizes our property investments
as of December 31, 2004:
Investment
Structure/Operator
|
Number
of
Beds
|
Number
of
Facilities
|
Occupancy
Percentage(1)
|
Gross
Investment
(In
thousands)
|
|||||||||
Purchase/Leaseback(2)
|
|||||||||||||
Sun
Healthcare Group, Inc
|
3,463
|
32
|
87
|
$
|
155,090
|
||||||||
Advocat,
Inc
|
2,997
|
29
|
76
|
91,567
|
|||||||||
Guardian
LTC Management, Inc
|
1,243
|
16
|
84
|
80,200
|
|||||||||
Seacrest
Healthcare
|
950
|
7
|
86
|
55,020
|
|||||||||
Haven
Healthcare
|
841
|
7
|
94
|
49,503
|
|||||||||
HQM
of Floyd County, Inc
|
643
|
6
|
90
|
37,899
|
|||||||||
Alden
Management Services, Inc
|
868
|
4
|
57
|
31,732
|
|||||||||
Mark
Ide Limited Liability Company
|
832
|
8
|
84
|
24,391
|
|||||||||
Harborside
Healthcare Corporation
|
465
|
4
|
88
|
22,868
|
|||||||||
Senior
Management
|
871
|
5
|
75
|
22,371
|
|||||||||
StoneGate
SNF Properties, LP
|
664
|
6
|
87
|
21,781
|
|||||||||
CommuniCare
Health Services.
|
260
|
2
|
65
|
20,386
|
|||||||||
Claremont
Health Care Holdings, Inc
|
268
|
2
|
93
|
20,200
|
|||||||||
Infinia
Properties of Arizona, LLC
|
378
|
4
|
58
|
18,886
|
|||||||||
Alterra
Healthcare Corporation
|
237
|
6
|
82
|
18,696
|
|||||||||
USA
Healthcare, Inc
|
489
|
5
|
81
|
15,029
|
|||||||||
Conifer
Care Communities, Inc.
|
195
|
3
|
91
|
14,367
|
|||||||||
Washington
N&R, LLC
|
286
|
2
|
78
|
12,152
|
|||||||||
Peak
Medical of Idaho, Inc
|
224
|
2
|
69
|
10,500
|
|||||||||
Triad
Health Management of Georgia II, LLC
|
304
|
2
|
99
|
10,000
|
|||||||||
The
Ensign Group, Inc
|
271
|
3
|
93
|
9,656
|
|||||||||
Lakeland
Investors, LLC
|
300
|
1
|
64
|
8,522
|
|||||||||
Hickory
Creek Healthcare Foundation, Inc.
|
138
|
2
|
89
|
7,250
|
|||||||||
American
Senior Communities, LLC
|
78
|
2
|
88
|
6,195
|
|||||||||
Liberty
Assisted Living Centers, LP
|
120
|
1
|
96
|
5,995
|
|||||||||
Emeritus
Corporation
|
52
|
1
|
73
|
5,674
|
|||||||||
Longwood
Management Corporation
|
185
|
2
|
92
|
5,425
|
|||||||||
Eldorado
Care Center, Inc. & Magnolia Manor, Inc.
|
167
|
2
|
36
|
5,100
|
|||||||||
Nexion
Management
|
131
|
1
|
94
|
4,602
|
|||||||||
LandCastle
Diversified LLC
|
238
|
2
|
63
|
3,900
|
|||||||||
Saber
Healthcare Group
|
36
|
1
|
41
|
3,521
|
|||||||||
Generations
Healthcare, Inc.
|
60
|
1
|
65
|
3,007
|
|||||||||
Parkview
Eskco of Paris, Inc./Lamar Healthcare
|
102
|
1
|
74
|
2,540
|
|||||||||
Skilled
Healthcare
|
59
|
1
|
81
|
1,764
|
|||||||||
Keh
|
98
|
1
|
62
|
1,486
|
|||||||||
Carter
Care Centers, Inc.
|
58
|
1
|
77
|
1,299
|
|||||||||
18,571
|
175
|
81
|
808,574
|
||||||||||
Fixed
Rate Mortgages(3)
|
|||||||||||||
Mariner
Health Care, Inc.(4)
|
1,618
|
12
|
93
|
59,658
|
|||||||||
Essex
Healthcare Corporation
|
633
|
6
|
76
|
13,776
|
|||||||||
Advocat,
Inc
|
423
|
4
|
83
|
12,677
|
|||||||||
Parthenon
Healthcare, Inc.
|
300
|
2
|
73
|
10,782
|
|||||||||
Hickory
Creek Healthcare Foundation, Inc. .
|
667
|
15
|
79
|
9,991
|
|||||||||
CommuniCare
Health Services
|
150
|
1
|
87
|
6,500
|
|||||||||
Texas
Health Enterprises/HEA Mgmt. Group, Inc
|
408
|
3
|
68
|
2,532
|
|||||||||
Evergreen
Healthcare
|
191
|
2
|
67
|
1,762
|
|||||||||
Paris
Nursing Home, Inc
|
144
|
1
|
70
|
380
|
|||||||||
4,534
|
46
|
83
|
118,058
|
||||||||||
Reserve
for uncollectible loans
|
-
|
-
|
-
|
-
|
|||||||||
Total
|
23,105
|
221
|
81
|
$
|
926,632
|
(1)
Represents the most recent data provided by our operators.
(2)
Certain
of our lease agreements contain purchase options that permit the lessees to
purchase the underlying properties from us.
(3) In
general, many of our mortgages contain prepayment provisions that permit
prepayment of the outstanding principal amounts thereunder. For more
information, see Note 18 - Subsequent Events.
(4) On
February 1, 2005, Mariner exercised its right to prepay its mortgage with us,
and as a result, as of the date of this report we no longer hold mortgages on
properties operated by Mariner.
15
The
following table presents the concentration of our facilities by state as of
December 31, 2004:
Number
of
Facilities
|
Number
of
Beds
|
Gross
Investment
(In
thousands)
|
%
of
Total
Investment
|
||||||||||
Florida |
21
|
2,770
|
$
|
126,134
|
13.6
|
||||||||
Pennsylvania |
14
|
1,136
|
80,821
|
8.7
|
|||||||||
Ohio |
17
|
1,730
|
70,834
|
7.7
|
|||||||||
California |
19
|
1,557
|
66,983
|
7.2
|
|||||||||
Illinois |
10
|
1,513
|
51,238
|
5.5
|
|||||||||
Texas |
16
|
2,189
|
49,604
|
5.4
|
|||||||||
Michigan |
9
|
1,171
|
41,977
|
4.5
|
|||||||||
North
Carolina |
8
|
1,154
|
40,389
|
4.4
|
|||||||||
Arkansas |
12
|
1,253
|
39,325
|
4.2
|
|||||||||
West
Virginia |
8
|
860
|
38,279
|
4.1
|
|||||||||
Indiana |
24
|
1,258
|
36,034
|
3.9
|
|||||||||
Alabama |
9
|
1,152
|
35,932
|
3.9
|
|||||||||
Connecticut |
5
|
562
|
35,221
|
3.8
|
|||||||||
Massachusetts |
5
|
600
|
31,168
|
3.4
|
|||||||||
Kentucky |
9
|
757
|
27,375
|
3.0
|
|||||||||
Tennessee |
6
|
642
|
21,553
|
2.3
|
|||||||||
Arizona |
4
|
378
|
18,886
|
2.1
|
|||||||||
Colorado |
4
|
232
|
16,950
|
1.8
|
|||||||||
Washington |
2
|
194
|
16,948
|
1.8
|
|||||||||
Iowa |
5
|
489
|
15,029
|
1.6
|
|||||||||
Vermont |
2
|
279
|
14,281
|
1.5
|
|||||||||
Missouri |
2
|
286
|
12,152
|
1.3
|
|||||||||
Idaho |
3
|
264
|
11,100
|
1.2
|
|||||||||
Georgia |
2
|
304
|
10,000
|
1.1
|
|||||||||
New
Hampshire |
1
|
68
|
5,800
|
0.6
|
|||||||||
Louisiana |
1
|
131
|
4,603
|
0.5
|
|||||||||
Kansas |
1
|
40
|
3,419
|
0.4
|
|||||||||
Oklahoma |
1
|
36
|
3,178
|
0.3
|
|||||||||
Utah
|
1
|
100
|
1,418
|
0.2
|
|||||||||
221
|
23,105
|
$
|
926,632
|
100.0
|
|||||||||
Reserve
for uncollectible loans
|
-
|
-
|
|||||||||||
Total
|
221
|
23,105
|
$
|
926,632
|
100.0
|
||||||||
Geographically
Diverse Property Portfolio. Our
portfolio of properties is broadly diversified by geographic location. We have
healthcare facilities located in 29 states. Only one state comprised more than
10% of our rental and mortgage income in 2004. In addition, the majority of our
2004 rental and mortgage income is derived from facilities in states that
require state approval for development and expansion of healthcare facilities.
We believe that such state approvals may limit competition for our operators and
enhance the value of our properties.
Large
Number of Tenants. Our
facilities are operated by 42 different public and private healthcare providers.
Except for Sun and Advocat, which together hold approximately 28% of our
portfolio (by investment), no single tenant holds greater than 10% of our
portfolio (by investment).
Significant
Number of Long-term Leases and Mortgage Loans. A large
portion of our core portfolio consists of long-term lease and mortgage
agreements. At December 31, 2004, approximately 91% of our leases and mortgages
have primary terms that expire in 2010 or later. Our leased real estate
properties are leased under provisions of single facility leases or master
leases with initial terms typically ranging from 5 to 15 years, plus renewal
options. Substantially all of the master leases provide for minimum annual
rentals that are subject to annual increases based upon increases in the
Consumer Price Index (“CPI”) or increases in revenues of the underlying
properties, with certain limits. Under
the terms of the leases, the lessee is responsible for all maintenance, repairs,
taxes and insurance on the leased properties.
16
Item
3 - Legal Proceedings
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 2000,
we filed suit against a title company (later adding a law firm as a defendant),
seeking damages based on claims of breach of contract and negligence, among
other things, as a result of the alleged failure to file certain Uniform
Commercial Code (“UCC”) financing statements in our favor. We filed a subsequent
suit seeking recovery under title insurance policies written by the title
company. The defendants denied the allegations made in the lawsuits. In
settlement of our claims against the defendants, we agreed in the first quarter
of 2003 to accept a lump sum cash payment of $3.2 million. The cash proceeds
were offset by related expenses incurred of $1.0 million resulting in a net gain
of $2.2 million.
No
matters were submitted to stockholders during the fourth quarter of the year
covered by this report.
17
PART
II
Item
5 - Market for Registrant’s Common Equity and Related Stockholder
Matters
Our
shares of Common Stock are traded on the New York Stock Exchange under the
symbol “OHI.” The following table sets forth, for the periods shown, the high
and low prices as reported on the New York Stock Exchange Composite for the
periods indicated and cash dividends per share:
2004
|
2003
|
|||||||||||||||||||||
Quarter
|
High
|
Low
|
Dividends
Per
Share
|
Quarter
|
High
|
Low
|
Dividends
Per
Share
|
|||||||||||||||
First |
$
|
11.450
|
$
|
9.150
|
$
|
0.17
|
First |
$
|
3.920
|
$
|
2.260
|
$
|
0.00
|
|||||||||
Second |
11.250
|
8.350
|
0.18
|
Second |
5.600
|
2.210
|
0.00
|
|||||||||||||||
Third |
10.800
|
9.470
|
0.18
|
Third |
8.350
|
5.070
|
0.00
|
|||||||||||||||
Fourth
|
12.950
|
10.670
|
0.19
|
Fourth
|
9.420
|
7.400
|
0.15
|
|||||||||||||||
$
|
0.72
|
$
|
0.15
|
The
closing price on December 31, 2004 was $11.80 per share. As of December 31,
2004, there were 50,824,489 shares of common stock outstanding with 1,624
registered holders and over 12,000 beneficial owners.
During
the fourth quarter of 2004, we purchased 13,967 shares of our common stock from
employees to pay the withholding taxes associated with employee exercising of
stock options.
Period
|
Total
Number of Shares Purchased (1)
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Number (or Approximate Dollar Value) of Shares that May be Purchased Under
these Plans or Programs
|
|||||||||
October
1, 2004 to October 31, 2004
|
13,967
|
$
|
11.05
|
-
|
$
|
-
|
|||||||
November
1, 2004 to November 30, 2004 |
-
|
-
|
-
|
-
|
|||||||||
December
1, 2004 to December 31, 2004 |
-
|
-
|
-
|
-
|
|||||||||
Total
|
13,967
|
$
|
11.05
|
-
|
$
|
-
|
(1)
Represents shares purchased from employees to pay the withholding taxes related
to the exercise of employee stock options. The shares were not part of a
publicly announced repurchase plan or program.
We expect
to continue our policy of paying regular cash dividends, although there is no
assurance as to future dividends because they depend on future earnings, capital
requirements and our financial condition. In addition, the payment of dividends
is subject to the restrictions described in Note 13 to our consolidated
financial statements.
18
Item
6 - Selected Financial Data
The
following table sets forth our selected financial data and operating data for
our company on a historical basis. The following data should be read in
conjunction with our audited consolidated financial statements and notes thereto
and Management’s Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein. Our historical operating results may not
be comparable to our future operating results.
|
Year
ended December 31,
|
|||||||||||||||
|
2004
|
2003
|
2002
|
2001
|
2000
|
|||||||||||
(In
thousands, except per share amounts) |
||||||||||||||||
Operating
Data |
||||||||||||||||
Revenues
from core operations
|
$
|
90,451
|
$
|
83,339
|
$
|
87,270
|
$
|
86,314
|
$
|
96,285
|
||||||
Revenues
from nursing home operations
|
-
|
4,395
|
42,203
|
160,580
|
167,287
|
|||||||||||
Total
revenues
|
$
|
90,451
|
$
|
87,734
|
$
|
129,473
|
$
|
246,894
|
$
|
263,572
|
||||||
Income
(loss) from continuing operations
|
$
|
13,467
|
$
|
32,162
|
$
|
1,477
|
$
|
(16,828
|
)
|
$
|
(42,783
|
)
|
||||
Net
(loss) income available to common
|
(40,123
|
)
|
2,915
|
(34,761
|
)
|
(36,651
|
)
|
(66,485
|
)
|
|||||||
Per
share amounts: |
||||||||||||||||
(Loss)
income from continuing operations:
Basic
|
$
|
(0.95
|
)
|
$
|
0.32
|
$
|
(0.54
|
)
|
$
|
(1.84
|
)
|
$
|
(2.98
|
)
|
||
Diluted
|
(0.95 |
) |
0.32 |
(0.54 |
) |
(1.84 |
) |
(2.98 |
) |
|||||||
Net
(loss) income available to common:
Basic
|
$
|
(0.88
|
)
|
$
|
0.08
|
$
|
(1.00
|
)
|
$
|
(1.83
|
)
|
$
|
(3.32
|
)
|
||
Diluted
|
(0.88 |
) |
0.08 |
(1.00 |
) |
(1.83 |
) |
(3.32 |
) |
|||||||
Dividends,
Common Stock(1)
|
0.72 |
0.15 |
- |
- |
1.00 |
|||||||||||
Dividends,
Series A Preferred(1)
|
1.156 |
6.937 |
- |
- |
2.31 |
|||||||||||
Dividends,
Series B Preferred(1)
|
2.156 |
6.469 |
- |
- |
2.16 |
|||||||||||
Dividends,
Series C Preferred(2)
|
- |
29.807 |
- |
- |
0.25 |
|||||||||||
Dividends,
Series D Preferred(1)
|
1.518 |
- |
- |
- |
- |
|||||||||||
Weighted-average
common shares outstanding,
basic
|
45,472
|
37,189
|
34,739
|
20,038
|
20,052
|
|||||||||||
Weighted-average
common shares outstanding, diluted
|
45,472
|
38,154
|
34,739
|
20,038
|
20,052
|
December
31,
|
||||||||||||||||
2004
|
2003
|
2002
|
2001
|
2000
|
||||||||||||
Balance
Sheet Data
Gross
investments
|
$
|
956,331
|
$
|
841,416
|
$
|
881,220
|
$
|
938,229
|
$
|
974,323
|
||||||
Total
assets
|
833,563 |
729,013 |
804,148 |
892,414 |
953,651 |
|||||||||||
Revolving
lines of credit
|
15,000 |
177,074 |
177,000 |
193,689 |
185,641 |
|||||||||||
Other
long-term borrowings
|
364,508 |
103,520 |
129,462 |
219,483 |
249,161 |
|||||||||||
Subordinated
convertible debentures
|
- |
- |
- |
- |
16,590 |
|||||||||||
Stockholders
equity
|
432,480 |
436,235 |
479,701 |
450,690 |
464,313 |
|||||||||||
(1) |
Dividends
per share are those declared and paid during such
period.
|
(2) |
Dividends
per share are those declared during such period, based on the number of
shares of common stock issuable upon conversion of the outstanding Series
C preferred stock.
|
19
Item
7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 1
above;
|
(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 assets on a timely basis and on terms that allow us
to realize the carrying value of these
assets;
|
(v) |
our
ability to negotiate appropriate modifications to the terms of our credit
facilities;
|
(vi) |
our
ability to manage, re-lease or sell any owned and operated
facilities;
|
(vii) |
the
availability and cost of capital;
|
(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 interest rates;
|
(xii) |
the
amount and yield of any additional
investments;
|
(xiii) |
changes
in tax laws and regulations affecting real estate investment trusts;
and
|
(xiv) |
changes
in the ratings of our debt and preferred
securities.
|
Overview
Our
portfolio of investments at December 31, 2004, consisted of 221 healthcare
facilities, located in 29 states and operated by 42 third-party operators. Our
gross investment in these facilities totaled approximately $927 million at
December 31, 2004, with 97% of our real estate investments related to long-term
healthcare facilities. This portfolio is made up of 173 long-term healthcare
facilities and two rehabilitation hospitals owned and leased to third parties
and fixed rate mortgages on 46 long-term healthcare facilities. At December 31,
2004, we also held other investments of approximately $30 million, consisting
primarily of secured loans to third-party operators of our
facilities.
20
Medicare
Reimbursement
Nearly
all of our properties are used as healthcare facilities; therefore, we are
directly affected by the risk associated with the healthcare industry. Our
lessees and mortgagors, as well as any facilities that may be owned and operated
for our own account from time to time, derive a substantial portion of their net
operating revenues from third-party payors, including the Medicare and Medicaid
programs. These programs are highly regulated by federal, state and local laws,
rules and regulations, and subject to frequent and substantial change. The
Balanced Budget Act of 1997 (the “Balanced Budget Act”) significantly reduced
spending levels for the Medicare and Medicaid programs. Due to the
implementation of the terms of the Balanced Budget Act, effective July 1, 1998,
the majority of skilled nursing facilities (“SNFs”) shifted from payments based
on reasonable cost to a prospective payment system for services provided to
Medicare beneficiaries. Under the prospective payment system, SNFs are paid on a
per diem prospective case-mix adjusted basis for all covered services.
Implementation of the prospective payment system has affected each long-term
care facility to a different degree, depending upon the amount of revenue such
facility derives from Medicare patients.
Legislation
adopted in 1999 and 2000 increased Medicare payments to nursing facilities and
specialty care facilities on an interim basis. Section 101 of the Balanced
Budget Refinement Act of 1999 (the “Balanced Budget Refinement Act”) included a
20% increase for 15 patient acuity categories (known as Resource Utilization
Groups (“RUGs”)) and a 4% across the board increase of the adjusted federal per
diem payment rate for all RUGs. The 20% increase was implemented in April 2000
and will remain in effect until the Centers for Medicare and Medicaid Services
(“CMS”) implements refinements to the current RUG case-mix classification system
to more accurately estimate the cost of non-therapy ancillary services. The 4%
increase was implemented in April 2000 and expired October 1, 2002.
The
Benefits Improvement and Protection Act of 2000 (the “Benefits Improvement and
Protection Act”) included a 16.7% increase in the nursing component of the
case-mix adjusted federal periodic payment rate, which was implemented in April
2000 and expired October 1, 2002. The Benefits Improvement and Protection Act
also modified the 20% increase granted in the Balanced Budget Refinement Act,
reducing the 20% increase for three of the 15 RUGs to a 6.7% increase and
instituting a new 6.7% increase for 11 other RUGs. These modifications were
implemented in April 2001 and will remain in effect until CMS refines the
current RUG case-mix classification system.
The
October 1, 2002 expiration of the 4% and 16.7% increases under these statutes
has had an adverse impact on the revenues of the operators of nursing facilities
and has negatively impacted some operators’ ability to satisfy their monthly
lease or debt payments to us. Medicare reimbursement could be further reduced
when CMS completes its refinement of the RUG classification system, thereby
eliminating the temporary 20% and 6.7% increases also established under these
statutes.
On August
4, 2003, CMS published the payment rates for SNFs for federal fiscal year 2004
(effective October 1, 2003 through September 30, 2004), which included a 3.0%
increase in Medicare payments for federal fiscal year 2004. In addition, CMS
announced that the 20% and 6.7% temporary add-ons for certain payment categories
would remain in effect for federal fiscal year 2004. CMS also confirmed in the
August 4, 2003 announcement its intention to incorporate a forecast error
adjustment to take into account previous years’ update errors. As a result, CMS
increased the national payment rates by an additional 3.26% above the 3.0%
increase for federal fiscal year 2004.
CMS
published the payment rates for SNFs for federal fiscal year 2005 (October 1,
2004 through September 30, 2005) on July 30, 2004. CMS announced that the
national payment rates would be increased by 2.8% over the previous year’s
rates. Additionally, CMS stated it would maintain the 20% and 6.7% temporary
add-ons for the designated payment categories for federal fiscal year
2005.
A 128%
temporary increase in the per diem amount paid to SNFs for residents who have
AIDS took effect on October 1, 2004. This temporary payment increase, which will
remain in place until CMS implements revisions to the RUG case-mix
classification system, arises from the Medicare Prescription Drug Improvement
and Modernization Act of 2003 (“Medicare Modernization Act”). When applicable,
this 128% increase applies in lieu of the 20% and 6.7% increases described
above.
The
Medicare Modernization Act also temporarily reinstituted a moratorium on the
application of a reimbursement cap on outpatient rehabilitative services. The
therapy cap limits reimbursement to $1,950 for physical therapy and
speech-language pathology services provided on an outpatient basis. Congress
first enacted a moratorium on the implementation of a reimbursement cap from
January 1, 2000 until January 1, 2003. CMS enforced the reimbursement cap from
September 1, 2003 through December 7, 2003, at which point Congress reinstituted
the moratorium under the Medicare Modernization Act. The moratorium remains in
place through December 31, 2005, and its future beyond that date is unclear at
this point.
21
CMS
released a proposed rule in February 2003 that, if implemented, would limit
Medicare reimbursement to certain providers, including SNFs, for bad debt
arising from unpaid beneficiary deductibles and coinsurance amounts. In the
proposed rule, CMS indicated that reimbursement rates would be reduced by 10%
each year for three years until reimbursement rates to SNFs for bad debt equal
70% of reimbursement rates during federal fiscal year 2003. CMS has not issued a
final rule on this issue, and we cannot predict whether CMS will implement these
proposed policies or when the final rule may be issued. However, extensive cuts
in Medicare payments for bad debt could have a material adverse effect on our
operators’ financial condition and result of operations, which could adversely
affect their ability to meet their payment obligation to us.
Due to
the temporary nature of the 20% and 6.7% Medicare payment increases established
under the Balanced Budget Refinement Act and the Benefits Improvement and
Protection Act as well as the increase in the per diem amounts for SNF residents
who have AIDS under the Medicare Modernization Act, we cannot be assured that
the federal reimbursement will remain at levels comparable to present levels and
that such reimbursement will be sufficient for our lessees or mortgagors to
cover all operating and fixed costs necessary to care for Medicare and Medicaid
patients. We also cannot be assured that there will be any future legislation to
increase payment rates for SNFs. If payment rates for SNFs are not increased in
the future, some of our lessees and mortgagors may have difficulty meeting their
payment obligations to us.
Congress
may consider federal legislation involving the Medicare program in 2005,
although the likelihood of enactment of such legislation remains
uncertain.
Medicaid
and Other Third-Party Reimbursement
Each
state has its own Medicaid program that is funded jointly by the state and
federal government. Federal law governs how each state manages its Medicaid
program, but there is wide latitude for states to customize Medicaid programs to
fit the needs and resources of its citizens. Rising
Medicaid costs and decreasing state revenues caused by recent economic
conditions have prompted an increasing number of states to cut or consider
reductions in Medicaid funding as a means of balancing their respective state
budgets. Existing and future initiatives affecting Medicaid reimbursement may
reduce utilization of (and reimbursement for) services offered by the operators
of our properties. In 2003 and 2004, many states announced actual or potential
budget shortfalls, and many budget forecasts for 2005 could be similar. As a
result of these budget shortfalls, many states have announced that they are
implementing or considering implementing “freezes” or cuts in Medicaid
reimbursement rates, including rates paid to SNF providers, or reductions in
Medicaid enrollee benefits, including long-term care benefits. We cannot predict
the extent to which Medicaid rate freezes or cuts or benefit reductions will
ultimately be adopted, the number of states that will adopt them or the impact
of such adoption on our operators. However, extensive Medicaid rate cuts or
freezes or benefit reductions could have a material adverse effect on our
operators’ liquidity, financial condition and results of operations, which could
adversely affect their ability to make lease or mortgage payments to
us.
On May
28, 2003, the federal Jobs and Growth Tax Relief Reconciliation Act (the “Tax
Relief Act”) was signed into law, which included an increase in Medicaid federal
funding for five fiscal quarters (April 1, 2003 through June 30, 2004). In
addition, the Tax Relief Act provided state fiscal relief for federal fiscal
years 2003 and 2004 to assist states with funding shortfalls, and these
temporary federal funding provisions are considered to have partially mitigated
state Medicaid funding reductions through federal fiscal year 2004. However, the
temporary Medicaid funding provided under the Tax Relief Act expired on June 30,
2004. Although federal legislation was introduced in Congress in 2004 to
reinstitute the funding, it is unknown whether such legislation will be
introduced in 2005, whether such legislation will be enacted, what level of
funding would be provided if the legislation was enacted, or how great an effect
this funding could have on mitigating Medicaid funding reductions.
Congress
may consider federal legislation to reform the Medicaid program in 2005,
although the content and likelihood of enactment of such legislation remains
uncertain. For example, in the proposed budget for fiscal year 2005, which was
released in February 2004, CMS indicated it intended to ask Congress to pass
legislation that would restrict states’ ability to use intergovernmental
transfers (“IGTs”) to access federal Medicaid funding for public
providers.
In
addition, private payors, including managed care payors, are increasingly
demanding discounted fee structures and the assumption by healthcare providers
of all or a portion of the financial risk of operating a healthcare facility.
Efforts to impose greater discounts and more stringent cost controls are
expected to continue. Any changes in reimbursement policies which reduce
reimbursement levels could adversely affect the revenues of our lessees and
mortgagors and thereby adversely affect those lessees' and mortgagors' abilities
to make their monthly lease or debt payments to us.
22
Fraud
and Abuse
There are
various extremely complex and largely uninterpreted federal and state laws
governing a wide array of referrals, relationships and arrangements and
prohibiting fraud by healthcare providers, including criminal provisions that
prohibit filing false claims or making false statements to receive payment or
certification under Medicare and Medicaid, or failing to refund overpayments or
improper payments. Governments are devoting increasing attention and resources
to anti-fraud initiatives against healthcare providers. Penalties for healthcare
fraud have been increased and expanded over recent years, including broader
provisions for the exclusion of providers from the Medicare and Medicaid
programs, and the OIG in cooperation with other federal and state agencies,
continues to focus on the activities of skilled nursing facilities in certain
states in which we have properties. In addition, the federal False Claims Act
allows a private individual with knowledge of fraud to bring a claim on behalf
of the federal government and earn a percentage of the federal government’s
recovery. Because of these incentives, these so-called ‘‘whistleblower’’ suits
have become more frequent. The violation of any of these laws or regulations by
an operator may result in the imposition of fines or other penalties that could
jeopardize that operator’s ability to make lease or mortgage payments to us or
to continue operating its facility.
Legislative
and Regulatory Developments
Each
year, legislative proposals are introduced or proposed in Congress, state
legislatures as well as by federal and state agencies, which, if implemented,
could result in major changes in the health care system, either nationally or at
the state level. In addition, regulatory proposals and rules are released on an
ongoing basis that may have major impacts on the health care system generally
and the industries in which our operators do business. Legislative and
regulatory developments can be expected to occur on an ongoing basis at the
local, state and federal levels that have direct or indirect impacts on the
policies governing the reimbursement levels paid to our facilities by public and
private third-party payors, the costs of doing business and the threshold
requirements that must be met for facilities to continue operation or to expand.
The Medicare Modernization Act, which is one example of such legislation, was
enacted in December 2003. The significant expansion of other benefits for
Medicare beneficiaries under this Act, such as the prescription drug benefit,
could result in financial pressures on the Medicare program that might result in
future legislative and regulatory changes with impacts on our operators.
Although the creation of a prescription drug benefit for Medicare beneficiaries
was expected to generate fiscal relief for state Medicaid programs, the
structure of the benefit and costs associated with its implementation and
administration through the states may mitigate the relief for states that was
anticipated. CMS also launched the Nursing Home Quality Initiative program in
2002, which requires nursing homes participating in Medicare to provide
consumers with comparative information about the quality of care at the
facility. 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 in the future to reimbursement
policies that reward or penalize facilities on the basis of the reported quality
of care parameters. Other proposals under consideration include efforts by
individual states to control costs by decreasing state Medicaid reimbursements
in the current or future fiscal years and federal legislation addressing various
issues, such as protecting consumers in managed care plans, improving quality of
care and reducing medical errors throughout the health care industry. We cannot
accurately predict whether any proposals will be adopted or, if adopted, what
effect, if any, these proposals would have on operators and, thus, our
business.
Significant
Highlights
The
following significant highlights occurred during the twelve-month period ended
December 31, 2004.
Financing
· |
In
February 2004, we issued 4,739,500 shares of 8.375% Series D cumulative
redeemable preferred stock.
|
· |
In
February 2004, we repurchased 700,000 shares of our 10% Series C
convertible preferred stock with the remaining shares converted into our
common stock.
|
· |
In
March 2004, we closed on an 18.1 million secondary common share offering
and a 2.7 million primary common share
offering.
|
· |
In
March 2004, we closed on a primary offering of $200 million, 7% unsecured
notes due 2014.
|
· |
In
March 2004, we obtained a $125 million Senior Secured Credit Facility
(“Credit Facility”) and terminated two credit facilities that existed at
that time.
|
· |
In
April 2004, we fully redeemed our 9.25% Series A cumulative preferred
stock.
|
· |
In
April 2004, we increased our Credit Facility commitment to $175 million
and in December 2004, we further increased our Credit Facility commitment
to $200 million.
|
· |
In
November 2004, we completed a primary offering of $60 million, 7%
unsecured notes due 2014.
|
· |
In
December 2004, we issued 4.0 million primary shares of our common
stock.
|
Dividends
· |
In
2004, we paid common stock dividends of $0.17, $0.18, $0.18 and $0.19 per
share, for stockholders of record on February 2, 2004, April 30, 2004,
July 30, 2004 and October 29, 2004,
respectively.
|
23
New
Investments
· |
In
April 2004, we purchased three SNFs for approximately $26 million and
leased them to an existing third-party
operator.
|
· |
In
April 2004, we purchased two SNFs for approximately $9 million and leased
them to an existing third-party operator.
|
· |
In
November 2004, we closed on a first mortgage loan to an existing operator
for approximately $7 million associated with one
SNF.
|
· |
In
November and December 2004, we purchased 15 SNFs and one assisted living
facility (“ALF”) for approximately $80 million and leased them to a new
third-party operator.
|
Re-leasing
and Restructuring
· |
In
January 2004, we re-leased five SNFs formerly operated by Sun Healthcare
Group, Inc. (“Sun”) to an existing third-party
operator.
|
· |
In
January 2004, we re-leased our last remaining owned and operated facility
to an existing third-party operator.
|
· |
In
January 2004, we re-leased one SNF formerly leased by Claremont Healthcare
Holdings, Inc. (“Claremont”) to an existing
operator.
|
· |
In
March 2004, we restructured and amended our master lease with Sun, our
largest operator.
|
· |
In
March 2004, we re-leased one SNF formerly operated by Sun to a new
third-party operator.
|
· |
In
March 2004, we re-leased three SNFs formerly leased by Claremont to an
existing operator.
|
· |
In
October 2004, we re-leased one assisted living facility formerly leased to
Alterra Healthcare Corporation (“Alterra”) to a new third party
operator.
|
· |
In
November 2004, we re-leased two SNFs formerly operated by Sun to two
unaffiliated new third-party operators.
|
Asset
sales
· |
Throughout
2004, we sold six closed facilities for proceeds of approximately $5.7
million.
|
The
preparation of financial statements in conformity with generally accepted
accounting principles (“GAAP”) in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our significant accounting policies are described
in Note 2 to our audited consolidated financial statements. These policies were
followed in preparing the consolidated financial statements for all periods
presented. Actual results could differ from those estimates.
We have
identified four significant accounting policies which we believe are critical
accounting policies. These critical accounting policies are those that have the
most impact on the reporting of our financial condition and those requiring
significant assumptions, judgments and estimates. With respect to these critical
accounting policies, we believe the application of judgments and assessments is
consistently applied and produces financial information that fairly presents the
results of operations for all periods presented. The four critical accounting
policies are:
Revenue
Recognition
With the
exception of one master lease, rental income and mortgage interest income are
recognized as earned over the terms of the related master leases and mortgage
notes, respectively. Such income includes periodic increases based on
pre-determined formulas (i.e., such as increases in the CPI) as defined in the
master leases and mortgage loan agreements. Reserves are taken against earned
revenues from leases and mortgages when collection becomes questionable or when
negotiations for restructurings of troubled operators result in significant
uncertainty regarding ultimate collection. The amount of the reserve is
estimated based on what management believes will likely be collected. When
collection is uncertain, lease revenues are recorded when received, after taking
into account application of security deposits. Interest income on impaired
mortgage loans is recognized when received after taking into account application
of principal repayments and security deposits.
The one
master lease not recognized as earned over the term of the lease is recognized
on a straight-line basis. We
recognize the minimum base rental revenue under this master lease on a
straight-line basis over the term of the related lease. Accrued straight-line
rents represent the rental revenue recognized in excess of rents due under the
lease agreements at the balance sheet date.
Gains on
sales of real estate assets are recognized pursuant to the provisions of SFAS
No. 66, “Accounting for Sales of Real Estate.” The specific timing of the
recognition of the sale and the related gain is measured against the various
criteria in SFAS No. 66 related to the terms of the transactions and any
continuing involvement associated with the assets sold. To the extent the sales
criteria are not met, we defer gain recognition until the sales criteria are
met.
24
Asset
Impairment
Under
GAAP, real estate assets are stated at the lower of depreciated cost or fair
value, if deemed impaired. Depreciation is computed on a straight-line basis
over the estimated useful lives of 25 to 40 years for buildings and
improvements. Management periodically, but not less than annually, evaluates
our real estate investments for impairment indicators, including the evaluation
of our assets’ useful lives. The judgment regarding the existence of impairment
indicators is based on factors such as, but not limited to, market conditions,
operator performance and legal structure. If indicators of impairment are
present, management evaluates the carrying value of the related real estate
investments in relation to the future undiscounted cash flows of the underlying
facilities. Provisions
for impairment losses related to long-lived assets are recognized when expected
future undiscounted cash flows are determined to be permanently less than the
carrying values of the assets. If the sum of the expected future undiscounted
cash flows, including sales proceeds, is determined to be permanently less than
carrying value, then an adjustment is made to the net carrying value of the
leased properties and other long-lived assets for the excess of historical cost
over fair value. The fair value of the real estate investment is determined by
market research, which includes valuing the property as a nursing home as well
as other alternative uses.
If we
decide to sell rental properties or land holdings, we evaluate the
recoverability of the carrying amounts of the assets. If the evaluation
indicates that the carrying value is not recoverable from estimated net sales
proceeds, the property is written down to estimated fair value less costs to
sell. Our estimates of cash flows and fair values of the properties are based on
current market conditions and consider matters such as rental rates and
occupancies for comparable properties, recent sales data for comparable
properties, and, where applicable, contracts or the results of negotiations with
purchasers or prospective purchasers. Changes in estimated future cash flows due
to changes in our plans or view of market and economic conditions could result
in recognition of additional impairment losses, which, under applicable
accounting guidance, could be substantial.
During
the year ended December 31, 2004, we did not recognize an impairment loss;
however, during the years ended December 31, 2003 and 2002, we recognized
impairment losses of $8.9 million and $15.4 million, respectively, including
amounts in discontinued operations.
Loan
Impairment
Management,
periodically but not less than annually, evaluates our outstanding loans and
notes receivable. When management identifies potential loan impairment
indicators, such as non-payment under the loan documents, impairment of the
underlying collateral, financial difficulty of the operator or other
circumstances that may impair full execution of the loan documents, and
management believes these indicators are permanent, then the loan is written
down to the present value of the expected future cash flows. In cases where
expected future cash flows cannot be estimated, the loan is written down to the
fair value of the collateral. The fair value of the loan is determined by market
research, which includes valuing the property as a nursing home as well as other
alternative uses. We recorded loan impairments of $0.0 million, $0.0 million and
$8.8 million for the years ended December 31, 2004, 2003 and 2002, respectively,
including amounts in discontinued operations.
Assets
Held for Sale and Discontinued Operations
Pursuant
to the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the operating results of specified real estate assets which
have been sold, or otherwise qualify as held for disposition (as defined by SFAS
No. 144), are reflected as discontinued operations in the consolidated
statements of operations for all periods presented. We held no assets that
qualified as held for disposition, as defined by SFAS No. 144, as of December
31, 2004 and December 31, 2003.
25
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 audited consolidated financial statements and accompanying
notes.
Year
Ended December 31, 2004 compared to Year Ended December 31,
2003
Operating
Revenues
Our
operating revenues for the year ended December 31, 2004 totaled $90.5 million,
an increase of $2.7 million from the same period in 2003. When excluding nursing
home revenues of owned and operated assets, revenues increased $7.1 million.
The $7.1
million increase was primarily a result of new investments made in second and
fourth quarters of 2004, re-leasing and restructuring activities completed
throughout 2003 and during the first quarter of 2004, as well as scheduled
contractual increases in rents.
Detailed
changes in operating revenues for the
year ended December 31, 2004 are as
follows:
· |
Rental
income for the year ended December 31, 2004 was $74.0 million, an increase
of $9.3 million over the same period in 2003. The increase was due to new
leases entered into in April, November and December of 2004, re-leasing
and restructuring activities and scheduled contractual increases in
rents.
|
· |
Mortgage
interest income for the year ended December 31, 2004 totaled $13.3
million, a decrease of $1.4 million over the same period in 2003. The
decrease is primarily the result of mortgage payoffs during 2004, the
restructuring of two mortgages during 2003 and normal amortization and was
partially offset by a new mortgage placed in November
2004.
|
· |
Other
investment income for the year ended December 31, 2004 totaled $2.4
million, a decrease of $0.6 million over the same period in 2003. The
primary reason for the decrease was due to the impact of the sale of our
investment in a Baltimore, Maryland asset leased by the United States
Postal Service (“USPS”) in 2003.
|
Operating
Expenses
Operating
expenses for the year ended December 31, 2004 totaled $30.4 million, a decrease
of approximately $4.9 million over the same period in 2003. When
excluding nursing home expenses of owned and operated assets, operating expenses
increased $0.6 million, primarily due to restricted stock amortization expense
resulting from issuance of restricted stock grants in 2004. This increase was
partially offset by reductions in general and administrative and legal
costs.
Detailed
changes in our operating expenses for the
year ended December 31, 2004 are as
follows:
· |
Our
general and administrative expense was $6.2 million, compared to $6.6
million for the same period in 2003.
|
· |
Our
legal expenses were $1.5 million, compared to $2.3 million for the same
period in 2003. The decrease is largely attributable to a reduction of
legal costs associated with our owned and operated facilities due to the
releasing efforts, sales and/or closures of 33 owned and operated assets
since December 31, 2001.
|
· |
Our
restricted stock expense was $1.1 million, compared to $0 for the same
period in 2003. The increase is due to the expense associated with
restricted stock awards granted during
2004.
|
· |
As
of December 31, 2004, we no longer owned any facilities that were
previously recovered from customers. As
a result, our
nursing home expenses for owned and operated assets decreased to $0 from
$5.5 million in 2003.
|
We
believe that the presentation of our revenues and expenses, excluding nursing
home owned and operated assets, provides a useful measure of the operating
performance of our core portfolio as a REIT in view of the disposition of all of
our owned and operated assets as of January 1, 2004.
26
Other
Income (Expense)
For the
year ended December 31, 2004, our total other net expenses were $46.6 million as
compared to $21.0 million for the same period in 2003. The significant changes
are as follows:
· |
Our
interest expense, excluding amortization of deferred costs, for the year
ended December 31, 2004 was $23.1 million, compared to $18.5 million for
the same period in 2003. The increase of $4.6 million was primarily due to
higher debt on our balance sheet versus the same period in
2003.
|
· |
For
the year ended December 31, 2004, we recorded $19.1 million of
refinancing-related charges associated with refinancing our capital
structure. The $19.1 million consists of a $6.4 million exit fee paid to
our old bank syndication and a $6.3 million non-cash deferred financing
cost write-off associated with the termination of our $225 million credit
facility and our $50 million acquisition facility, and a loss of
approximately $6.5 million associated with the sale of an interest rate
cap.
|
· |
For
the year ended December 31, 2003, we recorded a $2.6 million one-time,
non-cash charge associated with the termination of two credit facilities
syndicated by Fleet and Provident Bank during
2003.
|
· |
For
the year ended December 31, 2004, we recorded a $3.0 million charge
associated with professional liability claims made against our former
owned and operated facilities.
|
· |
For
the year ended December 31, 2003, we
recorded a legal settlement receipt of $2.2 million. In 2000, we filed
suit against a title company (later adding a law firm as a defendant),
seeking damages based on claims of breach of contract and negligence,
among other things, as a result of the alleged failure to file certain
Uniform Commercial Code financing statements on our
behalf.
|
Gain
(Loss) from Discontinued Operations
Discontinued
operations relate to properties we disposed of in 2004 and are accounted for as
discontinued operations under SFAS No. 144. For the year ended December 31,
2004, we sold
six closed facilities, realizing proceeds of approximately $5.7 million, net of
closing costs and other expenses, resulting in a net gain of approximately $3.3
million. In accordance with SFAS No. 144, the $3.3 million realized net gain is
reflected in our consolidated statements of operations as discontinued
operations.
Funds
From Operations
Our funds
from operations available to all equity holders (“FFO”), for the year ended
December 31, 2004, was a deficit of ($21.9) million, a decrease of $46.4 million
as compared to $24.5 million for the same period in 2003. Our funds from
operations available to common stockholders (“FFO available to common
stockholders”), for the year ended December 31, 2004, was a deficit of ($21.9)
million, a decrease of $56.9 million as compared to $35.0 million for the same
period in 2003.
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 all
equity holders, adjusted for the effects of asset dispositions and certain
non-cash items, primarily depreciation and amortization. FFO
available to common stockholders is the lower of funds from operations and funds
from operations adjusted for the assumed conversion of Series C cumulative
preferred stock (the “Series C preferred stock”) in 2003. 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
real estate investment trusts (“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 and between other REITs. We offer this measure to assist the users of
our
financial statements in evaluating our
financial performance under GAAP, and FFO 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.
In
February 2004, NAREIT informed its member companies that it was adopting the
position of the Securities and Exchange Commission (“SEC”) with respect to asset
impairment charges and would no longer recommend that impairment write-downs be
excluded from FFO. In the tables included in this disclosure, we have applied
this interpretation and have not excluded asset impairment charges in
calculating our FFO. As a result, our FFO and FFO available to common
stockholders may not be comparable to similar measures reported in previous
disclosures. According to NAREIT, there is inconsistency among NAREIT member
companies as to the adoption of this interpretation of FFO. Therefore, a
comparison of our FFO results to another company's FFO results may not be
meaningful.
27
The
following table presents our FFO results reflecting the impact of asset
impairment charges (the SEC's interpretation) for the years ended December 31,
2004 and 2003:
Year
Ended December 31,
|
|||||||
2004
|
2003
|
||||||
Net
(loss) income available to common
|
$
|
(40,123
|
)
|
$
|
2,915
|
||
Add
back loss (deduct gain) from real estate dispositions(1)
|
(3,310
|
)
|
149
|
||||
(43,433
|
) |
3,064
|
|||||
Elimination
of non-cash items included in net (loss) income: |
|||||||
Depreciation
and amortization(2)
|
21,551
|
21,426
|
|||||
Funds
from operations available to all equity holders
|
(21,882
|
) |
24,490
|
||||
Series
C Preferred Dividends
|
-
|
10,484
|
|||||
Funds
from operations available to common stockholders
|
$
|
(21,882
|
)
|
$
|
34,974
|
||
(1) |
The
add back of loss/deduction of gain from real estate dispositions includes
the facilities classified as discontinued operations in our consolidated
financial statements. The loss (deduct gain) add back includes $3.3
million gain and $0.8 million loss related to facilities classified as
discontinued operations for the year ended December 31, 2004 and 2003,
respectively.
|
(2) |
The
add back of depreciation and amortization includes the facilities
classified as discontinued operations in our consolidated financial
statements. FFO for 2004 and 2003 includes depreciation and amortization
of $0.0 million and $0.6 million, respectively, related to facilities
classified as discontinued operations.
|
Taxes
No
provision for federal income taxes has been made since we qualify as a REIT
under the provisions of Sections 856 through 860 of the Internal Revenue Code of
1986, as amended. For tax
year 2004, preferred and common dividend payments of approximately $49 million
made throughout 2004 satisfy the 2004 REIT requirements (which states we must
distribute at least 90% of our REIT taxable income for the taxable year and meet
certain other conditions). We are permitted to own up to 100% of a “taxable REIT
subsidiary” (“TRS”). Currently we have two TRSs that are taxable as corporations
and that pay federal, state and local income tax on their net income at the
applicable corporate rates. These TRSs had net operating loss carry-forwards as
of December 31, 2004 of $14.6 million. These loss carry-forwards were fully
reserved with a valuation allowance due to uncertainties regarding
realization.
Year
Ended December 31, 2003 compared to Year Ended December 31,
2002
Operating
Revenues
Our
operating revenues for the year ended December 31, 2003 totaled $87.7 million, a
decrease of $41.7 million from 2002 revenues. When excluding nursing home
revenues of owned and operated assets, revenues were $83.3 million for the year
ended December 31, 2003, a decrease of $3.9 million from the comparable prior
year period. The
decrease during the year was primarily the result of operator restructurings and
the sale of our investment in a Baltimore, Maryland asset leased by the
USPS.
Detailed
changes in revenues during the year ended December 31, 2003 are as
follows:
· |
Rental
income for the year ended December 31, 2003 totaled $64.7 million, an
increase of $4.4 million over 2002 rental
income.
|
· |
Mortgage
interest income for the year ended December 31, 2003 totaled $14.7
million, decreasing $5.7 million.
|
· |
Other
investment income for the year ended December 31, 2003 totaled $3.0
million, decreasing $2.3 million.
|
28
Operating
Expenses
Our
operating expenses for the year ended December 31, 2003 totaled $35.2 million,
decreasing approximately $62.3 million from expenses of $97.5 million during
2002. When
excluding nursing home expenses of owned and operated assets, operating expenses
were $29.7 million for the year ended December 31, 2003, a
decrease of $6.0 million from the comparable prior year period. The
decrease during the year was primarily the result of favorable reductions in
general and administrative and legal expenses, provisions for impairments
recorded in 2002, offset by an increase in depreciation and amortization
expense.
An
analysis of changes in our operating expenses during the years ended December
31, 2003 and 2002 is as follows:
· |
Our
general and administrative expenses for 2003 totaled $6.6 million as
compared to $6.8 million for 2002, a decrease of $0.2 million. The
decrease is due to lower costs, primarily related to the owned and
operated facilities and cost reductions due to reduced staffing, travel
and other employee-related expenses.
|
· |
Our
legal expenses for 2003 totaled $2.3 million as compared to $2.9 million
in 2002. The decrease is largely attributable to a reduction of legal
costs associated with our owned and operated facilities due to the
releasing efforts, sales and/or closures of 32 owned and operated assets
since December 31, 2001.
|
· |
Provisions
for impairment of $8.9 million and $15.4 million were recorded in 2003 and
2002, respectively. The 2003 provision of $8.9 million was to reduce the
carrying value of two closed facilities to their fair value less cost to
dispose. The 2002 provision of $15.4 million reduced the carrying value of
several closed facilities to their fair value less cost to dispose. See
“Loss from Discontinued Operations” below.
|
· |
We
recognized a provision for loss on uncollectible mortgages, notes and
accounts receivable of $8.8 million in 2002. The provision included $4.9
million associated with the write-down of two mortgage loans to bankrupt
operators and $3.5 million related to the restructuring of debt owed by
Madison/OHI Liquidity Investors, LLC (“Madison”) as part of the compromise
and settlement of a lawsuit with Madison.
|
We
believe that the presentation of our revenues and expenses, excluding nursing
home owned and operated assets, provides a useful measure of the operating
performance of our core portfolio as a REIT in view of the disposition of all
but one of our owned and operated assets as of December 31, 2003.
Other
Income (Expense)
For the
year ended December 31, 2003, our total other net expenses were $21.0 million as
compared to $33.1 million for the same period in 2002. The significant changes
are as follows:
· |
Our
interest expense, excluding amortization of deferred costs, for the year
ended December 31, 2003 was $18.5 million, compared to $24.6 million for
the same period in 2002. The decrease in 2003 is due to lower average
borrowings on the then existing credit facilities as well as the impact of
2003 refinancing activities and the payoff in 2002 of $97.5 million of
6.95% notes that matured in June 2002.
|
· |
For
the year ended December 31, 2003, we recorded a $2.6 million one-time,
non-cash charge associated with the termination of two credit facilities
syndicated by Fleet and Provident Bank during
2003.
|
· |
For
the year ended December 31, 2003, we
recorded a legal settlement receipt of $2.2 million. In 2000, we filed
suit against a title company (later adding a law firm as a defendant),
seeking damages based on claims of breach of contract and negligence,
among other things, as a result of the alleged failure to file certain
Uniform Commercial Code financing statements on our
behalf.
|
· |
In
2002, we recognized a $7.0 million refinancing expense as we were unable
to complete a
planned commercial mortgage-backed securities transaction due to the
impact on our operators resulting from reductions in Medicare
reimbursement and concerns about potential Medicaid rate
reductions.
|
· |
During
2002, we recorded a non-cash gain of $0.9 million related to the maturity
and payoff of two interest rate swaps with a notional amount of $32.0
million each.
|
29
Other
· |
During
2003,
we sold four closed facilities, which were classified as assets held for
sale in 2001, in four separate transactions, realizing proceeds, net of
closing costs, of $2.0 million, resulting in a net loss of approximately
$0.7 million.
|
· |
During
2003, we sold our investment in a Baltimore, Maryland asset, leased by the
USPS, for approximately $19.6 million. The purchaser paid us proceeds of
$1.8 million and assumed the first mortgage of approximately $17.6
million. As a result, we recorded a gain of $1.3 million, net of closing
costs and other expenses.
|
· |
In
2003, we sold our investment in Principal Healthcare Finance Trust
realizing proceeds of approximately $1.6 million, net of closing costs,
resulting in an accounting gain of approximately $0.1
million.
|
Loss
from Discontinued Operations
Discontinued
operations relates to properties we disposed of in 2004 and 2003 that are
accounted for as discontinued operations under SFAS No. 144. The loss of $9.1
million in 2003 versus the loss of $16.1 million in 2002 was primarily due to
provisions for impairment of $8.8 million on three closed facilities in 2003 as
compared to $13.4 million on several closed facilities in 2002.
Funds
From Operations
Our FFO
available to common stockholders for the year ended December 31, 2003, was $35.0
million, an increase of $41.5 million as compared to a deficit of $6.5 million
for 2002.
We
calculate and report FFO in accordance with the definition and interpretive
guidelines issued by the NAREIT, and, consequently, FFO is defined as net income
available to all equity holders, adjusted for the effects of asset dispositions
and certain non-cash items, primarily depreciation and amortization.
FFO
available to common stockholders is the lower of funds from operations and funds
from operations adjusted for the assumed conversion of Series C preferred stock
in 2003. 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 and between other REITs. We offer this measure to assist the users of
our financial statements in evaluating our financial performance under GAAP and
FFO 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.
In
February 2004, NAREIT informed its member companies that it was adopting the
position of the SEC with respect to asset impairment charges and would no longer
recommend that impairment write-downs be excluded from FFO. In the tables
included in this disclosure, we have applied this interpretation and have not
excluded asset impairment charges in calculating our FFO. As a result, our FFO
and FFO available to common stockholders may not be comparable to similar
measures reported in previous disclosures. According to NAREIT, there is
inconsistency among NAREIT member companies as to the adoption of this
interpretation of FFO. Therefore, a comparison of our FFO results to another
company's FFO results may not be meaningful.
The
following table presents our FFO results reflecting the impact of asset
impairment charges (the SEC's interpretation) for the years ended December 31,
2003 and 2002:
Year
Ended December 31,
|
|||||||
2003
|
2002
|
||||||
Net
income (loss) available to common
|
$
|
2,915
|
$
|
(34,761
|
)
|
||
Add
back loss (deduct gain) from real estate dispositions(1)
|
149
|
(2,548
|
)
|
||||
3,064
|
(37,309
|
) |
|||||
Elimination
of non-cash items included in net income (loss): |
|||||||
Depreciation
and amortization(2)
|
21,426
|
21,270
|
|||||
Adjustment
of derivatives to fair value
|
-
|
(946
|
)
|
||||
Funds
from operations, available to all equity holders
|
24,490
|
(16,985
|
) |
||||
Series
C Preferred Dividends
|
10,484
|
10,484
|
|||||
Funds
from operations, available to common stockholders
|
$
|
34,974
|
$
|
(6,501
|
)
|
||
(1) |
The
add back of loss/deduction of gain from real estate dispositions includes
the facilities classified as discontinued operations in our consolidated
financial statements. The 2003 net loss add back includes $0.8 million
loss related to facilities classified as discontinued
operations.
|
(2) |
The
add back of depreciation and amortization includes the facilities
classified as discontinued operations in our consolidated financial
statements. FFO for 2003 and 2002 includes depreciation and amortization
of $0.6 million and $1.1 million, respectively, related to facilities
classified as discontinued operations.
|
30
Portfolio
Developments, New Investments and Recent Developments
The
partial expiration of certain Medicare rate increases has had an adverse impact
on the revenues of the operators of nursing home facilities and has negatively
impacted some operators’ ability to satisfy their monthly lease or debt payment
to us. In several instances, we hold security deposits that can be applied in
the event of lease and loan defaults, subject to applicable limitations under
bankruptcy law with respect to operators seeking protection under Chapter 11 of
the Bankruptcy Act.
Below is
a brief description, by third-party operator, of our re-leasing, restructuring
or new investment transactions that occurred during the year ended December 31,
2004.
Alterra
Healthcare
· |
On
October 1, 2004, we re-leased one ALF formerly leased by Alterra, located
in Ohio and representing 36 beds, to a new operator under a single
facility lease.
|
Claremont
Healthcare Holdings, Inc.
· |
Effective
March 8, 2004, we re-leased three SNFs formerly leased by Claremont,
located in Florida and representing 360 beds, to an existing operator.
These facilities were added to an existing master lease, the initial term
of which has been extended ten years to February,
2014.
|
· |
Effective
January 1, 2005, we re-leased one SNF formerly leased to Claremont,
located in New Hampshire and representing 68 beds to an existing operator.
This facility was added to an existing master lease, which expires on
December 31, 2013, followed by two 10-year renewal
options.
|
· |
Separately,
we continue our ongoing restructuring discussions with Claremont regarding
the one facility Claremont currently leases from us. At the time of this
filing, we cannot determine the timing or outcome of these discussions.
Due to the significant uncertainty of collection, we recognize rental
income from Claremont when it is received.
|
CommuniCare
Health Services, Inc.
· |
On
November 1, 2004, we completed a first mortgage loan, in the amount of
approximately $7 million, on one SNF in Cleveland, Ohio. The operator of
the facility is an affiliate of CommuniCare Health Services, Inc., an
existing tenant of ours. The term of the mortgage is ten years and carries
an interest rate of 11%. We received a security deposit equivalent to
three months interest.
|
Essex
Healthcare Corporation
· |
On
January 13, 2005, we completed approximately $58 million of net new
investments as a result of the exercise by American Health Care Centers
(“American”) of a put agreement with Omega for the purchase by Omega of 13
SNFs. In October 2004, American and its affiliated companies paid one
thousand dollars to us and agreed to eliminate the right to prepay the
existing Omega mortgage in the event the option was not exercised. The
gross purchase price of approximately $79 million was offset by
approximately $7 million paid by us to American in 1997 to obtain an
option to acquire the properties and reflects approximately $14 million in
mortgage loans we had outstanding with American and its affiliates, which
encumbered 6 of the 13 properties.
|
· |
The
13 properties, all located in Ohio, will continue to be leased by Essex
Healthcare Corporation. The master lease and related agreements have
approximately six years remaining.
|
31
Guardian
LTC Management, Inc.
· |
On
November 2, 2004, we purchased 14 SNFs and one ALF from subsidiaries of
Guardian LTC Management, Inc. (“Guardian”), for a total investment of
approximately $72 million. Thirteen of the facilities are located in
Pennsylvania and two in Ohio. The 15 facilities were simultaneously leased
back to the sellers, which are subsidiaries of Guardian, under a new
master lease effective November 2, 2004.
|
· |
On
December 3, 2004, we purchased one additional facility located in West
Virginia from the sellers for approximately $8 million. The West Virginia
facility is a combined SNF and rehabilitation hospital. The West Virginia
facility was added to the master lease on December 3,
2004.
|
· |
The
term of the master lease is ten years and runs through October 31, 2014,
followed by four renewal options of five years each. We also received a
security deposit equivalent to three months
rent.
|
Haven
Healthcare Management
· |
On
April 1, 2004, we purchased three SNFs, representing 399 beds, for a total
investment of approximately $26 million. Two of the facilities are located
in Vermont and the third is located in Connecticut. The facilities were
combined into an existing master lease with Haven. The term of the master
lease was increased to ten years on January 1, 2004 and will expire on
December 31, 2013, followed by two ten-year renewal options. We received a
security deposit equivalent to three months of incremental
rent.
|
Mariner
Health Care, Inc.
· |
On
December 10, 2004, Mariner notified us of its intention to exercise its
right to prepay in full the approximately $60 million aggregate principal
amount owed to us under a promissory note secured by a mortgage with an
interest rate of 11.57%, together with the required prepayment premium of
3% of the outstanding principal balance and all accrued and unpaid
interest, on February 1, 2005. In addition, pursuant to certain provisions
contained in the promissory note, Mariner will pay us an amendment fee
owing for the period ending on February 1,
2005..
|
Senior
Management
· |
On
April 30, 2004, we purchased two SNFs representing 477 beds, for a total
investment of approximately $9 million. The purchase price includes funds
for capital expenditures, additional bed licenses and transaction costs.
Both facilities are located in Texas and were combined into an existing
master lease with Senior Management. The term of the master lease has been
increased to ten years and is followed by two ten-year renewal options.
During the first lease year, Senior Management will fund a security
deposit equivalent to approximately four months of incremental
rent.
|
Sun
Healthcare Group, Inc.
· |
Effective
November 1, 2004, we re-leased two SNF’s formerly leased by Sun, both
located in California. The first, representing 59 beds, was re-leased to a
new operator under a single facility lease with a five year term. The
second, representing 98 beds, was also re-leased to a new operator under a
single facility lease with a three and a half year
term.
|
· |
On
March 1, 2004, we entered into an agreement with Sun regarding 51
properties that are leased to various affiliates of Sun. Under the terms
of a master lease agreement, Sun will continue to operate and occupy 23
long-term care facilities, five behavioral properties and two hospital
properties through December 31, 2013. One property, located in Washington
and formerly operated by a Sun affiliate, has already been closed and the
lease relating to that property has been terminated. With respect to the
remaining 20 facilities, 17 have already been transferred to new operators
and three are in the process of being transferred to new
operators.
|
32
· |
Under
our restructuring agreement with Sun, we received the right to convert
deferred base rent owed to us, totaling approximately $7.8 million, into
800,000 shares of Sun’s common stock, subject to certain anti-dilution
provisions and Sun’s right to pay cash in an amount equal to the value of
that stock in lieu of issuing stock to us.
|
· |
On
March 30, 2004, we notified Sun of our intention to exercise our right to
convert the deferred base rent into fully paid and non-assessable shares
of Sun’s common stock. On April 16, 2004, we received a stock certificate
for 760,000 restricted shares of Sun’s common stock and cash in the amount
of approximately $0.5 million in exchange for the remaining 40,000 shares
of Sun’s common stock. On July 23, 2004, Sun registered these shares with
the SEC. We are accounting for the remaining 760,000 shares as “available
for sale” marketable securities with changes in market value recorded in
other comprehensive income.
|
· |
On
March 1, 2004, we re-leased one SNF formerly leased by Sun, located in
California and representing 58 beds, to a new operator under a master
lease, which has a ten-year term.
|
· |
Effective
January 1, 2004, we re-leased five SNFs to an existing operator under a
new master lease, which has a five-year term. Four former Sun SNFs, three
located in Illinois and one located in Indiana, representing an aggregate
of 449 beds, were part of the transaction. The fifth SNF in the
transaction, located in Illinois and representing 128 beds, was the last
remaining owned and operated facility in our
portfolio.
|
Tiffany
Care Centers, Inc.
· |
On
April 6, 2004, we received approximately $5 million in proceeds on a
mortgage loan payoff. We held mortgages on five facilities located in
Missouri, representing 319 beds.
|
Asset
Dispositions in 2004
Other
Assets
· |
In
connection with refinancing our $225 million senior secured credit
facility, we sold our $200 million interest rate cap on March 31, 2004.
Net proceeds from the sale totaled approximately $3.5 million and resulted
in a loss of approximately $6.5 million, which was recorded in the first
quarter of 2004.
|
Closed
Facilities
· |
During
2004, we sold six closed facilities, realizing proceeds of approximately
$5.7 million, net of closing costs and other expenses, resulting in an
accounting gain of approximately $3.3 million. As a result of these
transactions, we currently have no closed facilities remaining in our
portfolio.
|
· |
In
accordance with SFAS No. 144, the $3.3 million realized net gain from the
sales are included within discontinued operations in our consolidated
statements of operations for their respective time
periods.
|
33
Liquidity
and Capital Resources
At
December 31, 2004, we had total assets of $833.6 million, stockholders equity of
$432.5 million and debt of $379.5 million, representing approximately 46.7% of
total capitalization.
The
following table shows the amounts due in connection with the contractual
obligations described below as of December 31, 2004.
Payments
due by period
|
||||||||||||||||
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
||||||||||||
(In
thousands) |
||||||||||||||||
Long-term
debt(1)
|
$
|
378,170
|
$
|
370
|
$
|
100,805
|
$
|
15,900
|
$
|
261,095
|
||||||
Other
long-term liabilities
|
786
|
151
|
401
|
234
|
-
|
|||||||||||
Total
|
$
|
378,956
|
$
|
521
|
$
|
101,206
|
$
|
16,134
|
$
|
261,095
|
(1) |
The
$378.2 million includes the $100.0 million aggregate principal amount of
6.95% Senior Notes due 2007, $15 million in borrowings under the $200
million credit facility borrowing, which matures in March 2008, and $260
million aggregate principal amount of 7.0% Senior Notes due
2014.
|
Financing
Activities and Borrowing Arrangements
Bank
Credit Agreements
We have a
$200 million revolving senior secured credit facility (“Credit Facility”). At
December 31, 2004, $15.0 million was outstanding under the Credit Facility and
$4.3 million was utilized for the issuance of letters of credit, leaving
availability of $180.7 million. The $15.0 million of outstanding borrowings had
a blended interest rate of 5.41% at December 31, 2004.
On
December 2, 2004, we exercised our right to increase the revolving commitments
under our Credit Facility by an additional $25 million, to $200 million.
Additionally, on April 30, 2004, we exercised our right to increase the
revolving commitments under our Credit Facility by an additional $50 million, to
$175 million. All other terms of the Credit Facility, which closed on March 22,
2004 with commitments of $125 million, remain substantially the same.
The
Credit Facility will be used for acquisitions and general corporate
purposes. Bank of
America, N.A. serves as Administrative Agent for the Credit
Facility.
Our
long-term borrowings require us to meet certain property level financial
covenants and corporate financial covenants, including prescribed leverage,
fixed charge coverage, minimum net worth, limitations on additional indebtedness
and limitations on dividend payouts. As of December 31, 2004, we were in
compliance with all property level and corporate financial
covenants.
4.0
Million Primary Share Common Stock Offering
On
December 15, 2004, we closed an underwritten public offering of 4,025,000 shares
of our common stock at a price of $11.96 per share, less underwriting discounts.
The offering included 525,000 shares sold in connection with the exercise of an
over-allotment option granted to the underwriters. We received approximately $46
million in net proceeds from the sale of the shares, after deducting
underwriting discounts and before estimated offering expenses.
34
$60
Million 7% Senior Unsecured Notes Offering
On
October 29, 2004, we completed a privately placed offering of an additional $60
million aggregate principal amount of 7% senior notes due 2014 (the “Additional
Notes”) at an issue price of 102.25% of the principal amount of the Additional
Notes, resulting in gross proceeds of approximately $61 million. The terms of
the Additional Notes offered were substantially identical to our existing $200
million aggregate principal amount of 7% senior notes due 2014 issued in March
2004. (For additional information regarding our existing notes, see “$200
Million 7% Senior Unsecured Notes Offering and $125 Million Credit Facility”
below). The Additional Notes were issued through a private placement
to
qualified institutional buyers under Rule 144A under the Securities Act of 1933
(the “Securities Act”) and in offshore transactions pursuant to Regulation S
under the Securities Act.
On
December 21, 2004, we filed a registration statement on Form S-4 under the
Securities Act with the SEC offering to exchange (the “Additional Notes Exchange
Offer”) up to $60 million aggregate principal amount of our registered 7% Senior
Notes due 2014 (the “Additional Exchange Notes”), for all of our outstanding
unregistered Additional Notes. On February 11, 2005, we commenced the Additional
Notes Exchange Offer, which currently expires on March 18, 2005. The terms of
the Additional Exchange Notes will be identical to the terms of the Additional
Notes, except that the Additional Exchange Notes will be registered under the
Securities Act and therefore freely tradable (subject to certain conditions).
The Additional Exchange Notes will represent our unsecured senior obligations
and will be guaranteed by all of our subsidiaries with unconditional guarantees
of payment that rank equally with existing and future senior unsecured debt of
such subsidiaries and senior to existing and future subordinated debt of such
subsidiaries. There can be no assurance that we will experience full
participation in the Additional Notes Exchange Offer. In the event all the
Additional Notes are not exchanged in the Additional Notes Exchange Offer, we
will have two classes of 7% senior notes outstanding.
Universal
Shelf Registration Statement
On July
26, 2004, we filed a universal
shelf registration statement on Form S-3 with the SEC. The
registration statement was declared effective by the SEC on August 27, 2004,
allowing us to offer and sell up to $500 million aggregate amount of our common
stock, preferred stock, debt securities and warrants from time to time in one or
more offerings. The terms of any such future offerings will be established at
the time of such offering. At the time any of the securities covered by the
registration statement are offered for sale, a prospectus supplement will be
prepared and filed containing specific information about the terms of any such
offering. On December 15, 2004, we sold 4,025,000 shares of common stock under
the universal
shelf registration statement.
Series
A Preferred Redemption
On April
30, 2004, we redeemed all of the outstanding 2.3 million shares of our Series A
preferred stock at a price of $25.57813, comprised of the $25 per share
liquidation value and accrued dividend. Under FASB-EITF Issue D-42,
‘‘The
Effect on the Calculation of Earnings per Share for the Redemption or Induced
Conversion of Preferred Stock,” the
repurchase of the Series A preferred stock resulted in a non-cash charge to net
income available to common stockholders of approximately $2.3
million.
Series
C Preferred Stock Repurchase
On
February 5, 2004, we announced that Explorer Holdings L.P. (“Explorer”), our
then largest stockholder, granted us the option to repurchase up to 700,000
shares of our Series C preferred stock which were convertible into our common
shares held by Explorer at a negotiated purchase price of $145.92 per share of
Series C preferred stock (or $9.12 per common share on an as converted basis).
Explorer further agreed to convert any remaining Series C preferred stock into
our common stock.
Series
D Preferred Stock Offering
On
February 10, 2004, we closed on the sale of 4,739,500 shares of our 8.375%
Series D cumulative redeemable preferred stock (the “Series D preferred stock”)
at a price of $25 per share. The Series D preferred stock is listed on the NYSE
under the symbol “OHI PrD.”
35
Series
C Preferred Stock Redemption and Conversion
We used
approximately $102.1 million of the net proceeds from the Series D preferred
stock offering to repurchase 700,000 shares of our Series C preferred stock from
Explorer. In connection with the closing of the repurchase, Explorer converted
its remaining 348,420 shares of Series C preferred stock into approximately 5.6
million shares of our common stock. Following the repurchase and conversion,
Explorer held approximately 18.1 million of our common shares.
The
combined repurchase and conversion of the Series C preferred stock reduced our
preferred dividend requirements, increased our market capitalization and
facilitated future financings by simplifying our capital structure. Under
FASB-EITF Issue D-42, ‘‘The
Effect on the Calculation of Earnings per Share for the Redemption or Induced
Conversion of Preferred Stock,” the
repurchase of the Series C preferred stock resulted in a non-cash charge to net
income available to common stockholders of approximately $38.7
million.
18.1
Million Secondary and 2.7 Million Share Primary Offering of Our Common
Stock
On March
8, 2004, we announced the closing of an underwritten public offering of 18.1
million shares of our common stock, owned by Explorer, at a price of $9.85 per
share (the “Secondary Offering”). As a result of the Secondary Offering,
Explorer no longer owned any shares of our common stock. We did not receive any
proceeds from the sale of the shares sold by Explorer.
In
connection with the Secondary Offering, we issued approximately 2.7 million
additional shares of our common stock at a price of $9.85 per share, less
underwriting discounts (the “Over-Allotment Offering”), to cover over-allotments
in connection with the Secondary Offering. We received net proceeds of
approximately $23 million from the Over-Allotment Offering.
$200
Million 7% Senior Unsecured Notes Offering and $125 Million Credit
Facility
Effective
March 22, 2004, we closed a private offering of $200 million aggregate principal
amount of 7% senior unsecured notes due 2014 (the “Initial Notes”) and the
Credit Facility provided by Bank of America, N.A., Deutsche Bank AG, UBS Loan
Finance, LLC and GE Healthcare Financial Services. We used proceeds from the
offering of the Initial Notes to replace and terminate our previous $225 million
senior secured credit facility and $50 million acquisition credit facility
(collectively, the “Prior Credit Facility”). The Credit Facility will be used
for acquisitions and general corporate purposes. In connection with the
termination of the Prior Credit Facility, we recorded a charge of approximately
$12.6 million, of which $6.3 million consisted of non-cash charges relating to
deferred financing costs of the previous credit facilities.
On June
21, 2004, we filed a registration statement on Form S-4, as amended on July 26,
2003 and August 25, 2004, under the Securities Act, with the SEC offering to
exchange (the “Exchange Offer”) up to $200 million aggregate principal amount of
our registered 7% Senior Notes due 2014 (the “Exchange Notes”), for all of our
outstanding unregistered Initial Notes. In September 2004, upon the expiration
of the Exchange Offer, $200 million aggregate principal amount of Exchange Notes
were exchanged for the unregistered Initial Notes. As a result of the Exchange
Offer, no Initial Notes remain outstanding. The terms of the Exchange Notes are
identical to the terms of the Initial Notes, except that the Exchange Notes are
registered under the Securities Act and therefore freely tradable (subject to
certain conditions). The Exchange Notes represent our unsecured senior
obligations and have been guaranteed by all of our subsidiaries with
unconditional guarantees of payment that rank equally with existing and future
senior unsecured debt of such subsidiaries and senior to existing and future
subordinated debt of such subsidiaries. Following the completion of the
Additional Notes Exchange Offer discussed above, the Additional Exchange Notes
will trade together with the Exchange Notes as a single class of
securities.
$200
Million Interest Rate Cap Sale
In
connection with the repayment and termination of our Prior Credit Facility, we
sold our $200 million interest rate cap on March 31, 2004. Net proceeds from the
sale totaled approximately $3.5 million and resulted in a loss of approximately
$6.5 million, which was recorded in the first quarter of 2004.
36
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 Credit
Facility has certain financial covenants which limit the distribution of
dividends paid during a fiscal quarter to no more than 95% of our immediately
prior fiscal quarter’s FFO as defined in the loan agreement governing the Credit
Facility (the “Loan Agreement”), unless a greater distribution is required to
maintain REIT status. The Loan 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; and
(vi) non-cash impairment charges.
On
January 18, 2005, our Board of Directors announced a common stock dividend of
$0.20 per share, an increase of $0.01 per common share. The common stock
dividend was paid February 15, 2005 to common stockholders of record on January
31, 2005. Also on January 18, 2005, our Board of Directors declared regular
quarterly dividends for all classes of preferred stock, which was paid February
15, 2005 to preferred stockholders of record on January 31, 2005. Holders of
record of our 8.625% Series B cumulative preferred stock (the “Series B
preferred stock”) and 8.375% Series D cumulative redeemable preferred stock (the
“Series D preferred stock”) on January 31, 2005 were paid dividends in the
amount of approximately $0.53906 and
$0.52344, per preferred share, respectively, on February 15, 2005. The
liquidation preference for each of our Series B and D preferred stock is $25.00.
Regular quarterly preferred dividends represent dividends for the period
November 1, 2004 through January 31, 2005 for the Series B and Series D
preferred stock.
On
October 19, 2004, our Board of Directors announced a common stock dividend of
$0.19 per share, an increase of $0.01 per common share. The common stock
dividend was paid November 15, 2004 to common stockholders of record on October
29, 2004. In addition, our Board of Directors also declared regular quarterly
dividends for all classes of preferred stock to preferred stockholders of record
on October 29, 2004. These holders of the Series B preferred stock and the
Series D preferred stock were paid dividends in the amount of $0.53906 and
$0.52344, per preferred share, respectively, on November 15, 2004. Regular
quarterly preferred dividends represent dividends for the period August 1, 2004
through October 31, 2004 for the Series B and Series D preferred
stock.
On July
20, 2004, our Board of Directors announced a common stock dividend of $0.18 per
share. The common stock dividend was paid August 16, 2004 to common stockholders
of record on July 30, 2004. In addition, our Board of Directors also declared
regular quarterly dividends for all classes of preferred stock to preferred
stockholders of record on July 30, 2004. These holders of the Series B preferred
stock and the Series D preferred stock were paid dividends in the amount of
$0.53906 and $0.52344, per preferred share, respectively, on August 16, 2004.
Regular quarterly preferred dividends represented dividends for the period May
1, 2004 through July 31, 2004 for both the Series B preferred stock and the
Series D preferred stock.
On March
29, 2004, our Board of Directors declared regular quarterly dividends for all
classes of preferred stock, payable on May 17, 2004 to preferred stockholders of
record on April 30, 2004. These holders of the Series B preferred stock and the
Series D preferred stock received dividends in the amount of $0.53906 and
$0.47109, per preferred share, respectively, on May 17, 2004. Regular quarterly
preferred dividends represented dividends for the period February 1, 2004
through April 30, 2004 for the Series B preferred stock and February 10, 2004
through April 30, 2004 for the Series D preferred stock. On April 20, 2004, our
Board of Directors announced a common stock dividend of $0.18 per share, which
is a $0.01 per share, or 5.9% increase over the previous quarter’s dividend. The
common stock dividend was paid May 17, 2004 to common stockholders of record on
April 30, 2004.
In March
2004, our Board of Directors authorized the redemption of all outstanding 2.3
million shares of our Series A preferred stock. The Series A preferred stock was
redeemed on April 30, 2004 for $25 per share, plus $0.57813 per share in accrued
and unpaid dividends through the redemption date, for an aggregate redemption
price of $25.57813 per share.
37
Liquidity
We
believe our liquidity and various sources of available capital, including cash
from operations, our existing availability under our 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, administrative and legal 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.
Cash and
cash equivalents totaled $12.1 million as of December 31, 2004, an increase of
$9.0 million as compared to the balance at December 31, 2003. 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 Statement of
Cash Flows.
Operating
Activities - Net
cash flow from operating activities generated $54.4 million for the year ended
December 31, 2004 as compared to $56.5 million for the same period in 2003. The
$2.1 million decrease is due primarily to a $3.0 million charge associated with
professional liability claims (see Note 14 - Litigation) and normal working
capital fluctuations during the period.
Investing
Activities - Net
cash flow from investing activities was an outflow of $106.2 million for the
year ended December 31, 2004 as compared to an inflow of $31.1 million for the
same period in 2003. The decrease of $137.3 million was primarily due to: (i)
acquisitions completed in April, November and December of 2004; and (ii) a
mortgage placed in November 2004; offset partially by: (i) mortgage payoffs in
2004; and (ii) a decrease in the incremental cash flow from asset sales in 2003
as compared to 2004.
Financing
Activities - Net
cash flow from financing activities was an inflow of $60.9 million for the year
ended December 31, 2004 as compared to an outflow of $98.8 million for the same
period in 2003. The change in financing cash flow was primarily a result of: (i)
issuance of $118.5 million of preferred equity; (ii) a public issuance of 2.7
million shares of our common stock at a price of $9.85 per share; (iii) a public
issuance of 4.0 million shares of our common stock at a price of $11.96 per
share; (iv) private offerings of a combined $260 million of senior unsecured
notes; and (v) the sale of an interest rate cap. The financial cash inflows were
partially offset by: (i) the redemption of our Series A preferred stock and
Series C preferred stock; (ii) repayment of Prior Credit Facility and related
termination fees; and (iii) payments of common and preferred dividend
payments.
Effects
of Recently Issued Accounting Standards
In May
2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150,
Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity. SFAS
No. 150 requires certain financial instruments that embody obligations of the
issuer and have characteristics of both liabilities and equity to be classified
as liabilities. The provisions of SFAS No. 150 are effective for financial
instruments entered into or modified after May 31, 2003 and for all other
instruments that exist as of the beginning of the first interim financial
reporting period beginning after June 15, 2003. We do not have any financial
instruments that meet the provisions of SFAS No. 150; therefore, adopting the
provisions of SFAS No. 150 did not have an impact on our results of operations
or financial position.
In
December 2003, the FASB issued the revised Financial Interpretation Number
(“FIN”) 46R, Consolidation
of Variable Interest Entities an Interpretation of ARB No. 51. FIN 46R
was effective March 31, 2004. Variable interest entities (“VIEs”) are primarily
entities that lack sufficient equity to finance their activities without
additional financial support from other parties or whose equity holders lack
adequate decision-making ability. We do not have any entities that meet the
definition of a variable interest entity under FIN 46R; therefore, the
provisions of FIN 46R did not have an impact on our results of operations or
financial position.
In
December 2004, the FASB issued FASB Statement No. 123(R) (revised 2004),
Share
Based Payment.
Statement 123(R) addresses the accounting for share-based payment transactions
in which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise's equity instruments or that may be settled by the
issuance of such equity instruments. Statement 123(R) requires an entity to
recognize the grant-date fair-value of stock options and other equity-based
compensation issued to employees in the income statement. The revised Statement
generally requires that an entity account for those transactions using the
fair-value-based method, and eliminates the intrinsic value method of accounting
in APB Opinion No. 25, Accounting
for Stock Issued to Employees, which
was permitted under Statement 123, as originally issued. The revised Statement
requires entities to disclose information about the nature of the share-based
payment transactions and the effects of those transactions on the financial
statements. Statement 123(R) is effective for Omega after June 15, 2005 (i.e.,
our third quarter 2005). All public companies must use either the modified
prospective or the modified retrospective transition method. We are currently
evaluating the impact of adoption of this pronouncement, which must be adopted
in the third quarter of fiscal year 2005.
38
Item
7A - Quantitative and Qualitative Disclosure about Market
Risk
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
following disclosures of estimated fair value of financial instruments 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. 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 below are not necessarily indicative of the amounts we would realize
in a current market exchange.
Mortgage
notes receivable
- - The fair
value of mortgage notes receivable is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Notes receivable
- - The fair
value of notes receivable is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Borrowings
under lines of credit arrangement - The
carrying amount approximates fair value because the borrowings are interest rate
adjustable.
Senior
unsecured notes
- - The fair
value of the senior unsecured notes is estimated by discounting the future cash
flows using the current borrowing rate available for the similar
debt.
The
market value of our long-term fixed rate borrowings and mortgages is subject to
interest rate risks. Generally, the market value of fixed rate financial
instruments will decrease as interest rates rise and increase as interest rates
fall. The estimated fair value of our total long-term borrowings at December 31,
2004 was approximately $399 million. A one percent increase in interest rates
would result in a decrease in the fair value of long-term borrowings by
approximately $20 million.
While we
currently do not engage in hedging strategies, we may engage in such strategies
in the future, depending on management’s analysis of the interest rate
environment and the costs and risks of such strategies.
Item
8 - Financial Statements and Supplementary Data
The
consolidated financial statements and the report of Ernst & Young LLP,
Independent Registered Public Accounting Firm, on such financial statements are
filed as part of this report beginning on page F-1. The summary of unaudited
quarterly results of operations for the years ended December 31, 2004 and 2003
is included in Note 15 to our audited consolidated financial statements, which
is incorporated herein by reference in response to Item 302 of Regulation
S-K.
Item
9 - Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item
9A - Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
principal executive officer and principal financial officer are responsible for
establishing and maintaining disclosure controls and procedures as defined in
the rules promulgated under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). We evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of December 31, 2004 and, based on
that evaluation, our principal executive officer and principal financial officer
have concluded that these controls and procedures were effective as of December
31, 2004.
Disclosure
controls and procedures are the controls and other procedures designed to ensure
that information that we are required to disclose in our reports under the
Exchange Act is recorded, processed, summarized and reported within the time
periods required. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information we are
required to disclose in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
Design
and Evaluation of Internal Control Over Financial
Reporting
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, we have included a report of
management's assessment of the design and effectiveness of its internal controls
as part of this Annual Report on Form 10-K for the fiscal year ended December
31, 2004. Our independent registered public accounting firm also attested to,
and reported on, management's assessment of the effectiveness of internal
control over financial reporting. Management's report and the independent
registered public accounting firm's attestation report are included in our 2004
financial statements under the captions entitled "Management's Report on
Internal Control Over Financial Reporting" and "Report of Independent Registered
Public Accounting Firm on Internal Control Over Financial Reporting" and are
incorporated herein by reference.
Changes
in Internal Control Over Financial Reporting
No
changes in our internal control over financial reporting were identified as
having occurred in the fiscal year ended December 31, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
39
Item
9B - Other Information
None
40
PART
III
Item
10 - Directors and Executive Officers of the Registrant
The
information required by this item is incorporated herein by reference to our
company’s definitive proxy statement for the 2005 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A.
For
information regarding Executive Officers of our company, see Item 1
- - Business of the Company - Executive Officers of Our Company.
Code
of Business Conduct and Ethics. We have
adopted a written Code of Business Conduct and Ethics (“Code of Ethics”) that
applies to all of our directors and employees, including our chief executive
officer, chief financial officer and controller. A copy of our Code of Ethics is
available on our website at www.omegahealthcare.com and
print copies are available upon request without charge. You can request print
copies by contacting our Chief Financial Officer in writing at Omega Healthcare
Investors, Inc., 9690 Deereco Road, Suite 100, Timonium, Maryland 21093 or by
telephone at 410-427-1700. Any amendment to our Code of Ethics or any waiver of
our Code of Ethics will be disclosed on our website at www.omegahealthcare.com promptly
following the date of such amendment or waiver.
Item
11 - Executive Compensation
The
information required by this item is incorporated herein by reference to our
company's definitive proxy statement for the 2005 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A.
Item
12 - Security Ownership of Certain Beneficial Owners and
Management
The
information required by this item is incorporated herein by reference to our
company's definitive proxy statement for the 2005 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A.
Item
13 - Certain Relationships and Related Transactions
The
information required by this item is incorporated herein by reference to our
company's definitive proxy statement for the 2005 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A.
Item
14 - Principal Accountant Fees and Services
The
information required by this item is incorporated herein by reference to our
company's definitive proxy statement for the 2005 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A.
41
PART
IV
Item
15 - Exhibits, Financial Statements, Financial Statement Schedules and Reports
on Form 8-K
(a)(1)
Listing of Consolidated Financial Statements
Title
of Document
|
Page
Number
|
Management’s
Report on Internal Control over Financial Reporting
|
F-1
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting | F-3 |
Consolidated
Balance Sheets as of December 31, 2004 and 2003
|
F-4
|
Consolidated
Statements of Operations for the years ended
December
31, 2004, 2003 and 2002
|
F-5
|
Consolidated
Statements of Stockholders Equity for the years ended
December
31, 2004, 2003 and 2002
|
F-6
|
Consolidated
Statements of Cash Flows for the years ended
December
31, 2004, 2003 and 2002
|
F-8
|
Notes
to Consolidated Financial Statements
|
F-9
|
(a)(2)
Listing of Financial Statement Schedules. The following consolidated financial
statement schedules are included herein:
Schedule
III - Real Estate and Accumulated Depreciation
|
F-36
|
Schedule
IV - Mortgage Loans on Real Estate
|
F-37
|
All other
schedules for which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable or have been omitted because sufficient
information has been included in the notes to the Financial
Statements.
(a)(3)
Listing of Exhibits — See Index to Exhibits beginning on Page I-1 of this
report.
(b) Reports
on Form 8-K.
The
following reports were filed during the quarter ended December 31,
2004:
· |
Current
Report on Form 8-K filed on December 13,
2004;
|
· |
Current
Report on Form 8-K filed on December 3,
2004;
|
· |
Current
Report on Form 8-K filed on November 9,
2004;
|
· |
Current
Report on Form 8-K filed on November 8,
2004;
|
· |
Current
Report on Form 8-K filed on October 29,
2004;
|
· |
Current
Report on Form 8-K filed on October 29, 2004;
and
|
· |
Current
Report on Form 8-K filed on October 18,
2004;
|
The
following report on Form 8-K was furnished during the quarter ended December 31,
2004:
· |
Current
Report on Form 8-K furnished on October 26,
2004
|
(c) Exhibits
— See Index to Exhibits beginning on Page I-1 of this report.
(d)
Financial
Statement Schedules — The following consolidated financial statement schedules
are included herein:
Schedule
III — Real Estate and Accumulated Depreciation
Schedule
IV — Mortgage Loans on Real Estate
42
Management’s
Report on Internal Control over Financial Reporting
The
management of Omega Healthcare Investors, Inc. (“Omega”) is responsible for
establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(f) or
15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as
a process designed by, or under the supervision of, a company’s principal
executive and principal financial officers and effected by a company’s board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures
that:
· |
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
company;
|
· |
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and
|
· |
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company’s assets that
could have a material effect on the financial
statements.
|
All
internal control systems, no matter how well designed, have inherent limitations
and can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within Omega have been
detected. Therefore, even those systems determined to be effective can provide
only reasonable assurance with respect to financial statement preparation and
presentation.
Omega’s
management assessed the effectiveness of the company's internal control over
financial reporting as of December 31, 2004. In making this assessment, it used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on
our assessment we believe that, as of December 31, 2004, Omega’s internal
control over financial reporting is effective based on those
criteria.
Omega's
independent auditors have issued an audit report on our assessment of the
company's internal control over financial reporting. This report appears on page
F3 of our Annual Report on Form 10-K attached hereto.
F-1
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Omega
Healthcare Investors, Inc.
We have
audited the accompanying consolidated balance sheets of Omega Healthcare
Investors, Inc. as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2004. Our audits also included the
financial statement schedules listed in the Index at Item 15(a). These financial
statements and schedules are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Omega Healthcare
Investors, Inc. at December 31, 2004 and 2003, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth
therein.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Omega Healthcare
Investors, Inc.’s internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 11, 2005 expressed an unqualified opinion
thereon.
/s/ Ernst
& Young LLP
McLean,
Virginia
February
11, 2005
F-2
Report
of Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting
The Board
of Directors and Shareholders
Omega
Healthcare Investors, Inc.
We have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that Omega Healthcare
Investors, Inc. maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Omega Healthcare Investors, Inc.’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, management’s assessment that Omega Healthcare Investors, Inc.
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Omega Healthcare Investors, Inc. maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Omega
Healthcare Investors, Inc. as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2004 and our report
dated February 11, 2005 expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
McLean,
Virginia
February
11, 2005
F-3
OMEGA
HEALTHCARE INVESTORS, INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands)
December
31,
|
|||||||
2004
|
2003
|
||||||
ASSETS
|
|||||||
Real
estate properties |
|||||||
Land
and buildings, at cost
|
$
|
808,574
|
$
|
692,454
|
|||
Less
accumulated depreciation
|
(153,379
|
)
|
(134,477
|
)
|
|||
Real
estate properties—net
|
655,195
|
557,977
|
|||||
Mortgage
notes receivable—net
|
118,058
|
119,784
|
|||||
773,253
|
677,761
|
||||||
Other
investments—net
|
29,699
|
29,178
|
|||||
Total
investments
|
802,952
|
706,939
|
|||||
Cash
and cash equivalents |
12,083
|
3,094
|
|||||
Accounts
receivable—net |
5,582
|
2,592
|
|||||
Interest
rate cap |
—
|
5,537
|
|||||
Other
assets |
12,733
|
8,562
|
|||||
Operating
assets for owned properties
|
213
|
2,289
|
|||||
Total
assets
|
$
|
833,563
|
$
|
729,013
|
|||
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|||||||
Revolving
lines of credit and term loan
|
$
|
15,000
|
$
|
177,074
|
|||
Unsecured
borrowings
|
360,000
|
100,000
|
|||||
Premium
on unsecured borrowings
|
1,338
|
—
|
|||||
Other
long-term borrowings
|
3,170
|
3,520
|
|||||
Accrued
expenses and other liabilities
|
21,067
|
8,253
|
|||||
Operating
liabilities for owned properties
|
508
|
3,931
|
|||||
Total
liabilities
|
401,083
|
292,778
|
|||||
Stockholders
equity: |
|||||||
Preferred
stock $1.00 par value; authorized—20,000 shares:
|
|||||||
Issued
and outstanding in 2003—2,300 shares Class A with an aggregate liquidation
preference of $57,500
|
57,500
|
||||||
Issued
and outstanding—2,000 shares Class B with an aggregate liquidation
preference of $50,000
|
50,000
|
50,000
|
|||||
Issued
and outstanding in 2003—1,048 shares Class C with an aggregate liquidation
preference of $104,842
|
—
|
104,842
|
|||||
Issued
and outstanding in 2004—4,740 shares Class D with an aggregate liquidation
preference of $118,488
|
118,488
|
—
|
|||||
Common
stock $.10 par value; authorized—100,000 shares
|
|||||||
Issued
and outstanding—50,824 shares in 2004 and 37,291 shares in
2003
|
5,082
|
3,729
|
|||||
Additional
paid-in capital
|
592,698
|
481,467
|
|||||
Cumulative
net earnings
|
191,013
|
174,275
|
|||||
Cumulative
dividends paid
|
(480,292
|
) |
(431,123
|
) |
|||
Cumulative
dividends - redemption
|
(41,054
|
) |
—
|
||||
Unamortized
restricted stock awards
|
(2,231
|
) |
—
|
||||
Accumulated
other comprehensive loss
|
(1,224
|
)
|
(4,455
|
)
|
|||
Total
stockholders equity
|
432,480
|
436,235
|
|||||
Total
liabilities and stockholders equity
|
$
|
833,563
|
$
|
729,013
|
See
accompanying notes.
F-4
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
Year
Ended December 31,
|
||||||||||
2004
|
2003
|
2002
|
||||||||
Revenues |
||||||||||
Rental
income
|
$
|
73,982
|
$
|
64,653
|
$
|
60,233
|
||||
Mortgage
interest income
|
13,266
|
14,656
|
20,351
|
|||||||
Other
investment income - net
|
2,372
|
2,982
|
5,302
|
|||||||
Miscellaneous
|
831
|
1,048
|
1,384
|
|||||||
Nursing
home revenues of owned and operated assets
|
-
|
4,395
|
42,203
|
|||||||
Total
operating revenues
|
90,451
|
87,734
|
129,473
|
|||||||
Expenses |
||||||||||
Depreciation
and amortization
|
21,513
|
20,793
|
20,155
|
|||||||
General
and administrative
|
6,213
|
6,557
|
6,775
|
|||||||
Restricted
stock expense
|
1,115
|
-
|
-
|
|||||||
Legal
|
1,513
|
2,301
|
2,869
|
|||||||
Provision
for impairment
|
-
|
74
|
1,977
|
|||||||
Provisions
for uncollectible mortgages, notes and accounts receivable
|
-
|
-
|
3,941
|
|||||||
Nursing
home expenses of owned and operated assets
|
-
|
5,493
|
61,765
|
|||||||
Total
operating expenses
|
30,354
|
35,218
|
97,482
|
|||||||
Income
before other income and expense
|
60,097
|
52,516
|
31,991
|
|||||||
Other
income (expense): |
||||||||||
Interest
and other investment income
|
122
|
182
|
373
|
|||||||
Interest
expense
|
(23,050
|
) |
(18,495
|
) |
(24,548
|
) |
||||
Interest
- amortization of deferred financing costs
|
(1,852
|
) |
(2,307
|
) |
(2,833
|
) |
||||
Interest
- refinancing costs
|
(19,106
|
) |
(2,586
|
) |
(7,000
|
) |
||||
Owned
and operated professional liability claims
|
(3,000
|
) |
-
|
-
|
||||||
Litigation
settlements
|
-
|
2,187
|
-
|
|||||||
Adjustment
of derivative to fair value
|
256
|
-
|
946
|
|||||||
Total
other expense
|
(46,630
|
)
|
(21,019
|
)
|
(33,062
|
)
|
||||
Income
before gain on assets sold |
13,467
|
31,497
|
(1,071
|
) |
||||||
Gain
from assets sold - net
|
-
|
665
|
2,548
|
|||||||
Income
from continuing operations
|
13,467
|
32,162
|
1,477
|
|||||||
Gain
(loss) from discontinued operations
|
3,271
|
(9,132
|
)
|
(16,123
|
)
|
|||||
Net
income
|
16,738
|
23,030
|
(14,646
|
) |
||||||
Preferred
stock dividends
|
(15,807
|
) |
(20,115
|
) |
(20,115
|
) |
||||
Preferred
stock conversion and redemption charges
|
(41,054
|
)
|
-
|
-
|
||||||
Net
income (loss) available to common
|
$
|
(40,123
|
)
|
$
|
2,915
|
$
|
(34,761
|
)
|
||
Income
(loss) per common share: |
||||||||||
Basic:
|
||||||||||
Income
(loss) from continuing operations
|
$
|
(0.95
|
)
|
$
|
0.32
|
$
|
(0.54
|
)
|
||
Net
income (loss)
|
$
|
(0.88
|
)
|
$
|
0.08
|
$
|
(1.00
|
)
|
||
Diluted:
|
||||||||||
Income
(loss) from continuing operations
|
$
|
(0.95
|
)
|
$
|
0.32
|
$
|
(0.54
|
)
|
||
Net
income (loss)
|
$
|
(0.88
|
)
|
$
|
0.08
|
$
|
(1.00
|
)
|
||
Dividends
declared and paid per common share
|
$
|
0.72
|
$
|
0.15
|
$
|
-
|
||||
Weighted-average
shares outstanding, basic
|
45,472
|
37,189
|
34,739
|
|||||||
Weighted-average
shares outstanding, diluted
|
45,472
|
38,154
|
34,739
|
|||||||
Components
of other comprehensive income: |
||||||||||
Net
income
|
$
|
16,738
|
$
|
23,030
|
$
|
(14,646
|
)
|
|||
Unrealized
(loss) gain on investments and hedging contracts
|
3,231
|
(1,572
|
)
|
(1,064
|
)
|
|||||
Total
comprehensive income (loss)
|
$
|
19,969
|
$
|
21,458
|
$
|
(15,710
|
)
|
See
accompanying notes.
F-5
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(In
thousands, except per share amounts)
Common
Stock
Par
Value
|
Additional
Paid-in
Capital
|
Preferred
Stock
|
Cumulative
Net
Earnings
|
||||||||||
Balance
at December 31, 2001 (19,999 common shares)
|
$
|
2,000
|
$
|
438,071
|
$
|
212,342
|
$
|
165,891
|
|||||
Issuance
of common stock:
|
|||||||||||||
Release
of restricted and amortization of deferred stock
compensation
|
—
|
—
|
—
|
—
|
|||||||||
Dividend
reinvestment plan (1 share)
|
—
|
5
|
—
|
—
|
|||||||||
Rights
offering (17,123 shares)
|
1,712
|
42,888
|
—
|
—
|
|||||||||
Grant
of stock as payment of director fees (18 shares at
an
average of $5.129 per share)
|
2
|
88
|
—
|
—
|
|||||||||
Net
loss for 2002
|
—
|
—
|
—
|
(14,646
|
) |
||||||||
Unrealized
gain on Omega Worldwide, Inc.
|
—
|
—
|
—
|
—
|
|||||||||
Realized
gain on sale of Omega Worldwide, Inc.
|
—
|
—
|
—
|
—
|
|||||||||
Unrealized
gain on hedging contracts
|
—
|
—
|
—
|
—
|
|||||||||
Unrealized
loss on interest rate cap
|
—
|
—
|
—
|
—
|
|||||||||
Balance
at December 31, 2002 (37,141 common shares)
|
3,714
|
481,052
|
212,342
|
151,245
|
|||||||||
Issuance
of common stock:
|
|||||||||||||
Release
of restricted stock and amortization of deferred stock compensation
|
—
|
—
|
—
|
—
|
|||||||||
Dividend
reinvestment plan (6 shares)
|
1
|
41
|
—
|
—
|
|||||||||
Exercised
options (121shares at an average exercise price of $2.373 per share)
|
12
|
275
|
—
|
—
|
|||||||||
Grant
of stock as payment of directors fees (23 shares at an average of
$4.373
per share)
|
2
|
99
|
—
|
—
|
|||||||||
Net
income for 2003
|
—
|
—
|
—
|
23,030
|
|||||||||
Common
dividends paid ($0.15 per share).
|
—
|
—
|
—
|
—
|
|||||||||
Preferred
dividends paid (Series A of $6.359 per share, Series B of $5.930
per
share and Series C of $2.50 per share)
|
—
|
—
|
—
|
—
|
|||||||||
Unrealized
loss on interest rate cap
|
—
|
—
|
—
|
—
|
|||||||||
Balance
at December 31, 2003 (37,291 common shares)
|
3,729
|
481,467
|
212,342
|
174,275
|
|||||||||
Issuance
of common stock:
|
|||||||||||||
Grant
of restricted stock (318 shares at $10.54 per share)
|
—
|
3,346
|
—
|
—
|
|||||||||
Amortization
of restricted stock
|
—
|
—
|
—
|
—
|
|||||||||
Dividend
reinvestment plan (16 shares at $9.84 per share)
|
2
|
157
|
—
|
—
|
|||||||||
Exercised
options (1,190 shares at an average exercise price of $2.775 per
share)
|
119
|
(403
|
)
|
—
|
—
|
||||||||
Grant
of stock as payment of directors fees (10 shares at an average of
$10.3142
per share)
|
1
|
101
|
—
|
—
|
|||||||||
Equity
offerings (2,718 shares at $9.85 per share)
|
272
|
23,098
|
—
|
—
|
|||||||||
Equity
offerings (4,025 shares at $11.96 per share)
|
403
|
45,437
|
—
|
—
|
|||||||||
Net
income for 2004
|
—
|
—
|
—
|
16,738
|
|||||||||
Purchase
of Explorer common stock (11,200 shares).
|
(1,120
|
) |
(101,025
|
) |
—
|
—
|
|||||||
Common
dividends paid ($0.72 per share).
|
—
|
—
|
—
|
—
|
|||||||||
Issuance
of Series D preferred stock (4,740 shares).
|
—
|
(3,700
|
) |
118,488
|
—
|
||||||||
Series
A preferred redemptions.
|
—
|
2,311
|
(57,500
|
) |
—
|
||||||||
Series
C preferred stock conversions.
|
1,676
|
103,166
|
(104,842
|
) |
—
|
||||||||
Series
C preferred stock redemptions
|
—
|
38,743
|
—
|
—
|
|||||||||
Preferred
dividends paid (Series A of $1.156 per share, Series B of $2.156 per share
and Series D of $1.518 per share)
|
—
|
—
|
—
|
—
|
|||||||||
Sale
of interest rate cap
|
—
|
—
|
—
|
—
|
|||||||||
Unrealized
loss on investments
|
—
|
—
|
—
|
—
|
|||||||||
Balance
at December 31, 2004 (50,824 common shares)
|
$
|
5,082
|
$
|
592,698
|
$
|
168,488
|
$
|
191,013
|
See
accompanying notes.
F-6
OMEGA
HEALTHCARE INVESTORS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(In
thousands, except per share amounts)
Cumulative
Dividends
|
Unamortized
Restricted Stock Awards
|
Accumulated
Other Comprehensive Loss
|
Total
|
||||||||||
Balance
at December 31, 2001 (19,999 common shares)
|
$
|
(365,654
|
)
|
$
|
(142
|
)
|
$
|
(1,818
|
)
|
$
|
450,690
|
||
Issuance
of common stock:
|
|||||||||||||
Release
of restricted and amortization of deferred stock
compensation
|
—
|
26
|
—
|
26
|
|||||||||
Dividend
reinvestment plan (1 share)
|
—
|
—
|
—
|
5
|
|||||||||
Rights
offering (17,123 shares)
|
—
|
—
|
—
|
44,600
|
|||||||||
Grant
of stock as payment of director fees (18 shares at
an
average of $5.129 per share)
|
—
|
—
|
—
|
90
|
|||||||||
Net
loss for 2002
|
—
|
—
|
—
|
(14,646
|
)
|
||||||||
Unrealized
gain on Omega Worldwide, Inc.
|
—
|
—
|
558
|
558
|
|||||||||
Realized
gain on sale of Omega Worldwide, Inc.
|
—
|
—
|
411
|
411
|
|||||||||
Unrealized
gain on hedging contracts
|
—
|
—
|
849
|
849
|
|||||||||
Unrealized
loss on interest rate cap
|
—
|
—
|
(2,882
|
)
|
(2,882
|
)
|
|||||||
Balance
at December 31, 2002 (37,141 common shares)
|
(365,654
|
) |
(116
|
) |
(2,882
|
) |
479,701
|
||||||
Issuance
of common stock:
|
|||||||||||||
Release
of restricted stock and amortization of deferred stock
compensation
|
—
|
116
|
—
|
116
|
|||||||||
Dividend
reinvestment plan (6 shares)
|
—
|
—
|
—
|
42
|
|||||||||
Exercised
options (121shares at an average exercise price of $2.373 per
share)
|
—
|
—
|
—
|
287
|
|||||||||
Grant
of stock as payment of directors fees (23 shares at an average of $4.373
per
share)
|
—
|
—
|
—
|
101
|
|||||||||
Net
income for 2003
|
—
|
—
|
—
|
23,030
|
|||||||||
Common
dividends paid ($0.15 per share).
|
(5,582
|
) |
—
|
—
|
(5,582
|
)
|
|||||||
Preferred
dividends paid (Series A of $6.359 per share, Series B of $5.930 per
share
and Series C of $2.50 per share)
|
(59,887
|
)
|
—
|
—
|
(59,887
|
)
|
|||||||
Unrealized
loss on interest rate cap
|
—
|
—
|
(1,573
|
)
|
(1,573
|
)
|
|||||||
Balance
at December 31, 2003 (37,291 common shares)
|
(431,123
|
) |
—
|
(4,455
|
) |
436,235
|
|||||||
Issuance
of common stock:
|
|||||||||||||
Grant
of restricted stock (318 shares at $10.54 per share)
|
—
|
(3,346
|
) |
—
|
—
|
||||||||
Amortization
of restricted stock
|
—
|
1,115
|
—
|
1,115
|
|||||||||
Dividend
reinvestment plan (16 shares)
|
—
|
—
|
—
|
159
|
|||||||||
Exercised
options (1,190 shares at an average exercise price of $2.775
per share)
|
—
|
—
|
—
|
(284
|
)
|
||||||||
Grant
of stock as payment of directors fees (10 shares at an average
of $10.3142
per share)
|
—
|
—
|
—
|
102
|
|||||||||
Equity
offerings (2,718 shares)
|
—
|
—
|
—
|
23,370
|
|||||||||
Equity
offerings (4,025 shares)
|
—
|
—
|
—
|
45,840
|
|||||||||
Net
income for 2004
|
—
|
—
|
—
|
16,738
|
|||||||||
Purchase
of Explorer common stock (11,200 shares).
|
—
|
—
|
—
|
(102,145
|
)
|
||||||||
Common
dividends paid ($0.72 per share).
|
(32,151
|
) |
—
|
—
|
(32,151
|
)
|
|||||||
Issuance
of Series D preferred stock (4,740 shares)
|
—
|
—
|
—
|
114,788
|
|||||||||
Series
A preferred stock redemptions
|
(2,311
|
) |
—
|
—
|
(57,500
|
)
|
|||||||
Series
C preferred stock conversions
|
—
|
—
|
—
|
—
|
|||||||||
Series
C preferred stock redemptions
|
(38,743
|
) |
—
|
—
|
—
|
||||||||
Preferred
dividends paid (Series A of $1.156 per share, Series B of $2.156 per
share
and Series D of $1.518 per share)
|
(17,018
|
)
|
—
|
—
|
(17,018
|
)
|
|||||||
Sale
of interest rate cap
|
—
|
—
|
6,014
|
6,014
|
|||||||||
Unrealized
loss on investments
|
—
|
—
|
(2,783
|
)
|
(2,783
|
)
|
|||||||
Balance
at December 31, 2004 (50,824 common shares)
|
$
|
(521,346
|
)
|
$
|
(2,231
|
)
|
$
|
(1,224
|
)
|
$
|
432,480
|
See
accompanying notes.
F-7
OMEGA
HEALTHCARE INVESTORS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
Year
Ended December 31,
|
||||||||||
2004
|
2003
|
2002
|
||||||||
Cash
flow from operating activities |
||||||||||
Net
income (loss)
|
$
|
16,738
|
$
|
23,030
|
$
|
(14,646
|
)
|
|||
Adjustment
to reconcile net income to cash provided by operating
activities:
|
||||||||||
Depreciation
and amortization (including amounts in discontinued
operations)
|
21,551
|
21,426
|
21,270
|
|||||||
Provisions
for impairment (including amounts in discontinued operations)
|
—
|
8,894
|
15,366
|
|||||||
Provisions
for uncollectible mortgages, notes and accounts receivable (including
amounts in
discontinued operations)
|
—
|
—
|
8,844
|
|||||||
Refinancing
costs
|
19,106
|
2,586
|
7,000
|
|||||||
Amortization
for deferred finance costs
|
1,852
|
2,307
|
2,833
|
|||||||
(Gain)
loss on assets sold - net
|
(3,358
|
) |
148
|
(2,548
|
) |
|||||
Restricted
stock amortization expense |
1,115
|
—
|
—
|
|||||||
Adjustment
of derivatives to fair value
|
(256
|
) |
—
|
(946
|
) |
|||||
Other
|
(55
|
) |
(45
|
) |
(40
|
) |
||||
Net
change in accounts receivable |
(2,990
|
) |
174
|
1,799
|
||||||
Net
change in other assets |
(72
|
) |
303
|
289
|
||||||
Net
change in operating assets and liabilities
|
731
|
(2,370
|
)
|
8,035
|
||||||
Net
cash provided by operating activities
|
54,362
|
56,453
|
47,256
|
|||||||
Cash
flow from investing activities |
||||||||||
Acquisition
of real estate |
(114,214
|
) |
—
|
—
|
||||||
Placement
of mortgage loans |
(6,500
|
) |
—
|
—
|
||||||
Proceeds
from sale of stock |
480
|
—
|
—
|
|||||||
Proceeds
from sale of real estate investments |
5,672
|
12,911
|
1,246
|
|||||||
Capital
improvements and funding of other investments |
(5,606
|
) |
(1,504
|
) |
(727
|
) |
||||
Proceeds
from other investments and assets held for sale - net |
9,145
|
23,815
|
16,027
|
|||||||
Investments
in other investments- net |
(3,430
|
) |
(7,736
|
) |
—
|
|||||
Collection
of mortgage principal
|
8,226
|
3,624
|
14,334
|
|||||||
Net
cash (used in) provided by investing activities
|
(106,227
|
)
|
31,110
|
30,880
|
||||||
Cash
flow from financing activities |
||||||||||
Proceeds
from credit line borrowings |
157,700
|
260,977
|
20,005
|
|||||||
Payments
of credit line borrowings |
(319,774
|
) |
(260,903
|
) |
(36,694
|
) |
||||
Prepayment
of re-financing penalty |
(6,378
|
) |
—
|
—
|
||||||
Proceeds
from long-term borrowings |
261,350
|
—
|
13,293
|
|||||||
Payments
of long-term borrowings |
(350
|
) |
(25,942
|
) |
(98,111
|
) |
||||
Proceeds
from sale of interest rate cap |
3,460
|
—
|
(10,140
|
) |
||||||
Receipts
from Dividend Reinvestment Plan |
159
|
42
|
5
|
|||||||
Receipts
from exercised options |
1,806
|
287
|
—
|
|||||||
Payments
for exercised options |
(2,090
|
) |
—
|
—
|
||||||
Dividends
paid |
(49,169
|
) |
(65,469
|
) |
—
|
|||||
Redemption
of preferred stock |
(57,500
|
) |
—
|
—
|
||||||
Proceeds
from preferred stock offering |
12,643
|
—
|
—
|
|||||||
Proceeds
from common stock offering |
69,210
|
—
|
44,600
|
|||||||
Deferred
financing costs paid
|
(10,213
|
)
|
(7,801
|
)
|
(1,650
|
)
|
||||
Net
cash provided by (used in) financing activities
|
60,854
|
(98,809
|
)
|
(68,692
|
)
|
|||||
Increase
(decrease) in cash and cash equivalents |
8,989
|
(11,246
|
) |
9,444
|
||||||
Cash
and cash equivalents at beginning of year
|
3,094
|
14,340
|
4,896
|
|||||||
Cash
and cash equivalents at end of year
|
$
|
12,083
|
$
|
3,094
|
$
|
14,340
|
||||
Interest
paid during the year
|
$
|
19,150
|
$
|
18,101
|
$ |
26,036
|
See
accompanying notes.
F-8
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOE
1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization
Omega
Healthcare Investors, Inc. (“Omega”), a Maryland corporation, is a
self-administered real estate investment trust (“REIT”). From the date that we
commenced operations in 1992, we have invested primarily in income-producing
healthcare facilities, which include long-term care nursing homes, assisted
living facilities and rehabilitation hospitals. At December 31, 2004, we have
investments in 221 healthcare facilities located throughout the United
States.
Consolidation
Our
consolidated financial statements include the accounts of Omega and all direct
and indirect wholly owned subsidiaries. All inter-company accounts and
transactions have been eliminated in consolidation.
We have
one reportable segment consisting of investments in real estate. Our business is
to provide financing and capital to the long-term healthcare industry with a
particular focus on skilled nursing facilities located in the United States. Our
core portfolio consists of long-term lease 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. Substantially all depreciation expenses
reflected in the consolidated statement of operations relate to the ownership of
our investment in real estate.
In prior
years, we had a reportable segment relating to our portfolio of owned and
operated facilities that we acquired as a result of certain foreclosure
proceedings. However, owned and operated facilities are not our core business,
and thus we divested all of our owned and operated facilities. As of January 1,
2004, the divestment process had been sufficiently implemented such that our
holdings of owned and operated facilities were immaterial and thus no longer
constituted a separate reportable segment. As of December 31, 2004, we had
no owned and operated facilities. In addition, we previously reported a segment
entitled "Corporate and Other;" however, all of the items classified thereunder
are properly allocable to core operations and, as result, do not currently
constitute a separate reportable segment.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles (“GAAP”) in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Real
Estate Investments and Depreciation
We
allocate the purchase price of properties to net tangible and identified
intangible assets acquired based on their fair values in accordance with the
provisions Statement of Financial Accounting Standards ("SFAS") No. 141,
Business
Combinations. In
making estimates of fair values for purposes of allocating purchase price, we
utilize a number of sources, including independent appraisals that may be
obtained in connection with the acquisition or financing of the respective
property and other market data. We also consider information obtained about each
property as a result of its pre-acquisition due diligence, marketing and leasing
activities in estimating the fair value of the tangible and intangible assets
acquired.
Depreciation
for buildings is recorded on the straight-line basis, using estimated useful
lives ranging from 20 to 39 years. Leasehold interests are amortized over the
shorter of useful life or term of the lease, with lives ranging from four to
seven years.
Gains on
sales of real estate assets are recognized pursuant to the provisions of SFAS
No. 66, “Accounting for Sales of Real Estate.” The specific timing of the
recognition of the sale and the related gain is measured against the various
criteria in SFAS No. 66 related to the terms of the transactions and any
continuing involvement associated with the assets sold. To the extent the sales
criteria are not met, we defer gain recognition until the sales criteria are
met.
F-9
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Asset
Impairment
Management
periodically, but not less than annually, evaluates
our real estate investments for impairment indicators, including the evaluation
of our assets’ useful lives. The judgment regarding the existence of impairment
indicators is based on factors such as, but not limited to, market conditions,
operator performance and legal structure. If indicators of impairment are
present, management evaluates the carrying value of the related real estate
investments in relation to the future undiscounted cash flows of the underlying
facilities. Provisions
for impairment losses related to long-lived assets are recognized when expected
future undiscounted cash flows are determined to be permanently less than the
carrying values of the assets. An adjustment is made to the net carrying value
of the leased properties and other long-lived assets for the excess of
historical cost over fair value.
The fair
value of the real estate investment is determined by market research, which
includes valuing the property as a nursing home as well as other alternative
uses.
If we
decide to sell rental properties or land holdings, we evaluate the
recoverability of the carrying amounts of the assets. If the evaluation
indicates that the carrying value is not recoverable from estimated net sales
proceeds, the property is written down to estimated fair value less costs to
sell and an impairment loss is recognized. Our estimates of cash flow and fair
values of the properties are based on current market conditions and consider
matters such as rental rates and occupancies for comparable properties, recent
sales data for comparable properties, and, where applicable, contracts or the
results of negotiations with purchasers or prospective purchasers.
During
the year ended December 31, 2004, we did not recognize an impairment loss;
however, during the years ended December 31, 2003 and 2002, we recognized
impairment losses of $8.9 million and $15.4 million, respectively, including
amounts in discontinued operations.
Loan
Impairment
Management,
periodically but not less than annually, evaluates our outstanding loans and
notes receivable. When management identifies potential loan impairment
indicators, such as non-payment under the loan documents, impairment of the
underlying collateral, financial difficulty of the operator or other
circumstances that may impair full execution of the loan documents, and
management believes these indicators are permanent, then the loan is written
down to the present value of the expected future cash flows. In cases where
expected future cash flows cannot be estimated, the loan is written down to the
fair value of the collateral. The fair value of the loan is determined by market
research, which includes valuing the property as a nursing home as well as other
alternative uses. During the year ended December 31, 2004 and 2003, we did not
recognize an impairment loss; however, during the year ended December 31, 2002,
we recognized an impairment loss of $8.8 million, including amounts in
discontinued operations.
Cash
and Cash Equivalents
Cash and
cash equivalents consist of cash on hand and highly liquid investments with a
maturity date of three months or less when purchased. These investments are
stated at cost, which approximates fair value.
Accounts
Receivable
Accounts
receivable consists primarily of lease and mortgage interest payments. Amounts
recorded include estimated provisions for loss related to uncollectible accounts
and disputed items. On a monthly basis, we review the contractual payment versus
actual cash payment received and the contractual payment due date versus actual
receipt date. When management identifies delinquencies, a judgment is made as to
the amount of provision, if any, that is needed.
Investments
in Equity Securities
Marketable
securities classified as available-for-sale are stated at fair value with
unrealized gains and losses recorded in accumulated other comprehensive income.
Realized gains and losses and declines in value judged to be
other-than-temporary on securities held as available-for-sale are included in
investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities available-for-sale
are included in investment income. If events or circumstances indicate that the
fair value of an investment has declined below its carrying value and we
consider the decline to be “other than temporary,” the investment is written
down to fair value and an impairment loss is recognized.
F-10
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
At
December 31, 2004, we had one marketable security (i.e., shares of a publicly
traded company; see Note 5 - Other Investments) where the fair value had
temporarily declined below its carrying value. The fair value of this security
is directly impacted by stock market volatility. We are not aware of any factors
associated with this marketable security and its issuer that would otherwise
materially adversely affect our ability to realize our investment in this
asset.
Comprehension
Income
SFAS 130,
“Reporting Comprehensive Income,” establishes guideline for the reporting and
display of comprehensive income and its components in financial statements.
Comprehensive income includes net income and all other non-owner changes in
stockholders equity during a period including unrealized gains and losses on
equity securities classified as available-for-sale and unrealized fair value
adjustments on certain derivative instruments.
Deferred
Financing Costs
Deferred
financing costs are amortized on a straight-line basis over the terms of the
related borrowings which approximates the effective interest method.
Amortization of financing costs totaling $1.9 million, $2.3 million and $2.8
million in 2004, 2003 and 2002, respectively, is classified as “interest -
amortization of deferred financing costs” in our audited consolidated statements
of operations. When financings are terminated, unamortized amounts paid, as well
as, charges incurred for the termination, are expensed at the time the
termination is made. In addition, amounts paid for financings that are not
ultimately completed are expensed at the time the determination is made that
such financings are not viable. In 2002, $7.0 million of such costs were
expensed and were classified as “interest - refinancing costs” in our 2002
consolidated statements of operations.
We have
adopted Statement of Financial Accounting Standard No. 145, Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections, and,
accordingly gains and losses from the extinguishment of debt are presented as
interest expense within income from continuing operations in the accompanying
consolidated financial statements.
Revenue
Recognition
Rental
income is recognized as earned over the terms of the related master leases. Such
income includes periodic increases based on pre-determined formulas (i.e., such
as increases in the Consumer Price Index (“CPI”)) as defined in the master
leases. One lease with a tenant contains provisions relating to increases in
rental payments over the term of the leases. Rental income under this lease is
recognized over the term of the lease on a straight-line basis. Mortgage
interest income is recognized as earned over the terms of the related mortgage
notes.
Reserves
are taken against earned revenues from leases and mortgages 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, lease revenues are recorded as received, after
taking into account application of security deposits. Interest income on
impaired mortgage loans is recognized as received after taking into account
application of security deposits.
Nursing
home revenues from owned and operated assets (primarily Medicare, Medicaid and
other third party insurance) are recognized as patient services are
provided.
Owned
and Operated Assets
If real
estate is acquired and operated pursuant to a foreclosure proceeding, it is
designated as "owned and operated assets" and recorded at the lower of cost or
fair value.
Assets
Held for Sale and Discontinued Operations
When a
formal plan to sell real estate was adopted and we held a contract for sale, the
real estate was classified as "assets held for sale," with the net carrying
amount adjusted to the lower of cost or estimated fair value, less cost of
disposal. Depreciation of the facilities was excluded from operations after
management has committed to a plan to sell the asset. Pursuant to SFAS No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets,
long-lived assets sold or designated as held for sale are reported as
discontinued operations in our financial statements for all
periods presented.
F-11
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Derivative
Instruments
SFAS No.
133, Accounting
for Derivative Instruments and Hedging Activities, as
amended, requires that all derivatives are recognized on the balance sheet at
fair value. Derivatives that are not hedges are adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset against the change in
fair value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedge item is
recognized in earnings. The ineffective portion of a derivative’s change in fair
value will be immediately recognized in earnings.
Earnings
Per Share
Basic
earnings per common 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 year. Diluted EPS reflects the potential dilution that
could occur from shares issuable through stock-based compensation, including
stock options and the conversion of our Series C preferred stock.
Federal
and State Income Taxes
As a
qualified REIT, we will not be subject to Federal income taxes on our income,
and no provisions for Federal income taxes have been made. To the extent that we
have foreclosure income from our owned and operated assets, we will incur
federal tax at a rate of 35%. To date, our owned and operated assets have
generated losses, and therefore, no provision for federal income tax is
necessary. We are
permitted to own up to 100% of a “taxable REIT subsidiary” (“TRS”). Currently we
have two TRS’ that are taxable as corporations and that pay federal, state and
local income tax on their net income at the applicable corporate rates. These
TRS’ had net operating loss carry-forwards as of December 31, 2004 of $14.6
million. These loss carry-forwards were fully reserved with a valuation
allowance due to uncertainties regarding realization.
Stock-Based
Compensation
Our
company grants stock options to employees and directors with an exercise price
equal to the fair value of the shares at the date of the grant. In accordance
with the provisions of Accounting Principles Board (“APB”) Opinion No. 25,
Accounting
for Stock Issued to Employees, compensation
expense is not recognized for these stock option grants.
Statement
of Financial Accounting Standard No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure, which
was effective January 1, 2003, requires certain disclosures related to our
stock-based compensation arrangements.
F-12
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
The
following table presents the effect on net income and earnings per share if we
had applied the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, to our
stock-based compensation.
Twelve
Months Ended December 31,
|
||||||||||
2004
|
2003
|
2002
|
||||||||
(In
thousands, except per share amounts)
|
||||||||||
Net
(loss) income to common stockholders |
$
|
(40,123
|
)
|
$
|
2,915
|
$
|
(34,761
|
)
|
||
Add:
Stock-based compensation expense included in net (loss) income to common
stockholders
|
1,115
|
—
|
—
|
|||||||
(39,008
|
) |
2,915
|
(34,761
|
) |
||||||
Less:
Stock-based compensation expense determined under the fair value based
method for all awards |
1,140
|
79
|
70
|
|||||||
Pro
forma net (loss) income to common stockholders
|
$
|
(40,148
|
)
|
$
|
2,836
|
$
|
(34,831
|
)
|
||
Earnings
per share: |
||||||||||
Basic,
as reported
|
$
|
(0.88
|
)
|
$
|
0.08
|
$
|
(1.00
|
)
|
||
Basic,
pro forma
|
$
|
(0.88
|
)
|
$
|
0.08
|
$
|
(1.00
|
)
|
||
Diluted,
as reported
|
$
|
(0.88
|
)
|
$
|
0.08
|
$
|
(1.00
|
)
|
||
Diluted,
pro forma
|
$
|
(0.88
|
)
|
$
|
0.07
|
$
|
(1.00
|
)
|
The
Black-Scholes options valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, options valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
our employee stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options. In
connection with the implementation of the Black-Scholes options valuation model,
for each of the years ended December 31, 2004, 2003, and 2002, we made the
following significant weighted-average assumptions:
Significant
Weighted-Average Assumptions:
|
|
Risk-free
Interest Rate at time of Grant
|
2.50%
|
Expected
Stock Price Volatility
|
3.00%
|
Expected
Option Life in Years (a)
|
4
|
Expected
Dividend Payout
|
5.00%
|
(a)
Expected life is based on contractual expiration dates
Effects
of Recently Issued Accounting Standards
In May
2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150,
Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity. SFAS
No. 150 requires certain financial instruments that embody obligations of the
issuer and have characteristics of both liabilities and equity to be classified
as liabilities. The provisions of SFAS No. 150 are effective for financial
instruments entered into or modified after May 31, 2003 and to all other
instruments that exist as of the beginning of the first interim financial
reporting period beginning after June 15, 2003. We do not have any financial
instruments that meet the provisions of SFAS No. 150; therefore, adopting the
provisions of SFAS No. 150 did not have an impact on our results of operations
or financial position.
In
December 2003, the FASB issued the revised Financial Interpretation Number
(“FIN”) 46R, Consolidation
of Variable Interest Entities an Interpretation of ARB No. 51. FIN 46R
was effective March 31, 2004. Variable interest entities (“VIEs”) are primarily
entities that lack sufficient equity to finance their activities without
additional financial support from other parties or whose equity holders lack
adequate decision making ability. We do not have any entities that meet the
definition of a variable interest entity under FIN 46R; therefore, the
provisions of FIN 46R did not have an impact on our results of operations or
financial position.
F-13
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
In
December 2004, the FASB issued FASB Statement No. 123(R) (revised 2004),
Share
Based Payment.
Statement 123(R) addresses the accounting for share-based payment transactions
in which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise's equity instruments or that may be settled by the
issuance of such equity instruments. Statement 123(R) requires an entity to
recognize the grant-date fair-value of stock options and other equity-based
compensation issued to employees in the income statement. The revised Statement
generally requires that an entity account for those transactions using the
fair-value-based method, and eliminates the intrinsic value method of accounting
in APB Opinion No. 25, Accounting
for Stock Issued to Employees, which
was permitted under Statement 123, as originally issued. The revised Statement
requires entities to disclose information about the nature of the share-based
payment transactions and the effects of those transactions on the financial
statements. Statement 123(R) is effective for Omega after June 15, 2005 (i.e.,
our third quarter 2005). All public companies must use either the modified
prospective or the modified retrospective transition method. We are currently
evaluating the impact of adoption of this pronouncement, which must be adopted
in the third quarter of fiscal year 2005.
Risks
and Uncertainties
Our
company is subject to certain risks and uncertainties affecting the healthcare
industry as a result of healthcare legislation and growing regulation by
federal, state and local governments. Additionally, we are subject to risks and
uncertainties as a result of changes affecting operators of nursing home
facilities due to the actions of governmental agencies and insurers to limit the
growth in cost of healthcare services (see Note 6 - Concentration of
Risk).
Reclassifications
Certain
reclassifications have been made in the 2003 and 2002 financial statements to
conform to the 2004 presentation.
F-14
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
NOTE
3 - PROPERTIES
Leased
Property
Our
leased real estate properties, represented by 173 long-term care facilities and
two rehabilitation hospitals at December 31, 2004, 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 the leases and master
leases provide for minimum annual rentals which are subject to annual increases
based upon increases in CPI or increases in revenues of the underlying
properties, with certain maximum limits. Under the terms of the leases, the
lessee is responsible for all maintenance, repairs, taxes and insurance on the
leased properties.
A summary
of our investment in leased real estate properties is as follows:
December
31,
|
|||||||
2004
|
2003
|
||||||
(In
thousands)
|
|||||||
Buildings |
$
|
768,433
|
$
|
649,591
|
|||
Land
|
40,141
|
32,971
|
|||||
808,574
|
682,562
|
||||||
Less
accumulated depreciation
|
(153,379
|
)
|
(131,604
|
)
|
|||
Total
|
$
|
655,195
|
$
|
550,958
|
The
future minimum estimated rentals for the remainder of the initial terms of the
leases are as follows:
(In
thousands)
|
||||
2005 |
$
|
81,485
|
||
2006 |
80,954
|
|||
2007 |
77,800
|
|||
2008 |
77,466
|
|||
2009 |
76,732
|
|||
Thereafter
|
249,936
|
|||
$
|
644,373
|
Below is
a summary of the significant lease transactions which occurred in
2004.
Alterra
Healthcare
· |
On
October 1, 2004, we re-leased one assisted living facility (“ALF”),
formerly leased by Alterra Healthcare, located in Ohio and representing 36
beds, to a new operator under a single facility
lease.
|
Claremont
Healthcare Holdings, Inc.
· |
Effective
March 8, 2004, we re-leased three skilled nursing facilities (“SNFs”),
formerly leased by Claremont Healthcare Holdings, Inc. (“Claremont”),
located in Florida and representing 360 beds, to an existing operator.
These facilities were added to an existing master lease, the initial term
of which has been extended ten years to February,
2014.
|
· |
Effective
January 1, 2005, we re-leased one SNF, formerly leased to Claremont,
located in New Hampshire and representing 68 beds, to an existing
operator. This facility was added to an existing master lease which
expires on December 31, 2013, followed by two 10-year renewal
options.
|
· |
Separately,
we continue our ongoing restructuring discussions with Claremont regarding
the one facility Claremont currently leases from us. Due to the
significant uncertainty of collection, we recognize rental income from
Claremont when it is received.
|
F-15
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Guardian
LTC Management, Inc.
· |
On
November 2, 2004, we purchased 14 SNFs and one ALF from subsidiaries of
Guardian LTC Management, Inc. (“Guardian”), for a total investment of
approximately $72 million. Thirteen of the facilities are located in
Pennsylvania and two in Ohio. The 15 facilities were simultaneously leased
back to the sellers, which are subsidiaries of Guardian, under a new
master lease effective November 2, 2004.
|
· |
On
December 3, 2004, we purchased one additional facility located in West
Virginia from the sellers for approximately $8 million. The West Virginia
facility is a combined SNF and rehabilitation hospital. The West Virginia
facility was added to the master lease on December 3,
2004.
|
· |
The
term of the master lease is ten years and runs through October 31, 2014,
followed by four renewal options of five years each. We also received a
security deposit equivalent to three months
rent.
|
Haven
Healthcare Management
· |
On
April 1, 2004, we purchased three SNFs, representing 399 beds, for a total
investment of approximately $26 million. Two of the facilities are located
in Vermont and the third is located in Connecticut. The facilities were
combined into an existing master lease with Haven Healthcare Management
(“Haven”). The term of the master lease was increased to ten years on
January 1, 2004 and will expire on December 31, 2013, followed by two
ten-year renewal options. We received a security deposit equivalent to
three months of incremental rent.
|
Senior
Management
· |
On
April 30, 2004, we purchased two SNFs representing 477 beds, for a total
investment of approximately $9 million. Both facilities are located in
Texas and were combined into an existing master lease with Senior
Management. The term of the master lease has been increased to ten years
and is followed by two ten-year renewal
options.
|
Sun
Healthcare Group, Inc.
· |
Effective
November 1, 2004, we re-leased two SNF’s formerly leased by Sun Healthcare
Group, Inc. (“Sun”), both located in California. The first, representing
59 beds, was re-leased to a new operator under a single facility lease
with a five year term. The second, representing 98 beds, was also
re-leased to a new operator under a single facility lease with a three and
a half year term.
|
· |
On
March 1, 2004, we entered into an agreement with Sun regarding 51
properties that are leased to various affiliates of Sun. Under the terms
of a master lease agreement, Sun will continue to operate and occupy 23
long-term care facilities, five behavioral properties and two hospital
properties through December 31, 2013. One property, located in Washington
and formerly operated by a Sun affiliate, has already been closed and the
lease relating to that property has been terminated. With respect to the
remaining 20 facilities, 17 have already been transitioned to new
operators and three are in the process of being transferred to new
operators.
|
· |
Under
our restructuring agreement with Sun, we received the right to convert
deferred base rent owed to us, totaling approximately $7.8 million, into
800,000 shares of Sun’s common stock, subject to certain anti-dilution
provisions and Sun’s right to pay cash in an amount equal to the value of
that stock in lieu of issuing stock to us.
|
· |
On
March 30, 2004, we notified Sun of our intention to exercise our right to
convert the deferred base rent into fully paid and non-assessable shares
of Sun’s common stock. On April 16, 2004, we received a stock certificate
for 760,000 restricted shares of Sun’s common stock and cash in the amount
of approximately $0.5 million in exchange for the remaining 40,000 shares
of Sun’s common stock. On July 23, 2004, Sun registered these shares with
the Securities and Exchange Commission (“SEC”). We are accounting for the
remaining 760,000 shares as “available for sale” marketable securities
with changes in market value recorded in other comprehensive
income.
|
· |
On
March 1, 2004, we re-leased one SNF formerly leased by Sun located in
California and representing 58 beds, to a new operator under a master
lease, which has a ten-year term.
|
F-16
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
· |
Effective
January 1, 2004, we re-leased five SNFs to an existing operator under a
new master lease, which has a five-year term. Four former Sun SNFs, three
located in Illinois and one located in Indiana, representing an aggregate
of 449 beds, were part of the transaction. The fifth SNF in the
transaction, located in Illinois and representing 128 beds, was the last
remaining owned and operated facility in our
portfolio.
|
Acquisitions
There
were several acquisitions completed for the year ended December 31, 2004, as
described above. The table below summarizes these acquisitions. The purchase
price includes transaction costs.
100%
Interest Acquired
|
Acquisition
Date
|
Purchase
Price ($000’s)
|
|||||
Three
facilities (2 in Vermont, 1 in Connecticut) |
April
1, 2004
|
$
|
26,000
|
||||
Two
facilities in Texas |
April
30, 2004
|
9,400
|
|||||
Fifteen
facilities (13 in Pennsylvania, 2 Ohio) |
November
1, 2004
|
72,500
|
|||||
One
facility in West Virginia |
December
3, 2004
|
7,700
|
The
acquired properties are included in our results of operations from the
respective date of acquisition. The following unaudited pro forma results of
operations reflect these transactions as if each had occurred on January 1 of
the year presented. In our opinion, all significant adjustments necessary to
reflect the effects of the acquisitions have been made.
Pro
Forma
Year
Ended December 31,
|
||||||||||
2004
|
2003
|
2002
|
||||||||
(In
thousands, except per share amount)
|
||||||||||
Revenues
|
$
|
98,386
|
$
|
99,632
|
$
|
141,371
|
||||
Net
income
|
18,669
|
25,870
|
(11,806
|
)
|
||||||
Earnings
per share - proforma: |
||||||||||
Basic
|
$
|
(0.84
|
)
|
$
|
0.15
|
$
|
(0.92
|
)
|
||
Diluted
|
$
|
(0.84
|
)
|
$
|
0.15
|
$
|
(0.92
|
)
|
Owned
and Operated Assets
At
December 31, 2004, we did not own any facilities that were previously recovered
from a bankrupt tenant. At December 31, 2003, we owned and operated one
long-term care facility which was re-leased on January 1, 2004 to an existing
operator. At December 31, 2002, we owned and operated three long-term care
facilities (two owned and one subject to a leasehold interest). An impairment
charge of $3.0 million, including $2.0 million for a property that was sold, was
taken on these assets for the year ended December 31, 2002.
A summary
of our investment in owned and operated real estate assets at December 31, 2004
and 2003, respectively, is as follows:
December
31,
|
|||||||
2004
|
2003
|
||||||
(In
thousands)
|
|||||||
Buildings |
$
|
-
|
$
|
5,039
|
|||
Land
|
-
|
256
|
|||||
- |
5,295
|
||||||
Less
accumulated depreciation
|
-
|
(681
|
)
|
||||
Total
|
$
|
-
|
$
|
4,614
|
F-17
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Closed
Facilities
At
December 31, 2004, we had no closed facilities in our portfolio. For the year
ended December 31, 2004, we sold
six closed facilities, realizing proceeds of approximately $5.7 million, net of
closing costs and other expenses, resulting in a net gain of approximately $3.3
million. In accordance with SFAS No. 144, the $3.3 million realized net gain is
reflected in our consolidated statements of operations as discontinued
operations. At
December 31, 2003, there were six closed properties that were not under contract
for sale. For the year ended December 31, 2003, we recorded an $8.8 million
provision for impairment on these facilities. These properties were included in
real estate in our Consolidated Balance Sheet. A summary of our investment in
closed real estate properties is as follows:
December
31,
|
|||||||
2004
|
2003
|
||||||
(In
thousands)
|
|||||||
Buildings |
$
|
-
|
$
|
3,970
|
|||
Land
|
-
|
627
|
|||||
- |
4,597
|
||||||
Less
accumulated depreciation
|
-
|
(2,192
|
)
|
||||
Total
|
$
|
-
|
$
|
2,405
|
In 2003,
six facilities were transferred to closed facilities. Two facilities were
transferred from purchase leaseback, and non-cash impairments of $8.8 million
were recorded to reduce the value of the investments to their estimated fair
value. Three facilities were transferred from mortgage notes receivable after we
received a Deed in Lieu of Foreclosure. Finally, we transferred one facility
from our owned and operated portfolio into closed facilities. No provisions for
impairments were needed on the latter four investments.
In
addition, in 2003 we sold eight closed facilities and realized a net loss of
$3.0 million for the twelve months ended December 31, 2003, which is reflected
in our Consolidated Statements of Operations as discontinued
operations.
Assets
Sold or Held For Sale
During
2003, we sold four facilities, which were previously classified as “assets held
for sale,” realizing proceeds of $2.0 million, net of closing costs, resulting
in a net loss of approximately $0.7 million. Accordingly, these four facilities
were subject to SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed and were
not reported as discontinued operations in our audited consolidated financial
statements.
NOTE
4 - MORTGAGE NOTES RECEIVABLE
Mortgage
notes receivable relate to 46 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
ten states, operated by ten 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 December 31, 2004, we have no foreclosed property and none of our mortgages
were in foreclosure proceedings.
The
following table summarizes the mortgage notes balances for the years ended
December 31, 2004 and 2003:
December
31,
|
|||||||
2004
|
2003
|
||||||
(In
thousands)
|
|||||||
Gross
mortgage notes—unimpaired |
$
|
118,058
|
$
|
119,784
|
|||
Gross
mortgage notes—impaired |
—
|
—
|
|||||
Reserve
for uncollectible loans
|
—
|
—
|
|||||
Net
mortgage notes at December 31
|
$
|
118,058
|
$
|
119,784
|
F-18
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
During
2004, we reduced the number of mortgaged facilities by 5 as a result of the
following transactions:
· |
On
November 1, 2004, we closed on a first mortgage loan, in the amount of
$6.5 million on one SNF in Cleveland, Ohio. The operator of the facility
is an affiliate of CommuniCare Health Services, Inc., an existing tenant
of ours. The term of the mortgage is ten years and carries an interest
rate of 11%. We received a security deposit equivalent to three months
interest.
|
· |
On
April 6, 2004, we received approximately $4.6 million in proceeds on a
mortgage loan payoff. We held mortgages on five facilities with Tiffany
Care Centers, Inc. located in Missouri, representing 319
beds.
|
· |
On
November 1, 2004, we received approximately $1.6 million for the repayment
on one facility mortgage.
|
During
2003, we reduced the number of mortgaged facilities by 12, as compared to 2002,
as a result of the following:
· |
One
facility, located in Indiana, was removed from an existing mortgage and
sold on behalf of the mortgagor.
|
· |
Fee-simple
ownership of two closed facilities on which we held mortgages was
transferred to us by Deed in Lieu of Foreclosure. These facilities were
transferred to closed facilities and are included in our Consolidated
Balance Sheet under “Land and buildings, at
cost.”
|
· |
Titles
to eight Integrated Health Services, Inc. (“IHS”) properties on which we
held mortgages were transferred to wholly-owned subsidiaries of ours by
Deed in Lieu of Foreclosure. These facilities were then subsequently
leased to four unaffiliated third-party operators as part of four separate
transactions.
|
· |
Finally,
in an unrelated transaction with IHS, we received fee-simple ownership of
one closed property, which we previously held the mortgage on, by Deed in
Lieu of Foreclosure. This facility was transferred to closed facilities
and was included in our Consolidated Balance Sheet under “Land and
buildings, at cost.”
|
At
December 31, 2004, all mortgages were structured as fixed-rate mortgages. The
outstanding principal amounts of mortgage notes receivable, net of allowances,
were as follows (see Note 18 - Subsequent Events):
December
31,
|
|||||||
2004
|
2003
|
||||||
(In
thousands)
|
|||||||
Mortgage
note due 2010; interest only at 11.57% payable monthly |
$
|
59,657
|
$
|
59,657
|
|||
Mortgage
notes due 2015; monthly payments of $189,004, including interest at
11.06% |
13,776
|
14,484
|
|||||
Mortgage
note due 2014; interest only at 11.00% payable monthly |
6,500
|
—
|
|||||
Mortgage
note due 2010; monthly payment of $124,833, including interest at
11.50% |
12,677
|
12,715
|
|||||
Mortgage
note due 2006; monthly payment of $107,382, including interest at
11.50% |
10,782
|
10,851
|
|||||
Mortgage
note due 2004; interest at 10.00% payable monthly |
9,991
|
10,025
|
|||||
Other
mortgage notes
|
4,675
|
12,052
|
|||||
Total
mortgages—net (1)
|
$
|
118,058
|
$
|
119,784
|
(1)
Mortgage notes are shown net of allowances of $0.0 million in 2004 and
2003.
F-19
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
NOTE
5 - OTHER INVESTMENTS
Other
investments are made up of notes receivable, a purchase option and marketable
securities. A summary of our other investments is as follows:
At
December 31,
|
|||||||
2004
|
2003
|
||||||
(In
thousands) |
|||||||
Notes
receivable(1)
|
$
|
18,692
|
$
|
25,085
|
|||
Notes
receivable allowance |
(2,902
|
) |
(2,956
|
) |
|||
Purchase
option and other(2)
|
6,909
|
7,049
|
|||||
Marketable
securities
|
7,000
|
—
|
|||||
Total
other investments
|
$
|
29,699
|
$
|
29,178
|
(1) |
Includes
notes receivable on non-accrual status for 2004 and 2003 of $6.8 million
and $11.5 million respectively.
|
(2) |
We
paid $7.0 million to enter into a purchase option to acquire a portfolio
of seven SNFs in Ohio from a third-party operator. The purchase option was
exercised in January 2005 and applied against the purchase price. See Note
18 - Subsequent Events.
|
For the
year ended December 31, 2004, the following transactions impacted our other
investments:
· |
Under
our restructuring agreement with Sun, we received the right to convert
deferred base rent owed to us, totaling approximately $7.8 million, into
800,000 shares of Sun’s common stock, subject to certain non-dilution
provisions and the right of Sun to pay cash in an amount equal to the
value of that stock in lieu of issuing stock to
us.
|
· |
On
March 30, 2004, we notified Sun of our intention to exercise our right to
convert the deferred base rent into fully paid and non-assessable shares
of Sun’s common stock. On April 16, 2004, we received a stock certificate
for 760,000 restricted shares of Sun’s common stock and cash in the amount
of approximately $0.5 million in exchange for the remaining 40,000 shares
of Sun’s common stock. On July 23, 2004, Sun registered these shares with
the SEC. We are accounting for the remaining 760,000 shares as “available
for sale” marketable securities with changes in market value recorded in
other comprehensive income.
|
A summary
of our notes receivable is as follows:
At
December 31,
|
|||||||
2004
|
2003
|
||||||
(In
thousands)
|
|||||||
Note
receivable callable in 1999; interest only at 14% |
$
|
1,500
|
$
|
5,581
|
|||
Working
capital note receivable due 2004; interest only at 11% |
4,065
|
4,979
|
|||||
Note
receivable due 2008; interest only at 11% |
3,000
|
3,000
|
|||||
Other
notes receivable; 6% to 14%; maturity dates range from on demand to
2013
|
10,127
|
11,525
|
|||||
Total
notes receivable
|
$
|
18,692
|
$
|
25,085
|
NOTE
6 - CONCENTRATION OF RISK
As of
December 31, 2004, our portfolio of domestic investments consisted of 221
healthcare facilities, located in 29 states and operated by 42 third-party
operators. Our gross investment in these facilities, net of impairments and
before reserve for uncollectible loans, totaled approximately $927 million at
December 31, 2004, with approximately 97% of our real estate investments related
to long-term care facilities. This portfolio is made up of 173 long-term
healthcare facilities, two rehabilitation hospitals owned and leased to third
parties, and fixed rate mortgages on 46 long-term healthcare facilities. At
December 31, 2004, we also held miscellaneous investments of approximately $30
million, consisting primarily of secured loans to third-party operators of our
facilities.
At
December 31, 2004, approximately 34% of our real estate investments were
operated by three public companies: Sun (17%), Advocat (11%) and Mariner Health
Care, Inc. (“Mariner”) (6%). Our largest private company operators (by
investment) were Guardian (9%), Seacrest Healthcare (6%) and Haven (5%). No
other operator represents more than 5% of our investments. The three states in
which we had our highest concentration of investments were Florida (14%),
Pennsylvania (9%) and Ohio (8%) at December 31, 2004.
F-20
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
For the
year ended December 31, 2004, our revenues from operations totaled $90.5
million, of which approximately $21.8 million was derived from Sun (24%) and
$11.9 million from Advocat (13%). No other operator was greater than 10% of our
revenues from operations.
NOTE
7 - LEASE AND MORTGAGE DEPOSITS
We obtain
liquidity deposits and letters of credit from most operators pursuant to our
lease and mortgage contracts with the operators. These generally represent the
rental and mortgage interest for periods ranging from three to six months with
respect to certain of its investments. The liquidity deposits may be applied in
the event of lease and loan defaults, subject to applicable limitations under
bankruptcy law with respect to operators filing under Chapter 11 of the United
States Bankruptcy Code. At December 31, 2004, we held $4.6 million in such
liquidity deposits and $8.8 million in letters of credit. Additional security
for rental and mortgage interest revenue from operators is provided by covenants
regarding minimum working capital and net worth, liens on accounts receivable
and other operating assets of the operators, provisions for cross default,
provisions for cross-collateralization and by corporate/personal
guarantees.
NOTE
8 - BORROWING ARRANGEMENTS
Secured
Borrowings
We have a
$200 million revolving senior secured credit facility (“Credit Facility”). At
December 31, 2004, $15.0 million was outstanding under the Credit Facility and
$4.3 million was utilized for the issuance of letters of credit, leaving
availability of $180.7 million. The $15.0 million of outstanding borrowings had
a blended interest rate of 5.41% at December 31, 2004.
On
December 2, 2004, we exercised our right to increase the revolving commitments
under our Credit Facility by an additional $25 million, to $200 million.
Additionally, on April 30, 2004, we exercised our right to increase the
revolving commitments under our Credit Facility by an additional $50 million, to
$175 million. All other terms of the Credit Facility, which closed on March 22,
2004 with commitments of $125 million, remain substantially the same.
The
Credit Facility will be used for acquisitions and general corporate purposes.
Bank of
America, N.A. serves as Administrative Agent for the Credit
Facility.
Our
long-term borrowings require us to meet certain property level financial
covenants and corporate financial covenants, including prescribed leverage,
fixed charge coverage, minimum net worth, limitations on additional indebtedness
and limitations on dividend payouts. As of December 31, 2004, we were in
compliance with all property level and corporate financial
covenants.
At
December 31, 2003, we had $177.1 million combined outstanding borrowings with an
interest rate of 6.00% under our
previous $225 million senior secured credit facility and $50 million acquisition
credit facility (collectively, “Prior Credit Facility”).
Unsecured
Borrowings
$60
Million 7% Senior Unsecured Notes Offering
On
October 29, 2004, we completed a privately placed offering of an additional $60
million aggregate principal amount of 7% senior notes due 2014 (“the Additional
Notes”) at an issue price of 102.25% of the principal amount of the Additional
Notes (equal to a per annum yield to maturity of approximately 6.67%), resulting
in gross proceeds of approximately $61 million. The terms of the Additional
Notes offered were substantially identical to our existing $200 million
aggregate principal amount of 7% senior notes due 2014 issued in March 2004. The
Additional Notes were issued through a private placement to qualified
institutional buyers under Rule 144A under the Securities Act of 1933 (the
“Securities Act”) and in offshore transactions pursuant to Regulation S under
the Securities Act.
On
December 21, 2004, we filed a registration statement on Form S-4 under the
Securities Act with the SEC offering to exchange (the “Additional Notes Exchange
Offer”) up to $60 million aggregate principal amount of our registered 7% Senior
Notes due 2014 (the “Additional Exchange Notes”), for all of our outstanding
unregistered Additional Notes. The terms of the Additional Exchange Notes will
be identical to the terms of the Additional Exchange Notes, except that the
Additional Exchange Notes will be registered under the Securities Act and
therefore freely tradable (subject to certain conditions). The Additional
Exchange Notes will represent our unsecured senior obligations and will be
guaranteed by all of our subsidiaries with unconditional guarantees of payment
that rank equally with existing and future senior unsecured debt of such
subsidiaries and senior to existing and future subordinated debt of such
subsidiaries. There can be no assurance that we will experience full
participation in the Additional Notes Exchange Offer.
F-21
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
In the
event all the Additional Notes are not exchanged in the Additional Notes
Exchange Offer for Additional Exchange Notes, we will have two classes of 7%
senior notes outstanding.
$200
Million 7% Senior Unsecured Notes Offering
Effective
March 22, 2004, we closed a private offering of $200 million aggregate principal
amount of 7% senior unsecured notes due 2014 (the “Initial Notes”) and the
Credit Facility provided by Bank of America, N.A., Deutsche Bank AG, UBS Loan
Finance, LLC and GE Healthcare Financial Services. We used proceeds from the
offering of the Initial Notes to replace and terminate our Prior Credit
Facility.
On June
21, 2004, we filed a registration statement on Form S-4, as amended on July 26,
2003 and August 25, 2004, under the Securities Act with the SEC offering to
exchange (the “Exchange Offer”) up to $200 million aggregate principal amount of
our registered 7% Senior Notes due 2014 (the “Exchange Notes”), for all of our
outstanding unregistered Initial Notes. In September 2004, upon the expiration
of the Exchange Offer, $200 million aggregate principal amount of Exchange Notes
were exchanged for the unregistered Initial Notes. As a result of the Exchange
Offer, no Initial Notes remain outstanding. The terms of the Exchange Notes are
identical to the terms of the Initial Notes, except that the Exchange Notes are
registered under the Securities Act and therefore freely tradable (subject to
certain conditions). The Exchange Notes represent our unsecured senior
obligations and have been guaranteed by all of our subsidiaries with
unconditional guarantees of payment that rank equally with existing and future
senior unsecured debt of such subsidiaries and senior to existing and future
subordinated debt of such subsidiaries. Following the completion of the
Additional Notes Exchange Offer discussed above, the Additional Exchange Notes
will trade together with the Exchange Notes as a single class of
securities.
The
following is a summary of our long-term borrowings:
December
31,
|
|||||||
2004
|
2003
|
||||||
(In
thousands)
|
|||||||
Unsecured
borrowings: |
|||||||
6.95%
Notes due August 2007
|
$
|
100,000
|
$
|
100,000
|
|||
7%
Notes due August 2014
|
260,000
|
—
|
|||||
Premium
on 7% Notes due August 2014
|
1,338
|
—
|
|||||
Other
long-term borrowings
|
3,170
|
3,520
|
|||||
364,508
|
103,520
|
||||||
Secured
borrowings: |
|||||||
Revolving
lines of credit
|
15,000
|
177,074
|
|||||
15,000
|
177,074
|
||||||
$
|
379,508
|
$
|
280,594
|
Real
estate investments with a gross book value of approximately $206
million
are pledged as collateral for outstanding secured borrowings at December 31,
2004.
Assuming
none of our borrowing arrangements are refinanced, converted or prepaid prior to
maturity, required principal payments, excluding the premium on the 7% Notes,
for each of the five years following December 31, 2004 and the aggregate due
thereafter are set forth below:
(In
thousands)
|
||||
2005 |
$
|
370
|
||
2006 |
390
|
|||
2007 |
100,415
|
|||
2008 |
15,435
|
|||
2009 |
465
|
|||
Thereafter
|
261,095
|
|||
$
|
378,170
|
F-22
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
NOTE
9 - FINANCIAL INSTRUMENTS
At
December 31, 2004 and 2003, the carrying amounts and fair values of our
financial instruments were as follows:
2004
|
2003
|
||||||||||||
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||
Assets: |
(In
thousands)
|
||||||||||||
Cash
and cash equivalents
|
$
|
12,083
|
$
|
12,083
|
$
|
3,094
|
$
|
3,094
|
|||||
Mortgage
notes receivable - net
|
118,058
|
121,366
|
119,784
|
127,814
|
|||||||||
Other
investments
|
29,699
|
30,867
|
29,178
|
29,995
|
|||||||||
Derivative
instruments
|
-
|
-
|
5,537
|
5,537
|
|||||||||
Totals
|
$
|
159,840
|
$
|
164,316
|
$
|
157,593
|
$
|
166,440
|
|||||
Liabilities:
|
|||||||||||||
Revolving
lines of credit
|
$
|
15,000
|
$
|
15,000
|
$
|
177,074
|
$
|
177,074
|
|||||
6.95%
Notes
|
100,000
|
106,643
|
100,000
|
92,240
|
|||||||||
7.00%
Notes
|
260,000
|
272,939
|
-
|
-
|
|||||||||
Premium
on 7.00% Notes
|
1,338
|
990
|
-
|
-
|
|||||||||
Other
long-term borrowings
|
3,170
|
3,199
|
3,520
|
3,121
|
|||||||||
Totals
|
$
|
379,508
|
$
|
398,771
|
$
|
280,594
|
$
|
272,435
|
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). 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
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 receivable 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 notes receivable
and a marketable security held for resale. 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 marketable security is estimated
using a quoted market value.
|
· |
Revolving
lines of credit: The fair value of our borrowings under variable rate
agreements approximate their carrying
value.
|
· |
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.
|
From time
to time, we may utilize interest rate swaps and caps to fix interest rates on
variable rate debt and reduce certain exposures to interest rate fluctuations.
We do not use
derivatives for trading or speculative purposes. We have a policy of only
entering into contracts with major financial institutions based upon their
credit ratings and other factors. When viewed in conjunction with the underlying
and offsetting exposure that the derivatives are designed to hedge, we have not
sustained a material loss from those instruments nor do we anticipate any
material adverse effect on our net income or financial position in the future
from the use of derivatives.
F-23
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
To manage
interest rate risk, we may employ options, forwards, interest rate swaps, caps
and floors or a combination thereof depending on the underlying exposure. We may
employ swaps, forwards or purchased options to hedge qualifying forecasted
transactions. Gains and losses related to these transactions are deferred and
recognized in net income as interest expense in the same period or periods that
the underlying transaction occurs, expires or is otherwise terminated.
We
account for derivative financial instruments under the guidance of Financial
Accounting Standards Board SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, and
SFAS No. 138, Accounting
for Certain Instruments and Certain Hedging Activities, an Amendment of
Statement No. 133. The
Statements require us to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in Other Comprehensive Income until the hedge
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings.
In
September 2002, we entered into a 61-month, $200.0 million interest rate cap
with a strike of 3.50% that has been designated as a cash flow hedge. Under the
terms of the cap agreement, when LIBOR exceeds 3.50%, the counterparty would pay
us $200.0 million multiplied by the difference between LIBOR and 3.50% times the
number of days when LIBOR exceeds 3.50%. The
unrealized gain/loss in the fair value of cash flow hedges is reported on the
balance sheet with corresponding adjustments to accumulated Other Comprehensive
Income. On December 31, 2003, the derivative instrument was reported at its fair
value of $5.5 million. An adjustment of $1.6 million to Other Comprehensive
Income was made for the change in fair value of this cap during 2003. Over the
term of the interest rate cap, the $10.1 million cost will be amortized to
earnings based on the specific portion of the total cost attributed to each
monthly settlement period. In connection with the repayment and termination of
our Prior Credit Facility, we sold our $200 million interest rate cap on March
31, 2004. Net proceeds from the sale totaled approximately $3.5 million and
resulted in a loss of approximately $6.5 million, which was recorded in the
first quarter of 2004.
NOTE
10 - RETIREMENT ARRANGEMENTS
Our
company has a 401(k) Profit Sharing Plan covering all eligible employees. Under
this plan, employees are eligible to make contributions, and we, at our
discretion, may match contributions and make a profit sharing contribution.
We have a
Deferred Compensation Plan which is an unfunded plan under which we can award
units that result in participation in the dividends and future growth in the
value of our common stock. There are no outstanding units as of December 31,
2004.
Amounts
charged to operations with respect to these retirement arrangements totaled
approximately $52,800, $52,200 and $38,800 in 2004, 2003 and 2002,
respectively.
NOTE
11 - STOCKHOLDERS EQUITY AND STOCK-BASED COMPENSATION
Stockholders
Equity
4.0
Million Primary Share Common Stock Offering
On
December 15, 2004, we closed an underwritten public offering of 4,025,000 shares
of our common stock at a price of $11.96 per share, less underwriting discounts.
The offering included 525,000 shares sold in connection with the exercise of an
over-allotment option granted to the underwriters. We received approximately $46
million in net proceeds from the sale of the shares, after deducting
underwriting discounts and before estimated offering expenses.
Series
A Preferred Redemption
On April
30, 2004, we redeemed all of the outstanding 2.3 million shares of our Series A
Cumulative
Preferred Stock ("Series A preferred stock") at a
price of $25.57813, comprised of the $25 per share liquidation value and accrued
dividend. Under FASB-EITF Issue D-42, ‘‘The Effect on the Calculation of
Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,”
the repurchase of the Series A preferred stock resulted in a non-cash charge to
net income available to common stockholders of approximately $2.3 million.
In 1997,
we received gross proceeds of $57.5 million from the issuance of 2.3 million
shares of 9.25% Series A preferred stock at $25 per share. Dividends on the
Series A preferred stock were cumulative from the date of original issue and
were payable quarterly.
F-24
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Series
D Preferred Stock Offering
On
February 10, 2004, we closed on the sale of 4,739,500 shares of our 8.375%
Series D cumulative redeemable preferred stock (the “Series D preferred stock”)
at a price of $25 per share. The Series D preferred stock is listed on the NYSE
under the symbol “OHI PrD.” Dividends on the Series D preferred stock are
cumulative from the date of original issue and are payable quarterly. At
December 31, 2004, the aggregate liquidation preference of the Series D
preferred stock was $118.5 million. (See Note 13 - Dividends).
Series
C Preferred Stock Redemption, Conversion and Repurchase
On July
14, 2000, Explorer Holdings, L.P., (“Explorer”), a private equity investor,
completed an investment of $100.0 million in our company in exchange for
1,000,000 shares of our Series C convertible preferred stock (the “Series C
preferred stock”). Shares of the Series C preferred stock were convertible into
common stock at any time by the holder at an initial conversion price of $6.25
per share of common stock. The shares of Series C preferred stock were entitled
to receive dividends at the greater of 10% per annum or the dividend payable on
shares of common stock, with the Series C preferred stock participating on an
"as converted" basis. Dividends on the Series C preferred stock were cumulative
from the date of original issue and are payable quarterly.
On
February 5, 2004, we announced that Explorer, our then largest stockholder,
granted us the option to repurchase up to 700,000 shares of our Series C
preferred stock which were convertible into our common shares held by Explorer
at a negotiated purchase price of $145.92 per share of Series C preferred stock
(or $9.12 per common share on an as converted basis). Explorer further agreed to
convert any remaining Series C preferred stock into our common
stock.
We used
approximately $102.1 million of the net proceeds from the Series D preferred
stock offering to repurchase 700,000 shares of our Series C preferred stock from
Explorer. In connection with the closing of the repurchase, Explorer converted
its remaining 348,420 shares of Series C preferred stock into approximately 5.6
million shares of our common stock. Following the repurchase and conversion,
Explorer held approximately 18.1 million of our common shares.
The
combined repurchase and conversion of the Series C preferred stock reduced our
preferred dividend requirements, increased our market capitalization and
facilitated future financings by simplifying our capital structure. Under
FASB-EITF Issue D-42, ‘‘The Effect on the Calculation of Earnings per Share for
the Redemption or Induced Conversion of Preferred Stock,” the repurchase of the
Series C preferred stock resulted in a non-cash charge to net income available
to common stockholders of approximately $38.7 million.
18.1
Million Secondary and 2.7 Million Share Primary Offering of Our Common
Stock
On March
8, 2004, we announced the closing of an underwritten public offering of 18.1
million shares of our common stock at a price of $9.85 per share owned by
Explorer (the “Secondary Offering”). As a result of the Secondary Offering,
Explorer no longer owned any shares of our common stock. We did not receive any
proceeds from the sale of the shares sold by Explorer.
In
connection with the Secondary Offering, we issued approximately 2.7 million
additional shares of our common stock at a price of $9.85 per share, less
underwriting discounts (the “Over-Allotment Offering”), to cover over-allotments
in connection with the Secondary Offering. We received net proceeds of
approximately $23 million from the Over-Allotment Offering.
Series
B Cumulative Preferred Stock
In 1998,
we received gross proceeds of $50.0 million from the issuance of 2 million
shares of 8.625% Series B Cumulative Preferred Stock ("Series B preferred
stock") at $25 per share. Dividends on the Series B preferred stock are
cumulative from the date of original issue and are payable quarterly. At
December 31, 2004, the aggregate liquidation preference of Series B preferred
stock issued was $50 million (see Note 13 - Dividends and Note 18 - Subsequent
Events).
February
2002 Rights Offering and Concurrent Private Placement
In 2002,
we completed a registered rights offering and simultaneous private placement to
Explorer. Stockholders exercised subscription rights to purchase a total of 6.4
million shares of common stock at a subscription price of $2.92 per share,
raising gross proceeds of $18.7 million. In the private placement with Explorer,
we issued a total of 10.7 million shares of common stock at a price of $2.92 per
share, raising gross proceeds of $31.3 million. Proceeds from the rights
offering and private placement were used to repay outstanding indebtedness and
for working capital and general corporate purposes.
F-25
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Stock
Options
We
account for stock options using the intrinsic value method as defined by
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Under
the terms of the 2000 Stock Incentive Plan (the “2000 Plan”), we reserved
3,500,000 shares of common stock. The exercise price per share of an option
under the 2000 Plan cannot be reduced after the date of grant, nor can an option
be cancelled in exchange for an option with a lower exercise price per share.
The 2000 Plan provides for non-employee directors to receive options that vest
over three years while other grants vest over the period required in the
agreement applicable to the individual recipient. Directors, officers and
employees and consultants are eligible to participate in the 2000 Plan. At
December 31, 2004, there were outstanding options for 570,183 shares of common
stock granted to 17 eligible
participants under the 2000 Plan. Additionally, 355,655 shares of restricted
stock have been granted under the provisions of the 2000 Plan, and as of
December 31, 2004, there were no shares of unvested restricted stock outstanding
under the 2000 Plan.
At
December 31, 2004, under the 2000 Plan, there were options for 102,641 shares of
common stock currently exercisable with a weighted-average exercise price of
$8.11, with exercise prices ranging from $2.32 to $37.20. There were 559,960
shares available for future grants as of December 31, 2004. A breakdown of the
options outstanding under the 2000 Plan as of December 31, 2004, by price range,
is presented below:
Option
Price
Range
|
Number
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Life (Years)
|
Number
Exercisable
|
Weighted
Average Price on Options Exercisable
|
|||||||||||
$2.32
-$3.00
|
326,204 |
$ |
2.64 |
6.63 |
27,189 |
$ |
2.35 |
|||||||||
$3.01
-$3.81
|
194,981 |
$ |
3.21 |
6.93 |
38,541 |
$ |
3.28 |
|||||||||
$6.02
-$9.33
|
29,997 |
$ |
6.65 |
7.21 |
17,910 |
$ |
6.15 |
|||||||||
$20.25
-$37.20
|
19,001 |
$ |
28.03 |
2.48 |
19,001 |
$ |
28.03 |
On April
20, 2004, our Board of Directors approved the 2004 Stock Incentive Plan (the
“2004 Plan”), which was subsequently approved by our stockholders at our annual
meeting held on June 3, 2004. Under the terms of the 2004 Plan, we reserved
3,000,000 shares of common stock. The exercise price per share of an option
under the 2004 Plan cannot be less than fair market value (as defined in the
2004 Plan) on the date of grant. The exercise price per share of an option under
the 2004 Plan cannot be reduced after the date of grant, nor can an option be
cancelled in exchange for an option with a lower exercise price per share.
Directors, officers, employees and consultants are eligible to participate in
the 2004 Plan. As of December 31, 2004, a total of 322,060 shares of restricted
stock and 317,500 restricted stock units have been granted under the 2004 Plan,
and as of December 31, 2004, there were no outstanding options to purchase
shares of common stock under the 2004 Plan.
F-26
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
At
December 31, 2004, options outstanding (570,183) have a weighted-average
exercise price of $3.891, with exercise prices ranging from $2.32 to $37.20. For
the years ended December 31, 2004, 2003, and 2002, 9,000, 9,000 and 29,000
options were granted at a weighted average price per share of $9.33, $3.74 and
$6.02, respectively. The following is a summary of option activity under the
2000 Plan:
Stock
Options
|
Number
of
Shares
|
Exercise
Price
|
Weighted-
Average
Price
|
|||||||
Outstanding
at December 31, 2001 |
2,399,231
|
$$
|
1.590 - 37.205
|
$
|
3.413
|
|||||
Granted
during 2002
|
29,000
|
6.020 - 6.020
|
6.020
|
|||||||
Cancelled
|
(33,730
|
)
|
19.866 - 25.038
|
22.836
|
||||||
Outstanding
at December 31, 2002 |
2,394,501
|
1.590 - 37.205
|
3.150
|
|||||||
Granted
during 2003
|
9,000
|
3.740 - 3.740
|
3.740
|
|||||||
Exercised
|
(120,871
|
)
|
1.590 - 6.125
|
2.448
|
||||||
Outstanding
at December 31, 2003 |
2,282,630
|
2.320 - 37.205
|
3.202
|
|||||||
Granted
during 2004 |
9,000
|
9.330 - 9.330
|
9.330
|
|||||||
Exercised |
(1,713,442
|
) |
2.320 - 7.750
|
2.988
|
||||||
Cancelled
|
(8,005
|
)
|
3.740 - 9.330
|
6.914
|
||||||
Outstanding
at December 31, 2004
|
570,183
|
$$
|
2.320 - 37.205
|
$
|
3.891
|
Restricted
Stock
As of
September 10, 2004, we entered into restricted stock agreements with four
executive officers under the 2004 Plan. A total of 317,500 shares of restricted
stock were granted, which equated to approximately $3.3 million of deferred
compensation. The shares vest thirty-three and one-third percent (33 1/3%) on
each of January 1, 2005, January 1, 2006 and January 1, 2007 so long as the
executive officer remains employed on the vesting date, with vesting
accelerating upon a qualifying termination of employment or upon the occurrence
of a change of control (as defined in the Restricted Stock Agreements). As a
result of the grant, we recorded a $1.1 million non-cash compensation expense
for the year ended December 31, 2004. For the year ended December 31, 2004, we
issued 912 shares of restricted common stock to each non-employee director under
the 2004 Plan for a total of 4,560 shares. These shares represent a quarterly
payment of the portion of the directors’ annual retainer that is payable in
shares of our common stock.
Performance
Restricted Stock Units
As of
September 10, 2004, we entered into performance restricted stock unit agreements
with our four executive officers under the 2004 Plan. A total of 317,500
restricted stock units were issued under the 2004 Plan and will fully vest into
shares of common stock when our company attains $0.30 per share of adjusted
funds from operations (as defined in the Restricted Stock Unit Agreements) for
two (2) consecutive quarters, with vesting accelerating upon a qualifying
termination of employment or upon the occurrence of a change of control (as
defined in the Restricted Stock Unit Agreements). The issuance of restricted
stock units had no impact on our calculation of diluted earnings per common
share at this time; however, under our current method of accounting for
stock-based compensation, the expense related to the restricted stock units will
be recognized when it becomes probable that the vesting requirements will be
met.
NOTE
12 - RELATED PARTY TRANSACTIONS
Explorer
Holdings, L.P.
On
February 5, 2004, we entered into a Repurchase and Conversion Agreement with our
then largest stockholder, Explorer, pursuant to which Explorer granted us an
option to repurchase up to 700,000 shares of our Series C preferred stock at a
price of $145.92 per share (or $9.12 per share of common stock on an
as-converted basis), on the condition that we purchase a minimum of $100 million
on or prior to February 27, 2004. Explorer also agreed to convert all of its
remaining shares of Series C preferred stock into shares of our common stock
upon exercise of the repurchase option.
On
February 10, 2004, we sold in a registered direct placement 4,739,500 shares of
our Series D preferred stock at a price of $25 per share to a number of
institutional investors and other purchasers for net proceeds, after fees and
expenses, of approximately $114.9 million. Following the closing of the Series D
preferred stock offering, we used approximately $102.1 million of the net
proceeds to repurchase 700,000 shares of our Series C preferred stock from
Explorer pursuant to the repurchase option. In connection with this transaction,
Explorer converted its remaining 348,420 shares of Series C preferred stock into
5,574,720 shares of our common stock. The balance of the net proceeds from the
offering was used to redeem approximately 600,000 shares of our Series A
preferred stock.
F-27
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
As a
result of the Series D preferred stock offering, the application of the proceeds
received from the offering to fund the exercise of our repurchase option, and
the conversion of the remaining Series C preferred stock into shares of our
common stock:
· |
No
shares of Series C preferred stock were outstanding on July 9,
2004;
|
· |
4,739,500
shares of our Series D preferred stock, with an aggregate liquidation
preference of $118,487,500, have been issued;
and
|
· |
Explorer
held 18,118,246 shares of our common stock, representing approximately
41.5% of our outstanding common stock.
|
On
February 12, 2004, we registered Explorer’s 18,118,246 shares of common stock
with the SEC. Explorer sold all of these registered shares pursuant to the
registration statement.
In
connection with our repurchase of a portion of Explorer’s Series C preferred
stock, our results of operations for the first quarter of 2004 included a
non-recurring reduction in net income attributable to common stockholders of
approximately $38.7 million. This amount reflects the sum of: (i) the difference
between the deemed redemption price of $145.92 per share of our Series C
preferred stock and the carrying amount of $100 per share of our Series C
preferred stock multiplied by the number of shares of the Series C preferred
stock repurchased upon exercise of our option to repurchase shares of Series C
preferred stock; and (ii) the cost associated with the original issuance of our
Series C preferred stock that was previously classified as additional paid-in
capital, pro-rated for the repurchase.
Omega
Worldwide
In
December 2003, we sold our investment in the Principal
Healthcare Finance Trust, an Australian Unit Trust, which owns 47 nursing home
facilities and 446 assisted living units in Australia and New
Zealand,
realizing proceeds of approximately $1.6 million, net of closing costs,
resulting in a gain of approximately $0.1 million.
During
2002, we sold our investment in Omega
Worldwide, Inc.
(“Worldwide”),
a company
which provides asset management services and management advisory services, as
well as equity and debt capital to the healthcare industry, particularly
residential healthcare services to the elderly. Pursuant
to a tender offer by Four Seasons Health Care Limited (“Four Seasons”) for all
of the outstanding shares of common stock of Worldwide, we sold our investment,
which consisted of 1.2 million shares of common stock and 260,000 shares of
preferred stock, to Four Seasons for cash proceeds of approximately $7.4 million
(including $3.5 million for preferred stock liquidation preference and accrued
preferred dividends). In addition, we sold our investment in
Principal
Healthcare Finance Limited ("Principal"), an Isle of Jersey company, whose
purpose is to invest in nursing homes and long-term care facilities in the
United Kingdom, which
consisted of 990,000 ordinary shares and warrants to purchase 185,033 ordinary
shares, to an affiliate of Four Seasons for cash proceeds of $2.8 million. Both
transactions were completed in September 2002 and provided aggregate cash
proceeds of $10.2 million. We realized a gain from the sale of our investments
in Worldwide and Principal of $2.2 million which was recorded in gain (loss) on
assets sold in our audited Consolidated Financial Statements. We no longer own
any interest in Worldwide or Principal.
NOTE
13 - 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 Credit
Facility has certain financial covenants which limit the distribution of
dividends paid during a fiscal quarter to no more than 95% of our immediately
prior fiscal quarter’s FFO as defined in the loan agreement governing the Credit
Facility (the “Loan Agreement”), unless a greater distribution is required to
maintain REIT status. The Loan 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; and
(vi) non-cash impairment charges.
F-28
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
On
February 1, 2001, we announced the suspension of all common and preferred
dividends.
In July
2003, our Board of Directors declared a full catch-up of cumulative, unpaid
dividends for all classes of preferred stock, which was paid on August 15, 2003
to preferred stockholders of record on August 5, 2003. In addition, our Board of
Directors declared the regular quarterly dividend for all classes of preferred
stock that was also paid on August 15, 2003 to preferred stockholders of record
on August 5, 2003. Series A
and Series B preferred stockholders of record on August 5, 2003 were paid
dividends in the amount of approximately $6.36 and $5.93 per preferred share,
respectively, on August 15, 2003. Our Series C preferred stockholder was paid a
dividend of approximately $27.31 per Series C preferred share on August 15,
2003.
In
September 2003, our Board of Directors reinstated our common stock dividend,
which was paid on November 17, 2003 to common stockholders of record on October
31, 2003 in the amount of $0.15 per common share. Total common stock cash
dividends totaled approximately $5.6 million for the twelve months ended
December 31, 2003.
In
addition, our Board of Directors declared regular quarterly dividends for all
classes of preferred stock, which was paid on November 17, 2003 to preferred
stockholders of record on October 31, 2003. Series A and Series B preferred
stockholders of record on October 31, 2003 were paid dividends in the amount of
approximately $0.578 and $0.539 per preferred share, respectively, on November
17, 2003. Our Series C preferred stockholder was paid a dividend of $2.50 per
Series C preferred share on November 17, 2003. Regular quarterly dividends
represented dividends for the period August 1, 2003 through October 31, 2003.
Total preferred cash dividend payments for all classes of preferred stock
totaled approximately $59.9 million for the twelve months ended December 31,
2003.
In March
2004, our Board of Directors authorized the redemption of all outstanding 2.3
million shares of our Series A preferred stock. The Series A preferred stock was
redeemed on April 30, 2004 for $25 per share, plus $0.57813 per share in accrued
and unpaid dividends through the redemption date, for an aggregate redemption
price of $25.57813 per share.
On March
29, 2004, our Board of Directors declared regular quarterly dividends for all
classes of preferred stock, payable on May 17, 2004 to preferred stockholders of
record on April 30, 2004. These holders of the Series B preferred stock and the
Series D preferred stock received dividends in the amount of $0.53906 and
$0.47109, per preferred share, respectively, on May 17, 2004. Regular quarterly
preferred dividends represent dividends for the period February 1, 2004 through
April 30, 2004 for the Series B preferred stock and February 10, 2004 through
April 30, 2004 for the Series D preferred stock. On April 20, 2004, our Board of
Directors announced a common stock dividend of $0.18 per share, which is a $0.01
per share, or 5.9% increase over the previous quarter’s dividend. The common
stock dividend was paid May 17, 2004 to common stockholders of record on April
30, 2004.
On July
20, 2004, our Board of Directors announced a common stock dividend of $0.18 per
share. The common stock dividend was paid August 16, 2004 to common stockholders
of record on July 30, 2004. In addition, our Board of Directors also declared
regular quarterly dividends for all classes of preferred stock to preferred
stockholders of record on July 30, 2004. These holders of the Series B preferred
stock and the Series D preferred stock were paid dividends in the amount of
$0.53906 and $0.52344, per preferred share, respectively, on August 16, 2004.
Regular quarterly preferred dividends represented dividends for the period May
1, 2004 through July 31, 2004 for both the Series B preferred stock and the
Series D preferred stock.
On
October 19, 2004, our Board of Directors announced a common stock dividend of
$0.19 per share, an increase of $0.01 per common share. The common stock
dividend was paid November 15, 2004 to common stockholders of record on October
29, 2004. In addition, our Board of Directors also declared regular quarterly
dividends for all classes of preferred stock to preferred stockholders of record
on October 29, 2004. These holders of the Series B preferred stock and the
Series D preferred stock were paid dividends in the amount of $0.53906 and
$0.52344, per preferred share, respectively, on November 15, 2004. Regular
quarterly preferred dividends represent dividends for the period August 1, 2004
through October 31, 2004 for the Series B and Series D preferred
stock.
F-29
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Per share
distributions by our company were characterized in the following manner for
income tax purposes:
2004
|
2003
|
2002
|
||||||||
Common
|
||||||||||
Ordinary
income |
$
|
—
|
$
|
—
|
$
|
—
|
||||
Return
of capital |
0.720
|
0.150
|
—
|
|||||||
Long-term
capital gain
|
—
|
—
|
—
|
|||||||
Total
dividends paid
|
$
|
0.720
|
$
|
0.150
|
$
|
—
|
||||
Series
A Preferred
|
||||||||||
Ordinary
income |
$
|
0.901
|
$
|
1.064
|
$
|
—
|
||||
Return
of capital |
0.255
|
5.873
|
—
|
|||||||
Long-term
capital gain
|
—
|
—
|
—
|
|||||||
Total
dividends paid
|
$
|
1.156
|
$
|
6.937
|
$
|
—
|
||||
Series
B Preferred
|
||||||||||
Ordinary
income |
$
|
1.681
|
$
|
0.992
|
$
|
—
|
||||
Return
of capital |
0.475
|
5.477
|
—
|
|||||||
Long-term
capital gain
|
—
|
—
|
—
|
|||||||
Total
dividends paid
|
$
|
2.156
|
$
|
6.469
|
$
|
—
|
||||
Series
C Preferred
|
||||||||||
Ordinary
income |
$
|
2.120
|
$
|
4.572
|
$
|
—
|
||||
Return
of capital |
0.600
|
25.235
|
—
|
|||||||
Long-term
capital gain
|
—
|
—
|
—
|
|||||||
Total
dividends paid
|
$
|
2.720
|
$
|
29.807
|
$
|
—
|
||||
Series
D Preferred
|
||||||||||
Ordinary
income
|
$
|
1.184
|
$
|
—
|
$
|
—
|
||||
Return
of capital
|
0.334
|
—
|
—
|
|||||||
Long-term
capital gain
|
—
|
—
|
—
|
|||||||
Total
dividends paid
|
$
|
1.518
|
$
|
—
|
$
|
—
|
On
January 18, 2005, our Board of Directors announced a common stock dividend of
$0.20 per share, an increase of $0.01 per common share. The common stock
dividend was paid February, 2005 to common stockholders of record on January 31,
2005. Also on January 18, 2005, our Board of Directors declared regular
quarterly dividends for all classes of preferred stock, which were paid
February, 2005 to preferred stockholders of record on January 31, 2005. Holders
of record of our 8.625% Series B cumulative preferred stock (the “Series B
preferred stock”) and 8.375% Series D cumulative redeemable preferred stock (the
“Series D preferred stock”) on January 31, 2005 were paid dividends in the
amount of approximately $0.53906 and
$0.52344, per preferred share, respectively, on February 2005. The liquidation
preference for each of our Series B and D preferred stock is $25.00. Regular
quarterly preferred dividends represent dividends for the period November 1,
2004 through January 31, 2005 for the Series B and Series D preferred
stock.
NOTE
14 - 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.
F-30
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
In 2000,
we filed suit against a title company (later adding a law firm as a defendant),
seeking damages based on claims of breach of contract and negligence, among
other things, as a result of the alleged failure to file certain Uniform
Commercial Code (“UCC”) financing statements in our favor. We filed a subsequent
suit seeking recovery under title insurance policies written by the title
company. The defendants denied the allegations made in the lawsuits. In
settlement of our claims against the defendants, we agreed in the first quarter
of 2003 to accept a lump sum cash payment of $3.2 million. The cash proceeds
were offset by related expenses incurred of $1.0 million resulting in a net gain
of $2.2 million.
F-31
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
NOTE
15 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The
following summarizes quarterly results of operations for the years ended
December 31, 2004 and 2003.
March
31
|
June
30
|
September
30
|
December
31
|
||||||||||
(In
thousands, except per share amounts)
|
|||||||||||||
2004 |
|||||||||||||
Revenues |
$
|
21,260
|
$
|
22,345
|
$
|
22,607
|
$
|
24,239
|
|||||
(Loss)
income from continuing operations |
(9,934
|
) |
6,083
|
8,652
|
8,666
|
||||||||
(Loss)
gain from discontinued operations |
(364
|
) |
(146
|
) |
(10
|
) |
3,791
|
||||||
Net
(loss) income |
(10,298
|
) |
5,937
|
8,642
|
12,457
|
||||||||
Net
(loss) income available to common |
(53,728
|
) |
(376
|
) |
5,083
|
8,898
|
|||||||
(Loss)
income from continuing operations per share: |
|||||||||||||
Basic
(loss) income from continuing operations
|
$
|
(1.29
|
)
|
$
|
(0.01
|
)
|
$
|
0.11
|
$
|
0.11
|
|||
Diluted
(loss) income from continuing operations
|
$
|
(1.29
|
)
|
$
|
(0.01
|
)
|
$
|
0.11
|
$
|
0.11
|
|||
Net
(loss) income available to common per share: |
|||||||||||||
Basic
net (loss) income
|
$
|
(1.30
|
)
|
$
|
(0.01
|
)
|
$
|
0.11
|
$
|
0.19
|
|||
Diluted
net (loss) income
|
$
|
(1.30
|
)
|
$
|
(0.01
|
)
|
$
|
0.11
|
$
|
0.19
|
|||
Cash
dividends paid on common stock |
$
|
0.17
|
$
|
0.18
|
$
|
0.18
|
$
|
0.19
|
|||||
2003 |
|||||||||||||
Revenues |
$
|
23,032
|
21,395
|
$
|
21,617
|
$
|
21,690
|
||||||
Income
from continuing operations |
10,377
|
6,765
|
7,768
|
7,252
|
|||||||||
(Loss)
gain from discontinued operations |
(4,393
|
) |
64
|
(2,735
|
) |
(2,068
|
) |
||||||
Net
income |
5,984
|
6,829
|
5,033
|
5,184
|
|||||||||
Net
income available to common |
956
|
1,800
|
4
|
155
|
|||||||||
Income
from continuing operations per share: |
|||||||||||||
Basic
income from continuing operations
|
$
|
0.14
|
$
|
0.05
|
$
|
0.07
|
$
|
0.06
|
|||||
Diluted
income from continuing operations
|
$
|
0.14
|
$
|
0.05
|
$
|
0.07
|
$
|
0.06
|
|||||
Net
income available to common per share: |
|||||||||||||
Basic
net income
|
$
|
0.03
|
$
|
0.05
|
$
|
—
|
$
|
—
|
|||||
Diluted
net income
|
$
|
0.03
|
$
|
0.05
|
$
|
—
|
$
|
—
|
|||||
Cash
dividends paid on common stock |
$
|
—
|
$
|
—
|
$
|
—
|
$
|
0.15
|
Note:
|
2004
- During the three-month period ended March 31, 2004, we
completed a repurchase and conversion of the Series C preferred stock
which resulted in a non-cash charge to net income available to common
stockholders of approximately $38.7 million In addition, we
recognized $19.1 million of refinancing-related charges. In addition, we
sold our $200 million interest rate cap in the first quarter, realizing
net proceeds of approximately $3.5 million, resulting in an accounting
loss of $6.5 million. During the three-month period ended June 30, 2004,
we
redeemed all of the outstanding 2.3 million shares of our Series A
preferred
stock.
As a result, the repurchase of the Series A preferred stock resulted in a
non-cash charge to net income available to common stockholders of
approximately $2.3 million. In addition, we
recognized a $3.0 million charge associated with professional liability
claims made against our former owned and operated facilities. During the
three-month period ended September 30, 2004, we recognized a $0.3 million
expense associated with restricted stock awards issued during this period.
During the three-month period ended December 31, 2004, we recognized a
$1.1 million expense associated with restricted stock awards and we sold
our remaining three closed facilities, realizing proceeds of approximately
$5.5 million, net of closing costs and other expenses, resulting in an
accounting gain of approximately $3.8
million.
|
Note:
|
2003
- During the three-month period ended March 31, 2003, we recognized
provisions for impairment of $4.6 million. During the three-month period
ended June 30, 2003, we recognized a $1.3 million gain on the sale of an
asset held for sale and a non-healthcare investment. During the
three-month period ended September 30, 2003, we recognized provisions for
impairment of $4.3 million and a $91 thousand gain on the sale of two
properties held for sale. During the three-month period ended December 31,
2003, we recognized a $0.8 million loss on the sale of an asset held for
sale and a non-healthcare investment.
|
F-32
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
NOTE
16 - EARNINGS PER SHARE
The
following tables set forth the computation of basic and diluted earnings per
share:
Year
Ended December 31,
|
||||||||||
2004
|
2003
|
2002
|
||||||||
(In
thousands, except per share amounts)
|
||||||||||
Numerator: |
||||||||||
Income
(loss) from continuing operations
|
$
|
13,467
|
$
|
32,162
|
$
|
1,477
|
||||
Preferred
stock dividends
|
(15,807
|
) |
(20,115
|
) |
(20,115
|
) |
||||
Series
C preferred stock conversion charges
|
(41,054
|
)
|
-
|
-
|
||||||
Numerator
for (loss) income available to common from continuing operations - basic
and diluted
|
(43,394
|
)
|
12,047
|
(18,638
|
)
|
|||||
Gain
(loss) from discontinued operations
|
3,271
|
(9,132
|
)
|
(16,123
|
)
|
|||||
Numerator
for net (loss) income available to common per share - basic and
diluted
|
$
|
(40,123
|
)
|
$
|
2,915
|
$
|
(34,761
|
)
|
||
Denominator:
|
||||||||||
Denominator
for net income (loss) per share - basic
|
45,472
|
37,189
|
34,739
|
|||||||
Effect
of dilutive securities:
|
||||||||||
Stock
option incremental shares
|
-
|
965
|
-
|
|||||||
Denominator
for net income (loss) per share - diluted
|
45,472
|
38,154
|
34,739
|
Earnings
per share - basic: |
||||||||||
(Loss)
income available to common from continuing operations
|
$
|
(0.95
|
)
|
$
|
0.32
|
$
|
(0.54
|
)
|
||
Income
(loss) from discontinued operations
|
0.07
|
(0.24
|
) |
(0.46
|
) |
|||||
Net
(loss) income per share - basic
|
$
|
(0.88
|
)
|
$
|
0.08
|
$
|
(1.00
|
)
|
||
Earnings
per share - diluted:
|
||||||||||
(Loss)
income available to common from continuing operations
|
$
|
(0.95
|
)
|
$
|
0.32
|
$
|
(0.54
|
)
|
||
Income
(loss) from discontinued operations
|
0.07
|
(0.24
|
) |
(0.46
|
) |
|||||
Net
(loss) income per share - diluted
|
$
|
(0.88
|
)
|
$
|
0.08
|
$
|
(1.00
|
)
|
The
effects of converting the Series C preferred stock in 2003 and 2002 have been
excluded as all such effects are anti-dilutive. For the years ended December 31,
2004 and 2002 respectively, there were 683,399 and 17,837,456 stock options and
restricted stock shares, excluded as all such effects were
anti-dilutive.
F-33
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
NOTE
17 - DISCONTINUED OPERATIONS
The
implementation of SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, as of
January 1, 2002, resulted in the presentation of the net operating results on
facilities sold during 2004 as income from discontinued operations for all
periods presented. We incurred a net gain of $3.3 million from discontinued
operations in 2004. We incurred a net loss of $9.1 million and $16.1 million for
2003 and 2002, respectively, in the accompanying consolidated statements of
operations.
The
following table summarizes the results of operations of the sold and held for
sale facilities for the years ended December 31, 2004, 2003 and 2002,
respectively.
Year
Ended December 31,
|
|||||||||||||
2004
|
2003
|
2002
|
|||||||||||
(In
thousands)
|
|||||||||||||
Revenues |
|||||||||||||
Rental
income
|
$
|
—
|
$
|
1,412
|
$ 4,588
|
||||||||
Mortgage
interest income
|
—
|
92
|
603
|
||||||||||
Nursing
home revenues of owned and operated assets
|
—
|
206
|
2,073
|
||||||||||
Subtotal
Revenues
|
—
|
1,710
|
7,264
|
||||||||||
Expenses |
|||||||||||||
Nursing
home expenses of owned and operated assets
|
—
|
574
|
3,981
|
||||||||||
Depreciation
and amortization
|
38
|
634
|
1,115
|
||||||||||
Provisions
for impairment
|
—
|
8,820
|
13,388
|
||||||||||
Allowance
for uncollectible loans
|
—
|
—
|
4,903
|
||||||||||
Subtotal
Expenses
|
38
|
10,028
|
23,387
|
||||||||||
Loss
before gain (loss) on sale of assets
|
(38
|
)
|
(8,318
|
)
|
(16,123)
|
||||||||
Gain
(loss) on assets sold - net
|
3,309
|
(814
|
)
|
—
|
|||||||||
Gain
(loss) from discontinued operations
|
$
|
3,271
|
$
|
(9,132
|
)
|
$ (16,123)
|
F-34
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
NOTE
18 - SUBSEQUENT EVENTS
Essex
Healthcare Corporation
On
January 13, 2005, we completed approximately $58 million of net new investments
as a result of the exercise by American Health Care Centers (“American”) of a
put agreement with Omega for the purchase by Omega of 13 SNFs. In October 2004,
American and its affiliated companies paid one thousand dollars to us and agreed
to eliminate the right to prepay the existing Omega mortgage in the event the
option was not exercised. The gross purchase price of approximately $79 million
was offset by approximately $7 million paid by us to American in 1997 to obtain
an option to acquire the properties and approximately $14 million in mortgage
loans we had outstanding with American and its affiliates, which encumbered 6 of
the 13 properties.
The 13
properties, all located in Ohio, will continue to be leased to Essex Healthcare
Corporation. The master lease and related agreements have approximately six
years remaining and in 2005 annual payments are approximately $9 million with
annual escalators.
Mariner
Health Care, Inc.
On
December 10, 2004, Mariner notified us that on February 1, 2005, it intended to:
(i) exercise its right to prepay in full the aggregate principal amount owed to
us under a promissory note secured by a mortgage; (ii) pay a premium of 3% of
the outstanding principal balance; (iii) pay all accrued and unpaid interest;
and (iv) pursuant to certain provisions contained in the promissory note, pay us
an amendment fee. On February 1, 2005, Mariner paid us approximately $63 million
in reference to this transaction.
Dividends
On
January 18, 2005, our Board of Directors announced a common stock dividend of
$0.20 per share, an increase of $0.01 per common share. The common stock
dividend was paid February 15, 2005 to common stockholders of record on January
31, 2005. Also on January 18, 2005, our Board of Directors declared regular
quarterly dividends for all classes of preferred stock which were paid February
15, 2005 to preferred stockholders of record on January 31, 2005. Holders of
record of our 8.625% Series B cumulative preferred stock (the “Series B
preferred stock”) and 8.375% Series D cumulative redeemable preferred stock (the
“Series D preferred stock”) on January 31, 2005 were paid dividends in the
amount of approximately $0.53906 and $0.52344, per preferred share,
respectively, on February 15, 2005. The liquidation preference for each of our
Series B and D preferred stock is $25.00. Regular quarterly preferred dividends
represent dividends for the period November 1, 2004 through January 31, 2005 for
the Series B and Series D preferred stock.
Additional
Notes Exchange Offer
On
February 11, 2005, we commenced the Additional Notes Exchange Offer, which
currently expires on March 18, 2005. The terms of the Additional Exchange Notes
will be identical to the terms of the Additional Notes, except that the
Additional Exchange Notes will be registered under the Securities Act and
therefore freely tradable (subject to certain conditions). The Additional
Exchange Notes will represent our unsecured senior obligations and will be
guaranteed by all of our subsidiaries with unconditional guarantees of payment
that rank equally with existing and future senior unsecured debt of such
subsidiaries and senior to existing and future subordinated debt of such
subsidiaries. There can be no assurance that we will experience full
participation in the Additional Notes Exchange Offer. In the event all the
Additional Notes are not exchanged in the Additional Notes Exchange Offer for
Additional Exchange Notes, we will have two classes of 7% senior notes
outstanding. Following the completion of the Additional Notes Exchange Offer,
the Additional Exchange Notes will trade together with the previously issued
Exchange Notes as a single class of securities.
F-35
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
SCHEDULE
III REAL ESTATE AND ACCUMULATED DEPRECIATION
|
||||||||||||||||||||||||||||
OMEGA
HEALTHCARE INVESTORS, INC.
|
||||||||||||||||||||||||||||
December
31, 2004
|
||||||||||||||||||||||||||||
(3)
|
||||||||||||||||||||||||||||
Gross
Amount at
|
||||||||||||||||||||||||||||
Which
Carried at
|
||||||||||||||||||||||||||||
Initial
Cost to
|
Cost
Capitalized
|
Close
of Period
|
Life
on Which
|
|||||||||||||||||||||||||
Company
|
Subsequent
to
|
Buildings
|
Depreciation
|
|||||||||||||||||||||||||
Buildings
|
Acquisition
|
and
Land
|
(4)
|
in
Latest
|
||||||||||||||||||||||||
and
Land
|
Improvements
|
Accumulated
|
Date
of
|
Date
|
Income
Statements
|
|||||||||||||||||||||||
Description
(1)
|
Encumbrances
|
Improvements
|
Improvements
|
Impairment
|
Total
|
Depreciation
|
Renovation
|
Acquired
|
is
Computed
|
|||||||||||||||||||
Sun
Healthcare Group, Inc.:
|
||||||||||||||||||||||||||||
Alabama
(LTC)………………………………..
|
(2 |
) |
$ |
23,584,956 |
$ |
- |
-
|
$ |
23,584,956 |
$ |
5,269,333 |
1997 |
33
years |
|||||||||||||||
California
(LTC, RH)……………………………….
|
(2 |
) |
43,925,794
|
74,958
|
-
|
44,000,752
|
9,031,858
|
1964 |
1997 |
33
years |
||||||||||||||||||
Idaho
(LTC)…………………………….
|
(2 |
) |
600,000
|
-
|
-
|
600,000
|
135,478
|
1997 |
33
years |
|||||||||||||||||||
Massachusetts
(LTC)………………………….
|
(2 |
) |
8,300,000
|
-
|
-
|
8,300,000
|
1,874,116
|
1997 |
33
years |
|||||||||||||||||||
North
Carolina (LTC)………………………….
|
(2 |
) |
22,652,488
|
56,951
|
-
|
22,709,439
|
6,989,439
|
1982-1991 |
1994-1997 |
30
years to 33 years |
||||||||||||||||||
Ohio
(LTC)………………………………………
|
(2 |
) |
11,864,320
|
20,247
|
-
|
11,884,567
|
2,443,344
|
1995 |
1997 |
33
years |
||||||||||||||||||
Tennessee
(LTC)………………………………
|
(2 |
) |
7,905,139
|
37,234
|
-
|
7,942,373
|
2,566,789
|
1994 |
30
years |
|||||||||||||||||||
Washington
(LTC)…………………………….
|
(2 |
) |
10,000,000
|
1,274,300
|
-
|
11,274,300
|
4,315,253
|
1995 |
20
years |
|||||||||||||||||||
West
Virginia (LTC)…………………………..
|
(2
|
)
|
24,751,206
|
42,238
|
-
|
24,793,444
|
5,053,576
|
1997-1998
|
33
years
|
|||||||||||||||||||
Total
Sun………………………………
|
153,583,903
|
1,505,928
|
-
|
155,089,831
|
37,679,188
|
|||||||||||||||||||||||
Advocat,
Inc.:
|
||||||||||||||||||||||||||||
Alabama
(LTC)…………………………
|
11,588,534
|
758,261
|
-
|
12,346,795
|
4,519,586
|
1975-1985 |
1992 |
31.5
years |
||||||||||||||||||||
Arkansas
(LTC)……………………….
|
37,887,832
|
1,473,599
|
(36,350 |
) |
39,325,081
|
14,738,238
|
1984-1985 |
1992 |
31.5
years |
|||||||||||||||||||
Florida
(LTC)………………………..…
|
1,050,000
|
1,920,000
|
(970,000 |
) |
2,000,000
|
196,193
|
1992 |
31.5
years |
||||||||||||||||||||
Kentucky
(LTC)…………………...….
|
15,151,027
|
1,562,375
|
-
|
16,713,402
|
4,819,800
|
1972-1994 |
1994-1995 |
33
years |
||||||||||||||||||||
Ohio
(LTC)……………………………..
|
5,604,186
|
250,000
|
-
|
5,854,186
|
1,699,733
|
1984 |
1994 |
33
years |
||||||||||||||||||||
Tennessee
(LTC)………………………
|
9,542,121
|
-
|
9,542,121
|
3,622,933
|
1986-1987 |
1992 |
31.5
years |
|||||||||||||||||||||
West
Virginia (LTC)………………….
|
5,437,221
|
348,642
|
-
|
5,785,863
|
1,667,706
|
1994-1995
|
33
years
|
|||||||||||||||||||||
Total
Advocat…………………………
|
86,260,921
|
6,312,877
|
(1,006,350
|
)
|
91,567,448
|
31,264,189
|
||||||||||||||||||||||
Guardian
LTC Management, Inc.
|
||||||||||||||||||||||||||||
Ohio
(LTC)………………………….…..
|
6,078,915
|
-
|
-
|
6,078,915
|
12,452
|
2004 |
39
years |
|||||||||||||||||||||
Pennsylvania
(LTC, AL)………………
|
66,421,085
|
-
|
-
|
66,421,085
|
138,758
|
2004 |
39
years |
|||||||||||||||||||||
West
Virginia (LTC)…………………..
|
7,700,000
|
-
|
-
|
7,700,000
|
-
|
2004
|
39
years
|
|||||||||||||||||||||
Total
Guardian………………………
|
80,200,000
|
-
|
-
|
80,200,000
|
151,210
|
|||||||||||||||||||||||
Seacrest
Healthcare:
|
||||||||||||||||||||||||||||
Florida
(LTC)…………………………..
|
55,019,839
|
-
|
-
|
55,019,839
|
6,308,563
|
1997-1998
|
33
-37.5 years
|
|||||||||||||||||||||
Total
Seacrest…………………………
|
55,019,839
|
-
|
-
|
55,019,839
|
6,308,563
|
|||||||||||||||||||||||
Haven
Healthcare:
|
||||||||||||||||||||||||||||
Connecticut
(LTC)……………………
|
38,789,849
|
1,389,929
|
(4,958,643 |
) |
35,221,135
|
3,780,722
|
1999-2004 |
33
years to 39 years |
||||||||||||||||||||
Vermont
(LTC)…………………………
|
14,200,000
|
81,501
|
-
|
14,281,501
|
261,084
|
2004
|
39
years
|
|||||||||||||||||||||
Total
Haven…………………………..
|
52,989,849
|
1,471,430
|
(4,958,643
|
)
|
49,502,636
|
4,041,806
|
||||||||||||||||||||||
Other:
|
||||||||||||||||||||||||||||
Arizona
(LTC)…………………………
|
24,029,032
|
1,461,009
|
(6,603,745 |
) |
18,886,296
|
3,346,879
|
1998 |
33
years |
||||||||||||||||||||
California
(LTC)……………………………….
|
(2 |
) |
21,874,841
|
762,644
|
-
|
22,637,485
|
4,524,956
|
1997 |
33
years |
|||||||||||||||||||
Colorado
(LTC, AL)…………………..
|
16,754,408
|
196,017
|
-
|
16,950,425
|
2,886,289
|
1998-1999 |
33
years |
|||||||||||||||||||||
Florida
(LTC, AL) ………...………..…..
|
45,825,980
|
3,730,345
|
(3,901,250 |
) |
45,655,075
|
9,939,762
|
1992-1998 |
31.5
years to 33 years |
||||||||||||||||||||
Georgia
(LTC)…………………………
|
10,000,000
|
-
|
-
|
10,000,000
|
441,589
|
1998 |
37.5
years |
|||||||||||||||||||||
Idaho
(LTC)…………………………….
|
(2 |
) |
10,500,000
|
-
|
-
|
10,500,000
|
1,753,528
|
1999 |
33
years |
|||||||||||||||||||
Illinois
(LTC) ……………………...…..
|
50,061,501
|
1,197,853
|
(21,600 |
) |
51,237,754
|
14,397,381
|
1994-1999 |
30
years to 33 years |
||||||||||||||||||||
Indiana
(LTC, AL)…………….………
|
26,784,105
|
1,102,118
|
(1,843,400 |
) |
26,042,823
|
5,916,970
|
1980-1994 |
1992-1999 |
30
years to 33 years |
|||||||||||||||||||
Iowa
(LTC) ………………..….....…….
|
14,451,576
|
606,468
|
(29,156 |
) |
15,028,888
|
3,188,557
|
1996-1998 |
30
years to 33 years |
||||||||||||||||||||
Kansas
(AL)……………………………
|
3,418,670
|
-
|
-
|
3,418,670
|
546,139
|
1999 |
33
years |
|||||||||||||||||||||
Kentucky
(LTC)……………………………….
|
10,250,000
|
411,948
|
-
|
10,661,948
|
1,543,084
|
1999 |
33
years |
|||||||||||||||||||||
Louisiana
(LTC)……………………………….
|
(2 |
) |
4,602,574
|
-
|
-
|
4,602,574
|
1,028,304
|
1997 |
33
years |
|||||||||||||||||||
Massachusetts
(LTC)…………………
|
30,718,142
|
407,153
|
(8,257,521 |
) |
22,867,774
|
3,810,458
|
1999 |
33
years |
||||||||||||||||||||
Missouri
(LTC)………………………..
|
12,301,560
|
-
|
(149,386 |
) |
12,152,174
|
2,089,612
|
1999 |
33
years |
||||||||||||||||||||
New
Hampshire (LTC)………………..
|
5,800,000
|
-
|
-
|
5,800,000
|
1,163,333
|
1998 |
33
years |
|||||||||||||||||||||
Ohio
(LTC, AL)…………………………
|
26,468,999
|
271,903
|
-
|
26,740,902
|
5,028,844
|
1998-1999 |
33
years |
|||||||||||||||||||||
Oklahoma
(AL)……………………….
|
3,177,993
|
-
|
-
|
3,177,993
|
507,691
|
1999 |
33
years |
|||||||||||||||||||||
Pennsylvania
(LTC) ………...………..
|
14,400,000
|
-
|
-
|
14,400,000
|
2,888,274
|
1998 |
33
years |
|||||||||||||||||||||
Tennessee
(AL)……………………….
|
4,068,652
|
-
|
-
|
4,068,652
|
649,975
|
1999 |
33
years |
|||||||||||||||||||||
Texas
(LTC)…………………………………….
|
(2 |
) |
45,428,938
|
1,262,964
|
-
|
46,691,902
|
7,376,330
|
1997-2004 |
33
years to 39 years |
|||||||||||||||||||
Washington
(AL) ……………….……
|
5,673,693
|
-
|
-
|
5,673,693
|
906,383
|
1999
|
33
years
|
|||||||||||||||||||||
Total
Other…………………………….
|
386,590,664
|
11,410,422
|
(20,806,058
|
)
|
377,195,028
|
73,934,338
|
||||||||||||||||||||||
Total
|
814,645,176
|
20,700,657
|
(26,771,051
|
)
|
808,574,782
|
153,379,294
|
||||||||||||||||||||||
(1)
The real estate included in this schedule is being used in either the
operation of long-term care facilities (LTC), assisted living facilities
(AL)
|
||||||||||||||||||||||||||||
or
rehabilitation hospitals (RH) located in the states
indicated.
|
||||||||||||||||||||||||||||
(2)
Certain of the real estate indicated are security for the BAS Healthcare
Financial Services line of credit and term loan borrowings totaling
$15,000,000 at December 31, 2004.
|
||||||||||||||||||||||||||||
Year
Ended December 31,
|
||||||||||||||||||||||||||||
(3)
|
2002
|
2003
|
2004
|
|||||||||||||||||||||||||
Balance
at beginning of period
|
$ |
684,848,012 |
$ |
669,187,842 |
$ |
692,453,873 |
||||||||||||||||||||||
Additions
during period:
|
||||||||||||||||||||||||||||
Acquisitions
|
-
|
-
|
114,286,825
|
|||||||||||||||||||||||||
Conversion
from mortgage
|
2,000,000
|
49,971,206
|
-
|
|||||||||||||||||||||||||
Impairment
(a)
|
(1,679,423 |
) |
(8,894,000 |
) |
-
|
|||||||||||||||||||||||
Impairment
on Discontinued Ops
|
(11,709,098 |
) |
-
|
-
|
||||||||||||||||||||||||
Improvements
|
674,899
|
1,585,097
|
6,431,306
|
|||||||||||||||||||||||||
Disposals/other
|
(4,946,548
|
)
|
(19,396,272
|
)
|
(4,597,222
|
)
|
||||||||||||||||||||||
Balance
at close of period
|
$ |
669,187,842
|
$ |
692,453,873
|
$ |
808,574,782
|
||||||||||||||||||||||
(a)
The variance in impairment in the table shown above relates to assets
previously classified as impairment on assets sold in 2002 and
2003.
|
||||||||||||||||||||||||||||
(4)
|
2002
|
2003
|
2004
|
|||||||||||||||||||||||||
Balance
at beginning of period
|
$ |
100,037,825 |
$ |
117,986,084 |
$ |
134,477,229 |
||||||||||||||||||||||
Additions
during period:
|
||||||||||||||||||||||||||||
Provisions
for depreciation
|
19,435,023
|
20,208,110
|
21,093,611
|
|||||||||||||||||||||||||
Provisions
for depreciation, Discontinued Ops.
|
732,121
|
441,012
|
38,215
|
|||||||||||||||||||||||||
Dispositions/other
|
(2,218,885
|
)
|
(4,157,977
|
)
|
(2,229,761
|
)
|
||||||||||||||||||||||
Balance
at close of period
|
$ |
117,986,084
|
$ |
134,477,229
|
$ |
153,379,294
|
||||||||||||||||||||||
The
reported amount of our real estate at December 31, 2004 is less than the
tax basis of the real estate by approximately $26.1
million.
|
||||||||||||||||||||||||||||
|
F-36
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
Continued
SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE | |||||||||
OMEGA HEALTHCARE INVESTORS, INC. | |||||||||
December 31, 2004 | |||||||||
Grouping
|
Description
(1)
|
Interest
Rate
|
Final
Maturity Date
|
Periodic
Payment Terms
|
Prior
Liens
|
Face
Amount of Mortgages
|
Carrying
Amount of Mortgages (2)
(3)
|
||
Michigan
(9 LTC facilities) and
|
|||||||||
1
|
North
Carolina (3 LTC facilities)……………………………………………
|
11.57%
|
August
31, 2010
|
Interest
only at 11.57% payble monthly
|
None
|
$59,688,450
|
$59,657,083
|
||
2
|
Ohio
(6 LTC facilities)……………………………………………………..
|
11.06%
|
January
1, 2015
|
Interest
plus $66,000 of principal payable monthly
|
None
|
18,238,752
|
13,775,938
|
||
4
|
Florida
(4 LTC facilities)…………………………………………………
|
11.50%
|
February
28, 2010
|
Interest
plus $3,500 of principal payable monthly
|
None
|
12,891,454
|
12,676,839
|
||
5
|
Florida
(2 LTC facilities)……………………………………………………………..
|
11.50%
|
June
4, 2006
|
Interest
plus $4,200 of principal payable monthly
|
None
|
11,090,000
|
10,782,295
|
||
6
|
Indiana
(15 LTC facilities)…………………………………………………….
|
10.00%
|
October
31, 2006
|
Interest
payable monthly
|
None
|
10,500,000
|
9,990,843
|
||
3
|
Ohio
(1 LTC facilities)……………………………………………………..
|
11.00%
|
October
31, 2014
|
Interest
payable monthly
|
None
|
6,500,000
|
6,500,000
|
||
7
|
Texas
(3 LTC facilities)…………………………………………….
|
11.00%
to 11.50%
|
2006
to 2011
|
Interest
plus $70,000 of principal payable monthly
|
None
|
5,733,104
|
2,532,354
|
||
Other
mortgage notes:
|
|||||||||
8
|
Various……………………………………………………………….
|
9.00%
to 12.00%
|
2006
to 2011
|
Interest
plus $48,200 of principal payable monthly
|
None
|
4,056,380
|
2,142,259
|
||
$128,698,140 |
$118,057,610 |
||||||||
(1)
Mortgage loans included in this schedule represent first mortgages on
facilities used in the delivery of long-term healthcare of which such
facilities are located in the states indicated.
|
|||||||||
(2)
The aggregate cost for federal income tax purposes is equal to the
carrying amount.
|
|||||||||
Year
Ended December 31,
|
|||||||||
(3)
|
2002
|
2003
|
2004
|
||||||
Balance
at beginning of period………………………………….
|
$
195,193,424
|
$
173,914,080
|
$
119,783,915
|
||||||
Deductions
during period - collection of principal………………..
|
(14,333,620)
|
(4,158,959)
|
(8,226,305)
|
||||||
Allowance
for loss on mortgage loans…………………………….
|
(4,945,724)
|
-
|
-
|
||||||
Conversion
to purchase leaseback/other changes………………
|
(2,000,000)
|
(49,971,206)
|
6,500,000
|
||||||
Balance
at close of period......................…….
|
$
173,914,080
|
$
119,783,915
|
$
118,057,610
|
||||||
F-37
INDEX
TO EXHIBITS TO 2004 FORM 10-K
EXHIBIT
NUMBER
|
DESCRIPTION
|
3.1
|
Articles
of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of
the Company’s Form 10-Q for the quarterly period ended March 31,
1995).
|
3.2
|
Articles
of Amendment to the Company’s Articles of Incorporation, as amended
(Incorporated by reference to Exhibit 3(i) of the Company’s Form 10-Q for
the quarterly period ended June 30, 2002).
|
3.3
|
Articles
of Amendment the Company’s Articles of Incorporation, as amended.
(Incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q for
the quarterly period ended September 30, 2004).
|
3.4
|
Amended
and Restated Bylaws, as amended as of May 2002 (Incorporated by reference
to Exhibit 3(ii) to the Company’s Form 10-Q/A for the quarterly period
ended June 30, 2002).
|
3.5
|
Articles
Supplementary for Series B Preferred Stock (Incorporated by reference to
Exhibit 4 to the Company’s Form 8-K, filed on April 27,
1998).
|
3.6
|
Articles
of Amendment amending and restating the terms of the Company’s Series C
Convertible Preferred Stock (Incorporated by reference to Exhibit 4.1 to
the Company’s Form 8-K, filed on March 4, 2002).
|
3.7
|
Form
of Articles Supplementary relating to 8.375% Series D Cumulative
Redeemable Preferred Stock (Incorporated by reference to Exhibit 4.1 of
the Company’s Form 8-K, filed on February 10, 2004).
|
3.8
|
Articles
Supplementary reclassifying Omega Healthcare Investors, Inc.’s Series A
preferred stock and Series C preferred stock, as authorized but un-issued
shares of Omega Healthcare Investors, Inc.’s preferred stock without
designation as to series. (Incorporated by reference Exhibit 4.1 to the
Company’s Form 10-Q for the quarterly period ended September 30,
2004).
|
4.0
|
See
Exhibits 3.1 to 3.8.
|
4.1
|
Rights
Agreement, dated as of May 12, 1999, between Omega Healthcare
Investors, Inc. and First Chicago Trust Company, as Rights Agent,
including Exhibit A thereto (Form of Articles Supplementary relating to
the Series A Junior Participating Preferred Stock) and Exhibit B thereto
(Form of Rights Certificate) (Incorporated by reference to Exhibit 4
to the Company’s Form 8-K, filed on April 20, 1999).
|
4.2
|
Amendment
No. 1, dated May 11, 2000 to Rights Agreement, dated as of May 12, 1999,
between Omega Healthcare Investors, Inc. and First Chicago Trust Company,
as Rights Agent (Incorporated by reference to Exhibit 4.1 to the Company’s
Form 10-Q for the quarterly period ended March 31,
2000).
|
4.3
|
Amendment
No. 2 to Rights Agreement between Omega Healthcare Investors, Inc. and
First Chicago Trust Company, as Rights Agent (Incorporated by reference to
Exhibit F to the Schedule 13D filed by Explorer Holdings, L.P. on October
30, 2001 with respect to the Company).
|
4.4
|
Indenture,
dated as of March 22, 2004, among the Company, each of the subsidiary
guarantors named therein, and U.S. Bank National Association, as trustee
(Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K,
filed on March 26, 2004).
|
4.5
|
Form
of 7% Senior Notes due 2014 (Incorporated by reference to Exhibit 10.4 to
the Company’s Form 8-K, filed on March 26, 2004).
|
4.6
|
Form
of Subsidiary Guarantee relating to the 7% Senior Notes due 2014
(Incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K,
filed on March 26, 2004).
|
4.7
|
First
Supplemental Indenture, dated as of July 20, 2004, among the Company and
the subsidiary guarantors named therein, OHI Asset II (TX), LLC and U.S
Bank National Association. (Incorporated by reference Exhibit 4.9 to the
Company’s Form S-4 filed on December 21, 2003.)
|
4.8
|
Registration
Rights Agreement, dated as of November 8, 2004, by and among Omega
Healthcare, the Guarantors named therein, and Deutsche Bank Securities
Inc., Banc of America Securities LLC and UBS Securities LLC, as Initial
Purchasers. (Incorporated by reference to Exhibit 4.1 of the Company’s
Form 8-K, filed on November 9, 2004).
|
4.9
|
Second
Supplemental Indenture, dated as of November 5, 2004, among Omega
Healthcare Investors, Inc., each of the subsidiary guarantors listed on
Schedule I thereto, OHI Asset (OH) New Philadelphia, LLC, OHI Asset (OH)
Lender, LLC, OHI Asset (PA) Trust and U.S. Bank National Association, as
trustee. (Incorporated by reference to Exhibit 4.2 of the Company’s Form
8-K, filed on November 9, 2004).
|
4.10
|
Form
of Indenture. (Incorporated by reference to Exhibit 4.1 of the Company’s
Form S-3/A, filed on August 25, 2004).
|
4.11
|
Form
of Debt Security. (Incorporated by reference to Exhibit 4.2 of the
Company’s Form S-3/A, filed on August 25, 2004).
|
4.12
|
Form
of Articles Supplementary for Preferred Stock. (Incorporated by reference
to Exhibit 4.3 of the Company’s Form S-3/A, filed on August 25,
2004).
|
4.13
|
Form
of Preferred Stock Certificate. (Incorporated by reference to Exhibit 4.4
of the Company’s Form S-3/A, filed on August 25, 2004).
|
4.14
|
Form
of Securities Warrant Agreement. (Incorporated by reference to Exhibit 4.5
of the Company’s Form S-3/A, filed on August 25, 2004).
|
10.1
|
Amended
and Restated Secured Promissory Note between Omega Healthcare Investors,
Inc. and Professional Health Care Management, Inc. dated as of September
1, 2001 (Incorporated by reference to Exhibit 10.6 to the Company’s 10-Q
for the quarterly period ended September 30, 2001).
|
10.2
|
Settlement
Agreement between Omega Healthcare Investors, Inc., Professional Health
Care Management, Inc., Living Centers - PHCM, Inc. GranCare, Inc., and
Mariner Post-Acute Network, Inc. dated as of September 1, 2001
(Incorporated by reference to Exhibit 10.7 to the Company’s Form 10-Q for
the quarterly period ended September 30, 2001).
|
10.3
|
Form
of Directors and Officers Indemnification Agreement (Incorporated by
reference to Exhibit 10.11 to the Company’s Form 10-Q for the quarterly
period ended June 30, 2000).
|
10.4
|
1993
Amended and Restated Stock Option Plan (Incorporated by reference to
Exhibit A to the Company’s Proxy Statement dated April 6,
2003).+
|
10.5
|
2000
Stock Incentive Plan (as amended January 1, 2001) (Incorporated by
reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarterly
period ended September 30, 2003).+
|
10.6
|
Amendment
to 2000 Stock Incentive Plan (Incorporated by reference to Exhibit 10.6 to
the Company’s Form 10-Q for the quarterly period ended June 30,
2000).+
|
10.7
|
Repurchase
and Conversion Agreement by and between Omega Healthcare Investors, Inc.
and Explorer Holdings, L.P. dated as of February 5, 2004 (Incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K, filed on February 5,
2004).
|
10.8
|
Form
of Purchase Agreement dated as of February 5, 2004 by and between Omega
Healthcare Investors, Inc. and the purchasers of the 8.375% Series D
cumulative redeemable preferred shares (Incorporated by reference to
Exhibit 10.1 to the Company’s Form 8-K, filed on February 10,
2004).
|
10.9
|
Placement
Agent Agreement by and between the Omega Healthcare Investors, Inc. and
Cohen & Steers Capital Advisors, Inc. dated as of February 5, 2004
(Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K,
filed on February 10, 2004)
|
10.10
|
Purchase
Agreement, dated as of March 15, 2004, among Omega, Deutsche Bank
Securities Inc., UBS Securities LLC, Banc of America Securities LLC and
the subsidiary guarantors named therein (Incorporated by reference to
Exhibit 10.1 to the Company’s Form 8-K, filed on March 26,
2004).
|
10.11
|
Indenture,
dated as of March 22, 2004, among Omega, each of the subsidiary guarantors
named therein, and U.S. Bank National Association, as trustee
(Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K,
filed on March 26, 2004).
|
10.12
|
Registration
Rights Agreement, dated as of March 22, 2004, among Omega, Deutsche Bank
Securities Inc., UBS Securities LLC, Banc of America Securities LLC and
the subsidiary guarantors named therein (Incorporated by reference to
Exhibit 10.3 to the Company’s Form 8-K, filed on March 26,
2004).
|
10.13
|
Form
of 7% Senior Notes due 2014 (Incorporated by reference to Exhibit 10.4 to
the Company’s Form 8-K, filed on March 26, 2004).
|
10.14
|
Form
of Subsidiary Guarantee relating to the 7% Senior Notes due 2014
(Incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K,
filed on March 26, 2004).
|
10.15
|
Credit
Agreement, dated as of March 22, 2004, among OHI Asset, LLC, OHI Asset
(ID), LLC, OHI Asset (LA), LLC, OHI Asset (TX), LLC, OHI Asset (CA), LLC,
Delta Investors I, LLC, Delta Investors II, LLC, the lenders named
therein, and Bank of America, N.A. (Incorporated by reference to Exhibit
10.6 to the Company’s Form 8-K, filed on March 26,
2004).
|
10.16
|
Guaranty,
dated as of March 22, 2004, given by Omega and the subsidiary guarantors
named therein in favor of the Bank of America, N.A. (Incorporated by
reference to Exhibit 10.7 to the Company’s Form 8-K, filed on March 26,
2004).
|
10.17
|
Security
Agreement, dated as of March 22, 2004, made by OHI Asset, LLC, OHI Asset
(ID), LLC, OHI Asset (LA), LLC, OHI Asset (TX), LLC, OHI Asset (CA), LLC,
Delta Investors I, LLC, Delta Investors II, LLC, in favor of Bank of
America, N.A. (Incorporated by reference to Exhibit 10.8 to the Company’s
Form 8-K, filed on March 26, 2004).
|
10.18
|
First
Amendment to the Credit Agreement and Assignment Agreement, dated as of
June 18, 2004, among OHI Asset, LLC, OHI Asset (ID), LLC, OHI Asset (LA),
LLC, OHI Asset (TX), LLC, OHI Asset (CA), LLC, Delta Investors I, LLC,
Delta Investors II, LLC, the lenders named therein, and Bank of America,
N.A. (Incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q
for the quarterly period ended June 30, 2004).
|
10.19
|
Employment
Agreement, dated September 10, 2004 between Omega Healthcare Investors,
Inc. and C. Taylor Pickett (Incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K, filed on September 16,
2004).+
|
10.20
|
Employment
Agreement, dated September 10, 2004 between Omega Healthcare Investors,
Inc. and Daniel J. Booth (Incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K, filed on September 16,
2004).+
|
10.21
|
Employment
Agreement, dated September 10, 2004 between Omega Healthcare Investors,
Inc. and R. Lee Crabill (Incorporated by reference to Exhibit 10.3 to the
Company’s Current Report on Form 8-K, filed on September 16,
2004).+
|
10.22
|
Employment
Agreement, dated September 10, 2004 between Omega Healthcare Investors,
Inc. and Robert O. Stephenson (Incorporated by reference to Exhibit 10.4
to the Company’s Current Report on Form 8-K, filed on September 16,
2004).+
|
10.23
|
Form
of Restricted Stock Award (Incorporated by reference to Exhibit 10.5 to
the Company’s Current Report on Form 8-K, filed on September 16,
2004).+
|
10.24
|
Form
of Performance Restricted Stock Unit Agreement. (Incorporated by reference
to Exhibit 10.6 to the Company’s current report on Form 8-K, filed on
September 16, 2004).+
|
10.25
|
Put
Agreement, effective as of October 12, 2004, by and between American
Health Care Centers, Inc. and Omega Healthcare Investors, Inc.
(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K, filed on October 18, 2004).
|
10.26
|
Omega
Healthcare Investors, Inc. 2004 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarterly
period ended September 30, 2004).
|
10.27
|
Purchase
Agreement, dated as of October 28, 2004, effective November 1, 2004, among
Omega, OHI Asset (PA) Trust, Guardian LTC Management, Inc. and the
licensees named therein. (Incorporated by reference Exhibit 10.1 to the
Company’s current report on Form 8-K, filed on November 8,
2004).
|
10.28
|
Master
Lease, dated October 28, 2004, effective November 1, 2004, among Omega,
OHI Asset (PA) Trust and Guardian LTC Management, Inc. (Incorporated by
reference to Exhibit 10.2 to the Company’s current report on Form 8-K,
filed on November 8, 2004).
|
10.29
|
Second
Amendment to Credit Agreement and Waiver, dated as of November 5, 2004,
among OHI Asset , LLC, OHI Asset (ID), LLC, OHI Asset (LA), LLC, OHI Asset
(TX), LLC, OHI Asset (CA), LLC, Delta Investors I, LLC, Delta Investors
II, LLC, the lenders named therein, and Bank of America, N.A.
(Incorporated by reference to Exhibit 10.3 to the Company’s current report
on Form 8-K, filed on November 8, 2004).
|
10.30
|
Form
of Incentive Stock Option Award for the Omega Healthcare Investors, Inc.
2004 Stock Incentive Plan.+*
|
10.31
|
Form
of Non-Qualified Stock Option Award for the Omega Healthcare Investors,
Inc. 2004 Stock Incentive Plan.+*
|
10.32
|
Schedule
of 2005 Omega Healthcare Investors, Inc. Executive Officers Salaries and
Bonuses. +*
|
12.1
|
Ratio
of Earnings to Fixed Charges.*
|
12.2
|
Ratio
of Earnings to Combined Fixed Charges and Preferred Stock
Dividends.*
|
21
|
Subsidiaries
of the Registrant.*
|
23
|
Consent
of Independent Registered Public Accounting Firm.*
|
31.1
|
Certification
of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act
of 2002.*
|
31.2
|
Certification
of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act
of 2002.*
|
32.1
|
Certification
of the Chief Executive Officer under Section 906 of the Sarbanes- Oxley
Act of 2002.*
|
32.2
|
Certification
of the Chief Financial Officer under Section 906 of the Sarbanes- Oxley
Act of 2002.*
|
_________
*
Exhibits which are filed herewith.
+
Management contract or compensatory plan, contract or
arrangement.
I
1-3
SIGNATURES
Pursuant
to the requirements of Sections 13 or 15(d) 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.
By: /s/
C. TAYLOR PICKETT
C. Taylor
Pickett
Chief
Executive Officer
Date:
February 18, 2005
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities on the date indicated.
Signatures
|
Title
|
Date
|
PRINCIPAL
EXECUTIVE OFFICER
|
||
/s/
C. TAYLOR PICKETT
|
Chief
Executive Officer
|
February
18, 2005
|
C.
Taylor Pickett
|
||
PRINCIPAL
FINANCIAL OFFICER
|
||
/s/
ROBERT O. STEPHENSON
|
Chief
Financial Officer
|
February
18, 2005
|
Robert
O. Stephenson
|
||
DIRECTORS
|
||
/s/
BERNARD J. KORMAN
|
Chairman
of the Board
|
February
18, 2005
|
Bernard
J. Korman
|
||
/s/
THOMAS F. FRANKE
|
Director
|
February
18, 2005
|
Thomas
F. Franke
|
||
/s/
HAROLD J. KLOOSTERMAN
|
Director
|
February
18, 2005
|
Harold
J. Kloosterman
|
||
/s/
EDWARD LOWENTHAL
|
Director
|
February
18, 2005
|
Edward
Lowenthal
|
||
/s/
C. TAYLOR PICKETT
|
Director
|
February
18, 2005
|
C.
Taylor Pickett
|
||
/s/
STEPHEN D. PLAVIN
|
Director
|
February
18, 2005
|
Stephen
D. Plavin
|
I-4