10-K: Annual report pursuant to Section 13 and 15(d)
Published on March 2, 2009
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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, 2008.
[
] 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)
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Maryland
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38-3041398
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(State
or Other Jurisdiction
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(I.R.S. Employer Identification No.)
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of
Incorporation or Organization)
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200
International Circle, Suite 3500
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Hunt
Valley, MD
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21030
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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:
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Title of Each
Class
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Name
of Exchange on
Which
Registered
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Common
Stock, $.10 Par Value and
associated stockholder protection rights
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New
York Stock Exchange
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8.375%
Series D Cumulative Redeemable Preferred Stock, $1 Par
Value
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New
York Stock Exchange
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Securities registered pursuant to
Section 12(g) of the
Act:
None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 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]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer
[X] Accelerated
filer
[ ]
Non-accelerated filer
[ ] Smaller
reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X ]
The
aggregate market value of the common stock of the registrant held by
non-affiliates was $1,257,034,541. The aggregate market value was
computed using the $16.65 closing price per share for such stock on the New York
Stock Exchange on June 30, 2008.
As of
February 24, 2009 there were 82,408,075 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Proxy
Statement for the registrant’s 2009 Annual Meeting of Stockholders to be held on
May 21, 2009, to be filed with
the
Securities and Exchange Commission not later than 120 days after December 31,
2008, is incorporated by reference in Part III herein.
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OMEGA
HEALTHCARE INVESTORS, INC.
2008
FORM 10-K ANNUAL REPORT
PART
I
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PART
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PART III
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Item
1 - Business
We were incorporated in the State of
Maryland on March 31, 1992. We are a self-administered real estate
investment trust (“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 (“SNFs”) and, to a lesser extent, assisted living
facilities (“ALFs”), independent living facilities (“ILFs”) and rehabilitation
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. In July 2008, we assumed operating
responsibilities for 14 of our SNFs and one of our ALFs due to the bankruptcy of
one of our operators/tenants. In September 2008, we entered into an
agreement to lease these facilities to a new
operator/tenant. Effective September 1, 2008, the new operator/tenant
assumed operating responsibility for 13 of the 15
facilities. We are in the process of addressing state
regulatory requirements necessary to transfer the final two properties to the
new operator/tenant, and as a result, have retained operating responsibility for
those two properties as of December 31, 2008.
As of December 31, 2008, our portfolio
of investments consisted of 256 healthcare facilities, located in 28 states and
operated by 25 third-party operators. This portfolio was made up
of:
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•
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227
SNFs, seven ALFs, two rehabilitation hospitals owned and leased to third
parties and two ILFs;
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•
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fixed
rate mortgages on 15 long-term healthcare
facilities;
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•
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two
SNFs owned and operated by us; and
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•
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one
SNF as held-for-sale.
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As of December 31, 2008, our gross
investments in these facilities, net of impairments and before reserve for
uncollectible loans, totaled approximately $1.5 billion. In addition,
we also held miscellaneous investments of approximately $29.9 million at
December 31, 2008, consisting primarily of secured loans to third-party
operators of our facilities.
Our filings with the Securities and
Exchange Commission (“SEC”), including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports are accessible free of charge on our website at
www.omegahealthcare.com.
The following tables summarize our
revenues and real estate assets by asset category for 2008, 2007 and
2006. (See Item 7 – Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Note 3 – Properties and Note 5 – Mortgage
Notes Receivable).
Revenues by Asset
Category
(in thousands)
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Year
Ended December 31,
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2008
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2007
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2006
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Core
assets:
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Lease rental
income
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$ | 155,765 | $ | 152,061 | $ | 126,892 | ||||||
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Mortgage interest
income
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9,562 | 3,888 | 4,402 | |||||||||
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Total core asset
revenues
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165,327 | 155,949 | 131,294 | |||||||||
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Other
asset revenue
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2,031 | 2,821 | 3,687 | |||||||||
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Miscellaneous
income
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2,234 | 788 | 532 | |||||||||
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Total revenue before owned and
operated assets
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169,592 | 159,558 | 135,513 | |||||||||
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Owned
and operated asset revenue
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24,170 | — | — | |||||||||
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Total revenue
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$ | 193,762 | $ | 159,558 | $ | 135,513 | ||||||
Assets
by Category
(in
thousands)
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As
of December 31,
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2008
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2007
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Core
assets:
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Leased assets
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$ | 1,372,012 | $ | 1,274,722 | ||||
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Mortgaged
assets
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100,821 | 31,689 | ||||||
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Total core
assets
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1,472,833 | 1,306,411 | ||||||
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Other
assets
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29,864 | 13,683 | ||||||
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Total real estate assets before
held for sale assets
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1,502,697 | 1,320,094 | ||||||
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Held
for sale assets
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150 | 2,870 | ||||||
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Total real estate
assets
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$ | 1,502,847 | $ | 1,322,964 | ||||
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 and
future returns, we consider such factors as:
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•
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the
quality and experience of management and the creditworthiness of the
operator of the facility;
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•
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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 our
investment;
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•
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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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•
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the
tax, growth, regulatory and reimbursement environment of the jurisdiction
in which the facility is located;
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•
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the
occupancy and demand for similar healthcare facilities in the same or
nearby communities; and
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•
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the
payor mix of private, Medicare and Medicaid
patients.
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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 may
pursue alternative investment structures, which can achieve returns comparable
to equity investments. The following summarizes the primary
investment structures we typically use. The average annualized yields
described below 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, 2009 set forth below are not necessarily indicative of or a
forecast of actual yields, which may be lower.
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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”). The average annualized yield from
leases was approximately 11.3% at January 1,
2009.
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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 11.4% at January
1, 2009.
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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,
2008.
Borrowing
Policies. We may incur additional indebtedness and have
historically sought to maintain an annualized total debt-to-EBITDA ratio in the
range of 4 to 5 times. Annualized EBITDA is defined as earnings
before interest, taxes, depreciation and amortization for a twelve month
period. We intend to periodically review our policy with respect to
our total debt-to-EBITDA 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 that 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).
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. Holders of
such indebtedness may have 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.
Competition. The
healthcare industry is highly competitive and will likely become more
competitive in the future. We face competition from
other REITs, investment companies, private equity and hedge fund investors,
healthcare operators, lenders, developers and other institutional investors,
some of whom have greater resources and lower costs of capital than us.
Our operators compete on a
local and regional basis with operators of facilities that provide comparable
services. The basis
of competition for our operators includes the quality of care provided,
reputation, the physical appearance of a facility, price, the range of services
offered, family preference, alternatives for healthcare delivery, the supply of
competing properties, physicians, staff, referral sources, location and the size
and demographics of the population and surrounding areas.
Increased competition makes it more
challenging for us to identify and successfully capitalize on opportunities that
meet our objectives. Our ability to compete is also impacted by national and
local economic trends, availability of investment alternatives, availability and
cost of capital, construction and renovation costs, existing laws and
regulations, new legislation and population trends. For additional information
on the risks associated with our business, please see Item 1A — Risk
Factors below.
The following is a general summary of
the material U.S. federal income tax considerations applicable to us and to the
holders of our securities and our election to be taxed as a REIT. It
is not tax advice. The summary is not intended to represent a
detailed description of the U.S. federal income tax consequences applicable to a
particular stockholder in view of any person’s particular circumstances, nor is
it intended to represent a detailed description of the U.S. federal income tax
consequences applicable to stockholders subject to special treatment under the
federal income tax laws such as insurance companies, tax-exempt organizations,
financial institutions, securities broker-dealers, investors in pass-through
entities, expatriates and taxpayers subject to alternative minimum
taxation.
The following discussion, to the extent
it constitutes matters of law or legal conclusions (assuming the facts,
representations, and assumptions upon which the discussion is based are
accurate), accurately represents some of the material U.S. federal income tax
considerations relevant to ownership of our securities. The sections
of the Internal Revenue Code (the “Code”) relating to the qualification and
operation as a REIT are highly technical and complex. The following
discussion sets forth certain material aspects of the Code sections that govern
the federal income tax treatment of a REIT and its stockholders. The
information in this section is based on the Code; current, temporary, and
proposed Treasury regulations promulgated under the Code; the legislative
history of the Code; current administrative interpretations and practices of the
Internal Revenue Service (“IRS”); and court decisions, in each case, as of the
date of this report. In addition, the administrative interpretations
and practices of the IRS include its practices and policies as expressed in
private letter rulings, which are not binding on the IRS, except with respect to
the particular taxpayers who requested and received those rulings.
General. We have elected
to be taxed as a REIT, under Sections 856 through 860 of the Code, beginning
with our taxable year ended December 31, 1992. We believe that we
have been organized and operated in such a manner as to qualify for taxation as
a REIT. We intend to continue to operate in a manner that will allow us to
maintain our qualification as a REIT, but no assurance can be given that we have
operated or will be able to continue to operate in a manner so as to qualify or
remain qualified as a REIT.
The sections of the Code that govern
the federal income tax treatment of a REIT are highly technical and
complex. The following sets forth certain material aspects of those
sections. This summary is qualified in its entirety by the applicable
Code provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations thereof.
If we qualify for taxation as a REIT,
we generally will not be subject to federal corporate income taxes on our net
income that is currently distributed to stockholders. However, we
will be subject to certain federal income taxes as follows: First, we will be
taxed at regular corporate rates on any undistributed REIT taxable income,
including undistributed net capital gains; provided, however, that if we have a
net capital gain, we will be taxed at regular corporate rates on our
undistributed REIT taxable income, computed without regard to net capital gain
and the deduction for capital gains dividends, plus a 35% tax on undistributed
net capital gain, if our tax as thus computed is less than the tax computed in
the regular manner. Second, under certain circumstances, we may be
subject to the “alternative minimum tax” on our items of tax preference that we
do not distribute or allocate to our stockholders. Third, if we have
(i) net income from the sale or other disposition of “foreclosure property,”
which is held primarily for sale to customers in the ordinary course of
business, or (ii) other nonqualifying income from foreclosure property, we will
be subject to tax at the highest regular corporate rate on such
income. Fourth, if we have net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property (other
than foreclosure property) held primarily for sale to customers in the ordinary
course of business by us, i.e., when we are acting as a dealer), such income
will be subject to a 100% tax. Fifth, if we should fail to satisfy
the 75% gross income test or the 95% gross income test (as discussed below), but
have nonetheless maintained our qualification as a REIT because certain other
requirements have been met, we will be subject to a 100% tax on an amount equal
to (a) the gross income attributable to the greater of the amount by which we
fail the 75% or 95% test, multiplied by (b) a fraction intended to reflect our
profitability. Sixth, if we should fail to distribute by the end of
each year at least the sum of (i) 85% of our REIT ordinary income for such year,
(ii) 95% of our REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, we will be subject to a 4%
excise tax on the excess of such required distribution over the amounts actually
distributed. Seventh, we will be subject to a 100% excise tax on
transactions with a taxable REIT subsidiary (“TRS”) that are not conducted on an
arm’s-length basis. Eighth, if we acquire any asset, which is defined
as a “built-in gain asset” from a C corporation that is not a REIT (i.e.,
generally a corporation subject to full corporate-level tax) in a transaction in
which the basis of the built-in gain asset in our hands is determined by
reference to the basis of the asset (or any other property) in the hands of the
C corporation, and we recognize gain on the disposition of such asset during the
10-year period, which is defined as the “recognition period,” beginning on the
date on which such asset was acquired by us, then, to the extent of the built-in
gain (i.e., the excess of (a) the fair market value of such asset on the date
such asset was acquired by us over (b) our adjusted basis in such asset on such
date), our recognized gain will be subject to tax at the highest regular
corporate rate. The results described above with respect to the
recognition of built-in gain assume that we will not make an election pursuant
to Treasury Regulations Section 1.337(d)-7(c)(5).
Requirements for
Qualification.
The Code defines
a REIT as a corporation, trust or association: (1) which is managed by one or
more trustees or directors; (2) the beneficial ownership of which is evidenced
by transferable shares, or by transferable certificates of beneficial interest;
(3) which would be taxable as a domestic corporation, but for Sections 856
through 859 of the Code; (4) which is neither a financial institution nor an
insurance company subject to the provisions of the Code; (5) the beneficial
ownership of which is held by 100 or more persons; (6) during the last half year
of each taxable year not more than 50% in value of the outstanding stock of
which is owned, actually or constructively, by five or fewer individuals (as
defined in the Code to include certain entities); and (7) which meets certain
other tests, described below, regarding the nature of its income and assets and
the amount of its annual distributions to stockholders. The Code
provides that conditions (1) to (4), inclusive, must be met during the entire
taxable year and that condition (5) must be met during at least 335 days of a
taxable year of twelve months, or during a proportionate part of a taxable year
of less than twelve months. For purposes of conditions (5) and (6),
pension funds and certain other tax-exempt entities are treated as individuals,
subject to a “look-through” exception in the case of condition (6).
Income
Tests. To maintain our
qualification as a REIT, we annually must satisfy two gross income
requirements. First, at least 75% of our gross income (excluding
gross income from prohibited transactions) for each taxable year must be derived
directly or indirectly from investments relating to real property or mortgages
on real property (including generally “rents from real property,” interest on
mortgages on real property, and gains on sale of real property and real property
mortgages, other than property described in Section 1221(a)(1) of the Code) and
income derived from certain types of temporary investments. Second,
at least 95% of our gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from such real property
investments, dividends, interest and gain from the sale or disposition of stock
or securities other than property held for sale to customers in the ordinary
course of business.
Rents received by us will qualify as
“rents from real property” in satisfying the gross income requirements for a
REIT described above only if several conditions are met. First, the
amount of the rent must not be based in whole or in part on the income or
profits of any person. However, any amount received or accrued
generally will not be excluded from the term “rents from real property” solely
by reason of being based on a fixed percentage or percentages of receipts or
sales. Second, the Code provides that rents received from a tenant
(other than rent from a tenant that is a TRS that meets the requirements
described below) will not qualify as “rents from real property” in satisfying
the gross income tests if we, or an owner (actually or constructively) of 10% or
more of the value of our stock, actually or constructively owns 10% or more of
such tenant, which is defined as a related party tenant. Third, if
rent attributable to personal property, leased in connection with a lease of
real property, is greater than 15% of the total rent received under the lease,
then the portion of rent attributable to such personal property will not qualify
as “rents from real property.” Finally, for rents received to qualify as “rents
from real property,” we generally must not operate or manage the property or
furnish or render services to the tenants of such property, other than through
an independent contractor from which we derive no revenue. We may,
however, directly perform certain services that are “usually or customarily
rendered” in connection with the rental of space for occupancy only and are not
otherwise considered “rendered to the occupant” of the property. In
addition, we may provide a minimal amount of “non-customary” services to the
tenants of a property, other than through an independent contractor, as long as
our income from the services does not exceed 1% of our income from the related
property. Furthermore, we may own up to 100% of the stock of a TRS,
which may provide customary and non-customary services to our tenants without
tainting our rental income from the related properties. For our tax
years beginning after 2004, rents for customary services performed by a TRS or
that are received from a TRS and are described in Code Section 512(b)(3) no
longer need to meet the 100% excise tax safe harbor. Instead, such
payments avoid the excise tax if we pay the TRS at least 150% of its direct cost
of furnishing such services. Beginning in 2009, we will be able to
include as qualified rents from real property rental income that is paid to us
by a TRS with respect to a lease of a health care facility to the TRS provided
that the facility is operated and managed by an “eligible independent
contractor.”
The term “interest” generally does not
include any amount received or accrued (directly or indirectly) if the
determination of such amount depends in whole or in part on the income or
profits of any person. However, an amount received or accrued
generally will not be excluded from the term “interest” solely by reason of
being based on a fixed percentage or percentages of gross receipts or
sales. In addition, an amount that is based on the income or profits
of a debtor will be qualifying interest income as long as the debtor derives
substantially all of its income from the real property securing the debt from
leasing substantially all of its interest in the property, but only to the
extent that the amounts received by the debtor would be qualifying “rents from
real property” if received directly by a REIT.
If a loan contains a provision that
entitles us to a percentage of the borrower’s gain upon the sale of the real
property securing the loan or a percentage of the appreciation in the property’s
value as of a specific date, income attributable to that loan provision will be
treated as gain from the sale of the property securing the loan, which generally
is qualifying income for purposes of both gross income tests.
Interest on debt secured by mortgages
on real property or on interests in real property generally is qualifying income
for purposes of the 75% gross income test. However, if the highest
principal amount of a loan outstanding during a taxable year exceeds the fair
market value of the real property securing the loan as of the date we agreed to
originate or acquire the loan, a portion of the interest income from such loan
will not be qualifying income for purposes of the 75% gross income test, but
will be qualifying income for purposes of the 95% gross income
test. The portion of the interest income that will not be qualifying
income for purposes of the 75% gross income test will be equal to the portion of
the principal amount of the loan that is not secured by real
property.
Prohibited
Transactions. We will incur a
100% tax on the net income derived from any sale or other disposition of
property, other than foreclosure property, that we hold primarily for sale to
customers in the ordinary course of a trade or business. We believe
that none of our assets is primarily held for sale to customers and that a sale
of any of our assets would not be in the ordinary course of our
business. Whether a REIT holds an asset primarily for sale to
customers in the ordinary course of a trade or business depends, however, on the
facts and circumstances in effect from time to time, including those related to
a particular asset. Nevertheless, we will attempt to comply with the
terms of safe-harbor provisions in the federal income tax laws prescribing when
an asset sale will not be characterized as a prohibited
transaction. The Code also provides a number of alternative
exceptions from the 100% tax on ”prohibited transactions” if certain
requirements have been satisfied with respect to property disposed of by the
REIT. These requirements relate primarily to the number and/or amount
of properties disposed of by the REIT, the period of time the property has been
held by the REIT, and/or aggregate expenditures made by the REIT with respect to
the property being disposed of. The conditions needed to meets these
requirements have been lowered for taxable years beginning in
2009. However, we cannot assure you that we will be able to comply
with the safe-harbor provisions or that we will be able to avoid the 100% tax on
prohibited transactions if we were to dispose of an owned property that
otherwise may be characterized as property that we hold primarily for sale to
customers in the ordinary course of a trade or business.
Foreclosure
Property. We will be
subject to tax at the maximum corporate rate on any income from foreclosure
property, other than income that otherwise would be qualifying income for
purposes of the 75% gross income test, less expenses directly connected with the
production of that income. However, gross income from foreclosure
property is treated as qualifying for purposes of the 75% and 95% gross income
tests. Foreclosure property is any real property, including interests
in real property, and any personal property incident to such real
property:
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that
is acquired by a REIT as the result of i) the REIT having bid on such
property at foreclosure, or having otherwise reduced such property to
ownership or possession by agreement or process of law, after there was a
default, or ii) default was imminent on a lease of such property or on
indebtedness that such property
secured;
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for
which the related loan or lease was acquired by the REIT at a time when
the default was not imminent or anticipated;
and
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for
which the REIT makes a proper election to treat the property as
foreclosure property.
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Such property generally ceases to be
foreclosure property at the end of the third taxable year following the taxable
year in which the REIT acquired the property, or longer (for a total of up to
six years) if an extension is granted by the Secretary of the
Treasury. In the case of a “qualified health care property” acquired
solely as a result of termination of a lease, but not in connection with default
or an imminent default on the lease, the initial grace period terminates on the
second (rather than third) taxable year following the year in which the REIT
acquired the property (unless the REIT establishes the need for and the
Secretary of the Treasury grants one or more extension, not exceeding six years
in total including the original two year period, to provide for the orderly
leasing or liquidation of the REIT’s interest in the qualified health care
property). This grace period terminates and foreclosure property
ceases to be foreclosure property on the first day:
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on
which a lease is entered into for the property that, by its terms, will
give rise to income that does not qualify for purposes of the 75% gross
income test, or any amount is received or accrued, directly or indirectly,
pursuant to a lease entered into on or after such day that will give rise
to income that does not qualify for purposes of the 75% gross income
test;
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on
which any construction takes place on the property, other than completion
of a building or any other improvement, where more than 10% of the
construction was completed before default became imminent;
or
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which
is more than 90 days after the day on which the REIT acquired the property
and the property is used in a trade or business which is conducted by the
REIT, other than through an independent contractor from whom the REIT
itself does not derive or receive any
income.
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In July 2008, we assumed operating
responsibilities for the 15 properties due to the bankruptcy of Haven Eldercare,
LLC (“Haven facilities”) one of our operators/tenants, as described in Item 7 –
Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Portfolio Developments, New Investments, Asset Sales and Other
Developments. In September 2008, we entered into an agreement to
lease these facilities to a new operator/tenant. Effective September
1, 2008, the new operator/tenant assumed operating responsibility for 13 of the
15 facilities. We are in the process of addressing state regulatory
requirements necessary to transfer the final two properties to the new
operator/tenant, and as a result, we retained operating responsibility for two
properties as of December 31, 2008. We intend to make an election on
our 2008 federal income tax return to treat the Haven facilities as foreclosure
properties. Because we acquired possession in connection with a
foreclosure, the Haven facilities are eligible to be treated as foreclosure
property until the end of 2011. Although the Secretary of Treasury
may extend the foreclosure property period until the end of 2014, there can be
no assurance that we will receive such an extension. So long as the
Haven facilities qualify as foreclosure property, our gross income from the
properties will be qualifying income for the 75% and 95% gross income tests, but
we will generally be subject to corporate income tax at the highest rate on the
net income from the properties. If one or more of the Haven
facilities were to inadvertently fail to qualify as foreclosure property, we
would likely recognize nonqualifying income from such property for purposes of
the 75% and 95% gross income tests, which could cause us to fail to qualify as a
REIT. In addition, any gain from a sale of such property could be
subject to the 100% prohibited transactions tax. Although we intend
to sell or lease the remaining Haven facilities to one or more unrelated third
parties prior to the end of 2011, no assurance can be provided that we will
accomplish that objective. After the year 2000, the definition of
foreclosure property was amended to include any “qualified health care
property,” as defined in Code Section 856(e)(6) acquired by us as the result of
the termination or expiration of a lease of such property. We have
operated qualified healthcare facilities acquired in this manner for up to two
years (or longer if an extension was granted). However, we do not
currently own any property with respect to which we have made foreclosure
property elections. Properties that we had taken back in a
foreclosure or bankruptcy and operated for our own account were treated as
foreclosure properties for income tax purposes, pursuant to Code Section
856(e). Gross income from foreclosure properties was classified as
“good income” for purposes of the annual REIT income tests upon making the
election on the tax return. Once made, the income was classified as
“good” for a period of three years, or until the properties were no longer
operated for our own account. In all cases of foreclosure property,
we utilized an independent contractor to conduct day-to-day operations to
maintain REIT status. In certain cases we operated these facilities
through a taxable REIT subsidiary. For those properties operated
through the taxable REIT subsidiary, we utilized an eligible independent
contractor to conduct day-to-day operations to maintain REIT
status. As a result of the foregoing, we do not believe that our
participation in the operation of nursing homes increased the risk that we would
fail to qualify as a REIT. Through our 2008 taxable year, we had not
paid any tax on our foreclosure property because those properties had been
producing losses. We cannot predict whether, in the future, our
income from foreclosure property will be significant and/or whether we could be
required to pay a significant amount of tax on that income.
Hedging
Transactions. From time to
time, we may enter into hedging transactions with respect to one or more of our
assets or liabilities. Our hedging activities may include entering
into interest rate swaps, caps and floors, options to purchase these items, and
futures and forward contracts. To the extent that we enter into an
interest rate swap or cap contract, option, futures contract, forward rate
agreement, or any similar financial instrument to hedge our indebtedness
incurred to acquire or carry “real estate assets,” any periodic income or gain
from the disposition of that contract should be qualifying income for purposes
of the 95% gross income test, but not the 75% gross income
test. Accordingly, our income and gain from our interest rate swap
agreements generally is qualifying income for purposes of the 95% gross income
test, but not the 75% gross income test. To the extent that we hedge
with other types of financial instruments, or in other situations, it is not
entirely clear how the income from those transactions will be treated for
purposes of the gross income tests. We have structured and intend to
continue to structure any hedging transactions in a manner that does not
jeopardize our status as a REIT. For tax years beginning after 2004,
we were no longer required to include income from hedging transactions in gross
income (i.e., not
included in either the numerator or the denominator) for purposes of the 95%
gross income test and we are no longer required to include in gross income
(i.e., not included in
either the numerator or the denominator) for purposes of the 75% gross income
test any gross income from any hedging transaction entered into after July 30,
2008.
TRS
Income. A TRS may earn
income that would not be qualifying income if earned directly by the parent
REIT. Both the subsidiary and the REIT must jointly elect to treat
the subsidiary as a TRS. A corporation of which a TRS directly or
indirectly owns more than 35% of the voting power or value of the stock will
automatically be treated as a TRS. Overall, no more than 20% (25% in
2009) of the value of a REIT’s assets may consist of securities of one or more
TRSs. However, a TRS does not include a corporation which directly or
indirectly (i) operates or manages a health care (or lodging) facility, or (ii)
provides to any other person (under a franchise, license, or otherwise) rights
to any brand name under which a health care (or lodging) facility is
operated. Beginning in 2009, however, a TRS will be able to own or
lease a health care facility provided that the facility is operated and managed
by an “eligible independent contractor.” A TRS will pay income tax at
regular corporate rates on any income that it earns. In addition, the
new rules limit the deductibility of interest paid or accrued by a TRS to its
parent REIT to assure that the TRS is subject to an appropriate level of
corporate taxation. The rules also impose a 100% excise tax on
transactions between a TRS and its parent REIT or the REIT’s operators that are
not conducted on an arm’s-length basis.
Failure to
Satisfy Income Tests. If we fail to
satisfy one or both of the 75% or 95% gross income tests for any taxable year,
we may nevertheless qualify as a REIT for such year if we are entitled to relief
under certain provisions of the Code. These relief provisions will be
generally available if our failure to meet such tests was due to reasonable
cause and not due to willful neglect, we attach a schedule of the sources of our
income to our tax return, and any incorrect information on the schedule was not
due to fraud with intent to evade tax. It is not possible, however,
to state whether in all circumstances we would be entitled to the benefit of
these relief provisions. Even if these relief provisions apply, we
would incur a 100% tax on the gross income attributable to the greater of the
amounts by which we fail the 75% and 95% gross income tests, multiplied by a
fraction intended to reflect our profitability and we would file a schedule with
descriptions of each item of gross income that caused the failure.
Resolution of
Related Party Tenant Issue. In the fourth
quarter of 2006, we determined that, due to certain provisions of the Series B
preferred stock issued to us by Advocat, Inc. (“Advocat”) in 2000 in connection
with a restructuring, Advocat may have been considered to be a “related party
tenant” under the rules applicable to REITs. As a result, we (1) took
steps in 2006 to restructure our relationship with Advocat and ownership of
Advocat securities in order to avoid having the rent received from Advocat
classified as received from a “related party tenant” in taxable years after
2006, and (2) submitted a request to the IRS on December 15, 2006, that in the
event that rental income received by us from Advocat would not be qualifying
income for purposes of the REIT gross income tests, such failure during taxable
years prior to 2007 was due to reasonable cause. During 2007, we
entered into a closing agreement with the IRS covering all affected taxable
periods prior to 2007, which stated that our failure to meet the 95% gross
income tests as a result of the Advocat rental income being considered to be
received from a “related party tenant” was due to reasonable
cause. In connection with reaching this agreement with the IRS, we
paid to the IRS penalty income taxes and interest totaling approximately $5.6
million for the tax years 2002 through 2006. We had previously accrued $5.6
million of income tax liabilities as of December 31, 2006. Based on
our execution of the closing agreement with the IRS and the restructuring of our
relationship with Advocat, we believe that we have fully resolved all tax issues
relating to rental income received from Advocat prior to 2007 and have been
advised by tax counsel that we will not receive any non-qualifying related party
tenant income from Advocat in 2007 and future fiscal years. Accordingly, we do
not expect to incur tax expense associated with related party tenant income in
the periods commencing January 1, 2007.
Asset
Tests. At the close of
each quarter of our taxable year, we must also satisfy the following tests
relating to the nature of our assets. First, at least 75% of the
value of our total assets must be represented by real estate assets (including
(i) our allocable share of real estate assets held by partnerships in which we
own an interest and (ii) stock or debt instruments held for less than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of our company), cash, cash items and government
securities. Second, of our investments not included in the 75% asset
class, the value of our interest in any one issuer’s securities may not exceed
5% of the value of our total assets. Third, we may not own more than
10% of the voting power or value of any one issuer’s outstanding
securities. Fourth, no more than 20% (25% in 2009) of the value of
our total assets may consist of the securities of one or more
TRSs. Fifth, no more than 25% of the value of our total assets may
consist of the securities of TRSs and other non-TRS taxable subsidiaries and
other assets that are not qualifying assets for purposes of the 75% asset
test.
For purposes of the second and third
asset tests described below the term “securities” does not include our equity or
debt securities of a qualified REIT subsidiary, a TRS, or an equity interest in
any partnership, since we are deemed to own our proportionate share of each
asset of any partnership of which we are a partner. Furthermore, for
purposes of determining whether we own more than 10% of the value of only one
issuer’s outstanding securities, the term “securities” does not include: (i) any
loan to an individual or an estate; (ii) any Code Section 467 rental agreement;
(iii) any obligation to pay rents from real property; (iv) certain government
issued securities; (v) any security issued by another REIT; and (vi) our debt
securities in any partnership, not otherwise excepted under (i) through (v)
above, (A) to the extent of our interest as a partner in the partnership or (B)
if 75% of the partnership’s gross income is derived from sources described in
the 75% income test set forth above.
We may own up to 100% of the stock of
one or more TRSs. However, overall, no more than 20% (25% in 2009) of
the value of our assets may consist of securities of one or more TRSs, and no
more than 25% of the value of our assets may consist of the securities of TRSs
and other non-TRS taxable subsidiaries (including stock in non-REIT C
corporations) and other assets that are not qualifying assets for purposes of
the 75% asset test. If the outstanding principal balance of a
mortgage loan exceeds the fair market value of the real property securing the
loan, a portion of such loan likely will not be a qualifying real estate asset
for purposes of the 75% test. The nonqualifying portion of that
mortgage loan will be equal to the portion of the loan amount that exceeds the
value of the associated real property.
After initially meeting the asset tests
at the close of any quarter, we will not lose our status as a REIT for failure
to satisfy any of the asset tests at the end of a later quarter solely by reason
of changes in asset values. If the failure to satisfy the asset tests
results from an acquisition of securities or other property during a quarter,
the failure can be cured by disposition of sufficient nonqualifying assets
within 30 days after the close of that quarter.
For our tax years beginning after 2004,
subject to certain de
minimis exceptions, we may avoid REIT disqualification in the event of
certain failures under the asset tests, provided that (i) we file a schedule
with a description of each asset that caused the failure, (ii) the failure was
due to reasonable cause and not willful neglect, (iii) we dispose of the assets
within 6 months after the last day of the quarter in which the identification of
the failure occurred (or the requirements of the rules are otherwise met within
such period), and (iv) we pay a tax on the failure equal to the greater of (A)
$50,000 per failure, and (B) the product of the net income generated by the
assets that caused the failure for the period beginning on the date of the
failure and ending on the date we dispose of the asset (or otherwise satisfy the
requirements) multiplied by the highest applicable corporate tax
rate.
Annual
Distribution Requirements. 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 noncash
income. 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 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.
Furthermore, if we fail to distribute
during a calendar year, or by the end of January following the calendar year in
the case of distributions with declaration and record dates falling in the last
three months of the calendar year, at least the sum of:
• 85%
of our REIT ordinary income for such year;
• 95%
of our REIT capital gain income for such year; and
• any
undistributed taxable income from prior periods,
we will
incur a 4% nondeductible excise tax on the excess of such required distribution
over the amounts we actually distribute. We may elect to retain and
pay income tax on the net long-term capital gain we receive in a taxable
year. If we so elect, we will be treated as having distributed any
such retained amount for purposes of the 4% excise tax described
above. We have made, and we intend to continue to make, timely
distributions sufficient to satisfy the annual distribution
requirements. We may also be entitled to pay and deduct deficiency
dividends in later years as a relief measure to correct errors in determining
our taxable income. Although we may be able to avoid income tax on
amounts distributed as deficiency dividends, we will be required to pay interest
to the IRS based upon the amount of any deduction we take for deficiency
dividends.
The availability to us of, among other
things, depreciation deductions with respect to our owned facilities depends
upon the treatment by us as the owner of such facilities for federal income tax
purposes, and the classification of the leases with respect to such facilities
as “true leases” rather than financing arrangements for federal income tax
purposes. The questions of whether (1) we are the owner of such
facilities and (ii) the leases are true leases for federal tax purposes, are
essentially factual matters. We believe that we will be treated as
the owner of each of the facilities that we lease, and such leases will be
treated as true leases for federal income tax purposes. However, no
assurances can be given that the IRS will not successfully challenge our status
as the owner of our facilities subject to leases, and the status of such leases
as true leases, asserting that the purchase of the facilities by us and the
leasing of such facilities merely constitute steps in secured financing
transactions in which the lessees are owners of the facilities and we are merely
a secured creditor. In such event, we would not be entitled to claim
depreciation deductions with respect to any of the affected
facilities. As a result, we might fail to meet the 90% distribution
requirement or, if such requirement is met, we might be subject to corporate
income tax or the 4% excise tax.
Reasonable Cause
Savings Clause. We may avoid
disqualification in the event of a failure to meet certain requirements for REIT
qualification if the failures are due to reasonable cause and not willful
neglect, and if the REIT pays a penalty of $50,000 for each such
failure. This reasonable cause safe harbor is not available for
failures to meet the 95% and 75% gross income tests, the rules with respect to
ownership of securities of more than 10% of a single issuer, and the new rules
provided for failures of the asset tests.
Failure to
Qualify. If we fail to qualify as a REIT in any taxable year,
and the reasonable cause relief provisions do not apply, we will be subject to
tax (including any applicable alternative minimum tax) on our taxable income at
regular corporate rates. Distributions to stockholders in any year in
which we fail to qualify will not be deductible and our failure to qualify as a
REIT would reduce the cash available for distribution by us to our
stockholders. In addition, if we fail to qualify as a REIT, all
distributions to stockholders will be taxable as ordinary income, to the extent
of current and accumulated earnings and profits, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under
specific statutory provisions, we would also be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances we
would be entitled to such statutory relief. Failure to qualify could
result in our incurring indebtedness or liquidating investments to pay the
resulting taxes.
Other Tax
Matters. We own and operate a number of properties through
qualified REIT subsidiaries, (“QRSs”). The QRSs are treated as
qualified REIT subsidiaries under the Code. Code Section 856(i)
provides that a corporation which is a qualified REIT subsidiary shall not be
treated as a separate corporation, and all assets, liabilities, and items of
income, deduction, and credit of a qualified REIT subsidiary shall be treated as
assets, liabilities and such items (as the case may be) of the
REIT. Thus, in applying the tests for REIT qualification described
above, the QRSs will be ignored, and all assets, liabilities and items of
income, deduction, and credit of such QRSs will be treated as our assets,
liabilities and items of income, deduction, and credit.
In the case of a REIT that is a partner
in a partnership, the REIT is treated as owning its proportionate share of the
assets of the partnership and as earning its allocable share of the gross income
of the partnership for purposes of the applicable REIT qualification
tests. Thus, our proportionate share of the assets, liabilities, and
items of income of any partnership, joint venture, or limited liability company
that is treated as a partnership for federal income tax purposes in which we own
an interest, directly
All of
our properties are used as healthcare facilities, and as a result, we are
directly affected by the risk associated with government regulation and
reimbursement. Our operators, 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. In addition, our operators are
subject to extensive federal, state and local regulation including, but not
limited to, laws and regulations relating to licensure, operations, facilities,
professional staff and insurance. These laws and regulations are subject to
frequent and substantial change, which may be applied
retroactively. Changes in government laws and regulations,
interpretations, increased regulatory enforcement activity and regulatory
noncompliance by an operator can significantly affect the operator’s ability to
operate its facility or facilities and could adversely affect such operator’s
ability to meet its contractual and financial obligations to us.
Reimbursement. The
recent downturn in the U.S. economy and other factors could result in
significant cost-cutting at both the federal and state levels, resulting in a
reduction of reimbursement rates and levels to our operators under both the
Medicare and Medicaid programs. We currently believe that our
operator coverage ratios are strong and that our operators can absorb moderate
reimbursement rate reductions under Medicaid and Medicare and still meet their
obligations to us. However, significant limits on the scope of services
reimbursed and on reimbursement rates and fees could have a material adverse
effect on an operator’s results of operations and financial condition, which
could adversely affect the operator’s ability to meet its obligations to
us.
Medicaid. Each
state has its own Medicaid program that is funded jointly by the state and the
U.S. 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 their
citizens. Currently, Medicaid is the single largest source of
financing for long-term care in the United States.
Current
market and economic conditions will likely have a significant impact on state
budgets and health care spending. The states with the most significant projected
budget deficits in which the Company owns facilities are Alabama, Arizona,
California, Florida, New Hampshire and Rhode Island. These
deficits, exacerbated by the potential for increased enrollment in Medicaid due
to rising unemployment levels and declining family incomes, could cause states
to reduce state expenditures under their respective state Medicaid programs by
lowering reimbursement rates. Since the profit margins on Medicaid
patients are generally relatively low, substantial reductions in Medicaid
reimbursement could adversely affect our operators’ results of operations and
financial condition, which in turn could negatively impact us.
In 2007
and early 2008, the Center for Medicare & Medicaid Services (“CMS”) issued a
number of Medicaid rules that could reduce funding available under state
Medicaid programs to reimburse long-term care providers. On June 30,
2008 the Supplemental Appropriations Act of 2008 (H.R. 2642) was signed into
law, delaying the implementation of a number of these rules until April 1,
2009. The Medicaid rules that were delayed until April 1, 2009 by the
legislation address the following issues: intergovernmental
transfers; coverage of rehabilitation services for people with disabilities;
outreach and enrollment funded by Medicaid in schools; specialized
transportation to schools for children covered by Medicaid; graduate medical
education payments; targeted case management services and some provisions
relating to state provider tax limits. If some or all of these
delayed regulations go into effect in the future, the additional financial
burden placed on states could result in the operators of our properties
experiencing significant reductions in Medicaid reimbursement
levels.
However,
the Supplemental Appropriations Act of 2008 did not delay other recent Medicaid
rules that could negatively impact Medicaid reimbursement levels for long-term
care providers. Congress permitted certain Medicaid rules to become
effective, such as rules relating to outpatient hospital services, appeals filed
through the Department of Health and Human Services and some provisions relating
to state provider tax limits. For example, on April 22, 2008, a
federal Medicaid rule that reduced the maximum allowable health care-related
taxes that states can impose on providers from 6 percent to 5.5 percent became
effective. This rule could result in lower taxes for providers, but
could also result in less overall funding for state Medicaid programs by
limiting the ability of states to fund the non-federal share of the Medicaid
program. As a result, the operators of our properties could
potentially experience reductions in Medicaid funding, which could adversely
impact their ability to meet their obligations to us.
Medicare. Medicare
is a social insurance program administered by the U.S. federal government,
providing health insurance to people who are aged 65 and over, or who meet
special criteria. Similar to the Medicaid program, the Medicare
program may be subject to future reform and cost-cutting measures in response to
the recent downturn in U.S. economic and market conditions.
On August
8, 2008, CMS published a final rule on Medicare’s prospective payment system for
skilled nursing facilities for fiscal year 2009, which CMS estimates will
increase aggregate Medicare payments to skilled nursing facilities during fiscal
year 2009 by $780 million. CMS notes that the increase in payments is
due to an increase in the market basket adjustment factor of 3.4
percent.
The
Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”) became
law on July 15, 2008 and made a variety of changes to Medicare, some of which
may affect skilled nursing facilities. For instance, MIPPA extended
the therapy caps exceptions process through December 31, 2009. The
therapy caps limit the physical therapy, speech-language therapy and
occupational therapy services that a Medicare beneficiary can receive during a
calendar year. These caps do not apply to therapy services covered
under Medicare Part A in a skilled nursing facility, although the caps apply in
most other instances involving patients in skilled nursing facilities or
long-term care facilities who receive therapy services covered under Medicare
Part B. Congress implemented a temporary therapy cap exceptions
process, which permits medically necessary therapy services to exceed the
payment limits. MIPPA retroactively extended the therapy caps
exceptions process through December 31, 2009. Expiration of the
therapy caps exceptions process in the future could have a material adverse
effect on our operators’ financial condition and operations, which could
adversely impact their ability to meet their obligations to us.
In
general, we cannot be assured that Medicare and Medicaid reimbursement will
remain at levels comparable to present levels or that such reimbursement will be
sufficient for our operators to cover all operating and fixed costs necessary to
care for Medicare and Medicaid patients.
Quality of Care
Initiatives. CMS has implemented a number of initiatives
focused on the quality of care provided by nursing homes that could affect our
operators. For instance, in February 2008, CMS made publicly
available on its website the names of all 136 nursing homes targeted in its
Special Focus Facility program for underperforming nursing homes. CMS
plans to update the list regularly. As another example, in December
2008, CMS released quality ratings for all of the nursing homes that participate
in Medicare or Medicaid. Facility rankings, ranging from five stars
(“much above average”) to one star (“much below average”) will be updated on a
monthly basis. In the event any of our operators do not maintain the
same or superior levels of quality care as their competitors, patients could
choose alternate facilities, which could adversely impact our operators’
revenues. In addition, the reporting of such information could lead
to future reimbursement policies that reward or penalize facilities on the basis
of the reported quality of care parameters.
The
Office of Inspector General (“OIG”) of the Department of Health and Human
Services also has carried out a number of projects focused on the quality of
care provided by nursing homes. For example, in September 2008,
the OIG released a report based on an analysis of data from CMS’ Online Survey
and Certification Reporting System (“OSCAR”), which contains the results of all
state nursing home surveys. The report notes that over 91 percent of
nursing homes surveyed were cited for deficiencies and complaints between 2005
and 2007. The most common deficiencies cited involved quality of
care, resident assessments and quality of life. A greater percentage
of for-profit nursing homes were cited than not-for-profit and government
nursing homes. In addition, the OIG’s Work Plan for fiscal year 2009,
which describes projects that the OIG plans to address during the fiscal year,
includes a number of projects related to nursing homes.
Fraud and Abuse
Laws and Regulations. There are various complex federal and
state laws governing a wide array of referrals, relationships and arrangements
and prohibiting fraud by healthcare providers. Federal and state
agencies are devoting increasing attention and resources to anti-fraud
initiatives against healthcare providers, including long-term care providers.
There are also 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. 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 fraud and abuse
law or regulation by an operator could 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.
Licensing,
Certification and Other Laws and
Regulations. Our operators and facilities are subject to the
regulatory and licensing requirements of federal, state and local authorities
and are periodically audited 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 are resolved and the necessary licenses obtained or reinstated.
For example, some of our facilities may be unable to satisfy current and future
state 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 or
permanently.
Additional federal, state and local
laws affect how our operators conduct their operations, including federal and
state laws designed to protect the confidentiality and security of patient
health information, laws protecting consumers against deceptive practices, and
laws generally affecting our operators’ management of property and equipment and
how our operators conduct their operations (including laws and regulations
involving: fire, health and safety; quality of services, care and food service;
residents’ rights, including abuse and neglect laws; and the health standards
set by the federal Occupational Safety and Health Administration). We
are unable to predict the effect that potential changes in these requirements
could have on the revenues of our operators, and thus their ability to meet
their obligations to us.
Legislative and
Regulatory Developments. Each year, legislative proposals are
introduced or proposed in Congress and in some state legislatures that would
result in major changes in the healthcare system, either nationally or at the
state level. We are unable to predict accurately whether any
proposals will be adopted, or if adopted, what effect, if any, these proposals
would have on our operators or our business.
As of February 1, 2009, the executive
officers of our company were as follows:
C. Taylor Pickett (47) 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 2011. 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 (45) 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. (55) 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 (45) 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.
Michael D. Ritz (40) is the
Chief Accounting Officer and has served in this capacity since February
2007. Prior to joining our company, Mr. Ritz served as the Vice
President, Accounting & Assistant Corporate Controller from April 2005 until
February 2007 and the Director, Financial Reporting from August 2002 until April
2005 for Newell Rubbermaid Inc. Prior to his time with Newell
Rubbermaid Inc., Mr. Ritz served as the Director of Accounting and Controller of
Novavax Inc. from July 2001 through August 2002.
As of December 31, 2008, we had 19
full-time employees, including the five executive officers listed
above.
Following
are some of the risks and uncertainties that could cause the Company’s financial
condition, results of operation, business and prospects to differ materially
from those contemplated by the forward-looking statements contained in this
report or the Company’s other filings with the SEC. These risks
should be read in conjunction with the other risks described in this report
including but not limited to those described under “Taxation” and “Healthcare
Reimbursement and Regulation” under Item 1 above. The risks described
below are not the only risks facing the Company and there may be additional
risks of which the Company is not presently aware or that the Company currently
considers unlikely to significantly impact the Company. Our business,
financial condition, results of operations or liquidity could be materially
adversely affected by any of these risks, and, as a result, the trading price of
our common stock could decline.
We have
grouped the following risk factors into three general categories:
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Risks
Related to the Operators of our
Facility
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Risks
Related to Us and Our Operators
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Risks
Related to Our Stock
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Risks
Related to the Operators of Our Facilities
Our
financial position could be weakened and our ability to fulfill our obligations
under our indebtedness could be limited if any of our major operators become
unable to meet their obligations to us or fail to renew or extend their
relationship with us as their lease terms expire or their mortgages mature, or
if we become 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.
The
bankruptcy or insolvency of our operators could limit or delay our ability to
recover on our investments.
We are
exposed to the risk that our operators may experience a financial downturn,
which could result in their bankruptcy or insolvency. Further, the current
economic climate that exists in the United States serves to heighten and
increase this risk. Although our lease agreements and loan agreements
typically provide us with the right to terminate the agreement, evict an
operator, foreclose on our collateral, demand immediate payment, and exercise
other remedies, title 11 of the United States Code, as amended and supplemented
(the “Bankruptcy Code”), would limit or, at a minimum, delay our ability to
collect unpaid pre-bankruptcy rents and mortgage payments and to pursue other
remedies against a bankrupt operator.
Leases. A
bankruptcy filing by an operator/lessee generally halts all efforts to collect
unpaid pre-bankruptcy rents or to evict the operator, absent approval of the
bankruptcy court. The Bankruptcy Code provides a lessee with the
option to assume or reject an unexpired lease within certain specified periods
of time. Generally, an operator must pay all rent arising between its
bankruptcy filing and the assumption or rejection of the lease (although such
payments will likely be delayed as a result of the bankruptcy
filing). If the operator chooses to assume its lease with us, the
operator must cure all monetary defaults existing under the lease (including
payment of unpaid pre-bankruptcy rents) and provide adequate assurance of its
ability to perform its future obligations under the lease. If the
operator opts to reject its lease with us, we would have a claim against the
operator for unpaid and future rents payable under the lease, but such claim
would be subject to a statutory “cap” and would generally result in a recovery
substantially less than the face value of such claim. Although the
operator’s rejection of the lease would permit us to recover possession of the
leased facility, we would still face losses, costs and delays associated with
re-leasing the facility to a new operator.
Several other factors could impact our
rights under leases with bankrupt operators. First, the operator
could seek to assign its lease with us to a third party. The
Bankruptcy Code generally disregards anti-assignment provisions in leases to
permit assignment of unexpired leases to third parties (provided all monetary
defaults under the lease are cured and the third party can demonstrate its
ability to perform its obligations under the lease). Second, in
instances in which we have entered into a master lease agreement with an
operator that operates more than one facility, there exists the risk that the
bankruptcy court could determine that the master lease was comprised of
separate, divisible leases (each of which could be separately assumed or
rejected), rather than a single, integrated lease (which would have to be
assumed or rejected in its entirety). Finally, there exists the risk
that the bankruptcy court could re-characterize our lease agreement as a
disguised financing arrangement, which could require us to receive bankruptcy
court approval to foreclose or pursue other remedies with respect to the
facility.
Mortgages. A
bankruptcy filing by an operator/mortgagor also generally halts all efforts to
collect unpaid pre-bankruptcy mortgage payments and to foreclose on our
collateral, absent approval of the bankruptcy court. As an initial
matter, we could ask the bankruptcy court to order the operator to make periodic
payments or provide other financial assurances to us during the bankruptcy case
(known as “adequate protection”), but the ultimate decision regarding “adequate
protection” (and the timing and amount of same) rests with the bankruptcy
court. In addition, we would have to receive bankruptcy court
approval before we could commence or continue any foreclosure action against the
operator’s facility. The bankruptcy court could withhold such
approval, especially if the operator can demonstrate that the facility is
necessary for an effective reorganization and that we have a sufficient “equity
cushion” in the facility. If the bankruptcy court does not either
grant us “adequate protection” or permit us to foreclose on our collateral, we
may not receive any loan payments until after the bankruptcy court confirms a
plan of reorganization for the operator. Even if the bankruptcy court
permits us to foreclose on the facility, we would still be subject to the
losses, costs and other risks associated with a foreclosure sale, including
possible successor liability under government programs, indemnification
obligations and suspension or delay of third-party payments. Should
such events occur, our income and cash flow from operations would be adversely
affected.
Failure
by our operators to comply with various local, state and federal government
regulations may adversely impact their ability to make debt or lease payments 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
on the amount of reimbursement 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:
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Medicare and
Medicaid. A significant portion of our SNF and nursing
home operators’ revenue is derived from governmentally-funded
reimbursement programs, primarily Medicare and
Medicaid. Failure to maintain certification and accreditation
in these programs would result in a loss of funding from such
programs. See the risk factor entitled “Our operators depend on
reimbursement from governmental and other third party payors and
reimbursement rates from such payors may be reduced” for further
discussion.
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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 these
authorities. 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. For
example, some of our facilities may be unable to satisfy current and
future state 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 or permanently. In addition, 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.
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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. Governments are devoting increasing attention and
resources to anti-fraud initiatives against healthcare
providers. There are also 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. 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.
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Other
Laws. Other federal, state and local laws and
regulations that impact how our operators conduct their operations include
(i) laws designed to protect the confidentiality and security of patient
health information, (ii) licensure laws, (iii) laws protecting consumers
against deceptive practices, (iv) laws generally affecting our operators’
management of property and equipment and how our operators generally
conduct their operations, such as fire, health and safety laws;
(v) laws affecting assisted living facilities mandating quality
of services and care, and quality of food service , and (vi) resident
rights (including abuse and neglect laws) and health standards set by the
federal Occupational Safety and Health Administration. We
cannot predict the effect that additional costs to comply with these laws
may have on the revenues of our operators, and thus their ability to meet
their obligations to us.
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Legislative and Regulatory
Developments. Each year, legislative and regulatory
proposals are introduced at the federal and state levels that would affect
major changes in the healthcare system. 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.
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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. We currently believe that our
operator coverage ratios are strong and that our operators can absorb moderate
reimbursement rate reductions and still meet their financial obligations to
us. However, significant 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 jeopardize their ability to
meet their obligations to us.
Government
budget deficits could lead to a reduction in Medicare and Medicaid
reimbursement.
The
downturn in the U.S. economy has negatively affected state budgets, which may
put pressure on states to decrease reimbursement rates for our operators with
the goal of decreasing state expenditures under their state Medicaid
programs. The need to control Medicaid expenditures may be
exacerbated by the potential for increased enrollment in Medicaid due to
unemployment and declines in family incomes. These potential
reductions could be compounded by the potential for federal cost-cutting efforts
that could lead to reductions in reimbursement to our operators under both the
Medicare and Medicaid programs. Potential reductions in Medicaid and
Medicare reimbursement to our operators could reduce the cash flow of our
operators and their ability to make rent or mortgage payments to
us. Since the profit margins on Medicaid patients are generally
relatively low, more than modest reductions in Medicaid reimbursement could
place some operators in financial distress, which in turn could adversely affect
us.
A
prolonged economic slowdown could significantly harm our operators.
A
prolonged economic slowdown could result in depressed revenues and results from
operations of our operators. Any sustained period of increased
payment delinquencies, foreclosures or losses by our operators under our leases
and loans could adversely affect our net interest income from investments in our
portfolio.
Our
operators may be subject to significant legal actions that could result in their
increased operating costs and substantial uninsured liabilities, which may
affect their ability to meet their obligations 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. We can give no assurance that the insurance coverage
maintained by our operators will cover all claims made against them or 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. TC Healthcare, the new
entity operating certain facilities on our behalf on an interim basis, may be
named as a defendant in professional liability claims related to the properties
that were transitioned from Haven Eldercare, LLC (“Haven facilities”) as
described in Item 7 – Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Portfolio Developments, New Investments,
Asset Sales and Other Developments. In these suits, patients could
allege significant damages, including punitive damages. Such
potential litigation and rising insurance costs could not only affect TC
Healthcare’s ability to obtain and maintain adequate liability and other
insurance, but also may affect TC Healthcare’s ability to run the business
profitably. We currently consolidate the financial results of
TC Healthcare in our financial statements, and as such, our financial results
could suffer. Effective as of July 7, 2008, we took ownership and/or
possession of the Haven facilities and TC Healthcare, an entity in which we have
a substantial economic interest, subsequently began operating these facilities
on our behalf through an independent contractor.
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. Such liabilities could
adversely affect the operator’s ability to meet its obligations to
us.
In
addition, we may in some circumstances be named as a defendant in litigation
involving the actions of our operators. Although we generally have no
involvement in the actions of our operators and our standard lease agreements
and loan agreements generally require our operators to indemnify and carry
insurance to cover us in certain cases, a significant judgment against us in
such litigation could exceed our and our operators’ insurance coverage, which
would require us to make payments to cover the judgment.
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 operators 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. Our operators
compete on a number of different levels including the quality of care provided,
reputation, the physical appearance of a facility, price, the range of services
offered, family preference, alternatives for healthcare delivery, the supply of
competing properties, physicians, staff, referral sources, location and the size
and demographics of the population in the surrounding areas. We
cannot be certain that 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.
We
may be unable to successfully foreclose on the collateral securing our real
estate-related loans, and even if we are successful in our foreclosure efforts,
we may be unable to successfully operate or occupy the underlying real estate,
which may adversely affect our ability to recover our investments.
If an
operator defaults under one of our loans, we may have to foreclose on the loan
or protect our interest by acquiring title to the property and thereafter making
substantial improvements or repairs 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. Even if we are able to successfully foreclose on the
collateral securing our real estate-related loans, we may inherit properties for
which we are unable to expeditiously seek tenants or operators, if at all, which
would adversely affect our ability to recover our investment.
Risks
Related to 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.
To
qualify as a REIT under the Code, we are required, among other things, to
distribute at least 90% of our REIT taxable income each year to our
stockholders. Because of this distribution requirement, we may not be
able to fund, from cash retained from operations, all future capital needs,
including capital needed to make investments and to satisfy or refinance
maturing commitments. As a result, we rely on external sources of
capital, including debt and equity financing. 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 the performance of the national and global economies
generally; competition in the healthcare industry; issues facing the healthcare
industry, including regulations and government reimbursement policies; our
operators’ operating costs; the ratings of our debt and preferred securities;
the market’s perception of our growth potential; the market value of our
properties; our current and potential future earnings and cash distributions;
and the market price of the shares of our capital stock. Difficult
capital market conditions in our industry during the past several years,
exacerbated by the recent economic downturn, and our need to stabilize our
portfolio have limited and may continue to limit our access to
capital. While we currently have sufficient cash flow from operations
to fund our obligations and commitments, we may not be in position to take
advantage of future investment opportunities in the event that we are unable to
access the capital markets on a timely basis or we are only able to obtain
financing on unfavorable terms.
Current
economic conditions and turbulence in the credit markets may create challenges
in securing third-party borrowings or refinancing our existing debt, and may
cause market rental rates and property values to decline.
Current
economic conditions, the availability and cost of credit, turmoil in the
mortgage market and declining real estate markets have contributed to increased
volatility and diminished expectations for real estate markets and the economy
as a whole going forward. Many economists are predicting continued deterioration
in economic conditions in the United States, along with significant increases in
unemployment and vacancy rates at commercial properties. In the event that the
constriction within the credit markets persists, we may face challenges in
securing third-party borrowings or refinancing our existing debt in the future.
In particular, our $255.0 million revolving secured credit facility, as amended
(“Credit Facility”), will expire in March 2010, and continued disruption in the
credit markets could adversely affect our ability to renew or refinance on terms
favorable to us, or at all.
Additionally,
should such economic conditions continue for a prolonged period of time, the
value of our commercial real estate assets and our ability to achieve market
rental rates would decline significantly. In the near-term, we
believe that we are well positioned to withstand this downturn; however, no
assurances can be given that current economic conditions and the effects of the
credit crisis will not have a material adverse effect on our business, financial
condition and results of operations.
Our
ability to raise capital through equity sales is dependent, in part, on the
market price of our common stock, and our failure to meet market expectations
with respect to our business could negatively impact the market price of our
common stock and availability of equity capital.
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:
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the
extent of investor interest;
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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;
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our
financial performance and that of our
operators;
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the
contents of analyst reports about us and the REIT
industry;
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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;
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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
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other
factors such as governmental regulatory action and changes in REIT tax
laws.
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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 and, as a result,
the availability of equity capital to us.
We
are subject to risks associated with debt financing, which could negatively
impact our business and limit our ability to make distributions to our
stockholders and to repay maturing debt.
The
financing required to make future investments and satisfy maturing commitments
may be provided by borrowings under our Credit Facility, private or public
offerings of debt, the assumption of secured indebtedness, mortgage financing on
a portion of our owned portfolio or through joint ventures. To the
extent we must obtain debt financing from external sources to fund our capital
requirements, we cannot guarantee such financing will be available on favorable
terms, if at all. In addition, 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 to make distributions
to our stockholders and repay our 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. The degree of leverage could have important consequences to
stockholders, including affecting our investment grade ratings and our ability
to obtain additional financing in the future, and making us more vulnerable to a
downturn in our results of operations or the economy generally.
Certain
of our operators account for a significant percentage of our real estate
investment and revenues.
At December 31, 2008, approximately 24%
of our real estate investments were operated by two public companies: Sun
Healthcare Group (“Sun”) (14%) and Advocat Inc. (“Advocat”)
(10%). Our largest private company operators (by investment) were
CommuniCare Healthcare Services (“CommuniCare”) (22%) and Signature Holding II,
LLC (10%). No other operator represents more than 9% of our
investments. The three states in which we had our highest
concentration of investments were Ohio (23%), Florida (12%) and Pennsylvania
(10%) at December 31, 2008.
For the year ended December 31, 2008,
our revenues from operations totaled $193.8 million, of which approximately
$31.7 million were from Sun (16%), $31.6 million from CommuniCare (16%) and
$20.5 million from Advocat (11%). No other operator generated more
than 9% of our revenues from operations for the year ended December 31,
2008. In addition, our owned and operated assets generated $24.2
million (12%) of revenue in 2008. Thirteen of the fifteen owned and
operated facilities were transitioned/leased to a new tenant/operator effective
September 1, 2008.
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.
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 our acquired properties, including
contingent liabilities, or our newly acquired properties might require
significant management attention that would otherwise be devoted to our ongoing
business. As a further example, 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. Such 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 factors such as market conditions, operator
performance and legal structure. If we determine that a significant
impairment has occurred, we are required to make an adjustment to the net
carrying value of the asset, which could have a material adverse affect on our
results of operations and funds from operations in the period in which the
write-off occurs. During the year ended December 31, 2008, we
recognized an impairment loss associated with three facilities for approximately
$5.6 million.
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 are unable to sell these properties for our book value, we may be
required to take a non-cash impairment charge or loss on the sale, either of
which would reduce our net income.
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, 2008, we had total debt of approximately
$548.2 million, of which $63.5 million consisted of borrowings under our Credit
Facility, which matures in March 2010, $310.0 million of our 7% senior notes due
2014 and $175.0 million of our 7% senior notes due 2016. 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;
|
|
·
|
result
in a possible downgrade of our credit
rating;
|
|
·
|
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.
|
Covenants
in our Credit Facility and other debt instruments limit our operational
flexibility, and a covenant breach could materially adversely affect our
operations.
The terms
of our Credit Facility and other indebtedness require us to comply with a number
of customary financial and other covenants. Our continued ability to incur
indebtedness and conduct our operations is subject to compliance with these
financial and other covenants. Breaches of these covenants could result in
defaults under the instruments governing the applicable indebtedness, in
addition to any other indebtedness cross-defaulted against such instruments. Any
such breach could materially adversely affect our business, results of
operations and financial condition.
Our
real estate investments are relatively illiquid.
Real
estate investments are relatively illiquid and generally cannot be sold
quickly. In addition, some of our properties serve as collateral for
our secured debt obligations and cannot be readily sold. Additional
factors that are specific to our industry also tend to limit our ability to vary
our portfolio promptly in response to changes in economic or other
conditions. For example, all of our properties are ‘‘special
purpose’’ properties that cannot be readily converted into general residential,
retail or office use. In addition, 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 operator becomes unable to meet its obligations to us,
then 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. Furthermore, 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.
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,
a current or previous owner of real property or a secured lender, such as us,
may be liable in certain circumstances for the costs of investigation, removal
or remediation of, or related releases 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 based on the owner’s
knowledge of, or responsibility for, the presence or disposal of such
substances. As a result, liability may be imposed on the owner in
connection with the activities of an operator of the property. The
cost of any required investigation, 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 an operators’ ability to attract
additional residents and our ability to sell or rent such property or to borrow
using such property as collateral which, in turn, could negatively impact our
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. For instance, most of our leases do not require the lessee
to indemnify us for environmental liabilities arising before the lessee took
possession of the premises. Further, 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. Increasing investor interest
in our sector and consolidation at the operator of REIT level could increase
competition and reduce our profitability.
Our
business is highly competitive and we expect that it may become more competitive
in the future. We compete for healthcare facility investments with
other healthcare investors, including other REITs, some of which have greater
resources and lower costs of capital than we do. Increased
competition makes it more challenging for us to identify and successfully
capitalize on opportunities that meet our business goals. If we
cannot capitalize on our development pipeline, identify and purchase a
sufficient quantity of healthcare facilities at favorable prices, or if we are
unable to finance such acquisitions on commercially favorable terms, our
business, results of operations and financial condition may be materially
adversely affected. In addition, 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
may be named as defendants in litigation arising out of professional liability
and general liability claims relating to our previously owned and operated
facilities that if decided against us, could adversely affect our financial
condition.
We and
several of our wholly-owned subsidiaries were named as defendants in
professional liability and general liability claims related to our owned and
operated facilities prior to 2005. Other third-party managers
responsible for the day-to-day operations of these facilities were also 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. Although all of
these prior suits have been settled, we or our affiliates could be named as
defendants in similar suits related to our owned and operated assets resulting
from the transition of the Haven facilities as described in Item 7 –
Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Portfolio Developments, New Investments, Asset Sales and Other
Developments. There can be no assurance that we would be successful
in our defense of such potential matters or in asserting our claims against
various managers of the subject facilities or that the amount of any settlement
or judgment would be substantially covered by insurance or that any punitive
damages will be covered by insurance.
Our
charter and bylaws contain significant anti-takeover provisions which could
delay, defer or prevent a change in control or other transactions that could
provide our stockholders with the opportunity to realize a premium over the
then-prevailing market price of our common stock.
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 the members of our Board of Directors 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. 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 and/or result in
the delay, deferral or prevention of a change in control or other transactions
that could provide our stockholders with the opportunity to realize a premium
over the then-prevailing market price of our common stock.
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 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 Code. We believe that we have operated in such a manner as to
qualify for taxation as a REIT under the Code and intend to continue to operate
in a manner that will maintain our qualification 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 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. 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 with
respect to each such taxable year for which the statute of limitations remains
open. 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 significantly reduce our net earnings and
cash flow because of our additional tax liability for the years involved, which
could significantly impact our financial condition.
We
generally must distribute annually at least 90% of our taxable income to our
stockholders to maintain our REIT status. 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.
Even
if we remain qualified as a REIT, we may face other tax liabilities that reduce
our cash flow.
Even if
we remain qualified for taxation as a REIT, we may be subject to certain
federal, state and local taxes on our income and assets, including taxes on any
undistributed income, tax on income from some activities conducted as a result
of a foreclosure, and state or local income, property and transfer
taxes. Any of these taxes would decrease cash available for the
payment of our debt obligations. In addition, to meet REIT
qualification requirements, we may hold some of our non-healthcare assets
through taxable REIT subsidiaries (“TRS”) or other subsidiary corporations that
will be subject to corporate level income tax at regular rates.
Qualifying
as a REIT involves highly technical and complex provisions of the Internal
Revenue Code and complying with REIT requirements may affect our
profitability.
Qualification
as a REIT involves the application of technical and intricate Internal Revenue
Code provisions. Even a technical or inadvertent violation could jeopardize our
REIT qualification. To qualify as a REIT for federal income tax purposes, we
must continually satisfy tests concerning, among other things, the nature and
diversification of our assets, the sources of our income and the amounts we
distribute to our stockholders. Thus, we may be required to liquidate
otherwise attractive investments from our portfolio, or be unable to pursue
investments that would be otherwise advantageous to us, to satisfy the asset and
income tests or to qualify under certain statutory relief
provisions. We may also be required to make distributions to
stockholders at disadvantageous times or when we do not have funds readily
available for distribution (e.g., if we have assets which generate mismatches
between taxable income and available cash). Having to comply with the
distribution requirement could cause us to: (i) sell assets in adverse market
conditions; (ii) borrow on unfavorable terms; or (iii) distribute amounts that
would otherwise be invested in future acquisitions, capital expenditures or
repayment of debt. As a result, satisfying the REIT requirements
could have an adverse effect on our business results and
profitability.
Our
success depends in part on our ability to retain key personnel and our ability
to attract or retain other qualified personnel.
Our
future performance depends to a significant degree upon the continued
contributions of our executive management team and other key
employees. The loss of the services of our current executive
management team could have an adverse impact on our
operations. Although we have entered into employment agreements with
the members of our executive management team, these agreements may not assure
their continued service. In addition, our future success depends, in
part, on our ability to attract, hire, train and retain other qualified
personnel. Competition for qualified employees is intense, and we
compete for qualified employees with companies with greater financial
resources. Our failure to successfully attract, hire, retain and
train the people we need would significantly impede our ability to implement our
business strategy.
Failure
to maintain effective internal control over financial reporting could have a
material adverse effect on our business, results of operations, financial
condition and stock price.
Pursuant
to the Sarbanes-Oxley Act of 2002, we are required to provide a report by
management on internal control over financial reporting, including management's
assessment of the effectiveness of such control. Changes to our business will
necessitate ongoing changes to our internal control systems and processes.
Internal control over financial reporting may not prevent or detect
misstatements due to inherent limitations, including the possibility of human
error, the circumvention or overriding of controls, or fraud. Therefore, even
effective internal controls can provide only reasonable assurance with respect
to the preparation and fair presentation of financial statements. In addition,
projections of any evaluation of effectiveness of internal control over
financial reporting to future periods are subject to the risk that the control
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. If we fail to
maintain the adequacy of our internal controls, including any failure to
implement required new or improved controls, or if we experience difficulties in
their implementation, our business, results of operations and financial
condition could be materially adversely harmed, we could fail to meet our
reporting obligations and there could be a material adverse effect on our stock
price.
Risks
Related to Our Stock
The
market value of our stock could be substantially affected by various
factors.
Market
volatility may adversely affect the market price of our common
stock. As with other publically traded securities, the share price of
our stock depends 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;
|
|
·
|
prevailing
interest rates;
|
|
·
|
our
credit rating;
|
|
·
|
general
economic and market conditions; and
|
|
·
|
our
financial condition, performance and
prospects.
|
Our
issuance of additional capital stock, warrants or debt securities, whether or
not convertible, may reduce the market price for our outstanding securities,
including our common stock, and dilute the ownership interests of existing
stockholders.
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 securities, 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 negatively impact 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. We have in the past and may in the future issue
additional options or other securities convertible into or exercisable for
our common stock under 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.
|
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·
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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.
|
|
·
|
The
sales of securities convertible into our common stock could dilute the
interests of existing common
stockholders.
|
There
are no assurances of our ability to pay dividends in the future.
In 2001,
our Board of Directors suspended dividends on shares of 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 shares of series of preferred stock and reinstated dividends on
shares of 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 herein were to occur. Our
payment of dividends is subject to compliance with restrictions contained in our
Credit Facility, the indenture relating to our outstanding 7% senior notes due
2014, the indenture relating to our outstanding 7% senior notes due 2016 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 of Directors
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, 4,339,500 shares of our
8.375% Series D cumulative redeemable preferred stock (“Series D Preferred
Stock”) were issued and outstanding. The aggregate liquidation
preference with respect to the outstanding Series D Preferred Stock is
approximately $108.5 million, and annual
dividends on our outstanding Series D Preferred Stock were approximately $9.7
million. Holders of our Series D 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 Series D Preferred Stock are entitled to
receive a liquidation preference of $25 per share, plus any accrued and unpaid
distributions. This preference will reduce the remaining amount of
our assets, if any, available to distribute to holders of our common
stock. In addition, holders of our Series D Preferred Stock have the
right to elect two additional directors to our Board of Directors if six
quarterly preferred dividends are in arrears. If this were to occur,
the holders of our Series D Preferred Stock would have significant control over
our affairs, and their interests may differ from those of our other
stockholders.
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.
None.
At December 31, 2008, our real estate
investments included long-term care facilities and rehabilitation hospital
investments, either in the form of purchased facilities that are leased to
operators, mortgages on facilities that are operated by the mortgagors or their
affiliates and facilities subject to leasehold interests. The
facilities are located in 28 states and are operated by 25
operators. The following table summarizes our property investments as
of December 31, 2008:
|
Investment
Structure/Operator
|
Number
of
Beds
|
Number
of
Facilities
|
Occupancy
Percentage(1)
|
Gross
Investment
(in
thousands)
|
||||||||||||
|
Purchase/Leaseback(2)
|
||||||||||||||||
|
CommuniCare Health Services,
Inc.
|
3,530 | 28 | 82 | $ | 241,123 | |||||||||||
|
Sun Healthcare Group,
Inc
|
4,690 | 40 | 87 | 210,542 | ||||||||||||
|
Signature Holding II,
LLC
|
2,111 | 18 | 79 | 141,903 | ||||||||||||
|
Advocat, Inc
|
4,338 | 36 | 73 | 133,865 | ||||||||||||
|
Guardian LTC Management,
Inc.
|
1,686 | 23 | 87 | 125,971 | ||||||||||||
|
Formation Capital,
LLC.
|
1,799 | 15 | 88 | 119,112 | ||||||||||||
|
Nexion Health
Inc
|
2,283 | 19 | 74 | 79,942 | ||||||||||||
|
Essex Healthcare
Corporation
|
1,388 | 13 | 74 | 79,354 | ||||||||||||
|
Alpha Healthcare Properties,
LLC
|
959 | 8 | 87 | 55,834 | ||||||||||||
|
Mark Ide Limited Liability
Company
|
1,103 | 10 | 81 | 35,924 | ||||||||||||
|
StoneGate Senior Care
LP
|
664 | 6 | 85 | 21,781 | ||||||||||||
|
Infinia Properties of Arizona,
LLC
|
378 | 4 | 64 | 19,566 | ||||||||||||
|
Conifer Care Communities,
Inc
|
204 | 3 | 91 | 14,442 | ||||||||||||
|
TC Healthcare(3)
|
279 | 2 | 90 | 14,441 | ||||||||||||
|
Rest Haven Nursing Center,
Inc
|
200 | 1 | 76 | 14,400 | ||||||||||||
|
Washington N&R,
LLC
|
286 | 2 | 69 | 12,152 | ||||||||||||
|
Triad Health Management of
Georgia II, LLC
|
304 | 2 | 98 | 10,000 | ||||||||||||
|
Ensign Group,
Inc
|
271 | 3 | 92 | 9,656 | ||||||||||||
|
Lakeland Investors,
LLC
|
300 | 1 | 71 | 9,625 | ||||||||||||
|
Hickory Creek Healthcare
Foundation, Inc
|
138 | 2 | 85 | 7,250 | ||||||||||||
|
Longwood Management
Corporation
|
185 | 2 | 92 | 6,448 | ||||||||||||
|
Emeritus
Corporation
|
52 | 1 | 88 | 5,674 | ||||||||||||
|
Generations Healthcare,
Inc
|
60 | 1 | 83 | 3,007 | ||||||||||||
| 27,208 | 240 | 81 | 1,372,012 | |||||||||||||
|
Assets
Held for Sale
|
||||||||||||||||
|
Closed Facility
|
- | 1 | - | 150 | ||||||||||||
| - | 1 | - | 150 | |||||||||||||
|
Fixed
- Rate Mortgages(4)
|
||||||||||||||||
|
CommuniCare Health Services,
Inc
|
1,115 | 8 | 92 | 76,629 | ||||||||||||
|
Advocat Inc
|
423 | 4 | 79 | 12,474 | ||||||||||||
|
Parthenon Healthcare,
Inc
|
300 | 2 | 66 | 11,095 | ||||||||||||
|
Texas Health Enterprises/HEA
Mgmt. Group, Inc
|
147 | 1 | 67 | 623 | ||||||||||||
| 1,985 | 15 | 83 | 100,821 | |||||||||||||
|
Total
|
29,193 | 256 | 81 | $ | 1,472,983 | |||||||||||
(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) TC
Healthcare is an interim operator engaged to operate the former Haven
facilities
(4) In
general, many of our mortgages contain prepayment provisions that permit
prepayment of the outstanding principal amounts thereunder.
The
following table presents the concentration of our facilities by state as of
December 31, 2008:
|
Number
of
Facilities
|
Number
of
Beds
|
Gross
Investment
(in
thousands)
|
%
of
Gross
Investment
|
|||||||||||||
|
Ohio
|
47 | 5,323 | $ | 333,691 | 22.6 | |||||||||||
|
Florida
|
25 | 3,125 | 173,044 | 11.7 | ||||||||||||
|
Pennsylvania
|
23 | 1,975 | 150,225 | 10.2 | ||||||||||||
|
Texas
|
20 | 2,839 | 81,136 | 5.5 | ||||||||||||
|
Maryland
|
7 | 965 | 69,928 | 4.7 | ||||||||||||
|
Louisiana
|
14 | 1,668 | 55,343 | 3.8 | ||||||||||||
|
West
Virginia
|
10 | 1,151 | 54,100 | 3.7 | ||||||||||||
|
Colorado
|
8 | 895 | 52,784 | 3.6 | ||||||||||||
|
Arkansas
|
11 | 1,181 | 44,820 | 3.0 | ||||||||||||
|
Alabama
|
10 | 1,218 | 44,068 | 3.0 | ||||||||||||
|
Rhode
Island
|
4 | 639 | 39,430 | 2.7 | ||||||||||||
|
Massachusetts
|
6 | 682 | 38,948 | 2.6 | ||||||||||||
|
Kentucky
|
10 | 855 | 36,857 | 2.5 | ||||||||||||
|
California
|
11 | 950 | 34,756 | 2.4 | ||||||||||||
|
Connecticut
|
5 | 562 | 30,906 | 2.1 | ||||||||||||
|
Tennessee
|
6 | 726 | 28,918 | 2.0 | ||||||||||||
|
Georgia
|
4 | 661 | 27,642 | 1.9 | ||||||||||||
|
North
Carolina
|
5 | 707 | 22,709 | 1.5 | ||||||||||||
|
Idaho
|
4 | 412 | 22,360 | 1.5 | ||||||||||||
|
New
Hampshire
|
3 | 225 | 21,996 | 1.5 | ||||||||||||
|
Arizona
|
4 | 378 | 19,566 | 1.3 | ||||||||||||
|
Washington
|
2 | 194 | 17,473 | 1.2 | ||||||||||||
|
Indiana
|
5 | 429 | 15,605 | 1.1 | ||||||||||||
|
Vermont
|
2 | 279 | 14,441 | 1.0 | ||||||||||||
|
Illinois
|
4 | 478 | 14,406 | 1.0 | ||||||||||||
|
Missouri
|
2 | 286 | 12,152 | 0.8 | ||||||||||||
|
Iowa
|
3 | 271 | 10,479 | 0.7 | ||||||||||||
|
New
Mexico
|
1 | 119 | 5,200 | 0.4 | ||||||||||||
|
Total
|
256 | 29,193 | $ | 1,472,983 | 100.0 | |||||||||||
Geographically Diverse Property
Portfolio. Our portfolio of
properties is broadly diversified by geographic location. We have
healthcare facilities located in 28 states. In addition, the majority
of our 2008 rental and mortgage income was 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 25 different public and private healthcare
providers. Except for Sun (14%) and CommuniCare (22%) which together
hold approximately 36% of our portfolio (by investment), no other 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, 2008, approximately 97% of our leases and
mortgages had primary terms that expire in 2010 or later. The
majority of our leased real estate properties are leased under provisions of
master lease agreements. We also lease facilities under single
facility leases. The initial terms, on both type of leases, typically
range from 5 to 15 years, plus renewal options. Substantially all of
the leases provide for minimum annual rents that are subject to annual increases
based upon increases in the CPI or fixed rate increases. Under the
terms of the leases, the lessee is responsible for all maintenance, repairs,
taxes and insurance on the leased properties.
In 1999, we filed suit against a former
tenant seeking damages based on claims of breach of contract. The
defendants denied the allegations made in the lawsuit. In June 2008,
we were awarded damages in a jury trial. The case was then settled
prior to appeal. In settlement of our claim against the defendants,
we agreed in January 2009 to accept a lump sum cash payment of $6.8
million. The cash proceeds were offset by related expenses incurred
of $2.3 million, resulting in a net gain of $4.5 million paid in January
2009. This gain will be recorded during the first quarter of
2009.
In 2005,
we accrued $1.1 million for potential obligations relating to disputed capital
improvement requirements associated with a lease that expired June 30,
2005. Although no formal complaint for damages was filed against us,
in February 2006, we agreed to settle this dispute for approximately $1.0
million. In addition, we and several of our wholly-owned subsidiaries
were named as defendants in professional liability claims related to our owned
and operated facilities prior to 2005. 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. 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. All of these
suits have been settled.
No matters were submitted to
stockholders during the fourth quarter of the year covered by this
report.
PART
II
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:
|
2008
|
2007
|
||||||||||||||||||||||||
|
Quarter
|
High
|
Low
|
Dividends
Per
Share
|
Quarter
|
High
|
Low
|
Dividends
Per
Share
|
||||||||||||||||||
|
First
|
$ |
19.200
|
$ | 14.720 | $ | 0.29 |
First
|
$ | 19.170 | $ | 16.460 | $ | 0.26 | ||||||||||||
|
Second
|
19.230 | 15.970 | 0.30 |
Second
|
18.070 | 15.530 | 0.27 | ||||||||||||||||||
|
Third
|
19.660 | 15.630 | 0.30 |
Third
|
16.790 | 12.000 | 0.27 | ||||||||||||||||||
|
Fourth
|
19.750 | 9.300 | 0.30 |
Fourth
|
17.360 | 14.650 | 0.28 | ||||||||||||||||||
| $ | 1.19 | $ | 1.08 | ||||||||||||||||||||||
The
closing price for our common stock on the New York Stock Exchange on February
24, 2009 was $14.15 per share. As of February 24, 2009 there were
82,408,075 shares of common stock outstanding with 2,870 registered
holders.
The following table provides
information about all equity awards under our company’s 2004 Stock Incentive
Plan, 2000 Stock Incentive Plan and 1993 Amended and Restated Stock Option and
Restricted Stock Plan as of December 31, 2008.
Equity Compensation Plan
Information
|
(a)
|
(b)
|
(c)
|
||||||||||
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(1)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(2)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column (a)
(3)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
273,656 | $ | 12.88 | 2,323,115 | ||||||||
|
Equity
compensation plans not approved by security holders
|
— | — | — | |||||||||
|
Total
|
273,656 | $ | 12.88 | 2,323,115 | ||||||||
|
(1)
|
Reflects
25,664 shares issuable upon the exercise of outstanding options and
247,992 shares issuable in respect of performance restricted stock units
that vest over the years 2008 through
2010.
|
|
(2)
|
No
exercise price is payable with respect to the performance restricted stock
rights, and accordingly the weighted-average exercise price is calculated
based solely on outstanding
options.
|
|
(3)
|
Reflects
shares of Common Stock remaining available for future issuance under our
2000 and 2004 Stock Incentive
Plans.
|
Issuer Purchases of Equity
Securities
During the fourth quarter of 2008,
36,766 shares of our common stock were purchased from employees to pay the
withholding taxes associated with employee exercising of stock
options.
Common
Stock
|
(a)
|
(b)
|
(c)
|
(d)
|
|||||||||||||
|
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, 2008 to October 31, 2008
|
- | $ | - | - | $ | - | ||||||||||
|
November
1, 2008 to November 30, 2008
|
- | - | - | - | ||||||||||||
|
December
1, 2008 to December 31, 2008
|
36,766 | 15.97 | - | - | ||||||||||||
|
Total
|
36,766 | $ | 15.97 | - | $ | - | ||||||||||
|
|
(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.
|
On October 16, 2008, we purchased
400,000 shares of our Series D Preferred Stock (NYSE:OHI PrD) at a price of
$18.90 per share.
Series D Preferred
Stock
|
Period
|
Total
Number of Shares (or Units) Purchased
|
Average
Price Paid per Share (or Unit)
|
Total
Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans or Programs
|
Maximum
Number (or Approximate Dollar Value) of Shares (or Units) that May be
Purchased Under the Plans or Programs
|
||||||||||||
|
October
1, 2008 to October 31, 2008
|
400,000 | $ | 18.90 | - | $ | - | ||||||||||
|
November
1, 2008 to November 30, 2008
|
- | - | - | - | ||||||||||||
|
December
1, 2008 to December 31, 2008
|
- | - | - | - | ||||||||||||
|
Total
|
400,000 | $ | 18.90 | - | $ | - | ||||||||||
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 15 – Dividends to our consolidated
financial statements.
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,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||
|
Operating
Data
|
||||||||||||||||||||
|
Revenues
from core
operations
|
$ | 169,592 | $ | 159,558 | $ | 135,513 | $ | 109,535 | $ | 86,972 | ||||||||||
|
Revenues
from nursing home operations
|
24,170 | - | - | - | - | |||||||||||||||
|
Total
revenues
|
$ | 193,762 | $ | 159,558 | $ | 135,513 | $ | 109,535 | $ | 86,972 | ||||||||||
|
Income
from continuing operations
|
$ | 77,691 | $ | 67,598 | $ | 55,905 | $ | 37,289 | $ | 13,414 | ||||||||||
|
Net
income (loss) available to common shareholders
|
70,551 | 59,451 | 45,774 | 25,355 | (36,715 | ) | ||||||||||||||
|
Per
share amounts:
|
||||||||||||||||||||
|
Income
(loss) from continuing operations:
Basic
|
$ | 0.93 | $ | 0.88 | $ | 0.78 | $ | 0.46 | $ | (0.96 | ) | |||||||||
|
Diluted
|
0.93 | 0.88 | 0.78 | 0.46 | (0.96 | ) | ||||||||||||||
|
Net
income (loss) available to common:
Basic
|
$ | 0.94 | $ | 0.90 | $ | 0.78 | $ | 0.49 | $ | (0.81 | ) | |||||||||
|
Diluted
|
0.94 | 0.90 | 0.78 | 0.49 | (0.81 | ) | ||||||||||||||
|
Dividends, Common Stock(1)
|
$ | 1.19 | $ | 1.08 | $ | 0.96 | $ | 0.85 | $ | 0.72 | ||||||||||
|
Dividends, Series A
Preferred(1)
|
- | - | - | - | 1.16 | |||||||||||||||
|
Dividends, Series B
Preferred(1)
|
- | - | - | 1.09 | 2.16 | |||||||||||||||
|
Dividends, Series C
Preferred(2)
|
- | - | - | - | 2.72 | |||||||||||||||
|
Dividends, Series D
Preferred(1)
|
2.09 | 2.09 | 2.09 | 2.09 | 1.52 | |||||||||||||||
|
Weighted-average
common shares outstanding,
basic
|
75,127 | 65,858 | 58,651 | 51,738 | 45,472 | |||||||||||||||
|
Weighted-average
common shares outstanding,diluted
|
75,213 | 65,886 | 58,745 | 52,059 | 45,472 | |||||||||||||||
|
December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Balance
Sheet Data
Gross
investments
|
$ | 1,502,847 | $ | 1,322,964 | $ | 1,294,306 | $ | 1,129,405 | $ | 940,442 | ||||||||||
|
Total
assets
|
1,364,467 | 1,182,287 | 1,175,370 | 1,036,042 | 849,576 | |||||||||||||||
|
Revolving
lines of credit
|
63,500 | 48,000 | 150,000 | 58,000 | 15,000 | |||||||||||||||
|
Other
long-term borrowings
|
484,697 | 525,709 | 526,141 | 508,229 | 364,508 | |||||||||||||||
|
Stockholders’
equity
|
787,988 | 586,127 | 465,454 | 440,943 | 442,935 | |||||||||||||||
|
(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.
|
The following discussion should be read
in conjunction with the financial statements and notes thereto appearing
elsewhere in this document. This document contains forward-looking
statements within the meaning of the federal securities laws, including
statements regarding potential financings and potential future changes in
reimbursement. These statements relate to our expectations, beliefs,
intentions, plans, objectives, goals, strategies, future events, performance and
underlying assumptions and other statements other than statements of historical
facts. In some cases, you can identify forward-looking statements by
the use of forward-looking terminology including, but not limited to, terms such
as “may,” “will,” “anticipates,” “expects,” “believes,” “intends,” “should” or
comparable terms or the negative thereof. These statements are based
on information available on the date of this filing and only speak as to the
date hereof and no obligation to update such forward-looking statements should
be assumed. Our actual results may differ materially from those
reflected in the forward-looking statements contained herein as a result of a
variety of factors, including, among other things:
|
(i)
|
those
items discussed under “Risk Factors” in Item 1A
herein;
|
|
(ii)
|
uncertainties
relating to the business operations of the operators of our assets,
including those relating to reimbursement by third-party payors,
regulatory matters and occupancy
levels;
|
|
(iii)
|
the
ability of any operators in bankruptcy to reject unexpired lease
obligations, modify the terms of our mortgages and impede our ability to
collect unpaid rent or interest during the process of a bankruptcy
proceeding and retain security deposits for the debtors’
obligations;
|
|
(iv)
|
our
ability to sell closed or foreclosed assets on a timely basis and on terms
that allow us to realize the carrying value of these
assets;
|
|
(v)
|
our
ability to negotiate appropriate modifications to the terms of our credit
facility;
|
|
(vi)
|
our
ability to manage, re-lease or sell any owned and operated
facilities;
|
|
(vii)
|
the
availability and cost of capital;
|
|
(viii)
|
our
ability to maintain our credit
ratings;
|
|
(ix)
|
competition
in the financing of healthcare
facilities;
|
|
(x)
|
regulatory
and other changes in the healthcare
sector;
|
|
(xi)
|
the
effect of economic and market conditions generally and, particularly, in
the healthcare industry;
|
|
(xii)
|
changes
in the financial position of our
operators;
|
|
(xiii)
|
changes
in interest rates;
|
|
(xiv)
|
the
amount and yield of any additional
investments;
|
|
(xv)
|
changes
in tax laws and regulations affecting real estate investment
trusts;
|
|
(xvi)
|
our
ability to maintain our status as a real estate investment
trust;
|
|
(xvii)
|
changes
in our credit ratings and the ratings of our debt and preferred
securities;
|
|
(xviii)
|
the
potential impact of a general economic slowdown on governmental budgets
and healthcare reimbursement expenditures;
and
|
|
(xix)
|
the
effect of the recent financial crisis and severe tightening in the global
credit markets.
|
We have one reportable segment
consisting of investments in healthcare related real estate
properties. Our core business is to provide financing and capital to
the long-term healthcare industry with a particular focus on skilled nursing
facilities located in the United States. Our core portfolio consists
of long-term leases and mortgage agreements. All of our leases are
“triple-net” leases, which require the tenants to pay all property-related
expenses. Our mortgage revenue derives from fixed-rate mortgage
loans, which are secured by first mortgage liens on the underlying real estate
and personal property of the mortgagor. In July 2008, we assumed
operating responsibilities for 15 of our facilities due to the bankruptcy of one
of our operator/tenants. In September, we entered into an agreement
to lease these facilities to a new operator/tenant. The new
operator/tenant assumed operating responsibility for 13 of the 15 facilities
effective September 1, 2008. We continue to be responsible for the
two remaining facilities as of December 31, 2008 that are in the process of
being transitioned to the new operator pending approval by state
regulators.
Our
consolidated financial statements include the accounts of Omega, all direct and
indirect wholly owned subsidiaries; as well as TC Healthcare, a new entity and
interim operator created to operate the 15 facilities we assumed as a result of
the bankruptcy of one our tenant/operators). We consolidate the
financial results of TC Healthcare into our financial statements based on the
application of the applicable consolidation accounting literature. We
include the operating results and assets and liabilities of these facilities for
the period of time that TC Healthcare was responsible for the operations of the
facilities. Thirteen of these facilities were transitioned from TC
Healthcare to a new tenant/operator on September 1, 2008, however, TC Healthcare
continues to be responsible for two facilities as of December 31, 2008 that are
in the process of being transitioned to the new operator/tenant pending approval
by state regulators. The operating revenues and expenses and related
operating assets and liabilities of the owned and operated facilities are shown
on a gross basis in our Consolidated Statements of Income and Consolidated
Balance Sheets, respectively. All inter-company accounts and
transactions have been eliminated in consolidation of the financial
statements.
Our
portfolio of investments at December 31, 2008, consisted of 256 healthcare
facilities, located in 28 states and operated by 25 third-party
operators. Our gross investment in these facilities totaled
approximately $1.5 billion at December 31, 2008, with 99% of our real estate
investments related to long-term healthcare facilities. This
portfolio is made up of (i) 227 SNFs, (ii) seven ALFs, (iii) two rehabilitation
hospitals owned and leased to third parties, (iii) two ILFs, (iv) fixed rate
mortgages on 15 SNFs, (v) two SNFs that are owned and operated by us and (vi)
one SNF that is currently held for sale. At December 31, 2008, we
also held other investments of approximately $29.9 million, consisting primarily
of secured loans to third-party operators of our facilities.
The
recent downturn in the U.S. economy and other factors could result in
significant cost-cutting at both the federal and state levels, resulting in a
reduction of reimbursement rates and levels to our operators under both the
Medicare and Medicaid programs. Current market and economic
conditions may have a significant impact on state budgets and health care
spending. The states with the most significant projected budget deficits in
which the Company owns facilities and the percentage of our gross investments in
such states as of December 31, 2008 are as follows: Alabama (3.0%), Arizona
(1.3%), California (2.4%), Florida (11.7%), New Hampshire (1.5%) and Rhode
Island (2.7%). These deficits, exacerbated by the potential for
increased enrollment in Medicaid due to rising unemployment levels and declining
family incomes, could cause states to reduce state expenditures under their
respective state Medicaid programs by lowering reimbursement rates.
We
currently believe that our operator coverage ratios are strong and that our
operators can absorb moderate reimbursement rate reductions under Medicaid and
Medicare and still meet their obligations to us. However, significant
limits on the scope of services reimbursed and on reimbursement rates and fees
could have a material adverse effect on an operator’s results of operations and
financial condition, which could adversely affect the operator’s ability to meet
its obligations to us.
2008
Highlights
The following significant highlights
occurred during the twelve-month period ended December 31, 2008.
Financing
Preferred
Stock Repurchase/Gain
On October 16, 2008, we purchased
400,000 shares of our Series D Preferred Stock (NYSE:OHI PrD) at a price of
$18.90 per share. The liquidation preference for the Series D
Preferred Stock (“Series D”) is $25.00 per share. The purchase of the
Series D Preferred Stock shares resulted in a fourth quarter 2008 gain of
approximately $2.1 million, net of a non-cash charge of $0.3 million reflecting
the write-off of the pro-rata portion of the original issuance costs of the
Series D Preferred Stock.
6.0
Million Share Common Stock Offering
On September 19, 2008, we closed an
underwritten public offering of 6.0 million shares our common stock at $16.37
per share. The net proceeds, after deducting underwriting discounts
and offering expenses, were approximately $96.9 million. The net
proceeds were used to repay indebtedness under our senior credit facility and
for working capital and general corporate purposes.
5.9
Million Common Stock Offering
On May 6, 2008, we have issued 5.9
million shares of our common stock at $16.93 per share, in a registered direct
placement to a number of institutional investors. The net proceeds
from the offering were approximately $98.8 million, after deducting the
placement agent’s fee and other estimated offering expense. The net
proceeds were used to repay indebtedness under our senior credit
facility.
Dividend
Reinvestment and Common Stock Purchase Plan
We have a Dividend Reinvestment and
Common Stock Purchase Plan (the “DRSPP”) that allows for the reinvestment of
dividends and the optional purchase of our common stock. For the
twelve- month period ended December 31, 2008, we issued 2,067,809 shares of
common stock for approximately $34.1 million in net proceeds.
On
October 29, 2008, we announced the immediate suspension of the optional cash
purchase component of our DRSPP until further notice. Dividend
reinvestment and all other features of the DRSPP will continue as set forth in
the DRSPP, including sales, transfers and certificate issuances of stock held in
participant accounts.
Stockholders participating in the DRSPP
who have elected to reinvest dividends will continue to have cash dividends
reinvested in accordance with the DRSPP. Any checks or other funds received by
Computershare Trust Company, N.A. from DRSPP participants on or after October
15, 2008, for optional cash investments will be returned without
interest.
Dividends
Common
Dividends
On January 15, 2009, the Board of
Directors declared a common stock dividend of $0.30 per share that was paid on
February 17, 2009 to common stockholders of record on January 30,
2009.
On October 16, 2008, the Board of
Directors declared a common stock dividend of $0.30 per share. The
common dividend was paid November 17, 2008 to common stockholders of record on
October 31, 2008.
On July 16, 2008, the Board of
Directors declared a common stock dividend of $0.30 per share. The
common dividend was paid August 15, 2008 to common stockholders of record on
July 31, 2008.
On April 16, 2008, the Board of
Directors declared a common stock dividend of $0.30 per share, an increase of
$0.01 per common share compared to the prior quarter. The common
dividend was paid May 15, 2008 to common stockholders of record on April 30,
2008.
On January 17, 2008, the Board of
Directors declared a common stock dividend of $0.29 per share, an increase of
$0.01 per common share compared to the prior quarter. The common
dividend was paid February 15, 2008 to common stockholders of record on January
31, 2008.
Series
D Preferred Dividends
On January 15, 2009, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on its Series D Preferred Stock, that were paid February 17,
2009 to preferred stockholders of record on January 30, 2009. The
liquidation preference for our Series D Preferred Stock is $25.00 per
share. Regular quarterly preferred dividends for the Series D
Preferred Stock represent dividends for the period November 1, 2008 through
January 31, 2009.
On October 16, 2008, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D preferred stock that were paid November 17, 2008
to preferred stockholders of record on October 31, 2008.
On July 16, 2008, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D Preferred Stock that were paid August 15, 2008
to preferred stockholders of record on July 31, 2008.
On April 16, 2008, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D Preferred Stock that were paid May 15, 2008 to
preferred stockholders of record on April 30, 2008.
On January 17, 2008, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D Preferred Stock that were paid February 15, 2008
to preferred stockholders of record on January 31, 2008.
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. See
Item 1 Business - Healthcare Reimbursement and Regulation above for further
discussion. 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 title 11 of the United States Code, 11 U.S.C. §§ 101-1532, as amended and
supplemented, (the “Bankruptcy Code”).
Below is a brief description, by
third-party operator, of new investments or operator related transactions that
occurred during the year ended December 31, 2008.
New
Investments and Re-leasing Activities
Alpha
HealthCare Properties, LLC
On January 17, 2008, we purchased one
SNF for $5.2 million from an unrelated third party and leased the facility to
Alpha Health Care Properties, LLC (“Alpha”), an existing tenant of
ours. The facility was added to Alpha’s existing master lease and
provides for an additional $0.5 million of cash rent annually.
Advocat
Inc.
During the first quarter of 2008, we
amended our master lease with Advocat Inc. (“Advocat”) to allow for the
construction of a new facility to replace an existing facility currently
operated by Advocat. Upon completion (estimated to be in 2010),
annual cash rent will increase by approximately $0.7 million. As a
result of our plan to replace the existing facility, we recorded a $1.5 million
impairment loss related to the existing facility during the first quarter of
2008 to record it at its estimated fair value.
CommuniCare Health
Services
On April
18, 2008, we completed approximately $123 million of combined new investments
with affiliates of CommuniCare, an existing operator. Effective April
18, 2008, we purchased from several unrelated third parties seven (7) SNFs, one
(1) ALF and one (1) rehabilitation hospital, all located in Ohio, totaling 709
beds for a total investment of $47.4 million. The facilities were
added into our master lease with CommuniCare, increasing annualized cash rent
under the master lease by approximately $4.7 million, subject to annual
escalators. The term of the CommuniCare master lease was extended to
April 30, 2018, with two ten-year renewal options.
Also on April 18, 2008, and
simultaneous with the amendment and extension of the master lease with
CommuniCare, we entered into a first mortgage loan with CommuniCare in the
amount of $74.9 million. This mortgage loan matures on April 30, 2018
and carries an interest rate of 11% per year. The $74.9 million
mortgage included $4.9 million in funds placed in escrow for the purchase of a
facility that was pending environmental and other studies prior to
closure. In December 2008, CommuniCare notified us of their decision
not to purchase the additional facility and the escrow agent returned the
escrowed funds to us. As of December 31, 2008, the outstanding
mortgage note was approximately $69.9 million. CommuniCare used the
proceeds of the mortgage loan to acquire seven (7) SNFs located in Maryland,
totaling 965 beds from several unrelated third parties. The mortgage
loan is secured by a lien on the seven (7) facilities. The mortgage
properties are cross-collateralized with the master lease
agreement.
Guardian
LTC Management, Inc.
On September 30, 2008, we completed a
$40.0 million investment with subsidiaries of Guardian LTC Management, Inc.
(“Guardian”), an existing operator. The transaction involved the sale
and leaseback of four SNFs, one ALF and one ILF all located in
Pennsylvania. The facilities and related $4.0 million of initial
annual rent were added to an existing master lease with Guardian. The
amended and restated master lease now includes 21 facilities and $15.7 million
of annual rent, with annual escalators. In addition, the master lease term was
extended from August 2016 through September 30, 2018.
Transition
of Haven Properties to Formation/Genesis
In January 2008, we purchased from
General Electric Capital Corporation (“GE Capital”) a $39.0 million mortgage
loan due October 2012 on seven (7) facilities then operated by Haven Eldercare,
LLC (“Haven”). Prior to the acquisition of this mortgage, we had a
$22.8 million second mortgage on these facilities, resulting in a combined $61.8
million mortgage on these facilities immediately following the purchase from GE
Capital. In conjunction with the above noted mortgage and purchase
option and the application of FIN 46R, we consolidated the financial statements
and real estate of the Haven entity that was the obligor under this mortgage
loan into our financial statements. See Note 1 – Organization and
Basis of Presentation for additional discussion regarding the impact of the
consolidation of this entity. On July 7, 2008, we took ownership
and/or possession of the Haven facilities and TC Healthcare assumed operations
of the facilities. As a result of our taking ownership and/or
possession of the Haven facilities, effective July 7, 2008, we were no longer
required to consolidate the Haven entity pursuant to FIN 46R. Our
prior consolidation of the Haven entity under the mortgage loan resulted in the
following adjustments to our consolidated balance sheet as of December 31, 2007:
(i) an increase in total gross investments of $39.0 million; (ii) an increase in
accumulated depreciation of $3.1 million; (iii) an increase in Accounts
receivable – net of $0.4 million; (iv) an increase in Other long-term borrowings
of $39.0 million; and (v) a reduction of $2.7 million in Cumulative net earnings
primarily due to increased depreciation expense. Our results of
operation reflect the impact of the consolidation of this Haven entity for the
period from January 1, 2008 through July 7, 2008 and the twelve- month periods
ended December 31, 2007, respectively. In 2007, the Haven facilities
represented 9% of our total investment and 8% of our operating
revenue.
From November 2007 until July 7, 2008,
affiliates of Haven, one of our operators/lessees/mortgagors, operated under
Chapter 11 bankruptcy protection. Commencing in February 2008, the
assets of Haven were marketed for sale via an auction process to be conducted
through proceedings established by the bankruptcy court. The auction
process failed to produce a qualified buyer. As a result, and
pursuant to our rights as ordered by the bankruptcy court, Haven moved the
bankruptcy court to authorize us to credit bid certain of the indebtedness that
Haven owed to us in exchange for taking ownership of and transitioning certain
of the assets of Haven to a new entity in which we have a substantial economic
interest, all of which was approved by the bankruptcy court on July 4,
2008. Effective July 7, 2008, we took ownership and/or possession of
15 facilities previously operated by Haven, and a new entity and interim
operator in which we have a substantial economic interest (TC Healthcare) began
operating these facilities on our behalf through an independent
contractor. For financial reporting purposes, the financial
statements of TC Healthcare, the new entity and interim operator which assumed
the operations of these facilities on our behalf will be consolidated into our
financial statements in accordance with FIN 46R beginning on July 7,
2008. Effective September 1, 2008, TC Healthcare transferred the
operations of 13 of the 15 facilities it operated to affiliates of Formation
Capital (“Formation”). Therefore, beginning on September 1, 2008, TC
Healthcare includes only the financial results of the two remaining facilities
that are currently pending state approval prior to the transfer of these
facilities.
In January 2008, Haven entered into a
debtors-in-possession financing (“DIP”) agreement with us and one other
financial institution (collectively, the “DIP Lenders”), in which our initial
participation was approximately $5.0 million of a $50.0 million total
commitment. The agreement was originally scheduled to mature in June
2008 and yield an interest rate of prime plus 3%. On June 4,
2008, the DIP Lenders and Haven amended the DIP agreement (the “Amended DIP”)
which, among other things, extended the term to allow Haven additional time to
sell its assets. As collateral for the Amended DIP, we received the
right to use all facility accounts receivable generated from the Omega
facilities from June 4, 2008 to satisfy any of our post-June 3, 2008
advances. As of December 31, 2008, we had collected all outstanding
balances on the DIP agreement and had $1.2 million net outstanding related to
the Amended DIP.
We entered into a Master Transaction
Agreement (“MTA”) to re-lease the Haven facilities to affiliates of
Formation. The 15 properties consist of 14 SNFs and one ALF, and are
located in Connecticut (5), Rhode Island (4), New Hampshire (3), Vermont (2) and
Massachusetts (1). As part of the transaction, Genesis Healthcare
(“Genesis”) has entered into a long-term management agreement with Formation to
oversee the day-to-day operations of each of these facilities. As of
September 30, 2008, we have completed the operational transfer of 13 of the 15
Haven facilities with an annual rent of approximately $10.1
million. The operational transfer for the two remaining facilities in
Vermont is subject to the receipt of appropriate regulatory approvals, which is
expected sometime in the near future. Annual rent for the facilities
that have not closed due to regulatory requirements is approximately $2.0
million.
The master lease with Formation has an
initial term of 10 years with initial annual rent of approximately $12.0 million
upon regulatory approval for all facilities. In addition, Formation
has an option after the initial 12 months of the lease to convert eight of the
leased facilities into mortgaged properties, with economic terms substantially
similar to that of the original lease.
Other
Formation Capital Facilities
On December 31, 2008, we acquired two
SNFs in West Virginia, totaling 291 beds, for approximately $19.5 million, from
an unrelated third party and leased the facility to Formation. These
facilities were added to Formation’s existing master lease and provides for an
additional $2.4 million of cash rent annually starting January 1,
2009.
Longwood
Management Corporation
On September 17, 2008, we purchased
the land that our Pico Rivera facility is located on in California, for
approximately $1 million.
Sun
Healthcare Group, Inc.
On February 1, 2008, we amended our
master lease with Sun primarily to: (i) consolidate three existing master leases
into one master lease; (ii) extend the lease terms of the agreement through
September 2017 for facilities acquired in August 2006; and (iii) allow for the
sale of two rehabilitation hospitals currently operated by Sun. On
July 1, 2008, the two rehabilitation hospitals were sold for approximately $29.0
million. As a result of the sale, contractual rent decreased by $1.7
million annually beginning July 1, 2008.
Assets
Held for Sale
At December 31, 2008, we had one
facility that we are marketing for sale, classified as held for sale with a net
book value of approximately $0.2 million. In 2008, we recorded an
impairment reserve of $0.2 million to reduce the carrying value to our
held-for-sale facility to its estimated fair market value.
Asset
Sales
|
·
|
On
January 31, 2008, we sold one SNF in California for approximately $1.5
million resulting in a gain of approximately $0.4 million, which was
included in our gain/loss from discontinued operations. For
additional information, see Note 19 – Discontinued
Operations.
|
|
·
|
On
February 1, 2008, we sold one SNF in California for approximately $1.5
million resulting in a gain of approximately $46
thousand.
|
|
·
|
On
July 1, 2008, we sold two rehabilitation hospitals in California for
approximately $29.0 million resulting in a gain of approximately $12.3
million.
|
|
·
|
On
September 29, 2008, we sold one SNF in Texas for approximately $0.1
million resulting in a loss of approximately $0.5
million.
|
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, 2008 compared to Year Ended December 31, 2007
Operating
Revenues
Our operating revenues for the year
ended December 31, 2008, were $193.8 million, an increase of $34.2 million over
the same period in 2007. Detailed changes in operating revenues for
the year ended December 31, 2008 are as follows:
|
·
|
Rental
income was $155.8 million, an increase of $3.7 million over the same
period in 2007. The increase is primarily due to: (i)
additional rental income from the acquisitions of one SNF in January 2008,
seven SNFs, one ALF and one rehabilitation hospital in April 2008 and four
SNFs, one ALF and one ILF in September 2008, which were all leased to
existing operators and (ii) an amendment to an existing operator’s lease
that extended the terms of the lease agreement and increased the annual
rent starting in the first quarter of 2008. Offsetting the
increase were (i) the first quarter 2007 reversal of approximately $5.0
million in allowance for straight-line rent, resulting from an improvement
in one of our operator’s financial condition in 2007, (ii) the 2008
reduction of rent related to the bankruptcy of Haven and (iii) the sale of
the two rehabilitation hospitals in
2008.
|
|
·
|
Mortgage
interest income totaled $9.6 million, an increase of $5.7 million over the
same period in 2007. The increase was primarily the result of
the mortgage financing of seven new facilities in April
2008.
|
|
·
|
Other
investment income totaled $2.0 million, a decrease of $0.8 million over
the same period in 2007. The primary reason for the decrease
was the payoff of notes from our existing
operators.
|
|
·
|
Miscellaneous
revenue was $2.2 million, an increase of $1.4 million over the same period
in 2007. The primary reason for the increase was the payment of
the Haven facilities’ late fees and penalties related to their
bankruptcy.
|
|
·
|
Nursing
home revenues of owned and operated assets was $24.2 million in 2008
compared to no revenue in 2007. See Note 1 – Organization and
Basis of Presentation for additional information regarding the
consolidation of this entity.
|
Operating
Expenses
Operating expenses for the year ended
December 31, 2008, were $89.0 million, an increase of approximately $40.5
million over the same period in 2007. Detailed changes in our
operating expenses for the year ended December 31, 2008 versus the same period
in 2007 are as follows:
|
·
|
Our
depreciation and amortization expense was $39.9 million, compared to $36.0
million for the same period in 2007. The increase is due to the
acquisitions of one SNF in January 2008, seven SNFs, one ALF and one
rehabilitation hospital in April 2008 and four SNFs, one ALF and one ILF
in September 2008.
|
|
·
|
Our
general and administrative expense, when excluding stock-based
compensation expense related to restricted stock units, was $9.6
million, compared to $9.7 million for the same period in
2007.
|
|
·
|
Our
restricted stock-based compensation expense was $2.1 million, an increase
of $0.7 million over the same period in 2007. The increase
primarily related to four additional months of expense in 2008 versus
2007. In May 2007, we entered into a new restricted stock
agreement with executives of the
Company.
|
|
·
|
In
2008, we recorded $5.6 million of provision for impairment, compared to
$1.4 million for the same period in
2007.
|
|
·
|
In
2008, we recorded $4.3 million of provision for uncollectible accounts
receivable associated with Haven. The provision consisted of
$3.3 million associated with straight-line receivables and $1.0 million in
pre-petition contractual
receivables.
|
|
·
|
Nursing
home expenses of owned and operated assets was $27.6 million in 2008
compared to no expense in 2007. See Note 1 – Organization and
Basis of Presentation for additional information regarding the
consolidation of this entity.
|
Other
Income (Expense)
For the year ended December 31, 2008,
our total other net expenses were $39.0 million as compared to $43.8 million for
the same period in 2007, a decrease of $4.9 million. The decrease was
primarily due to lower average LIBOR interest rates on our outstanding
borrowings and $0.5 million associated with cash received for a legal settlement
in the second quarter of 2008.
2008
Taxes
So long as we qualify as a real estate
investment trust (“REIT”), we generally will not be subject to Federal income
taxes on the REIT taxable income that we distribute to stockholders, subject to
certain exceptions. For tax year 2008, preferred and common dividend
payments of $98.1 million made throughout 2008 satisfy the 2008 REIT
requirements relating to qualifying income. We are permitted to own
up to 100% of a taxable REIT subsidiary (“TRS”). Currently, we have
one TRS that is taxable as a corporation and that pays federal, state and local
income tax on its net income at the applicable corporate rates. The
TRS had a net operating loss carry-forward as of December 31, 2008 of $1.1
million. The loss carry-forward was fully reserved with a valuation
allowance due to uncertainties regarding realization. We recorded
interest and penalty charges associated with tax matters as income tax
expense.
Income
from continuing operations
Income from continuing operations for
the year ended December 31, 2008 was $77.7 million compared to $67.6 million for
the same period in 2007. The increase in income from continuing
operations is the result of the factors described above.
2008
Discontinued Operations
Discontinued operations relate to
properties we disposed of or plan to dispose of and are currently classified as
assets held for sale.
For the year ended December 31, 2008,
discontinued operations include the one month revenue of $15 thousand and a gain
of $0.4 million on the sale of one SNF.
For the year ended December 31, 2007,
discontinued operations include the revenue of $0.2 million and expense of $31
thousand and a gain of $1.6 million on the sale of four SNFs and two
ALFs.
For additional information, see Note 19
– Discontinued Operations.
Funds
From Operations
Our funds
from operations available to common stockholders (“FFO”), for the year ended
December 31, 2008, was $98.1 million, compared to $93.5 million for the same
period in 2007.
We
calculate and report FFO in accordance with the definition and interpretive
guidelines issued by the National Association of Real Estate Investment Trusts
(“NAREIT”), and, consequently, FFO is defined as net income available to common
stockholders, adjusted for the effects of asset dispositions and certain
non-cash items, primarily depreciation and amortization. We believe
that FFO is an important supplemental measure of our operating
performance. Because the historical cost accounting convention used
for real estate assets requires depreciation (except on land), such accounting
presentation implies that the value of real estate assets diminishes predictably
over time, while real estate values instead have historically risen or fallen
with market conditions. The term FFO was designed by the real estate
industry to address this issue. FFO herein is not necessarily
comparable to FFO of other REITs that do not use the same definition or
implementation guidelines or interpret the standards differently from
us.
We use
FFO as one of several criteria to measure the 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.
The following table presents our FFO
results for the years ended December 31, 2008 and 2007:
|
Year
Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Net
income available to common
|
$ | 70,551 | $ | 59,451 | ||||
|
Deduct gain from real estate
dispositions(1)
|
(12,292 | ) | (1,994 | ) | ||||
| 58,259 | 57,457 | |||||||
|
Elimination
of non-cash items included in net income:
|
||||||||
|
Depreciation
and amortization(2)
|
39,890 | 36,056 | ||||||
|
Funds
from operations available to common stockholders
|
$ | 98,149 | $ | 93,513 | ||||
|
(1)
|
The
deduction of the gain from real estate dispositions includes the
facilities classified as discontinued operations in our consolidated
financial statements. The gain deducted includes $0.4 million
gain and $1.6 million gain related to facilities classified as
discontinued operations for the year ended December 31, 2008 and 2007,
respectively.
|
|
(2)
|
The
add back of depreciation and amortization includes the facilities
classified as discontinued operations in our consolidated financial
statements. FFO for 2008 and 2007 includes depreciation and
amortization of $0 and $28 thousand, respectively, related to facilities
classified as discontinued
operations.
|
Year
Ended December 31, 2007 compared to Year Ended December 31, 2006
Operating
Revenues
Our operating revenues for the year
ended December 31, 2007 totaled $159.6 million, an increase of $24.0 million
over the same period in 2006. The $24.0 million increase was
primarily a result of new investments made throughout 2006 and 2007, a change in
an accounting estimate related to one of our operators, partially offset by
reduction in mortgage interest income and restructuring associated with the
Advocat securities we owned.
Detailed changes in operating revenues
for the year ended December 31, 2007 are as follows:
|
·
|
Rental
income was $152.1 million, an increase of $25.2 million over the same
period in 2006. The increase is primarily due to additional
rental income from the third quarter 2006 acquisition of 30 SNFs and one
independent living center from Litchfield Investment Company, LLC and its
affiliates (“Litchfield”), the third quarter 2007 acquisition of five SNFs
from Litchfield and a change in accounting estimate related to one of our
operators as more fully disclosed in Note 3 – Properties and Note 2 –
Summary of Significant Accounting Policies. During the first
quarter of 2007, we determined that we should reverse approximately $5.0
million of allowance previously established for straight-line rent, as a
result of an improvement in Advocat’s financial
condition.
|
|
·
|
Mortgage
interest income totaled $3.9 million, a decrease of $0.5 million over the
same period in 2006. The decrease was primarily the result of a
$10.0 million loan payoff that occurred in the second quarter of
2006.
|
|
·
|
Other
investment income totaled $2.8 million, a decrease of $0.9 million over
the same period in 2006. The primary reason for the decrease
was due to restructuring Advocat securities we
owned.
|
|
·
|
Miscellaneous
revenue was $0.8 million, an increase of $0.3 million over the same period
in 2006.
|
Operating
Expenses
Operating expenses for the year ended
December 31, 2007 totaled $48.5 million, an increase of approximately $1.9
million over the same period in 2006. The increase was primarily due
to $4.0 million of increased depreciation expense and a $1.4 million provision
for impairment on real estate properties, offset by a reduction of $3.1 million
of restricted stock-based compensation expense compared to 2006.
Detailed changes in our operating
expenses for the year ended December 31, 2007 versus the same period in 2006 are
as follows:
|
·
|
Our
depreciation and amortization expense was $36.0 million, compared to $32.1
million for the same period in 2006. The increase is due to the
third quarter 2006 acquisition of 30 SNFs and one independent living
center and the third quarter 2007 acquisition of the five Litchfield
facilities.
|
|
·
|
Our
general and administrative expense, when excluding stock-based
compensation expense related to performance restricted stock units, was
$9.7 million, compared to $9.2 million for the same period in
2006. The increase was primarily due to additional personnel
costs related to additional personnel and annual merit increases, offset
by reduction in consulting costs, primarily associated with the 2006
restatement.
|
|
·
|
Our
restricted stock-based compensation expense was $1.4 million, a decrease
of $3.1 million over the same period in 2006. The decrease
primarily relates to the third quarter 2006 vesting of performance awards
granted to executives in 2004.
|
|
·
|
In
2006, we recorded $0.8 million of provision for uncollectible notes
receivable.
|
Other
Income (Expense)
For the year ended December 31, 2007,
our total other net expenses were $43.8 million as compared to $31.8 million for
the same period in 2006. The significant changes are as
follows:
|
·
|
Our
interest expense, excluding amortization of deferred costs and refinancing
related interest expenses, for the year ended December 31, 2007 was $42.1
million, compared to $42.2 million for the same period in
2006.
|
|
·
|
For
the year ended December 31, 2006, we sold our remaining 760,000 shares of
Sun’s common stock we owned for approximately $7.6 million, realizing a
gain on the sale of these securities of approximately $2.7
million.
|
|
·
|
For
the year ended December 31, 2006 in accordance with FAS No. 133, we
recorded a $9.1 million fair value adjustment to reflect the change in
fair value during 2006 of our derivative instrument (i.e., the conversion
feature of a redeemable convertible preferred stock security in Advocat, a
publicly traded company; see Note 6 – Other
Investments).
|
|
·
|
For
the year ended December 31, 2006, we recorded a $3.6 million gain on
Advocat securities (see Note 6 – Other
Investments).
|
|
·
|
For
the year ended December 31, 2006, we recorded $0.8 million of non-cash
charge associated with the redemption of the remaining 20.7% of our $100
million aggregate principal amount of 6.95% unsecured notes due 2007 not
otherwise tendered in 2005.
|
|
·
|
For
the year ended December 31, 2006, we recorded a one time, non-cash charge
of approximately $2.7 million relating to the write-off of deferred
financing costs associated with the termination of our prior credit
facility.
|
2007
Taxes
As more fully disclosed under “Taxation
– Resolution of Related Party Tenant Issue” in Item 1 above, during the fourth
quarter of 2006, we identified a related party tenant issue with one of our
operators, Advocat, that could have been interpreted as affecting our compliance
with federal income tax rules applicable to REITs regarding related party tenant
income. As a result of the related party tenant issue, we recorded a
provision for income taxes of $2.3 million in 2006. During the fourth
quarter of 2006, we restructured our agreement with Advocat and have been
advised by tax counsel that we will not receive a nonqualifying related party
income from Advocat in future periods. As a result of the
restructured agreement, we do not expect to incur tax expense associated related
party tenant income in periods commencing after January 1,
2007. During the fourth quarter of 2007, we entered into a closing
agreement with the IRS for the tax years 2002-2006. In 2007, we
recorded $7 thousand of tax credit related to resolving interest and penalties
for the tax years 2002-2006.
So long as we qualify as a REIT we
generally will not be subject to Federal income taxes on the REIT taxable income
that we distribute to stockholders, subject to certain
exceptions. For tax year 2007, preferred and common dividend payments
of $81.3 million made throughout 2007 satisfy the 2007 REIT requirements
relating to qualifying income. We are permitted to own up to 100% of
a TRS. Currently, we have one TRS that is taxable as a corporation
and that pays federal, state and local income tax on its net income at the
applicable corporate rates. The TRS had a net operating loss
carry-forward as of December 31, 2007 of $1.1 million. The loss
carry-forward was fully reserved with a valuation allowance due to uncertainties
regarding realization. We recorded interest and penalty charges
associated with tax matters as income tax expense.
Income
from continuing operations
Income from continuing operations for
the year ended December 31, 2007 was $67.6 million compared to $55.9 million for
the same period in 2006. The increase in income from continuing
operations is the result of the factors described above.
2007
Discontinued Operations
Discontinued operations relate to
properties we disposed of or plan to dispose of and are currently classified as
assets held for sale.
For the year ended December 31, 2007,
discontinued operations include the revenue of $0.2 million and expense of $31
thousand and a gain of $1.6 million on the sale of four SNFs and two
ALFs.
For the year ended December 31, 2006,
discontinued operations include the revenue of $0.6 million and expense of $0.9
million and a gain of $0.2 million on the sale of three SNFs and one
ALF.
For additional information, see Note 19
– Discontinued Operations.
Funds
From Operations
Our FFO,
for the year ended December 31, 2007, was $93.5 million, compared to $76.7
million for the same period in 2006.
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 common stockholders, adjusted for the effects of asset dispositions
and certain non-cash items, primarily depreciation and
amortization. We believe that FFO is an important supplemental
measure of our operating performance. Because the historical cost
accounting convention used for real estate assets requires depreciation (except
on land), such accounting presentation implies that the value of real estate
assets diminishes predictably over time, while real estate values instead have
historically risen or fallen with market conditions. The term FFO was
designed by the real estate industry to address this issue. FFO
herein is not necessarily comparable to FFO of other REITs that do not use the
same definition or implementation guidelines or interpret the standards
differently from us.
We use
FFO as one of several criteria to measure the 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.
The following table presents our FFO
results for the years ended December 31, 2007 and 2006:
|
Year
Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Net
income available to common
|
$ | 59,451 | $ | 45,774 | ||||
|
Deduct gain from real estate
dispositions(1)
|
(1,994 | ) | (1,354 | ) | ||||
| 57,457 | 44,420 | |||||||
|
Elimination
of non-cash items included in net income:
|
||||||||
|
Depreciation and
amortization(2)
|
36,056 | 32,263 | ||||||
|
Funds
from operations available to common stockholders
|
$ | 93,513 | $ | 76,683 | ||||
|
|
(1)
|
The
deduction of the gain from real estate dispositions includes the
facilities classified as discontinued operations in our consolidated
financial statements. The gain deducted includes $1.6 million
gain and $0.2 million gain related to facilities classified as
discontinued operations for the year ended December 31, 2007 and 2006,
respectively.
|
|
|
(2)
|
The
add back of depreciation and amortization includes the facilities
classified as discontinued operations in our consolidated financial
statements. FFO for 2007 and 2006 includes depreciation and
amortization of $28 thousand and $0.2 million, respectively, related to
facilities classified as discontinued
operations.
|
At December 31, 2008, we had total
assets of $1.4 billion, stockholders’ equity of $788.0 million and debt of
$548.2 million, representing approximately 41.0% of total
capitalization.
The
following table shows the amounts due in connection with the contractual
obligations described below as of December 31, 2008.
|
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)
|
$ | 548,500 | $ | - | $ | 63,500 | $ | - | $ | 485,000 | ||||||||||
|
Operating
lease obligations
|
3,214 | 209 | 582 | 614 | 1,809 | |||||||||||||||
|
Total
|
$ | 551,714 | $ | 209 | $ | 64,082 | $ | 614 | $ | 486,809 | ||||||||||
|
(1)
|
The
$548.5 million includes $310 million aggregate principal amount of 7%
Senior Notes due April 2014, $175 million aggregate principal amount of 7%
Senior Notes due January 2016, $63.5 million in borrowings under the $255
million revolving senior secured credit facility that matures in March
2010.
|
Financing
Activities and Borrowing Arrangements
Bank
Credit Agreements
At December 31, 2008, we had $63.5
million outstanding under our $255.0 million revolving senior secured credit
facility (“Credit Facility”) and no letters of credit outstanding, leaving
availability of $191.5 million. The $63.5 million of outstanding
borrowings had a blended interest rate of 2.0% at December 31,
2008. Borrowings under the credit agreement are due March
2010.
The Credit Agreement (the “Credit
Agreement”) that governs our Credit Facility allowed us to increase our
available borrowing base under the credit agreement from $200.0 million up to an
aggregate of $300.0 million, subject to certain conditions. Effective
February 22, 2007, we exercised our right to increase the available revolving
commitment under the Credit Agreement from $200.0 million to $255.0 million and
we consented to the addition of 18 of our properties to the borrowing base
assets under the Credit Agreement. At December 31, 2008, we had real
estate assets with a gross book value of $271.5 million pledged as collateral
for the Credit Facility. At December 31, 2008 and 2007, we had
letters of credit outstanding of $0.0 million and $2.1 million,
respectively.
For the years ended December 31, 2008
and 2007, the weighted average interest rates with respect to the Credit
Facility were 3.89% and 6.70%, respectively.
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, 2008, we were in compliance with all
property level and corporate financial covenants.
Equity
Financing
On October 16, 2008, we purchased
400,000 shares of our Series D Preferred Stock (NYSE:OHI PrD) at a price of
$18.90 per share. The liquidation preference for the Series D
Preferred Stock (“Series D”) is $25.00 per share. The purchase
of the Series D Preferred Stock shares resulted in a fourth quarter 2008 gain of
approximately $2.1 million, net of a non-cash charge of $0.3 million reflecting
the write-off of the pro-rata portion of the original issuance costs of the
Series D Preferred Stock.
On September 19, 2008, we closed an
underwritten public offering of 6.0 million shares our common stock at $16.37
per share. The net proceeds, after deducting underwriting discounts
and offering expenses, were approximately $96.9 million. The net
proceeds were used to repay indebtedness under our senior credit facility and
for working capital and general corporate purposes.
On May 6, 2008, we have issued 5.9
million shares of our common stock at $16.93 per share, in a registered direct
placement to a number of institutional investors. The net proceeds
from the offering were approximately $98.8 million, after deducting the
placement agent’s fee and other estimated offering expense. The net
proceeds were used to repay indebtedness under our senior credit
facility.
Dividend
Reinvestment and Common Stock Purchase Plan
We have a Dividend Reinvestment and
Common Stock Purchase Plan (the “DRSPP”) that allows for the reinvestment of
dividends and the optional purchase of our common stock. For the
twelve- month period ended December 31, 2008, we issued 2,067,809 shares of
common stock for approximately $34.1 million in net proceeds.
On
October 29, 2008, we announced the immediate suspension of the optional cash
purchase component of our DRSPP until further notice. Dividend
reinvestment and all other features of the DRSPP will continue as set forth in
the DRSPP, including sales, transfers and certificate issuances of stock held in
participant accounts.
Stockholders participating in the DRSPP
who have elected to reinvest dividends will continue to have cash dividends
reinvested in accordance with the DRSPP.
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 that limit the distribution of dividends paid during a fiscal quarter
to no more than 95% of our aggregate cumulative FFO as defined in the credit
agreement, unless a greater distribution is required to maintain REIT
status. The Credit Agreement defines FFO as net income (or loss) plus
depreciation and amortization and shall be adjusted for charges related to: (i)
restructuring our debt; (ii) redemption of preferred stock; (iii) litigation
charges up to $5.0 million; (iv) non-cash charges for accounts and notes
receivable up to $5.0 million; (v) non-cash compensation related expenses; (vi)
non-cash impairment charges; and (vii) tax liabilities in an amount not to
exceed $8.0 million. In 2008, we paid dividends of $1.19 per share of
common stock and $2.09 per share of preferred stock. In 2008, we paid
a total of $98.1 million in dividends to common and preferred
stockholders.
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 and
administrative expenses. The timing, source and amount of cash flows
provided by financing activities and used in investing activities are sensitive
to the capital markets environment, especially to changes in interest
rates. Changes in the capital markets environment may impact the
availability of cost-effective capital and affect our plans for acquisition and
disposition activity.
Cash and
cash equivalents totaled $0.2 million as of December 31, 2008, a decrease of
$1.8 million as compared to the balance at December 31, 2007. 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 $89.3 million for the year
ended December 31, 2008, as compared to $84.5 million for the same period in
2007, an increase of $4.8 million. The increase is primarily
due to additional cash flow resulting from new investments.
Investing
Activities – Net cash flow used in investing activities was an outflow of
$187.1 million for the year ended December 31, 2008, as compared to an outflow
of $29.9 million for the same period in 2007. The increase in cash
outflow from investing activities of $157.2 million relates primarily to: (i)
the level of acquisition of $112.8 million in real estate in 2008 compared to
$39.5 million in 2007, (ii) the $74.9 million mortgage loan with one of our
operators; (iii) the investment of $17.5 million in capital improvements and
renovations in 2008 compared to $8.6 million in 2007; and (iv) the investment in
a debtor-in-possession note with one of our operators in 2008; offset by change
in net proceeds for the sales of real estate of $22.9 million and net change in
collection of mortgage principal of $5.2 million.
In 2008, we acquired one SNF for $5.2
million in the first quarter of 2008, nine facilities for $47.4 million in the
second quarter of 2008, six facilities for $40 million in the third quarter of
2008 and two SNFs for approximately $19.5 million in the fourth quarter of
2008. In 2007, we acquired five SNFs for approximately $39.5
million. In 2008, we sold two rehabilitation hospitals and three SNFs
for approximately $31.9 million compared to sales of six SNFs and two ALFs in
2007 for approximately $9.0 million.
Financing
Activities – Net cash flow from financing activities was an inflow of
$96.0 million for the year ended December 31, 2008 as compared to an outflow of
$53.4 million for the year ended December 31, 2007. The $149.4
million change in financing cash flow was a result of an increase in dividend
reinvestment proceeds of $15.2 million and an increase in common stock offering
of $82.8 million. In 2007 and 2008, we used the proceeds of the
equity offerings to repay debt. In 2008, dividend payments increased
by $16.8 million as a result of the equity issuances and increased dividend per
share, and we also paid $7.6 million to purchase a portion of our Series D
preferred stock.
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 – Summary of Significant
Accounting Policies. 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 that 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
We have various different investments
that generate revenue, including leased and mortgaged properties, as well as,
other investments, including working capital loans. We recognized
rental income and mortgage interest income and other investment income as earned
over the terms of the related master leases and notes,
respectively.
Substantially all of our leases contain
provisions for specified annual increases over the rents of the prior year and
are generally computed in one of three methods depending on specific provisions
of each lease as follows: (i) a specific annual increase over the prior year’s
rent, generally 2.5%; (ii) an increase based on the change in pre-determined
formulas from year to year (i.e., such as increases in the CPI); or (iii)
specific dollar increases over prior years. Revenue under lease
arrangements with specific determinable increases is recognized over the term of
the lease on a straight-line basis. SEC Staff Accounting Bulletin No.
101, Revenue Recognition in
Financial Statements does not provide for the recognition of contingent
revenue until all possible contingencies have been eliminated. We
consider the operating history of the lessee, the payment history, the general
condition of the industry and various other factors when evaluating whether all
possible contingencies have been eliminated. We do not include
contingent rents as income until the contingencies are resolved.
In the case of rental revenue
recognized on a straight-line basis, we generally record reserves against earned
revenues from leases 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. We
continually evaluate the collectability of our straight-line rent
assets. If it appears that we will not collect future rent due under
our leases, we will record a provision for loss related to the straight-line
rent asset.
Recognizing rental income on a
straight-line basis results may cause recognized revenue to exceed contractual
amounts due from our tenants. Such cumulative excess amounts are
included in accounts receivable and were $43.1 million and $33.9 million, net of
allowances, at December 31, 2008 and 2007, respectively.
Gains on
sales of real estate assets are recognized pursuant to the provisions of SFAS
No. 66, Accounting for Sales
of Real Estate (“SFAS No.66”). 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.
Nursing
home revenues of owned and operated assets consist of long-term care revenues,
rehabilitation therapy services revenues, temporary medical staffing services
revenues and other ancillary services revenues. The revenues are recognized as
services are provided. Revenues are recorded net of provisions for
discount arrangements with commercial payors and contractual allowances with
third-party payors, primarily Medicare and Medicaid. Revenues
realizable under third-party payor agreements are subject to change due to
examination and retroactive adjustment. Estimated third-party payor
settlements are recorded in the period the related services are rendered. The
methods of making such estimates are reviewed periodically, and differences
between the net amounts accrued and subsequent settlements or estimates of
expected settlements are reflected in the current period results of operations.
Laws and regulations governing the Medicare and Medicaid programs are extremely
complex and subject to interpretation. For additional information,
see Note 4 – Owned and Operated Assets.
Depreciation
and 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 20 to 40 years for buildings and improvements and
three to 10 years for furniture, fixtures and equipment. 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. All impairments are
taken as a period cost at that time, and depreciation is adjusted going forward
to reflect the new value assigned to the asset.
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.
For the years ended December 31, 2008,
2007, and 2006, we recognized impairment losses of $5.6 million, $1.4 million
and $0.5 million, respectively, including amounts classified within 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 it is probable that all amounts will not be collected under
the contractual terms of the loan, the loan is written down to the present value
of the expected future cash flows. In cases where expected future
cash flows are not readily determinable, 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 $0.8 million for the years ended December 31, 2008,
2007 and 2006, respectively.
We currently account for impaired loans
using the cost-recovery method applying cash received against the outstanding
principal balance prior to recording interest income (see Note 6 – Other
Investments). At December 31, 2008 and 2007, we had total reserves of
approximately $2.2 million on two working capital notes.
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 that have been sold, or otherwise qualify as held
for disposition (as defined by SFAS No. 144), are reflected as assets held for
sale in our balance sheet. Assets that qualify as held for sale may
also be considered as a discontinued operation if, (a) the operation and cash
flows of the asset have been or will be eliminated from future operations and
(b) we will not have significant involvement with the asset after its
disposition. For assets that qualify as discontinued operations, we have
reclassified the operations of those assets to discontinued operations in the
consolidated statements of income for all periods presented and assets held
for sale in the consolidated balance sheet for all periods
presented.
For the year ended December 31, 2008,
we had one asset held for sale with a net book value of $0.2
million. Discontinued operations includes the one month revenue of
$15 thousand and the gain of $0.4 million on the sale of one SNF.
For the year ended December 31, 2007,
we had three assets held for sale with a combined net book value of $2.9
million. Discontinued operations includes the revenue of $0.2 million
and expense of $31 thousand for 6 facilities. It also includes the
gain of $1.6 million on the sale of six SNFs and two ALFs.
For the year ended December 31, 2006,
we had seven assets held for sale with a combined net book value of $4.7
million, which includes a reclassification of one asset with a net book value of
$1.1 million that was reclassified as held for sale and discontinued operations
during 2007. Discontinued operations includes revenue of $0.6 million
and expense of $0.9 million and a gain of $0.2 million on the sale of three SNFs
and one ALF.
Effects
of Recently Issued Accounting Standards
FAS 157
Evaluation
On January 1, 2008, we adopted
Financial Accounting Standards Board, (“FASB”), Statement No. 157, Fair Value Measurements (“FAS
No. 157”). This standard defines fair value, establishes a
methodology for measuring fair value and expands the required disclosure for
fair value measurements. FAS No. 157 emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and states that a
fair value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability. This
statement applies under other accounting pronouncements that require or permit
fair value measurements, the FASB having previously concluded in those
pronouncements that fair value is the relevant measurement
attribute. Accordingly, this statement does not require any new fair
value measurements. The standard applies prospectively to new fair
value measurements performed after the required effective dates, which are as
follows: (i) on January 1, 2008, the standard applied to our measurements of the
fair values of financial instruments and recurring fair value measurements of
non-financial assets and liabilities; and (ii) on January 1, 2009, the standard
will apply to all remaining fair value measurements, including non-recurring
measurements of non-financial assets and liabilities such as measurement of
potential impairments of goodwill, other intangible assets and other long-lived
assets. It also will apply to fair value measurements of non-financial assets
acquired and liabilities assumed in business combinations. We evaluated FAS No.
157 and determined that the adoption of the provisions FAS No. 157 effective on
January 1, 2008 and 2009 had no impact on our financial statements.
FAS 159
Evaluation
In February 2007, the FASB issued
Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”). SFAS No.
159 permits entities to choose to measure certain financial assets and
liabilities at fair value, with the change in unrealized gains and losses on
items for which the fair value option has been elected reported in
earnings. We adopted SFAS No. 159 on January 1, 2008. We
evaluated SFAS No. 159 and did not elect the fair value accounting option for
any of our eligible assets; therefore, the adoption of SFAS 159 had no impact on
our financial statements.
FAS 141(R)
Evaluation
On December 4, 2007, the Financial
Accounting Standards Board issued Statement No. 141(R), Business Combinations (“FAS
141(R)”). The new standard will significantly change the accounting
for and reporting of business combination transactions. FAS 141(R)
requires companies to recognize, with certain exception, 100 percent of the fair
value of the assets acquired, liabilities assumed and non-controlling interest
in acquisitions of less than a 100 percent controlling interest when the
acquisition constitutes a change in control; measure acquirer shares issued as
consideration for a business combination at fair value on the date of the
acquisition; recognize contingent consideration arrangements at their
acquisition date fair value, with subsequent change in fair value generally
reflected in earnings; recognition of reacquisition loss and gain contingencies
at their acquisition date fair value; expense as incurred, acquisition related
transaction costs. FAS 141(R) is effective for fiscal years beginning
after December 15, 2008 and early adoption is prohibited. We intend
to adopt the standard on January 1, 2009. We are currently evaluating
the impact, if any, that FAS 141(R) will have on our financial
statements.
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. Readers are cautioned that many of the
statements contained in these paragraphs are forward-looking and should be read
in conjunction with our disclosures under the heading “Statement Regarding
Forward-Looking Disclosure” set forth above. 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 fair value of our borrowings under variable rate
agreements are estimated using an expected present value technique based on
expected cash flows discounted using the current credit-adjusted risk-free
rate.
Senior 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, 2008 was approximately $465.5 million. A one percent
increase in interest rates would result in a decrease in the fair value of
long-term borrowings by approximately $17.6 million at December 31,
2008. The estimated fair value of our total long-term borrowings at
December 31, 2007 was approximately $570.2 million, and a one percent increase
in interest rates would have resulted in a decrease in the fair value of
long-term borrowings by approximately $26.5 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.
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, 2008 and 2007 is included in Note 17
to our audited consolidated financial statements, which is incorporated herein
by reference in response to Item 302 of Regulation S-K.
None.
Evaluation
of Disclosure Controls and Procedures
Disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) are controls and other procedures that are designed to
provide reasonable assurance that the information that we are required to
disclose in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
In connection with the preparation of
our Form 10-K as of and for the year ended December 31, 2008, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2008. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective at the reasonable assurance
level as of December 31, 2008.
Management’s
Report on Internal Control over Financial Reporting
Our management 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 Exchange Act 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 GAAP 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 our company have been
detected. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
In connection with the preparation of
our Form 10-K, our management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2008. In making that
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on management’s assessment, management
believes that, as of December 31, 2008, our internal control over financial
reporting was effective based on those criteria.
Pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, we have included above a report of management's
assessment of the design and effectiveness of our internal controls as part of
this Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Our
independent registered public accounting firm also reported on the effectiveness
of internal control over financial reporting. The independent registered public
accounting firm's attestation report is included in our 2008 financial
statements under the caption entitled "Report of Independent Registered Public
Accounting Firm" and is incorporated herein by reference.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the quarter ended December 31, 2008 identified in
connection with the evaluation of our disclosure controls and procedures
described above that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Compensation
The Board
of Directors has modified the number of shares of restricted stock granted to
non-employee directors each year. Commencing in 2009, the Chairman of
the Board is entitled to receive a grant of 3,500 shares of restricted stock
each year, and each of the other non-employee directors is entitled to receive a
grant of 2,100 shares of restricted stock each year. These restricted
stock grants were made as of February 3, 2009 and will be made as of January 15
in future years (or if January 15 is not a business day, the next business
day).
The Board
of Directors of the Company has adopted a Deferred Stock Plan that allows
directors and executive officers to defer receipt of stock grants, subject to
the terms of the plan and agreements approved by the Compensation Committee of
the Board of Directors for such purpose. The terms and conditions
will be reflected in a deferral agreement approved by the Compensation
Committee. If a participant makes a deferral election, the deferred shares will
be issued at a date or event specified in the deferral agreement.
Unless
otherwise determined by the Compensation Committee, each stock grant that is
deferred will accrue dividend equivalents. The Compensation Committee
may provide in the applicable agreement that dividend equivalents will be
deferred along with the stock grants or may give the participant the right to
elect to receive the dividend equivalents currently or defer them. If
a participant makes a deferral election, the dividend equivalents will be
deferred until the date or event specified in the participant’s
agreement. The Compensation Committee may allow a participant to
elect, or may require, that deferred dividend equivalents will be converted into
common stock under a conversion formula or instead that the dividend equivalents
will not be converted but the amount will be increased by an interest rate set
by the Compensation Committee.
Litigation
Settlement Proceeds
In 1999, we filed suit against a former
tenant seeking damages based on claims of breach of contract. The
defendants denied the allegations made in the lawsuit. In June 2008,
we were awarded damages in a jury trial. The case was then settled
prior to appeal. In settlement of our claim against the defendants,
we agreed in January 2009 to accept a lump sum cash payment of $6.8
million. The cash proceeds were offset by related expenses incurred
of $2.3 million, resulting in a net gain of $4.5 million paid in January
2009. This gain will be recorded during the first quarter of
2009.
PART
III
The information required by this item
is incorporated herein by reference to our Company’s definitive proxy statement
for the 2009 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 – 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, chief accounting
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., 200
International Circle, Suite 3500, Hunt Valley, Maryland 21030 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.
The information required by this item
is incorporated herein by reference to our Company's definitive proxy statement
for the 2009 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission (“SEC”) pursuant to Regulation 14A.
The information required by this item
is incorporated herein by reference to our Company's definitive proxy statement
for the 2009 Annual Meeting of Stockholders, to be filed with the SEC pursuant
to Regulation 14A.
The information required by this item,
if any, is incorporated herein by reference to our Company's definitive proxy
statement for the 2009 Annual Meeting of Stockholders, to be filed with the SEC
pursuant to Regulation 14A.
The information required by this item
is incorporated herein by reference to our Company's definitive proxy statement
for the 2009 Annual Meeting of Stockholders, to be filed with the SEC pursuant
to Regulation 14A.
PART
IV
(a)(1) Listing of Consolidated
Financial Statements
|
Title of Document
|
Page
Number
|
|
F-1
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-7
|
|
|
F-8
|
(a)(2) Listing of Financial Statement
Schedules. The following consolidated financial statement schedules are included
herein:
|
F-33
|
|
|
F-34
|
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) Exhibits
— See Index to Exhibits beginning on Page I-1 of this report.
|
(c)
|
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.
-51-
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, 2008 and 2007, and the related consolidated statements of income,
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2008. 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, 2008 and 2007, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2008, 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 also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), Omega Healthcare Investors Inc.’s internal control over financial
reporting as of December 31, 2008, 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 26, 2009 expressed an
unqualified opinion thereon.
/s/ Ernst
& Young LLP
Baltimore,
Maryland
February
26, 2009
-F1-
The Board
of Directors and Shareholders
Omega
Healthcare Investors, Inc.
We have audited Omega Healthcare
Investors, Inc.’s internal control over financial reporting as of December 31,
2008, 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 included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the
risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, 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, Omega Healthcare
Investors, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2008, 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, 2008 and 2007, and the related consolidated statements of
income, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2008 and our report dated February 26, 2009 expressed
an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Baltimore,
Maryland
February
26, 2009
-F2-
OMEGA
HEALTHCARE INVESTORS, INC.
(in
thousands)
|
December
31,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Real
estate properties
|
||||||||
|
Land and
buildings
|
$ | 1,372,012 | $ | 1,274,722 | ||||
|
Less accumulated
depreciation
|
(251,854 | ) | (221,366 | ) | ||||
|
Real estate properties –
net
|
1,120,158 | 1,053,356 | ||||||
|
Mortgage notes receivable –
net
|
100,821 | 31,689 | ||||||
| 1,220,979 | 1,085,045 | |||||||
|
Other
investments – net
|
29,864 | 13,683 | ||||||
| 1,250,843 | 1,098,728 | |||||||
|
Assets
held for sale – net
|
150 | 2,870 | ||||||
|
Total
investments
|
1,250,993 | 1,101,598 | ||||||
|
Cash
and cash equivalents
|
209 | 1,979 | ||||||
|
Restricted
cash
|
6,294 | 2,104 | ||||||
|
Accounts
receivable – net
|
75,037 | 64,992 | ||||||
|
Other
assets
|
18,613 | 11,614 | ||||||
|
Operating
assets for owned and operated properties
|
13,321 | — | ||||||
|
Total assets
|
$ | 1,364,467 | $ | 1,182,287 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Revolving
line of credit
|
$ | 63,500 | $ | 48,000 | ||||
|
Unsecured
borrowings
|
484,697 | 484,714 | ||||||
|
Other
long–term borrowings
|
— | 40,995 | ||||||
|
Accrued
expenses and other liabilities
|
25,420 | 22,378 | ||||||
|
Accrued
income tax liabilities
|
— | 73 | ||||||
|
Operating
liabilities for owned and operated properties
|
2,862 | — | ||||||
|
Total
liabilities
|
576,479 | 596,160 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred stock issued and
outstanding – 4,340 shares Series D with an aggregate liquidation
preference of $108,488 in 2008 and 4,740 shares Series D with an aggregate
liquidation preference of $118,488 in 2007
|
108,488 | 118,488 | ||||||
|
Common stock $.10 par value
authorized – 100,000 shares: Issued and outstanding – 82,382 shares in
2008 and 68,114 shares in 2007
|
8,238 | 6,811 | ||||||
|
Common
stock – additional paid-in-capital
|
1,054,157 | 825,925 | ||||||
|
Cumulative
net earnings
|
440,277 | 362,140 | ||||||
|
Cumulative
dividends paid
|
(823,172 | ) | (727,237 | ) | ||||
|
Total stockholders’
equity
|
787,988 | 586,127 | ||||||
|
Total liabilities and
stockholders’ equity
|
$ | 1,364,467 | $ | 1,182,287 | ||||
See accompanying
notes.
-F3-
OMEGA
HEALTHCARE INVESTORS, INC.
(in
thousands, except per share amounts)
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Revenues
|
||||||||||||
|
Rental
income
|
$ | 155,765 | $ | 152,061 | $ | 126,892 | ||||||
|
Mortgage interest
income
|
9,562 | 3,888 | 4,402 | |||||||||
|
Other investment income –
net
|
2,031 | 2,821 | 3,687 | |||||||||
|
Miscellaneous
|
2,234 | 788 | 532 | |||||||||
|
Nursing home revenues of owned
and operated assets
|
24,170 | - | - | |||||||||
|
Total
operating
revenues
|
193,762 | 159,558 | 135,513 | |||||||||
|
Expenses
|
||||||||||||
|
Depreciation and
amortization
|
39,890 | 36,028 | 32,070 | |||||||||
|
General and
administrative
|
11,701 | 11,086 | 13,744 | |||||||||
|
Impairment on real estate
properties
|
5,584 | 1,416 | - | |||||||||
|
Provisions for uncollectible
mortgages, notes and accounts receivable
|
4,248 | - | 792 | |||||||||
|
Nursing home expenses of owned
and operated assets
|
27,601 | - | - | |||||||||
|
Total
operating
expenses
|
89,024 | 48,530 | 46,606 | |||||||||
|
Income
before other income and
expense
|
104,738 | 111,028 | 88,907 | |||||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
income
|
240 | 257 | 413 | |||||||||
|
Interest
expense
|
(37,745 | ) | (42,134 | ) | (42,174 | ) | ||||||
|
Interest – amortization of
deferred financing
costs
|
(2,001 | ) | (1,958 | ) | (1,952 | ) | ||||||
|
Interest – refinancing
costs
|
- | - | (3,485 | ) | ||||||||
|
Litigation
settlements
|
526 | - | - | |||||||||
|
Gain on sale of equity
securities
|
- | - | 2,709 | |||||||||
|
Gain on investment
restructuring
|
- | - | 3,567 | |||||||||
|
Change in fair value of
derivatives
|
- | - | 9,079 | |||||||||
|
Total
other
expense
|
(38,980 | ) | (43,835 | ) | (31,843 | ) | ||||||
|
Income
before gain on sale of real estate
assets
|
65,758 | 67,193 | 57,064 | |||||||||
|
Gain
from assets sold –
net
|
11,861 | 398 | 1,188 | |||||||||
|
Income
from continuing operations before income taxes
|
77,619 | 67,591 | 58,252 | |||||||||
|
Provision
for income
taxes
|
72 | 7 | (2,347 | ) | ||||||||
|
Income
from continuing
operations
|
77,691 | 67,598 | 55,905 | |||||||||
|
Discontinued
operations
|
446 | 1,776 | (208 | ) | ||||||||
|
Net
income
|
78,137 | 69,374 | 55,697 | |||||||||
|
Preferred
stock
dividends
|
(9,714 | ) | (9,923 | ) | (9,923 | ) | ||||||
|
Preferred
stock repurchase
gain
|
2,128 | - | - | |||||||||
|
Net
income available to common
shareholders
|
$ | 70,551 | $ | 59,451 | $ | 45,774 | ||||||
|
Income
per common share available to common shareholders:
|
||||||||||||
|
Basic:
|
||||||||||||
|
Income from continuing
operations
|
$ | 0.93 | $ | 0.88 | $ | 0.78 | ||||||
|
Net
income
|
$ | 0.94 | $ | 0.90 | $ | 0.78 | ||||||
|
Diluted:
|
||||||||||||
|
Income from continuing
operations
|
$ | 0.93 | $ | 0.88 | $ | 0.78 | ||||||
|
Net
income
|
$ | 0.94 | $ | 0.90 | $ | 0.78 | ||||||
|
Dividends
declared and paid per common
share
|
$ | 1.19 | $ | 1.08 | $ | 0.96 | ||||||
|
Weighted-average
shares outstanding,
basic
|
75,127 | 65,858 | 58,651 | |||||||||
|
Weighted-average
shares outstanding,
diluted
|
75,213 | 65,886 | 58,745 | |||||||||
|
Components
of other comprehensive income:
|
||||||||||||
|
Net
income
|
$ | 78,137 | $ | 69,374 | $ | 55,697 | ||||||
|
Unrealized
gain on common stock
investment
|
- | - | 1,580 | |||||||||
|
Reclassification
adjustment for gains on common stock investment
|
- | - | (1,740 | ) | ||||||||
|
Reclassification
adjustment for gains on preferred stock investment
|
- | - | (1,091 | ) | ||||||||
|
Unrealized
loss on preferred stock
investment
|
- | - | (803 | ) | ||||||||
|
Total
comprehensive
income
|
$ | 78,137 | $ | 69,374 | $ | 53,643 | ||||||
See accompanying
notes.
-F4-
OMEGA
HEALTHCARE INVESTORS, INC.
(in
thousands, except per share amounts)
|
Common
Stock
Par
Value
|
Additional
Paid-in
Capital
|
Preferred
Stock
|
Cumulative
Net
Earnings
|
|||||||||||||
|
Balance
at December 31, 2005 (56,872 common shares)
|
5,687 | 657,920 | 118,488 | 237,069 | ||||||||||||
|
Impact of adoption of FAS No.
123(R)
|
— | (1,167 | ) | — | — | |||||||||||
|
Issuance of common
stock:
|
||||||||||||||||
|
Grant
of restricted stock (7 shares at $12.59 per share)
|
1 | (1 | ) | — | — | |||||||||||
|
Amortization
of restricted stock
|
— | 4,517 | — | — | ||||||||||||
|
Vesting of restricted stock
(grants 90 shares)
|
9 | (247 | ) | — | — | |||||||||||
|
Dividend reinvestment plan
(2,558 shares at $12.967 per share)
|
256 | 32,840 | — | — | ||||||||||||
|
Exercised options (170 shares
at an average exercise price of $2.906
pershare)
|
17 | 446 | — | — | ||||||||||||
|
Grant of stock as payment of
directors fees (6 shares at an average of$12.716 per
share)
|
— | 77 | — | — | ||||||||||||
|
Costs for 2005 equity
offerings
|
— | (178 | ) | — | — | |||||||||||
|
Net income for
2006
|
— | — | — | 55,697 | ||||||||||||
|
Common dividends paid ($0.96
per share).
|
— | — | — | — | ||||||||||||
|
Preferred dividends paid
(Series D of $2.094 per share)
|
— | — | — | — | ||||||||||||
|
Reclassification for realized
gain on Sun common stock investment
|
— | — | — | — | ||||||||||||
|
Unrealized gain on Sun common
stock investment
|
— | — | — | — | ||||||||||||
|
Reclassification for unrealized
gain on Advocat securities
|
— | — | — | — | ||||||||||||
|
Unrealized loss on Advocat
securities
|
— | — | — | — | ||||||||||||
|
Balance
at December 31, 2006 (59,703 common shares)
|
5,970 | 694,207 | 118,488 | 292,766 | ||||||||||||
|
Issuance of common
stock:
|
||||||||||||||||
|
Grant of restricted stock (9
shares at $17.530 per share)
|
1 | (1 | ) | — | — | |||||||||||
|
Amortization of restricted
stock
|
— | 1,425 | — | — | ||||||||||||
|
Vesting of restricted stock
(grants 62 shares)
|
6 | (829 | ) | — | — | |||||||||||
|
Dividend reinvestment plan
(1,190 shares at $15.911 per share)
|
119 | 18,768 | — | — | ||||||||||||
|
Exercised options (12 shares
at an average exercise price of $4.434
pershare)
|
1 | 41 | — | — | ||||||||||||
|
Grant of stock as payment of
directors fees (9 shares at an average of$16.360 per
share)
|
1 | 149 | — | — | ||||||||||||
|
Equity offerings (7,130 shares
at $16.750 per share)
|
713 | 112,165 | — | — | ||||||||||||
|
Net income for
2007
|
— | — | — | 69,374 | ||||||||||||
|
Common dividends paid ($1.08
per share).
|
— | — | — | — | ||||||||||||
|
Preferred dividends paid
(Series D of $2.094 per share)
|
— | — | — | — | ||||||||||||
|
Balance
at December 31, 2007 (68,114 common shares)
|
6,811 | 825,925 | 118,488 | 362,140 | ||||||||||||
|
Issuance of common
stock:
|
||||||||||||||||
|
Grant of restricted stock (9
shares at $15.040 per share)
|
1 | (1 | ) | — | — | |||||||||||
|
Amortization of restricted
stock
|
— | 2,103 | — | — | ||||||||||||
|
Vesting of restricted stock
(grants 272 shares)
|
27 | (2,731 | ) | — | — | |||||||||||
|
Dividend reinvestment plan
(2,068 shares at $16.502 per share)
|
206 | 33,866 | — | — | ||||||||||||
|
Exercised options (5 shares at
an average exercise price of $6.020 pershare)
|
1 | 30 | — | — | ||||||||||||
|
Grant of stock as payment of
directors fees (8 shares at an average of$16.024 per
share)
|
1 | 124 | — | — | ||||||||||||
|
Equity offerings (5,900 shares
at $16.930 per share)
|
591 | 98,202 | — | — | ||||||||||||
|
Equity offerings (6,000 shares
at $16.370 per share)
|
600 | 96,327 | — | — | ||||||||||||
|
Preferred stock purchase (400
shares at $18.90 per share)
|
— | 312 | (10,000 | ) | — | |||||||||||
|
Net income for
2008
|
— | — | — | 78,137 | ||||||||||||
|
Common dividends paid ($1.19
per share).
|
— | — | — | — | ||||||||||||
|
Preferred dividends paid
(Series D of $2.094 per share)
|
— | — | — | — | ||||||||||||
|
Balance
at December 31, 2008 (82,382 common shares)
|
$ | 8,238 | $ | 1,054,157 | $ | 108,488 | $ | 440,277 | ||||||||
See
accompanying notes.
-F5-
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, 2005 (56,872 common shares)
|
(579,108 | ) | (1,167 | ) | 2,054 | 440,943 | ||||||||||
|
Impact of adoption of FAS No.
123(R)
|
— | 1,167 | — | — | ||||||||||||
|
Issuance of common
stock:
|
||||||||||||||||
|
Grant of restricted stock (7
shares at $12.59 per share)
|
— | — | — | — | ||||||||||||
|
Amortization of restricted
stock
|
— | — | — | 4,517 | ||||||||||||
|
Vesting of restricted stock
(grants 90 shares)
|
— | — | — | (238 | ) | |||||||||||
|
Dividend reinvestment plan
(2,558 shares at $12.967 per share)
|
— | — | — | 33,096 | ||||||||||||
|
Exercised options (170 shares
at an average exercise price of $2.906per
share)
|
— | — | — | 463 | ||||||||||||
|
Grant of stock as payment of
directors fees (6 shares at an average of$12.716per share)
|
— | — | — | 77 | ||||||||||||
|
Costs for 2005 equity
offerings
|
— | — | — | (178 | ) | |||||||||||
|
Net income for
2006
|
— | — | — | 55,697 | ||||||||||||
|
Common dividends paid ($0.96
per share).
|
(56,946 | ) | — | — | (56,946 | ) | ||||||||||
|
Preferred dividends paid
(Series D of $2.094 per share)
|
(9,923 | ) | — | — | (9,923 | ) | ||||||||||
|
Reclassification for realized
gain on Sun common stock investment
|
— | — | (1,740 | ) | (1,740 | ) | ||||||||||
|
Unrealized gain on Sun common
stock investment
|
— | — | 1,580 | 1,580 | ||||||||||||
|
Reclassification for unrealized
gain on Advocat securities
|
— | — | (1,091 | ) | (1,091 | ) | ||||||||||
|
Unrealized loss on Advocat
securities
|
— | — | (803 | ) | (803 | ) | ||||||||||
|
Balance
at December 31, 2006 (59,703 common shares)
|
(645,977 | ) | — | — | 465,454 | |||||||||||
|
Issuance of common
stock:
|
||||||||||||||||
|
Grant of restricted stock (9
shares at $17.530 per share)
|
— | — | — | — | ||||||||||||
|
Amortization of restricted
stock
|
— | — | — | 1,425 | ||||||||||||
|
Vesting of restricted stock
(grants 62 shares)
|
— | — | — | (823 | ) | |||||||||||
|
Dividend reinvestment plan
(1,190 shares at $15.911 per share)
|
— | — | — | 18,887 | ||||||||||||
|
Exercised options (12 shares
at an average exercise price of $4.434per
share)
|
— | — | — | 42 | ||||||||||||
|
Grant of stock as payment of
directors fees (9 shares at an average of$16.360per share)
|
— | — | — | 150 | ||||||||||||
|
Equity offerings (7,130 shares
at $16.750 per share)
|
— | — | — | 112,878 | ||||||||||||
|
Net income for
2007
|
— | — | — | 69,374 | ||||||||||||
|
Common dividends paid ($1.08
per share).
|
(71,337 | ) | — | — | (71,337 | ) | ||||||||||
|
Preferred dividends paid
(Series D of $2.094 per share)
|
(9,923 | ) | — | — | (9,923 | ) | ||||||||||
|
Balance
at December 31, 2007 (68,114 common shares)
|
(727,237 | ) | — | — | 586,127 | |||||||||||
|
Issuance of common
stock:
|
||||||||||||||||
|
Grant of restricted stock (9
shares at $15.040 per share)
|
— | — | — | — | ||||||||||||
|
Amortization of restricted
stock
|
— | — | — | 2,103 | ||||||||||||
|
Vesting of restricted stock
(grants 272 shares)
|
— | — | — | (2,704 | ) | |||||||||||
|
Dividend reinvestment plan
(2,068 shares at $16.502 per share)
|
— | — | — | 34,072 | ||||||||||||
|
Exercised options (5 shares at
an average exercise price of $6.020 per share)
|
— | — | — | 31 | ||||||||||||
|
Grant of stock as payment of
directors fees (8 shares at an average of$16.024 per
share)
|
— | — | — | 125 | ||||||||||||
|
Equity offerings (5,900 shares
at $16.930 per share)
|
— | — | — | 98,793 | ||||||||||||
|
Equity offerings (6,000 shares
at $16.370 per share)
|
— | — | — | 96,927 | ||||||||||||
|
Preferred stock purchase (400
shares at $18.90 per share)
|
2,128 | — | — | (7,560 | ) | |||||||||||
|
Net income for
2008
|
— | — | — | 78,137 | ||||||||||||
|
Common dividends paid ($1.19
per share).
|
(88,349 | ) | — | — | (88,349 | ) | ||||||||||
|
Preferred dividends paid
(Series D of $2.094 per share)
|
(9,714 | ) | — | — | (9,714 | ) | ||||||||||
|
Balance
at December 31, 2008 (82,382 common shares)
|
$ | (823,172 | ) | $ | — | $ | — | $ | 787,988 | |||||||
See
accompanying notes.
-F6-
OMEGA
HEALTHCARE INVESTORS, INC.
(in
thousands)
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flow from operating activities
|
||||||||||||
|
Net
income
|
$ | 78,137 | $ | 69,374 | $ | 55,697 | ||||||
|
Adjustment to reconcile net
income to cash provided by operating activities:
|
||||||||||||
|
Depreciation and amortization
(including amounts in discontinued operations)
|
39,890 | 36,056 | 32,263 | |||||||||
|
Impairment (including amounts
in discontinued operations)
|
5,584 | 1,416 | 541 | |||||||||
|
Provisions for uncollectible
mortgages, notes and accounts receivable (including amounts in
discontinued operations)
|
4,248 | — | 944 | |||||||||
|
Income from accretion of
marketable securities to redemption value
|
(207 | ) | (207 | ) | (1,280 | ) | ||||||
|
Refinancing
costs
|
— | — | 3,485 | |||||||||
|
Amortization for deferred
financing costs
|
2,001 | 1,958 | 1,952 | |||||||||
|
Gain on assets and equity
securities sold - net (incl. amounts in discontinued
operations)
|
(12,292 | ) | (1,994 | ) | (4,063 | ) | ||||||
|
Gain on investment
restructuring
|
— | — | (3,567 | ) | ||||||||
|
Restricted stock amortization
expense
|
2,103 | 1,425 | 4,517 | |||||||||
|
Adjustment of derivatives to
fair value
|
— | — | (9,079 | ) | ||||||||
|
Other
|
(188 | ) | (296 | ) | (61 | ) | ||||||
|
Net
change in accounts receivable
|
681 | (2,145 | ) | (64 | ) | |||||||
|
Net
change in straight-line rent
|
(11,860 | ) | (13,821 | ) | (6,158 | ) | ||||||
|
Net
change in lease inducement
|
(2,596 | ) | 2,168 | (19,965 | ) | |||||||
|
Net
change in other assets
|
(4,619 | ) | (185 | ) | 2,558 | |||||||
|
Net
change in income tax liabilities
|
(72 | ) | (5,574 | ) | 2,347 | |||||||
|
Net
change in other operating assets and liabilities
|
(1,023 | ) | (3,633 | ) | 2,744 | |||||||
|
Net
change in operating assets and liabilities for owned and operated
properties
|
(10,459 | ) | — | — | ||||||||
|
Net
cash provided by operating activities
|
89,328 | 84,542 | 62,811 | |||||||||
|
Cash
flow from investing activities
|
||||||||||||
|
Acquisition
of real estate
|
(112,760 | ) | (39,503 | ) | (178,906 | ) | ||||||
|
Placement
of mortgage loans
|
(74,928 | ) | (345 | ) | — | |||||||
|
Proceeds
from sale of equity securities
|
— | — | 7,573 | |||||||||
|
Proceeds
from sale of real estate investments
|
31,902 | 9,042 | 2,406 | |||||||||
|
Capital
improvements and funding of other investments
|
(17,458 | ) | (8,550 | ) | (6,806 | ) | ||||||
|
Proceeds
from other investments
|
16,510 | 17,671 | 37,937 | |||||||||
|
Investments
in other investments– net
|
(36,310 | ) | (8,978 | ) | (34,445 | ) | ||||||
|
Collection
of mortgage principal
|
5,945 | 757 | 10,886 | |||||||||
|
Net
cash used in investing activities
|
(187,099 | ) | (29,906 | ) | (161,355 | ) | ||||||
|
Cash
flow from financing activities
|
||||||||||||
|
Proceeds
from credit line borrowings
|
361,300 | 129,000 | 262,800 | |||||||||
|
Payments
of credit line borrowings
|
(345,800 | ) | (231,000 | ) | (170,800 | ) | ||||||
|
Payment
of financing costs
|
— | (696 | ) | (3,194 | ) | |||||||
|
Proceeds
from long-term borrowings
|
— | — | 39,000 | |||||||||
|
Payments
of long-term borrowings
|
(40,995 | ) | (415 | ) | (390 | ) | ||||||
|
Payment
to Trustee to redeem long-term borrowings
|
— | — | — | |||||||||
|
Receipts
from Dividend Reinvestment Plan
|
34,072 | 18,887 | 33,096 | |||||||||
|
Receipts/(payments)
for exercised options – net
|
(2,673 | ) | (780 | ) | 225 | |||||||
|
Dividends
paid
|
(98,063 | ) | (81,260 | ) | (66,869 | ) | ||||||
|
Repurchase
of preferred stock
|
(7,560 | ) | — | — | ||||||||
|
Proceeds
from common stock offering
|
195,720 | 112,878 | — | |||||||||
|
Payment
on common stock offering
|
— | — | (178 | ) | ||||||||
|
Other
|
— | — | 1,635 | |||||||||
|
Net
cash provided by (used in) financing activities
|
96,001 | (53,386 | ) | 95,325 | ||||||||
|
(Decrease)
increase in cash and cash equivalents
|
(1,770 | ) | 1,250 | (3,219 | ) | |||||||
|
Cash
and cash equivalents at beginning of year
|
1,979 | 729 | 3,948 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 209 | $ | 1,979 | $ | 729 | ||||||
|
Interest
paid during the year, net of amounts capitalized
|
$ | 38,016 | $ | 39,416 | $ | 34,995 | ||||||
See
accompanying notes.
-F7-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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, independent living facilities and
rehabilitation hospitals. In July 2008, we assumed operating
responsibilities for 14 of our skilled nursing facilities (“SNFs”) and one of
our assisted living facilities (“ALFs”) due to the bankruptcy of one of our
operators/tenants. In September 2008, we entered into an agreement to
lease these facilities to a new operator/tenant. The new
operator/tenant assumed operating responsibility for 13 of the 15 facilities
effective September 1, 2008. We are in the process of addressing
state regulatory requirements necessary to transfer the final two properties to
the new operator/tenant.
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 operators/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 statements
of income relate to the ownership of our investment in real
estate. At December 31, 2008, we have investments in 256 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 as well as entities that we consolidate
due to the application of Financial Accounting Standards Board (“FASB”)
Interpretation No. 46R, Consolidation of Variable Interest
Entities, (“FIN 46R”). All inter-company accounts and
transactions have been eliminated in consolidation of the financial
statements.
FIN 46R
addresses the consolidation by business enterprises of Variable Interest
Entities (“VIEs”). We consolidate all VIEs for which we are the
primary beneficiary. Generally, a VIE is an entity with one or more
of the following characteristics: (a) the total equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
subordinated financial support; (b) as a group the holders of the equity
investment at risk lack (i) the ability to make decisions about an entity’s
activities through voting or similar rights, (ii) the obligation to absorb the
expected losses of the entity, or (iii) the right to receive the expected
residual returns of the entity; or (c) the equity investors have voting rights
that are not proportional to their economic interests, and substantially all of
the entity’s activities either involve, or are conducted on behalf of, an
investor that has disproportionately few voting rights. FIN 46R
requires a VIE to be consolidated in the financial statements of the entity that
is determined to be the primary beneficiary of the VIE. The primary
beneficiary generally is the entity that will receive a majority of the VIEs
expected losses, receive a majority of the VIEs expected residual returns, or
both.
During
the first quarter of 2006, an entity of Haven Eldercare, LLC (“Haven”), formerly
one of our operators, entered into a $39.0 million first mortgage loan with GE
Capital (collectively, “GE Loan”). Haven used the $39.0 million in
proceeds to partially repay on a $61.8 million mortgage it had with
us. Simultaneously, we subordinated the payment of our remaining
$22.8 million mortgage note, to that of the GE Loan. The mortgage
agreement included a purchase option allowing us to purchase the facilities for
$61.8 million. The Haven entity was engaged in the ownership and
rental of six SNFs and one ALF. In accordance with FIN 46R, we
determined that we were the primary beneficiary of the Haven entity and
consolidated the financial statements and related real estate of the Haven
entity starting in 2006. In January 2008, we purchased the $39.0
million GE loan from GE Capital.
On July
7, 2008, we took ownership and/or possession through bankruptcy proceedings of
15 facilities previously operated by Haven, including all of the facilities
previously mortgaged to the Haven entity that we consolidated and TC Healthcare,
a new entity and an interim operator in which we have a substantial economic
interest was formed and began operating these facilities on our behalf through
an independent contractor. As a result of the bankruptcy proceedings,
the mortgage with the Haven entity was retired in exchange for our ownership of
the facilities. Accordingly, effective July 7, 2008, we were no
longer required to consolidate the Haven entity into our financial
statements. However, pursuant to FIN 46R and effective July 7, 2008,
we determined that we were the primary beneficiary of TC Healthcare and were
required to consolidate the financial position and results of operations of TC
Healthcare. Effective September 1, 2008, we transitioned/leased 13 of
the 15 facilities that were being operated by TC Healthcare to a new
operator/tenant and ceased consolidation of those facilities
operations. TC Healthcare continues to be responsible for the
operations of two facilities as of December 31, 2008 which are in the process of
being transitioned to the new operator/tenant pending regulatory approval by the
state. For additional information relating to our consolidation of TC
Healthcare, including revenues, expenses, assets and liabilities (see Note 4 –
Owned and Operated Assets).
-F8-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS- Continued
The
consolidation of the Haven entity under the mortgage loan resulted in the
following adjustments to our consolidated balance sheet as of December 31, 2007:
(i) an increase in total gross investments of $39.0 million; (ii) an increase in
accumulated depreciation of $3.1 million; (iii) an increase in Accounts
receivable – net of $0.4 million; (iv) an increase in Other long-term borrowings
of $39.0 million; and (v) a reduction of $2.7 million in cumulative net earnings
primarily due to increased depreciation expense. Our results of
operation reflect the impact of the consolidation of this Haven entity through
July 6, 2008.
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. All
costs of significant improvements, renovations and replacements are
capitalized. In addition, we capitalize leasehold improvements when
certain criteria are met, including when we supervise construction and will own
the improvement. Expenditures for maintenance and repairs are charged
to operations as they are incurred.
Depreciation is computed on a
straight-line basis over the estimated useful lives ranging from 20 to 40 years
for buildings and improvements and three to 10 years for furniture, fixtures and
equipment. Leasehold interests are amortized over the shorter of
useful life or term of the lease, with lives ranging from four to 12
years.
Owned
and Operated Assets
Real estate properties that are
operated pursuant to a foreclosure proceeding are included within "real estate
properties" and are reported at the time of foreclosure at the lower of carrying
cost or fair value.
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. All impairments are
taken as a period cost at that time, and depreciation is adjusted going forward
to reflect the new value assigned to the asset.
-F9-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS- Continued
If we decide to sell real estate
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.
For the years ended December 31, 2008,
2007, and 2006 we recognized impairment losses of $5.6 million, $1.4 million and
$0.5 million, respectively, including amounts classified within discontinued
operations. In 2008, we amended a master lease with an existing
operator to allow for the construction of a new facility to replace an existing
facility currently operated by the operator and recorded an impairment on the
existing property. In addition, in 2008, based upon provisions in a
master lease with our tenant, the lessee exercised its option to vacate one of
our properties and remove it from the master lease. We recorded an
impairment charge of $3.9 million on this property to record it at its estimated
fair value.
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 it is probable that all amounts will not be collected under
the contractual terms of the loan, the loan is written down to the present value
of the expected future cash flows. In cases where expected future
cash flows are not readily determinable, 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 $0.8 million for the years ended December 31, 2008,
2007 and 2006, respectively.
We currently account for impaired loans
using the cost-recovery method applying cash received against the outstanding
principal balance prior to recording interest income (see Note 6 – Other
Investments). At December 31, 2008 and 2007, we had allowances for
loan losses totaling $2.2 million on two working capital notes.
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.
Restricted
Cash
Restricted cash consists primarily of
funds escrowed for tenants’ security deposits required by us pursuant to certain
contractual terms (see Note 8 – Lease and Mortgage Deposits).
Accounts
Receivable
Accounts receivable includes:
contractual receivables, straight-line rent receivables, lease inducements, net
of an estimated provision for losses related to uncollectible and disputed
accounts. Contractual receivables relate to the amounts currently
owed to us under the terms of the lease agreement. Straight-line
receivables relates to the difference between the rental revenue recognized on a
straight-line basis and the amounts due to us contractually. Lease
inducements result from value provided by us to the lessee at the inception of
the lease and will be amortized as a reduction of rental revenue over the lease
term. On a quarterly basis, we review the collection of our
contractual payments and determine the appropriateness of our allowance for
uncollectible contractual rents. In the case of a lease recognized on
a straight-line basis, we generally provide an allowance for straight-line
accounts receivable when certain conditions or indicators of adverse
collectability are present.
-F10-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
A summary
of our net receivables by type is as follows:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Contractual
receivables
|
$ | 2,358 | $ | 5,517 | ||||
|
Straight-line
receivables
|
43,636 | 34,537 | ||||||
|
Lease
inducements
|
30,561 | 27,965 | ||||||
|
Allowance
|
(1,518 | ) | (3,027 | ) | ||||
|
Accounts
receivable – net
|
$ | 75,037 | $ | 64,992 | ||||
In 2008,
we recorded a $5.7 million lease inducements associated with the master lease
agreement with affiliates of Formation Capital (“Formation”), the new
operator/tenant of 13 facilities previously operated by Haven.
We
continuously evaluate the payment history and financial strength of our
operators and have historically established allowance reserves for straight-line
rent adjustments for operators that do not meet our requirements. We
consider factors such as payment history, the operator’s financial condition as
well as current and future anticipated operating trends when evaluating whether
to establish allowance reserves. During the three months ended June
30, 2008, we recorded a $4.3 million provision for uncollectible accounts
receivable associated with Haven receivables. The $4.3 million charge
consisted of $3.3 million to write-off straight-line receivables and $1.0
million to establish an allowance for pre-petition contractual receivables
associated with Haven. In 2008, we wrote-off some receivables that
were fully reserved.
Accounts receivable from owned and
operated assets consist of amounts due from Medicare and Medicaid programs,
other government programs, managed care health plans, commercial insurance
companies and individual patients. Amounts recorded include estimated provisions
for loss related to uncollectible accounts and disputed items. For
additional information, see Note 4 – Owned and Operated Assets.
Investments
in Debt and 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 other income. The cost of securities
sold is based on the specific identification method. 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.
Comprehensive
Income
SFAS 130, Reporting Comprehensive
Income, establishes guidelines 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.
-F11-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
Deferred
Financing Costs
External costs incurred from placement
of our debt are capitalized and amortized on a straight-line basis over the
terms of the related borrowings which approximate the effective interest method.
Amortization of financing costs totaling $2.0 million, $2.0 million and $2.0
million in 2008, 2007 and 2006, respectively, is classified as “interest -
amortization of deferred financing costs” in our consolidated statements of
income. When financings are terminated, unamortized amounts paid, as
well as charges incurred for the termination, are expensed at the time the
termination is made. 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
We have various different investments
that generate revenue, including leased and mortgaged properties, as well as
other investments, including working capital loans. We recognize
rental income and mortgage interest income and other investment income as earned
over the terms of the related master leases and notes,
respectively.
Substantially all of our leases contain
provisions for specified annual increases over the rents of the prior year and
are generally computed in one of three methods depending on specific provisions
of each lease as follows: (i) a specific annual increase over the prior year’s
rent, generally 2.5%; (ii) an increase based on the change in pre-determined
formulas from year to year (i.e., such as increases in the Consumer Price Index
(“CPI”)); or (iii) specific dollar increases over prior
years. Revenue under lease arrangements with specific determinable
increases is recognized over the term of the lease on a straight-line
basis. Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin No. 101, Revenue
Recognition in Financial Statements, does not provide for the recognition
of contingent revenue until all possible contingencies have been
eliminated. We consider the operating history of the lessee, the
payment history, the general condition of the industry and various other factors
when evaluating whether all possible contingencies have been
eliminated. We do not include contingent rents as income until the
contingencies have been resolved.
In the case of rental revenue
recognized on a straight-line basis, we generally record reserves against earned
revenues from leases 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. We
continually evaluate the collectability of our straight-line rent
assets. If it appears that we will not collect future rent due under
our leases, we will record a provision for loss related to the straight-line
rent asset.
Recognizing rental income on a
straight-line basis may cause recognized revenue to exceed contractual amounts
due from our tenants. Such cumulative excess amounts are included in
accounts receivable and were $43.1 million and $33.9 million, net of allowances,
at December 31, 2008 and 2007, respectively.
Gains on
sales of real estate assets are recognized pursuant to the provisions of SFAS
No. 66, Accounting for Sales
of Real Estate (“SFAS No. 66”). 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.
Nursing
home revenues of owned and operated assets consist of long-term care revenues,
rehabilitation therapy services revenues, temporary medical staffing services
revenues and other ancillary services revenues. The revenues are recognized as
services are provided. Revenues are recorded net of provisions for
discount arrangements with commercial payors and contractual allowances with
third-party payors, primarily Medicare and Medicaid. Revenues
realizable under third-party payor agreements are subject to change due to
examination and retroactive adjustment. Estimated third-party payor
settlements are recorded in the period the related services are rendered. The
methods of making such estimates are reviewed periodically, and differences
between the net amounts accrued and subsequent settlements or estimates of
expected settlements are reflected in the current period results of operations.
Laws and regulations governing the Medicare and Medicaid programs are extremely
complex and subject to interpretation. For additional information,
see Note 4 – Owned and Operated Assets.
-F12-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
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 (“SFAS No. 144”), the
operating results of specified real estate assets that have been sold, or
otherwise qualify as held for disposition (as defined by SFAS No. 144), are
reflected as assets held for sale in our balance sheet. Assets that
qualify as held for sale may also be considered as a discontinued operation if,
(a) the operation and cash flows of the asset have been or will be eliminated
from future operations and (b) we will not have significant involvement with the
asset after its disposition. For assets that qualify as discontinued operations,
we have reclassified the operations of those assets to discontinued operations
in the consolidated statements of income for all periods presented and
assets held for sale in the consolidated balance sheet for all periods
presented. We had one assets held for sale as of December 31, 2008
with a net book value of $0.2 million.
For additional information, see Note 19
– Discontinued Operations.
Derivative
Instruments
We follow SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, (“FAS No.
133”). From time to time we may use derivatives financial instruments
to manage interest rates. These instruments include options,
forwards, interest rate swaps, caps or floors or a combination thereof depending
on the underlying exposure. We do not use derivatives for trading or
speculative purposes. On the date we enter into a derivative, the
derivative is designated as a hedge of the identified exposure. We
measure the effectiveness of its hedging relationships both at the hedge
inception and on an ongoing basis.
FAS No.133 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. Gains and losses related to hedged transaction
are deferred and recognized as interest expense in the period or periods that
the underlying transaction occurs, expires or is otherwise terminated. The
ineffective portion of a derivative’s change in fair value will be immediately
recognized in earnings.
At December 31, 2008 and 2007, we had
no derivative instruments.
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 restricted stock. For additional information, see Note 18 –
Earnings Per Share.
Income
Taxes
We were organized to qualify for
taxation as a REIT under Section 856 through 860 of the Internal Revenue
Code. So long as we qualify as a REIT; we will not be subject to
Federal income taxes on the REIT taxable income that we distributed to
shareholders, subject to certain exceptions. In 2008, we paid
preferred and common dividend payments of $98.1 million which satisfies the 2008
REIT requirements relating to qualifying income. We are permitted to
own up to 100% of a taxable REIT subsidiary (“TRS”). Currently, we
have one TRS that is taxable as a corporation and that pays federal, state and
local income tax on its net income at the applicable corporate
rates. The loss carry-forward was fully reserved with a valuation
allowance due to uncertainties regarding realization. We record
interest and penalty charges associated with tax matters as income
tax. For additional information on income taxes, see Note 11 –
Taxes.
-F13-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
On January 1, 2007, we adopted
Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”),
Accounting for Uncertainty in
Income Taxes, an
interpretation of FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement No. 109, by defining a criterion that an individual tax
position must meet for any part of that position to be recognized in an
enterprise’s financial statements. The interpretation requires a
review of all tax positions accounted for in accordance with FASB Statement No.
109 and applies a more-likely-than-not recognition threshold. A tax
position that meets the more-likely-than-not recognition threshold is initially
and subsequently measured as the largest amount of tax benefit that is greater
than 50 percent likely of being realized upon ultimate settlement with the
taxing authority that has full knowledge of all relevant
information. We are subject to the provisions of FIN 48 beginning
January 1, 2007. We evaluated FIN 48 and determined that the adoption
of FIN 48 had no impact on our financial statements.
Stock-Based
Compensation
Prior to January 1, 2006, we accounted
for stock based compensation using the intrinsic value method as defined by APB
Opinion No. 25, Accounting for
Stock Issued to Employees (“APB 25”). Under APB 25, we
generally recognized compensation expense only for restricted stock
grants. We have recognized the compensation expense associated with
the restricted stock ratably over the associated service period.
Effective January 1, 2006, we adopted
the provisions of SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS
No. 123(R)”), using the modified prospective transition method, and therefore
has not restated the results of prior periods. The additional expense
recorded in 2006 as a result of this adoption is approximately $3
thousand.
Effects
of Recently Issued Accounting Standards
FAS 157
Evaluation
On January 1, 2008, we adopted FASB
Statement No. 157, Fair Value
Measurements (“FAS No. 157”). This standard defines fair
value, establishes a methodology for measuring fair value and expands the
required disclosure for fair value measurements. FAS No. 157
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement, and states that a fair value measurement should be determined based
on the assumptions that market participants would use in pricing the asset or
liability. This statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those pronouncements that fair value is the relevant
measurement attribute. Accordingly, this statement does not require
any new fair value measurements. The standard applies prospectively
to new fair value measurements performed after the required effective dates,
which are as follows: (i) on January 1, 2008, the standard applied to our
measurements of the fair values of financial instruments and recurring fair
value measurements of non-financial assets and liabilities; and (ii) on January
1, 2009, the standard will apply to all remaining fair value measurements,
including non-recurring measurements of non-financial assets and liabilities
such as measurement of potential impairments of goodwill, other intangible
assets and other long-lived assets. It also will apply to fair value
measurements of non-financial assets acquired and liabilities assumed in
business combinations. We evaluated FAS No. 157 and determined that
the adoption of the provisions FAS No. 157 effective on January 1, 2008 and 2009
had no impact on our financial statements.
FAS 159
Evaluation
In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities (“SFAS No.
159”). SFAS No. 159 permits entities to choose to measure certain
financial assets and liabilities at fair value, with the change in unrealized
gains and losses on items for which the fair value option has been elected
reported in earnings. We adopted SFAS No. 159 on January 1,
2008. We evaluated SFAS No. 159 and did not elect the fair value
accounting option for any of our eligible assets; therefore, the adoption of
SFAS 159 had no impact on our financial statements.
FAS 141(R)
Evaluation
On December 4, 2007, the FASB issued
Statement No. 141(R), Business
Combinations (“FAS
141(R)”). The new standard will significantly change the accounting
for and reporting of business combination transactions. FAS 141(R)
requires companies to recognize, with certain exception, 100 percent of the fair
value of the assets acquired, liabilities assumed and non-controlling interest
in acquisitions of less than a 100 percent controlling interest when the
acquisition constitutes a change in control; measure acquirer shares issued as
consideration for a business combination at fair value on the date of the
acquisition; recognize contingent consideration arrangements at their
acquisition date fair value, with subsequent change in fair value generally
reflected in earnings; recognition of reacquisition loss and gain contingencies
at their acquisition date fair value; expense as incurred, acquisition related
transaction costs. FAS 141(R) is effective for fiscal years beginning
after December 15, 2008 and early adoption is prohibited. We intend
to adopt the standard on January 1, 2009. We are currently evaluating
the impact, if any, that FAS 141(R) will have on our financial
statements.
-F14-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
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 7 – Concentration of Risk).
Reclassifications
Certain amounts in the prior year have
been reclassified to conform to the 2008 presentation and to reflect the results
of discontinued operations. Such reclassifications have no effect on
previously reported earnings or equity. See Note 19 – Discontinued
Operations for a discussion of discontinued operations.
NOTE
3 - PROPERTIES
Leased
Property
Our
leased real estate properties, represented by 238 long-term care facilities and
two rehabilitation hospitals at December 31, 2008, 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 that are typically subject
to annual increases based upon the lesser of a fixed amount or increases derived
from changes in CPI. 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,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Buildings
|
$ | 1,279,266 | $ | 1,191,816 | ||||
|
Land
|
92,746 | 82,906 | ||||||
| 1,372,012 | 1,274,722 | |||||||
|
Less
accumulated depreciation
|
(251,854 | ) | (221,366 | ) | ||||
|
Total
|
$ | 1,120,158 | $ | 1,053,356 | ||||
The future minimum estimated rents due
for the remainder of the initial terms of the leases are as follows at December
31, 2008:
|
(in
thousands)
|
||||
|
2009
|
$ | 155,819 | ||
|
2010
|
158,665 | |||
|
2011
|
161,536 | |||
|
2012
|
158,197 | |||
|
2013
|
160,610 | |||
|
Thereafter
|
642,239 | |||
|
Total
|
$ | 1,437,066 | ||
Below is
a summary of the significant lease transactions that occurred in
2008.
2008
Acquisitions
On
December 31, 2008, we purchased two (2) SNFs from an unrelated third party for
$19.5 million and leased those facilities to an existing operator,
Formation. The facilities were added to Formation’s existing master
lease and will increase cash rent by $2.4 million annually starting in
2009. The $19.5 million was allocated to building and personal
property of $18.7 million and $0.8 million, respectively.
-F15-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
In
September 2008, we purchased four (4) SNFs, one (1) ALF and one (1) independent
living facility (“ILF”) for $40.0 million from subsidiaries of an existing
tenant, and leased those facilities back to the tenant. The
facilities were added to the tenant’s existing master lease and will increase
cash rent by $4.0 million annually. The $40.0 million acquisition
price was allocated $2.4 million to land, $35.4 million to building and $2.2
million to personal property.
In April
2008, we purchased seven (7) SNFs, one (1) ALF and one rehab hospital for $47.4
million from an unrelated third party and leased the facilities to an existing
tenant of ours. The facilities were added to the tenant’s existing
master lease and will increase cash rent by $4.7 million
annually. The $47.4 million acquisition price was allocated $6.6
million to land, $38.9 million to building and $1.9 million to personal
property.
In
January 2008, we purchased one (1) SNF for $5.2 million from an unrelated third
party and leased the facility to an existing tenant of ours. The
facility was added to the tenant’s existing master lease and increased cash rent
by $0.5 million annually. The $5.2 million acquisition price was
allocated $0.4 million to land, $4.5 million to building and $0.3 million to
personal property.
In
January 2008, we purchased from GE Capital a $39.0 million first mortgage loan
on seven (7) facilities operated by Haven due October 2012. Prior to
the acquisition of this first mortgage, we had a $22.8 million second mortgage
on these facilities. In July 2008, we acquired these properties from
Haven through a credit bid with the United States Bankruptcy
Court. These facilities were part of the Haven’s chapter 11
proceeding being jointly administered in the United States Bankruptcy Court for
the District of Connecticut, New Haven Division that began in November
2007. We consolidated the Haven entity which owned these facilities
into our financial statements in accordance with FIN 46R because we determined
that the Haven entity was a VIE and that we were the primary beneficiary, see
Note 1 – Organization and Basis of Presentation for additional
information. In 2007, the Haven facilities represented approximately
8% of our operating revenue.
2007
Acquisitions
During
the third quarter of 2007, we completed a transaction with Litchfield Investment
Company, LLC and its affiliates (“Litchfield”) to purchase five (5) SNFs for a
total investment of $39.5 million. The facilities total 645 beds and
are located in Alabama (1), Georgia (2), Kentucky (1) and Tennessee
(1). We also provided a $2.5 million loan in the form of a
subordinated note as part of the transaction, which was repaid in full during
the fourth quarter 2007. Simultaneously with the close of the
purchase transaction, the facilities were combined into an Amended and Restated
Master Lease with Signature Holding II, LLC (formerly known as Home Quality
Management, Inc.) The Amended and Restated Master Lease was extended
until July 31, 2017. The investment allocated to land, building and
personal property is $6.3 million, $32.1 million and $1.1 million,
respectively.
During
the third quarter of 2007, we continued our restructure of a five (5) facility
master lease with USA Healthcare whereby we have agreed to sell three (3)
facilities and reduce the overall annual rent on the master lease by $0.4
million. During the fourth quarter of 2007, two (2) of the facilities
were sold for approximately $2.8 million in cash proceeds and the overall annual
rent on the master lease is reduced by $0.4 million.
2006
Acquisitions
In the
third quarter of 2006, we completed two transactions: (i) on August 1, 2006, we
purchase a 100% interest in 30 SNFs and one (1) ILF from Litchfield; and (ii) on
September 1, 2006, we purchased a 100% interest in a facility located in
Pennsylvania, the combined total investment was $178.9 million. We
have finalized the purchase price allocation of the $178.9
million. The amount allocated to land, building and personal property
is $15.4 million, $154.4 million and $7.5 million, respectively, including $1.8
million in land and building classified as held for sale. We also
allocated $1.6 million to a below-market lease.
Assets
Sold or Held for Sale
|
·
|
At
December 31, 2008, we had one SNF classified as held-for-sale with a net
book value of approximately $0.2 million. In 2008, a $0.2
million provision for impairment charge was recorded to reduce the
carrying value of our held-for-sale facility to its estimated fair
value.
|
-F16-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
|
·
|
At
December 31, 2007, we had three facilities classified as held for sale
with a net book value of approximately $2.9 million. In 2007,
we recorded a $1.4 million provision for impairment charge on one of the
facility to reduce the carrying value to its estimated fair
value.
|
2008
Asset
Sales
|
·
|
On
January 31, 2008, we sold one SNF in California for approximately $1.5
million resulting in a gain of approximately $0.4 million, which was
included in our gain (loss) from discontinued operations. For
additional information, see Note 19 – Discontinued
Operations.
|
|
·
|
On
February 1, 2008, we sold a SNF in California for approximately $1.5
million resulting in a gain of approximately $46
thousand.
|
|
·
|
On
July 1, 2008, we sold two rehabilitation hospitals in California for
approximately $29.0 million resulting in a gain of approximately $12.3
million.
|
|
·
|
On
September 29, 2008, we sold one SNF in Texas for approximately $0.1
million resulting in a loss of approximately $0.5
million.
|
2007
Asset
Sales
|
·
|
In
November 2007, we sold two SNFs in Iowa for approximately $2.8 million
resulting in a gain of $0.4
million.
|
|
·
|
In
May 2007, we sold two SNFs in Texas for their net book values, generating
cash proceeds of approximately $1.8
million.
|
|
·
|
In
March 2007, we sold a SNF in Arkansas for approximately $0.7 million
resulting in a loss of $15 thousand. The results of this
operation and the related loss are included in discontinued
operations.
|
|
·
|
In
February 2007, we sold a closed SNF in Illinois for approximately $0.1
million resulting in a loss of $35 thousand. The results of
this operation and the related loss are included in discontinued
operations.
|
|
·
|
In
January 2007, we sold two ALFs in Indiana for approximately $3.6 million
resulting in a gain of approximately $1.7 million. The results
of these operations and the related gains are included in discontinued
operations.
|
2006
Asset Sales
|
·
|
In
October 2006, we sold an ALF in Ohio resulting in an accounting gain of
approximately $0.4 million. The results of this operation and
the related gain are included in discontinued
operations.
|
|
·
|
In
May 2006, we sold two SNFs in California resulting in an accounting loss
of approximately $0.1 million. The results of these operations
and the related losses are included in discontinued
operations.
|
|
·
|
In
March 2006, we sold a SNF in Illinois resulting in an accounting loss of
approximately $0.2 million. The results of this operation and
the related loss are included in discontinued
operations.
|
NOTE
4 – OWNED AND OPERATED ASSETS
At December 31, 2008, we own and are
operating two facilities with a total of 279 beds that were previously recovered
from a bankrupt operator/tenant.
Since November 2007, affiliates of
Haven, one of our operators/lessees/mortgagors, operated under Chapter 11
bankruptcy protection. Commencing in February 2008, the assets of the
Haven facilities were marketed for sale via an auction process to be conducted
through proceedings established by the bankruptcy court. The auction
process failed to produce a qualified buyer. As a result, and
pursuant to our rights as ordered by the bankruptcy court, Haven moved the
bankruptcy court to authorize us to credit bid certain of the indebtedness that
it owed to us in exchange for taking ownership of and transitioning certain of
its assets to a new entity in which we have a substantial ownership interest,
all of which was approved by the bankruptcy court on July 4,
2008. Effective as of July 7, 2008, we took ownership and/or
possession of 15 facilities previously operated by Haven and TC Healthcare, a
new entity and an interim operator in which we have a substantial economic
interest, began operating these facilities on our behalf through an independent
contractor.
-F17-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
On August 6, 2008, we entered into a
Master Transaction Agreement (“MTA”) with affiliates of Formation whereby
Formation agreed (subject to certain closing conditions, including the receipt
of licensure) to lease 14 SNFs and one ALF facility under a master
lease. These facilities were formerly leased to Haven.
Effective September 1, 2008, we
completed the operational transfer, of 12 SNFs and one ALF to affiliates of
Formation, in accordance with the terms of the MTA. The 13 facilities
are located in Connecticut (5), Rhode Island (4), New Hampshire (3) and
Massachusetts (1). As part of the transaction, Genesis Healthcare
(“Genesis”) has entered into a long-term management agreement with Formation to
oversee the day-to-day operations of each of these facilities. The two remaining
facilities in Vermont, which are currently being operated by TC Healthcare, will
transfer to Formation/Genesis upon the appropriate regulatory approvals expected
sometime in the near future. Our financial statements include the
financial position and results of operations of TC Healthcare from July 7, 2008
to December 31, 2008. As of December 31, 2008, our gross investment
in land and buildings for the two properties operated by TC Healthcare was
approximately $14.4 million.
Nursing home revenues, expenses, assets
and liabilities included in our consolidated financial statements that relate to
such owned and operated assets are set forth in the tables below.
|
For
Year Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Nursing
home revenues (1)
(3)
|
$ | 24,170 | $ | — | ||||
|
Nursing
home expenses (2)
(3)
|
27,601 | — | ||||||
|
Loss
from nursing home operations
|
$ | (3,431 | ) | $ | — | |||
|
(1)
|
Nursing
revenues and expenses includes revenues and expenses for 15 facilities for
the period July 7, 2008 through August 31, 2008 and two facilities from
September 1, 2008 through December 31,
2008.
|
|
(2)
|
Includes $0.9 million related to
employee severance.
|
|
(3)
|
Nursing
home revenues and expenses for the three months ended December 31, 2008,
were $4.8 million and $6.8 million,
respectively.
|
NOTE
5 - MORTGAGE NOTES RECEIVABLE
Mortgage notes receivable relate to
fixed-rate mortgages on 15 long-term care facilities. The mortgage
notes are secured by first mortgage liens on the borrowers' underlying real
estate and personal property. The mortgage notes receivable relate to
facilities located in four states, operated by four 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, 2008, we
have no foreclosed property and none of our mortgages were in foreclosure
proceedings.
2008
and 2007 Mortgage Note Activity
In January 2008, we purchased from GE
Capital a $39.0 million mortgage loan due October 2012 on seven facilities then
operated by Haven. Prior to the acquisition of this mortgage, we had
a $22.8 million second mortgage on these facilities, resulting in a combined
$61.8 million mortgage on these facilities immediately following the purchase
from GE Capital. In conjunction with the above-noted mortgage and the
application of FIN 46R, we consolidated the financial statements and real estate
of the Haven entity that was the obligor under this mortgage loan into our
financial statements. On July 7, 2008, we took ownership and/or
possession of the Haven facilities and a new entity assumed operations of the
facilities. As a result of our taking ownership and/or possession of
the Haven facilities, effective July 7, 2008, the mortgage note was retired and
we were no longer required to consolidate the Haven entity.
-F18-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
On April 18, 2008, and simultaneous
with the amendment and extension of the master lease with CommuniCare Health
Services (“CommuniCare”), we entered into a first mortgage loan with CommuniCare
in the amount of $74.9 million. This mortgage loan matures on April
30, 2018 and carries an interest rate of 11% per year. The $74.9
million mortgage included $4.9 million in funds placed in escrow for the
purchase of a facility that was pending environmental and other studies prior to
closure. In December 2008, CommuniCare notified us of their decision
not to purchase the additional facility and the escrow agent returned the
escrowed funds to us. As of December 31, 2008, the outstanding
mortgage note was $69.9 million. CommuniCare used the proceeds of the
mortgage loan to acquire seven (7) SNFs located in Maryland, totaling 965 beds
from several unrelated third parties. The mortgage loan is secured by
a lien on the seven (7) facilities. The mortgage properties are
cross-collateralized with the master lease agreement.
The
outstanding principal amounts of mortgage notes receivable, net of allowances,
were as follows:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Mortgage
note due 2014; monthly payment of $66,923, including interest at
11.00%
|
$ | 6,701 | $ | 6,752 | ||||
|
Mortgage
note due 2018; monthly payment of $635,303, including interest at
11.00%
|
69,928 | - | ||||||
|
Mortgage
note due 2010; monthly payment of $124,833, including interest at
11.50%
|
12,474 | 12,534 | ||||||
|
Mortgage
note due 2016; monthly interest only payment of $116,992 at
11.50%
|
11,095 | 10,945 | ||||||
|
Other
mortgage notes
|
623 | 1,458 | ||||||
|
Total mortgages — net (1)
|
$ | 100,821 | $ | 31,689 | ||||
|
(1)
|
Mortgage
notes are shown net of allowances of $0.0 million in 2008 and
2007.
|
NOTE
6 - OTHER INVESTMENTS
A summary of our other investments is
as follows:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Notes
receivable, net
|
$ | 25,337 | $ | 9,400 | ||||
|
Marketable
securities and other
|
4,527 | 4,283 | ||||||
|
Total other
investments
|
$ | 29,864 | $ | 13,683 | ||||
At
December 31, 2008, we had 9 notes receivable, with maturities ranging from on
demand to 2018. At December 31, 2007, we had 10 notes receivable,
with maturities ranging from on demand to 2016. At December 31, 2008
and 2007, we had total reserves of approximately $2.2 million on two
notes.
For the year ended December 31, 2008
and 2007, apart from the normal scheduled monthly loan payments, we had the
following transactions that impacted our other investments:
2008
Transactions
Haven
Properties Debtor-in-Possession Financing Agreement
In January 2008, Haven entered into a
debtors-in-possession financing (“DIP”) agreement with us and one other
financial institution (collectively, the “DIP Lenders”), in which our initial
participation was approximately $5.0 million of a $50 million total
commitment. The agreement was originally scheduled to mature in June
2008 and yield an interest rate of the greater of prime plus 3% or 9.5%
annually. On June 4, 2008, the DIP Lenders and Haven amended the DIP
agreement (the “Amended DIP”) which, among other things, extended the term to
allow Haven additional time to sell its assets. As collateral for the
Amended DIP, we received the right to use all facility accounts receivable
generated from the Omega facilities from June 4, 2008 to satisfy any of our
post-June 3, 2008 advances. As of December 31, 2008, we had collected
all outstanding balances on the DIP agreement and had $1.2 million net
outstanding related to the Amended DIP.
-F19-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
Formation
Capital Note Origination
In September 2008, we entered into a
loan agreement with Formation pursuant to which we agreed to provide Formation
up to $23.0 million working capital in two years.
Alden
Management Note Payoff
In May 2008, we received approximately
$0.8 million in proceeds on a loan payoff.
Mark
Ide Limited Liability Company Note Payoff
In May 2008, we received approximately
$1.3 million in proceeds on a loan payoff.
Nexion
Health, Inc. Note Payoff
In February 2008, we received
approximately $0.1 million in proceeds on a loan payoff.
2007
Transactions
Debtor-in-Possession
Financing Agreement
In May 2007, we entered into a DIP
financing agreement with one of our operators, providing up to $6.0 million to
maintain its day-to-day operation while it was undergoing its workout
plan. The balance was paid off in August 2007.
Alden
Management Note Payoff
In August 2007, we received
approximately $4.0 million in proceeds on a loan payoff.
NOTE
7 - CONCENTRATION OF RISK
As of December 31, 2008, our portfolio
of domestic investments consisted of 256 healthcare facilities, located in 28
states and operated by 25 third-party operators. Our gross investment
in these facilities, net of impairments and before reserve for uncollectible
loans, totaled approximately $1.5 billion at December 31, 2008, with
approximately 99% of our real estate investments related to long-term care
facilities. This portfolio is made up of 227 SNFs, seven ALFs, two
rehabilitation hospitals, two ILFs, fixed rate mortgages on 15 SNFS, two SNFS
that are owned and operated and one SNF is currently held for
sale. At December 31, 2008, we also held miscellaneous investments of
approximately $29.9 million, consisting primarily of secured loans to
third-party operators of our facilities.
At December 31, 2008, approximately 24%
of our real estate investments were operated by two public companies: Sun
Healthcare Group, Inc (“Sun”) (14%) and Advocat (10%). Our largest
private company operators (by investment) were CommuniCare (22%), Signature
Holding II, LLC (10%). No other operator represents more than 9% of
our investments. The three states in which we had our highest
concentration of investments were Ohio (23%), Florida (12%) and Pennsylvania
(10%) at December 31, 2008.
For the year ended December 31, 2008,
our revenues from operations totaled $193.8 million, of which approximately
$31.7 million were from Sun (16%), $31.6 million from CommuniCare (16%) and
$20.5 million from Advocat (11%). No other operator generated more
than 9% of our revenues from operations for the year ended December 31,
2008. In addition, our owned and operated assets generated $24.2
million (12%) of revenue in 2008. Thirteen of these facilities were
transitioned/leased to a new operator/tenant effective September 1,
2008.
Sun and Advocat are subject to the
reporting requirements of the SEC and are required to file with the SEC annual
reports containing audited financial information and quarterly reports
containing unaudited interim financial information. Sun’s and
Advocat’s filings with the SEC can be found at the SEC’s website at
www.sec.gov. We are providing this data for information purposes
only, and you are encouraged to obtain Sun’s and Advocat’s publicly available
filings from the SEC.
-F20-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
NOTE
8 - 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. At December 31, 2008, we held $6.3
million in such liquidity deposits and $29.6 million in letters of
credit. 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. Liquidity deposits are recorded as restricted cash on our
consolidated balance sheet. 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
9 - BORROWING ARRANGEMENTS
Secured
Borrowings
At December 31, 2008, we had $63.5
million outstanding under our $255.0 million revolving senior secured credit
facility (the “Credit Facility”) and no letters of credit outstanding, leaving
availability of $191.5 million as of December 31, 2008. The $63.5
million of outstanding borrowings had a blended interest rate of 2.0% at
December 31, 2008. The Credit Facility matures in March
2010.
At December 31, 2007, we had $48.0
million outstanding under the Credit Facility and $2.1 million of letters of
credit outstanding. The $48.0 million of outstanding borrowings had a
blended interest rate of 6.15% at December 31, 2007.
For the years ended December 31, 2008
and 2007, the weighted average interest rates were 3.89% and 6.70%,
respectively.
The Credit Agreement (the “Credit
Agreement”) that governs our Credit Facility, allowed us to increase our
available borrowing base under the Credit Agreement from $200.0 million up to an
aggregate of $300.0 million, subject to certain conditions. Effective
February 22, 2007, we exercised our right to increase the available revolving
commitment under the Credit Agreement from $200.0 million to $255.0 million and
we consented to the addition of 18 of our properties to the borrowing base
assets under the Credit Agreement. In 2007, we paid approximately
$0.7 million in fees and expenses associated with increasing the available
revolving commitments. At December 31, 2008, we had real estate
assets with a gross book value of $271.5 million pledged as collateral 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, 2008, we were in compliance with all
property level and corporate financial covenants.
The Credit Agreement has certain
financial covenants that limit the distribution of dividends paid during a
fiscal quarter to no more than 95% of our aggregate cumulative Funds From
Operations (“FFO”) as defined in the Credit Agreement unless a greater
distribution is required to maintain REIT status. The Credit
Agreement defines FFO as net income (or loss) plus depreciation and amortization
and shall be adjusted for charges related to: (i) restructuring our debt; (ii)
redemption of preferred stock; (iii) litigation charges up to $5.0 million; (iv)
non-cash charges for accounts and notes receivable up to $5.0 million; (v)
non-cash compensation related expenses; (vi) non-cash impairment charges; and
(vii) tax liabilities in an amount not to exceed $8.0 million.
Unsecured
Borrowings
Other
Long-Term Borrowings
In January 2008, we purchased from GE
Capital a $39.0 million mortgage loan due October 2012 on seven facilities then
operated by Haven. Prior to the acquisition of this mortgage, we had
a $22.8 million second mortgage on these facilities, resulting in a combined
$61.8 million mortgage on these facilities immediately following the purchase
from GE Capital. In conjunction with the above-noted mortgage and
purchase option and the application of FIN 46R, we consolidated the financial
statements and real estate of the Haven entity that was the obligor under this
mortgage loan into our financial statements. On July 7, 2008, we took
ownership and/or possession of the Haven facilities and TC Healthcare assumed
operations of the facilities. As a result of our taking ownership
and/or possession of the Haven facilities, effective July 7, 2008, the mortgage
note was retired and we were no longer required to consolidate the Haven entity
pursuant to FIN 46R. See Note 1 – Organization and Basis of
Presentation for additional discussion regarding the impact of the consolidation
of the Haven entity on our financial statements.
-F21-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
The
following is a summary of our long-term borrowings:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Unsecured
borrowings:
|
||||||||
|
7% Notes due April
2014
|
$ | 310,000 | $ | 310,000 | ||||
|
7% Notes due January
2016
|
175,000 | 175,000 | ||||||
|
Haven – GE Loan due October
2012
|
— | 39,000 | ||||||
|
Premium on 7% Notes due April
2014
|
831 | 990 | ||||||
|
Discount on 7% Notes due
January 2016
|
(1,134 | ) | (1,276 | ) | ||||
|
Other long-term
borrowings
|
— | 1,995 | ||||||
| 484,697 | 525,709 | |||||||
|
Secured
borrowings:
|
||||||||
|
Revolving lines of
credit
|
63,500 | 48,000 | ||||||
|
Totals
|
$ | 548,197 | $ | 573,709 | ||||
The required principal payments,
excluding the premium/discount on the 7% Notes, for each of the five years
following December 31, 2008 and the aggregate due thereafter are set forth
below:
|
(in
thousands)
|
||||
|
2009
|
$ | — | ||
|
2010
|
63,500 | |||
|
2011
|
— | |||
|
2012
|
— | |||
|
2013
|
— | |||
|
Thereafter
|
485,000 | |||
|
Totals
|
$ | 548,500 | ||
-F22-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
NOTE
10 - FINANCIAL INSTRUMENTS
At December 31, 2008 and 2007, the
carrying amounts and fair values of our financial instruments were as
follows:
|
2008
|
2007
|
|||||||||||||||
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
|
Assets:
|
(in
thousands)
|
|||||||||||||||
|
Cash and cash
equivalents
|
$ | 209 | $ | 209 | $ | 1,979 | $ | 1,979 | ||||||||
|
Restricted cash
|
6,294 | 6,294 | 2,104 | 2,104 | ||||||||||||
|
Mortgage notes receivable –
net
|
100,821 | 93,892 | 31,689 | 31,880 | ||||||||||||
|
Other
investments
|
29,864 | 25,343 | 13,683 | 13,642 | ||||||||||||
|
Totals
|
$ | 137,188 | $ | 125,738 | $ | 49,455 | $ | 49,605 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Revolving lines of
credit
|
$ | 63,500 | $ | 59,550 | $ | 48,000 | $ | 48,000 | ||||||||
|
7.00% Notes due
2014
|
310,000 | 268,712 | 310,000 | 302,744 | ||||||||||||
|
7.00% Notes due
2016
|
175,000 | 137,285 | 175,000 | 178,576 | ||||||||||||
|
(Discount)/Premium on 7.00%
Notes – net
|
(303 | ) | (37 | ) | (286 | ) | (191 | ) | ||||||||
|
Other long-term
borrowings
|
— | — | 40,995 | 41,039 | ||||||||||||
|
Totals
|
$ | 548,197 | $ | 465,510 | $ | 573,709 | $ | 570,168 | ||||||||
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
receivables are estimated using a discounted cash flow analysis, using
interest rates being offered for similar loans to borrowers with similar
credit ratings.
|
|
·
|
Other
investments: Other investments are primarily comprised of: (i)
notes receivable; (ii) a redeemable non-convertible preferred security;
and (iii) a subordinated debt instrument of a publicly traded company in
2006 and paid off in 2007. 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 securities are
estimated using discounted cash flow and volatility assumptions or, if
available, a quoted market value.
|
|
·
|
Revolving
lines of credit: The fair value of our borrowings under
variable rate agreements are estimated using an expected present value
technique based on expected cash flows discounted using the current
credit-adjusted risk-free rate.
|
|
·
|
Senior
notes and other long-term borrowings: The fair value of our
borrowings under fixed rate agreements are estimated based on open market
trading activity provided by a third
party.
|
-F23-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
NOTE
11 – TAXES
We were organized, have operated, and
intend to continue to operate in a manner that enables us to qualify for
taxation as a REIT under Sections 856 through 860 of the Internal Revenue
Code. On a quarterly and annual basis we perform several analyses to
test our compliance within the REIT taxation rules. In order to
qualify as a REIT, we are required to: (i) distribute dividends (other than
capital gain dividends) to our stockholders in an amount at least equal to (A)
the sum of (a) 90% of our "REIT taxable income" (computed without regard to the
dividends paid deduction and our net capital gain), and (b) 90% of the net
income (after tax), if any, from foreclosure property, minus (B) the sum of
certain items of non-cash income on an annual basis, (ii) ensure that at least
75% and 95%, respectively of our gross income is generated from qualifying
sources that are described in the REIT tax law, (iii) ensure that at least 75%
of our assets consist of qualifying assets, such as real property, mortgages,
and other qualifying assets described in the REIT tax law, (iv) ensure that we
do not own greater than 10% of the voting or value of any one security, (v)
ensure that we don’t own either debt or equity securities of another company
that are in excess of 5% of our total assets and (vi) ensure that no more that
20% of our assets are invested in one or more taxable REIT subsidiaries. In
addition to the income and asset tests, the REIT rules require that no less than
100 shareholders own shares or an interest in the REIT and that five or fewer
individuals do not own (directly or indirectly) more than 50% of the shares or
proportionate interest in the REIT. If we fail to qualify as a REIT
in any tax year, we will be subject to federal income tax on our taxable income
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent years.
We are also subject to federal taxation
of 100% of the derived net income if we sell or dispose of property, other than
foreclosure property, that we held primarily for sale to customers in the
ordinary course of a trade or business. We believe that we do not
hold assets for sale to customers in the ordinary course of business and that
none of the assets currently held for sale or that have been sold would be
considered a prohibited transaction within the REIT taxation rules.
So long as we qualify as a REIT we
generally will not be subject to Federal income taxes on the REIT taxable income
that we distribute to stockholders, subject to certain exceptions. In
2008, we paid preferred and common dividend payments of $98.1 million which
satisfies the 2008 REIT requirements relating to the distribution of our REIT
Taxable Income. On a quarterly and annual basis we tested our
compliance within the REIT taxation rules described above to ensure that we were
in compliance with the rules.
In July 2008, we assumed operating
responsibilities for the 15 Haven facilities due to the bankruptcy of one of our
operators/tenants. In September 2008, we entered into an agreement to
lease these facilities to a new operator/tenant. Effective September
1, 2008, the new operator/tenant assumed operating responsibility for 13 of the
15 facilities, and, as a result, we retained operating responsibility for two
properties as of December 31, 2008. We are in the process of
addressing state regulatory requirements necessary to transfer the final two
properties to the new operator/tenant. We intend to make an election
on our 2008 federal income tax return to treat the Haven facilities as
foreclosure properties. Because we acquired possession in connection
with a foreclosure, the Haven facilities are eligible to be treated as
foreclosure property until the end of 2011. Although the Secretary of
Treasury may extend the foreclosure property period until the end of 2014, there
can be no assurance that we will receive such an extension. So long
as the Haven facilities qualify as foreclosure property, our gross income from
the properties will be qualifying income for the 75% and 95% gross income tests,
but we will generally be subject to corporate income tax at the highest rate on
the net income from the properties. If one or more of the Haven
facilities were to inadvertently fail to qualify as foreclosure property, we
would likely recognize nonqualifying income from such property for purposes of
the 75% and 95% gross income tests, which could cause us to fail to qualify as a
REIT. In addition, any gain from a sale of such property could be
subject to the 100% prohibited transactions tax. Although we intend
to sell or lease the remaining Haven facilities to one or more unrelated third
parties prior to the end of 2011, no assurance can be provided that we will
accomplish that objective. After the year 2000, the definition of
foreclosure property was amended to include any “qualified health care
property,” as defined in Code Section 856(e)(6) acquired by us as the result of
the termination or expiration of a lease of such property. We have
operated qualified healthcare facilities acquired in this manner for up to two
years (or longer if an extension was granted). However, we do not
currently own any property with respect to which we have made foreclosure
property elections. Properties that we had taken back in a
foreclosure or bankruptcy and operated for our own account were treated as
foreclosure properties for income tax purposes, pursuant to Internal Revenue
Code Section 856(e). Gross income from foreclosure properties was
classified as “good income” for purposes of the annual REIT income tests upon
making the election on the tax return. Once made, the income was
classified as “good” for a period of three years, or until the properties were
no longer operated for our own account. In all cases of foreclosure
property, we utilized an independent contractor to conduct day-to-day operations
to maintain REIT status. In certain cases we operated these
facilities through a taxable REIT subsidiary. For those properties
operated through the taxable REIT subsidiary, we utilized an eligible
independent contractor to conduct day-to-day operations to maintain REIT
status. As a result of the foregoing, we do not believe that our
participation in the operation of nursing homes increased the risk that we would
fail to qualify as a REIT. Through our 2008 taxable year, we had not
paid any tax on our foreclosure property because those properties had been
producing losses. We cannot predict whether, in the future, our
income from foreclosure property will be significant and/or whether we could be
required to pay a significant amount of tax on that income.
-F24-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
Subject to the limitation described
above under the REIT asset test rules, we are permitted to own up to 100% of the
stock of one or more TRSs. Currently, we have one TRS that is taxable
as a corporation and that pays federal, state and local income tax on its net
income at the applicable corporate rates. The TRS had a net operating
loss carry-forward as of December 31, 2008 of $1.1 million. The loss
carry-forward was fully reserved with a valuation allowance due to uncertainties
regarding realization.
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,
2008.
Amounts charged to operations with
respect to these retirement arrangements totaled approximately $151,500, $77,600
and $62,700 in 2008, 2007 and 2006, respectively.
NOTE
13 – STOCKHOLDERS’ EQUITY
Stockholders’
Equity
Purchase
of 400,000 shares of Series D Preferred Stock
On October 16, 2008, we purchased
400,000 shares of our Series D Preferred Stock (NYSE:OHI PrD) at a price of
$18.90 per share. The liquidation preference for the Series D
Preferred Stock (“Series D”) is $25.00 per share. 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 purchase of the Series D Preferred Stock shares
resulted in a fourth quarter 2008 gain of approximately $2.1 million, net of a
non-cash charge $0.3 million reflecting the write-off of the pro-rata portion of
the original issuance costs of the Series D Preferred Stock.
6.0
Million Share Common Stock Offering
On September 19, 2008, we closed an
underwritten public offering of 6.0 million shares our common stock at $16.37
per share. The net proceeds, after deducting underwriting discounts
and offering expenses, were approximately $96.9 million. The net
proceeds were used to repay indebtedness under our senior credit facility and
for working capital and general corporate purposes.
5.9
Million Common Stock Offering
On May 6, 2008, we have issued 5.9
million shares of our common stock at $16.93 per share in a registered direct
placement to a number of institutional investors. The net proceeds
from the offering were approximately $98.8 million, after deducting the
placement agent’s fee and other estimated offering expense. The net
proceeds were used to repay indebtedness under our senior credit
facility.
Dividend
Reinvestment and Common Stock Purchase Plan
We have a Dividend Reinvestment and
Common Stock Purchase Plan (the “DRSPP”) that allows for the reinvestment of
dividends and the optional purchase of our common stock. For the
twelve-month period ended December 31, 2008, we issued 2,067,809 shares of
common stock for approximately $34.1 million in net proceeds. For the
twelve- month period ended December 31, 2007, we issued 1,189,779 shares of
common stock for approximately $18.9 million in net proceeds.
On
October 29, 2008, we announced the immediate suspension of the optional cash
purchase component of our DRSPP until further notice. Dividend
reinvestment and all other features of the DRSPP will continue as set forth in
the DRSPP, including sales, transfers and certificate issuances of stock held in
participant accounts.
Stockholders participating in the DRSPP
who have elected to reinvest dividends will continue to have cash dividends
reinvested in accordance with the DRSPP.
-F25-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
7.130 Million Common Stock
Offering
On April 3, 2007, we completed an
underwritten public offering of 7,130,000 shares our common stock at $16.75 per
share, less underwriting discounts. The sale included 930,000 shares sold in
connection with the exercise of an over-allotment option granted to the
underwriters. We received approximately $112.9 million in net
proceeds from the sale of the shares, after deducting underwriting discounts and
offering expenses. The net proceeds were used to repay indebtedness
under our Credit Facility.
NOTE
14 –STOCK-BASED COMPENSATION
We offer stock-based compensation to
our employees that include stock options, restricted stock awards and
performance share awards. Under the terms of our 2000 Stock Incentive
Plan (the “2000 Plan”) and the 2004 Stock Incentive Plan (the “2004 Plan”), we
reserved 3,500,000 shares and 3,000,000 shares of common stock,
respectively.
Stock
Options
The 2000 and 2004 Plan allows for the
issuance of stock options to employees, directors and consultants at exercise
price equal to the Company’s common stock price on the date of
grant. The 2000 Plan and 2004 Plan do not allow for a reduction in
the exercise price after the date of grant, nor does it allow for an option to
be cancelled in exchange for an option with a lower exercise price per
share. At December 31, 2008, there were 25,664 options outstanding
under the 2000 Plan with a weighted average exercise price of $12.88 per
share. We have not issued stock option to employees, directors or
consultants since 2004.
Cash received from the exercise under
all stock-based payment arrangements for the year ended 2008, 2007 and 2006 was
$0.1 million, $58 thousand and $0.9 million, respectively. Cash used
to settle equity instruments granted under stock-based payment arrangements for
the year ended 2008, 2007 and 2006, was $2.7 million, $0.8 million and $0.7
million, respectively.
Restricted
Stock
Restricted stock awards are
independent of stock option grants and are subject to forfeiture if the holder’s
service to us terminates prior to vesting. Prior to vesting,
ownership of the shares cannot be transferred. The restricted stock
has the same dividend and voting rights as the common stock. We
expense the cost of these awards ratably over their vesting period.
In 2004, we granted 317,500 shares of
restricted stock to four executive officers under the 2004 Plan. 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. As of December 31, 2007, there
were no shares of unvested restricted stock outstanding.
In May 2007, we granted 286,908
shares of restricted stock to five executive officers under the 2004
Plan. The restricted stock award vests one-seventh on December 31,
2007 and two-sevenths on December 31, 2008, December 31, 2009, and December 31,
2010, respectively, subject to continued employment on the vesting date (as
defined in the agreements filed with the SEC on May 8, 2007). As of
December 31, 2008, there were 163,947 shares of unvested restricted stock
outstanding.
In addition, in January of each year
we grant restricted stock to directors as part of the annual
retainer. These shares vest ratably over a three year
period.
-F26-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
The following table summarizes the
activity in restricted stock for the years ended December 31, 2006, 2007 and
2008:
|
Number
of Shares
|
Weighted-Average
Grant-Date Fair Value per Share
|
Compensation
Cost (1)
(in
millions)
|
||||||||||
|
Non-vested
at December 31, 2005
|
218,666 | $ | 10.56 | |||||||||
|
Granted during
2006
|
7,000 | 12.59 | $ | 0.1 | ||||||||
|
Vested during
2006
|
(108,170 | ) | 10.55 | |||||||||
|
Non-vested
at December 31, 2006
|
117,496 | $ | 10.68 | |||||||||
|
Granted during
2007
|
295,408 | 17.07 | $ | 5.0 | ||||||||
|
Vested during
2007
|
(151,487 | ) | 12.34 | |||||||||
|
Non-vested
at December 31, 2007
|
261,417 | $ | 16.94 | |||||||||
|
Granted during
2008
|
8,500 | 15.04 | $ | 0.1 | ||||||||
|
Vested during
2008
|
(89,475 | ) | 16.80 | |||||||||
|
Non-vested
at December 31, 2008
|
180,442 | $ | 16.92 | |||||||||
(1) Total
compensation cost to be recognized on the awards based on grant date fair
value.
Performance
Restricted Stock Units
Performance Restricted Stock Units
(“PRSU”) are subject to forfeiture if the employee terminates service prior to
vesting. Prior to vesting, ownership of the shares cannot be
transferred. The dividends on the PRSUs accumulate and if vested are
paid. We expense the cost of these awards ratably over their service
period.
In September 2004, we issued 317,500
PRSU to four executive officers under the 2004 Plan. The PRSU fully
vest into shares of common stock if our company attains $0.30 per share of
adjusted funds from operations (“AFFO”) (as defined in the applicable restricted
stock unit agreements) for two (2) consecutive quarters. During the
third quarter of 2006, we achieved the vesting target as defined in the 2004
Plan, and recognized $3.3 million compensation expense associated with the
vesting of the performance shares. Pursuant to the terms of the
performance restricted stock unit agreements, each of the executive officers did
not receive the vested shares attributable to the performance restricted stock
units until January 1, 2008. As of December 31, 2007, we had 317,500
shares of PRSU vested and outstanding. We used the fair value on the
grant date to determine the compensation cost.
In May 2007, we awarded in two types
of PRSU (annual and cliff vesting awards) to our five executives totaling
247,992 shares. One half of the PRSU awards vest annually in equal
increments on December 31, 2008, December 31, 2009, and December 31, 2010,
respectively. The other half of the PRSU awards cliff vest on
December 31, 2010. Vesting on both types of awards requires
achievement of total shareholder return as defined in the agreements filed with
the SEC on May 8, 2007. All vested shares will be delivered to the
executive on January 2, 2011, provided that the executive is employed, or will
be delivered on the date of cessation of service as an employee if the employee
was terminated without cause or the employee terminated employment with
cause.
We used a Monte Carlo model to
estimate the fair value and derived service periods for PRSUs granted to the
executives in May 2007. The following are some of the significant
assumptions used in estimating the value of the awards:
|
Closing
stock price on date of grant
|
$17.06
|
|
20-day-average
stock price
|
$17.27
|
|
Risk-free
interest rate at time of grant
|
4.6%
to 5.1%
|
|
Expected
volatility
|
24.0%
to 29.4%
|
-F27-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
The following table summarizes the
activity in PRSU for the years ended December 31, 2006, 2007 and
2008:
|
Number
of Shares
|
Weighted-Average
Grant-Date Fair Value per Share
|
|||||||
|
Non-vested
at December 31, 2005
|
317,500 | $ | 10.54 | |||||
|
Granted during
2006
|
- | - | ||||||
|
Vested during
2006
|
(317,500 | ) | 10.54 | |||||
|
Non-vested
at December 31, 2006
|
- | $ | - | |||||
|
Granted during
2007
|
247,992 | 7.28 | ||||||
|
Vested during
2007
|
- | - | ||||||
|
Non-vested
at December 31, 2007
|
247,992 | $ | 7.28 | |||||
|
Granted during
2008
|
- | - | ||||||
|
Vested during
2008
|
- | - | ||||||
|
Non-vested
at December 31, 2008
|
247,992 | $ | 7.28 | |||||
The following table summarizes the
unrecognized compensation cost at December 31, 2008 and the remaining
contractual term:
|
Unrecognized
Compensation Cost
(in
thousands)
|
Weighted
Average Service Period
(in
months)
|
|||||||
|
Stock
Options
|
$ | - | - | |||||
|
Restricted
Stock
|
2,670 | 24 | ||||||
|
Performance
Restricted Stock Units
|
729 | 24 | ||||||
|
Total
|
$ | 3,399 | 24 | |||||
NOTE
15 - DIVIDENDS
Common
Dividends
On January 15, 2009, the Board of
Directors declared a common stock dividend of $0.30 per share that was paid on
February 17, 2009 to common stockholders of record on January 30,
2009.
On October 16, 2008, the Board of
Directors declared a common stock dividend of $0.30 per share. The
common dividend was paid November 17, 2008 to common stockholders of record on
October 31, 2008.
On July 16, 2008, the Board of
Directors declared a common stock dividend of $0.30 per share. The
common dividend was paid August 15, 2008 to common stockholders of record on
July 31, 2008.
On April 16, 2008, the Board of
Directors declared a common stock dividend of $0.30 per share, an increase of
$0.01 per common share compared to the prior quarter. The common
dividend was paid May 15, 2008 to common stockholders of record on April 30,
2008.
On January 17, 2008, the Board of
Directors declared a common stock dividend of $0.29 per share, an increase of
$0.01 per common share compared to the prior quarter. The common
dividend was paid February 15, 2008 to common stockholders of record on January
31, 2008.
-F28-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
Series
D Preferred Dividends
On January 15, 2009, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on its 8.375% Series D cumulative redeemable preferred stock
(the “Series D Preferred Stock”), that were paid February 17, 2009 to preferred
stockholders of record on January 30, 2009. The liquidation
preference for our Series D Preferred Stock is $25.00 per
share. Regular quarterly preferred dividends for the Series D
Preferred Stock represent dividends for the period November 1, 2008 through
January 31, 2009.
On October 16, 2008, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D preferred stock that were paid November 17, 2008
to preferred stockholders of record on October 31, 2008.
On July 16, 2008, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D Preferred Stock that were paid August 15, 2008
to preferred stockholders of record on July 31, 2008.
On April 16, 2008, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D Preferred Stock that were paid May 15, 2008 to
preferred stockholders of record on April 30, 2008.
On January 17, 2008, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D Preferred Stock that were paid February 15, 2008
to preferred stockholders of record on January 31, 2008.
Per
Share Distributions
Per share distributions by our company
were characterized in the following manner for income tax purposes
(unaudited):
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Common
|
||||||||||||
|
Ordinary
income
|
$ | 0.987 | $ | 0.765 | $ | 0.560 | ||||||
|
Return
of capital
|
0.203 | 0.315 | 0.400 | |||||||||
|
Long-term
capital gain
|
— | — | — | |||||||||
|
Total dividends
paid
|
$ | 1.190 | $ | 1.080 | $ | 0.960 | ||||||
|
Series D Preferred
|
||||||||||||
|
Ordinary
income
|
$ | 2.094 | $ | 2.094 | $ | 2.094 | ||||||
|
Return
of capital
|
— | — | — | |||||||||
|
Long-term
capital gain
|
— | — | — | |||||||||
|
Total dividends
paid
|
$ | 2.094 | $ | 2.094 | $ | 2.094 | ||||||
For additional information regarding
dividends, see Note 9 – Borrowing Arrangements and Note 11 – Taxes.
NOTE
16 - LITIGATION
In 1999, we filed suit against a former
tenant seeking damages based on claims of breach of contract. The
defendants denied the allegations made in the lawsuit. In June 2008,
we were awarded damages in a jury trial. The case was then settled
prior to appeal. In settlement of our claim against the defendants,
we agreed in January 2009 to accept a lump sum cash payment of $6.8
million. The cash proceeds were offset by related expenses incurred
of $2.3 million, resulting in a net gain of $4.5 million paid in January
2009. This gain will be recorded during the first quarter of
2009.
-F29-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
In 2005,
we accrued $1.1 million to settle a dispute relating to capital improvement
requirements associated with a lease that expired June 30,
2005. Although no formal complaint for damages was filed against us,
in February 2006, we agreed to settle this dispute for approximately $1.0
million. In addition, we and several of our wholly-owned subsidiaries
were named as defendants in professional liability claims related to our owned
and operated facilities prior to 2005. 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. 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. All of these
suits have been settled.
NOTE
17 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes quarterly
results of operations for the years ended December 31, 2008 and
2007.
|
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||
|
2008
|
||||||||||||||||
|
Revenues
|
$ | 40,866 | $ | 43,735 | $ | 59,999 | $ | 49,162 | ||||||||
|
Income from
continuing operations
|
16,788 | 17,122 | 28,072 | 15,709 | ||||||||||||
|
Discontinued
operations
|
446 | - | - | - | ||||||||||||
|
Net
income
|
17,234 | 17,122 | 28,072 | 15,709 | ||||||||||||
|
Net
income available to common
|
14,753 | 14,641 | 25,592 | 15,565 | ||||||||||||
|
Income
from continuing operations per share:
|
||||||||||||||||
|
Basic income from continuing
operations
|
$ | 0.21 | $ | 0.20 | $ | 0.33 | $ | 0.19 | ||||||||
|
Diluted income from continuing
operations
|
$ | 0.21 | $ | 0.20 | $ | 0.33 | $ | 0.19 | ||||||||
|
Net
income available to common per share:
|
||||||||||||||||
|
Basic net
income
|
$ | 0.21 | $ | 0.20 | $ | 0.33 | $ | 0.19 | ||||||||
|
Diluted net
income
|
$ | 0.21 | $ | 0.20 | $ | 0.33 | $ | 0.19 | ||||||||
|
Cash
dividends paid on common stock
|
$ | 0.29 | $ | 0.30 | $ | 0.30 | $ | 0.30 | ||||||||
|
2007
|
||||||||||||||||
|
Revenues
|
$ | 42,623 | $ | 38,117 | $ | 39,224 | $ | 39,594 | ||||||||
|
Income from
continuing operations
|
18,999 | 16,016 | 15,312 | 17,271 | ||||||||||||
|
Discontinued
operations
|
1,660 | 34 | 37 | 45 | ||||||||||||
|
Net
income
|
20,659 | 16,050 | 15,349 | 17,316 | ||||||||||||
|
Net
income available to common
|
18,178 | 13,569 | 12,869 | 14,835 | ||||||||||||
|
Income
from continuing operations per share:
|
||||||||||||||||
|
Basic income from continuing
operations
|
$ | 0.27 | $ | 0.20 | $ | 0.19 | $ | 0.22 | ||||||||
|
Diluted income from continuing
operations
|
$ | 0.27 | $ | 0.20 | $ | 0.19 | $ | 0.22 | ||||||||
|
Net
income available to common per share:
|
||||||||||||||||
|
Basic net
income
|
$ | 0.30 | $ | 0.20 | $ | 0.19 | $ | 0.22 | ||||||||
|
Diluted net
income
|
$ | 0.30 | $ | 0.20 | $ | 0.19 | $ | 0.22 | ||||||||
|
Cash
dividends paid on common stock
|
$ | 0.26 | $ | 0.27 | $ | 0.27 | $ | 0.28 | ||||||||
-F30-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
NOTE
18 - EARNINGS PER SHARE
We calculate basic and diluted earnings
per common share (“EPS”) in accordance with FAS No. 128. The
computation of basic EPS is computed by dividing net income available to common
stockholders by the weighted-average number of shares of common stock
outstanding during the relevant period. Diluted EPS is computed using
the treasury stock method, which is net income divided by the total
weighted-average number of common outstanding shares plus the effect of dilutive
common equivalent shares during the respective period. Dilutive
common shares reflect the assumed issuance of additional common shares pursuant
to certain of our share-based compensation plans, including stock options,
restricted stock and PRSUs.
The following tables set forth the
computation of basic and diluted earnings per share:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Income from continuing
operations
|
$ | 77,691 | $ | 67,598 | $ | 55,905 | ||||||
|
Preferred stock
dividends
|
(9,714 | ) | (9,923 | ) | (9,923 | ) | ||||||
|
Preferred stock repurchase
gain
|
2,128 | - | - | |||||||||
|
Numerator for income available
to common from continuing operations - basic and diluted
|
70,105 | 57,675 | 45,982 | |||||||||
|
Discontinued
operations
|
446 | 1,776 | (208 | ) | ||||||||
|
Numerator for net income
available to common per share - basic and diluted
|
$ | 70,551 | $ | 59,451 | $ | 45,774 | ||||||
|
Denominator:
|
||||||||||||
|
Denominator for basic earnings
per share
|
75,127 | 65,858 | 58,651 | |||||||||
|
Effect of dilutive
securities:
|
||||||||||||
|
Restricted
stock
|
75 | 12 | 74 | |||||||||
|
Stock option incremental
shares
|
11 | 16 | 20 | |||||||||
|
Denominator for diluted
earnings per share
|
75,213 | 65,886 | 58,745 | |||||||||
|
Earnings
per share - basic:
|
||||||||||||
|
Income available to common from
continuing operations
|
$ | 0.93 | $ | 0.88 | $ | 0.78 | ||||||
|
Discontinued
operations
|
0.01 | 0.02 | - | |||||||||
|
Net income per share -
basic
|
$ | 0.94 | $ | 0.90 | $ | 0.78 | ||||||
|
Earnings
per share - diluted:
|
||||||||||||
|
Income available to common from
continuing operations
|
$ | 0.93 | $ | 0.88 | $ | 0.78 | ||||||
|
Discontinued
operations
|
0.01 | 0.02 | - | |||||||||
|
Net income per share -
diluted
|
$ | 0.94 | $ | 0.90 | $ | 0.78 | ||||||
-F31-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
NOTE
19 – DISCONTINUED OPERATIONS
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, requires the presentation of the net
operating results of facilities classified as discontinued operations for all
periods presented. For the year ended December 31, 2008, discontinued
operations includes one month revenue of $15 thousand and a gain of $0.4 million
on the sale of one SNF. For the year ended December 31, 2007,
discontinued operations includes the revenue of $0.2 million and expense of $31
thousand for 6 facilities. It also includes the gain of $1.6 million
on the sale of six SNFs and two ALFs. For the year ended December 31,
2006, discontinued operations includes revenue of $0.6 million and expense of
$0.9 million and a gain of $0.2 million on the sale of three SNFs and one
ALF.
The following table summarizes the
results of operations of the facilities sold or held- for- sale for the years
ended December 31, 2008, 2007 and 2006, respectively.
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Revenues
|
||||||||||||
|
Rental income
|
$ | 15 | $ | 212 | $ | 552 | ||||||
|
Expenses
|
||||||||||||
|
Depreciation and
amortization
|
— | 28 | 193 | |||||||||
|
General and
administrative
|
— | 3 | 40 | |||||||||
|
Provision for uncollectible
accounts receivable
|
— | — | 152 | |||||||||
|
Provisions for
impairment
|
— | — | 541 | |||||||||
|
Subtotal
expenses
|
— | 31 | 926 | |||||||||
|
Gain
(loss) income before gain on sale of assets
|
15 | 181 | (374 | ) | ||||||||
|
Gain
on assets sold – net
|
431 | 1,595 | 166 | |||||||||
|
Discontinued
operations
|
$ | 446 | $ | 1,776 | $ | (208 | ) | |||||
NOTE
20 – SUBSEQUENT EVENTS
In 1999, we filed suit against a former
tenant seeking damages based on claims of breach of contract. The
defendants denied the allegations made in the lawsuit. In June 2008,
we were awarded damages in a jury trial. The case was then settled
prior to appeal. In settlement of our claim against the defendants,
we agreed in January 2009 to accept a lump sum cash payment of $6.8
million. The cash proceeds were offset by related expenses incurred
of $2.3 million, resulting in a net gain of $4.5 million paid in January
2009. This gain will be recorded during the first quarter of
2009.
-F32-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
|
OMEGA
HEALTHCARE INVESTORS, INC.
|
||||||||||
|
December
31, 2008
|
||||||||||
|
(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
|
Other
|
Total
|
Depreciation
|
Renovation
|
Acquired
|
is
Computed
|
|
CommuniCare
Health Services:
|
||||||||||
|
Ohio
(LTC, AL, RH)……………….......……
|
218,726,757
|
1,998,578
|
-
|
-
|
220,725,335
|
21,130,768
|
1998-2008
|
20
years to 39 years
|
||
|
Pennsylvania (LTC)………………........…..
|
20,286,067
|
111,194
|
-
|
-
|
20,397,261
|
2,097,645
|
2005
|
39
years
|
||
|
Total
CommuniCare……………...........……
|
239,012,824
|
2,109,772
|
-
|
-
|
241,122,596
|
23,228,413
|
||||
|
Sun
Healthcare Group, Inc.:
|
||||||||||
|
Alabama
(LTC)………………………………..
|
(2)
|
23,584,956
|
-
|
-
|
-
|
23,584,956
|
7,989,482
|
2008
|
1997
|
33
years
|
|
California
(LTC)...……………………………….
|
(2)
|
15,618,263
|
26,652
|
-
|
-
|
15,644,915
|
5,019,024
|
1964
|
1997
|
33
years
|
|
Colorado
(LTC, ILF)……………………...…
|
38,341,876
|
-
|
-
|
-
|
38,341,876
|
2,470,780
|
2008
|
2006
|
39
years
|
|
|
Idaho
(LTC)……….........….
|
(2)
|
21,705,266
|
654,430
|
-
|
-
|
22,359,696
|
3,794,136
|
2008
|
1997-2006
|
33
years
|
|
Massachusetts
(LTC)……….
|
(2)
|
39,018,142
|
932,328
|
(8,257,521)
|
-
|
31,692,949
|
9,304,472
|
2008
|
1997-1999
|
33
years
|
|
North
Carolina (LTC)……….
|
(2)
|
22,652,488
|
56,951
|
-
|
-
|
22,709,439
|
9,791,591
|
1982-2008
|
1994-1997
|
30
years to 33 years
|
|
Ohio
(LTC)…………………
|
(2)
|
11,653,451
|
20,247
|
-
|
-
|
11,673,698
|
3,815,922
|
1995
|
1997
|
33
years
|
|
Tennessee
(LTC)…….……
|
(2)
|
7,905,139
|
37,234
|
-
|
-
|
7,942,373
|
3,563,795
|
1994
|
30
years
|
|
|
Washington
(LTC)….....….
|
(2)
|
10,000,000
|
1,798,843
|
-
|
-
|
11,798,843
|
6,788,006
|
2005
|
1995
|
20
years
|
|
West
Virginia (LTC)….…...
|
(2)
|
24,751,206
|
42,238
|
-
|
-
|
24,793,444
|
7,911,126
|
2008
|
1997-1998
|
33
years
|
|
Total
Sun…………………………….........…
|
215,230,787
|
3,568,923
|
(8,257,521)
|
-
|
210,542,189
|
60,448,334
|
||||
|
Signature
Holdings II LLC.:
|
||||||||||
|
Alabama
(LTC)………………………............
|
4,827,266
|
640,457
|
-
|
-
|
5,467,723
|
368,799
|
2007
|
20
years
|
||
|
Florida
(LTC)………………………...........…
|
85,423,730
|
1,791,202
|
-
|
-
|
87,214,932
|
12,255,970
|
1998-2006
|
33
years to 39 years
|
||
|
Georgia
(LTC)………………………..........…
|
14,679,314
|
2,963,007
|
-
|
-
|
17,642,321
|
1,079,313
|
2008
|
2007
|
20
years
|
|
|
Kentucky
(LTC)………………….............….
|
19,015,715
|
1,128,366
|
-
|
-
|
20,144,081
|
3,413,564
|
1999-2007
|
33
years
|
||
|
Tennessee
(LTC)……………………........…
|
11,230,702
|
202,973
|
-
|
-
|
11,433,675
|
771,755
|
2008
|
2007
|
20
years
|
|
|
Total
Signature Holdings II LLC…........….
|
135,176,727
|
6,726,005
|
-
|
-
|
141,902,732
|
17,889,401
|
||||
|
Advocat,
Inc.:
|
||||||||||
|
Alabama
(LTC)………………………........…
|
11,588,534
|
3,427,225
|
-
|
-
|
15,015,759
|
6,255,848
|
1975,
1985, 2007
|
1992
|
31.5
years
|
|
|
Arkansas
(LTC)……………………..........….
|
36,052,809
|
8,804,028
|
(36,350)
|
-
|
44,820,487
|
19,531,196
|
1984,
1985, 2007
|
1992
|
31.5
years
|
|
|
Florida
(LTC)………………………...........…
|
1,050,000
|
1,920,000
|
(970,000)
|
-
|
2,000,000
|
437,471
|
1992
|
31.5
years
|
||
|
Kentucky
(LTC)…………………...…...........
|
15,151,027
|
1,562,375
|
-
|
-
|
16,713,402
|
6,840,984
|
1972-1994
|
1994-1995
|
33
years
|
|
|
Ohio
(LTC)……………………………...........
|
5,604,186
|
250,000
|
-
|
-
|
5,854,186
|
2,428,592
|
1984
|
1994
|
33
years
|
|
|
Tennessee
(LTC)…………………........……
|
9,542,121
|
-
|
-
|
-
|
9,542,121
|
4,796,787
|
1986-1987
|
1992
|
31.5
years
|
|
|
Texas
(LTC)……………………….........……
|
35,355,759
|
1,017,163
|
(2,239,967)
|
-
|
34,132,955
|
5,828,115
|
2008
|
1997-2008
|
33
years to 39 years
|
|
|
West
Virginia (LTC)……………..........…….
|
5,437,221
|
348,642
|
-
|
-
|
5,785,863
|
2,359,857
|
1994-1995
|
33
years
|
||
|
Total
Advocat…………………........………
|
119,781,657
|
17,329,433
|
(3,246,317)
|
-
|
133,864,773
|
48,478,850
|
||||
|
Guardian
LTC Management, Inc.
|
||||||||||
|
Ohio
(LTC, AL)……………………..........….
|
6,548,435
|
-
|
-
|
-
|
6,548,435
|
645,676
|
2004
|
39
years
|
||
|
Pennsylvania
(LTC, AL, ILF)………………
|
115,427,312
|
-
|
-
|
-
|
115,427,312
|
7,961,313
|
2004-2008
|
20
years - 39 years
|
||
|
West
Virginia (LTC)…………………...........
|
3,995,581
|
-
|
-
|
-
|
3,995,581
|
392,774
|
2004
|
39
years
|
||
|
Total
Guardian……………………...........…
|
125,971,328
|
-
|
-
|
-
|
125,971,328
|
8,999,763
|
||||
|
Formation
Capital LLC.
|
||||||||||
|
Connecticut
(LTC)…………………..........…
|
38,762,737
|
2,500,199
|
(10,357,224)
|
-
|
30,905,712
|
6,193,346
|
1999-2004
|
33
years to 39 years
|
||
|
Massachusetts
(LTC)………………........…
|
7,190,685
|
64,324
|
-
|
-
|
7,255,009
|
523,645
|
2006
|
39
years
|
||
|
New
Hampshire (LTC, AL)……………........
|
21,619,503
|
376,245
|
-
|
-
|
21,995,748
|
3,066,907
|
1998-2006
|
39
years
|
||
|
Rhode
Island (LTC)…………………...........
|
38,739,812
|
690,279
|
-
|
-
|
39,430,091
|
2,978,593
|
2006
|
39
years
|
||
|
West
Virginia (LTC)……………........……..
|
19,525,000
|
-
|
-
|
19,525,000
|
-
|
2008
|
25
years
|
|||
|
Total
Haven…………………………............
|
125,837,737
|
3,631,047
|
(10,357,224)
|
-
|
119,111,560
|
12,762,491
|
||||
|
Nexion
Health:
|
||||||||||
|
Louisiana
(LTC)……..…….
|
(2)
|
55,343,066
|
-
|
-
|
-
|
55,343,066
|
5,294,902
|
2008
|
1997-2006
|
33
years
|
|
Texas
(LTC)……….……….
|
(2)
|
24,599,275
|
-
|
-
|
-
|
24,599,275
|
1,903,313
|
2008
|
2005-2006
|
39
years
|
|
Total
Nexion Health………………………..
|
79,942,341
|
-
|
-
|
-
|
79,942,341
|
7,198,215
|
||||
|
Essex
Healthcare:
|
||||||||||
|
Ohio
(LTC)………………………….........…..
|
79,353,622
|
-
|
-
|
-
|
79,353,622
|
8,546,946
|
2005
|
39
years
|
||
|
Total
Essex…………………………..............
|
79,353,622
|
-
|
-
|
-
|
79,353,622
|
8,546,946
|
||||
|
Other:
|
||||||||||
|
Arizona
(LTC)………………………..........…
|
24,029,032
|
2,141,226
|
(6,603,745)
|
-
|
19,566,513
|
5,549,141
|
2005
- 2008
|
1998
|
33
years
|
|
|
California
(LTC)……............
|
(2)
|
17,333,030
|
1,778,353
|
-
|
-
|
19,111,383
|
5,705,516
|
1997
|
33
years
|
|
|
Colorado
(LTC)………………….............…..
|
14,170,968
|
271,017
|
-
|
-
|
14,441,985
|
4,131,706
|
1998
|
33
years
|
||
|
Florida
(LTC, AL) ………...………..........…..
|
58,367,881
|
1,891,512
|
-
|
-
|
60,259,393
|
14,674,099
|
2008
|
1993-1998
|
27
years to 37.5 years
|
|
|
Georgia
(LTC)……………………….............
|
10,000,000
|
-
|
-
|
-
|
10,000,000
|
1,401,650
|
1998
|
37.5
years
|
||
|
Illinois
(LTC) …………………….............…..
|
13,961,501
|
444,484
|
-
|
-
|
14,405,985
|
4,733,503
|
1996-1999
|
30
years to 33 years
|
||
|
Indiana
(LTC)…………….…………........….
|
15,142,300
|
2,305,705
|
(1,843,400)
|
-
|
15,604,605
|
5,870,923
|
1980-1994
|
1992-1999
|
30
years to 33 years
|
|
|
Iowa
(LTC) ………………..….....…..........….
|
8,769,595
|
1,559,807
|
-
|
-
|
10,329,402
|
3,074,101
|
2007
|
1997
|
30
years to 33 years
|
|
|
Missouri
(LTC)…………………….........…..
|
12,301,560
|
-
|
(149,386)
|
-
|
12,152,174
|
3,488,467
|
1999
|
33
years
|
||
|
New
Mexico (LTC)………………...………..
|
5,200,000
|
-
|
-
|
-
|
5,200,000
|
260,915
|
2008
|
20
years
|
||
|
Ohio
(LTC)…………………………..........….
|
2,648,252
|
186,187
|
-
|
-
|
2,834,439
|
828,175
|
1999
|
33
years
|
||
|
Pennsylvania
(LTC) ………...…..........……..
|
14,400,000
|
-
|
-
|
-
|
14,400,000
|
4,546,183
|
1998
|
39
years
|
||
|
Texas
(LTC)…………......….
|
(2)
|
21,436,145
|
344,679
|
-
|
-
|
21,780,824
|
6,819,734
|
2001
|
33
years to 39 years
|
|
|
Vermont
(LTC)…………………….........……
|
14,145,776
|
294,826
|
-
|
-
|
14,440,602
|
1,657,367
|
2004
|
39
years
|
||
|
Washington
(AL) ……………..............……
|
5,673,693
|
-
|
-
|
-
|
5,673,693
|
1,559,677
|
1999
|
33
years
|
||
|
Total
Other…………………….........……….
|
237,579,733
|
11,217,796
|
(8,596,531)
|
-
|
240,200,998
|
64,301,157
|
||||
|
Total
|
$1,357,886,756
|
$44,582,976
|
($30,457,593)
|
$ -
|
$1,372,012,139
|
251,853,570
|
||||
|
(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), independent living facilities (ILF)
|
||||||||||
|
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 $63,500,000 at
December 31, 2008.
|
||||||||||
|
Year
Ended December 31,
|
||||||||||
|
(3)
|
2006
|
2007
|
2008
|
|||||||
|
Balance
at beginning of period
|
$ 989,006,714
|
$ 1,235,678,965
|
$ 1,274,721,518
|
|||||||
|
Acquisitions
|
178,906,047
|
39,502,998
|
112,760,290
|
|||||||
|
Impairment
|
-
|
-
|
(5,414,207)
|
|||||||
|
Improvements
|
6,817,638
|
8,549,415
|
17,457,389
|
|||||||
|
Consolidation
under FIN 46R (a)
|
61,750,000
|
-
|
||||||||
|
Disposals/other
|
(801,434)
|
(9,009,860)
|
(27,512,851)
|
|||||||
|
Balance
at close of period
|
$ 1,235,678,965
|
$ 1,274,721,518
|
$ 1,372,012,139
|
|||||||
|
(a)
As a result of the application of FIN 46R in 2006, we consolidated an
entity determined to be a VIE for which we are the primary
beneficiary. Our consolidated balance sheet at December 31,
2006 and 2007 reflects
|
||||||||||
|
gross
real estate assets of $61,750,000, reflecting the real estate owned by the
VIE.
|
||||||||||
|
(4)
|
2006
|
2007
|
2008
|
|||||||
|
Balance
at beginning of period
|
$ 155,849,481
|
$ 187,796,810
|
$ 221,365,513
|
|||||||
|
Provisions
for depreciation (a)
|
32,140,641
|
35,942,916
|
39,778,363
|
|||||||
|
Dispositions/other
|
(193,312)
|
(2,374,213)
|
(9,290,306)
|
|||||||
|
Balance
at close of period
|
$ 187,796,810
|
$ 221,365,513
|
$ 251,853,570
|
|||||||
|
The
reported amount of our real estate at December 31, 2008 is greater than
the tax basis of the real estate by approximately $32.9 million, due to
the Emory and Essex acquisition's aquired tax basis.
|
||||||||||
|
(a) Includes
depreciation for discontinued operations.
|
||||||||||
-F33-
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
|
OMEGA
HEALTHCARE INVESTORS, INC.
|
||||||||||||||||||||||||||||
|
December
31, 2008
|
||||||||||||||||||||||||||||
|
Grouping
|
Description
(1)
|
Interest
Rate
|
Final
Maturity Date
|
Periodic
Payment Terms
|
Prior
Liens
|
Face
Amount of Mortgages
|
Carrying
Amount of Mortgages (2)
(3)
|
Principal
Amount of Loans Subject to Delinquent Principal or
Interest
|
||||||||||||||||||||
| 1 |
Florida
(4 LTC facilities).............
|
11.50 | % |
February
28, 2010
|
Interest
plus $5,000 of principal payable monthly
|
None
|
12,891,500 | 12,474,063 | ||||||||||||||||||||
| 2 |
Florida
(2 LTC facilities)............
|
11.50 | % |
June
4, 2016
|
Interest
payable monthly
|
None
|
12,590,000 | 11,095,423 | ||||||||||||||||||||
| 3 |
Maryland
(7 LTC facilities).......
|
11.00 | % |
April
30, 2018
|
Interest
payable monthly
|
None
|
74,927,751 | 69,927,759 | ||||||||||||||||||||
| 4 |
Ohio
(1 LTC facility)..................
|
11.00 | % |
October
31, 2014
|
Interest
plus $4,200 of principal payable monthly
|
None
|
6,500,000 | 6,356,019 | ||||||||||||||||||||
| 11.00 | % |
October
31, 2014
|
Interest
payable monthly
|
None
|
345,011 | 345,011 | ||||||||||||||||||||||
| 5 |
Texas
(1 LTC facility).............…
|
11.00 | % |
November
30, 2011
|
Interest
plus $26,700 of principal payable monthly
|
None
|
2,245,745 | 623,012 | ||||||||||||||||||||
| $ | 109,500,007 | $ | 100,821,287 | |||||||||||||||||||||||||
|
(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 | ) |
2006
|
2007
|
2008
|
||||||||||||||||||||||||
|
Balance
at beginning of
period……...................................
|
$ | 104,522,341 | $ | 31,886,421 | $ | 31,688,941 | ||||||||||||||||||||||
|
Additions
during period - Placements……...................…...
|
- | 345,011 | 74,927,751 | |||||||||||||||||||||||||
|
Deductions
during period - collection of principal/other…..
|
(10,885,920 | ) | (542,491 | ) | (5,795,405 | ) | ||||||||||||||||||||||
|
Consolidation
under FIN 46R (a)………...............................…...
|
(61,750,000 | ) | - | - | ||||||||||||||||||||||||
|
Balance
at close of period…....
|
$ | 31,886,421 | $ | 31,688,941 | $ | 100,821,287 | ||||||||||||||||||||||
|
(a)
As a result of the application of FIN 46R in 2006, we consolidated an
entity that was the debtor of a mortgage note with us for $61,750,000 as
of December 31, 2005.
|
||||||||||||||||||||||||||||
-F34-
INDEX
TO EXHIBITS TO 2008 FORM 10-K
|
EXHIBIT
NUMBER
|
DESCRIPTION
|
|
3.1
|
Amended
and Restated Bylaws, as amended as of January 16, 2007. (Incorporated by
reference to Exhibit 3.1 to the Company’s Form S-11, filed on January 29,
2007).
|
|
3.2
|
Articles
of Incorporation, as restated on May 6, 1996, as amended on July 19, 1999,
June 3, 2002, and August 5, 2004, and supplemented on February 19, 1999,
February 10, 2004, August 10, 2004 and June 20, 2005. (Incorporated by
reference to Exhibit 3.1 to the Company’s Form 10-Q/A for the quarterly
period ended June 30, 2005, filed on October 21, 2005).
|
|
4.0
|
See
Exhibits 3.1 to 3.2.
|
|
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 May 14, 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 4.2 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).
|
|
4.3A
|
Amendment
No. 3 to Rights Agreement, dated as of April 3, 2008, to Rights Agreement
dated as of May 12, 1999, as amended on May 11, 2000 and October 29, 2001,
by and between Omega Healthcare Investors, Inc. and Computershare Trust
Company, N.A. (as successor to First Chicago Trust Company). (Incorporated
by reference to Exhibit 4.1 to the Company’s current Report on Form 8-K,
filed April 3, 2008.)
|
|
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 4.8 to the
Company’s Form S-4/A filed on July 26, 2004.)
|
|
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
|
Third
Supplemental Indenture, dated as of December 1, 2005, 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 December 2, 2005).
|
|
4.11
|
Registration
Rights Agreement, dated as of December 2, 2005, 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 December 2, 2005).
|
|
4.12
|
Indenture,
dated as of December 30, 2005, among Omega Healthcare Investors, Inc.,
each of the subsidiary guarantors listed therein and U.S. Bank National
Association, as trustee. (Incorporated by reference to Exhibit
4.1 of the Company’s Form 8-K, filed on January 4,
2006).
|
|
4.13
|
Registration
Rights Agreement, dated as of December 30, 2005, 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 4.2 of the
Company’s Form 8-K, filed on January 4, 2006).
|
|
4.14
|
Form
of 7% Senior Notes due 2016. (Incorporated by reference to Exhibit A of
Exhibit 4.1 of the Company’s Form 8-K, filed on January 4,
2006).
|
|
4.15
|
Form
of Subsidiary Guarantee relating to the 7% Senior Notes due 2016.
(Incorporated by reference to Exhibit E of Exhibit 4.1 of the Company’s
Form 8-K, filed on January 4, 2006).
|
|
4.16
|
Form
of Indenture. (Incorporated by reference to Exhibit 4.1 of the Company’s
Form S-3, filed on July 26, 2004).
|
|
4.17
|
Form
of Indenture. (Incorporated by reference to Exhibit 4.2 of the Company’s
Form S-3, filed on February 3, 1997).
|
|
4.18
|
Form
of Supplemental Indenture No. 1 dated as of August 5, 1997 relating to the
6.95% Notes due 2007. (Incorporated by reference to Exhibit 4 of the
Company’s Form 8-K, filed on August 5, 1997).
|
|
4.19
|
Second
Supplemental Indenture, dated as of December 30, 2005, among Omega
Healthcare Investors, Inc. and Wachovia Bank, National Association, as
trustee. (Incorporated by reference to Exhibit 4.1 of the Company’s Form
8-K, filed on January 5, 2006).
|
|
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
|
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).
|
|
10.3
|
1993
Amended and Restated Stock Option Plan. (Incorporated by reference to
Exhibit A to the Company’s Proxy Statement dated April 6,
2003).+
|
|
10.4
|
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).+
|
|
10.5
|
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).+
|
|
10.6
|
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).+
|
|
10.6A
|
Restated
Amendment to Employment Agreement, dated May 7, 2007 between Omega
Healthcare Investors, Inc. and C. Taylor Pickett.
(Incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for
the quarterly period ended June 30,2007).+
|
|
10.6B
|
Amendment
to Employment Agreement, dated December 16, 2008 between Omega Healthcare
Investors, Inc. and C. Taylor Pickett.*+
|
|
10.7
|
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).+
|
|
10.7A
|
Restated
Amendment to Employment Agreement, dated May 7, 2007 between Omega
Healthcare Investors, Inc. and Daniel J. Booth. (Incorporated by reference
to Exhibit 10.3 to the Company’s Form 10-Q for the quarterly period ended
June 30, 2007).+
|
|
10.7B
|
Amendment
to Employment Agreement, dated December 16, 2008 between Omega Healthcare
Investors, Inc. and Daniel J. Booth.*+
|
|
10.8
|
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).+
|
|
10.8A
|
Restated
Amendment to Employment Agreement, dated May 7, 2007 between Omega
Healthcare Investors, Inc. and R. Lee Crabill. (Incorporated by reference
to Exhibit 10.4 to the Company’s Form 10-Q for the quarterly
period ended June 30, 2007).+
|
|
10.8B
|
Amendment
to Employment Agreement, dated December 16, 2008 between Omega Healthcare
Investors, Inc. and R. Lee Crabill.*+
|
|
10.9
|
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).+
|
|
10.9A
|
Restated
Amendment to Employment Agreement, dated May 7, 2007 between Omega
Healthcare Investors, Inc. and Robert O. Stephenson. (Incorporated by
reference to Exhibit 10.5 to the Company’s Form 10-Q for the quarterly
period ended June 30, 2007).+
|
|
10.9B
|
Amendment
to Employment Agreement, dated December 16, 2008 between Omega Healthcare
Investors, Inc. and Robert O. Stephenson.*+
|
|
10.10
|
Form
of Restricted Stock Award for 2004 to 2006 officer grants. (Incorporated
by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K,
filed on September 16, 2004).+
|
|
10.10A
|
Form
of Restricted Stock Unit Award for officer grants since 2007.
(Incorporated by reference to Exhibit 10.6 to the Company’s Form 10-Q for
the quarterly period ended March 31, 2007).+
|
|
10.11
|
Form
of Performance Restricted Stock Unit Agreement for 2004 to 2006 officer
grants. (Incorporated by reference to Exhibit 10.6 to the Company’s
current report on Form 8-K, filed on September 16,
2004).+
|
|
10.11A
|
Form
of Performance Restricted Stock Unit Award with annual vesting for officer
grants since 2007. (Incorporated by reference to Exhibit 10.7 to the
Company’s Form 10-Q for the quarterly period ended March 31,
2007).+
|
|
10.11B
|
Form
of Performance Restricted Stock Unit Award with cliff vesting for officer
grants since 2007. (Incorporated by reference to Exhibit 10.8 to the
Company’s Form 10-Q for the quarterly period ended March 31,
2007).+
|
|
10.12
|
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).
|
|
10.12A
|
First
Amendment to the Omega Healthcare Investors, Inc. 2004 Stock Incentive
Plan, dated as of May 22, 2008 (Incorporated by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K, filed May 29,
2008).
|
|
10.13
|
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).
|
|
10.13A
|
Second
Consolidated Amended and Restated Master Lease, dated as of September 24,
2008, between OHI Asset (PA) Trust and Guardian LTC Management, Inc.
(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K, filed October 3, 2008)
|
|
10.14
|
Form
of Incentive Stock Option Award for the Omega Healthcare Investors, Inc.
2004 Stock Incentive Plan.+ (Incorporated by reference to Exhibit 10.30 to
the Company’s Form 10-K, filed on February 18, 2005).
|
|
10.15
|
Form
of Non-Qualified Stock Option Award for the Omega Healthcare Investors,
Inc. 2004 Stock Incentive Plan.+ (Incorporated by reference to Exhibit
10.31 to the Company’s Form 10-K, filed on February 18,
2005).
|
|
10.16
|
Form
of Directors’ Restricted Stock Award. (Incorporated by reference to
Exhibit 10.1 to the Company’s current report on Form 8-K, filed on January
19, 2005). +
|
|
10.17
|
Stock
Purchase Agreement, dated June 10, 2005, by and between Omega Healthcare
Investors, Inc., OHI Asset (OH), LLC, Hollis J. Garfield, Albert M.
Wiggins, Jr., A. David Wiggins, Estate of Evelyn R. Garfield, Evelyn R.
Garfield Revocable Trust, SG Trust B - Hollis Trust, Evelyn Garfield
Family Trust, Evelyn Garfield Remainder Trust, Baldwin Health Center,
Inc., Copley Health Center, Inc., Hanover House, Inc., House of Hanover,
Ltd., Pavilion North, LLP, d/b/a Wexford House Nursing Center, Pavilion
Nursing Center North, Inc., Pavilion North Partners, Inc., and The
Suburban Pavilion, Inc., OMG MSTR LSCO, LLC, CommuniCare Health Services,
Inc., and Emery Medical Management Co. (Incorporated by
reference to Exhibit 10.1 to the Company’s current report on Form 8-K,
filed on June 16, 2005).
|
|
10.18
|
Purchase
Agreement dated as of December 16, 2005 by and between Cleveland
Seniorcare Corp. and OHI Asset II (OH), LLC. (Incorporated by reference to
Exhibit 10.1 to the Company’s current report on Form 8-K, filed on
December 21, 2005).
|
|
10.19
|
Master
Lease dated December 16, 2005 by and between OHI Asset II (OH), LLC as
lessor, and CSC MSTR LSCO, LLC as lessee. (Incorporated by
reference to Exhibit 10.2 to the Company’s current report on Form 8-K,
filed on December 21, 2005).
|
|
10.19A
|
Second
Consolidated Amended and Restated Master Lease dated as of April 19, 2008
by and among OHI Asset III (PA) Trust as lessor and certain affiliated
entities of CommuniCare Health Service as lessees. (Incorporated by
reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q,
filed April 28, 2008.)
|
|
10.20
|
Loan
Agreement dated as of April 19, 2008, by and among OHI Asset III (PA)
Trust, as Lender, certain affiliated entities of CommuniCare Health
Services as Borrowers, and certain affiliated entities of CommuniCare
Health Services as Guarantors (Incorporated by reference to Exhibit 10.4
to the Company’s Current Report on Form 10-Q, filed April 28,
2008).
|
|
10.21
|
Credit
Agreement, dated as of March 31, 2006, 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, Texas Lessor – Stonegate,
LP, the lenders named therein, and Bank of America, N.A. (Incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K, filed on April 5,
2006).
|
|
10.22
|
Second
Amendment, Waiver and Consent to Credit Agreement dated as of October 23,
2006, by and among the Borrowers, the Lenders, and Bank of America, N.A.,
as Administrative Agent and a Lender. (Incorporated by reference to
Exhibit 10.1 of the Company’s Form 8-K, filed on October 25,
2006).
|
|
10.22A
|
Third
Amendment and Consent to Credit Agreement, dated February 8, 2008, by and
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, and Texas Lessor – Stonegate, LP, the Lenders from time to time
party thereto, and Bank of America, N.A., as Administrative Agent, Swing
Line Lender and L/C Issuer. (Incorporated by reference to Exhibit 10.1 of
the Company’s Quarterly Report on Form 10-Q, filed April 28,
2008).
|
|
10.23
|
Contract
of sale, dated as of May 5, 2006, between Laramie Associates, LLC, Casper
Associates, LLC, North 12th
Street Associates, LLC, North Union Boulevard Associates, LLC, Jones
Avenue Associates, LLC, Litchfield Investment Company, L.L.C., Ustick Road
Associates, LLC, West 24th
Street Associates, LLC, North Third Street Associates, LLC, Midwestern
parkway Associates, LLC, North Francis Street Associates, LLC, West Nash
Street Associates, LLC (as sellers) and OHI Asset (LA), LLC, NRS ventures,
L.L.C. and OHI Asset (CO), LLC (as buyers). (Incorporated by reference to
Exhibit 10.1 of the Company’s Form 10-Q for the quarterly period ended
June 30, 2006).
|
|
10.24
|
Restructuring
Stock Issuance and Subscription Agreement dated as of October 20, 2006, by
and between Omega Healthcare Investors, Inc. and Advocat Inc.
(Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K,
filed on October 25, 2006).
|
|
10.25
|
Consolidated
Amended and Restated Master Lease by and between Sterling Acquisition
Corp., a Kentucky corporation, as lessor, Diversicare Leasing Corp., a
Tennessee corporation, dated as of November 8, 2000, together with First
Amendment thereto dated as of September 30, 2001, and Second Amendment
thereto dated as of June 15, 2005. (Incorporated by reference to Exhibit
10.3 of the Company’s Form 8-K, filed on October 25,
2006).
|
|
10.26
|
Third
Amendment to Consolidated Amended and Restated Master Lease by and between
Sterling Acquisition Corp., a Kentucky corporation, as lessor, and
Diversicare Leasing Corp., a Tennessee corporation, dated as of October
20, 2006. (Incorporated by reference to Exhibit 10.4 of the Company’s Form
8-K, filed on October 25, 2006).
|
|
10.26A
|
Fourth
Amendment to Consolidated Amended and Restated Master Lease dated as of
April 1, 2007, by and between Sterling Acquisition Corp. and Diversicare
Leasing Corp. (Incorporated by reference to Exhibit 10.5 of the Company’s
Quarterly Report on Form 10-Q, filed April 28, 2008).
|
|
10.26B
|
Fifth
Amendment to Consolidated Amended and Restated Master Lease dated as of
August 10, 2007, by and between Sterling Acquisition Corp. and Diversicare
Leasing Corp. (Incorporated by reference to Exhibit 10.6 of the Company’s
Quarterly Report on Form 10-Q, filed April 28, 2008).
|
|
10.26C
|
Sixth
Amendment to Consolidated Amended and Restated Master Lease dated as of
March 14, 2008, by and between Sterling Acquisition Corp. and Diversicare
Leasing Corp. (Incorporated by reference to Exhibit 10.7 of the Company’s
Quarterly Report on Form 10-Q, filed April 28, 2008).
|
|
10.27
|
Employment
Agreement, dated May 7, 2007 between Omega Healthcare Investors, Inc. and
Michael Ritz (Incorporated by reference to Exhibit 10.1 to the Company’s
Form 10-Q for the quarterly period ended March 31,
2007).+
|
|
10.27A
|
Amendment
to Employment Agreement, dated December 16, 2008 between Omega Healthcare
Investors, Inc. and Michael Ritz.*+
|
|
10.28
|
Deferred
Stock Plan, dated January 20, 2009, and forms of related
agreements.*+
|
|
10.29
|
Second
Amended and Restated Master Lease Agreement dated as of February 1, 2008
and among Omega Healthcare Investors, Inc., certain of its subsidiaries as
lessors, Sun Healthcare Group, Inc. and certain of its affiliates as
lessees, amending and restating prior master leases with Sun Healthcare
Group, its subsidiaries, and lessees and guarantors acquired by Sun
Healthcare Group. (Incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K, filed April 3,
2008).
|
|
10.29A
|
First
Amendment to Second Amended and Restated Master Lease Agreement, dated as
of August 26, 2008, among Omega Healthcare Investors, Inc., certain of its
subsidiaries as lessors, Sun Healthcare Group, Inc. and certain of its
affiliates as lessees, amending and restating prior master leases with Sun
Healthcare Group, its subsidiaries, and lessees and guarantors acquired by
Sun Healthcare Group.
|
|
10.30
|
Purchase
Agreement, dated May 1, 2008, by and among OHI and the Purchasers (as
defined therein) (Incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed May 2,
2008).
|
|
10.31
|
Placement
Agreement, dated as of May 1, 2008, between Omega Healthcare Investors,
Inc. and Cohen & Steers Capital Advisors, LLC (Incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K,
filed May 2, 2008).
|
|
10.32
|
Underwriting
Agreement, dated as of September 15, 2008, between Omega Healthcare
Investors, Inc. and UBS Securities LLC (Incorporated by reference to
Exhibit 1.1 to the Company’s Current Report on Form 8-K, filed September
15, 2008).
|
|
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 that are filed herewith.
|
|
|
+
Management contract or compensatory plan, contract or
arrangement.
|
I-1 thru
4-
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: March
2, 2009
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
|
March
2, 2009
|
|
C.
Taylor Pickett
|
||
|
PRINCIPAL
FINANCIAL OFFICER
|
||
|
/s/ Robert O.
Stephenson
|
Chief
Financial Officer
|
March
2, 2009
|
|
Robert
O. Stephenson
|
||
|
/s/ Michael
D.Ritz
|
Chief
Accounting Officer
|
March
2, 2009
|
|
Michael
D. Ritz
|
||
|
DIRECTORS
|
||
|
/s/ Bernard J.
Korman
|
Chairman
of the Board
|
March
2, 2009
|
|
Bernard
J. Korman
|
||
|
/s/ Thomas F.
Franke
|
Director
|
March
2, 2009
|
|
Thomas
F. Franke
|
||
|
/s/ Harold J.
Kloosterman
|
Director
|
March
2, 2009
|
|
Harold
J. Kloosterman
|
||
|
/s/ Edward
Lowenthal
|
Director
|
March
2, 2009
|
|
Edward
Lowenthal
|
||
|
/s/ C. Taylor
Pickett
|
Director
|
March
2, 2009
|
|
C.
Taylor Pickett
|
||
|
/s/ Stephen D.
Plavin
|
Director
|
March
2, 2009
|
|
Stephen
D. Plavin
|
||
I-5-