S-11: Registration statement for securities to be issued by real estate companies
Published on March 13, 2007
As
filed with the Securities and Exchange Commission on
March 13, 2007
Registration
No. 333-
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
S-11
FOR
REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF
SECURITIES OF CERTAIN REAL ESTATE COMPANIES
OMEGA
HEALTHCARE INVESTORS, INC.
(Exact
name of registrant as specified in its charter)
MARYLAND
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38-3041398
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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9690
Deereco Road, Suite 100
Timonium,
Maryland 21093
(410)
427-1700
(Address,
including zip code, and telephone number, including
area
code,
of registrant’s principal executive offices)
C.
Taylor Pickett
Chief
Executive Officer
Omega
Healthcare Investors, Inc.
9690
Deereco Road, Suite 100
Timonium,
Maryland 21093
(410)
427-1700
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
of communications to:
Richard
H. Miller, Esq.
Michael
J. Delaney, Esq.
Powell
Goldstein LLP
Fourteenth
Floor
1201
West Peachtree Street NW
Atlanta,
Georgia 30309
(404)
572-6600
Approximate
date of commencement of proposed sale to the public:
From time
to time or at one time after the effective date of this registration
statement.
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. o
CALCULATION
OF REGISTRATION
FEE
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||||||||
Title
of Each Class
of
Securities to be Registered
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Amount
to be
Registered
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Proposed
Maximum
Offering
Price Per Unit
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Proposed
Maximum
Aggregate
Offering Price
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Amount
of
Registration
Fee
(1)
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||||
Common
Stock, par value $.10 per share
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2,900,000
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$
17.09
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$49,561,000
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$1,522
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(1)
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A
registration fee of $1,522 was paid with this Registration Statement,
estimated solely for purposes of computing the registration fee and
computed in accordance with Rule 457(c) upon the basis of the high
and low
prices per share of the Registrant’s Common Stock on March 6, 2007
for 2,900,000 shares.
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The
Registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
PROSPECTUS
(Subject
to Completion, Dated March
13,
2007)
2,900,000
Shares
OMEGA
HEALTHCARE INVESTORS, INC.
Common
Stock
We
are
offering for sale 2,900,000 shares of our common stock to be sold in this
offering. We will receive all of the net proceeds from the sale of such common
stock.
Our
common stock is listed on the New York Stock Exchange, or NYSE, under the symbol
“OHI.” On March 12, 2007, the last reported sale price of our common stock on
the NYSE was $17.61 per share.
Investing
in our common stock involves a high degree of risk. Before buying any shares,
you should read the discussion of material risks of investing in our common
stock in “Risk factors” beginning on page 9 of this
prospectus.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
Per
Share
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Total
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||||
Public
offering price
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$
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$
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|||
Underwriting
discounts and commissions
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$
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$
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|||
Proceeds,
before expenses
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$
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$
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The
underwriters may also purchase up to an additional __________ shares of common
stock from us at the public offering price, less underwriting discounts and
commissions payable by us, to cover over-allotments, if any, within 30 days
from
the date of this prospectus. If the underwriters exercise the option in full,
the total underwriting discounts and commissions will be $_____,
and the
total proceeds, before expenses, to us will be $_____.
The
underwriters are offering the shares of our common stock as set forth under
“Underwriting.” Delivery of the shares of common stock will be made on or about
____________,
2007.
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor the sale of shares
of
common stock means that information contained in this prospectus is correct
after the date of this prospectus. These documents do not constitute an offer
to
sell or solicitation of any offer to buy these shares of common stock in any
circumstances under which the offer or solicitation is unlawful.
Table
of contents
iv
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ii
17
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17
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18
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18
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18
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CAUTIONARY LANGUAGE REGARDING FORWARD_LOOKING STATEMENTS |
23
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USE OF PROCEEDS |
24
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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY |
25
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26
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SELECTED CONSOLIDATED FINANCIAL DATA |
28
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
30
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BUSINESS |
53
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DIRECTORS AND EXECUTIVE OFFICERS |
61
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iii
64
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64
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66
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70
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79
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81
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82
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88
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98
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101
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102
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103
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This
prospectus includes market share, industry data and forecasts that we obtained
from the United States Census Bureau and the Centers for Medicare and Medicaid
Services, or CMS. In this prospectus, we refer to additional information
regarding market data obtained from internal sources, market research, publicly
available information and industry publications. Although we believe the
information is reliable, we cannot guarantee the accuracy or completeness of
the
information and have not independently verified it.
This
prospectus is part of a registration statement that we filed with the Securities
and Exchange Commission, or the SEC, on Form S-11 to register the shares offered
by this prospectus. This prospectus does not include all of the information
contained in the registration statement. For further information about us and
the common stock offered in this prospectus, you should review the registration
statement. You should read this prospectus together with additional information
described under the heading “Available Information.”
All
references to “you” in this prospectus refer to those persons who invest in the
common stock being offered by this prospectus, and all references to “we,” “us”
and “our” in this prospectus refer to Omega Healthcare Investors, Inc., a
Maryland corporation, and its subsidiaries.
iv
Prospectus
summary
The
following summary may not contain all the information that may be important
to
you. You should read the entire prospectus and the documents we have filed
with
the SEC before making a decision to invest in our common stock.
OUR
COMPANY
We
were
incorporated in the State of Maryland on March 31, 1992. We are a
self-administered real estate investment trust, or REIT, investing in
income-producing healthcare facilities, principally long-term care facilities
located in the United States. We provide lease or mortgage financing to
qualified operators of skilled nursing facilities, or SNFs, and, to a lesser
extent, assisted living facilities, or ALFs, 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.
Our
portfolio of investments, as of December 31, 2006, consisted of 239 healthcare
facilities, located in 27 states and operated by 32 third-party operators.
This
portfolio was made up of:
· |
228
long-term healthcare facilities and two rehabilitation hospitals
owned and
leased to third parties; and
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· |
fixed
rate mortgages on 9 long-term healthcare
facilities.
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As
of
December 31, 2006, our gross investments in these facilities, net of impairments
and before reserve for uncollectible loans, totaled approximately $1.3 billion.
In addition, we also held miscellaneous investments of approximately $22 million
at December 31, 2006, consisting primarily of secured loans to third-party
operators of our facilities.
1
OUR
PROPERTY INVESTMENTS
We
own a
diversified portfolio of assets. The following table summarizes our property
investments as of December 31, 2006:
Investment
Structure/Operator
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Number
of
Beds
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Number
of
Facilities
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Occupancy
Percentage
(1)
|
Gross
Investment
(in
thousands)
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|||||||||
Purchase/Leaseback(2)
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|||||||||||||
Sun
Healthcare Group, Inc.
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4,523
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38
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86
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$
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210,222
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||||||||
CommuniCare
Health Services, Inc.
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2,781
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18
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89
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185,821
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|||||||||
Haven
Healthcare
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1,787
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15
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91
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117,230
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|||||||||
HQM
of Floyd County, Inc
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1,466
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13
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87
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98,368
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|||||||||
Advocat
Inc
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2,925
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28
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78
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94,432
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|||||||||
Guardian
LTC Management, Inc.
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1,308
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17
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83
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85,981
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|||||||||
Nexion
Health Inc
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2,412
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20
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78
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80,211
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|||||||||
Essex
Health Care Corporation
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1,388
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13
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78
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79,354
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Seacrest
Healthcare
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720
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6
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92
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44,223
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Senior
Management
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1,413
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8
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70
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35,243
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Mark
Ide Limited Liability Company
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832
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8
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77
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25,595
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Harborside
Healthcare Corporation
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465
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4
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92
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23,393
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StoneGate
Senior Care LP
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664
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6
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87
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21,781
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Infinia
Properties of Arizona, LLC
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378
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4
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63
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19,289
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|||||||||
USA
Healthcare, Inc
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489
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5
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65
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15,703
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|||||||||
Rest
Haven Nursing Center, Inc
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200
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1
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90
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14,400
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Conifer
Care Communities, Inc.
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204
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3
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89
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14,367
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|||||||||
Washington
N&R, LLC
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286
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2
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75
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12,152
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|||||||||
Triad
Health Management of Georgia II, LLC
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304
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2
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98
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10,000
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|||||||||
Ensign
Group, Inc
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271
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3
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92
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9,656
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|||||||||
Lakeland
Investors, LLC
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300
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1
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73
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8,893
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|||||||||
Hickory
Creek Healthcare Foundation, Inc.
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138
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2
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85
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7,250
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|||||||||
Liberty
Assisted Living Centers, LP
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120
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1
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85
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5,997
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Emeritus
Corporation
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52
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1
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66
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5,674
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|||||||||
Longwood
Management Corporation
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185
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2
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91
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5,425
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Generations
Healthcare, Inc.
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60
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1
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84
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3,007
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Skilled
Healthcare
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59
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1
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92
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2,012
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Healthcare
Management Services
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98
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1
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48
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1,486
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25,828
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224
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83
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1,237,165
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||||||||||
Assets
Held for Sale
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|||||||||||||
Active
Facilities
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354
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5
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58
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3,443
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|||||||||
Closed
Facility
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—
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1
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—
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125
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|||||||||
354
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6
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58
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3,568
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||||||||||
Fixed
Rate Mortgages(3)
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Advocat
Inc
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423
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4
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82
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12,587
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Parthenon
Healthcare, Inc
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300
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2
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73
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10,730
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|||||||||
CommuniCare
Health Services, Inc.
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150
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1
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91
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6,454
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|||||||||
Texas
Health Enterprises/HEA Mgmt. Group, Inc.
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147
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1
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68
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1,230
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|||||||||
Evergreen
Healthcare
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100
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1
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67
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885
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|||||||||
1,120
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9
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80
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31,886
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||||||||||
Total
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27,302
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239
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82
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$
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1,272,619
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(1) |
Represents
the most recent data provided by our
operators.
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(2) |
Certain of our lease agreements
contain
purchase options that permit the lessees to purchase the underlying
properties from us.
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(3) |
In general, many of our mortgages
contain
prepayment provisions that permit prepayment of the outstanding principal
amounts thereunder.
|
COMPETITIVE
STRENGTHS
Geographically
Diverse Property Portfolio. Our
portfolio of properties is broadly diversified by geographic location. We have
healthcare facilities located in 27 states. Only two states comprised more
than
10% of our rental and mortgage income in 2006. In addition, the majority of
our
2006 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.
2
Large
Number of Tenants. Our
facilities are operated by 32 different public and private healthcare providers.
Except for Sun Healthcare Group, Inc., or Sun, and CommuniCare Health Services,
Inc., or CommuniCare, which together hold approximately 32% of our portfolio
(by
investment), no single tenant holds greater than 10% of our portfolio (by
investment).
Significant
Number of Long-term Leases and Mortgage Loans. A
large
portion of our core portfolio consists of long-term lease and mortgage
agreements. At December 31, 2006, approximately 92% of our leases and mortgages
had primary terms that expire in 2010 or later. Our leased real estate
properties are leased under provisions of single facility leases or master
leases with initial terms typically ranging from 5 to 15 years, plus renewal
options. Substantially all of the leases and master leases provide for minimum
annual rentals that are subject to annual increases based upon increases in
the
Consumer Price Index, or CPI, or increases in revenues of the underlying
properties, with certain limits.
Under
the terms of the leases, the lessee is responsible for all maintenance, repairs,
taxes and insurance on the leased properties.
Experienced
management team. The
top
four members of our executive team average over 19 years of experience in the
long-term healthcare industry. We believe that the long, accomplished tenure
of
our management team helps to distinguish us from our competitors in the
long-term healthcare industry.
OUR
STRATEGY
In
making
investments in properties, we generally have focused on established,
creditworthy, middle-market healthcare operators that meet our standards for
quality and experience of management. We have sought to diversify our
investments in terms of geographic locations and operators. In evaluating
potential investments, we consider such factors as:
· |
the
quality and experience of management and the creditworthiness of
the
operator of the facility;
|
· |
the
facility’s historical and forecasted cash flow and its ability to meet
operational needs, capital expenditure requirements and lease or
debt
service obligations, providing a competitive return on investment
to
us;
|
· |
the
construction quality, condition and design of the
facility;
|
· |
the
geographic area of the facility;
|
· |
the
tax, growth, regulatory and reimbursement environment of the jurisdiction
in which the facility is located;
|
· |
the
occupancy and demand for similar healthcare facilities in the same
or
nearby communities; and
|
· |
the
payor mix of private, Medicare and Medicaid
patients.
|
We
prefer
to invest in equity ownership of properties. Due to regulatory, tax or other
considerations, we sometimes pursue alternative investment structures that
can
achieve returns comparable to equity investments.
OUR
INDUSTRY
We
are a
REIT that invests in income-producing healthcare facilities, principally
long-term care facilities located in the United States. Within this long-term
care industry, we focus specifically on the approximately $122 billion United
States nursing home market by providing lease or mortgage financing to operators
of SNFs and, to a lesser extent, assisted living and acute care facilities.
According to Centers for Medicare and Medicaid Services, or CMS, as of May
2003,
there were approximately 16,500 nursing homes with approximately 1.8 million
total beds certified to provide Medicare and/or Medicaid services in the United
States. The nursing home industry is highly fragmented. As of May 2003, the
ten
largest for-profit chains combined control approximately 16% of the industry’s
beds, with the largest company operating just under 3% of the industry’s
beds.
3
The
aging
population and increased life expectancies are the primary growth drivers for
long-term care facilities. According to the United States Census Bureau, in
2000, there were approximately 35 million Americans aged 65 or older, comprising
approximately 12% of the total United States population. The number of Americans
aged 65 or older is expected to climb to approximately 40.2 million by 2010
and
to approximately 54.6 million by 2020. In addition to positive demographic
trends, the demand for the services provided by operators of long-term care
facilities is expected to increase substantially during the next decade due
primarily to the impact of cost containment measures by government and
private-pay sources resulting in higher acuity patients being transferred more
quickly from hospitals to less expensive care settings such as SNFs. According
to CMS, national nursing home expenditures are expected to grow from $122
billion in 2005 to $211 billion in 2016, representing a 5.1% compounded annual
growth rate. We believe that these trends will support a growing demand for
the
services provided by nursing and assisted living facility operators, which
in
turn will support a growing demand for our properties.
In
recent
years, Congress has enacted three significant laws that have dramatically
altered payments to operators of SNFs under Medicare. Beginning with the
enactment of the Balanced Budget Act of 1997, or Balanced Budget Act, payments
for Medicare services were reduced and extensive changes in the Medicare and
Medicaid programs were made. Congress twice enacted legislation intended to
mitigate temporarily the reduction in Medicare reimbursement rates for SNFs
caused by the Balanced Budget Act. These bills were the Medicare, Medicaid,
and
SCHIP Balanced Budget Refinement Act of 1999, or Balanced Budget Refinement
Act,
and the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act
of
2000, or Benefits Improvement and Protection Act. These acts implemented several
temporary payment increases for services provided under Medicare in SNFs.
On
August
4, 2005, CMS published a final rule, effective October 1, 2005, establishing
Medicare payments for SNFs under the prospective payment system for federal
fiscal year 2006, thereby triggering the elimination of the remaining temporary
payment increases arising from the Balanced Budget Refinement Act and the
Benefits Improvement and Protection Act. CMS estimated that the increases in
Medicare reimbursements to SNFs arising from refinements to the prospective
payment system under the final rule would offset the reductions stemming from
the elimination of the temporary increases during federal fiscal year 2006
(October 1, 2005 through September 30, 2006), resulting in a overall increase
in
Medicare payments to SNFs of $20 million in fiscal year 2006 compared to 2005.
We cannot accurately predict what effect, if any, these changes will have on
individual operators, and as a result, our business in 2007 and beyond.
Furthermore,
Medicaid programs, which are administered at the state level and are a
significant source of revenues for our operators, are impacted by fluctuations
in state budgets. The recent economic climate has had a detrimental effect
on
state revenues in most regions of the United States. Given that Medicaid outlays
are a significant component of state budgets, we expect continuing cost
containment pressures on Medicaid outlays for skilled nursing services in the
states in which we maintain facilities.
In
large
part as a result of the 1997 changes in Medicare reimbursement of services
provided by SNFs and reimbursement cuts imposed under state Medicaid programs,
a
number of operators of our properties have encountered significant financial
difficulties in recent years. Some of these operators, including Sun and
Integrated Health Services, or IHS, who is no longer one of our operators,
filed
for bankruptcy protection. Other operators were required to undertake
significant restructuring efforts. We have restructured our arrangements with
many of our operators by renegotiating lease and mortgage terms, re-leasing
properties to new operators and closing and/or disposing of
properties.
RECENT
DEVELOPMENTS
Increase
in Credit Facility
Pursuant
to Section 2.01 of our Credit Agreement, dated as of March 31, 2006, as amended,
by and among OHI Asset, LLC, a Delaware limited liability company, OHI Asset
(ID), LLC, a Delaware limited liability company, OHI Asset (LA), LLC, a Delaware
limited liability company, OHI Asset (TX), LLC, a Delaware limited liability
company, OHI Asset (CA), LLC, a Delaware limited liability company, Delta
Investors I, LLC a Maryland limited liability company, Delta Investors II,
LLC,
a Maryland limited liability company and Texas Lessor - Stonegate, LP, a
Maryland limited partnership, the Lenders identified therein, and Bank of
America, N.A., as Administrative Agent, or the Credit Agreement, we are
permitted under certain circumstances to increase our available borrowing base
under the Credit Agreement from $200 million up to an aggregate of $300 million.
Effective as of February 22, 2007, we exercised our right to increase our
available revolving commitment under Section 2.01 of the Credit Agreement from
$200 million to $255 million and we consented to the addition of 18 our
properties to the borrowing base assets under the Credit Agreement. For
additional information regarding our Credit Agreement, see Management’s
discussion and analysis of financial condition and results of operations -
Liquidity and capital resources -
Financing activities and borrowing arrangements.
4
Appointment
of Chief Accounting Officer
On
February 19, 2007, we hired Michael Ritz, 38, to serve as our Chief Accounting
Officer. Mr. Ritz will commence employment with us effective February 28, 2007
and will assume the role of chief accounting officer effective as of March
31,
2007. Ritz will also be permitted to participate in our health and welfare
plans, 401(k) program and similar plans and programs available to all of our
employees. Prior to joining us, 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. (NYSE:NWL). Mr. Ritz also served as the Director of
Accounting and Controller of Novavax, Inc. (Nasdaq:NVAX) from July 2001 through
August 2002.
CORPORATE
INFORMATION
We
were
incorporated in the State of Maryland on March 31, 1992. Our principal executive
offices are located at 9690 Deereco Road, Suite 100, Timonium, Maryland 21093,
and our telephone number is (410) 427-1700.
5
The
Offering
Common
stock we are offering
|
2,900,000
shares.
|
|
Common
stock to be outstanding immediately after the offering
|
62,920,758
shares.
|
|
New
York Stock Exchange symbol
|
OHI
|
|
Use
of proceeds
|
We
intend to use all of the net proceeds of this offering to repay
indebtedness outstanding under our senior revolving credit facility.
If
and to the extent there are net proceeds remaining after we have
repaid
all indebtedness under our senior revolving credit facility, we will
use
these proceeds for working capital and general corporate purposes.
See
“Use of Proceeds.”
|
|
Risk
factors
|
This
investment involves a high degree of risk. See the section entitled
“Risk
Factors” beginning on page 9 of this prospectus for a discussion of
certain factors you should consider before deciding to invest in
our
common stock.
|
The
number of shares of our common stock outstanding after this offering is based
on
approximately 60,020,758 shares outstanding as of December 31, 2006 and
excludes:
· |
47,244 shares
of
our common stock issuable upon exercise of options outstanding as
of
December 31, 2006 at a weighted average exercise price of $12.70
per
share;
|
· |
1,516,428 shares
of
our common stock available for issuance under our dividend reinvestment
and common stock purchase plan as of December 31,
2006;
|
· |
2,891,980
shares of
our common stock available for future grant under our 2000 Stock
Incentive
Plan and our 2004 Stock Incentive Plan;
and
|
· |
____________ shares
of
our common stock that may be purchased by underwriters to cover
over-allotments, if any.
|
Unless
otherwise stated, all information in this prospectus supplement assumes that
the
underwriters do not exercise their over-allotment option.
6
Summary historical financial information
The
following table sets forth summary consolidated financial data as of the dates
and for the periods presented. The operating data and other financial data
as
of, and for each of the years during the three-year period ended, December
31,
2006 have been derived from, and should be read in conjunction with, our audited
consolidated financial statements and the related notes included elsewhere
in
this prospectus. The operating data and other financial data as of and for
each
of the years ended December 31, 2002 and 2003 are derived from our audited
consolidated financial statements.
Year
ended December 31,
|
||||||||||||||||
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Operating
data:
|
||||||||||||||||
Revenues:
|
||||||||||||||||
Core
operations
|
$
|
80,572
|
$
|
76,803
|
$
|
86,972
|
$
|
109,644
|
$
|
135,693
|
||||||
Nursing
home operations
|
42,203
|
4,395
|
—
|
—
|
—
|
|||||||||||
Total
revenues
|
122,775
|
81,198
|
86,972
|
109,644
|
135,693
|
|||||||||||
Interest
expense (1)
|
27,381
|
20,802
|
24,902
|
32,021
|
44,126
|
|||||||||||
(Loss)
income from continuing operations
|
(2,561
|
)
|
27,770
|
13,371
|
37,355
|
56,042
|
||||||||||
Net
(loss) income available to common shareholders
|
(32,801
|
)
|
3,516
|
(36,715
|
)
|
25,355
|
45,774
|
|||||||||
Other
financial data:
|
||||||||||||||||
Depreciation
and amortization (2)
|
17,495
|
18,129
|
18,842
|
23,856
|
32,113
|
|||||||||||
Funds
from operations(3)
|
(15,025
|
)
|
25,091
|
(18,474
|
)
|
42,663
|
76,683
|
Twelve
months ended
December
31, 2006
|
|||||||
Actual
|
Pro
forma(4)
|
||||||
Balance
sheet data:
|
(in
thousands)
|
||||||
Cash
|
$
|
729
|
|
||||
Gross
investment
|
1,294,697
|
||||||
Total
assets
|
1,175,370
|
||||||
Total
debt(5)
|
676,141
|
||||||
Stockholders’
equity
|
465,454
|
(1)
Excludes
interest expense related to refinancing activities.
(2)
Excludes
amounts included in discontinued operations
(3)
We
consider funds from operations, or FFO, to be a key measure of a REIT’s
performance which should be considered along with, but not as an alternative
to,
net income and cash flow as a measure of operating performance and liquidity.
We
calculate and report FFO in accordance with the definition and interpretive
guidelines issued by the National Association of Real Estate Investment Trusts,
or 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 of implementation guidelines or interpret the standards
differently from us.
7
We
use FFO as one of several criteria to measure operating performance of our
business. We further believe that by excluding the effect of depreciation,
amortization and gains or losses from sales of real estate, all of which are
based on historical costs and which may be of limited relevance in evaluating
current performance, FFO can facilitate comparisons of operating performance
between periods and between other REITs. We offer this measure to assist the
users of our financial 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. Investor and potential
investors in our securities should not rely on this measure as a substitute
for
any GAAP measure, including net income.
In
February 2004, NAREIT informed its member companies that it was adopting the
position of the SEC with respect to asset impairment charges and would no longer
recommend that impairment write-downs be excluded from FFO. In the table
included below, we have applied this interpretation and have not excluded asset
impairment charges in calculating our FFO. As a result, our FFO may not be
comparable to similar measures reported in previous disclosures. According
to
NAREIT, there is inconsistency among NAREIT member companies as to the adoption
of this interpretation of FFO. Therefore, a comparison of our FFO results to
another company’s FFO results may not be meaningful.
The
following table is a reconciliation of net income (loss) available to common
shareholders to FFO:
Year
ended December 31,
|
||||||||||||||||
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Net
income (loss) available to common shareholders
|
(32,801
|
)
|
3,516
|
(36,715
|
)
|
25,355
|
45,774
|
|||||||||
(Deduct
gain) add back loss from real estate dispositions(a)
|
(2,548
|
)
|
149
|
(3,310
|
)
|
(7,969
|
)
|
(1,354
|
)
|
|||||||
(35,349
|
)
|
3,665
|
(40,025
|
)
|
17,386
|
44,420
|
||||||||||
Elimination
of non-cash items included in net income (loss):
|
||||||||||||||||
Depreciation
and amortization(b)
|
21,270
|
21,426
|
21,551
|
25,277
|
32,263
|
|||||||||||
Adjustments
of derivatives to fair market value
|
(946
|
)
|
—
|
—
|
—
|
—
|
||||||||||
FFO
|
(15,025
|
)
|
25,091
|
(18,474
|
)
|
42,663
|
76,683
|
(a)
|
The
add back of loss/deduction of gain from real estate dispositions
includes
the facilities classified as discontinued operations in our audited
consolidated financial statements included in our Annual Reports
on Form
10-K for the three year period ended December 31, 2006.
|
(b)
|
The
add back of depreciation and amortization includes the facilities
classified as discontinued operations in our audited consolidated
financial statements included in our Annual Reports on Form 10-K
for the
three year period ended December 31, 2006. The 2002, 2003, 2004,
2005 and
2006 includes depreciation
of $3.8 million, $3.3 million, $2.7 million, $1.4 million , and $0.2
million, respectively, related to facilities classified as discontinued
operations.
|
(4)
|
On
a pro forma as adjusted basis giving effect to our sale of the common
stock in this offering at an assumed offering price of $_____ per
share
and the receipt of the estimated net proceeds of this sale of $_____
million, the assumed application of the approximately $_____ of net
proceeds to repay a portion of our outstanding borrowings under
our
senior revolving credit facility, and the completion of new investments
and borrowings under our senior revolving credit facility since December
31, 2006.
|
(5)
|
Total
debt includes long-term debt and current maturities of long-term
debt.
|
8
You
should carefully consider the risks described below. These risks are not the
only ones that we may face. Additional risks and uncertainties that we are
unaware of, or that we currently deem immaterial, also may become important
factors that affect us. If any of the following risks occurs, our business,
financial condition or results of operations could be materially and adversely
affected.
RISKS
RELATED TO THE OPERATORS OF OUR
FACILITIES
Our
financial position could be weakened and our ability to fulfill our obligations
under our indebtedness could be limited if any of our major operators were
unable to meet their obligations to us or failed to renew or extend their
relationship with us as their lease terms expire, or if we were unable to lease
or re-lease our facilities or make mortgage loans on economically favorable
terms. These adverse developments could arise due to a number of factors,
including those listed below.
The
bankruptcy, insolvency or financial deterioration of our
operators could delay our ability to collect unpaid rents or require us to
find
new operators for rejected facilities.
We
are
exposed to the risk that our operators may not be able to meet their
obligations, which may result in their bankruptcy or insolvency. Although our
leases and loans provide us the right to terminate an investment, evict an
operator, demand immediate repayment and other remedies, title 11 of the United
States Code, 11 U.S.C. §§ 101-1330, as amended and supplemented, or the
Bankruptcy Code, affords certain protections to a party that has filed for
bankruptcy that would probably render certain of these remedies unenforceable,
or, at the very least, delay our ability to pursue such remedies. In addition,
an operator in bankruptcy may be able to restrict our ability to collect unpaid
rent or mortgage payments during the bankruptcy case.
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 licensed to manage the facility. In addition, some
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. In order to protect our
investments, we may take possession of a property or even become licensed as
an
operator, which might expose us to successor liability under government programs
(or otherwise) or require us to indemnify subsequent operators to whom we might
transfer the operating rights and licenses. Third-party payors may also suspend
payments to us following foreclosure until we receive the required licenses
to
operate the facilities. Should such events occur, our income and cash flow
from
operations would be adversely affected.
9
Risk
Factors
A
debtor may have the right to assume or reject a lease with us
under bankruptcy law and his or her decision could delay or limit our ability
to
collect rents thereunder.
If
one or
more of our lessees files bankruptcy relief, the Bankruptcy Code provides that
a
debtor has the option to assume or reject the unexpired lease within a certain
period of time. However, our lease arrangements with operators that operate
more
than one of our facilities are generally made pursuant to a single master lease
covering all of that operator’s facilities leased from us, and consequently, it
is possible that in bankruptcy the debtor-lessee may be required to assume
or
reject the master lease as a whole, rather than making the decision on a
facility by facility basis, thereby preventing the debtor-lessee from assuming
only the better performing facilities and terminating the leasing arrangement
with respect to the poorer performing facilities. The Bankruptcy Code generally
requires that a debtor must assume or reject a contract in its entirety. Thus,
a
debtor cannot choose to keep the beneficial provisions of a contract while
rejecting the burdensome ones; the contract must be assumed or rejected as
a
whole. However, where under applicable law a contract (even though it is
contained in a single document) is determined to be divisible or severable
into
different agreements, or similarly where a collection of documents are
determined to constitute separate agreements instead of a single, integrated
contract, then in those circumstances a debtor/trustee may be allowed to assume
some of the divisible or separate agreements while rejecting the others. Whether
a master lease agreement would be determined to be a single contract or a
divisible agreement, and hence whether a bankruptcy court would require a master
lease agreement to be assumed or rejected as a whole, would depend on a number
of factors some of which may include, but may not necessarily be limited to,
the
following:
· |
applicable
state law;
|
· |
the
parties’ intent;
|
· |
whether
the master lease agreement and related documents were executed
contemporaneously;
|
· |
the
nature and purpose of the relevant
documents;
|
· |
whether
the obligations in various documents are
independent;
|
· |
whether
the leases are coterminous;
|
· |
whether
a single check is paid for all
properties;
|
· |
whether
rent is apportioned among the
leases;
|
· |
whether
termination of one lease constitutes termination of
all;
|
· |
whether
the leases may be separately assigned or
sublet;
|
· |
whether
separate consideration exists for each lease;
and
|
· |
whether
there are cross-default provisions.
|
The
Bankruptcy Code provides that a debtor has the power and the option to assume,
assume and assign to a third party, or reject the unexpired lease. In the event
that the unexpired lease is assumed on behalf of the debtor-lessee, obligations
under the lease generally would be entitled to administrative priority over
other unsecured pre-bankruptcy claims. If the debtor chooses to assume the
lease
(or assume and assign the lease), then the debtor is required to cure all
monetary defaults, or provide adequate assurance that it will promptly cure
such
defaults. However, the debtor-lessee may not have to cure historical
non-monetary defaults under the lease to the extent that they have not resulted
in an actual pecuniary loss, but the debtor-lessee must cure non-monetary
defaults under the lease from the time of assumption going forward. A debtor
must generally pay all rent payments coming due under the lease after the
bankruptcy filing but before the assumption or rejection of the lease. The
Bankruptcy Code provides that the debtor-lessee must make the decision regarding
assumption, assignment or rejection within a certain period of time. For cases
filed on or after October 17, 2005, the time period to make the decision is
120
days, subject to one extension ‘‘for cause.’’ A bankruptcy court may only
further extend this period for 90 days unless the lessor consents in
writing.
If
a
tenant rejects a lease under the Bankruptcy Code, it is deemed to be a
pre-petition breach of the lease, and the lessor’s claim arising therefrom may
be limited to any unpaid rent already due plus an amount equal to the rent
reserved under the lease, without acceleration, for the greater of one year,
and
15%, not to exceed three years, of the remaining term of such lease, following
the earlier of the petition date and repossession or surrender of the leased
property. If the debtor rejects the lease, the facility would be returned to
us.
In that event, if we were unable to re-lease the facility to a new operator
on
favorable terms or only after a significant delay, we could lose some or all
of
the associated revenue from that facility for an extended period of
time.
With
respect to our mortgage loans, the imposition of an automatic
stay under bankruptcy law could negatively impact our ability to foreclose
or
seek other remedies against a mortgagor.
Generally,
with respect to our mortgage loans, the imposition of an automatic stay under
the Bankruptcy Code precludes us from exercising foreclosure or other remedies
against the debtor without first obtaining stay relief from the bankruptcy
court. Pre-petition creditors generally do not have rights to the cash flows
from the properties underlying the mortgages unless their security interest
in
the property includes such cash flows. Mortgagees may, however, receive periodic
payments from the debtor/mortgagors. Such payments are referred to as adequate
protection payments. The timing of adequate protection payments and whether
the
mortgagees are entitled to such payments depends on negotiating an acceptable
settlement with the mortgagor (subject to approval of the bankruptcy court)
or
on the order of the bankruptcy court in the event a negotiated settlement cannot
be achieved.
A
mortgagee also is treated differently from a landlord in three key respects.
First, the mortgage loan is not subject to assumption, assumption and
assignment, or rejection. Second, the mortgagee’s loan may be divided into a
secured claim for the portion of the mortgage debt that does not exceed the
value of the property securing the debt and a general unsecured claim for the
portion of the mortgage debt that exceeds the value of the property. A secured
creditor such as our company is entitled to the recovery of interest and
reasonable fees, costs and charges provided for under the agreement under which
such claim arose only if, and to the extent that, the value of the collateral
exceeds the amount owed. If the value of the collateral exceeds the amount
of
the debt, interest as well as reasonable fees, costs, and charges are not
necessarily required to be paid during the progress of the bankruptcy case,
but
they will accrue until confirmation of a plan of reorganization/liquidation
and
are generally paid at confirmation or such other time as the court orders unless
the debtor voluntarily makes a payment. If the value of the collateral held
by a
secured creditor is less than the secured debt (including such creditor’s
secured debt and the secured debt of any creditor with a more senior security
interest in the collateral), interest on the loan for the time period between
the filing of the case and confirmation may be disallowed. Finally, while a
lease generally would either be assumed, assumed and assigned, or rejected
with
all of its benefits and burdens intact, the terms of a mortgage, including
the
rate of interest and the timing of principal payments, may be modified under
certain circumstances if the debtor is able to effect a ‘‘cram down’’ under the
Bankruptcy Code. Before such a ‘‘cram down’’ is allowed, the Bankruptcy Court
must conclude that the treatment of the secured creditor’s claim is ‘‘fair and
equitable.’’
10
Risk
Factors
If
an operator files bankruptcy, our leases with the debtor could
be recharacterized as a financing agreement, which could negatively impact
our
rights under the lease.
Another
risk regarding our leases is that in an operator’s bankruptcy the leases could
be re-characterized as a financing agreement. In making such a determination,
a
bankruptcy court may consider certain factors, which may include, but are not
necessarily limited to, the following:
· |
whether
rent is calculated to provide a return on investment rather than
to
compensate the lessor for loss, use and possession of the
property;
|
· |
whether
the property is purchased specifically for the lessee’s use or whether the
lessee selected, inspected, contracted for, and received the
property;
|
· |
whether
the transaction is structured solely to obtain tax
advantages;
|
· |
whether
the lessee is entitled to obtain ownership of the property at the
expiration of the lease, and whether any option purchase price is
unrelated to the value of the land;
and
|
· |
whether
the lessee assumed many of the obligations associated with outright
ownership of the property, including responsibility for maintenance,
repair, property taxes and
insurance.
|
If
an
operator defaults under one of our mortgage loans, we may have to foreclose
on
the mortgage or protect our interest by acquiring title to the property and
thereafter making substantial improvements or repairs in order to maximize
the
facility’s investment potential. Operators may contest enforcement of
foreclosure or other remedies, seek bankruptcy protection against our exercise
of enforcement or other remedies and/or bring claims for lender liability in
response to actions to enforce mortgage obligations. If an operator seeks
bankruptcy protection, the automatic stay provisions of the Bankruptcy Code
would preclude us from enforcing foreclosure or other remedies against the
operator unless relief is first obtained from the court having jurisdiction
over
the bankruptcy case. High ‘‘loan to value’’ ratios or declines in the value of
the facility may prevent us from realizing an amount equal to our mortgage
loan
upon foreclosure.
Operators
that fail to comply with the requirements of
governmental reimbursement programs such as Medicare or Medicaid, licensing
and
certification requirements, fraud and abuse regulations or new legislative
developments may be unable to meet their obligations to us.
Our
operators are subject to numerous federal, state and local laws and regulations
that are subject to frequent and substantial changes (sometimes applied
retroactively) resulting from legislation, adoption of rules and regulations,
and administrative and judicial interpretations of existing law. The ultimate
timing or effect of these changes cannot be predicted. These changes may have
a
dramatic effect on our operators’ costs of doing business and 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:
· |
Medicare
and Medicaid.
A
significant portion of our SNF operators’ revenue is derived from
governmentally-funded reimbursement programs, primarily Medicare
and
Medicaid, and failure to maintain certification and accreditation
in these
programs would result in a loss of funding from such programs. Loss
of
certification or accreditation could cause the revenues of our operators
to decline, potentially jeopardizing their ability to meet their
obligations to us. In that event, our revenues from those facilities
could
be reduced, which could in turn cause the value of our affected properties
to decline. State licensing and Medicare and Medicaid laws also require
operators of nursing homes and assisted living facilities to comply
with
extensive standards governing operations. Federal and state agencies
administering those laws regularly inspect such facilities and investigate
complaints. Our operators and their managers receive notices of potential
sanctions and remedies from time to time, and such sanctions have
been
imposed from time to time on facilities operated by them. If they
are
unable to cure deficiencies, which have been identified or which
are
identified in the future, such sanctions may be imposed and if imposed
may
adversely affect our operators’ revenues, potentially jeopardizing their
ability to meet their obligations to
us.
|
11
Risk
Factors
· |
Licensing
and Certification.
Our operators and facilities are subject to regulatory and licensing
requirements of federal, state and local authorities and are periodically
audited by them to confirm compliance. Failure to obtain licensure
or loss
or suspension of licensure would prevent a facility from operating
or
result in a suspension of reimbursement payments until all licensure
issues have been resolved and the necessary licenses obtained or
reinstated. Our SNFs require governmental approval, in the form of
a
certificate of need that generally varies by state and is subject
to
change, prior to the addition or construction of new beds, the addition
of
services or certain capital expenditures. Some of our facilities
may be
unable to satisfy current and future certificate of need requirements
and
may for this reason be unable to continue operating in the future.
In such
event, our revenues from those facilities could be reduced or eliminated
for an extended period of time or
permanently.
|
· |
Fraud
and Abuse Laws and Regulations.
There are various extremely complex and largely uninterpreted federal
and
state laws governing a wide array of referrals, relationships and
arrangements and prohibiting fraud by healthcare providers, including
criminal provisions that prohibit filing false claims or making false
statements to receive payment or certification under Medicare and
Medicaid, or failing to refund overpayments or improper payments.
Governments are devoting increasing attention and resources to anti-fraud
initiatives against healthcare providers. The Health Insurance Portability
and Accountability Act of 1996 and the Balanced Budget Act expanded
the
penalties for healthcare fraud, including broader provisions for
the
exclusion of providers from the Medicare and Medicaid programs.
Furthermore, the Office of Inspector General of the U.S. Department
of
Health and Human Services in cooperation with other federal and state
agencies continues to focus on the activities of SNFs in certain
states in
which we have properties. In addition, the federal False Claims Act
allows
a private individual with knowledge of fraud to bring a claim on
behalf of
the federal government and earn a percentage of the federal government’s
recovery. Because of these incentives, these so-called ‘‘whistleblower’’
suits have become more frequent. The violation of any of these laws
or
regulations by an operator may result in the imposition of fines
or other
penalties that could jeopardize that operator’s ability to make lease or
mortgage payments to us or to continue operating its
facility.
|
· |
Legislative
and Regulatory Developments.
Each year, legislative proposals are introduced or proposed in Congress
and in some state legislatures that would affect major changes in
the
healthcare system, either nationally or at the state level. The Medicare
Prescription Drug, Improvement and Modernization Act of 2003, or
Medicare
Modernization Act, which is one example of such legislation, was
enacted
in late 2003. The Medicare reimbursement changes for the long term
care
industry under this Act are limited to a temporary increase in the
per
diem amount paid to SNFs for residents who have AIDS. The significant
expansion of other benefits for Medicare beneficiaries under this
Act,
such as the expanded prescription drug benefit, could result in financial
pressures on the Medicare program that might result in future legislative
and regulatory changes with impacts for our operators. Other proposals
under consideration include efforts by individual states to control
costs
by decreasing state Medicaid reimbursements, a federal ‘‘Patient
Protection Act’’ to protect consumers in managed care plans, efforts to
improve quality of care and reduce medical errors throughout the
health
care industry and cost-containment initiatives by public and private
payors. We cannot accurately predict whether any proposals will be
adopted
or, if adopted, what effect, if any, these proposals would have on
operators and, thus, our business.
|
12
Risk
Factors
Regulatory
proposals and rules are released on an ongoing basis that may have major impacts
on the healthcare system generally and the skilled nursing and long-term care
industries in particular.
Our
operators depend on reimbursement from governmental and other
third-party payors and reimbursement rates from such payors may be
reduced.
Changes
in the reimbursement rate or methods of payment from third-party payors,
including the Medicare and Medicaid programs, or the implementation of other
measures to reduce reimbursements for services provided by our operators has
in
the past, and could in the future, result in a substantial reduction in our
operators’ revenues and operating margins. Additionally, net revenue realizable
under third-party payor agreements can change after examination and retroactive
adjustment by payors during the claims settlement processes or as a result
of
post-payment audits. Payors may disallow requests for reimbursement based on
determinations that certain costs are not reimbursable or reasonable or because
additional documentation is necessary or because certain services were not
covered or were not medically necessary. There also continue to be new
legislative and regulatory proposals that could impose further limitations
on
government and private payments to healthcare providers. In some cases, states
have enacted or are considering enacting measures designed to reduce their
Medicaid expenditures and to make changes to private healthcare insurance.
We
cannot assure you that adequate reimbursement levels will continue to be
available for the services provided by our operators, which are currently being
reimbursed by Medicare, Medicaid or private third-party payors. Further limits
on the scope of services reimbursed and on reimbursement rates could have a
material adverse effect on our operators’ liquidity, financial condition and
results of operations, which could cause the revenues of our operators to
decline and potentially jeopardize their ability to meet their obligations
to
us.
Our
operators may be subject to significant legal actions that
could subject them to increased operating costs and substantial uninsured
liabilities, which may affect their ability to pay their lease and mortgage
payments to us.
As
is
typical in the healthcare industry, our operators are often subject to claims
that their services have resulted in resident injury or other adverse effects.
Many of these operators have experienced an increasing trend in the frequency
and severity of professional liability and general liability insurance claims
and litigation asserted against them. The insurance coverage maintained by
our
operators may not cover all claims made against them nor continue to be
available at a reasonable cost, if at all. In some states, insurance coverage
for the risk of punitive damages arising from professional liability and general
liability claims and/or litigation may not, in certain cases, be available
to
operators due to state law prohibitions or limitations of availability. As
a
result, our operators operating in these states may be liable for punitive
damage awards that are either not covered or are in excess of their insurance
policy limits. We also believe that there has been, and will continue to be,
an
increase in governmental investigations of long-term care providers,
particularly in the area of Medicare/Medicaid false claims, as well as an
increase in enforcement actions resulting from these investigations. Insurance
is not available to cover such losses. Any adverse determination in a legal
proceeding or governmental investigation, whether currently asserted or arising
in the future, could have a material adverse effect on an operator’s financial
condition. If an operator is unable to obtain or maintain insurance coverage,
if
judgments are obtained in excess of the insurance coverage, if an operator
is
required to pay uninsured punitive damages, or if an operator is subject to
an
uninsurable government enforcement action, the operator could be exposed to
substantial additional liabilities.
Increased
competition
as well as increased operating costs have
resulted in lower revenues for some of our operators and may affect the ability
of our tenants to meet their payment obligations to us.
The
healthcare industry is highly competitive and we expect that it may become
more
competitive in the future. Our operators are competing with numerous other
companies providing similar healthcare services or alternatives such as home
health agencies, life care at home, community-based service programs, retirement
communities and convalescent centers. We cannot be certain the operators of
all
of our facilities will be able to achieve occupancy and rate levels that will
enable them to meet all of their obligations to us. Our operators may encounter
increased competition in the future that could limit their ability to attract
residents or expand their businesses and therefore affect their ability to
pay
their lease or mortgage payments.
13
Risk
Factors
The
market for qualified nurses, healthcare professionals and other key personnel
is
highly competitive and our operators may experience difficulties in attracting
and retaining qualified personnel. Increases in labor costs due to higher wages
and greater benefits required to attract and retain qualified healthcare
personnel incurred by our operators could affect their ability to pay their
lease or mortgage payments. This situation could be particularly acute in
certain states that have enacted legislation establishing minimum staffing
requirements.
RISKS
RELATED TO US AND OUR OPERATIONS
In
addition to the operator related risks discussed above, there are a number
of
risks directly associated with us and our operations.
We
rely on external sources of capital to fund future capital
needs, and if we encounter difficulty in obtaining such capital, we may not
be
able to make future investments necessary to grow our business or meet maturing
commitments.
In
order
to qualify as a REIT under the Internal Revenue Code
of 1986,
as amended, or the Code,
we are
required, among other things, to distribute each year to our stockholders at
least 90% of our REIT taxable income. Because of this distribution requirement,
we may not be able to fund, from cash retained from operations, all future
capital needs, including capital needs to make investments and to satisfy or
refinance maturing commitments. As a result, we 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 general market conditions and
the
market’s perception of our growth potential and our current and potential future
earnings and cash distributions and the market price of the shares of our
capital stock. Generally speaking, difficult capital market conditions in our
industry during the past several years and our need to stabilize our portfolio
have limited our access to capital. The “related party tenant” issue discussed
in “Note 10 - Taxes”
to
our consolidated financial statements for the year ended December 31, 2006
included elsewhere herein may
make
it more difficult for us to raise additional capital unless and until we enter
into a closing agreement with the Internal Revenue Service or IRS, or otherwise
resolve such issue. 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 attractive investment opportunities for growth 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.
Our
ability to raise capital through sales of equity 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 limit our ability to sell
equity.
As
with
other publicly-traded companies, the availability of equity capital will depend,
in part, on the market price of our common stock which, in turn, will depend
upon various market conditions and other factors that may change from time
to
time including:
· |
the
extent of investor interest;
|
· |
the
general reputation of REITs and the attractiveness of their equity
securities in comparison to other equity securities, including securities
issued by other real estate-based
companies;
|
· |
our
financial performance and that of our
operators;
|
· |
the
contents of analyst reports about us and the REIT
industry;
|
· |
general
stock and bond market conditions, including changes in interest rates
on
fixed income securities, which may lead prospective purchasers of
our
common stock to demand a higher annual yield from future
distributions;
|
· |
our
failure to maintain or increase our dividend, which is dependent,
to a
large part, on growth of funds from operations which in turn depends
upon
increased revenues from additional investments and rental increases;
and
|
· |
other
factors such as governmental regulatory action and changes in REIT
tax
laws.
|
14
Risk
Factors
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.
We
are subject to risks associated with debt financing, which
could negatively impact our business, limit our ability to make distributions
to
our stockholders and to repay maturing debt.
Financing
for future investments and our maturing commitments may be provided by
borrowings under our revolving senior secured credit facility, as amended,
or
the New 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. We are subject to risks normally associated with debt
financing, including the risks that our cash flow will be insufficient to make
timely payments of interest, that we will be unable to refinance existing
indebtedness and that the terms of refinancing will not be as favorable as
the
terms of existing indebtedness. If we are unable to refinance or extend
principal payments due at maturity or pay them with proceeds from other capital
transactions, our cash flow may not be sufficient in all years to pay
distributions to our stockholders and to repay all maturing debt. Furthermore,
if prevailing interest rates, changes in our debt ratings or other factors
at
the time of refinancing result in higher interest rates upon refinancing, the
interest expense relating to that refinanced indebtedness would increase, which
could reduce our profitability and the amount of dividends we are able to pay.
Moreover, additional debt financing increases the amount of our
leverage.
Certain
of our operators account for a significant percentage of
our real estate investment and revenues.
At
December 31, 2006, approximately 25% of our real estate investments were
operated by two public companies: Sun Healthcare Group, Inc., or Sun (17%),
and
Advocat, Inc. or Advocat (8%). Our largest private company operators (by
investment) were CommuniCare Health Services, Inc., or CommuniCare (15%), Haven
Eldercare, LLC, or Haven (9%), Home Quality Management, Inc., or HQM (8%),
Guardian LTC Management, Inc., or Guardian (7%), Nexion Health, Inc., or Nexion
(6%) and Essex Healthcare Corporation (6%). No other operator represents more
than 4% of our investments. The three states in which we had our highest
concentration of investments were Ohio (22%), Florida (14%) and Pennsylvania
(9%) at December 31, 2006.
For
the
year ended December 31, 2006, our revenues from operations totaled $135.7
million, of which approximately $25.1 million were from Sun (19%), $20.3 million
from CommuniCare (15%) and $15.3 million from Advocat (11%). No other operator
generated more than 9% of our revenues from operations for the year ended
December 31, 2006.
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 any acquired properties, including contingent
liabilities, or newly acquired properties might require significant management
attention that would otherwise be devoted to our ongoing business. If we agree
to provide funding to enable healthcare operators to build, expand or renovate
facilities on our properties and the project is not completed, we could be
forced to become involved in the development to ensure completion or we could
lose the property. These costs may negatively affect our results of
operations.
Our
assets may be subject to impairment
charges.
We
periodically, but not less than annually, evaluate our real estate investments
and other assets for impairment indicators. The judgment regarding the existence
of impairment indicators is based on factors such as market conditions, operator
performance and legal structure. If we determine that a significant impairment
has occurred, we would be required to make an adjustment to the net carrying
value of the asset, which could have a material adverse 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, 2006, we recognized an impairment
loss associated with three facilities for approximately $0.5
million.
15
Risk
Factors
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, 2006, we had total debt of approximately $676 million, of which
$150 million consisted of borrowings under our New Credit Facility, $310 million
of which consisted of our 7% senior notes due 2014 and $175 million of which
consisted of our 7% senior notes due 2016 and $39 million of non-recourse debt
to us resulting from the consolidation of a variable interest entity, or VIE,
in
accordance with Financial Accounting Standards Board Interpretation No. 46R,
Consolidation
of Variable Interest Entities,
or FIN
46R. Our level of indebtedness could have important consequences to our
stockholders. For example, it could:
· |
limit
our ability to satisfy our obligations with respect to holders of
our
capital stock;
|
· |
increase
our vulnerability to general adverse economic and industry
conditions;
|
· |
limit
our ability to obtain additional financing to fund future working
capital,
capital expenditures and other general corporate requirements, or
to carry
out other aspects of our business
plan;
|
· |
require
us to dedicate a substantial portion of our cash flow from operations
to
payments on indebtedness, thereby reducing the availability of such
cash
flow to fund working capital, capital expenditures and other general
corporate requirements, or to carry out other aspects of our business
plan;
|
· |
require
us to pledge as collateral substantially all of our
assets;
|
· |
require
us to maintain certain debt coverage and financial ratios at specified
levels, thereby reducing our financial
flexibility;
|
· |
limit
our ability to make material acquisitions or take advantage of business
opportunities that may arise;
|
· |
expose
us to fluctuations in interest rates, to the extent our borrowings
bear
variable rates of interests;
|
· |
limit
our flexibility in planning for, or reacting to, changes in our business
and industry; and
|
· |
place
us at a competitive disadvantage compared to our competitors that
have
less debt.
|
Our
real estate investments are relatively
illiquid.
Real
estate investments are relatively illiquid and, therefore, tend to limit our
ability to vary our portfolio promptly in response to changes in economic or
other conditions. All of our properties are ‘‘special purpose’’ properties that
could not be readily converted to general residential, retail or office use.
Healthcare facilities that participate in Medicare or Medicaid must meet
extensive program requirements, including physical plant and operational
requirements, which are revised from time to time. Such requirements may include
a duty to admit Medicare and Medicaid patients, limiting the ability of the
facility to increase its private pay census beyond certain limits. Medicare
and
Medicaid facilities are regularly inspected to determine compliance and may
be
excluded from the programs—in some cases without a prior hearing—for failure to
meet program requirements. Transfers of operations of nursing homes and other
healthcare-related facilities are subject to regulatory approvals not required
for transfers of other types of commercial operations and other types of real
estate. Thus, if the operation of any of our properties becomes unprofitable
due
to competition, age of improvements or other factors such that our lessee or
mortgagor becomes unable to meet its obligations on the lease or mortgage loan,
the liquidation value of the property may be substantially less, particularly
relative to the amount owing on any related mortgage loan, than would be the
case if the property were readily adaptable to other uses. The receipt of
liquidation proceeds or the replacement of an operator that has defaulted on
its
lease or loan could be delayed by the approval process of any federal, state
or
local agency necessary for the transfer of the property or the replacement
of
the operator with a new operator licensed to manage the facility. In addition,
certain significant expenditures associated with real estate investment, such
as
real estate taxes and maintenance costs, are generally not reduced when
circumstances cause a reduction in income from the investment. Should such
events occur, our income and cash flows from operations would be adversely
affected.
16
Risk
Factors
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 without regard to whether the owner knew of, or
was
responsible for, the presence or disposal of such substances and liability
may
be imposed on the owner in connection with the activities of an operator of
the
property. The cost of any required 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 our operators’ ability to attract
additional residents, the owner’s ability to sell or rent such property or to
borrow using such property as collateral which, in turn, would reduce the
owner’s revenues.
Although
our leases and mortgage loans require the lessee and the mortgagor to indemnify
us for certain environmental liabilities, the scope of such obligations may
be
limited. 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. This
competition may prevent us from raising prices at the same pace as our costs
increase.
We
compete for additional healthcare facility investments with other healthcare
investors, including other REITs. The operators of the facilities compete with
other regional or local nursing care facilities for the support of the medical
community, including physicians and acute care hospitals, as well as the general
public. Some significant competitive factors for the placing of patients in
skilled and intermediate care nursing facilities include quality of care,
reputation, physical appearance of the facilities, services offered, family
preferences, physician services and price. If our cost of capital should
increase relative to the cost of capital of our competitors, the spread that
we
realize on our investments may decline if competitive pressures limit or prevent
us from charging higher lease or mortgage rates.
We
are named as defendants in litigation arising out of
professional liability and general liability claims relating to our previously
owned and operated facilities that if decided against us, could adversely affect
our financial condition.
We
and
several of our wholly-owned subsidiaries have been named as defendants in
professional liability and general liability claims related to our owned and
operated facilities. Other third-party managers responsible for the day-to-day
operations of these facilities have also been named as defendants in these
claims. In these suits, patients of certain previously owned and operated
facilities have alleged significant damages, including punitive damages, against
the defendants. The lawsuits are in various stages of discovery and we are
unable to predict the likely outcome at this time. We continue to vigorously
defend these claims and pursue all rights we may have against the managers
of
the facilities, under the terms of the management agreements. We have insured
these matters, subject to self-insured retentions of various amounts. There
can
be no assurance that we will be successful in our defense of these matters
or in
asserting our claims against various managers of the subject facilities or
that
the amount of any settlement or judgment will be substantially covered by
insurance or that any punitive damages will be covered by
insurance.
17
Risk
Factors
We
are subject to significant anti-takeover
provisions.
Our
articles of incorporation and bylaws contain various procedural and other
requirements which could make it difficult for stockholders to effect certain
corporate actions. Our Board of Directors is divided into three classes and
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. We have also adopted a
stockholders rights plan which provides for share purchase rights to become
exercisable at a discount if a person or group acquires more than 9.9% of our
common stock or announces a tender or exchange offer for more than 9.9% of
our
common stock. These provisions could discourage unsolicited acquisition
proposals or make it more difficult for a third party to gain control of us,
which could adversely affect the market price of our securities.
We
may change our investment strategies and policies and capital
structure.
Our
Board
of Directors, without the approval of our stockholders, may alter our investment
strategies and policies if it determines in the future that a change is in
our
stockholders’ best interests. The methods of implementing our investment
strategies and policies may vary as new investments and financing techniques
are
developed.
If
we fail to maintain our REIT status, we will be subject to
federal income tax on our taxable income at regular corporate
rates.
We
were
organized to qualify for taxation as a REIT under Sections 856 through 860
of
the Code. Except with respect to the potential Advocat “related party tenant”
issue discussed below, we believe we have conducted, and we intend to continue
to conduct, our operations so as to qualify as a REIT. Qualification as a REIT
involves the satisfaction of numerous requirements, some on an annual and some
on a quarterly basis, established under highly technical and complex provisions
of the 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.
In
connection with exploring the potential disposition of the Advocat Series B
preferred stock, we were advised by our tax counsel that due to the structure
of
the Series B preferred stock issued by Advocat to us in 2000 in connection
with
a prior restructuring, Advocat may be deemed to be a “related party tenant”
under applicable federal income tax rules and, in such event, rental income
from
Advocat would not be qualifying income under the gross income tests that are
applicable to REITs. In order to maintain qualification as a REIT, we annually
must satisfy certain tests regarding the source of our gross income. The
applicable federal income tax rules provide a “savings clause” for REITs that
fail to satisfy the REIT gross income tests, if such failure is due to
reasonable cause. A REIT that qualifies for the savings clause will retain
its
REIT status but will pay a tax. On December 15, 2006, we submitted to the IRS
a
request for a closing agreement to resolve the “related party tenant” issue.
Since that time, we have had additional conversations with the IRS, who has
encouraged us to move forward with the process of obtaining a closing agreement,
and we have submitted additional documentation in support of the issuance of
a
closing agreement with respect to this matter. While we believe there are valid
arguments that Advocat should not be deemed a “related party tenant,” the matter
is still not free from doubt, and we believe it is in our best interest to
move
forward with the request for a closing agreement in order to resolve the matter,
minimize potential penalties and obtain assurances regarding our continuing
REIT
status. If we are able to enter into the closing agreement with the IRS, the
closing agreement will conclude that any failure to satisfy the gross income
tests was due to reasonable cause. In the event that it is determined that
the
“savings clause” described above does not apply and we are unable to conclude a
closing agreement with the IRS, we could be treated as having failed to qualify
as a REIT for one or more taxable years. If we fail to qualify for taxation
as a
REIT for any taxable year, our income will be taxed at regular corporate rates,
and we could be disqualified as a REIT for the following four taxable
years.
18
Risk
Factors
To
maintain our REIT status, we must distribute at least 90% of
our taxable income each year.
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, we may derive income through Taxable REIT
Subsidiaries, or TRS, which will then be subject to corporate level income
tax
at regular rates.
Complying
with REIT requirements may affect our
profitability.
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 in order 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). Then, 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.
We
depend upon our key employees and may be unable to attract or
retain sufficient numbers of qualified personnel.
Our
future performance depends to a significant degree upon the continued
contributions of our executive management team and other key employees.
Accordingly, our future success depends on our ability to attract, hire, train
and retain highly skilled management and other qualified personnel. Competition
for qualified employees is intense, and we compete for qualified employees
with
companies that may have greater financial resources than we have. Our employment
agreements with our executive officers provide that their employment may be
terminated by either party at any time. Consequently, we may not be successful
in attracting, hiring, and training and retaining the people we need, which
would seriously impede our ability to implement our business
strategy.
In
the event we are unable to satisfy regulatory requirements
relating to internal controls, or if these internal controls over financial
reporting are not effective, our business could suffer.
Section
404 of the Sarbanes-Oxley Act of 2002 requires companies to do a comprehensive
evaluation of their internal controls. As a result, each year we evaluate our
internal controls over financial reporting so that our management can certify
as
to the effectiveness of our internal controls and our auditor can publicly
attest to this certification. Our efforts to comply with Section 404 and related
regulations regarding our management’s required assessment of internal control
over financial reporting and our independent auditors’ attestation of that
assessment has required, and continues to require, the commitment of significant
financial and managerial resources. If for any period our management is unable
to ascertain the effectiveness of our internal controls or if our auditors
cannot attest to management’s certification, we could be subject to regulatory
scrutiny and a loss of public confidence, which could have an adverse effect
on
our business.
In
connection with the restatement of our financial statements for
the year ended December 31, 2005, we identified a material weakness in our
internal control over financial reporting, which could materially and adversely
affect our business and financial condition.
In
connection with the restatement of our financial statements for the year ended
December 31, 2005, our management identified a material weakness in internal
control over financial reporting. Our management determined that as of December
31, 2005, we lacked sufficient internal control processes, procedures and
personnel resources necessary to address accounting for certain complex and/or
non-routine transactions. This material weakness resulted in errors in
accounting for financial instruments, income taxes and straight-line rental
revenue and could result in a material misstatement to our consolidated
financial statements that would not be prevented or detected on a timely basis.
Due to this material weakness, management concluded that we did not maintain
effective internal control over financial reporting as of December 31,
2005.
19
Risk
Factors
While
we
have engaged in, and continue to engage in, substantial efforts to address
the
material weakness in our internal control over financial reporting, as of
December 31, 2006, we
have
not concluded that our internal control over financial reporting is effective.
We cannot be certain that any remedial measures we have taken or plan to take
will ensure that we design, implement and maintain adequate controls over our
financial processes and reporting in the future or will be sufficient to address
and eliminate the material weakness. Our inability to remedy this identified
material weakness or any additional deficiencies or material weaknesses that
may
be identified in the future, could, among other things, cause us to fail to
file
our periodic reports with the SEC in a timely manner or require us to incur
additional costs or to divert management resources. Due to its inherent
limitations, even effective internal control over financial reporting can
provide only reasonable assurance with respect to financial statement
preparation and presentation. These limitations may not prevent or detect all
misstatements or fraud, regardless of their effectiveness.
RISKS
RELATED TO OUR STOCK
The
market value of our stock could be substantially affected by
various factors.
The
share
price of our stock will depend on many factors, which may change from time
to
time, including:
· |
the
market for similar securities issued by
REITs;
|
· |
changes
in estimates by analysts;
|
· |
our
ability to meet analysts’
estimates;
|
· |
general
economic and financial market conditions;
and
|
· |
our
financial condition, performance and
prospects.
|
Our
issuance of additional capital stock, warrants or debt
securities, whether or not convertible, may reduce the market price for our
shares.
We
cannot
predict the effect, if any, that future sale of our capital stock, warrants
or
debt securities, or the availability of our securities for future sale, will
have on the market price of our shares, including our common stock. Sales of
substantial amounts of our common stock or preferred shares, warrants or debt
securities convertible into or exercisable or exchangeable for common stock
in
the public market or the perception that such sales might occur could reduce
the
market price of our stock and the terms upon which we may obtain additional
equity financing in the future.
In
addition, we may issue additional capital stock in the future to raise capital
or as a result of the following:
· |
The
issuance and exercise of options to purchase our common stock. As
of
December 31, 2006, we had outstanding options to acquire approximately
0.1 million
shares of our common stock. In addition, we may in the future issue
additional options or other securities convertible into or exercisable
for
our common stock under our 2004 Stock Incentive Plan, our 2000 Stock
Incentive Plan, as amended, or other remuneration plans we establish
in
the future. We may also issue options or convertible securities to
our
employees in lieu of cash bonuses or to our directors in lieu of
director’s fees.
|
· |
The
issuance of shares pursuant to our dividend reinvestment and direct
stock
purchase plan.
|
· |
The
issuance of debt securities exchangeable for our common
stock.
|
· |
The
exercise of warrants we may issue in the
future.
|
20
Risk
Factors
· |
Lenders
sometimes ask for warrants or other rights to acquire shares in connection
with providing financing. We cannot assure you that our lenders will
not
request such rights.
|
There
are no assurances of our ability to pay dividends in the
future.
In
2001,
our Board of Directors suspended dividends on our common stock and all series
of
preferred stock in an effort to generate cash to address then impending debt
maturities. In 2003, we paid all accrued but unpaid dividends on all series
of
preferred stock and reinstated dividends on our common stock and all series
of
preferred stock. However, our ability to pay dividends may be adversely affected
if any of the risks described above were to occur. Our payment of dividends
is
subject to compliance with restrictions contained in our New 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 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, 4,739,500 shares of our 8.375%
Series D cumulative redeemable preferred stock were issued and outstanding.
The
aggregate liquidation preference with respect to this outstanding preferred
stock is approximately $118.5 million,
and annual dividends on our outstanding preferred stock are approximately $9.9
million. Holders of our preferred stock are generally entitled to cumulative
dividends before any dividends may be declared or set aside on our common stock.
Upon our voluntary or involuntary liquidation, dissolution or winding up, before
any payment is made to holders of our common stock, holders of our preferred
stock are entitled to receive a liquidation preference of $25 per share with
respect to the Series D preferred stock, plus any accrued and unpaid
distributions. This will reduce the remaining amount of our assets, if any,
available to distribute to holders of our common stock. In addition, holders
of
our preferred stock have the right to elect two additional directors to our
Board of Directors if six quarterly preferred dividends are in
arrears.
Legislative
or regulatory action could adversely affect purchasers
of our stock.
In
recent
years, numerous legislative, judicial and administrative changes have been
made
in the provisions of the federal income tax laws applicable to investments
similar to an investment in our stock. Changes are likely to continue to occur
in the future, and we cannot assure you that any of these changes will not
adversely affect our stockholder’s stock. Any of these changes could have an
adverse effect on an investment in our stock or on market value or resale
potential. Stockholders are urged to consult with their own tax advisor with
respect to the impact that recent legislation may have on their investment
and
the status of legislative, regulatory or administrative developments and
proposals and their potential effect.
Recent
changes in taxation of corporate dividends may adversely
affect the value of our stock.
The
Jobs
and Growth Tax Relief Reconciliation Act of 2003 that was enacted into law
May
28, 2003, among other things, generally reduces to 15% the maximum marginal
rate
of tax payable by individuals on dividends received from a regular C
corporation. This reduced tax rate, however, will not apply to dividends paid
to
individuals by a REIT on its shares, except for certain limited amounts. While
the earnings of a REIT that are distributed to its stockholders still generally
will be subject to less combined federal income taxation than earnings of a
non-REIT C corporation that are distributed to its stockholders net of
corporate-level tax, this legislation could cause individual investors to view
the stock of regular C corporations as more attractive relative to the shares
of
a REIT than was the case prior to the enactment of the legislation. Individual
investors could hold this view because the dividends from regular C corporations
will generally be taxed at a lower rate while dividends from REITs will
generally be taxed at the same rate as the individual’s other ordinary income.
We cannot predict what effect, if any, the enactment of this legislation may
have on the value of the shares of REITs in general or on the value of our
stock
in particular, either in terms of price or relative to other
investments.
21
Risk
Factors
We
have submitted to the Internal Revenue Service a request for a
closing agreement and may not be able to obtain a closing agreement on
satisfactory terms.
Management
believes that certain of the terms of the Advocat Series B preferred stock
previously held by us could be interpreted as affecting our compliance with
federal income tax rules applicable to REITs regarding related party tenant
income. See Note 10 - Taxes
to our
consolidated financial statements for the year ended December 31, 2006 included
elsewhere herein.
On
December 15, 2006, we submitted to the IRS a request for a closing agreement,
which would provide that, in the event that our ownership of Advocat stock
gave
rise to disqualified “related party tenant” income, we are eligible for relief
under a “savings clause set forth in the Code because our actions with respect
to the ownership of the Advocat stock were due to “reasonable cause.” Since that
time, we have had additional conversations with the IRS, who has encouraged
us
to move forward with the process of obtaining a closing agreement, and we have
submitted additional documentation in support of the issuance of a closing
agreement with respect to this matter. While we believe there are valid
arguments that Advocat should not be deemed a “related party tenant,” the matter
still is not free from doubt, and we believe it is in our best interest to
proceed with the request for a closing agreement with the IRS in order to
resolve the matter, minimize potential interest charges and obtain assurances
regarding its continuing REIT status. If obtained, a closing agreement will
establish that any failure to satisfy the gross income tests was due to
reasonable cause. In the event that it is determined that the “savings clause”
described above does not apply, we could be treated as having failed to qualify
as a REIT for one or more taxable years.
As
noted
above, we have completed the Second Advocat Restructuring and have been advised
by tax counsel that we will not receive any non-qualifying related party tenant
income from Advocat in future fiscal years. Accordingly, we do not expect to
incur tax expense associated with related party tenant income in future periods
commencing January 1, 2007, assuming we enter into a closing agreement with
the
IRS that recognizes that reasonable cause existed for any failure to satisfy
the
REIT gross income tests as explained above.
If
we
were to fail to qualify as a REIT for any taxable year, we would be subject
to
federal income tax, including any applicable alternative minimum tax, on our
taxable income at regular corporate rates for such year, and distributions
to
stockholders would not be deductible by us in computing our taxable income.
Any
such corporate tax liability could be substantial and, unless we were
indemnified against such tax liability, would reduce the amount of cash we
have
available for distribution to our stockholders, which in turn could have a
material adverse impact on the value of, and trading prices for, our securities.
In addition, we would not be able to re-elect REIT status until the fifth
taxable year following the initial year of disqualification unless we were
to
qualify for relief under applicable Code provisions. Thus, for example, if
the
IRS successfully challenges our status as a REIT solely for our taxable year
ended December 31, 2005 based on our ownership of the Advocat Series B
preferred stock, we would not be able to re-elect REIT status until our taxable
year which began January 1, 2010, unless we were to qualify for
relief.
We
have
accrued $5.6 million at December 31, 2006 for a potential tax liability,
including interest, arising from our ownership of the Advocat securities
and we believe, but can provide no assurance, that we currently have sufficient
assets to pay any such tax liabilities. The ultimate resolution of any
controversy over potential tax liabilities covered by the closing agreement
may
have a material adverse effect on our financial position, results of operations
or cash flows, including if we are required to distribute deficiency dividends
to our stockholders and/or pay additional taxes, interest and penalties to
the
IRS in amounts that exceed the amount of our reserves for potential tax
liabilities. There can be no assurance that the IRS will not assess us with
substantial taxes, interest and penalties above the amount for which we have
reserved. For further discussion, see Note 10 - Taxes
to our
consolidated financial statements for the year ended December 31, 2006 included
elsewhere herein.
22
Cautionary
language regarding forward-looking
statements
This
prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this prospectus may constitute
forward-looking statements. 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:
· |
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;
|
· |
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;
|
· |
our
ability to sell closed assets on a timely basis and on terms that
allow us
to realize the carrying value of these
assets;
|
· |
our
ability to negotiate appropriate modifications to the terms of our
credit
facility;
|
· |
our
ability to manage, re-lease or sell any owned and operated
facilities;
|
· |
the
availability and cost of capital;
|
· |
competition
in the financing of healthcare
facilities;
|
· |
regulatory
and other changes in the healthcare
sector;
|
· |
the
effect of economic and market conditions generally and, particularly,
in
the healthcare industry;
|
· |
changes
in interest rates;
|
· |
the
amount and yield of any additional
investments;
|
· |
changes
in tax laws and regulations affecting
REITs;
|
· |
our
ability to maintain our status as a real estate investment trust;
and
|
· |
changes
in the ratings of our debt and preferred
securities.
|
Any
subsequent written or oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements set forth or referred to above, as well as the risk
factors contained in this prospectus. Except as required by law, we disclaim
any
obligation to update such statements or to publicly announce the result of
any
revisions to any of the forward-looking statements contained in this prospectus
to reflect future events or developments.
23
Our
net
proceeds from the sale of the shares of common stock, after deducting
underwriting discounts and commissions and other expenses of this offering
payable by us, are estimated to be approximately $___ million ($___ million
if
the underwriters’ over-allotment option is exercised in full), assuming a public
offering price of $___ per share. We intend to use all of the net proceeds
of
this offering to repay indebtedness outstanding under our New Credit Facility,
which currently bears an interest rate of 6.82% and matures on March 31, 2010.
We entered into our New Credit Facility on March 31, 2006 and have used the
funds for general corporate purposes, including the acquisition of
healthcare-related properties and the funding of mortgage loans secured by
healthcare-related properties. If and to the extent there are net proceeds
remaining after we have repaid all indebtedness under our New Credit Facility,
we will use these proceeds for working capital and general corporate
purposes.
24
Our
common stock is traded on the NYSE under the symbol “OHI.” The following table
sets forth, for the periods shown, the high and low prices for our common stock
as reported by the NYSE for the periods indicated, and cash dividends per
share:
High
|
Low
|
Dividends
Per
Share
|
||||||||
Year
ended December 31, 2005
|
||||||||||
First
Quarter
|
$
|
11.950
|
$
|
10.310
|
$
|
0.20
|
||||
Second
Quarter
|
13.650
|
10.580
|
0.21
|
|||||||
Third
Quarter
|
14.280
|
12.390
|
0.22
|
|||||||
Fourth
Quarter
|
13.980
|
11.660
|
0.22
|
|||||||
Year
ended December 31, 2006
|
||||||||||
First
Quarter
|
$
|
14.030
|
$
|
12.360
|
$
|
0.23
|
||||
Second
Quarter
|
13.920
|
11.150
|
0.24
|
|||||||
Third
Quarter
|
15.500
|
12.560
|
0.24
|
|||||||
Fourth
Quarter
|
18.000
|
14.810
|
0.25
|
The
closing price on March 12, 2007 was $17.61 per share. As of March 8, 2007 there
were 60,100,525 shares of common stock outstanding with 2,971
registered holders.
In
2005,
we paid all regular quarterly dividend payments on our outstanding series of
preferred stock and common stock. In 2006, we have paid all regular quarterly
dividend payments on our outstanding series of preferred stock and common stock.
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 14 to
our
consolidated financial statements for the fiscal year ended December 31, 2006
included elsewhere herein.
25
The
following table sets forth our capitalization as of December 31, 2006:
· |
On
an actual basis; and
|
· |
On
a pro forma as adjusted basis giving further effect to our sale of
the
common stock in this offering at an assumed offering price of $_______
per
share and the assumed application of the approximately $_______ million
of
net proceeds
to
repay borrowings outstanding under our New Credit
Facility.
|
This
table should be read in conjunction with ‘‘Management’s discussion and analysis
of financial condition and results of operations’’ and our consolidated
financial statements and the related notes included in this
prospectus.
As
of December 31, 2006
|
|||||||
Actual
|
Pro
forma
|
||||||
(in
thousands)
|
|||||||
Cash
|
729
|
||||||
Debt:
|
|||||||
Senior
revolving credit facility
|
150,000
|
||||||
7.00%
senior notes due 2014
|
310,000
|
||||||
Premium
on new 7.00% senior notes due 2014
|
1,148
|
||||||
Discount
on 7% Note due 2016
|
(1,417
|
)
|
|||||
7.00%
senior notes due 2016
|
175,000
|
||||||
Other
long-term borrowings
|
41,410
|
||||||
Total
Debt
|
676,141
|
||||||
Stockholders’
Equity:
|
|||||||
Preferred
Stock, $1.00 par value; authorized -20,000,000 shares:
|
|||||||
Issued
and Outstanding - 4,739,500 shares Series D with an aggregate liquidation
preference of $118,487,500 as December 31, 2006
|
118,488
|
||||||
Common
Stock, $0.10 par value:
|
|||||||
Authorized
- 100,000,000 shares
|
|||||||
Issued
and Outstanding - 59,703 as of December 31, 2006; pro forma as
adjusted
_____________ shares
|
5,970
|
||||||
Additional
paid in capital
|
694,207
|
||||||
Cumulative
net earnings
|
292,766
|
||||||
Cumulative
dividends paid
|
(602,910
|
)
|
|||||
Cumulative
dividends - redemption
|
(43,067
|
)
|
|||||
Unamortized
restricted stock award
|
—
|
||||||
Accumulated
other comprehensive gain
|
—
|
||||||
Total
Stockholders’ Equity
|
465,454
|
||||||
Total
Capitalization
|
1,142,324
|
The
table
above excludes:
· |
47,244
shares of
our common stock issuable upon exercise of options outstanding as
of
December
31, 2006
at
a weighted average exercise price of $12.70
per share;
|
26
Capitalization
· |
1,516,428
shares of
our common stock available for issuance under our dividend reinvestment
and common stock purchase plan as of December
31, 2006;
|
· |
2,891,980
shares of
our common stock available for future grant under our 2000 Stock
Incentive
Plan and our 2004 Stock Incentive Plan;
and
|
· |
__________ shares
of
our common stock that may be purchased by underwriters to cover
over-allotments, if any.
|
27
Selected
consolidated financial data
The
following table sets forth consolidated financial data as of the dates and
for
the periods presented. The balance sheet data as of December 31, 2006 and 2005
and the statement of operations data, and other data for each of the years
during the three-year period ended December 31, 2006 have been derived from,
and
should be read in conjunction with, our audited consolidated financial
statements and the related notes included elsewhere in this prospectus. The
balance sheet data as of December 31, 2004, 2003, and 2002, and the statement
of
operations data, and other data for the years ended December 31, 2003
and 2002 are derived from our audited consolidated financial statements.
Year
Ended December 31,
|
||||||||||||||||
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
(in
thousands, except per share amounts)
|
||||||||||||||||
Operating
Data
|
||||||||||||||||
Revenues
from core operations
|
$
|
135,693
|
$
|
109,644
|
$
|
86,972
|
$
|
76,803
|
$
|
80,572
|
||||||
Revenues
from nursing home operations
|
—
|
—
|
—
|
4,395
|
42,203
|
|||||||||||
Total
revenues
|
$
|
135,693
|
$
|
109,644
|
$
|
86,972
|
$
|
81,198
|
$
|
122,775
|
||||||
Income
(loss) from continuing operations
|
$
|
56,042
|
$
|
37,355
|
$
|
13,371
|
$
|
27,770
|
$
|
(2,561
|
)
|
|||||
Net
income (loss) available to common
|
45,774
|
25,355
|
(36,715
|
)
|
3,516
|
(32,801
|
)
|
|||||||||
Per
share amounts:
|
||||||||||||||||
Income
(loss) from continuing operations:
Basic
|
$
|
0.79
|
$
|
0.46
|
$
|
(0.96
|
)
|
$
|
0.21
|
$
|
(0.65
|
)
|
||||
Diluted
|
0.79
|
0.46
|
(0.96
|
)
|
0.20
|
(0.65
|
)
|
|||||||||
Net
income (loss) available to common:
Basic
|
$
|
0.78
|
$
|
0.49
|
$
|
(0.81
|
)
|
$
|
0.09
|
$
|
(0.94
|
)
|
||||
Diluted
|
0.78
|
0.49
|
(0.81
|
)
|
0.09
|
(0.94
|
)
|
|||||||||
Dividends,
Common Stock(1)
|
0.96
|
0.85
|
0.72
|
0.15
|
—
|
|||||||||||
Dividends,
Series A Preferred(1)
|
—
|
—
|
1.16
|
6.94
|
—
|
|||||||||||
Dividends,
Series B Preferred(1)
|
—
|
1.09
|
2.16
|
6.47
|
—
|
|||||||||||
Dividends,
Series C Preferred(2)
|
—
|
—
|
2.72
|
29.81
|
—
|
|||||||||||
Dividends,
Series D Preferred(1)
|
2.09
|
2.09
|
1.52
|
—
|
—
|
|||||||||||
Weighted-average
common shares outstanding,
basic
|
58,651
|
51,738
|
45,472
|
37,189
|
34,739
|
|||||||||||
Weighted-average
common shares outstanding,
diluted
|
58,745
|
52,059
|
45,472
|
38,154
|
34,739
|
|||||||||||
Other
financial data:
|
||||||||||||||||
Depreciation
and amortization
(3)
|
32,113
|
23,856
|
18,842
|
18,129
|
17,495
|
|||||||||||
Funds
from
operations(4)
|
76,683
|
42,663
|
(18,474
|
)
|
25,091
|
(15,025
|
)
|
Year
Ended December 31,
|
||||||||||||||||
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
Balance
Sheet Data
Gross
investments
|
$
|
1,294,697
|
$
|
1,129,753
|
$
|
940,747
|
$
|
821,244
|
$
|
860,188
|
||||||
Total
assets
|
1,175,370
|
1,036,042
|
849,576
|
736,775
|
811,096
|
|||||||||||
Revolving
lines of credit
|
150,000
|
58,000
|
15,000
|
177,074
|
177,000
|
|||||||||||
Other
long-term borrowings
|
526,141
|
508,229
|
364,508
|
103,520
|
129,462
|
|||||||||||
Stockholders’
equity
|
465,454
|
440,943
|
442,935
|
440,130
|
482,995
|
(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.
|
(3) |
Excludes
amounts included in discontinued
operations
|
28
Selected
consolidated financial data
(4)
|
We
consider funds from operations, or FFO, to be a key measure of a
REIT’s
performance which should be considered along with, but not as an
alternative to, net income and cash flow as a measure of operating
performance and liquidity. We calculate and report FFO in accordance
with
the definition and interpretive guidelines issued by the National
Association of Real Estate Investment Trusts, or 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
of
implementation guidelines or interpret the standards differently
from
us.
|
We
use FFO as one of several criteria to measure operating performance of our
business. We further believe that by excluding the effect of depreciation,
amortization and gains or losses from sales of real estate, all of which are
based on historical costs and which may be of limited relevance in evaluating
current performance, FFO can facilitate comparisons of operating performance
between periods and between other REITs. We offer this measure to assist the
users of our financial performance under GAAP and should not be considered
a
measure of liquidity, an alternative to net income or an indicator of any other
performance measure determined in accordance with GAAP. Investor and potential
investors in our securities should not rely on this measure as a substitute
for
any GAAP measure, including net income.
In
February 2004, NAREIT informed its member companies that it was adopting the
position of the SEC with respect to asset impairment charges and would no longer
recommend that impairment write-downs be excluded from FFO. In the table
included below, we have applied this interpretation and have not excluded asset
impairment charges in calculating our FFO. As a result, our FFO may not be
comparable to similar measures reported in previous disclosures. According
to
NAREIT, there is inconsistency among NAREIT member companies as to the adoption
of this interpretation of FFO. Therefore, a comparison of our FFO results to
another company’s FFO results may not be meaningful.
The
following table is a reconciliation of net income (loss) available to common
to
FFO:
Year
ended December 31,
|
||||||||||||||||
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||
(in
thousands)
|
||||||||||||||||
Net
income (loss) available to common shareholders
|
(32,801
|
)
|
3,516
|
(36,715
|
)
|
25,355
|
45,774
|
|||||||||
(Deduct
gain) add back loss from real estate dispositions(a)
|
(2,548
|
)
|
149
|
(3,310
|
)
|
(7,969
|
)
|
(1,354
|
)
|
|||||||
(35,349
|
)
|
3,665
|
(40,025
|
)
|
17,386
|
44,420
|
||||||||||
Elimination
of non-cash items included in net income (loss):
|
||||||||||||||||
Depreciation
and amortization(b)
|
21,270
|
21,426
|
21,551
|
25,277
|
32,263
|
|||||||||||
Adjustments
of derivatives to fair market value
|
(946
|
)
|
—
|
—
|
—
|
—
|
||||||||||
FFO
|
(15,025
|
)
|
25,091
|
(18,474
|
)
|
42,663
|
76,683
|
(a)
|
The
add back of loss/deduction of gain from real estate dispositions
includes
the facilities classified as discontinued operations in our audited
consolidated financial statements included in our Annual Reports
on Form
10-K for the three year period ended December 31, 2006.
|
(b)
|
The
add back of depreciation and amortization includes the facilities
classified as discontinued operations in our audited consolidated
financial statements included in our Annual Reports on Form 10-K
for the
three year period ended December 31, 2006. The 2002, 2003, 2004,
2005 and
2006 includes depreciation of $3.8 million, $3.3 million, $2.7 million,
$1.4 million , and $0.2 million, respectively, related to facilities
classified as discontinued
operations.
|
29
Management’s
discussion and analysis of financial condition and results of
operations
OVERVIEW
Our
portfolio of investments at December 31, 2006, consisted of 239 healthcare
facilities, located in 27 states and operated by 32 third-party operators.
Our
gross investment in these facilities totaled approximately $1.3 billion at
December 31, 2006, with 98% of our real estate investments related to long-term
healthcare facilities. This portfolio is made up of 228 long-term healthcare
facilities and two rehabilitation hospitals owned and leased to third parties
and fixed rate mortgages on nine long-term healthcare facilities. At December
31, 2006, we also held other investments of approximately $22 million,
consisting primarily of secured loans to third-party operators of our
facilities.
RESTATEMENTS
On
December 14, 2006, we filed a Form 10-K/A, which amended our previously filed
Form 10-K for fiscal year 2005. Contained within that Form 10-K/A were restated
consolidated financial statements for the three years ended December 31, 2005.
The restatements corrected
errors
in previously reported amounts related to income tax matters and to certain
debt
and equity investments in Advocat,
as well
as to the recording of certain straight-line rental income. Amounts reflected
herein were derived from the restated financial information rather than the
2005
Form 10-K, which had been filed with the SEC on February 17, 2006 and mailed
to
stockholders shortly thereafter. Similarly, on December 14, 2006, we filed
Forms
10-Q/A amending our previously filed consolidated financial statements for
the
first and second quarters of fiscal 2006 to correct errors in previously
recorded amounts as discussed previously. Amounts reflected in Note 16 - Summary
of Quarterly Results (Unaudited) to our audited consolidated financial
statements as of December 31, 2006 were derived from the restated financial
information rather than the Form 10-Q as of March 31, 2006 and June 30, 2006.
See also Note 10
-
Taxes to
our audited consolidated financial statements for the fiscal year ended December
31, 2006 included elsewhere herein.
MEDICARE
REIMBURSEMENT
All
of
our properties are used as healthcare facilities; therefore, we are directly
affected by the risk associated with the healthcare industry. Our lessees and
mortgagors, as well as any facilities that may be owned and operated for our
own
account from time to time, derive a substantial portion of their net operating
revenues from third-party payors, including the Medicare and Medicaid programs.
These programs are highly regulated by federal, state and local laws, rules
and
regulations and are subject to frequent and substantial change.
In
1997,
the Balanced Budget Act significantly reduced spending levels for the Medicare
and Medicaid programs, in part because the legislation modified the payment
methodology for skilled nursing facilities, or SNFs by shifting payments for
services provided to Medicare beneficiaries from a reasonable cost basis to
a
prospective payment system. Under the prospective payment system, SNFs are
paid
on a per diem prospective case-mix adjusted basis for all covered services.
Implementation of the prospective payment system has affected each long-term
care facility to a different degree, depending upon the amount of revenue such
facility derives from Medicare patients.
Legislation
adopted in 1999 and 2000 provided for a few temporary increases to Medicare
payment rates, but these temporary increases have since expired. Specifically,
in 1999 the Balanced Budget Refinement Act included a 4% across-the-board
increase of the adjusted federal per diem payment rates for all patient acuity
categories (known as “Resource Utilization Groups” or “RUGs”) that were in
effect from April 2000 through September 30, 2002. In 2000, the Benefits
Improvement and Protection Act included a 16.7% increase in the nursing
component of the case-mix adjusted federal periodic payment rate, which was
implemented in April 2000 and also expired October 1, 2002. The October 1,
2002
expiration of these temporary increases has had an adverse impact on the
revenues of the operators of SNFs and has negatively impacted some operators’
ability to satisfy their monthly lease or debt payments to us.
The
Balanced Budget Refinement Act and the Benefits Improvement and Protection
Act
also established temporary increases, beginning in April 2001, to Medicare
payment rates to SNFs that were designated to remain in place until the Centers
for Medicare and Medicaid Services, or CMS, implemented refinements to the
existing RUG case-mix classification system to more accurately estimate the
cost
of non-therapy ancillary services. The Balanced Budget Refinement Act provided
for a 20% increase for 15 RUG categories until CMS modified the RUG case-mix
classification system. The Benefits Improvement and Protection Act modified
this
payment increase by reducing the 20% increase for three of the 15 RUGs to a
6.7%
increase and instituting an additional 6.7% increase for eleven other
RUGs.
30
Management’s
discussion and analysis of financial condition and results of
operations
On
August
4, 2005, CMS published a final rule, effective October 1, 2005, establishing
Medicare payments for SNFs under the prospective payment system for federal
fiscal year 2006 (October 1, 2005 to September 30, 2006). The final rule
modified the RUG case-mix classification system and added nine new categories
to
the system, expanding the number of RUGs from 44 to 53. The implementation
of
the RUG refinements triggered the expiration of the temporary payment increases
of 20% and 6.7% established by the Balanced Budget Refinement Act and the
Benefits Improvement and Protection Act, respectively.
Additionally,
CMS announced updates in the final rule to reimbursement rates for SNFs in
federal fiscal year 2006 based on an increase in the “full market-basket” of
3.1%. In the August 4, 2005 notice, CMS estimated that the increases in Medicare
reimbursements to SNFs arising from the refinements to the prospective payment
system and the market basket update under the final rule would offset the
reductions stemming from the elimination of the temporary increases during
federal fiscal year 2006. CMS estimated that there would be an overall increase
in Medicare payments to SNFs totaling $20 million in fiscal year 2006 compared
to 2005.
On
July
27, 2006, CMS posted a notice updating the payment rates to SNFs for fiscal
year
2007 (October 1, 2006 to September 30, 2007). The market basket increase factor
is 3.1% for 2007. CMS estimates that the payment update will increase aggregate
payments to SNFs nationwide by approximately $560 million in fiscal year 2007
compared to 2006.
Nonetheless,
we cannot accurately predict what effect, if any, these changes will have on
our
lessees and mortgagors in 2007 and beyond. These changes to the Medicare
prospective payment system for SNFs, including the elimination of temporary
increases, could adversely impact the revenues of the operators of nursing
facilities and could negatively impact the ability of some of our lessees and
mortgagors to satisfy their monthly lease or debt payments to us.
A
128%
temporary increase in the per diem amount paid to SNFs for residents who have
AIDS took effect on October 1, 2004. This temporary payment increase arose
from
the Medicare Prescription Drug Improvement and Modernization Act of 2003, or
the
Medicare Modernization Act. Although CMS also noted that the AIDS add-on was
not
intended to be permanent, the July 2006 notice updating payment rates for SNFs
for fiscal year 2007 indicated that the increase will continue to remain in
effect for fiscal year 2007.
A
significant change enacted under the Medicare Modernization Act is the creation
of a new prescription drug benefit, Medicare Part D, which went into effect
January 1, 2006. The
significant expansion of benefits for Medicare beneficiaries arising under
the
expanded prescription drug benefit could result in financial pressures on the
Medicare program that might result in future legislative and regulatory changes
with impacts for our operators. As part of this new program, the prescription
drug benefits for patients who are dually eligible for both Medicare and
Medicaid are being transitioned from Medicaid to Medicare, and many of these
patients reside in long-term care facilities. The Medicare program experienced
significant operational difficulties in transitioning prescription drug coverage
for this population when the benefit went into effect on January 1, 2006,
although it is unclear whether or how issues involving Medicare Part D might
have any direct financial impacts on our operators.
On
February 8, 2006, the President signed into law a $39.7 billion budget
reconciliation package called the Deficit Reduction Act of 2005, or Deficit
Reduction Act, to lower the federal budget deficit. The Deficit Reduction Act
included estimated net savings of $8.3 billion from the Medicare program over
5
years.
The
Deficit Reduction Act contained a provision reducing payments to SNFs for
allowable bad debts. Previously, Medicare reimbursed SNFs for 100% of
beneficiary bad debt arising from unpaid deductibles and coinsurance amounts.
In
2003, CMS released a proposed rule seeking to reduce bad debt reimbursement
rates for certain providers, including SNFs, by 30% over a three-year period.
Subsequently, in early 2006 the Deficit Reduction Act reduced payments to SNFs
for allowable bad debts by 30% effective October 1, 2005 for those individuals
not dually eligible for Medicare and Medicaid. Bad debt payments for the dually
eligible population will remain at 100%. Consistent with this legislation,
CMS
finalized its 2003 proposed rule on August 18, 2006, and the regulations became
effective on October 1, 2006. CMS estimates that implementation of this bad
debt
provision will result in a savings to the Medicare program of $490 million
from
FY 2006 to FY 2010. These reductions in Medicare payments for bad debt could
have a material adverse effect on our operators’ financial condition and
operations, which could adversely affect their ability to meet their payment
obligations to us.
31
Management’s
discussion and analysis of financial condition and results of
operations
The
Deficit Reduction Act also contained a provision governing the therapy caps
that
went into place under Medicare on January 1, 2006. The therapy caps limit
the
physical therapy, speech-language therapy and occupation therapy services
that a
Medicare beneficiary can receive during a calendar year. The therapy caps
were
in effect for calendar year 1999 and then suspended by Congress for three
years.
An inflation-adjusted therapy limit ($1,590 per year) was implemented in
September of 2002, but then once again suspended in December of 2003 by the
Medicare Modernization Act. Under the Medicare Modernization Act, Congress
placed a two-year moratorium on implementation of the caps, which expired
at the
end of 2005.
The
inflation-adjusted therapy caps are set at $1,780 for calendar year 2007. These
caps do not apply to therapy services covered under Medicare Part A in a SNF,
although the caps apply in most other instances involving patients in SNFs
or
long-term care facilities who receive therapy services covered under Medicare
Part B. The Deficit Reduction Act permitted exceptions in 2006 for therapy
services to exceed the caps when the therapy services are deemed medically
necessary by the Medicare program. The Tax Relief and Health Care Act of 2006,
signed into law on December 20, 2006, extends these exceptions through December
31, 2007. Future and continued implementation of the therapy caps could have
a
material adverse effect on our operators’ financial condition and operations,
which could adversely affect their ability to meet their payment obligations
to
us.
In
general, we cannot be assured that federal reimbursement will remain at levels
comparable to present levels or that such reimbursement will be sufficient
for
our lessees or mortgagors to cover all operating and fixed costs necessary
to
care for Medicare and Medicaid patients. We also cannot be assured that there
will be any future legislation to increase Medicare payment rates for SNFs,
and
if such payment rates for SNFs are not increased in the future, some of our
lessees and mortgagors may have difficulty meeting their payment obligations
to
us.
MEDICAID
AND OTHER THIRD-PARTY REIMBURSEMENT
Each
state has its own Medicaid program that is funded jointly by the state and
federal government. Federal law governs how each state manages its Medicaid
program, but there is wide latitude for states to customize Medicaid programs
to
fit the needs and resources of their citizens. Currently, Medicaid is the single
largest source of financing for long-term care in the United States. Rising
Medicaid costs and decreasing state revenues caused by recent economic
conditions have prompted an increasing number of states to cut or consider
reductions in Medicaid funding as a means of balancing their respective state
budgets. Existing and future initiatives affecting Medicaid reimbursement may
reduce utilization of (and reimbursement for) services offered by the operators
of our properties.
In
recent
years, many states have announced actual or potential budget shortfalls. As
a
result of these budget shortfalls, many states have announced that they are
implementing or considering implementing “freezes” or cuts in Medicaid
reimbursement rates, including rates paid to SNF and long-term care providers,
or reductions in Medicaid enrollee benefits, including long-term care benefits.
We cannot predict the extent to which Medicaid rate freezes, cuts or benefit
reductions ultimately will be adopted, the number of states that will adopt
them
or the impact of such adoption on our operators. However, extensive Medicaid
rate cuts, freezes or benefit reductions could have a material adverse effect
on
our operators’ liquidity, financial condition and operations, which could
adversely affect their ability to make lease or mortgage payments to
us.
The
Deficit Reduction Act included $4.7 billion in estimated savings from Medicaid
and the State Children’s Health Insurance Program over five years. The Deficit
Reduction Act gave states the option to increase Medicaid cost-sharing and
reduce Medicaid benefits, accounting for an estimated $3.2 billion in federal
savings over five years. The remainder of the Medicaid savings under the Deficit
Reduction Act comes primarily from changes to prescription drug reimbursement
($3.9 billion in savings over five years) and tightened policies governing
asset
transfers ($2.4 billion in savings over five years).
32
Management’s
discussion and analysis of financial condition and results of
operations
Asset
transfer policies, which determine Medicaid eligibility based on whether
a
Medicaid applicant has transferred assets for less than fair value, became
more
restrictive under the Deficit Reduction Act, which extended the look-back
period
to five years, moved the start of the penalty period and made individuals
with
more than $500,000 in home equity ineligible for nursing home benefits
(previously, the home was excluded as a countable asset for purposes of Medicaid
eligibility). These changes could have a material adverse effect on our
operators’ financial condition and operations, which could adversely affect
their ability to meet their payment obligations to us.
Additional
reductions in federal funding are expected for some state Medicaid programs
as a
result of changes in the percentage rates used for determining federal
assistance on a state-by-state basis. Legislation has been introduced in
Congress that would partially mitigate the reductions for some states that
would
experience significant reductions in federal funding, although whether Congress
will enact this or other legislation remains uncertain.
Finally,
private payors, including managed care payors, increasingly are demanding
discounted fee structures and the assumption by healthcare providers of all
or a
portion of the financial risk of operating a healthcare facility. Efforts to
impose greater discounts and more stringent cost controls are expected to
continue. Any changes in reimbursement policies that reduce reimbursement levels
could adversely affect the revenues of our lessees and mortgagors, thereby
adversely affecting those lessees’ and mortgagors’ abilities to make their
monthly lease or debt payments to us.
FRAUD
AND ABUSE LAWS AND REGULATIONS
There
are
various extremely complex and largely uninterpreted federal and state laws
governing a wide array of referrals, relationships and arrangements and
prohibiting fraud by healthcare providers, including criminal provisions that
prohibit filing false claims or making false statements to receive payment
or
certification under Medicare and Medicaid, and failing to refund overpayments
or
improper payments. The federal and state governments are devoting increasing
attention and resources to anti-fraud initiatives against healthcare providers.
Penalties for healthcare fraud have been increased and expanded over recent
years, including broader provisions for the exclusion of providers from the
Medicare and Medicaid programs. The Office of the Inspector General for the
U.S.
Department of Health and Human Services, or OIG-HHS, has described a number
of
ongoing and new initiatives for 2007 to study instances of potential overbilling
and/or fraud in SNFs and nursing homes under both Medicare and Medicaid. The
OIG-HHS, in cooperation with other federal and state agencies, also continues
to
focus on the activities of SNFs in certain states in which we have properties.
In
addition, the federal False Claims Act allows a private individual with
knowledge of fraud to bring a claim on behalf of the federal government and
earn
a percentage of the federal government’s recovery. Because of these monetary
incentives, these so-called ‘‘whistleblower’’ suits have become more frequent.
Some states currently have statutes that are analogous to the federal False
Claims Act. The Deficit Reduction Act encourages additional states to enact
such
legislation and may encourage increased enforcement activity by permitting
states to retain 10% of any recovery for that state’s Medicaid program if the
enacted legislation is at least as rigorous as the federal False Claims Act.
The
violation of any of these laws or regulations by an operator may result in
the
imposition of fines or other penalties that could jeopardize that operator’s
ability to make lease or mortgage payments to us or to continue operating its
facility.
LEGISLATIVE
AND REGULATORY DEVELOPMENTS
Each
year, legislative and regulatory proposals are introduced or proposed in
Congress and state legislatures as well as by federal and state agencies that,
if implemented, could result in major changes in the healthcare system, either
nationally or at the state level. In addition, regulatory proposals and rules
are released on an ongoing basis that may have major impacts on the healthcare
system generally and the industries in which our operators do business.
Legislative and regulatory developments can be expected to occur on an ongoing
basis at the local, state and federal levels that have direct or indirect
impacts on the policies governing the reimbursement levels paid to our
facilities by public and private third-party payors, the costs of doing business
and the threshold requirements that must be met for facilities to continue
operation or to expand.
The
Medicare Modernization Act, which is one example of such legislation, was
enacted in December 2003. The significant expansion of other benefits for
Medicare beneficiaries under this Act, such as the prescription drug benefit,
could create financial pressures on the Medicare program that might result
in
future legislative and regulatory changes with impacts on our operators.
Although the creation of a prescription drug benefit for Medicare beneficiaries
was expected to generate fiscal relief for state Medicaid programs, the
structure of the benefit and costs associated with its implementation may
mitigate the relief for states that originally was anticipated.
33
Management’s
discussion and analysis of financial condition and results of
operations
The
Deficit Reduction Act is another example of such legislation. The provisions
in
the legislation designed to create cost savings from both Medicare and Medicaid
could diminish reimbursement for our operators under both Medicare and
Medicaid.
CMS
also
launched, in 2002, the Nursing Home Quality Initiative program in 2002, which
requires nursing homes participating in Medicare to provide consumers with
comparative information about the quality of care at the facility. In the fall
of 2007, CMS plans to initiate a new quality campaign, Advancing Excellence
for
America’s Nursing Home Residents, to be conducted over the next two years with
the ultimate goal being improvement in quality of life and efficiency of care
delivery. 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 reimbursement policies that
reward or penalize facilities on the basis of the reported quality of care
parameters.
In
late
2005, CMS began soliciting public comments regarding a demonstration to examine
pay-for-performance approaches in the nursing home setting that would offer
financial incentives for facilities delivering high quality care. In June 2006,
Abt Associates published recommendations for CMS on how to design this
demonstration project. The two-year demonstration is slated to begin in October
2007 and will run through September, 2009. Other proposals under consideration
include efforts by individual states to control costs by decreasing state
Medicaid reimbursements in the current or future fiscal years and federal
legislation addressing various issues, such as improving quality of care and
reducing medical errors throughout the health care industry. We cannot
accurately predict whether specific proposals will be adopted or, if adopted,
what effect, if any, these proposals would have on operators and, thus, our
business.
The
following significant highlights occurred during the twelve-month period ended
December 31, 2006.
Financing
·
|
In
January 2006, we redeemed the remaining 20.7% of our $100 million
aggregate principal amount of 6.95% notes due 2007 that were not
otherwise
tendered in 2005.
|
Dividends
·
|
In
2006, we paid common stock dividends of $0.23, $0.24, $0.24 and
$0.25 per
share, for stockholders of record on January 31, 2006, April 28,
2006,
July 31, 2006 and November 3, 2006,
respectively.
|
New
Investments
·
|
In
August 2006, we closed on $171 million of new investments and leased
them
to existing third-party operators.
|
·
|
In
September 2006, we closed on $25.0 million of investments with
an existing
third-party operator.
|
·
|
On
October 20, 2006, we restructured our relationship with Advocat,
which
restructuring included a rent increase of $0.7 million annually
and a term
extension to September 30, 2018.
|
34
Management’s
discussion and analysis of financial condition and results of
operations
ASSET
SALES AND OTHER
·
|
In
August 2006, we sold our common stock investment in Sun Healthcare
Group,
Inc., or Sun, for $7.6 million of cash
proceeds.
|
·
|
In
June 2006, a $10 million mortgage was paid-off in
full.
|
·
|
In
March 2006, Haven Eldercare, LLC, or Haven, paid $39 million on
a $62
million mortgage it has with us.
|
·
|
Throughout
2006, in various transactions, we sold three SNFs and one assisted
living
facility, or ALF, for cash proceeds of approximately $1.6
million.
|
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
preparation of financial statements in conformity with generally accepted
accounting principles , or GAAP, in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our significant accounting policies are described
in Note 2 to our audited consolidated financial statements. These policies
were
followed in preparing the consolidated financial statements for all periods
presented. Actual results could differ from those estimates.
We
have
identified four significant accounting policies 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
Rental
income and mortgage interest income are recognized as earned over the terms
of
the related master leases and mortgage 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,”
or SAB
101, 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 general condition of the industry and various other factors
when evaluating whether all possible contingencies have been eliminated. We
have
historically not included, and generally expect in the future not to include,
contingent rents as income until received. We follow a policy related to rental
income whereby we typically consider a lease to be non-performing after 90
days
of non-payment of past due amounts and do not recognize unpaid rental income
from that lease until the amounts have been received.
In
the
case of rental revenue recognized on a straight-line basis, we
will
generally discontinue recording rent on a straight-line basis if the lessee
becomes delinquent in rent owed under the terms of the lease. Reserves
are taken 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. Once
the
recording of straight-line rent is suspended, we will evaluate the
collectibility of the related straight-line rent asset. If it is determined
that
the delinquency is temporary, we will resume booking rent on a straight-line
basis once payment is received for past due rents,
after
taking into account application of security deposits. 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.
35
Management’s
discussion and analysis of financial condition and results of
operations
Recognizing
rental income on a straight-line basis results in recognized revenue exceeding
contractual amounts due from our tenants. Such cumulative excess amounts
are
included in accounts receivable and were $20.0 million and $13.8 million,
net of
allowances, at December 31, 2006 and 2005, respectively.
Gains
on
sales of real estate assets are recognized pursuant to the provisions of SFAS
No. 66, Accounting
for Sales of Real Estate.
The
specific timing of the recognition of the sale and the related gain is measured
against the various criteria in SFAS No. 66 related to the terms of the
transactions and any continuing involvement associated with the assets sold.
To
the extent the sales criteria are not met, we defer gain recognition until
the
sales criteria are met.
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 25 to 40 years for buildings and improvements
and 3 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, 2006, 2005, and 2004, we recognized impairment losses
of $0.5 million, $9.6 million and $0.0 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 these indicators are permanent, then the loan is written
down to the present value of the expected future cash flows. In cases where
expected future cash flows cannot be estimated, the loan is written down to
the
fair value of the collateral. The fair value of the loan is determined by market
research, which includes valuing the property as a nursing home as well as
other
alternative uses. We recorded loan impairments of $0.9 million, $0.1 million
and
$0.0 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
In
accordance with FASB Statement No. 114, Accounting by Creditors for Impairment
of a Loan and FASB Statement No. 118, Accounting by Creditors for Impairment
of
a Loan - Income Recognition and Disclosures, 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 5 - Other Investments to our consolidated financial
statements for the year ended December 31, 2006 included elsewhere
herein).
36
Management’s
discussion and analysis of financial condition and results of
operations
ASSETS
HELD FOR SALE AND DISCONTINUED OPERATIONS
Pursuant
to the provisions of SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,
the
operating results of specified real estate assets that have been sold, or
otherwise qualify as held for disposition (as defined by SFAS No. 144), are
reflected as discontinued operations in the consolidated statements of
operations for all periods presented. We had six assets held for sale as of
December 31, 2006 with a combined net book value of $3.6 million.
RESULTS
OF OPERATIONS
The
following is our discussion of the consolidated results of operations, financial
position and liquidity and capital resources, which should be read in
conjunction with our audited consolidated financial statements and accompanying
notes.
Year
Ended December 31, 2006 compared to Year Ended December 31,
2005
Operating
Revenues
Our
operating revenues for the year ended December 31, 2006 totaled $135.7 million,
an increase of $26.0 million, over the same period in 2005. The $26.0 million
increase was primarily a result of new investments made throughout 2005 and
2006. The increase in operating revenues from new investments was partially
offset by a reduction in mortgage interest income and one-time contractual
interest revenue associated with the payoff of a mortgage during the first
quarter of 2005.
Detailed
changes in operating revenues for
the
year ended December 31, 2006
are as
follows:
·
|
Rental
income was $127.1 million, an increase of $31.6 million over the
same
period in 2005. The increase was due to new leases entered into
throughout
2006 and 2005, as well as rental revenue from the consolidation
of a
variable interest entity, or VIE.
|
·
|
Mortgage
interest income totaled $4.4 million, a decrease of $2.1 million
over the
same period in 2005. The decrease was primarily the result of normal
amortization, a $60 million loan payoff that occurred in the first
quarter
of 2005 and a $10 million loan payoff that occurred in the second
quarter
of 2006.
|
·
|
Other
investment income totaled $3.7 million, an increase of $0.5 million
over
the same period in 2005. The primary reason for the increase was
due to
dividends and accretion income associated with the Advocat
securities.
|
·
|
Miscellaneous
revenue was $0.5 million, a decrease of $4.0 million over the same
period
in 2005. The decrease was due to contractual revenue owed to us
resulting
from a mortgage note prepayment that occurred in the first quarter
of
2005.
|
Operating
Expenses
Operating
expenses for the year ended December 31, 2006 totaled $46.6 million, an increase
of approximately $13.0 million over the same period in 2005. The increase was
primarily due to $8.3 million of increased depreciation expense, $3.3 million
of
incremental restricted stock expense and a $0.8 million provision for
uncollectible notes receivable, partially offset by a 2005 leasehold termination
expense for $1.1 million.
37
Management’s
discussion and analysis of financial condition and results of
operations
Detailed
changes in our operating expenses for the year ended December 31, 2006 versus
the same period in 2005 are as follows:
·
|
Our
depreciation and amortization expense was $32.1 million, compared
to $23.9
million for the same period in 2005. The increase is due to new
investments placed throughout 2005 and 2006, as well as depreciation
from
the consolidation of a VIE.
|
·
|
Our
general and administrative expense, when excluding restricted stock
amortization expense and compensation expense related to the performance
restricted stock units, was $9.2 million, compared to $7.4 million
for the
same period in 2005. The increase was primarily due to $1.2 million
of
restatement related expenses and normal inflationary increases
in goods
and services.
|
|
·
|
For
the year ended December 31, 2006, in accordance with FAS No.
123R, we
recorded approximately $3.3 million (included in general and
administrative expense) of compensation expense associated with
the
performance restricted stock units (see Note 12 - Stockholders’ Equity and
Stock Based Compensation to our consolidated financial statements
for the
year ended December 31, 2006 included elsewhere
herein).
|
·
|
In
2006, we recorded a $0.8 million provision for uncollectible notes
receivable.
|
·
|
In
2005, we recorded a $1.1 million lease expiration accrual relating
to
disputed capital improvement requirements associated with a lease
that
expired June 30, 2005.
|
Other
Income (Expense)
For
the
year ended December 31, 2006, our total other net expenses were $31.8 million
as
compared to $36.3 million for the same period in 2005. 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, 2006
was $42.2
million, compared to $29.9 million for the same period in 2005.
The
increase of $13.3 million was primarily due to higher debt on our
balance
sheet versus the same period in 2005 and from consolidation of
interest
expense from a VIE in 2006.
|
·
|
For
the year ended December 31, 2006, we sold our remaining 760,000
shares of
Sun’s common stock 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 5 - Other Investments to our
consolidated financial statements for the year ended December 31,
2006
included elsewhere herein).
|
·
|
For
the year ended December 31, 2006, we recorded a $3.6 million gain
on
Advocat securities (see Note 5 - Other Investments to our consolidated
financial statements for the year ended December 31, 2006 included
elsewhere herein).
|
·
|
For
the year ended December 31, 2006, we recorded a $0.8 million 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.
|
38
Management’s
discussion and analysis of financial condition and results of
operations
·
|
During
the year ended December 31, 2005, we recorded a $3.4 million provision
for
impairment of an equity security. In accordance with FASB No. 115,
the
$3.4 million provision for impairment was to write-down our 760,000
share
investment in Sun’s common stock to its then current fair market
value.
|
·
|
For
the year ended December 31, 2005, we recorded $1.6 million in net
cash
proceeds resulting from settlement of a lawsuit filed suit filed
by us
against a former tenant.
|
2006
Taxes
So
long
as we qualify as a REIT and, among other things, we distribute 90% of our
taxable income, we will not be subject to Federal income taxes on our income,
except as described below. For tax year 2006, preferred and common dividend
payments of approximately $67 million made throughout 2006 satisfy the 2006
REIT
requirements relating to qualifying income. We are permitted to own up to 100%
of a “taxable REIT subsidiary,” or TRS. Currently, we have two TRSs that are
taxable as corporations and that pay federal, state and local income tax on
their net income at the applicable corporate rates. These TRSs had net operating
loss carry-forwards as of December 31, 2006 of $12 million. These loss
carry-forwards were fully reserved with a valuation allowance due to
uncertainties regarding realization.
During
the fourth quarter of 2006, we determined that certain terms of the Advocat
Series B non-voting, redeemable convertible preferred stock held by us could
be
interpreted as affecting our compliance with federal income tax rules applicable
to REITs regarding related party tenant income. As such, Advocat, one of our
lessees, may be deemed to be a “related party tenant” under applicable federal
income tax rules. In such event, our rental income from Advocat would not be
qualifying income under the gross income tests that are applicable to REITs.
In
order to maintain qualification as a REIT, we annually must satisfy certain
tests regarding the source of our gross income. The applicable federal income
tax rules provide a “savings clause” for REITs that fail to satisfy the REIT
gross income tests if such failure is due to reasonable cause. A REIT that
qualifies for the savings clause will retain its REIT status but will pay a
tax
under section 857(b)(5) and related interest. On December 15, 2006, we submitted
to the IRS a request for a closing agreement to resolve the “related party
tenant” issue. Since that time, we have had additional conversations with the
IRS, who has encouraged us to move forward with the process of obtaining a
closing agreement, and we have submitted additional documentation in support
of
the issuance of a closing agreement with respect to this matter. While we
believe there are valid arguments that Advocat should not be deemed a “related
party tenant,” the matter still is not free from doubt, and we believe it is in
our best interest to proceed with the request for a closing agreement with
the
IRS in order to resolve the matter, minimize potential interest charges and
obtain assurances regarding its continuing REIT status. If obtained, a closing
agreement will establish that any failure to satisfy the gross income tests
was
due to reasonable cause. In the event that it is determined that the “savings
clause” described above does not apply, we could be treated as having failed to
qualify as a REIT for one or more taxable years.
As
a
result of the potential related party tenant issue described above and further
discussed in Note 10 - Taxes,
we
have recorded a $2.3
million and $2.4 million provision for income taxes,
including related interest expense,
for the
year ended December 31, 2006 and 2005, respectively.
The
amount accrued represents the estimated liability and interest, which remains
subject to final resolution and therefore is subject to change. In addition,
in
October 2006, we restructured our Advocat relationship and have been advised
by
tax counsel that we will not receive any non-qualifying related party tenant
income from Advocat in future fiscal years. Accordingly, we do not expect to
incur tax expense associated with related party tenant income in future periods
commencing January 1, 2007, assuming we enter into a closing agreement with
the
IRS that recognizes that reasonable cause existed for any failure to satisfy
the
REIT gross income tests as explained above.
2006
Loss from Discontinued Operations
Discontinued
operations relate to properties we disposed of in 2006 or are currently
held-for-sale and are accounted for as discontinued operations under SFAS No.
144. For the year ended December 31, 2006, we sold three SNFs and one ALF
resulting in an accounting gain of approximately $0.2 million.
At
December 31, 2006, we had six assets held for sale with a net book value of
approximately $3.6 million.
39
Management’s
discussion and analysis of financial condition and results of
operations
During
the three months ended March 31, 2006, a $0.1 million provision for impairment
charge was recorded to reduce the carrying value to its sales price of one
facility that was under contract to be sold that was subsequently sold during
the second quarter of 2006. During the three months ended December 31, 2006,
a
$0.4 million impairment charge was recorded to reduce the carrying value of
two
facilities, currently under contract to be sold in the first quarter of 2007,
to
their respective sales price.
In
accordance with SFAS No. 144, the $0.2 million realized net gain is reflected
in
our consolidated statements of operations as discontinued operations. See Note
18 - Discontinued Operations
to our
consolidated financial statements for the year ended December 31, 2006 included
elsewhere herein.
Funds
From Operations
Our
funds
from operations available to common stockholders, or FFO, for the year ended
December 31, 2006, was $76.7 million, compared to $42.7 million for the same
period in 2005.
We
calculate and report FFO in accordance with the definition and interpretive
guidelines issued by the National Association of Real Estate Investment Trusts,
or 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, 2006
and 2005:
Year
Ended December 31,
|
|||||||
2006
|
2005
|
||||||
Net
income available to common
|
$
|
45,774
|
$
|
25,355
|
|||
Deduct
gain from real estate dispositions(1)
|
(1,354
|
)
|
(7,969
|
)
|
|||
44,420
|
17,386
|
||||||
Elimination
of non-cash items included in net income:
|
|||||||
Depreciation
and amortization(2)
|
32,263
|
25,277
|
|||||
Funds
from operations available to common stockholders
|
$
|
76,683
|
$
|
42,663
|
(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 $1.2 million from
a
distribution from an investment in a limited partnership in 2006
and $0.2
million gain and $8.0 million gain related to facilities classified
as
discontinued operations for the year ended December 31, 2006 and
2005,
respectively.
|
(2)
|
The
add back of depreciation and amortization includes the facilities
classified as discontinued operations in our consolidated financial
statements. FFO for 2006 and 2005 includes depreciation and amortization
of $0.2 million and $1.4 million, respectively, related to facilities
classified as discontinued
operations.
|
40
Management’s
discussion and analysis of financial condition and results of
operations
Year
Ended December 31, 2005 compared to Year Ended December 31, 2004
Operating
Revenues
Our
operating revenues for the year ended December 31, 2005 totaled $109.6 million,
an increase of $22.7 million, over the same period in 2004. The $22.7 million
increase was primarily a result of new investments made throughout 2004 and
2005, contractual interest revenue associated with the payoff of a mortgage
note, re-leasing and restructuring activities completed throughout 2004 and
2005. The increase in operating revenues from new investments was partially
offset by a reduction in mortgage interest income.
Detailed
changes in operating revenues for
the
year ended December 31, 2005
are as
follows:
·
|
Rental
income was $95.4 million, an increase of $25.7 million over the
same
period in 2004. The increase was primarily due to new leases
entered into
throughout 2004 and 2005, re-leasing and restructuring
activities.
|
·
|
Mortgage
interest income totaled $6.5 million, a decrease of $6.7 million
over the
same period in 2004. The decrease is primarily the result of normal
amortization and a $60 million loan payoff that occurred in the
first
quarter of 2005.
|
·
|
Other
investment income totaled $3.2 million, an increase of $0.1 million
over
the same period in 2004. The primary reason for the increase was
due to
dividends and accretion income associated with the Advocat
securities.
|
·
|
Miscellaneous
revenue was $4.5 million, an increase of $3.6 million over the
same period
in 2004. The increase was due to contractual revenue owed to us
as a
result of a mortgage note
prepayment.
|
Operating
Expenses
Operating
expenses for the year ended December 31, 2005 totaled $33.6 million, an increase
of approximately $5.9 million over the same period in 2004. The increase was
primarily due to $5.0 million of increased depreciation expense and a $1.1
million lease expiration accrual recorded in 2005.
Detailed
changes in our operating expenses for
the
year ended December 31, 2005
are as
follows:
·
|
Our
depreciation and amortization expense was $23.9 million, compared
to $18.8
million for the same period in 2004. The increase is due to new
investments placed throughout 2004 and
2005.
|
·
|
Our
general and administrative expense, when excluding restricted stock
amortization expense, was $7.4 million, compared to $7.7 million
for the
same period in 2004.
|
·
|
A
$0.1 million provision for uncollectible notes receivable was recorded
in
2005.
|
·
|
A
$1.1 million lease expiration accrual was recorded in 2005 relating
to
disputed capital improvement requirements associated with a lease
that
expired June 30, 2005.
|
Other
Income (Expense)
For
the
year ended December 31, 2005, our total other net expenses were $36.3 million
as
compared to $45.5 million for the same period in 2004. 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, 2005
was $29.9
million, compared to $23.1 million for the same period 2004. The
increase
of $6.8 million was primarily due to higher debt on our balance
sheet
versus the same period in
2004.
|
41
Management’s
discussion and analysis of financial condition and results of
operations
·
|
For
the year ended December 31, 2005, we recorded a $2.8 million
non-cash
charge associated with the tender and purchase of 79.3% of our
$100
million aggregate principal amount of 6.95% unsecured notes due
2007.
|
·
|
For
the year ended December 31, 2005, we recorded a $3.4 million provision
for
impairment on an equity security. In accordance with FASB Statement
No.
115, Accounting
for Certain Investments in Debt and Equity Securities,
we recorded the provision for impairment to write-down our 760,000
share
investment in Sun common stock to its then current fair market
value of
$4.9 million.
|
·
|
For
the year ended December 31, 2004, we recorded $19.1 million of
refinancing-related charges associated with refinancing our capital
structure. The $19.1 million consists of a $6.4 million exit fee
paid to
our old bank syndication and a $6.3 million non-cash deferred financing
cost write-off associated with the termination of our $225 million
credit
facility and our $50 million acquisition facility, and a loss of
approximately $6.5 million associated with the sale of an interest
rate
cap.
|
·
|
For
the year ended December 31, 2004, we recorded a $1.1 million fair
value
adjustment to reflect the change in fair value during 2004 of our
derivative instrument (i.e., the conversion feature of a redeemable
convertible preferred stock security in Advocat, a publicly traded
company; see Note 5 - Other
Investments).
|
·
|
For
the year ended December 31, 2004, we recorded a $3.0 million charge
associated with professional liability claims made against our
former
owned and operated
facilities.
|
2005
Taxes
As
a
result of the possible related party tenant issue discussed in Note 10 - Taxes
to our consolidated financial statements for the year ended December 31, 2006
included elsewhere herein, we have recorded a $2.4 million and $0.4 million
provision for income tax for the years ended December 31, 2005 and 2004,
respectively. The amount accrued represents the estimated liability and
interest, which remains subject to final resolution and therefore is subject
to
change. In addition, in October 2006, we restructured our Advocat relationship
and have been advised by tax counsel that we will not receive any non-qualifying
related party tenant income from Advocat in future fiscal years. Accordingly,
we
do not expect to incur tax expense associated with related party tenant income
in future periods commencing January 1, 2007, assuming we enter into a closing
agreement with the IRS that recognizes that reasonable cause existed for any
failure to satisfy the REIT gross income tests as explained above.
In
addition, for
tax year
2005, preferred and common dividend payments of approximately $56 million made
throughout 2005 satisfy the 2005 REIT requirements relating to qualifying income
(which states we must distribute at least 90% of our REIT taxable income for
the
taxable year and meet certain other conditions). We are permitted to own up
to
100% of a TRS. Currently we have two TRSs that are taxable as corporations
and
that pay federal, state and local income tax on their net income at the
applicable corporate rates. These TRSs had net operating loss carry-forwards
as
of December 31, 2005 of $14.4 million. These loss carry-forwards were fully
reserved with a valuation allowance due to uncertainties regarding
realization.
2005
Income from Discontinued Operations
Discontinued
operations relate to properties we disposed of in 2005 or are currently
held-for-sale and are accounted for as discontinued operations under SFAS No.
144. For the year ended December 31, 2005, we sold eight SNFs, six ALFs and
50.4
acres of undeveloped land for combined cash proceeds of approximately $53
million, net of closing costs and other expenses, resulting in a combined
accounting gain of approximately $8.0 million.
During
the year ended December 31, 2005, a combined $9.6 million provision for
impairment charge was recorded to reduce the carrying value on several
facilities, some of which were subsequently closed, to their estimated fair
values.
42
Management’s
discussion and analysis of financial condition and results of
operations
In
accordance with SFAS No. 144, the $8.0 million realized net gain as well as
the
combined $9.6 million impairment charge is reflected in our consolidated
statements of operations as discontinued operations.
Funds
From Operations
Our
FFO
for the year ended December 31, 2005, was $42.7 million, compared to a deficit
of $18.5 million, for the same period in 2004.
We
calculate and report FFO in accordance with the definition and interpretive
guidelines issued by NAREIT, and, consequently, FFO is defined as net income
available to common stockholders, adjusted for the effects of asset dispositions
and certain non-cash items, primarily depreciation and amortization. We believe
that FFO is an important supplemental measure of our operating performance.
Because the historical cost accounting convention used for real estate assets
requires depreciation (except on land), such accounting presentation implies
that the value of real estate assets diminishes predictably over time, while
real estate values instead have historically risen or fallen with market
conditions. The term FFO was designed by the real estate industry to address
this issue. FFO herein is not necessarily comparable to FFO of other REITs
that
do not use the same definition or implementation guidelines or interpret the
standards differently from us.
We
use
FFO as one of several criteria to measure operating performance of our business.
We further believe that by excluding the effect of depreciation, amortization
and gains or losses from sales of real estate, all of which are based on
historical costs and which may be of limited relevance in evaluating current
performance, FFO can facilitate comparisons of operating performance between
periods and between other REITs. We offer this measure to assist the users
of
our financial statements in evaluating our financial performance under GAAP,
and
FFO should not be considered a measure of liquidity, an alternative to net
income or an indicator of any other performance measure determined in accordance
with GAAP. Investors and potential investors in our securities should not rely
on this measure as a substitute for any GAAP measure, including net
income.
In
February 2004, NAREIT informed its member companies that it was adopting the
position of the SEC with respect to asset impairment charges and would no longer
recommend that impairment write-downs be excluded from FFO. In the tables
included in this disclosure, we have applied this interpretation and have not
excluded asset impairment charges in calculating our FFO. As a result, our
FFO
may not be comparable to similar measures reported in previous disclosures.
According to NAREIT, there is inconsistency among NAREIT member companies as
to
the adoption of this interpretation of FFO. Therefore, a comparison of our
FFO
results to another company’s FFO results may not be meaningful.
The
following table presents our FFO results for the years ended December 31, 2005
and 2004:
Year
Ended December 31,
|
|||||||
2005
|
2004
|
||||||
Net
income (loss) available to common
|
$
|
25,355
|
$
|
(36,715
|
)
|
||
Deduct
gain from real estate dispositions(1)
|
(7,969
|
)
|
(3,310
|
)
|
|||
17,386
|
(40,025
|
)
|
|||||
Elimination
of non-cash items included in net income (loss):
|
|||||||
Depreciation
and amortization(2)
|
25,277
|
21,551
|
|||||
Funds
from operations available to common stockholders
|
$
|
42,663
|
$
|
(18,474
|
)
|
(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 $8.0 million gain
and
$3.3 million gain related to facilities classified as discontinued
operations for the year ended December 31, 2005 and 2004,
respectively.
|
(2)
|
The
add back of depreciation and amortization includes the facilities
classified as discontinued operations in our consolidated financial
statements. FFO for 2005 and 2004 includes depreciation and amortization
of $1.4 million and $2.7 million, respectively, related to facilities
classified as discontinued
operations.
|
43
Management’s
discussion and analysis of financial condition and results of
operations
Portfolio
Developments, New Investments and Recent Developments
The
partial expiration of certain Medicare rate increases has had an adverse impact
on the revenues of the operators of nursing home facilities and has negatively
impacted some operators’ ability to satisfy their monthly lease or debt payment
to us. In several instances, we hold security deposits that can be applied
in
the event of lease and loan defaults, subject to applicable limitations under
bankruptcy law with respect to operators seeking protection under title 11
of
the United States Code, 11 U.S.C. §§ 101-1330, as amended and supplemented, or
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, 2006.
New
Investments and Re-leasing Activities
Advocat,
Inc.
On
October 20, 2006, we restructured our relationship with Advocat, or the Second
Advocat Restructuring, by entering into a Restructuring Stock Issuance and
Subscription Agreement with Advocat, or the 2006 Advocat Agreement. Pursuant
to
the 2006 Advocat Agreement, we exchanged the Advocat Series B preferred stock
and subordinated note issued to us in November 2000 in connection with a
restructuring because Advocat was in default on its obligations to us, or the
Initial Advocat Restructuring, for 5,000 shares of Advocat’s Series C
non-convertible, redeemable (at our option after September 30, 2010) preferred
stock with a face value of approximately $4.9 million and a dividend rate of
7%
payable quarterly, and a secured non-convertible subordinated note in the amount
of $2.5 million maturing September 30, 2007 and bearing interest at 7% per
annum. As part of the Second Advocat Restructuring, we also amended our
Consolidated Amended and Restated Master Lease by and between one of its
subsidiaries, as lessor, and a subsidiary of Advocat, as lessee, to commence
a
new 12-year lease term through September 30, 2018 (with a renewal option for
an
additional 12 year term) and Advocat agreed to increase the master lease annual
rent by approximately $687,000 to approximately $14 million commencing on
January 1, 2007.
The
Second Advocat Restructuring has been accounted for as a new lease in accordance
with FASB Statement No. 13, Accounting
for Leases, or
FAS No.
13, and FASB Technical Bulletin No. 88-1, Issues
Relating to Accounting for Leases,
or FASB
TB No. 88-1. The fair value of the assets exchanged in the restructuring (i.e.,
the Series B non-voting redeemable convertible preferred stock and the secured
convertible subordinated note, with a fair value of $14.9 million and $2.5
million, respectively, at October 20, 2006) in excess of the fair value of
the
assets received (the Advocat Series C non-convertible redeemable preferred
stock
and the secured non-convertible subordinated note, with a fair value of $4.1
million and $2.5 million, respectively, at October 20, 2006) have been recorded
as a lease inducement asset of approximately $10.8 million in the fourth quarter
of 2006. The $10.8 million lease inducement asset is included in accounts
receivable-net on our consolidated balance sheet and will be amortized as a
reduction to rental income on a straight-line basis over the term of the new
master lease. The exchange of securities also resulted in a gain in 2006 of
approximately $3.6 million representing: (i) the fair value of the secured
convertible subordinated note of $2.5 million, previously reserved and (ii)
the
realization of the gain on investments previously classified as other
comprehensive income of approximately $1.1 million relating to the Series B
non-voting redeemable convertible preferred stock.
Guardian
LTC Management, Inc.
On
September 1, 2006, we completed a $25.0 million investment with subsidiaries
of
Guardian LTC Management, Inc., or Guardian, an existing operator of ours. The
transaction involved the purchase and leaseback of a SNF in Pennsylvania and
termination of a purchase option on a combination SNF and rehabilitation
hospital in West Virginia owned by us. The facilities were included in an
existing master lease with Guardian with an increase in contractual annual
rent
of approximately $2.6 million in the first year. The master lease now includes
17 facilities. In addition, the master lease term was extended from October
2014
through August 2016.
In
accordance with FAS No. 13 and FASB TB No. 88-1 $19.2 million of the $25.0
million transaction amount will be accounted for as a lease inducement and
is
classified within accounts receivable - net on our consolidated balance sheets.
The lease inducement will be amortized as a reduction to rental income on a
straight-line basis over the term of the new master lease. The remaining payment
to Guardian of $5.8 million will be allocated to the purchase of the
Pennsylvania SNF.
44
Management’s
discussion and analysis of financial condition and results of
operations
Litchfield
Transaction
On
August
1, 2006, we completed a transaction with Litchfield Investment Company, LLC
and
its affiliates, or Litchfield, to purchase 30 SNFs and one independent living
center for a total investment of approximately $171 million. The facilities
total 3,847 beds and are located in the states of Colorado (5), Florida (7),
Idaho (1), Louisiana (13), and Texas (5). The facilities were subject to master
leases with three national healthcare providers, which are existing tenants
of
the Company. The tenants are Home Quality Management, Inc., or HQM, Nexion
Health, Inc., or Nexion, and Peak Medical Corporation, which was acquired by
Sun
Healthcare Group, Inc. or Sun, in December of 2005.
Simultaneously
with the close of the purchase transaction, the seven HQM facilities were
combined into an Amended and Restated Master Lease containing 13 facilities
between us and HQM. In addition, the 18 Nexion facilities were combined into
an
Amended and Restated Master Lease containing 22 facilities between us and
Nexion.
We
entered into a Master Lease, Assignment and Assumption Agreement with Litchfield
on the six Sun facilities. These six facilities are currently under a master
lease that expires on September 30, 2007.
Haven
Eldercare, LLC
During
the three months ending March 31, 2006, Haven Eldercare, LLC , or Haven, an
existing operator of ours, entered into a $39 million first mortgage loan with
General Electric Capital Corporation, or GE Loan. Haven used the $39 million
of
proceeds to partially repay on a $62 million mortgage it has with us.
Simultaneously, we subordinated the payment of our remaining $23 million on
the
mortgage note, due in October 2012, to that of the GE Loan. As a result of
this
transaction, the interest rate on our remaining mortgage note to Haven rose
from
10% to approximately 15%, with annual escalators.
In
conjunction with the above transactions and the application of Financial
Accounting Standards Board Interpretation No. 46R, Consolidation of Variable
Interest Entities, or FIN 46R, we consolidated the financial statements and
related real estate of this Haven entity into our financial statements. The
consolidation resulted in the following changes to our consolidated balance
sheet as of December 31, 2006: (1) an increase in total gross investments of
$39.0 million; (2) an increase in accumulated depreciation of $1.6 million;
(3)
an increase in accounts receivable-net of $0.1 million relating to straight-line
rent; (4) an increase in other long-term borrowings of $39.0 million; and (5)
a
reduction of $1.5 million in cumulative net earnings for the year ended December
31, 2006 due to the increased depreciation expense offset by straight-line
rental revenue. General Electric Capital Corporation and Haven’s other creditors
do not have recourse to our assets. We have an option to purchase the mortgaged
facilities for a fixed price in 2012. Our results of operations reflect the
effects of the consolidation of this entity, which is being accounted for
similarly to our other purchase-leaseback transactions.
Assets
Held for Sale
·
|
We
had six assets held for sale as of December 31, 2006 with a net
book value
of approximately $3.6 million. We had eight assets held for sale
as of
December 31, 2005 with a combined net book value of $5.8 million,
which
includes a reclassification of five assets with a net book value
of $4.6
million that were sold or reclassified as held for sale during
2006.
|
· |
During
the three months ended March 31, 2006, a $0.1 million provision
for
impairment charge was recorded to reduce the carrying value to
its sales
price of one facility that was under contract to be sold that was
subsequently sold during the second quarter of 2006. During the
three
months ended December 31, 2006, a $0.4 million impairment charge
was
recorded to reduce the carrying value of two facilities, currently
under
contract to be sold in the first quarter of 2007, to their respective
sales price.
|
45
Management’s
discussion and analysis of financial condition and results of
operations
Asset
Dispositions and Mortgage Payoffs in 2006
Hickory
Creek Healthcare Foundation, Inc.
On
June
16, 2006, we received approximately $10 million in proceeds on a mortgage loan
payoff. We held mortgages on 15 facilities located in Indiana, representing
619
beds.
Other
Asset Sales
·
|
For
the three-month period ended December 31, 2006, we sold an ALF
in Ohio
resulting in an accounting gain of approximately $0.4
million.
|
·
|
For
the three-month period ended June 30, 2006, we sold two SNFs in
California
resulting in an accounting loss of approximately $0.1
million.
|
·
|
For
the three-month period ended March 31, 2006, we sold a SNF in Illinois
resulting in an accounting loss of approximately $0.2
million.
|
In
accordance with SFAS No. 144, all related revenues and expenses as well as
the
$0.2 million realized net gain from the above mentioned facility sales are
included within discontinued operations in our consolidated statements of
operations for their respective time periods.
LIQUIDITY
AND CAPITAL RESOURCES
At
December 31, 2006, we had total assets of $1.2 billion, stockholders’ equity of
$465.5 million and debt of $676.1 million, representing approximately 59.2%
of
total capitalization.
The
following table shows the amounts due in connection with the contractual
obligations described below as of December 31, 2006.
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)
|
$
|
676,410
|
$
|
415
|
$
|
900
|
$
|
150,785
|
$
|
524,310
|
||||||
Other
long-term liabilities
|
513
|
236
|
277
|
-
|
-
|
|||||||||||
Total
|
$
|
676,923
|
$
|
651
|
$
|
1,177
|
$
|
150,785
|
$
|
524,310
|
(1) |
The
$676.4 million includes $310 million aggregate principal amount of
7.0%
Senior Notes due 2014, $175 million principal amount of 7.0% Senior
Notes
due 2016, $150.0 million borrowings under the new $200 million revolving
secured credit facility (“New Credit Facility”), which matures in March
2010 and Haven’s $39 million first mortgage loan with General electric
Capital Corporation that expires in
2012.
|
Financing
Activities and Borrowing Arrangements
Bank
Credit Agreements
At
December 31, 2006, we had $150.0 million outstanding under our $200 million
revolving senior secured credit facility, or he New Credit Facility, and $2.5
million was utilized for the issuance of letters of credit, leaving availability
of $47.5 million. The $150.0 million of outstanding borrowings had a blended
interest rate of 6.60% at December 31, 2006. The New Credit Facility, entered
into on March 31, 2006, is being provided by Bank of America, N.A., as
Administrative Agent, Deutsche Bank Trust Company Americas, UBS Securities
LLC,
General Electric Capital Corporation, LaSalle Bank N.A., and Citicorp North
America, Inc. and will be used for acquisitions and general corporate
purposes.
46
Management’s
discussion and analysis of financial condition and results of
operations
The
New
Credit Facility replaced our previous $200 million senior secured credit
facility, or the Prior Credit Facility, that was terminated on March 31, 2006.
The New Credit Facility matures on March 31, 2010, and includes an “accordion
feature” that permits us to expand our borrowing capacity to $300 million during
our first two years. 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.
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, 2006, we were in
compliance with all property level and corporate financial
covenants.
$100
Million Aggregate Principal Amount of 6.95% Unsecured Notes Tender and
Redemption
On
December 16, 2005, we initiated a tender offer and consent solicitation for
all
of our outstanding $100 million aggregate principal amount 6.95% notes due
2007,
or the 2007 Notes. On December 30, 2005, we accepted for purchase 79.3% of
the
aggregate principal amount of the 2007 Notes outstanding that were tendered.
On
December 30, 2005, our Board of Directors also authorized the redemption of
all
outstanding 2007 Notes that were not otherwise tendered. On December 30, 2005,
upon our irrevocable funding of the full redemption price for the 2007 Notes
and
certain other acts required by the Indenture governing the 2007 Notes, the
Trustee of the 2007 Notes certified in writing to us, or the Certificate of
Satisfaction and Discharge, that the Indenture was satisfied and discharged
as
of December 30, 2005, except for certain provisions. In accordance with FASB
Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities,
we
removed 79.3% of the aggregate principal amount of the 2007 Notes, which were
tendered in our tender offer and consent solicitation, and the corresponding
portion of the funds held in trust by the Trustee to pay the tender price from
our balance sheet and recognized $2.8 million of additional interest expense
associated with the tender offer. On January 18, 2006, we completed the
redemption of the remaining 2007 Notes not otherwise tendered. In connection
with the redemption and in accordance with FASB No. 140, we recognized $0.8
million of additional interest expense in the first quarter of 2006. As of
January 18, 2006, none of the 2007 Notes remained outstanding.
$175
Million Aggregate Principal Amount of 7% Unsecured Notes
Issuance
On
December 30, 2005, we closed on a private offering of $175 million of 7% senior
unsecured notes due 2016, or 2016 Notes, at an issue price of 99.109% of the
principal amount of the notes (equal to a per annum yield to maturity of
approximately 7.125%), resulting in gross proceeds to us of approximately $173.4
million. The 2016 Notes are unsecured senior obligations to us, which have
been
guaranteed by our subsidiaries. The 2016 Notes were issued in a private
placement to qualified institutional buyers under Rule 144A under the Securities
Act of 1933, or the Securities Act. A portion of the proceeds of this private
offering was used to pay the tender price and redemption price of the 2007
Notes. On February 24, 2006, we filed a registration statement on Form S-4
under
the Securities Act with the SEC offering to exchange up to $175 million
aggregate principal amount of our registered 7% Senior Notes due 2016, or the
2016 Exchange Notes, for all of our outstanding unregistered 2016 Notes. The
terms of the 2016 Exchange Notes are identical to the terms of the 2016 Notes,
except that the 2016 Exchange Notes are registered under the Securities Act
and
therefore freely tradable (subject to certain conditions). The 2016 Exchange
Notes represent our unsecured senior obligations and are guaranteed by all
of
our subsidiaries with unconditional guarantees of payment that rank equally
with
existing and future senior unsecured debt of such subsidiaries and senior to
existing and future subordinated debt of such subsidiaries. In April 2006,
upon
the expiration of the 2016 Notes Exchange Offer, $175 million aggregate
principal amount of 2016 Notes were exchanged for the 2016 Exchange
Notes.
$50
Million Aggregate Principal Amount of 7% Unsecured Notes
Issuance
On
December 2, 2005, we completed a privately placed offering of an additional
$50
million aggregate principal amount of 7% senior notes due 2014, or the 2014
Add-on Notes, at an issue price of 100.25% of the principal amount of the notes
(equal to a per annum yield to maturity of approximately 6.95%), resulting
in
gross proceeds to us of approximately $50.1 million. The terms of the 2014
Add-on Notes offered were substantially identical to our existing $200 million
aggregate principal amount of 7% senior notes due 2014 issued in March 2004.
The
2014 Add-on Notes were issued through a private placement to qualified
institutional buyers under Rule 144A under the Securities Act. After giving
effect to the issuance of the $50 million aggregate principal amount of this
offering, we had outstanding $310 million aggregate principal amount of 7%
senior notes due 2014. On February 24, 2006, we filed a registration statement
on Form S-4 under the Securities Act with the SEC offering to exchange up to
$50
million aggregate principal amount of our registered 7% Senior Notes due 2014
(the “2014 Add-on Exchange Notes”), for all of our outstanding unregistered 2014
Add-on Notes. The terms of the 2014 Add-on Exchange Notes are identical to
the
terms of the 2014 Add-on Notes, except that the 2014 Add-on Exchange Notes
are
registered under the Securities Act and therefore freely tradable (subject
to
certain conditions). The 2014 Add-on Exchange Notes represent our unsecured
senior obligations and are guaranteed by all of our subsidiaries with
unconditional guarantees of payment that rank equally with existing and future
senior unsecured debt of such subsidiaries and senior to existing and future
subordinated debt of such subsidiaries. In May 2006, upon the expiration of
the
2014 Add-on Notes Exchange Offer, $50 million aggregate principal amount of
2014
Add-on Notes were exchanged for the 2014 Add-on Exchange Notes.
47
Management’s
discussion and analysis of financial condition and results of
operations
5.175
Million Common Stock Offering
On
November 21, 2005, we closed an underwritten public offering of 5,175,000 shares
of our common stock at $11.80 per share, less underwriting discounts. The sale
included 675,000 shares sold in connection with the exercise of an
over-allotment option granted to the underwriters. We received approximately
$58
million in net proceeds from the sale of the shares, after deducting
underwriting discounts and before estimated offering expenses.
8.625%
Series B Preferred Redemption
On
May 2,
2005, we fully redeemed our 8.625% Series B Cumulative Preferred Stock (NYSE:OHI
PrB), or Series B Preferred Stock. We redeemed the 2.0 million shares of Series
B at a price of $25.55104, comprising the $25 liquidation value and accrued
dividend. Under FASB-EITF Issue D-42, The
Effect on the Calculation of Earnings per Share for the Redemption or Induced
Conversion of Preferred Stock,
the
repurchase of the Series B Preferred Stock resulted in a non-cash charge to
net
income available to common shareholders of approximately $2.0 million reflecting
the write-off of the original issuance costs of the Series B Preferred
Stock.
Other
Long-Term Borrowings
During
the three months ended March 31, 2006, Haven used the $39 million of proceeds
from the GE Loan to partially repay a portion of a $62 million mortgage it
has
with us. Simultaneously, we subordinated the payment of its remaining $23
million on the mortgage note to that of the GE Loan. In conjunction with the
above transactions and the application of FIN 46R, we consolidated the financial
statements of this Haven entity into our financial statements, which contained
the long-term borrowings with General Electric Capital Corporation of $39.0
million. The loan has an interest rate of approximately seven percent and is
due
in 2012. The lender of the $39.0 million does not have recourse to our assets.
See Note - 3 Properties; Leased Property
to our
consolidated financial statements for the year ended December 31, 2006 included
elsewhere herein.
Dividends
In
order
to qualify as a REIT, we are required to distribute dividends (other than
capital gain dividends) to our stockholders in an amount at least equal to
(A)
the sum of (i) 90% of our “REIT taxable income” (computed without regard to the
dividends paid deduction and our net capital gain), and (ii) 90% of the net
income (after tax), if any, from foreclosure property, minus (B) the sum of
certain items of non-cash income. In addition, if we dispose of any built-in
gain asset during a recognition period, we will be required to distribute at
least 90% of the built-in gain (after tax), if any, recognized on the
disposition of such asset. Such distributions must be paid in the taxable year
to which they relate, or in the following taxable year if declared before we
timely file our tax return for such year and paid on or before the first regular
dividend payment after such declaration. In addition, such distributions are
required to be made pro rata, with no preference to any share of stock as
compared with other shares of the same class, and with no preference to one
class of stock as compared with another class except to the extent that such
class is entitled to such a preference. To the extent that we do not distribute
all of our net capital gain or do distribute at least 90%, but less than 100%
of
our “REIT taxable income,” as adjusted, we will be subject to tax thereon at
regular ordinary and capital gain corporate tax rates. In addition, our New
Credit Facility has certain financial covenants that limit the distribution
of
dividends paid during a fiscal quarter to no more than 95% of our aggregate
cumulative funds from operations, or FFO, as defined in the loan agreement
governing the New Credit Facility, or the Loan Agreement, unless a greater
distribution is required to maintain REIT status. The Loan Agreement defines
FFO
as net income (or loss) plus depreciation and amortization and shall be adjusted
for charges related to: (i) restructuring our debt; (ii) redemption of preferred
stock; (iii) litigation charges up to $5.0 million; (iv) non-cash charges for
accounts and notes receivable up to $5.0 million; (v) non-cash compensation
related expenses; (vi) non-cash impairment charges; and (vii) tax liabilities
in
an amount not to exceed $8.0 million.
48
Management’s
discussion and analysis of financial condition and results of
operations
Common
Dividends
On
January 16, 2007, the Board of Directors declared a common stock dividend of
$0.26 per share, an increase of $0.01 per common share compared to the prior
quarter. The common dividend was paid February 15, 2007 to common stockholders
of record on January 31, 2007.
On
October 24, 2006, the Board of Directors declared a common stock dividend of
$0.25 per share, an increase of $0.01 per common share compared to the prior
quarter. The common dividend was paid November 15, 2006 to common stockholders
of record on November 3, 2006.
On
July
17, 2006, the Board of Directors declared a common stock dividend of $0.24
per
share. The common dividend was paid August 15, 2006 to common stockholders
of
record on July 31, 2006.
On
April
18, 2006, the Board of Directors declared a common stock dividend of $0.24
per
share, an increase of $0.01 per common share compared to the prior quarter.
The
common dividend was paid May 15, 2006 to common stockholders of record on April
28, 2006.
On
January 17, 2006, the Board of Directors declared a common stock dividend of
$0.23 per share, an increase of $0.01 per common share compared to the prior
quarter. The common stock dividend was paid February 15, 2006 to common
stockholders of record on January 31, 2006.
Series
D Preferred Dividends
On
January 16, 2007, 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, or the Series D Preferred Stock, that were paid
February 15, 2007 to preferred stockholders of record on January 31, 2007.
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, 2006 through January 31, 2007.
On
October 24, 2006, the Board of Directors declared the regular quarterly
dividends of approximately $0.52344 per preferred share on the Series D
Preferred Stock that were paid November 15, 2006 to stockholders of record
on
November 3, 2006.
On
July
17, 2006, 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, 2006 to preferred stockholders of record on July 31,
2006.
On
April
18, 2006, 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, 2006 to preferred stockholders of record on April 28,
2006.
On
January 17, 2006, 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, 2006 to preferred stockholders of record on January
31,
2006.
49
Management’s
discussion and analysis of financial condition and results of
operations
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 $0.7 million as of December 31, 2006, a decrease of
$3.2 million as compared to the balance at December 31, 2005. 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 $62.8 million for the year ended
December 31, 2006, as compared to $74.1 million for the same period in 2005.
The
$11.2 million decrease is due primarily to: (i) an investment made with Guardian
that is classified as a lease inducement asset and (ii) one-time contractual
revenue associated with a mortgage note prepayment in 2005. The decrease was
partially offset by (i) incremental revenue associated with acquisitions
completed throughout 2005 and 2006 and (ii) normal working capital fluctuations
during the period.
Investing
Activities
- Net
cash flow from investing activities was an outflow of $161.4 million for the
year ended December 31, 2006, as compared to an outflow of $195.3 million for
the same period in 2005. The decrease in outflows of $34.0 million was primarily
due to: (i) $70 million of fewer acquisitions completed in 2006 versus 2005;
(ii) $50 million of fewer proceeds received from the sale of real estate assets
and the sale of Sun common stock in 2006 versus 2005; and (iii) a $10 million
mortgage payoff in 2006 versus a $60 million mortgage payoff in
2005.
Financing
Activities
- Net
cash flow from financing activities was an inflow of $95.3 million for the
year
ended December 31, 2006 as compared to an inflow of $113.1 million for the
same
period in 2005. The change in financing cash flow was primarily a result of:
(i)
$50 million of additional net borrowings under our credit facility in 2006
compared to 2005; (ii) no common equity offerings in 2006 compared to a public
issuance of 5.2 million shares of our common stock at a price of $11.80 per
share in 2005; (iii) no debt offerings in 2006 compared to private offerings
of
a combined $225 million of senior unsecured notes in 2005; (iv) a $50 million
redemption of Series B Preferred Stock in 2005; (v) a
tender
offer and purchase of our 2007 Notes in 2005; (vi) $26 million of incremental
DRIP proceeds in 2006; (vii) $39 million in proceeds in 2006 due to the
consolidation of a VIE; and (viii) $11 million of additional payments of common
and preferred dividend payments in 2006.
50
Management’s
discussion and analysis of financial condition and results of
operations
EFFECTS
OF RECENTLY ISSUED ACCOUNTING STANDARDS
In
December 2004, the Financial Accounting Standards Board, or FASB, issued FAS
No.
123 (revised 2004), Share-Based
Payment, or
FAS No.
123R, which is a revision of FAS No. 123, Accounting
for Stock-Based Compensation. FAS
No.
123R supersedes Accounting Principles Board, APB, Opinion No. 25, Accounting
for Stock Issued to Employees,
and
amends FAS No. 95, Statement
of Cash Flows.
We
adopted FAS No. 123R at the beginning of our 2006 fiscal year using the modified
prospective transition method. The additional expense recorded in 2006 as a
result of this adoption was approximately $3 thousand.
FIN
48 Evaluation
In
July
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes
, or FIN
48. FIN 48 is an interpretation of FASB Statement No. 109, Accounting
for Income Taxes,
and it
seeks to reduce the diversity in practice associated with certain aspects of
measurement and recognition in accounting for income taxes. In addition, FIN
48
will require expanded disclosure with respect to the uncertainty in income
taxes
and is effective as of the beginning of our 2007 fiscal year. We are currently
evaluating the impact of adoption of FIN 48 on our financial statements and
we
currently expect the impact to be immaterial.
FAS
157 Evaluation
In
September 2006, the FASB issued FASB Statement No. 157, Fair
Value Measurements, or 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 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those years. Provisions of FAS No. 157 are required
to be
applied prospectively as of the beginning of the fiscal year in which FAS No.
157 is applied. We are evaluating the impact that FAS No. 157 will have on
our
financial statements.
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We
are
exposed to various market risks, including the potential loss arising from
adverse changes in interest rates. We do not enter into derivatives or other
financial instruments for trading or speculative purposes, but we seek to
mitigate the effects of fluctuations in interest rates by matching the term
of
new investments with new long-term fixed rate borrowing to the extent
possible.
The
following disclosures of estimated fair value of financial instruments are
subjective in nature and are dependent on a number of important assumptions,
including estimates of future cash flows, risks, discount rates and relevant
comparable market information associated with each financial instrument. The
use
of different market assumptions and estimation methodologies may have a material
effect on the reported estimated fair value amounts. Accordingly, the estimates
presented below are not necessarily indicative of the amounts we would realize
in a current market exchange.
Mortgage
notes receivable
- The
fair
value of mortgage notes receivable is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Notes receivable
- The
fair
value of notes receivable is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Borrowings
under lines of credit arrangement -
The
carrying amount approximates fair value because the borrowings are interest
rate
adjustable.
Senior
unsecured notes
- The
fair
value of the senior unsecured notes is estimated by discounting the future
cash
flows using the current borrowing rate available for the similar
debt.
51
Management’s
discussion and analysis of financial condition and results of
operations
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,
2006 was approximately $693.7 million. A one percent increase in interest rates
would result in a decrease in the fair value of long-term borrowings by
approximately $30.7 million at December 31, 2006. The estimated fair value
of
our total long-term borrowings at December 31, 2005 was approximately $568.7
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 $31
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.
52
OVERVIEW
We
were
incorporated in the State of Maryland on March 31, 1992. We are a
self-administered real estate investment trust, or REIT, investing in
income-producing healthcare facilities, principally long-term care facilities
located in the United States. We provide lease or mortgage financing to
qualified operators of skilled nursing facilities, or SNFs, and, to a lesser
extent, assisted living facilities, or ALFs, 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.
Our
portfolio of investments, as of December 31, 2006, consisted of 239 healthcare
facilities, located in 27 states and operated by 32 third-party operators.
This
portfolio was made up of:
·
|
228
long-term healthcare facilities and two rehabilitation hospitals
owned and
leased to third parties; and
|
·
|
fixed
rate mortgages on 9 long-term healthcare
facilities.
|
As
of
December 31, 2006, our gross investments in these facilities, net of impairments
and before reserve for uncollectible loans, totaled approximately $1.3 billion.
In addition, we also held miscellaneous investments of approximately $22 million
at December 31, 2006, consisting primarily of secured loans to third-party
operators of our facilities.
Our
filings with the 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.
SUMMARY
OF FINANCIAL INFORMATION
The
following tables summarize our revenues and real estate assets by asset category
for 2006, 2005 and 2004. (Management’s discussion and analysis of financial
condition and results of operations, Note 3 - Properties and Note 4 - Mortgage
Notes Receivable to our audited financial statements for the year ended December
31, 2006 included elsewhere herein).
Revenues
by Asset Category
(in
thousands)
Year
ended December 31,
|
||||||||||
2006
|
2005
|
2004
|
||||||||
Core
assets:
|
||||||||||
Lease
rental
income
|
$
|
127,072
|
$
|
95,439
|
$
|
69,746
|
||||
Mortgage
interest
income
|
4,402
|
6,527
|
13,266
|
|||||||
Total
core asset revenues
|
131,474
|
101,966
|
83,012
|
|||||||
Other
asset revenue
|
3,687
|
3,219
|
3,129
|
|||||||
Miscellaneous
income
|
532
|
4,459
|
831
|
|||||||
Total
revenue
|
$
|
135,693
|
$
|
109,644
|
$
|
86,972
|
53
Business
Real
Estate Assets by Asset Category
(in
thousands)
As
of December 31,
|
|||||||
2006
|
2005
|
||||||
Core
assets:
|
|||||||
Leased
assets
|
$
|
1,237,165
|
$
|
990,492
|
|||
Mortgaged
assets
|
31,886
|
104,522
|
|||||
Total
core assets
|
1,269,051
|
1,095,014
|
|||||
Other
assets
|
22,078
|
28,918
|
|||||
Total
real estate assets before held for sale assets
|
1,291,129
|
1,123,932
|
|||||
Held
for sale assets
|
3,568
|
5,821
|
|||||
Total
real estate assets
|
$
|
1,294,697
|
$
|
1,129,753
|
DESCRIPTION
OF THE BUSINESS
Investment
Strategy. We
maintain a diversified portfolio of long-term healthcare facilities and
mortgages on healthcare facilities located throughout the United States. In
making investments, we generally have focused on established, creditworthy,
middle-market healthcare operators that meet our standards for quality and
experience of management. We have sought to diversify our investments in terms
of geographic locations and operators.
In
evaluating potential investments, we consider such factors as:
·
|
the
quality and experience of management and the creditworthiness of
the
operator of the facility;
|
·
|
the
facility’s historical and forecasted cash flow and its ability to meet
operational needs, capital expenditure requirements and lease or
debt
service obligations, providing a competitive return on our
investment;
|
·
|
the
construction quality, condition and design of the
facility;
|
·
|
the
geographic area of the facility;
|
·
|
the
tax, growth, regulatory and reimbursement environment of the jurisdiction
in which the facility is located;
|
·
|
the
occupancy and demand for similar healthcare facilities in the same
or
nearby communities; and
|
·
|
the
payor mix of private, Medicare and Medicaid
patients.
|
One
of
our fundamental investment strategies is to obtain contractual rent escalations
under long-term, non-cancelable, “triple-net” leases and fixed-rate mortgage
loans, and to obtain substantial liquidity deposits. Additional security is
typically provided by covenants regarding minimum working capital and net worth,
liens on accounts receivable and other operating assets, and various provisions
for cross-default, cross-collateralization and corporate/personal guarantees,
when appropriate.
We
prefer
to invest in equity ownership of properties. Due to regulatory, tax or other
considerations, we sometimes pursue alternative investment structures, including
convertible participating and participating mortgages, which can achieve returns
comparable to equity investments. The following summarizes the primary
investment structures we typically use. Average annualized yields reflect
existing contractual arrangements. However, in view of the ongoing financial
challenges in the long-term care industry, we cannot assure you that the
operators of our facilities will meet their payment obligations in full or
when
due. Therefore, the annualized yields as of January 1, 2007 set forth below
are
not necessarily indicative of or a forecast of actual yields, which may be
lower.
54
Business
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, or CPI. The average annualized
yield from leases was approximately 11.3% at January 1, 2007.
Convertible
Participating Mortgage.
Convertible participating mortgages are secured by first mortgage liens on
the
underlying real estate and personal property of the mortgagor. Interest rates
are usually subject to annual increases based upon increases in the CPI.
Convertible participating mortgages afford us the option to convert our mortgage
into direct ownership of the property, generally at a point five to ten years
from inception. If we exercise our purchase option, we are obligated to lease
the property back to the operator for the balance of the originally agreed
term
and for the originally agreed participations in revenues or CPI adjustments.
This allows us to capture a portion of the potential appreciation in value
of
the real estate. The operator has the right to buy out our option at prices
based on specified formulas. At December 31, 2006, we did not have any
convertible participating mortgages.
Participating
Mortgage.
Participating mortgages are similar to convertible participating mortgages
except that we do not have a purchase option. Interest rates are usually subject
to annual increases based upon increases in the CPI. At December 31, 2006,
we
did not have any participating mortgages.
Fixed-Rate
Mortgage.
These
mortgages have a fixed interest rate for the mortgage term and are secured
by
first mortgage liens on the underlying real estate and personal property of
the
mortgagor. The average annualized yield on these investments was approximately
11.4% at January 1, 2007.
The
table
set forth below under the heading “Properties” contains information regarding
our real estate properties, their geographic locations, and the types of
investment structures as of December 31, 2006.
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
Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources).
Federal
Income Tax Considerations. We
intend
to make and manage our investments, including the sale or disposition of
property or other investments, and to operate in such a manner as to qualify
as
a REIT under the Internal Revenue Code of 1986, as amended, or the Code, unless,
because of changes in circumstances or changes in the Internal Revenue Code,
our
Board of Directors determines that it is no longer in our best interest to
qualify as a REIT. So long as we qualify as a REIT, we generally will not pay
federal income taxes on the portion of our taxable income that is distributed
to
stockholders (See Management’s Discussion and Analysis of Financial Condition -
Results of Operations; 2006 Taxes).
55
Business
During
the fourth quarter of 2006, we determined that certain terms of the Advocat
Inc., or Advocat, Series B non-voting, redeemable convertible preferred stock
held by us until October 20, 2006 could be interpreted as affecting our
compliance with federal income tax rules applicable to REITs regarding related
party tenant income. As such, Advocat, one of our lessees, may be deemed to
be a
“related party tenant” under applicable federal income tax rules. In such event,
our rental income from Advocat would not be qualifying income under the gross
income tests that are applicable to REITs. In order to maintain qualification
as
a REIT, we annually must satisfy certain tests regarding the source of our
gross
income. The applicable federal income tax rules provide a “savings clause” for
REITs that fail to satisfy the REIT gross income tests if such failure is due
to
reasonable cause. A REIT that qualifies for the savings clause will retain
its
REIT status but will pay a tax under section 857(b)(5) and related interest.
On
December 15, 2006, we submitted to the IRS a request for a closing agreement
to
resolve the “related party tenant” issue. Since that time, we have had
additional conversations with the IRS, who has encouraged us to move forward
with the process of obtaining a closing agreement, and we have submitted
additional documentation in support of the issuance of a closing agreement
with
respect to this matter. While we believe there are valid arguments that Advocat
should not be deemed a “related party tenant,” the matter is not free from
doubt, and we believe it is in our best interest to request a closing agreement
in order to resolve the matter, minimize potential penalties and obtain
assurances regarding our continuing REIT status. By submitting a request for
a
closing agreement, we intend to establish that any failure to satisfy the gross
income tests was due to reasonable cause. In the event that it is determined
that the “savings clause” described above does not apply, we could be treated as
having failed to qualify as a REIT for one or more taxable years. If we fail
to
qualify for taxation as a REIT for any taxable year, our income will be taxed
at
regular corporate rates, and we could be disqualified as a REIT for the
following four taxable years.
As
a
result of the potential related party tenant issue described above,
we have
recorded a $2.3
million and $2.4 million provision for income taxes,
including related interest expense,
for the
year ended December 31, 2006 and 2005, respectively.
The
amount accrued represents the estimated liability and interest, which remains
subject to final resolution and therefore is subject to change. In addition,
in
October 2006, we restructured our Advocat relationship and have been advised
by
tax counsel that we will not receive any non-qualifying related party tenant
income from Advocat in future fiscal years. Accordingly, we do not expect to
incur tax expense associated with related party tenant income in future periods
commencing January 1, 2007, assuming we enter into a closing agreement with
the
IRS that recognizes that reasonable cause existed for any failure to satisfy
the
REIT gross income tests as explained above.
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.
In
the
past three years, we have issued the following debt and equity securities;
·
|
4,739,500
shares of Series D cumulative redeemable preferred stock;
|
·
|
An
aggregate of 11,917,736 shares of common stock in registered public
offerings;
|
·
|
$310
million in aggregate principal amount of 7% senior notes due 2014;
and
|
·
|
$175
million in aggregate principal amount of 7% senior notes
due 2016.
|
56
Business
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.
Reporting
Policies.
We make
our annual and quarterly reports on Forms 10-K and 10-Q available to our
stockholders pursuant to the requirements of the Securities Exchange Act of
1934. We may elect to deliver other forms or reports to stockholders from time
to time.
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.
Conflicts
of Interest Policies.
We will
not engage in any purchase, sale or lease of property or other business
transaction in which our officers or directors have a direct or indirect
material interest without the approval by resolution of a majority of those
directors who do not have an interest in such transaction. It is generally
our
policy to enter into or ratify related party transactions only when our Board
of
Directors, acting through our Audit Committee, determines that the related
person transaction in question is in, or is not inconsistent with, our best
interests and the interests of our stockholders. We are currently unaware of
any
transactions with our company in which our directors or officers have a material
interest.
The
Maryland General Corporation Law, or MGCL, provides that a contract or other
transaction between a corporation and any of that corporation’s directors or any
other entity in which that director is also a director or has a material
financial interest is not void or voidable solely on the grounds of the common
directorship or interest, the fact that the director was present at the meeting
at which the contract or transaction is approved or the fact that the director’s
vote was counted in favor of the contract or transaction, if:
·
|
the
fact of the common directorship or interest is disclosed to the
board or a
committee of the board, and the board or that committee authorizes
the
contract or transaction by the affirmative vote of a majority of
the
disinterested directors, even if the disinterested directors constitute
less than a quorum;
|
·
|
the
fact of the common directorship or interest is disclosed to stockholders
entitled to vote on the contract or transaction, and the contract
or
transaction is approved by a majority of the votes cast by the
stockholders entitled to vote on the matter, other than votes of
stock
owned of record or beneficially by the interested director, corporation,
firm or other entity; or
|
·
|
the
contract or transaction is fair and reasonable to the
corporation.
|
57
Business
At
December 31, 2006, our real estate investments included long-term care
facilities and rehabilitation hospital investments, either in the form
of
purchased facilities which are leased to operators, mortgages on facilities
which are operated by the mortgagors or their affiliates and facilities
subject
to leasehold interests. The facilities are located in 27 states and are
operated
by 32 unaffiliated operators. The following table summarizes our property
investments as of December 31, 2006:
Investment
Structure/Operator
|
Number
of
Beds
|
Number
of
Facilities
|
Occupancy
Percentage(1)
|
Gross
Investment
(in
thousands)
|
|||||||||
Purchase/Leaseback(2)
|
|||||||||||||
Sun
Healthcare Group, Inc.
|
4,523
|
38
|
86
|
$
|
210,222
|
||||||||
CommuniCare
Health Services, Inc.
|
2,781
|
18
|
89
|
185,821
|
|||||||||
Haven
Healthcare
|
1,787
|
15
|
91
|
117,230
|
|||||||||
HQM
of Floyd County, Inc
|
1,466
|
13
|
87
|
98,368
|
|||||||||
Advocat
Inc
|
2,925
|
28
|
78
|
94,432
|
|||||||||
Guardian
LTC Management, Inc. (4)
|
1,308
|
17
|
83
|
85,981
|
|||||||||
Nexion
Health Inc
|
2,412
|
20
|
78
|
80,211
|
|||||||||
Essex
Health Care Corporation
|
1,388
|
13
|
78
|
79,354
|
|||||||||
Seacrest
Healthcare
|
720
|
6
|
92
|
44,223
|
|||||||||
Senior
Management
|
1,413
|
8
|
70
|
35,243
|
|||||||||
Mark
Ide Limited Liability Company
|
832
|
8
|
77
|
25,595
|
|||||||||
Harborside
Healthcare Corporation
|
465
|
4
|
92
|
23,393
|
|||||||||
StoneGate
Senior Care LP
|
664
|
6
|
87
|
21,781
|
|||||||||
Infinia
Properties of Arizona, LLC
|
378
|
4
|
63
|
19,289
|
|||||||||
USA
Healthcare, Inc
|
489
|
5
|
65
|
15,703
|
|||||||||
Rest
Haven Nursing Center, Inc
|
200
|
1
|
90
|
14,400
|
|||||||||
Conifer
Care Communities, Inc.
|
204
|
3
|
89
|
14,367
|
|||||||||
Washington
N&R, LLC
|
286
|
2
|
75
|
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
|
73
|
8,893
|
|||||||||
Hickory
Creek Healthcare Foundation, Inc.
|
138
|
2
|
85
|
7,250
|
|||||||||
Liberty
Assisted Living Centers, LP
|
120
|
1
|
85
|
5,997
|
|||||||||
Emeritus
Corporation
|
52
|
1
|
66
|
5,674
|
|||||||||
Longwood
Management Corporation (5)
|
185
|
2
|
91
|
5,425
|
|||||||||
Generations
Healthcare, Inc.
|
60
|
1
|
84
|
3,007
|
|||||||||
Skilled
Healthcare (6)
|
59
|
1
|
92
|
2,012
|
|||||||||
Healthcare
Management Services (6)
|
98
|
1
|
48
|
1,486
|
|||||||||
25,828
|
224
|
83
|
1,237,165
|
||||||||||
Assets
Held for Sale
|
|||||||||||||
Active
Facilities (7)
|
354
|
5
|
58
|
3,443
|
|||||||||
Closed
Facility
|
—
|
1
|
—
|
125
|
|||||||||
354
|
6
|
58
|
3,568
|
||||||||||
Fixed
Rate Mortgages(3)
|
|||||||||||||
Advocat
Inc
|
423
|
4
|
82
|
12,587
|
|||||||||
Parthenon
Healthcare, Inc
|
300
|
2
|
73
|
10,730
|
|||||||||
CommuniCare
Health Services, Inc.
|
150
|
1
|
91
|
6,454
|
|||||||||
Texas
Health Enterprises/HEA Mgmt. Group, Inc.
|
147
|
1
|
68
|
1,230
|
|||||||||
Evergreen
Healthcare
|
100
|
1
|
67
|
885
|
|||||||||
1,120
|
9
|
80
|
31,886
|
||||||||||
Total
|
27,302
|
239
|
82
|
$
|
1,272,619
|
(1) |
Represents
the most recent data provided by our
operators.
|
(2) |
Certain
of our lease agreements contain purchase options that permit the
lessees
to purchase the underlying properties from
us.
|
(3) |
In
general, many of our mortgages contain prepayment provisions that
permit
prepayment of the outstanding principal amounts
thereunder.
|
(4) |
All
17 facilities are subject to a purchase option on September 1,
2015.
|
(5) |
Both
facilities are subject to a purchase option on November 1,
2007.
|
(6) |
The
facility is subject to a purchase option on November 1,
2007.
|
(7) |
Two
facilities representing $1.9 million were purchased on January
31, 2007
pursuant to a purchase
option.
|
58
Business
The
following table presents the concentration of our facilities by state as of
December 31, 2006:
Number
of
Facilities
|
Number
of
Beds
|
Gross
Investment
(in
thousands)
|
%
of
Total
Investment
|
||||||||||
Ohio
|
37
|
4,574
|
$
|
278,253
|
21.9
|
||||||||
Florida
|
25
|
3,125
|
172,029
|
13.5
|
|||||||||
Pennsylvania
|
17
|
1,597
|
110,123
|
8.6
|
|||||||||
Texas
|
23
|
3,144
|
83,598
|
6.6
|
|||||||||
California
|
15
|
1,277
|
60,665
|
4.8
|
|||||||||
Louisiana
|
14
|
1,668
|
55,639
|
4.4
|
|||||||||
Colorado
|
8
|
955
|
52,930
|
4.1
|
|||||||||
Arkansas
|
12
|
1,281
|
42,889
|
3.4
|
|||||||||
Massachusetts
|
6
|
682
|
38,884
|
3.1
|
|||||||||
Rhode
Island
|
4
|
639
|
38,740
|
3.0
|
|||||||||
Alabama
|
9
|
1,152
|
35,982
|
2.8
|
|||||||||
Connecticut
|
5
|
562
|
35,453
|
2.8
|
|||||||||
West
Virginia
|
8
|
860
|
34,575
|
2.7
|
|||||||||
Kentucky
|
9
|
757
|
27,485
|
2.2
|
|||||||||
North
Carolina
|
5
|
707
|
22,709
|
1.8
|
|||||||||
Idaho
|
4
|
480
|
21,776
|
1.7
|
|||||||||
New
Hampshire
|
3
|
225
|
21,620
|
1.7
|
|||||||||
Arizona
|
4
|
378
|
19,289
|
1.5
|
|||||||||
Indiana
|
7
|
507
|
17,525
|
1.4
|
|||||||||
Tennessee
|
5
|
602
|
17,484
|
1.4
|
|||||||||
Washington
|
2
|
194
|
17,473
|
1.4
|
|||||||||
Iowa
|
5
|
489
|
15,703
|
1.2
|
|||||||||
Illinois
|
5
|
478
|
14,531
|
1.1
|
|||||||||
Vermont
|
2
|
279
|
14,227
|
1.1
|
|||||||||
Missouri
|
2
|
286
|
12,152
|
0.9
|
|||||||||
Georgia
|
2
|
304
|
10,000
|
0.8
|
|||||||||
Utah
|
1
|
100
|
885
|
0.1
|
|||||||||
Total
|
239
|
27,302
|
$
|
1,272,619
|
100.0
|
Geographically
Diverse Property Portfolio. Our
portfolio of properties is broadly diversified by geographic location. We have
healthcare facilities located in 27 states. Only two states comprised more
than
10% of our rental and mortgage income in 2006. In addition, the majority of
our
2006 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 32 different public and private healthcare providers.
Except for Sun and CommuniCare, which together hold approximately 32% of our
portfolio (by investment), no single tenant holds greater than 10% of our
portfolio (by investment).
Significant
Number of Long-term Leases and Mortgage Loans. A
large
portion of our core portfolio consists of long-term lease and mortgage
agreements. At December 31, 2006, approximately 92% of our leases and mortgages
had primary terms that expire in 2010 or later. Our leased real estate
properties are leased under provisions of single facility leases or master
leases with initial terms typically ranging from 5 to 15 years, plus renewal
options. Substantially all of the leases and master leases provide for minimum
annual rentals that are subject to annual increases based upon increases in
the
CPI or increases in revenues of the underlying properties, with certain
limits.
Under
the terms of the leases, the lessee is responsible for all maintenance, repairs,
taxes and insurance on the leased properties.
LEGAL
PROCEEDINGS
We
are
subject to various legal proceedings, claims and other actions arising out
of
the normal course of business. While any legal proceeding or claim has an
element of uncertainty, management believes that the outcome of each lawsuit,
claim or legal proceeding that is pending or threatened, or all of them
combined, will not have a material adverse effect on our consolidated financial
position or results of operations.
In
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
settlement of our claim against the defendants, we agreed in the fourth quarter
of 2005 to accept a lump sum cash payment of $2.4 million. The cash proceeds
were offset by related expenses incurred of $0.8 million, resulting in a net
gain of $1.6 million paid December 22, 2005.
59
Business
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.
60
Directors
and executive officers
The
following table sets forth the name and age of each of our executive officers
and directors:
Name
|
Age
|
Position
|
||
Bernard
J. Korman(1),(3),(4)
|
75
|
Chairman
of the Board of Directors
|
||
Thomas
F. Franke(1),(4),(6)
|
76
|
Director
|
||
Harold
J. Kloosterman(1),(2),(3),(4),(7)
|
64
|
Director
|
||
Edward
Lowenthal(1),(2),(4)
|
62
|
Director
|
||
Stephen
D. Plavin(1),(2),(4),(5)
|
47
|
Director
|
||
C.
Taylor Pickett(3)
|
45
|
Chief
Executive Officer and Director
|
||
Daniel
J. Booth
|
43
|
Chief
Operating Officer
|
||
R.
Lee Crabill, Jr.
|
53
|
Senior
Vice President of Operations
|
||
Robert
O. Stephenson
|
43
|
Chief
Financial Office
|
(1)
Member of Compensation Committee.
(2)
Member of Audit Committee.
(3)
Member of Investment Committee.
(4)
Member of Nominating and Corporate Governance Committee.
(5)
Chairman of Audit Committee.
(6)
Chairman of Compensation Committee.
(7)
Chairman of Investment and Nominating and Corporate Governance
Committees.
Set
forth
below are descriptions and backgrounds of each of our current executive officers
and directors.
DIRECTORS
OF OUR COMPANY
Under
the
terms of our Articles of Incorporation, our Board of Directors is classified
into three classes. Each class of directors serves for a term of three years,
with one class being elected each year. As of the date of this prospectus,
there
are six directors, with two directors in each class.
Thomas
F. Franke is
a
Director and has served in this capacity since March 31, 1992. His term expires
in 2009. Mr. Franke is Chairman and a principal owner of Cambridge Partners,
Inc., an owner, developer and manager of multifamily housing in Grand Rapids,
Michigan. He is also a principal owner of Laurel Healthcare (a private
healthcare firm operating in the United States) and is a principal owner of
Abacus Hotels LTD. (a private hotel firm in the United Kingdom). Mr. Franke
was
a founder and previously a director of Principal Healthcare Finance Limited
and
Omega Worldwide, Inc.
Harold
J. Kloosterman is a
Director and has served in this capacity since September 1, 1992. His
term
expires in 2008. Mr.
Kloosterman has served as President since 1985 of Cambridge Partners, Inc.,
a
company he formed in 1985. He has been involved in the development and
management of commercial, apartment and condominium projects in Grand Rapids
and
Ann Arbor, Michigan and in the Chicago area. Mr. Kloosterman was formerly a
Managing Director of Omega Capital from 1986 to 1992. Mr. Kloosterman has been
involved in the acquisition, development and management of commercial and
multifamily properties since 1978. He has also been a senior officer of LaSalle
Partners, Inc. (now Jones Lang LaSalle).
Bernard
J. Korman is
Chairman of the Board and has served in this capacity since March 8, 2004.
His
term expires in 2009. He has served as a director since October 19, 1993. Mr.
Korman has been Chairman of the Board of Trustees of Philadelphia Health Care
Trust, a private healthcare foundation, since December 1995. Mr. Korman is
also
a director of The New America High Income Fund, Inc. (NYSE:HYB) (financial
services), Medical Nutrition USA, Inc. (OTC:MDNU.OB) (develops and distributes
nutritional products) and NutraMax Products, Inc. (OTC:NUTP) (consumer health
care products). He was formerly President, Chief Executive Officer and Director
of MEDIQ Incorporated (OTC:MDDQP) (health care services) from 1977 to 1995.
Mr.
Korman served as a director of Kramont Realty Trust (NYSE:KRT) (real estate
investment trust) from June 2000 until its merger in April 2005 and of The
Pep
Boys, Inc. (NYSE:PBY) and also served as The Pep Boys, Inc.’s Chairman of the
Board from May 28, 2003 until his retirement from such board in September 2004.
Mr. Korman was previously a director of Omega Worldwide, Inc.
61
Directors
and executive officers
Edward
Lowenthal is
a
Director and has served in this capacity since October 17, 1995. His term
expires in 2007. From January 1997 to March 2002, Mr. Lowenthal served as
President and Chief Executive Officer of Wellsford Real Properties, Inc.
(AMEX:WRP) (a real estate merchant bank), and was President of the predecessor
of Wellsford Real Properties, Inc. since 1986. Mr. Lowenthal also serves as
a
director of WRP, REIS, Inc. (a private provider of real estate market
information and valuation technology), Ark Restaurants (Nasdaq:ARKR) (a publicly
traded owner and operator of restaurants), American Campus Communities
(NYSE:ACC) (a public developer, owner and operator of student housing at the
university level), Desarrolladora Homex (NYSE: HXM) (a Mexican homebuilder)
and
serves as a trustee of the Manhattan School of Music.
C.
Taylor Pickett is
the
Chief Executive Officer of our company 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. His
term
expires in 2008. 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. 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.
Stephen
D. Plavin is
a
Director and has served in this capacity since July 17, 2000. His term expires
in 2007. Mr. Plavin has been Chief Operating Officer of Capital Trust, Inc.,
(NYSE:CT) a New York City-based mortgage real estate investment trust (“REIT”)
and investment management company and has served in this capacity since 1998.
In
this role, Mr. Plavin is responsible for all of the lending, investing and
portfolio management activities of Capital Trust, Inc.
While
the
Board of Directors has not adopted any categorical standards of independence,
in
making these independence determinations, the Board of Directors noted that
no
director other than Mr. Pickett (a) received direct compensation from our
company other than director annual retainers and meeting fees, (b) had any
relationship with our company or a third party that would preclude independence,
or (c) had any business relationship with our company and its management, other
than as a director of our company. Each of the members of the Audit Committee,
Compensation Committee and Nominating and Corporate Governance Committee meets
the New York Stock Exchange listing standards for independence.
Each
of
the members of the Audit Committee is financially literate, as required of
audit
committee members by the New York Stock Exchange (“NYSE”), and independent as is
required under the Exchange Act and the NYSE rules. The Board has determined
that Mr. Plavin is qualified to serve as an “audit committee financial expert”
as such term is defined in Item 401 (h) of Regulation S-K promulgated by the
SEC. The Board made a qualitative assessment of Mr. Plavin’s level of knowledge
and experience based on a number of factors, including his formal education
and
his experience as Chief Operating Officer of Capital Trust, Inc., a New York
City-based mortgage REIT and investment management company, where he is
responsible for all lending and portfolio management activities. Mr. Plavin
holds an M.B.A. from J.L. Kellogg Graduate School of Management at Northwestern
University.
EXECUTIVE
OFFICERS OF OUR COMPANY
At
the
date of this report, the executive officers of our company are:
C.
Taylor Pickett
is the
Chief Executive Officer and has served in this capacity since June, 2001. See
“—Directors of our Company” above for additional information.
Daniel
J. Booth 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).
62
Directors
and executive officers
R.
Lee Crabill, Jr.
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 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.
As
of
December 31, 2006, we had 18 full-time employees, including the four executive
officers listed above.
63
Directors
and executive officers
Our
Compensation Discussion and Analysis, or CD&A, addresses the following
topics:
·
|
the
members and role of our Compensation Committee, or the Committee;
|
·
|
our
compensation-setting process;
|
·
|
our
compensation philosophy and policies regarding executive compensation;
|
·
|
the
components of our executive compensation program; and
|
·
|
our
compensation decisions for fiscal year 2006 and for the first
quarter of
2007.
|
In
this
Compensation Discussion and Analysis section, the terms “we,” “our,” “us” and
the “Committee” refer to the Compensation Committee of Omega Healthcare
Investors, Inc.’s Board of Directors.
Committee
Members and Independence
Thomas
F.
Franke, Harold J. Kloosterman, Bernard J. Korman, Edward Lowenthal, and Stephen
D. Plavin are the members of the Committee. Mr. Franke, who has served on the
Company’s Board of Directors since 1992, is the Chairman of the Committee. Each
member of the Committee qualifies as an independent director under the New
York
Stock Exchange listing standards and under the Company’s Board of Directors’
standards of independence.
Role
of the Committee
The
Committee’s responsibilities and function are governed by its charter, which the
Board of Directors has adopted and a copy of which is available at our website.
The Committee administers our 2004 Stock Incentive Plan, our 2000 Stock
Incentive Plan and our 1993 Deferred Compensation Plan and has responsibility
for other incentive and benefit plans. The Committee determines the compensation
of our executive officers and reviews with the Board of Directors all aspects
of
compensation for our executive officers.
The
Committee is responsible to the Board for the following activities:
·
|
The
Committee determines and approves the compensation for the Chief
Executive
Officer and our other executive officers. In doing so, the Committee
evaluates their performance in light of goals and objectives reviewed
by
the Committee and such other factors as the Committee deems appropriate
in
our best interests and in satisfaction of any applicable requirements
of
the New York Stock Exchange and any other legal or regulatory
requirements.
|
64
Directors
and executive officers
·
|
The
Committee reviews and recommends for Board approval (or approves,
where
applicable) the adoption and amendment of our director and executive
officer incentive compensation and equity-based plans. The Committee
has
the responsibility for recommending to the Board the level and
form of
compensation and benefits for
directors.
|
·
|
The
Committee may administer our incentive compensation and equity-based
plans
and may approve such awards thereunder as the Committee deems
appropriate.
|
·
|
The
Committee reviews and monitors succession plans for the Chief Executive
Officer and our other senior
executives.
|
·
|
The
Committee meets to review and discuss with management the CD&A
required by the SEC rules and regulations. The Committee recommends
to the
Board whether the CD&A should be included in our proxy statement or
other applicable SEC filings. The Committee prepares a Compensation
Committee Report for inclusion in our applicable filings with the
SEC.
Such reports state whether the Committee reviewed and discussed
with
management the CD&A, and whether, based on such review and discussion,
the Committee recommended to the Board that the CD&A be included in
our proxy statement or other applicable SEC
filings.
|
·
|
The
Committee should be consulted with respect to any employment agreements,
severance agreements or change of control agreements that are entered
into
between us and any executive
officer.
|
·
|
To
the extent not otherwise inconsistent with its obligations and
responsibilities, the Committee may form subcommittees (which shall
consist of one or more members of the Committee) and delegate authority
to
such subcommittees hereunder as it deems
appropriate.
|
·
|
The
Committee reports to the Board as it deems appropriate and as the
Board
may request.
|
·
|
The
Committee performs such other activities consistent with its charter,
our
Bylaws, governing law, the rules and regulations of the New York
Stock
Exchange and such other requirements applicable to the Company
as the
Committee or the Board deems necessary or
appropriate.
|
The
responsibilities of a member of the Committee are in addition to those
responsibilities set out for a member of the Board.
Committee
Meetings
The
Committee meets as often as necessary to perform its duties and
responsibilities. The Committee met four times during the year ended December
31, 2006 and thus far has held three meetings in 2007. Mr. Franke works, from
time to time, with Mr. Pickett and other members of the Committee to establish
the agenda. The Committee typically meets in executive sessions without
management and meets with the Company’s legal counsel and outside advisors when
necessary.
The
Committee receives and reviews materials in advance of its meetings. These
materials include information that management believes will be helpful to the
Committee as well as materials the Committee has requested. Depending upon
the
agenda for the particular meeting, these materials may include, among other
things:
·
|
reports
from compensation consultants or legal
counsel;
|
·
|
a
comparison of the compensation of our executives and directors
compared to
its competitors prepared by members of the Committee, by management
at the
Committee’s request or by a compensation consultant engaged by the
Committee;
|
65
Directors
and executive officers
·
|
financial
reports on year-to-date performance versus budget and compared
to prior
year performance, as well as other financial data regarding us
and our
performance;
|
·
|
reports
on our strategic plan and budgets for future
periods;
|
·
|
information
on the executive officers’ stock ownership and option holdings; and
|
·
|
reports
on the levels of achievement of individual and corporate
objectives.
|
Committee
Advisors
The
Compensation Committee Charter grants the Committee the sole and direct
authority to engage and terminate advisors and compensation consultants and
to
approve their fees and retention terms. These advisors and consultants report
directly to the Committee and we are responsible for paying their
fees.
The
Committee had previously engaged a consulting group in 2004, The Schonbraun
McCann Group LLP (“Schonbraun”), in connection with determining the compensation
of our executive officers for the current fiscal year, and the Committee also
retained Schonbraun in late 2006 in connection with determining the compensation
and incentive arrangements for our executive officers for fiscal year 2007.
Schonbraun has not performed and has agreed not to perform in the future any
work for us other than work for which it is engaged by the Committee. During
late 2006 and early 2007, Schonbraun presented to the Committee analysis that
included, but was not limited to, the status of our current compensation scheme
as compared to our peer companies, the methodologies behind the research and
analysis it used to determine the comparisons, the techniques it used to
standardize the compensation schemes of peer companies in order to permit more
accurate comparisons against our policies, and a proposed incentive compensation
plan for executive officers. The Committee also requested that Schonbraun
evaluate our current director compensation and prepare a proposal with respect
to compensation for our directors in 2007.
Peer
companies included in Schonbraun’s 2006/2007 analysis were Alexandria Real
Estate Equities, Inc., BioMed Realty Trust, Corporate Office Properties Trust
Inc., Digital Realty Trust, Inc., First Potomac Realty Trust, Glenborough Realty
Trust Incorporated, Health Care REIT, Inc., Healthcare Realty Trust, LTC
Properties, Inc., Medical Properties Trust Inc., Nationwide Health Properties,
Inc., Parkway Properties, Inc., Republic Property Trust, Ventas, Inc.,
Washington Real Estate Investment Trust and Windrose Medical Properties Trust.
Analyses performed included a comparison of the total return to the stockholders
of the respective companies, a comparison of salaries of comparable officers
for
each company and a comparison of the terms of officer employment agreements.
Also,
our
Chief Executive Officer meets with the Committee upon the Committee’s request to
provide information to the Committee regarding management’s views regarding its
performance as well as other factors the Chief Executive Officer believes should
impact the compensation of our executive officers. In addition, the Chief
Executive Officer provides his recommendation to the Committee regarding the
compensation of the executive officers and the business and performance targets
for incentive awards and bonuses.
Annual
Evaluation
The
Committee meets in one or more executive sessions each year to evaluate the
performance of our named executive officers, to determine their bonuses for
the
prior year, to establish bonus metrics for the current year, to set their
salaries for the current year, and to approve any grants to them of equity
incentive compensation, as the case may be.
The
Committee also performs an annual evaluation of its performance and the adequacy
of its charter and reports to our Board of Directors regarding this evaluation.
66
Directors
and executive officers
Compensation
Policy
Historically,
the policy and the guidelines followed by the Committee have been directed
toward providing compensation and incentives to our executive officers in order
to achieve the following objectives:
1)
|
Assist
in attracting and retaining talented and well-qualified
executives;
|
2)
|
Reward
performance and initiative;
|
3)
|
Be
competitive with other healthcare real estate investment
trusts;
|
4)
|
Be
significantly related to accomplishments and our short-term and long-term
successes, particularly measured in terms of growth in funds from
operations on a per share basis;
|
5)
|
Align
the interests of our executive officers with the interests of our
stockholders; and
|
6)
|
Encourage
executives to achieve meaningful levels of ownership of our
stock.
|
Elements
of Compensation
The
following is a discussion of each element of our executive compensation:
Annual
Base Salary
Our
approach to base compensation levels has been to offer competitive salaries
in
comparison with prevailing market practices. The Committee examined market
compensation levels and trends in connection with the issuance of the executive
employment contracts during 2004. Additionally, in connection with the issuance
of these contracts, the Committee hired Schonbraun in 2004 to conduct a review
and analysis of our peer group companies and to provide the Committee with
executive base salaries of individuals then employed in similar positions in
such companies. The employment agreements for each of the executive officers
established a base annual salary and provided that the base salary should be
reviewed on an annual basis to determine if increases are
warranted.
In
2006
and 2007, the Committee evaluated and established the annual executive officer
salaries for each fiscal year in connection with its annual review of
management’s performance and based on input from our Chairman of the Board of
Directors and our Chief Executive Officer. The Committee undertook this
evaluation and determination at the beginning of fiscal year 2006 and 2007
so
that it could have available data for the recently completed prior fiscal year
and so that it could set expectations for the beginning fiscal year. In
undertaking the annual review, the Committee considered the decision-making
responsibilities of each position and the experience, work performance and
team-building skills of each incumbent officer, as well as our overall
performance and the achievement of our strategic objectives and budgets. The
Committee viewed work performance as the single most important measurement
factor, followed by team-building skills and decision-making responsibilities.
We
accrue
salaries as they are earned by our officers, and thus all salaries earned during
the year are expensed in the year earned. Each officer must include his salary
in his taxable income in the year during which he receives it. We withhold
appropriate tax withholdings from the salaries of the respective
officers.
Annual
Cash Bonus
Our
historical compensation practices have embodied the principle that annual cash
bonuses should be based primarily on achieving objectives that enhance long-term
stockholder value is desirable in aligning stockholder and management
interests.
The
Committee has considered our overall financial performance for the fiscal year
and the performance of the specific areas of our company under each incumbent
officer’s direct control. It was the Committee’s view that this balance
supported the accomplishment of overall objectives and rewarded individual
contributions by executive officers. Individual annual bonuses for each named
executive have been consistent with market practices for positions with
comparable decision-making responsibilities and have been awarded in accordance
with the terms of each executive officer’s employment agreement.
67
Directors
and executive officers
In
2006,
the executive officers were eligible for a cash bonus at the Committee’s
discretion based on the objective, subjective and personal performance goals
set
by the Committee. This bonus is in addition to any special bonus that may be
paid at the discretion of the Board. In determining the amount of the annual
cash bonuses, the Committee considered a variety of factors, including the
individual performance of each executive officer along with our achievement
of
certain financial benchmarks, the successful implementation of asset management
initiatives, control of expenses and satisfaction of our strategic objectives.
Considering these factors, the Committee set annual cash bonuses related to
fiscal year 2006 for Messrs. Pickett, Booth, Stephenson, and Crabill at
$463,500, $158,500, $114,750 and $123,000, respectively.
We
accrue
estimated bonuses for our executive officers throughout the year service is
performed relating to such bonuses, and thus bonuses are expensed in the year
they are earned, assuming they are approved by our Board of Directors. Each
officer must include his bonus in his taxable income in the year during which
he
receives it, which is generally in the year following the year it is earned.
We
withhold appropriate tax withholdings from the bonus amounts awarded.
Restricted
Stock Incentives
In
2004,
we entered into restricted stock agreements with four executive officers under
the Omega Healthcare Investors, Inc. 2004 Stock Incentive Plan. A total of
317,500 shares of restricted stock were granted, which equated to approximately
$3.3 million of deferred compensation. The shares vest thirty-three and
one-third percent (33 ⅓%) on each of January 1, 2005, January 1, 2006 and
January 1, 2007 so long as the executive officer remains employed on the vesting
date, with vesting accelerating upon a qualifying termination of employment,
upon the occurrence of a change of control (as defined in the restricted stock
agreements), death or disability. In addition, we also entered into performance
restricted stock unit agreements with our four executive officers. A total
of
317,500 performance restricted stock units were granted under the Omega
Healthcare Investors, Inc. 2004 Stock Incentive Plan. The performance restricted
stock units were fully vested as December 31, 2006 following our attaining
$0.30
per share of common stock per fiscal quarter in “Adjusted Funds from Operations”
(as defined in the agreement) for two (2) consecutive quarters. Dividend
equivalents (plus an interest factor based on our company’s cost of borrowing)
accrued on unvested shares and were paid, according to the terms of the stock
grant, because the performance restricted stock units vested. Dividend
equivalents on vested performance restricted stock units are paid currently.
Pursuant to the terms of the performance restricted stock unit agreements,
each
of the executive officers will not receive the vested shares attributable to
the
performance restricted stock units until the earlier of January 1, 2008, such
executive officer is terminated without cause or quits for good reason (as
defined in the performance restricted stock unit agreement), or the death or
disability (as defined in performance restricted stock unit agreement) of the
executive officer.
In
2006,
the Committee did not make any grants under the 2004 Stock Incentive Plan,
2000
Stock Incentive Plan or 1993 Deferred Compensation Plan to any executive officer
or employee.
We
account for all stock and option awards in accordance with Statement of FAS
123R. Executive officers recognize taxable income from stock option awards
when
a vested option is exercised. We generally receive a corresponding tax deduction
for compensation expense in the year of exercise. The amount included in the
executive officer’s wages and the amount we may deduct is equal to the most
recent closing common stock price on the date the stock options are exercised
less the exercise price multiplies by the number of stock options exercised.
We
do not pay or reimburse any executive officer for any taxes due upon exercise
of
a stock option or upon vesting of an award.
Retirement
Savings Opportunities
All
employees may participate in our 401(k) Retirement Savings Plan, or 401(k)
Plan.
We provide this plan to help our employees save some amount of their cash
compensation for retirement in a tax efficient manner. Under
the
401(k)
Plan,
employees are eligible to make contributions, and we, at our discretion, may
match contributions and make a profit sharing contribution.
We do
not provide an option for our employees to invest in our stock in the 401(k)
plan.
68
Directors
and executive officers
Health
and Welfare Benefits
We
provide a competitive benefits package to all full-time employees which includes
health and welfare benefits, such as medical, dental, disability insurance,
and
life insurance benefits. The plans under which these benefits are offered do
not
discriminate in scope, terms or operation in favor of officers and directors
and
are available to all salaried employees. We have no structured executive
perquisite benefits (e.g., club memberships or company vehicles) for any
executive officer, including the named executive officers, and we currently
do
not provide supplemental pensions to our employees, including the named
executive officers.
2006
Chief Executive Officer Compensation
In
connection with retaining the services of Mr. Pickett to act as our Chief
Executive Officer, we entered into an employment Agreement dated September
1,
2004 with Mr. Pickett. The Committee believes that the terms of the employment
agreement are consistent with the duties and scope of responsibilities assigned
to Mr. Pickett as Chief Executive Officer. In order to align Mr. Pickett’s
interests with our long-term interests, Mr. Pickett’s compensation package
includes significant equity-based compensation, including stock options and
restricted stock. For a detailed description of the terms of the Employment
Agreement, see “Compensation and Severance Agreements - C. Taylor Pickett
Employment Agreement” below.
For
the
fiscal year ended December 31, 2006, the Committee awarded Mr. Pickett an annual
cash bonus of $463,500. This bonus was determined by the Committee substantially
in accordance with the policies described above relating to all of our executive
officers.
69
Directors
and executive officers
The
Committee reviewed and discussed the CD&A with management, and based on this
review and discussion, the Committee recommended to the Board of Directors
that
the CD&A be included in this prospectus, in the company’s annual proxy
statement and the Annual Report on Form 10-K for the year ended December 31,
2006.
Tax
Deductibility of Executive Compensation
The
SEC
requires that this report comment upon our policy with respect to Section 162(m)
of the Internal Revenue Code. Section 162(m) disallows a federal income tax
deduction for compensation over $1.0 million to any of the named executive
officers unless the compensation is paid pursuant to a plan that is
performance-related, non-discretionary and has been approved by our
stockholders. We did not pay any compensation during 2006 that would be subject
to Section 162(m). We believe that, because we qualify as a REIT under the
Internal Revenue Code and therefore are not subject to federal income taxes
on
our income to the extent distributed, the payment of compensation that does
not
satisfy the requirements of Section 162(m) will not generally affect our net
income, although to the extent that compensation does not qualify for deduction
under Section 162(m), a larger portion of stockholder distributions may be
subject to federal income taxation as dividend income rather than return of
capital. We do not believe that Section 162(m) will materially affect the
taxability of stockholder distributions, although no assurance can be given
in
this regard due to the variety of factors that affect the tax position of each
stockholder. For these reasons, Section 162(m) does not directly govern the
Compensation Committee’s compensation policy and practices.
Compensation
Committee of the Board of Directors
/s/
Thomas F. Franke
/s/
Harold J. Kloosterman
/s/
Bernard J. Korman
/s/
Edward Lowenthal
/s/
Stephen D. Plavin
|
70
Directors
and executive officers
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Thomas
F.
Franke, Harold J. Kloosterman, Bernard J. Korman, Edward Lowenthal and Stephen
D. Plavin were members of the Compensation Committee for the year ended December
31, 2006 and during such period, there were no Compensation Committee interlocks
or insider participation in compensation decisions.
SUMMARY
COMPENSATION TABLE
Name
and Principal Position
(A)
|
Year
(B)
|
Salary
($)
(C)
|
Bonus
($)
(1)
(D)
|
Stock
Awards
($)
(2)
(E)
|
Option
Awards
($)
(F)
|
Non-Equity
Incentive Plan Compensation ($)
(G)
|
Change
in Pension Value and Non-qualified Deferred Compensation
Earnings
(H)
|
All
Other Compen-
sation
($)
(3)
(I)
|
Total
($)
(J)
|
|||||||||||||||||||
Taylor
Pickett
|
2006
|
$
|
515,000
|
$
|
463,500
|
$
|
1,317,500
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
343,211
|
$
|
2,639,211
|
|||||||||||
Robert
Stephenson
|
2006
|
$
|
255,000
|
$
|
114,750
|
$
|
632,400
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
168,172
|
$
|
1,170,322
|
|||||||||||
Dan
Booth
|
2006
|
$
|
317,000
|
$
|
158,500
|
$
|
790,500
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
208,566
|
$
|
1,474,566
|
|||||||||||
Lee
Crabill
|
2006
|
$
|
246,000
|
$
|
123,000
|
$
|
606,050
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
161,441
|
$
|
1,136,491
|
(1)
|
This
amount represents the bonuses related to the performance in 2006
but paid
in 2007.
|
(2)
|
The
restricted common stock units were granted in 2004 and earned in
2006 because
we attained $0.30 per share of common stock per fiscal quarter in
“Adjusted Funds from Operations,” which target was previously set in 2004
by the Committee, valued at grant date price of $10.54 times the
number of
units earned.
|
(3) |
This
amount
includes: (i)
dividends
on units paid in January 2007 (see footnote 2
above);
|
(ii)
|
interest
earned on dividends on units paid in January 2007 (see footnote 2
above);
|
(iii)
|
dividends
on restricted stock that was paid during 2006, which vested on January
1,
2007; and
|
(iv) |
401(K)
matching contributions.
|
71
Directors
and executive officers
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END
Option
Awards
|
Stock
Awards
|
|||||||||||||||||||||||||||
Name
(A)
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
(B)
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
(C)
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
(D)
|
Option
Exercise Price
($)
(E)
|
Option
Expiration
Date
(F)
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
(G)(1)
|
Market
Value of Shares or Units of Stock
That
Have Not Vested
($)
(H)(2)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested
(#)
(I)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested
($)
(J)
|
|||||||||||||||||||
Taylor
Pickett
|
41,666
|
$
|
738,322
|
|||||||||||||||||||||||||
Robert
Stephenson
|
20,000
|
$
|
354,400
|
|||||||||||||||||||||||||
Dan
Booth
|
25,000
|
$
|
443,000
|
|||||||||||||||||||||||||
Lee
Crabill
|
19,166
|
$
|
339,622
|
(1) |
These
balances represent unvested restricted stock at December 31, 2006,
which
subsequently vested on January 1, 2007. These balances exclude performance
restricted stock units, which were vested as of December 31, 2006
but will
be distributed on January 1, 2008. The performance criteria for the
receipt of these units were met in 2006. Messrs. Pickett, Stephenson,
Booth and Crabill were awarded 125,000, 60,000, 75,000 and 57,500
of these
performance restricted stock units, respectively.
|
(2) |
The
market value is based on the closing price of our common stock on
December
29, 2006 of $17.72.
|
OPTION
EXERCISES AND STOCK VESTED
Option
Awards
|
Stock
Awards
|
||||||||||||
Name
(A)
|
Number
of Shares Acquired on Exercise
(#)
(B)
|
Value
Realized on Exercise
($)
(1)
(C)
|
Number
of Shares Acquired on Vesting
(#)
(D)
|
Value
Realized on Vesting
($)
(E)
|
|||||||||
Taylor
Pickett
|
—
|
$
|
—
|
—
|
$
|
—
|
|||||||
Robert
Stephenson
|
80,274
|
$
|
785,891
|
—
|
$
|
—
|
|||||||
Dan
Booth
|
91,667
|
$
|
874,837
|
—
|
$
|
—
|
|||||||
Lee
Crabill
|
—
|
$
|
—
|
—
|
$
|
—
|
(1)
|
This
amount represents the gain to the employee based on the market price
of
underlying shares at the date of exercise less the exercise
price.
|
72
Directors and executive officers
COMPENSATION
AND SEVERANCE AGREEMENTS
C.
Taylor Pickett Employment Agreement
We
entered into an employment agreement with C. Taylor Pickett, dated as of
September 1, 2004, to be our Chief Executive Officer. The term of the agreement
expires on December 31, 2007.
Mr.
Pickett’s current base salary is $530,500 per year, subject to increase by us
and provides that he will be eligible for an annual bonus of up to 125% of
his
base salary based on criteria determined by the Compensation Committee of our
Board of Directors.
In
connection with this employment agreement, we issued Mr. Pickett 125,000 shares
of our restricted common stock on September 10, 2004, which vested 33 1/3%
on
each of January 1, 2005, January 1, 2006, and January 1, 2007. Dividends were
paid on unvested shares and a dividend equivalent per share was paid in an
amount equal to the dividend per share payable to stockholders of record as
of
July 30, 2004. Also in connection with this employment agreement, we issued
Mr.
Pickett 125,000 performance restricted stock units on September 10, 2004, which
were fully vested as of December 31, 2006 because we had attained $0.30 per
share of common stock per fiscal quarter in “Adjusted Funds from Operations” (as
defined in the agreement) for two (2) consecutive quarters. Dividend equivalents
accrued on unvested shares and were paid upon vesting of the performance
restricted stock units. Dividend equivalents on vested performance restricted
stock units are paid currently. Pursuant to the terms of Mr. Pickett’s
performance restricted stock unit agreement, he will not receive the vested
shares attributable to his performance restricted stock units until the earlier
of January 1, 2008, he is terminated without cause or quits for good reason
(as
defined in the performance restricted stock unit agreement), or his death or
disability (as defined in performance restricted stock unit
agreement).
If
we
terminate Mr. Pickett’s employment without “cause” or if he resigns for “good
reason,” he will be entitled to payment of his cash compensation (the sum of his
then current annual base salary plus average annual bonus payable based on
the
three completed fiscal years prior to termination of employment) for a period
of
three (3) years. “Cause” is defined in the employment agreement to include
events such as willful refusal to perform duties, willful misconduct in
performance of duties, unauthorized disclosure of confidential company
information, or fraud or dishonesty against us. “Good reason” is defined in the
employment agreement to include events such as our material breach of the
employment agreement or our relocation of Mr. Pickett’s employment to more than
50 miles away without his consent.
Mr.
Pickett is required to execute a release of claims against us as a condition
to
the payment of severance benefits. Severance is not paid if the term of the
employment agreement expires. Mr. Pickett’s restricted common stock and
performance restricted stock units will become fully vested upon the occurrence
of Mr. Pickett’s death, disability, termination of employment without cause or
resignation for good reason, or a “change in control” (as defined in the
respective restricted stock agreement). In the event of a termination by us
without cause or by Mr. Pickett for good reason, benefits are grossed up to
cover federal excise taxes. If Mr. Pickett dies during the term of the
employment agreement, his estate is entitled to a prorated bonus for the year
of
his death.
Mr.
Pickett is restricted from using any of our confidential information during
his
employment and for two years thereafter or from using any trade secrets during
his employment and for as long thereafter as permitted by applicable law. During
the period of employment and for one year thereafter, Mr. Pickett is obligated
not to provide managerial services or management consulting services to a
competing business. Competing businesses is defined to include a defined list
of
competitors and any other business with the primary purpose of leasing assets
to
healthcare operators or financing ownership or operation of senior, retirement
or healthcare related real estate. In addition, during the period of employment
and for one year thereafter, Mr. Pickett agrees not to solicit clients or
customers with whom he had material contact or to solicit our management level
or key employees. If the term of the employment agreement expires at December
31, 2007 and as a result no severance is paid, then these provisions also expire
at December 31, 2007.
73
Directors
and executive officers
Daniel
J. Booth Employment Agreement
We
entered into an employment agreement with Daniel J. Booth, dated as of September
1, 2004, to be our Chief Operating Officer. The term of the agreement expires
on
December 31, 2007.
Mr.
Booth’s current base salary is $326,500 per year, subject to increase by us and
provides that he will be eligible for an annual bonus of up to 75% of his base
salary based on criteria determined by the Compensation Committee of our Board
of Directors.
In
connection with this employment agreement, we issued Mr. Booth 75,000 shares
of
our restricted common stock on September 10, 2004, which vested 33 1/3% on
each
of January 1, 2005, January 1, 2006, and January 1, 2007. Dividends were paid
on
unvested shares and a dividend equivalent per share was paid in an amount equal
to the dividend per share payable to stockholders of record as of July 30,
2004.
Also in connection with this employment agreement, we issued Mr. Booth 75,000
performance restricted stock units on September 10, 2004, which were fully
vested as of December 31, 2006 because we had attained $0.30 per share of common
stock per fiscal quarter in “Adjusted Funds from Operations” (as defined in the
agreement) for two (2) consecutive quarters. Dividend equivalents on vested
performance restricted stock units are paid currently. Pursuant to the terms
of
Mr. Booth’s performance restricted stock unit agreement, he will not receive the
vested shares attributable to his performance restricted stock units until
the
earlier of January 1, 2008, he is terminated without cause or quits for good
reason (as defined in the performance restricted stock unit agreement), or
his
death or disability (as defined in performance restricted stock unit
agreement).
If
we
terminate Mr. Booth’s employment without “cause” or if he resigns for “good
reason,” he will be entitled to payment of his cash compensation (the sum of his
then current annual base salary plus average annual bonus payable based on
the
three completed fiscal years prior to termination of employment) for a period
of
two (2) years. “Cause” is defined in the employment agreement to include events
such as willful refusal to perform duties, willful misconduct in performance
of
duties, unauthorized disclosure of confidential company information, or fraud
or
dishonesty against us. “Good reason” is defined in the employment agreement to
include events such as our material breach of the employment agreement or our
relocation of Mr. Booth’s employment to more than 50 miles away without his
consent.
Mr.
Booth
is required to execute a release of claims against us as a condition to the
payment of severance benefits. Severance is not paid if the term of the
employment agreement expires. Mr. Booth’s restricted common stock and
performance restricted stock units will become fully vested upon the occurrence
of Mr. Booth’s death, disability, termination of employment without cause or
resignation for good reason, or a “change in control” (as defined in the
respective restricted stock agreement). In the event of a termination by us
without cause or by Mr. Booth for good reason, benefits are grossed up to cover
federal excise taxes. If Mr. Booth dies during the term of the employment
agreement, his estate is entitled to a prorated bonus for the year of his
death.
Mr.
Booth
is restricted from using any of our confidential information during his
employment and for two years thereafter or from using any trade secrets during
his employment and for as long thereafter as permitted by applicable law. During
the period of employment and for one year thereafter, Mr. Booth is obligated
not
to provide managerial services or management consulting services to a competing
business. Competing businesses is defined to include a defined list of
competitors and any other business with the primary purpose of leasing assets
to
healthcare operators or financing ownership or operation of senior, retirement
or healthcare related real estate. In addition, during the period of employment
and for one year thereafter, Mr. Booth agrees not to solicit clients or
customers with whom he had material contact or to solicit our management level
or key employees. If the term of the employment agreement expires at December
31, 2007 and as a result no severance is paid, then these provisions also expire
at December 31, 2007.
Robert
O. Stephenson Employment Agreement
We
entered into an employment agreement with Robert O. Stephenson, dated as of
September 1, 2004, to be our Chief Financial Officer. The term of the agreement
expires on December 31, 2007.
74
Directors
and executive officers
Mr.
Stephenson’s current base salary is $262,700 per year, subject to increase by us
and provides that he will be eligible for an annual bonus of up to 60% of his
base salary based on criteria determined by the Compensation Committee of our
Board of Directors.
In
connection with this employment agreement, we issued Mr. Stephenson 60,000
shares of our restricted common stock on September 10, 2004, which vested 33
1/3% on each of January 1, 2005, January 1, 2006, and January 1, 2007. Dividends
were paid on unvested shares and a dividend equivalent per share was paid in
an
amount equal to the dividend per share payable to stockholders of record as
of
July 30, 2004. Also in connection with this employment agreement, we issued
Mr.
Stephenson 60,000 performance restricted stock units on September 10, 2004,
which were fully vested as of as of December 31, 2006 because we had attained
$0.30 per share of common stock per fiscal quarter in “Adjusted Funds from
Operation” (as defined in the agreement) for two (2) consecutive quarters.
Dividend equivalents on vested performance restricted stock units are paid
currently. Pursuant to the terms of Mr. Stephenson’s performance restricted
stock unit agreement, he will not receive the vested shares attributable to
his
performance restricted stock units until the earlier of January 1, 2008, he
is
terminated without cause or quits for good reason (as defined in the performance
restricted stock unit agreement), or his death or disability (as defined in
performance restricted stock unit agreement).
If
we
terminate Mr. Stephenson’s employment without “cause” or if he resigns for “good
reason,” he will be entitled to payment of his cash compensation (the sum of his
then current annual base salary plus average annual bonus payable based on
the
three completed fiscal years prior to termination of employment) for a period
of
one and one half (1.5) years. “Cause” is defined in the employment agreement to
include events such as willful refusal to perform duties, willful misconduct
in
performance of duties, unauthorized disclosure of confidential company
information, or fraud or dishonesty against us. “Good reason” is defined in the
employment agreement to include events such as our material breach of the
employment agreement or our relocation of Mr. Stephenson’s employment to more
than 50 miles away without his consent.
Mr.
Stephenson is required to execute a release of claims against us as a condition
to the payment of severance benefits. Severance is not paid if the term of
the
employment agreement expires. Mr. Stephenson’s restricted common stock and
performance restricted stock units will become fully vested upon the occurrence
of Mr. Stephenson’s death, disability, termination of employment without cause
or resignation for good reason, or a “change in control” (as defined in the
respective restricted stock agreement). In the event of a termination by us
without cause or by Mr. Stephenson for good reason, benefits are grossed up
to
cover federal excise taxes. If Mr. Stephenson dies during the term of the
employment agreement, his estate is entitled to a prorated bonus for the year
of
his death.
Mr.
Stephenson is restricted from using any of our confidential information during
his employment and for two years thereafter or from using any trade secrets
during his employment and for as long thereafter as permitted by applicable
law.
During the period of employment and for one year thereafter, Mr. Stephenson
is
obligated not to provide managerial services or management consulting services
to a competing business. Competing businesses is defined to include a defined
list of competitors and any other business with the primary purpose of leasing
assets to healthcare operators or financing ownership or operation of senior,
retirement or healthcare related real estate. In addition, during the period
of
employment and for one year thereafter, Mr. Stephenson agrees not to solicit
clients or customers with whom he had material contact or to solicit our
management level or key employees. If the term of the employment agreement
expires at December 31, 2007 and as a result no severance is paid, then these
provisions also expire at December 31, 2007.
R.
Lee Crabill, Jr. Employment Agreement
We
entered into an employment agreement with R. Lee Crabill, dated as of September
1, 2004, to be our Senior Vice President of Operations. The term of the
agreement expires on December 31, 2007.
Mr.
Crabill’s current base salary is $253,400 per year, subject to increase by us
and provides that he will be eligible for an annual bonus of up to 60% of his
base salary based on criteria determined by the Compensation Committee of our
Board of Directors.
75
Directors
and executive officers
In
connection with this employment agreement, we issued Mr. Crabill 57,500 shares
of our restricted common stock on September 10, 2004, which vested 33 1/3%
on
each of January 1, 2005, January 1, 2006, and January 1, 2007. Dividends were
paid on unvested shares and a dividend equivalent per share was paid in an
amount equal to the dividend per share payable to stockholders of record as
of
July 30, 2004. Also in connection with this employment agreement, we issued
Mr.
Crabill 57,500 performance restricted stock units on September 10, 2004, which
were fully vested as of as of December 31, 2006 because we had attained $0.30
per share of common stock per fiscal quarter in “Adjusted Funds from Operations”
(as defined in the agreement) for two (2) consecutive quarters. Dividend
equivalents on vested performance restricted stock units are paid currently.
Performance restricted stock units that have not become vested as of December
31, 2007 are forfeited. Pursuant to the terms of Mr. Crabill’s performance
restricted stock unit agreement, he will not receive the vested shares
attributable to his performance restricted stock units until the earlier of
January 1, 2008, he is terminated without cause or quits for good reason (as
defined in the performance restricted stock unit agreement), or his death or
disability (as defined in performance restricted stock unit
agreement).
If
we
terminate Mr. Crabill’s employment without “cause” or if he resigns for “good
reason,” he will be entitled to payment of his cash compensation (the sum of his
then current annual base salary plus average annual bonus payable based on
the
three completed fiscal years prior to termination of employment) for a period
of
one and one half (1.5) years. “Cause” is defined in the employment agreement to
include events such as willful refusal to perform duties, willful misconduct
in
performance of duties, unauthorized disclosure of confidential company
information, or fraud or dishonesty against us. “Good reason” is defined in the
employment agreement to include events such as our material breach of the
employment agreement or our relocation of Mr. Crabill’s employment to more than
50 miles away without his consent.
Mr.
Crabill is required to execute a release of claims against us as a condition
to
the payment of severance benefits. Severance is not paid if the term of the
employment agreement expires. Mr. Crabill’s restricted common stock and
performance restricted stock units will become fully vested upon the occurrence
of Mr. Crabill’s death, disability, termination of employment without cause or
resignation for good reason, or a “change in control” (as defined in the
respective restricted stock agreement). In the event of a termination by us
without cause or by Mr. Crabill for good reason, benefits are grossed up to
cover federal excise taxes. If Mr. Crabill dies during the term of the
employment agreement, his estate is entitled to a prorated bonus for the year
of
his death.
Mr.
Crabill is restricted from using any of our confidential information during
his
employment and for two years thereafter or from using any trade secrets during
his employment and for as long thereafter as permitted by applicable law. During
the period of employment and for one year thereafter, Mr. Crabill is obligated
not to provide managerial services or management consulting services to a
competing business. Competing businesses is defined to include a defined list
of
competitors and any other business with the primary purpose of leasing assets
to
healthcare operators or financing ownership or operation of senior, retirement
or healthcare related real estate. In addition, during the period of employment
and for one year thereafter, Mr. Crabill agrees not to solicit clients or
customers with whom he had material contact or to solicit our management level
or key employees. If the term of the employment agreement expires at December
31, 2007 and as a result no severance is paid, then these provisions also expire
at December 31, 2007.
OPTION
GRANTS/SAR GRANTS
No
options or stock appreciation rights, or SARs, were granted to the named
executive officers during 2006.
LONG-TERM
INCENTIVE PLAN
For
the
period from August 14, 1992, the date of commencement of our operations, through
December 31, 2006, we have had no long-term incentive plans.
DEFINED
BENEFIT OR ACTUARIAL PLAN
For
the
period from August 14, 1992, the date of commencement of our operations, through
December 31, 2006, we have had no pension plans.
76
Directors and executive officers
DIRECTOR
COMPENSATION
Name
(A)
|
Fees
earned or paid in cash
($)
(1)
(B)
|
Stock
Awards
($)
(C)
|
Option
Awards
($)
(D)
|
Non-Equity
Incentive Plan Compensation
($)
(E)
|
Change
in Pension Value and Non-Qualified Deferred Compensation
Earnings
(F)
|
All
Other Compensation
($)
(G)
|
Total
($)
(H)
|
|||||||||||||||
Thomas
F. Franke
|
$
|
53,500
|
$
|
27,582
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
81,082
|
||||||||
Harold
J. Kloosterman
|
$
|
69,000
|
$
|
27,582
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
96,582
|
||||||||
Bernard
J. Korman
|
$
|
75,000
|
$
|
52,762
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
127,762
|
||||||||
Edward
Lowenthal
|
$
|
57,500
|
$
|
27,582
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
85,082
|
||||||||
Stephen
D. Plavin
|
$
|
67,500
|
$
|
27,582
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
95,082
|
(1)
|
This
represents the fees earned in 2006 and includes amounts to be paid
in
2007. The amount excludes amounts paid in 2006 but earned in
2005.
|
2006
Standard Compensation Arrangement for Directors. For
the
year ended December 31, 2006, our standard compensation arrangement for our
Board of Directors provided that each non-employee director would receive a
cash
payment equal to $20,000 per year, payable in quarterly installments of $5,000.
Each non-employee director also is entitled to receive a quarterly grant of
shares of common stock equal to the number of shares determined by dividing
the
sum of $5,000 by the fair market value of the common stock on the date of each
quarterly grant, currently set at February 15, May 15, August 15, and November
15. At the director’s option, the quarterly cash payment of director’s fees may
be payable in shares of common stock. In addition, each non-employee director
is
entitled to receive fees equal to $1,500 per meeting for attendance at each
regularly scheduled meeting of the Board of Directors. For each teleconference
or called special meeting of the Board of Directors, each non-employee director
receives $1,500 for meeting. The Chairman of the Board receives an annual
payment of $25,000 for being Chairman and each Committee Chair received an
annual payment of $5,000. In addition, we reimburse the directors for travel
expenses incurred in connection with their duties as directors. Employee
directors received no compensation for service as directors.
Under
our
standard compensation arrangement of directors, each non-employee director
of
our company receives awarded options with respect to 10,000 shares at the date
the plan was adopted or upon their initial election as a director. For the
fiscal year ended December 31, 2006, our standard compensation arrangement
for
directors provide that each non-employee director receives awarded an additional
option grant with respect to 1,000 restricted shares on January 1 of each year
they served as a director. All grants have been and will be at an exercise
price
equal to 100% of the fair market value of our common stock on the date of the
grant. Non-employee director options and restricted stock vest ratably over
a
three-year period beginning the date of grant.
2007
Standard Compensation Arrangement for Directors. Effective
January 1, 2007, we modified our standard compensation arrangement for directors
to provide that each non-employee director would receive (i) a cash payment
of
$25,000, payable in quarterly installments of $6,250, (ii) a quarterly grant
of
shares of common stock equal to the number of shares determined by dividing
the
sum of $6,250 by the fair market value of the common stock on the date of each
quarterly grant, currently set at February 15, May 15, August 15, and November
15, and (iii) restricted stock with respect to 1,500 shares on January 1 of
each
year they serve as a director (except that the chairman of the board will be
awarded an additional 2,500 restricted shares on January 1 of each year he
serves as Chairman). In addition, the Chairman of the Board will receive an
additional annual payment of $25,000, the Chairman of the Audit Committee will
receive an additional $15,000, the Chairman of the Compensation Committee will
receive an additional $10,000 and all other committee chairman will receive
$7,000.
We
will
continue to pay each non-employee director fees equal to $1,500 per meeting
for
attendance at each regularly scheduled meeting of the Board of Directors. For
each teleconference or called special meeting of the Board
of
Directors, each non-employee director will continue to receive $1,500 for
meeting. In addition, each non-new employee director of our company will be
awarded options with respect to 10,000 shares upon their initial election as
a
director.
77
Directors
and executive officers
All
stock
grants will be at an exercise price equal to 100% of the fair market value
of
our common stock on the date of the grant. Non-employee director options and
restricted stock vest ratably over a three-year period beginning the date of
grant.
78
The
following table sets forth information regarding beneficial ownership of our
capital stock as of March 8, 2007 for:
·
|
each
of our directors and the named executive officers appearing in the
table
under “Executive Compensation — Compensation of Executive Officers”;
and
|
·
|
all
persons known to us to be the beneficial owner of more than 5% of
our
outstanding common stock.
|
Except
as
indicated in the footnotes to this table, the persons named in the table have
sole voting and investment power with respect to all shares of our common stock
shown as beneficially owned by them, subject to community property laws where
applicable. The business address of the directors and executive officers is
9690
Deereco Road, Suite 100, Timonium, Maryland 21093.
Common
Stock
|
Series
D Preferred
|
||||||||||||
Beneficial
Owner
|
Number
of
Shares
|
Percent
of
Class(1)
|
Number
of
Shares
|
Percent
of
Class(19)
|
|||||||||
C.
Taylor Pickett
|
397,742
|
(2)
|
0.7
|
%
|
—
|
—
|
|||||||
Daniel
J. Booth
|
122,889
|
(3)
|
0.2
|
%
|
—
|
—
|
|||||||
R.
Lee Crabill, Jr.
|
91,667
|
(4)
|
0.2
|
%
|
—
|
—
|
|||||||
Robert
O. Stephenson
|
136,458
|
(5)
|
0.2
|
%
|
—
|
—
|
|||||||
Thomas
F. Franke
|
86,176
|
(6)
(7)
|
0.1
|
%
|
—
|
—
|
|||||||
Harold
J. Kloosterman
|
83,597
|
(8)
(9)
|
0.1
|
%
|
—
|
—
|
|||||||
Bernard
J. Korman
|
563,422
|
(10)
|
0.9
|
%
|
—
|
—
|
|||||||
Edward
Lowenthal
|
40,968
|
(11)(12)
|
0.1
|
%
|
—
|
—
|
|||||||
Stephen
D. Plavin
|
33,195
|
(13)
|
0.1
|
%
|
—
|
—
|
|||||||
Directors
and executive officers as a group (9 persons)
|
1,556,114
|
(14)
|
2.6
|
%
|
—
|
—
|
|||||||
5%
Beneficial Owners:
|
|||||||||||||
ING
Clarion Real Estate Securities, L.P.
|
9,061,903
|
(15)
|
15.1
|
%
|
|||||||||
Nomura
Asset Management Co., LTD.
|
3,934,600
|
(16)
|
6.5
|
%
|
|||||||||
The
Vanguard Group, Inc.
|
3,461,503
|
(17)
|
5.8
|
%
|
|||||||||
ING
Groep N.V.
|
9,713,849
|
(18)
|
16.2
|
%
|
(1)
|
Based
on 60,100,525 shares of our common stock outstanding
as of March 8, 2007.
|
(2)
|
Includes
125,000 shares of restricted common stock that vested on 12/31/06
based on achievement of $0.30 per share of common stock per fiscal
quarter
in “Adjusted Funds from
Operations.”
|
(3)
|
Includes
75,000 shares of restricted common stock that vested on 12/31/06
based on achievement of $0.30 per share of common stock per fiscal
quarter
in “Adjusted Funds from
Operations.”
|
(4)
|
Includes
57,500 shares of restricted common stock that vested on 12/31/06
based on achievement of $0.30 per share of common stock per fiscal
quarter
in “Adjusted Funds from
Operations.”
|
(5)
|
Includes
60,000 shares of restricted common stock that vested on 12/31/06
based on achievement of $0.30 per share of common stock per fiscal
quarter
in “Adjusted Funds from
Operations.”
|
(6)
|
Includes
47,141 shares owned by a family limited liability company (Franke
Family
LLC) of which Mr. Franke is a member.
|
(7)
|
Includes
stock options that are exercisable within 60 days to acquire 4,668
shares.
|
79
Security
ownership of certain beneficial owners and
management
(8)
|
Includes
shares owned jointly by Mr. Kloosterman and his wife, and 10,827
shares
held solely in Mr. Kloosterman’s wife’s name.
|
(9)
|
Includes
stock options that are exercisable within 60 days to acquire 9,000
shares.
|
(10)
|
Includes
stock options that are exercisable within 60 days to acquire 7,001
shares.
|
(11)
|
Includes
1,400 shares owned by his wife through an individual retirement
account.
|
(12)
|
Includes
stock options that are exercisable within 60 days to acquire 7,335
shares.
|
(13)
|
Includes
stock options that are exercisable within 60 days to acquire 14,000
shares.
|
(14)
|
Includes
stock options that are exercisable within 60 days to acquire 42,004
shares
|
(15)
|
Based
on a Schedule 13G filed by ING Clarion Real Estate Securities, L.
P. on
February 12, 2007. ING Clarion Real Estate Securities, L.P. is located
at
259 N. Radnor Chester Road, Suite 205 Radnor, PA 19087. Includes
4,801,428
shares of common stock over which ING Clarion Real Estate Securities,
L.P.
has sole voting power or power to direct the
vote.
|
(16)
|
Based
on a Schedule 13G filed by Nomura Asset Management Co., LTD. on February
12, 2007. Nomura Asset Management Co., LTD. is located at 1-12-1,
Nihonbashi, Chuo-ku, Toyko, Japan 103-8260. Includes 3,934,600 shares
of
common stock over which Nomura Asset Management Co., LTD. has sole
voting
power or power to direct the vote.
|
(17)
|
Based
on a Schedule 13G filed by The Vanguard Group, Inc. on February 14,
2007.
The Vanguard Group, Inc. is located at 100 Vanguard Blvd. Malvern,
PA
19355. Includes 85,883 shares of common stock over which The Vanguard
Group, Inc. has sole voting power or power to direct the
vote.
|
(18)
|
Based
on a Schedule 13G filed by ING Groep N.V. on February 14, 2007. ING
Groep
N.V. is located at Amstelveenseweg 500, 1081 KL Amsterdam, The
Netherlands. Includes 9,713,849 shares of common stock over which
ING
Groep N.V. has sole voting power or power to direct the
vote.
|
(19)
|
Based
on 4,739,500 shares of Series D preferred stock outstanding at March
8,
2007.
|
80
Because
our board of directors believes it is essential for us to continue to qualify
as
a REIT, our charter documents contain restrictions on the ownership and transfer
of our capital stock that are intended to assist us in complying with the
requirements to qualify as a real estate investment trust.
If
our
board of directors is, at any time and in good faith, of the opinion that direct
or indirect ownership of at least 9.9% or more of the voting shares of stock
has
or may become concentrated in the hands of one beneficial owner (as that term
is
defined in Rule 13d-3 under the Exchange Act), our board of directors has the
power:
·
|
by
any means deemed equitable by it to call for the purchase from any
stockholder a number of voting shares sufficient, in the opinion
of our
board of directors, to maintain or bring the direct or indirect ownership
of voting shares of stock of the beneficial owner to a level of no
more
than 9.9% of the outstanding voting shares of our stock;
and
|
·
|
to
refuse to transfer or issue voting shares of stock to any person
whose
acquisition of those voting shares would, in the opinion of our board
of
directors, result in the direct or indirect ownership by that person
of
more than 9.9% of the outstanding voting shares of our
stock.
|
Further,
any transfer of shares, options, warrants or other securities convertible into
voting shares that would create a beneficial owner of more than 9.9% of the
outstanding shares of our stock shall be deemed void ab initio and the intended
transferee shall be deemed never to have had an interest therein. The purchase
price for any voting shares of stock so redeemed shall be equal to:
·
|
the
fair market value of the shares reflected in the closing sales price
for
the shares, if then listed on a national securities
exchange;
|
·
|
the
average of the closing sales prices for the shares, if then listed
on more
than one national securities
exchange;
|
·
|
if
the shares are not then listed on a national securities exchange,
the
latest bid quotation for the shares if then traded over-the-counter,
on
the last business day immediately preceding the day on which notices
of
the acquisitions are sent; or
|
·
|
if
none of these closing sales prices or quotations are available, then
the
purchase price will be equal to the net asset value of the stock
as
determined by our board of directors in accordance with the provisions
of
applicable law.
|
From
and
after the date fixed for purchase by our board of directors, the holder of
any
shares so called for purchase shall cease to be entitled to distributions,
voting rights and other benefits with respect to those shares, except the right
to payment of the purchase price for the shares.
81
As
of
the
date of this prospectus,
our
authorized capital stock consisted of 100,000,000 shares of common stock, par
value $0.10 per share, and 20,000,000 shares of preferred stock, par value
$1.00
per share, of which 4,739,500 shares
were designated as Series D preferred stock. As of March
8,
2007,
we had
60,093,030 shares
of
our common stock and 4,739,500 shares
of
our Series D preferred stock issued and outstanding.
Our
common stock and Series D preferred stock are listed on the New York Stock
Exchange. We intend to apply to list for trading on the New York Stock Exchange
any additional shares of our common stock that are issued and sold hereunder.
Our outstanding Series D Preferred Stock has no stated maturity
or voting rights and is not subject to any sinking fund or mandatory redemption.
The Series D Preferred Stock is, with respect to dividend rights and rights
upon liquidation, dissolution or winding up of our company, ranked senior to
all
classes or series of our common stock. Holders of shares of the Series D
Preferred Stock are entitled to receive the payment of dividends, preferential
cumulative cash dividends at a rate of 8.375% per annum of the liquidation
preference per share. Dividends on the Series D Preferred Stock are
cumulative from the date of original issue and are payable
quarterly.
Computershare
Trust Company, N.A. is the transfer agent and registrar of the common stock
and
preferred stock.
COMMON
STOCK
All
shares of our common stock participate equally in dividends payable to
stockholders of our common stock when and as declared by our board of directors
and in net assets available for distribution to stockholders of our common
stock
on liquidation or dissolution, have one vote per share on all matters submitted
to a vote of the stockholders and do not have cumulative voting rights in the
election of directors. All issued and outstanding shares of our common stock
are, and our common stock offered hereby will be upon issuance, validly issued,
fully paid and nonassessable. Holders of our common stock do not have
preference, conversion, exchange or preemptive rights. Our common stock is
listed on the New York Stock Exchange under the symbol “OHI.”
PREFERRED
STOCK
The
following description of the terms of the preferred stock sets forth certain
general terms and provisions of the preferred stock. The description of certain
provisions of the preferred stock set forth below does not purport to be
complete and is subject to and qualified in its entirety by reference to our
articles of incorporation, as amended, and the Board of Directors’ resolution or
articles supplementary relating to each series of the preferred
stock.
General
Under
the
articles of incorporation, our Board of Directors is authorized without further
stockholder action to provide for the issuance of shares of our preferred stock,
up to the amount of shares of preferred stock authorized under the articles
of
incorporation but not issued or reserved for issuance thereunder, in one or
more
series, with such designations, preferences, powers and relative participating,
optional or other special rights and qualifications, limitations or restrictions
thereon, including, but not limited to, dividend rights, dividend rate or rates,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), redemption price or prices, and liquidation
preferences as shall be stated in the resolution providing for the issue of
a
series of such stock, adopted, at any time or from time to time, by our Board
of
Directors.
The
board
of directors’ resolution or articles supplementary relating to each particular
series of the preferred stock offered will establish specific terms for each
series, including:
·
|
the
designation and stated value per share of such preferred stock and
the
number of shares offered;
|
·
|
the
amount of liquidation preference per
share;
|
·
|
the
initial public offering price at which such preferred stock will
be
issued;
|
82
Description
of capital stock
·
|
the
dividend rate (or method of calculation), the dates on which dividends
shall be payable and the dates from which dividends shall commence
to
cumulate, if any;
|
·
|
any
redemption or sinking fund
provisions;
|
·
|
any
conversion rights; and
|
·
|
any
additional voting, dividend, liquidation, redemption, sinking fund
and
other rights, preferences, privileges, limitations and
restrictions.
|
The
preferred stock will, when issued, be fully paid and nonassessable and will
have
no preemptive rights. Unless otherwise stated in a board of directors’
resolution or articles supplementary relating to a particular series of the
preferred stock, each series of the preferred stock will rank on a parity as
to
dividends and distributions of assets with each other series of the preferred
stock. The rights of the holders of each series of the preferred stock will
be
subordinate to those of the company’s general creditors.
Dividend
Rights
Holders
of the preferred stock of each series will be entitled to receive, when, as
and
if declared by our Board of Directors, out of funds of the company legally
available therefor, cash dividends on such dates and at such rates as will
be
set forth in, or as are determined by, the method described in the board of
directors’ resolution or articles supplementary relating to such series of the
preferred stock. Such rate may be fixed or variable or both. Each such dividend
will be payable to the holders of record as they appear on the stock books
of
the company on such record dates, fixed by our Board of Directors, as specified
in the board of directors’ resolution or articles supplementary relating to such
series of preferred stock.
Dividends
on any series of preferred stock may be cumulative or noncumulative, as provided
in the applicable board of directors’ resolution or articles supplementary. If
the board of directors of the company fails to declare a dividend payable on
a
dividend payment date on any series of preferred stock for which dividends
are
noncumulative, then the holders of such series of preferred stock will have
no
right to receive a dividend in respect of the dividend period ending on such
dividend payment date, and the company shall have no obligation to pay the
dividend accrued for such period, whether or not dividends on such series are
declared payable on any future dividend payment dates. Dividends on the shares
of each series of preferred stock for which dividends are cumulative will accrue
from the date on which we initially issue shares of such series.
So
long
as the shares of any series of the preferred stock shall be outstanding,
unless
·
|
full
dividends (including if such preferred stock is cumulative, dividends
for
prior dividend periods) shall have been paid or declared and set
apart for
payment on all outstanding shares of the preferred stock of such
series
and all other classes and series of preferred stock of the company
(other
than “junior stock” as defined below),
and
|
·
|
we
are not in default or in arrears with respect to the mandatory or
optional
redemption or mandatory repurchase or other mandatory retirement
of, or
with respect to any sinking or other analogous fund for, any shares
of
preferred stock of such series or any shares of any of our other
preferred
stock of any class or series (other than junior
stock),
|
we
may
not declare any dividends on any shares of our common stock or our other stock
ranking as to dividends or distributions of assets junior to such series of
preferred stock (the common stock and any such other stock being herein referred
to as “junior stock”), or make any payment on account of, or set apart money
for, the purchase, redemption or other retirement of, or for a sinking or other
analogous fund for, any shares of junior stock or make any distribution in
respect thereof, whether in cash or property or in obligations or our stock,
other than junior stock which is neither convertible into, nor exchangeable
or
exercisable for, any of our securities other than junior stock.
83
Description
of capital stock
Liquidation
Preference
In
the
event of any liquidation, dissolution or winding up of our company, voluntary
or
involuntary, the holders of each series of the preferred stock will be entitled
to receive out of the assets of the company available for distribution to
stockholders, before any distribution of assets is made to the holders of our
common stock or any other shares of our stock ranking junior as to such
distribution to such series of preferred stock, the amount set forth in the
prospectus supplement relating to such series of the preferred stock. If, upon
any voluntary or involuntary liquidation, dissolution or winding up of our
company, the amounts payable with respect to the preferred stock of any series
and any other shares of our preferred stock (including any other series of
the
preferred stock) ranking as to any such distribution on a parity with such
series of the preferred stock are not paid in full, the holders of the preferred
stock of such series and of such other shares of our preferred stock will share
ratably in any such distribution of our assets in proportion to the full
respective preferential amounts to which they are entitled. After payment to
the
holders of the preferred stock of each series of the full preferential amounts
of the liquidating distribution to which they are entitled, the holders of
each
such series of the preferred stock will be entitled to no further participation
in any distribution of our assets.
If
liquidating distributions shall have been made in full to all holders of shares
of preferred stock, the remaining assets of the company shall be distributed
among the holders of junior stock, according to their respective rights and
preferences and in each case according to their respective number of shares.
For
such purposes, the consolidation or merger of the company with or into any
other
corporation, or the sale, lease or conveyance of all or substantially all of
our
property or business shall not be deemed to constitute a liquidation,
dissolution or winding up of our company.
Redemption
A
series
of the preferred stock may be redeemable, in whole or from time to time in
part,
at our option, and may be subject to mandatory redemption pursuant to a sinking
fund or otherwise, in each case upon terms, at the time and at the redemption
prices set forth in the prospectus supplement relating to such series. Shares
of
the preferred stock redeemed by us will be restored to the status of authorized
but unissued shares of our preferred stock.
In
the
event that fewer than all of the outstanding shares of a series of the preferred
stock are to be redeemed, whether by mandatory or optional redemption, the
number of shares to be redeemed will be determined by lot or pro rata (subject
to rounding to avoid fractional shares) as may be determined by us or by any
other method as may be determined by the company in its sole discretion to
be
equitable. From and after the redemption date (unless default shall be made
by
the company in providing for the payment of the redemption price plus
accumulated and unpaid dividends, if any), dividends shall cease to accumulate
on the shares of the preferred stock called for redemption and all rights of
the
holders thereof (except the right to receive the redemption price plus
accumulated and unpaid dividends, if any) shall cease.
So
long
as any dividends on shares of any series of the preferred stock or any other
series of preferred stock of the company ranking on a parity as to dividends
and
distribution of assets with such series of the preferred stock are in arrears,
no shares of any such series of the preferred stock or such other series of
preferred stock of the company will be redeemed (whether by mandatory or
optional redemption) unless all such shares are simultaneously redeemed, and
we
will not purchase or otherwise acquire any such shares; provided, however,
that
the foregoing will not prevent the purchase or acquisition of such shares
pursuant to a purchase or exchange offer made on the same terms to holders
of
all such shares outstanding.
Conversion
Rights
The
terms
and conditions, if any, upon which shares of any series of preferred stock
are
convertible into common stock will be set forth in the applicable prospectus
supplement relating thereto. Such terms will include the number of shares of
common stock into which the preferred stock is convertible, the conversion
price
(or manner of calculation thereof), the conversion period, provisions as to
whether conversion will be at the option of the holders of preferred stock
or
the company, the events requiring an adjustment of the conversion price and
provisions affecting conversion.
84
Description
of capital stock
Voting
Rights
Except
as
indicated below or in a prospectus supplement relating to a particular series
of
the preferred stock, or except as required by applicable law, the holders of
the
preferred stock will not be entitled to vote for any purpose.
So
long
as any shares of the preferred stock of a series remain outstanding, the consent
or the affirmative vote of the holders of at least 80% of the votes entitled
to
be cast with respect to the then outstanding shares of such series of the
preferred stock together with any “parity preferred” (as defined below), voting
as one class, either expressed in writing or at a meeting called for that
purpose, will be necessary (i) to permit, effect or validate the
authorization, or any increase in the authorized amount, of any class or series
of shares of the company ranking prior to the preferred stock of such series
as
to dividends, and (ii) to repeal, amend or otherwise change any of the
provisions applicable to the preferred stock of such series in any manner which
adversely affects the powers, preferences, voting power or other rights or
privileges of such series of the preferred stock. In case any series of the
preferred stock would be so affected by any such action referred to in
clause (ii) above in a different manner than one or more series of the
parity preferred then outstanding, the holders of shares of the preferred stock
of such series, together with any series of the parity preferred which will
be
similarly affected, will be entitled to vote as a class, and the company will
not take such action without the consent or affirmative vote, as above provided,
of at least 80% of the total number of votes entitled to be cast with respect
to
each such series of the preferred stock and the parity preferred, then
outstanding, in lieu of the consent or affirmative vote hereinabove otherwise
required.
With
respect to any matter as to which the preferred stock of any series is entitled
to vote, holders of the preferred stock of such series and any other series
of
preferred stock of the company ranking on a parity with such series of the
preferred stock as to dividends and distributions of assets and which by its
terms provides for similar voting rights (referred to herein as the “parity
preferred”) will be entitled to cast the number of votes set forth in the
prospectus supplement with respect to that series of preferred stock. As a
result of the provisions described in the preceding paragraph requiring the
holders of shares of a series of the preferred stock to vote together as a
class
with the holders of shares of one or more series of parity preferred, it is
possible that the holders of such shares of parity preferred could approve
action that would adversely affect such series of preferred stock, including
the
creation of a class of capital stock ranking prior to such series of preferred
stock as to dividends, voting or distributions of assets.
The
foregoing voting provisions will not apply if, at or prior to the time when
the
act with respect to which such vote would otherwise be required shall be
effected, all outstanding shares of the preferred stock shall have been redeemed
or called for redemption and sufficient funds shall have been deposited in
trust
to effect such redemption.
REDEMPTION
AND BUSINESS COMBINATION PROVISIONS
If
our
Board of Directors is, at any time and in good faith, of the opinion that actual
or constructive ownership of at least 9.9% or more of the value of our
outstanding capital stock has or may become concentrated in the hands of one
owner, our board of directors will have the power:
·
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by
means deemed equitable by it, to call for the purchase from any of
our
stockholders a number of voting shares sufficient, in the opinion
of our
board of directors, to maintain or bring the actual or constructive
ownership of such owner to a level of no more than 9.9% of the value
of
our outstanding capital stock; and
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·
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to
refuse to transfer or issue voting shares of our capital stock to
any
person whose acquisition of such voting shares would, in the opinion
of
our board of directors, result in the actual or constructive ownership
by
that person of more than 9.9% of the value of our outstanding capital
stock.
|
Further,
any transfer of shares, options, warrants, or other securities convertible
into
voting shares that would create a beneficial owner of more than 9.9% of the
value of our outstanding capital stock will be deemed void ab initio and the
intended transferee will be deemed never to have had an interest therein.
Subject to the rights of the preferred stock described below, the purchase
price
for any voting shares of our capital stock so redeemed will be equal to the
fair
market value of the shares reflected in the closing sales prices for the shares,
if then listed on a national securities exchange, or the average of the closing
sales prices for the shares if then listed on more than one national securities
exchange, or if the shares are not then listed on a national securities
exchange, the latest bid quotation for the shares if then traded
over-the-counter, on the last business day immediately preceding the day on
which we send notices of such acquisitions, or, if no such closing sales prices
or quotations are available, then the purchase price shall be equal to the
net
asset value of such stock as determined by our Board of Directors in accordance
with the provisions of applicable law. The purchase price for shares of
Series D preferred stock will be equal to the fair market value of the
shares reflected in the closing sales price for the shares, if then listed
on a
national securities exchange, or if the shares are not then listed on a national
securities exchange, the purchase price will be equal to the liquidation
preference of such shares of Series D preferred stock. From and after the
date fixed for purchase by our board of directors, the holder of any shares
so
called for purchase will cease to be entitled to distributions, voting rights
and other benefits with respect to such shares, except the right to payment
of
the purchase price for the shares.
85
Description
of capital stock
Our
articles of incorporation require that, except in certain circumstances,
business combinations between us and a beneficial holder of 10% or more of
our
outstanding voting stock, a related person, be approved by the affirmative
vote
of at least 80% of our outstanding voting shares.
A
“business combination” is defined in our articles of incorporation
as:
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any
merger or consolidation of our company with or into a related
person;
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·
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any
sale, lease, exchange, transfer or other disposition, including without
limitation a mortgage or any other security device, of all or any
“substantial part,” as defined below, of our assets including, without
limitation, any voting securities of a subsidiary to a related
person;
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·
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any
merger or consolidation of a related person with or into our
company;
|
·
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any
sale, lease, exchange, transfer or other disposition of all or any
substantial part of the assets of a related person to our
company;
|
·
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the
issuance of any securities (other than by way of pro rata distribution
to
all stockholders) of our company to a related person;
and
|
·
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any
agreement, contract or other arrangement providing for any of the
transactions described in the definition of business
combination.
|
The
term
“substantial part” is defined as more than 10% of the book value of our total
assets as of the end of our most recent fiscal year ending prior to the time
the
determination is being made.
The
80%
voting requirement described above will not be applicable if (i) our board
of directors has unanimously approved in advance the acquisition of our stock
that caused a related person to become a related person, or (ii) the
business combination is solely between us and a wholly owned subsidiary.
Under
the
terms of our articles of incorporation, as amended, our Board of Directors
is
classified into three classes. Each class of directors serves for a term of
three years, with one class being elected each year.
The
foregoing provisions of the articles of incorporation and certain other matters
may not be amended without the affirmative vote of at least 80% of our
outstanding voting shares.
The
foregoing provisions may have the effect of discouraging unilateral tender
offers or other takeover proposals which certain stockholders might deem
in
their interests or in which they might receive a substantial premium. Our
Board
of Directors’ authority to issue and establish the terms of currently authorized
preferred stock, without stockholder approval, may also have the effect of
discouraging takeover attempts. The provisions could also have the effect
of
insulating current management against the possibility of removal and could,
by
possibly reducing temporary fluctuations in market price caused by accumulation
of shares, deprive stockholders of opportunities to sell at a temporarily
higher
market price. However, our board of directors believes that inclusion of
the
business combination provisions in our articles of incorporation may help
assure
fair treatment of stockholders and preserve our assets.
86
Description
of capital stock
The foregoing summary of certain provisions of our articles of incorporation does not purport to be complete or to give effect to provisions of statutory or common law. The foregoing summary is subject to, and qualified in its entirety by reference to, the provisions of applicable law and the articles of incorporation, a copy of which is incorporated by reference as an exhibit to the registration statement of which this prospectus is a part.
STOCKHOLDER
RIGHTS PLAN
On
May 12, 1999, our Board of Directors authorized the adoption of a
stockholder rights plan. The plan is designed to require a person or group
seeking to gain control of our company to offer a fair price to all of our
stockholders. The rights plan will not interfere with any merger, acquisition
or
business combination that our board of directors finds is in our best interest
and the best interests of our stockholders.
In
connection with the adoption of the stockholder rights plan, our Board of
Directors declared a dividend distribution of one right for each common share
outstanding on May 24, 1999. The stockholder protection rights will not
become exercisable unless a person acquires 10% or more of our common stock,
or
begins a tender offer that would result in the person owning 10% or more of
our
common stock. At that time, each stockholder protection right would entitle
each
stockholder other than the person who triggered the rights plan to purchase
either our common stock or stock of an acquiring entity at a discount to the
then market price. The plan was not adopted in response to any specific attempt
to acquire control of our company.
87
CONSEQUENCES
OF AN INVESTMENT IN OUR SECURITIES
The
following is a general summary of the material U.S. federal income tax
considerations applicable to us, and to the purchasers 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 relating to an investment in our securities was based
on
consultations with Powell Goldstein LLP, our special counsel. In the opinion
of
Powell Goldstein LLP, 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 the material U.S. federal income tax considerations relevant to
purchasers of our securities. Powell Goldstein LLP has not rendered any opinion
regarding any effect of such issuance on purchasers of our securities. The
sections of the Code relating to the qualification and operation as a REIT
are
highly technical and complex. The following discussion sets forth the 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, or IRS; and
court
decisions, in each case, as of the date of this prospectus. 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.
TAXATION
OF OMEGA
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. Except with respect
to
the Advocat “related party tenant” issue described elsewhere in this prospectus,
we believe that we have been organized and operated in such a manner as to
qualify for taxation as a REIT under the Code and we intend to continue to
operate in such a manner, 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 the 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 federal income tax 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, or 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).
88
Certain
federal income tax considerations
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.
In order
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 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 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, 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 taxable REIT subsidiary, or 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 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.
89
Certain
federal income tax considerations
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. We cannot assure you, however, that we can comply with
the safe-harbor provisions or that we will avoid owning property that 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
will
qualify 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 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 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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90
Certain
federal income tax considerations
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
if
an extension is granted by the Secretary of the Treasury. 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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·
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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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·
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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.
|
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 in order 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 will fail to qualify
as a
REIT. Through our 2005 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 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 will no longer 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.
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% 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. 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
tenants that are not conducted on an arm’s-length basis. We have made a TRS
election with respect to Bayside Street II, Inc. That entity will pay corporate
income tax on its taxable income and its after-tax net income will be available
for distribution to us.
91
Certain
federal income tax considerations
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.
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 not more 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% 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 the term “securities” does not
include our equity or debt securities of a qualified REIT subsidiary or TRS
or
our 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% 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 under the federal
income tax laws. 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.
92
Certain
federal income tax considerations
Annual
distribution requirements.
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 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 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.
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 we are
the owner of such facilities and whether 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.
Other
Failures.
We may
avoid disqualification in the event of a failure to meet certain requirements
for REIT qualification, other than 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, 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.
93
Certain
federal income tax considerations
FAILURE
TO QUALIFY
If
we
fail to qualify as a REIT in any taxable year, and the 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 in order to pay the resulting taxes.
OTHER
TAX MATTERS
We
own
and operate a number of properties through qualified REIT subsidiaries, or
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 in this prospectus under
the
heading “Taxation of Omega,” 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 or indirectly, will be
treated as our assets and gross income for purposes of applying the various
REIT
qualification requirements.
TAXATION
OF STOCKHOLDERS
Taxation
of Domestic Stockholders.
As
long
as we qualify as a REIT, if you are a taxable U.S. stockholder, distributions
made to you out of current or accumulated earnings and profits (and not
designated as capital gain dividends) will be taken into account by you as
ordinary income and will not be eligible for the dividends received deduction
for corporations or the special 15% tax rate applicable to individuals and
certain other taxpayers in the case of dividends paid by a regular C
corporation. However, to the extent that any of our income represents income
on
which we have paid tax at corporate income tax rates or dividend income from
a
regular C corporation, including dividend income from a TRS that we own, your
proportionate share of such dividend income will be eligible for such special
15% tax rate. Distributions that are designated as capital gain dividends will
be taxed as long-term capital gains (to the extent they do not exceed our actual
net capital gain for the taxable year) and eligible for the special 15% maximum
tax rate on capital gain income (unless such capital gain income is attributable
to unrecaptured Section 1250 gain, in which case the applicable maximum tax
rate
will be 25%, instead of 15%), without regard to the period for which you have
held our stock. However, if you are a corporation, you may be required to treat
up to 20% of certain capital gain dividends as ordinary income. Further, if
we
designate a dividend as a capital gain dividend to you and you dispose of your
shares in a sale or exchange in which you recognize a loss, and have held those
shares for six (6) months or less, you will be required to treat the loss from
the sale of your shares as long-term (instead of short-term) capital loss to
the
extent of the of the dividend distributions you received from us that were
designated as capital gain distributions that were permitted to treat as
long-term capital gains.
Distributions
in excess of current and accumulated earnings and profits will not be taxable
to
you to the extent that they do not exceed the adjusted basis of your shares,
but
rather will reduce the adjusted basis of those shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of your shares, you will include the distributions in income
as long-term capital gain (or short-term capital gain if you have held the
shares for one year or less) assuming the shares are a capital asset in your
hands. In addition, any distribution declared by us in October, November or
December of any year payable to you as a stockholder of record on a specified
date in any of these months shall be treated as both paid by us and received
by
you on December 31 of that year, provided that the distribution is actually
paid by us during January of the following calendar year. You may not include
in
your individual income tax returns any of our net operating losses or capital
losses.
94
Certain
federal income tax considerations
BACKUP
WITHHOLDING
Assuming
that you are a U.S. stockholder, we will report to you and the IRS the amount
of
distributions paid during each calendar year, and the amount of tax withheld,
if
any. Under the backup withholding rules, you may be subject to backup
withholding with respect to distributions paid unless you:
· |
are
a corporation or come within certain other exempt categories and
when
required, demonstrate this fact; or
|
· |
provide
a taxpayer identification number, certify as to no loss of exemption
from
backup withholding, and otherwise comply with applicable requirements
of
the backup withholding rules.
|
If
you do
not provide us with your correct taxpayer identification number, you may also
be
subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against your income tax liability. In addition, we may be
required to withhold a portion of capital gain distributions to you, if you
fail
to certify your nonforeign status to us. See “—Taxation of Stockholders—Taxation
of Foreign Stockholders.”
Treatment
of Tax-Exempt Stockholders.
If
you
are a tax-exempt employee pension trust or other domestic tax-exempt
stockholder, our distributions to you generally will not constitute “unrelated
business taxable income,” or UBTI, unless you have borrowed to acquire or carry
our common stock. However, qualified trusts that hold more than 10% (by value)
of certain REITs may be required to treat a certain percentage of that REIT’s
distributions as UBTI. This requirement will apply only if:
· |
the
REIT would not qualify for federal income tax purposes but for the
application of a “look-through” exception to the “five or fewer”
requirement applicable to shares held by qualified trusts;
and
|
· |
the
REIT is “predominantly held” by qualified
trusts.
|
· |
A
REIT is predominantly held if
either:
|
· |
a
single qualified trust holds more than 25% by value of the REIT interests;
or
|
· |
one
or more qualified trusts, each owning more than 10% by value of the
REIT
interests, hold in the aggregate more than 50% by value of the REIT
interests.
|
The
percentage of any REIT dividend treated as UBTI is equal to the ratio of the
UBTI earned by the REIT (treating the REIT as if it were a qualified trust
and
therefore subject to tax on UBTI) to the total gross income (less certain
associated expenses) of the REIT.
A
de
minimis exception applies where the ratio set forth in the preceding sentence
is
less than 5% for any year. For those purposes, a qualified trust is any trust
described in section 401(a) of the Internal Revenue Code and exempt from
tax under section 501(a) of the Internal Revenue Code. The provisions
requiring qualified trusts to treat a portion of REIT distributions as UBTI
will
not apply if the REIT is able to satisfy the “five or fewer” requirement without
relying upon the “look-through” exception. The restrictions on ownership of our
common stock in our Amended and Restated Articles of Incorporation, as amended,
will prevent application of the provisions treating a portion of REIT
distributions as UBTI to tax-exempt entities purchasing our common stock, absent
approval by our board of directors.
Taxation
of Foreign Stockholders.
The
rules
governing U.S. federal income taxation of nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign stockholders (collectively,
Non-U.S. Stockholders) are complex and no attempt will be made herein to provide
more than a summary of these rules. Prospective Non-U.S. Stockholders should
consult with their own tax advisors to determine the impact of federal, state
and local income tax laws with regard to an investment in shares, including
any
reporting requirements.
95
Certain
federal income tax considerations
If
you
are a Non-U.S. Stockholder, the following discussion will apply to you.
Distributions that are not attributable to gain from our sales or exchanges
of
U.S. real property interests and not designated by us as capital gains dividends
will be treated as dividends of ordinary income to the extent that they are
made
out of our current or accumulated earnings and profits. Such distributions
will
ordinarily be subject to a withholding tax equal to 30% of the gross amount
of
the distribution unless an applicable tax treaty reduces or eliminates that
tax.
However,
if income from the investment in the shares is treated as effectively connected
with your conduct of a U.S. trade or business, you generally will be subject
to
a tax at graduated rates, in the same manner as U.S. stockholders are taxed
with
respect to the distributions (and may also be subject to the 30% branch profits
tax if you are a foreign corporation). We expect to withhold U.S. income tax
at
the rate of 30% on the gross amount of any distributions made to you
unless:
· |
a
lower treaty rate applies, you file an IRS Form W-8BEN with us and
other conditions are met; or
|
· |
you
file an IRS Form W-8ECI with us claiming that the distribution is
effectively connected income, and other conditions are
met.
|
Distributions
in excess of our current and accumulated earnings and profits will not be
taxable to you to the extent that the distributions do not exceed the adjusted
basis of your shares, but rather will reduce the adjusted basis of the shares.
To the extent that distributions in excess of current accumulated earnings
and
profits exceed the adjusted basis of your shares, these distributions will
give
rise to tax liability if you would otherwise be subject to tax on any gain
from
the sale or disposition of your shares in us, as described below. If it cannot
be determined at the time a distribution is made whether or not the distribution
will be in excess of current and accumulated earnings and profits, the
distributions will be subject to withholding at the same rate as dividends.
However, amounts thus withheld are refundable if it is subsequently determined
that a distribution was, in fact, in excess of our current and accumulated
earnings and profits.
For
any
year in which we qualify as a REIT, distributions that are attributable to
gain
from our sales or exchanges of U.S. real property interests will be taxed to
you
under the provisions of the Foreign Investment in Real Property Tax Act of
1980,
or FIRPTA. Under FIRPTA, distributions attributable to gain from sales of U.S.
real property interests are taxed to you as if the gain were effectively
connected with a U.S. business. You would thus be taxed at the normal capital
gain rates applicable to U.S. stockholders (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals). Also, distributions subject to FIRPTA may be subject to
a
30% branch profits tax in the hands of a foreign corporate stockholder not
entitled to a treaty exemption. We are required by applicable Treasury
Regulations to withhold 35% of any distribution that could be designated by
us
as a capital gains dividend. This amount is creditable against your FIRPTA
tax
liability. Notwithstanding the foregoing, in the case of any distribution
attributable to gain from a sale by us of U.S. real property interests, if
the
distribution is with respect to a class of our stock that is regularly traded
on
an established securities market, you do not own more than 5% of that class
of
stock at any time during the one-year period ending on the date of the
distribution, and we are a “domestically controlled REIT” as defined below, then
the distribution will be exempted from the application of the FIRPTA rules
and
the distribution will be subject to the withholding rules for ordinary income,
i.e.,
subject
to a 30% withholding tax unless the a Form W-8BEN has been filed (indicating
that a lower treaty rate applies) or a Form W-8ECI has been filed (indicating
that the distribution is effectively connected income).
Gain
recognized by you upon a sale of shares generally will not be taxed under FIRPTA
if we are a “domestically controlled REIT,” defined generally as a REIT in which
at all times during a specified testing period less than 50% in value of the
stock was held directly or indirectly by foreign persons. It is currently
anticipated that we will be a “domestically controlled REIT,” although there can
be no assurance that we will retain that status. If we are not “domestically
controlled,” gain recognized by you will continue to be exempt under FIRPTA if
you at no time owned more than five percent of our common stock. However, gain
not subject to FIRPTA will be taxable to you if:
96
Certain
federal income tax considerations
· |
investment
in the shares is effectively connected with your U.S. trade or business,
in which case you will be subject to the same treatment as U.S.
stockholders with respect to the gain;
or
|
· |
you
are a nonresident alien individual who was present in the United
States
for more than 182 days during the taxable year and other applicable
requirements are met, in which case you will be subject to a 30%
tax on
your capital gains.
|
If
the
gain on the sale of shares were to be subject to taxation under FIRPTA, you
will
be subject to the same treatment as U.S. stockholders with respect to the gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals).
If
the
proceeds of a sale of shares by you are paid by or through a U.S. office of
a
broker, the payment is subject to information reporting and to backup
withholding unless you certify as to your name, address and non-U.S. status
or
otherwise establish an exemption. Generally, U.S. information reporting and
backup withholding will not apply to a payment of disposition proceeds if the
payment is made outside the U.S. through a non-U.S. office of a non-U.S. broker.
U.S. information reporting requirements (but not backup withholding) will apply,
however, to a payment of disposition proceeds outside the U.S. if:
· |
the
payment is made through an office outside the U.S. of a broker that
is:
(a) a U.S. person; (b) a foreign person that derives 50% or more
of its gross income for certain periods from the conduct of a trade
or
business in the U.S.; or (c) a “controlled foreign corporation” for
U.S. federal income tax purposes;
and
|
· |
the
broker fails to initiate documentary evidence that you are a Non-U.S.
Stockholder and that certain conditions are met or that you otherwise
are
entitled to an exemption.
|
POSSIBLE
LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSEQUENCES
Prospective
holders of our securities should recognize that the present federal income
tax
treatment of investment in our company may be modified by legislative, judicial
or administrative action at any time and that any of these actions may affect
investments and commitments previously made. The rules dealing with federal
income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the Treasury Department, resulting in
revisions of regulations and revised interpretations of established concepts
as
well as statutory changes. Revisions in federal tax laws and interpretations
thereof could adversely affect the tax consequences of investment in our
company.
STATE
AND LOCAL TAXES
We
may be
and you may be subject to state or local taxes in other jurisdictions such
as
those in which we may be deemed to be engaged in activities or own property
or
other interests. The state and local tax treatment of us may not conform to
the
federal income tax consequences discussed above.
97
We
are
offering the shares of our common stock described in this prospectus through
the
underwriters named below. ________________ are the underwriters. We have entered
into an underwriting agreement with the underwriters. Subject to the terms
and
conditions of the underwriting agreement, each of the underwriters has severally
agreed to purchase the number of shares listed next to its name in the following
table:
Underwriters
|
Number
of shares
|
||
Total
|
The
underwriting agreement provides that the underwriters must buy all of the shares
if they buy any of them. However, the underwriters are not required to take
or
pay for the shares covered by the underwriters’ over-allotment option described
below.
Our
common stock is offered subject to a number of conditions,
including:
· |
receipt
and acceptance of our common stock by the underwriters,
and
|
· |
the
underwriters’ right to reject orders in whole or in
part.
|
In
connection with this offering, certain of the underwriters or securities dealers
may distribute prospectuses electronically.
Sales
of
shares made outside the United States may be made by affiliates of the
underwriters.
OVER-ALLOTMENT
OPTION
We
have
granted the underwriters an option to buy up to ___________ additional shares
of
our common stock. The underwriters may exercise this option solely for the
purpose of covering over-allotments, if any, made in connection with this
offering. The underwriters have 30 days from the date of this prospectus to
exercise this option. If the underwriters exercise this option, they will each
purchase additional shares approximately in proportion to the amounts specified
in the table above.
COMMISSIONS
AND DISCOUNTS
Shares
sold by the underwriters to the public will initially be offered at the offering
price set forth on the cover of this prospectus supplement. Any shares sold
by
the underwriters to securities dealers may be sold at a discount of up to $
per
share from the public offering price. Any of these securities dealers may resell
any shares purchased from the underwriters to other brokers or dealers at a
discount of up to $ per
share
from the public offering price. If all the shares are not sold at the public
offering price, the representatives may change the offering price and the other
selling terms. Upon execution of the underwriting agreement, the underwriters
will be obligated to purchase the shares at the prices and upon the terms stated
therein, and, as a result, will thereafter bear any risk associated with
changing the offering price to the public or other selling terms.
98
Underwriting
The
following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters assuming both no exercise and full
exercise of the underwriters’ over-allotment option to purchase up to an
additional _________ shares.
No
exercise
|
Full
exercise
|
||||
Per
share
|
|||||
Total
|
We
estimate that the total expenses of this offering payable by us, not including
underwriting discounts and commissions, will be approximately $ .
NO
SALES OF SIMILAR SECURITIES
We,
our
directors and our executive officers have entered into lock-up agreements with
the underwriters. Under these agreements, we and each of these persons may
not,
without the prior written approval of _____________, subject to certain
permitted exceptions, offer, sell, contract to sell or otherwise dispose of
or
hedge shares of our common stock or securities convertible into or exercisable
or exchangeable for shares of our common stock. The permitted exceptions include
issuances of shares under our stock incentive plans, provided such shares are
subject to restrictions on transfer for the remainder of the lock-up period,
and
the use of previously owned shares to pay withholding obligations related to
the
vesting of restricted stock. These restrictions will be in effect for a period
of 60 days after the date of this prospectus supplement. At any time and without
public notice, _____________ may release all or some of the securities from
these lock-up agreements.
If
(1)
during the period that begins on the date that is 15 calendar days plus 3
business days before the last day of the 60-day restricted period described
above and ends on the last day of the 60-day restricted period, the Company
issues an earnings release or material news or a material event relating to
the
Company occurs; or (2) prior to the expiration of the 60-day restricted period,
the Company announces that it will release earnings results during the 16-day
period beginning on the last day of the 60-day restricted period, the
restrictions described above shall continue to apply until the expiration of
the
date that is 15 calendar days plus 3 business days after the date on which
the
issuance of the earnings release or the material news or material event occurs;
provided, however, the restrictions described above will not apply if, within
3
days of the termination of the 60-day restricted period, the Company delivers
to
__________ a certificate, signed by the Chief Financial Officer or Chief
Executive Officer of the Company, certifying on behalf of the Company that
the
Company’s shares of common stock are, as of the date of delivery of such
certificate, “actively traded securities,” as defined in Regulation M under the
Securities and Exchange Act of 1934, as amended.
INDEMNIFICATION
AND CONTRIBUTION
We
have
agreed to indemnify the underwriters against certain liabilities, including
liabilities under the Securities Act. If we are unable to provide this
indemnification, we will contribute to payments the underwriters may be required
to make with respect to those liabilities.
NEW
YORK STOCK EXCHANGE LISTING
Our
common stock is listed on the New York Stock Exchange under the symbol
“OHI.”
PRICE
STABILIZATION AND SHORT POSITIONS
In
connection with this offering, the underwriters may engage in activities that
stabilize, maintain or otherwise affect the price of our shares of common stock
including:
· |
stabilizing
transactions;
|
· |
short
sales;
|
99
Underwriting
· |
purchases
to cover positions created by short
sales;
|
· |
imposition
of penalty bids; and
|
· |
syndicate
covering transactions.
|
Stabilizing
transactions consist of bids or purchases made for the purpose of preventing
or
retarding a decline in the market price of our shares of common stock while
this
offering is in progress. These transactions may also include making short sales
of our shares of common stock, which involves the sale by the underwriters
of a
greater number of shares of common stock than they are required to purchase
in
this offering, and purchasing shares of common stock on the open market to
cover
positions created by short sales. Short sales may be “covered” shorts, which are
short positions in an amount not greater than the underwriters’ over-allotment
option referred to above, or may be “naked” shorts, which are short positions in
excess of that amount.
The
underwriters may close out any covered short position by either exercising
their
over-allotment option, in whole or in part, or by purchasing shares of common
stock in the open market. In making this determination, the underwriters will
consider, among other things, the price of the shares available for purchase
in
the open market as compared to the price at which they may purchase shares
through the over-allotment option.
Naked
short sales are sales in excess of the over-allotment option. The underwriters
must close out any naked short position by purchasing shares in the open market.
A naked short position is more likely to be created if the underwriters are
concerned there may be downward pressure on the price of shares in the open
market after pricing that could adversely affect investors who purchase in
this
offering.
The
underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by
or
for the account of that underwriter in stabilizing or short covering
transactions.
As
a
result of these activities, the price of our shares may be higher than the
price
that otherwise might exist in the open market. If these activities are
commenced, they may be discontinued by the underwriters at any time. The
underwriters may carry out these transactions on the New York Stock Exchange,
in
the over-the-counter market or otherwise.
AFFILIATIONS
Certain
of the underwriters and their affiliates have in the past provided and may
from
time to time provide certain commercial banking, financial advisory, investment
banking and other services for us for which they were and will be entitled
to
receive separate fees.
100
We
are
subject to the informational requirements of the Exchange Act and file annual,
quarterly and current reports, proxy statements and other information with
the
SEC. You may read and copy any reports, statements or other information that
we
file with the SEC at the SEC’s public reference rooms at 100 F Street, N.E.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to
the public from commercial document retrieval services and free of charge at
the
website maintained by the SEC at www.sec.gov.
We
have
filed with the SEC an amendment no. 1 to registration statement on Form S-11,
or
the registration statement, under the Securities Act. This prospectus does
not
contain all the information set forth in the registration statement, certain
parts of which are omitted in accordance with the rules and regulations of
the
SEC. For further information, reference is hereby made to the registration
statement.
From
time
to time, we may supplement this prospectus to incorporate future filings made
by
us with the SEC. Any such prospectus supplements will be available at the SEC’s
website at www.sec.gov or our website at www.omegahealthcare.com. In addition,
you may request copies of all such filings by contacting our investor relations
personnel at 410-427-1700.
The
validity of the securities offered hereby have been passed upon for us by
Powell
Goldstein LLP, Atlanta, Georgia. In addition, Powell Goldstein LLP, Atlanta,
Georgia, has passed upon certain federal income tax matters.
The
consolidated financial statements and schedules of Omega Healthcare Investors,
Inc. at December 31, 2006 and 2005, and for each of the three years in the
period ended December 31, 2006, appearing in this prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent registered
public accounting firm, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority
of
such firm as experts in accounting and auditing.
101
Index
to consolidated financial statements
Title
of Document
|
Page
Number
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets as of December 31, 2006 and 2005
|
F-3
|
Consolidated
Statements of Operations for the years ended December
31, 2006, 2005 and 2004
|
F-4
|
Consolidated
Statements of Stockholders’ Equity for the years ended December
31, 2006, 2005 and 2004
|
F-5
|
Consolidated
Statements of Cash Flows for the years ended December
31, 2006, 2005 and 2004
|
F-7
|
Notes
to Consolidated Financial Statements
|
F-8
|
Schedule
III - Real Estate and Accumulated Depreciation
|
F-37
|
Schedule
IV - Mortgage Loans on Real Estate
|
F-40
|
F-1
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders
Omega
Healthcare Investors, Inc.
We
have
audited the accompanying consolidated balance sheets of Omega Healthcare
Investors, Inc. as of December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholder’s equity, and cash flows for each
of the three years in the period ended December 31, 2006. Our audits also
included the financial statement schedules listed in the accompanying Index.
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, 2006 and 2005, and the consolidated results
of
its operations and its cash flows for each of the three years in the period
ended December 31, 2006, 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.
As
discussed in Note 2 to the consolidated financial statements, the Company
changed its accounting for stock-based compensation in connection with the
adoption of Statement of Financial Accounting Standards No. 123 (R),
“Share-Based Payment”.
/s/
Ernst
& Young LLP
McLean,
Virginia
February
22, 2007
F-2
OMEGA
HEALTHCARE INVESTORS, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands)
December
31,
|
|||||||
2006
|
2005
|
||||||
ASSETS
|
|||||||
Real
estate properties
|
|||||||
Land
and buildings at cost
|
$
|
1,237,165
|
$
|
990,492
|
|||
Less
accumulated depreciation
|
(188,188
|
)
|
(156,198
|
)
|
|||
Real
estate properties – net
|
1,048,977
|
834,294
|
|||||
Mortgage
notes receivable – net
|
31,886
|
104,522
|
|||||
1,080,863
|
938,816
|
||||||
Other
investments – net
|
22,078
|
28,918
|
|||||
1,102,941
|
967,734
|
||||||
Assets
held for sale – net
|
3,568
|
5,821
|
|||||
Total
investments
|
1,106,509
|
973,555
|
|||||
Cash
and cash equivalents
|
729
|
3,948
|
|||||
Restricted
cash
|
4,117
|
5,752
|
|||||
Accounts
receivable –net
|
51,194
|
15,018
|
|||||
Other
assets
|
12,821
|
37,769
|
|||||
Total
assets
|
$
|
1,175,370
|
$
|
1,036,042
|
|||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
Revolving
line of credit
|
$
|
150,000
|
$
|
58,000
|
|||
Unsecured
borrowings
|
484,731
|
505,429
|
|||||
Other
long –
term borrowings
|
41,410
|
2,800
|
|||||
Accrued
expenses and other liabilities
|
28,037
|
25,315
|
|||||
Income
tax liabilities
|
5,646
|
3,299
|
|||||
Operating
liabilities for owned properties
|
92
|
256
|
|||||
Total
liabilities
|
709,916
|
595,099
|
|||||
Stockholders’
equity:
|
|||||||
Preferred
stock issued and outstanding – 4,740 shares Class D with an aggregate
liquidation preference of $118,488
|
118,488
|
118,488
|
|||||
Common
stock $.10 par value authorized – 100,000 shares: Issued and
outstanding – 59,703 shares in 2006 and 56,872 shares in
2005
|
5,970
|
5,687
|
|||||
Common
stock and additional paid-in-capital
|
694,207
|
657,920
|
|||||
Cumulative
net earnings
|
292,766
|
237,069
|
|||||
Cumulative
dividends paid
|
(602,910
|
)
|
(536,041
|
)
|
|||
Cumulative
dividends – redemption
|
(43,067
|
)
|
(43,067
|
)
|
|||
Unamortized
restricted stock awards
|
—
|
(1,167
|
)
|
||||
Accumulated
other comprehensive income
|
—
|
2,054
|
|||||
Total
stockholders’ equity
|
465,454
|
440,943
|
|||||
Total
liabilities and stockholders’ equity
|
$
|
1,175,370
|
$
|
1,036,042
|
See
accompanying notes.
F-3
OMEGA
HEALTHCARE INVESTORS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
Year
Ended December 31,
|
||||||||||
2006
|
2005
|
2004
|
||||||||
Revenues
|
||||||||||
Rental
income
|
$
|
127,072
|
$
|
95,439
|
$
|
69,746
|
||||
Mortgage
interest
income
|
4,402
|
6,527
|
13,266
|
|||||||
Other
investment income –
net
|
3,687
|
3,219
|
3,129
|
|||||||
Miscellaneous
|
532
|
4,459
|
831
|
|||||||
Total
operating revenues
|
135,693
|
109,644
|
86,972
|
|||||||
Expenses
|
||||||||||
Depreciation
and
amortization
|
32,113
|
23,856
|
18,842
|
|||||||
General
and
administrative
|
13,744
|
8,587
|
8,841
|
|||||||
Provision
for impairment on real
estate properties
|
—
|
—
|
—
|
|||||||
Provisions
for uncollectible
mortgages, notes and accounts receivable
|
792
|
83
|
—
|
|||||||
Leasehold
expiration
expense
|
—
|
1,050
|
—
|
|||||||
Total
operating expenses
|
46,649
|
33,576
|
27,683
|
|||||||
Income
before other income and expense
|
89,044
|
76,068
|
59,289
|
|||||||
Other
income (expense):
|
||||||||||
Interest
and other investment
income
|
413
|
220
|
122
|
|||||||
Interest
expense
|
(42,174
|
)
|
(29,900
|
)
|
(23,050
|
)
|
||||
Interest
–
amortization
of
deferred financing costs
|
(1,952
|
)
|
(2,121
|
)
|
(1,852
|
)
|
||||
Interest
–
refinancing
costs
|
(3,485
|
)
|
(2,750
|
)
|
(19,106
|
)
|
||||
Gain
on sale of equity
securities
|
2,709
|
—
|
—
|
|||||||
Gain
on investment
restructuring
|
3,567
|
—
|
—
|
|||||||
Provisions
for impairment on
equity securities
|
—
|
(3,360
|
)
|
—
|
||||||
Litigation
settlements and
professional liability claims
|
—
|
1,599
|
(3,000
|
)
|
||||||
Change
in fair value of
derivatives
|
9,079
|
(16
|
)
|
1,361
|
||||||
Total
other expense
|
(31,843
|
)
|
(36,328
|
)
|
(45,525
|
)
|
||||
Income
before gain on assets sold
|
57,201
|
39,740
|
13,764
|
|||||||
Gain
from assets sold - net
|
1,188
|
—
|
—
|
|||||||
Income
from continuing operations before income
taxes
|
58,389
|
39,740
|
13,764
|
|||||||
Provision
for income taxes
|
(2,347
|
)
|
(2,385
|
)
|
(393
|
)
|
||||
Income
from continuing operations
|
56,042
|
37,355
|
13,371
|
|||||||
(Loss)
income from discontinued operations
|
(345
|
)
|
1,398
|
6,775
|
||||||
Net
income
|
55,697
|
38,753
|
20,146
|
|||||||
Preferred
stock dividends
|
(9,923
|
)
|
(11,385
|
)
|
(15,807
|
)
|
||||
Preferred
stock conversion and redemption charges
|
—
|
(2,013
|
)
|
(41,054
|
)
|
|||||
Net
income (loss) available to common
|
$
|
45,774
|
$
|
25,355
|
$
|
(36,715
|
)
|
|||
Income
(loss) per common share:
|
||||||||||
Basic:
|
||||||||||
Income
(loss) from continuing
operations
|
$
|
0.79
|
$
|
0.46
|
$
|
(0.96
|
)
|
|||
Net
income (loss)
|
$
|
0.78
|
$
|
0.49
|
$
|
(0.81
|
)
|
|||
Diluted:
|
||||||||||
Income
(loss) from continuing
operations
|
$
|
0.79
|
$
|
0.46
|
$
|
(0.96
|
)
|
|||
Net
income (loss)
|
$
|
0.78
|
$
|
0.49
|
$
|
(0.81
|
)
|
|||
Dividends
declared and paid per common share
|
$
|
0.96
|
$
|
0.85
|
$
|
0.72
|
||||
Weighted
– average shares outstanding, basic
|
58,651
|
51,738
|
45,472
|
|||||||
Weighted
– average shares outstanding, diluted
|
58,745
|
52,059
|
45,472
|
|||||||
Components
of other comprehensive income:
|
||||||||||
Net
income
|
$
|
55,697
|
$
|
38,753
|
$
|
20,146
|
||||
Unrealized
gain (loss) on common stock investment
|
1,580
|
1,384
|
(1,224
|
)
|
||||||
Reclassification
adjustment for gains on common stock investment
|
(1,740
|
)
|
—
|
—
|
||||||
Reclassification
adjustment for gains on preferred stock investment
|
(1,091
|
)
|
—
|
—
|
||||||
Unrealized
(loss) gain on preferred stock investment
and
hedging contracts –
net
|
(803
|
)
|
(1,258
|
)
|
7,607
|
|||||
Total
comprehensive income
|
$
|
53,643
|
$
|
38,879
|
$
|
26,529
|
See
accompanying notes.
F-4
OMEGA
HEALTHCARE INVESTORS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(in
thousands, except per share amounts)
Common
Stock
Par
Value
|
Additional
Paid-in
Capital
|
Preferred
Stock
|
Cumulative
Net
Earnings
|
||||||||||
Balance
at December 31, 2003 (37,291 common shares)
|
3,729
|
481,467
|
212,342
|
178,170
|
|||||||||
Issuance
of common stock:
|
|||||||||||||
Grant
of restricted stock (318 shares at $10.54 per share)
|
—
|
3,346
|
—
|
—
|
|||||||||
Amortization
of restricted stock
|
—
|
—
|
—
|
—
|
|||||||||
Dividend
reinvestment plan (16 shares at $9.84 per share)
|
2
|
157
|
—
|
—
|
|||||||||
Exercised
options (1,190 shares at an average exercise price of $2.775 per
share)
|
119
|
(403
|
)
|
—
|
—
|
||||||||
Grant
of stock as payment of directors fees (10 shares at an average
of $10.3142
per share)
|
1
|
101
|
—
|
—
|
|||||||||
Equity
offerings (2,718 shares at $9.85 per share)
|
272
|
23,098
|
—
|
—
|
|||||||||
Equity
offerings (4,025 shares at $11.96 per share)
|
403
|
45,437
|
—
|
—
|
|||||||||
Net
income for 2004
|
—
|
—
|
—
|
20,146
|
|||||||||
Purchase
of Explorer common stock (11,200 shares)
|
(1,120
|
)
|
(101,025
|
)
|
—
|
—
|
|||||||
Common
dividends paid ($0.72 per share)
|
—
|
—
|
—
|
—
|
|||||||||
Issuance
of Series D preferred stock (4,740 shares)
|
—
|
(3,700
|
)
|
118,488
|
—
|
||||||||
Series
A preferred redemptions
|
—
|
2,311
|
(57,500
|
)
|
—
|
||||||||
Series
C preferred stock conversions
|
1,676
|
103,166
|
(104,842
|
)
|
—
|
||||||||
Series
C preferred stock redemptions
|
—
|
38,743
|
—
|
—
|
|||||||||
Preferred
dividends paid (Series A of $1.156 per share, Series B of $2.156
per share
and Series D of $1.518 per share)
|
—
|
—
|
—
|
—
|
|||||||||
Reclassification
for realized loss on sale of interest rate cap
|
—
|
—
|
—
|
—
|
|||||||||
Unrealized
loss on Sun common stock investment
|
—
|
—
|
—
|
—
|
|||||||||
Unrealized
gain on Advocat securities
|
—
|
—
|
—
|
—
|
|||||||||
Balance
at December 31, 2004 (50,824 common shares)
|
5,082
|
592,698
|
168,488
|
198,316
|
|||||||||
Issuance
of common stock:
|
|||||||||||||
Grant
of restricted stock (7 shares at $11.03 per share)
|
—
|
77
|
—
|
—
|
|||||||||
Amortization
of restricted stock
|
—
|
—
|
—
|
—
|
|||||||||
Vesting
of restricted stock (grants 66 shares)
|
7
|
(521
|
)
|
—
|
—
|
||||||||
Dividend
reinvestment plan (573 shares at $12.138 per share)
|
57
|
6,890
|
—
|
—
|
|||||||||
Exercised
options (218 shares at an average exercise price of $2.837 per
share)
|
22
|
(546
|
)
|
—
|
—
|
||||||||
Grant
of stock as payment of directors fees (9 shares at an average of
$11.735
per share)
|
1
|
99
|
—
|
—
|
|||||||||
Equity
offerings (5,175 shares at $11.80 per share)
|
518
|
57,223
|
—
|
—
|
|||||||||
Net
income for 2005
|
—
|
—
|
—
|
38,753
|
|||||||||
Common
dividends paid ($0.85 per share)
|
—
|
—
|
—
|
—
|
|||||||||
Series
B preferred redemptions
|
—
|
2,000
|
(50,000
|
)
|
—
|
||||||||
Preferred
dividends paid (Series B of $1.090 per share and Series D of $2.0938
per
share)
|
—
|
—
|
—
|
—
|
|||||||||
Reclassification
for realized loss on Sun common stock investment
|
—
|
—
|
—
|
—
|
|||||||||
Unrealized
loss on Sun common stock investment
|
—
|
—
|
—
|
—
|
|||||||||
Unrealized
gain on Advocat securities
|
—
|
—
|
—
|
—
|
|||||||||
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 per
share)
|
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
|
See
accompanying notes.
F-5
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, 2003 (37,291 common shares)
|
(431,123
|
)
|
—
|
(4,455
|
)
|
440,130
|
|||||||
Issuance
of common stock:
|
|||||||||||||
Grant
of restricted stock (318 shares at $10.54 per share)
|
—
|
(3,346
|
)
|
—
|
—
|
||||||||
Amortization
of restricted stock
|
—
|
1,115
|
—
|
1,115
|
|||||||||
Dividend
reinvestment plan (16 shares)
|
—
|
—
|
—
|
159
|
|||||||||
Exercised
options (1,190 shares at an average exercise price of $2.775
per
share)
|
—
|
—
|
—
|
(284
|
)
|
||||||||
Grant
of stock as payment of directors fees (10 shares at an average
of
$10.3142
per share)
|
—
|
—
|
—
|
102
|
|||||||||
Equity
offerings (2,718 shares)
|
—
|
—
|
—
|
23,370
|
|||||||||
Equity
offerings (4,025 shares)
|
—
|
—
|
—
|
45,840
|
|||||||||
Net
income for 2004
|
—
|
—
|
—
|
20,146
|
|||||||||
Purchase
of Explorer common stock (11,200 shares).
|
—
|
—
|
—
|
(102,145
|
)
|
||||||||
Common
dividends paid ($0.72 per share).
|
(32,151
|
)
|
—
|
—
|
(32,151
|
)
|
|||||||
Issuance
of Series D preferred stock (4,740 shares)
|
—
|
—
|
—
|
114,788
|
|||||||||
Series
A preferred stock redemptions
|
(2,311
|
)
|
—
|
—
|
(57,500
|
)
|
|||||||
Series
C preferred stock conversions
|
—
|
—
|
—
|
—
|
|||||||||
Series
C preferred stock redemptions
|
(38,743
|
)
|
—
|
—
|
—
|
||||||||
Preferred
dividends paid (Series A of $1.156 per share, Series B of $2.156
per
share
and Series D of $1.518 per share)
|
(17,018
|
)
|
—
|
—
|
(17,018
|
)
|
|||||||
Reclassification
for realized loss on sale of interest rate cap
|
—
|
—
|
6,014
|
6,014
|
|||||||||
Unrealized
loss on Sun common stock investment
|
—
|
—
|
(2,783
|
)
|
(2,783
|
)
|
|||||||
Unrealized
gain on Advocat securities
|
—
|
—
|
3,152
|
3,152
|
|||||||||
Balance
at December 31, 2004 (50,824 common shares)
|
(521,346
|
)
|
(2,231
|
)
|
1,928
|
442,935
|
|||||||
Issuance
of common stock:
|
|||||||||||||
Grant
of restricted stock (7 shares at $11.03 per share)
|
—
|
(77
|
)
|
—
|
—
|
||||||||
Amortization
of restricted stock
|
—
|
1,141
|
—
|
1,141
|
|||||||||
Vesting
of restricted stock (grants 66 shares)
|
—
|
—
|
—
|
(514
|
)
|
||||||||
Dividend
reinvestment plan (573 shares at $12.138 per share)
|
—
|
—
|
—
|
6,947
|
|||||||||
Exercised
options (218 shares at an average exercise price of
$2.837 per
share)
|
—
|
—
|
—
|
(524
|
)
|
||||||||
Grant
of stock as payment of directors fees (9 shares at an average
of
$11.735
per
share)
|
—
|
—
|
—
|
100
|
|||||||||
Equity
offerings (5,175 shares at $11.80 per share)
|
—
|
—
|
—
|
57,741
|
|||||||||
Net
income for 2005
|
—
|
—
|
—
|
38,753
|
|||||||||
Common
dividends paid ($0.85 per share).
|
(43,645
|
)
|
—
|
—
|
(43,645
|
)
|
|||||||
Series
B preferred redemptions
|
(2,013
|
)
|
—
|
—
|
(50,013
|
)
|
|||||||
Preferred
dividends paid (Series B of $1.090 per share and Series D of
$2.0938 per
share)
|
(12,104
|
)
|
—
|
—
|
(12,104
|
)
|
|||||||
Reclassification
for realized loss on Sun common stock investment
|
—
|
—
|
3,360
|
3,360
|
|||||||||
Unrealized
loss on Sun common stock investment
|
—
|
—
|
(1,976
|
)
|
(1,976
|
)
|
|||||||
Unrealized
loss on Advocat securities
|
—
|
—
|
(1,258
|
)
|
(1,258
|
)
|
|||||||
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 $12.590 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
$2.906 per
share)
|
—
|
—
|
—
|
463
|
|||||||||
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)
|
(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
|
See
accompanying notes.
F-6
OMEGA
HEALTHCARE INVESTORS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (in thousands)
Year
Ended December 31,
|
||||||||||
2006
|
2005
|
2004
|
||||||||
Cash
flow from operating activities
|
||||||||||
Net
income
|
$
|
55,697
|
$
|
38,753
|
$
|
20,146
|
||||
Adjustment
to reconcile net income to cash provided by operating
activities:
|
||||||||||
Depreciation
and amortization (including amounts in discontinued
operations)
|
32,263
|
25,277
|
21,551
|
|||||||
Provisions
for impairment (including amounts in discontinued operations)
|
541
|
9,617
|
—
|
|||||||
Provisions
for uncollectible mortgages, notes and accounts
receivable (including amounts in discontinued operations)
|
944
|
83
|
—
|
|||||||
Provision
for impairment on equity securities
|
—
|
3,360
|
—
|
|||||||
Income
from accretion of marketable securities to redemption value
|
(1,280
|
)
|
(1,636
|
)
|
(810
|
)
|
||||
Refinancing
costs
|
3,485
|
2,750
|
19,106
|
|||||||
Amortization
for deferred finance costs
|
1,952
|
2,121
|
1,852
|
|||||||
(Gain)
loss on assets and equity securities sold –
net (incl.
amounts in discontinued operations)
|
(4,063
|
)
|
(7,969
|
)
|
(3,358
|
)
|
||||
Gain
on investment restructuring
|
(3,567
|
)
|
—
|
—
|
||||||
Restricted
stock amortization expense
|
4,517
|
1,141
|
1,115
|
|||||||
Adjustment
of derivatives to fair value
|
(9,079
|
)
|
16
|
(1,361
|
)
|
|||||
Other
|
(61
|
)
|
(1,521
|
)
|
(55
|
)
|
||||
Net
change in accounts receivable
|
(64
|
)
|
2,150
|
(742
|
)
|
|||||
Net
change in straight – line rent
|
(6,158
|
)
|
(5,284
|
)
|
(4,136
|
)
|
||||
Net
change in lease inducement
|
(19,965
|
)
|
—
|
—
|
||||||
Net
change in other assets
|
2,558
|
4,075
|
(72
|
)
|
||||||
Net
change in income tax liabilities
|
2,347
|
2,385
|
394
|
|||||||
Net
change in other operating assets and liabilities
|
2,744
|
(1,252
|
)
|
2,028
|
||||||
Net
cash provided by operating activities
|
62,811
|
74,066
|
55,658
|
|||||||
Cash
flow from investing activities
|
||||||||||
Acquisition
of real estate
|
(178,906
|
)
|
(248,704
|
)
|
(114,214
|
)
|
||||
Placement
of mortgage loans
|
—
|
(61,750
|
)
|
(6,500
|
)
|
|||||
Proceeds
from sale of stock
|
7,573
|
—
|
480
|
|||||||
Proceeds
from sale of real estate investments
|
2,406
|
60,513
|
5,672
|
|||||||
Capital
improvements and funding of other investments
|
(6,806
|
)
|
(3,821
|
)
|
(5,606
|
)
|
||||
Proceeds
from other investments and assets held for sale – net
|
37,937
|
6,393
|
9,145
|
|||||||
Investments
in other investments- net
|
(34,445
|
)
|
(9,574
|
)
|
(3,430
|
)
|
||||
Collection
of mortgage principal
|
10,886
|
61,602
|
8,226
|
|||||||
Net
cash used in investing activities
|
(161,355
|
)
|
(195,341
|
)
|
(106,227
|
)
|
||||
Cash
flow from financing activities
|
||||||||||
Proceeds
from credit line borrowings
|
262,800
|
387,800
|
157,700
|
|||||||
Payments
of credit line borrowings
|
(170,800
|
)
|
(344,800
|
)
|
(319,774
|
)
|
||||
Payment
of re – financing related costs
|
(3,194
|
)
|
(7,818
|
)
|
(16,591
|
)
|
||||
Proceeds
from long-term borrowings
|
39,000
|
223,566
|
261,350
|
|||||||
Payments
of long – term borrowings
|
(390
|
)
|
(79,688
|
)
|
(350
|
)
|
||||
Payment
to Trustee to redeem long-term borrowings
|
—
|
(22,670
|
)
|
—
|
||||||
Proceeds
from sale of interest rate cap
|
—
|
—
|
3,460
|
|||||||
Receipts
from Dividend Reinvestment Plan
|
33,096
|
6,947
|
262
|
|||||||
Receipts/(payments)
for exercised options – net
|
225
|
(1,038
|
)
|
(387
|
)
|
|||||
Dividends
paid
|
(66,869
|
)
|
(55,749
|
)
|
(49,169
|
)
|
||||
Redemption
of preferred stock
|
—
|
(50,013
|
)
|
(57,500
|
)
|
|||||
Proceeds
from preferred stock offering
|
—
|
—
|
12,643
|
|||||||
Proceeds
from common stock offering
|
—
|
57,741
|
69,210
|
|||||||
Payment
on common stock offering
|
(178
|
)
|
(29
|
)
|
—
|
|||||
Other
|
1,635
|
(1,109
|
)
|
(1,296
|
)
|
|||||
Net
cash provided by financing activities
|
95,325
|
113,140
|
59,558
|
|||||||
(Decrease)
increase in cash and cash equivalents
|
(3,219
|
)
|
(8,135
|
)
|
8,989
|
|||||
Cash
and cash equivalents at beginning of year
|
3,948
|
12,083
|
3,094
|
|||||||
Cash
and cash equivalents at end of year
|
$
|
729
|
$
|
3,948
|
$
|
12,083
|
||||
Interest
paid during the year
|
$
|
34,995
|
$
|
31,354
|
$
|
19,150
|
See
accompanying notes.
F-7
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization
Omega
Healthcare Investors, Inc. (“Omega”), a Maryland corporation, is a
self-administered real estate investment trust (“REIT”). From the date that we
commenced operations in 1992, we have invested primarily in income-producing
healthcare facilities, which include long-term care nursing homes, assisted
living facilities and rehabilitation hospitals. At December 31, 2006, we have
investments in 239 healthcare facilities located throughout the United
States.
Consolidation
Our
consolidated financial statements include the accounts of Omega and all direct
and indirect wholly owned subsidiaries. All inter-company accounts and
transactions have been eliminated in consolidation.
Financial
Accounting Standards Board (“FASB”) Interpretation No. 46R, Consolidation
of Variable Interest Entities,
(“FIN
46R”), addresses the consolidation by business enterprises of 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 VIE’s expected
losses, receive a majority of the VIE’s expected residual returns, or
both.
In
accordance with FIN 46R, we determined that we were the primary beneficiary
of
one VIE beginning in 2006. This VIE is derived from a financing relationship
entered into between Omega and one company that is engaged in the ownership
and
rental of six skilled nursing facilities (“SNFs”) and one assisted living
facility (“ALF”). The consolidation of the VIE as of December 31, 2006 resulted
in an increase in our consolidated total assets (primarily real estate) of
$37.5
million and liabilities (primarily indebtedness) of approximately $39 million
and a decrease in stockholders’ equity of approximately $1.5 million. The
creditors of the VIE do not have recourse to our assets.
We
have
one reportable segment consisting of investments in real estate. Our business
is
to provide financing and capital to the long-term healthcare industry with a
particular focus on skilled nursing facilities located in the United States.
Our
core portfolio consists of long-term lease and mortgage agreements. All of
our
leases are “triple-net” leases, which require the tenants to pay all property
related expenses. Our mortgage revenue derives from fixed-rate mortgage loans,
which are secured by first mortgage liens on the underlying real estate and
personal property of the mortgagor. Substantially all depreciation expenses
reflected in the consolidated statement of operations relate to the ownership
of
our investment in real estate.
Restated
Financial Data
On
December 14, 2006, we filed a Form 10-K/A, which amended our previously filed
Form 10-K for fiscal year 2005. Contained within that Form 10-K/A were restated
consolidated financial statements for the three years ended December 31, 2005.
The restatements corrected errors in previously reported amounts related to
income tax matters and to certain debt and equity investments in Advocat Inc.
(“Advocat”), as well as to the recording of certain straight-line rental income.
Amounts reflected herein were derived from the restated financial information
rather than the 2005 Form 10-K, which had been filed with the SEC on February
17, 2006 and mailed to shareholders shortly thereafter. Similarly, on December
14, 2006, we filed Forms 10-Q/A amending the previously filed consolidated
financial statements for the first and second quarters of fiscal
2006.
F-8
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
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
seven years.
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.
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, 2006, 2005, and 2004 we recognized impairment losses
of
$0.5 million, $9.6 million and $0.0 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 these indicators are permanent, then the loan is written
down to the present value of the expected future cash flows. In cases where
expected future cash flows cannot be estimated, the loan is written down to
the
fair value of the collateral. The fair value of the loan is determined by market
research, which includes valuing the property as a nursing home as well as
other
alternative uses. We recorded loan impairments of $0.9 million, $0.1 million
and
$0.0 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
F-9
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
In
accordance with FASB Statement No. 114, Accounting
by Creditors for Impairment of a Loan
and FASB
Statement No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and
Disclosures,
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 5 – Other
Investments). At December 31, 2006 and 2005, we had notes receivable totaling
$0.0 million and $1.8 million, respectively, which were determined to be
impaired.
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 7 – Lease and
Mortgage Deposits).
Accounts
Receivable
Accounts
receivable consists primarily of amounts due under lease and mortgage
agreements. Amounts recorded include estimated provisions for loss related
to
uncollectible accounts and disputed items. On a monthly basis, we review the
contractual payment versus actual cash payment received and the contractual
payment due date versus actual receipt date. When management identifies
delinquencies, a judgment is made as to the amount of provision, if any, that
is
needed.
Recognizing
rental income on a straight-line basis results in recognized revenue exceeding
contractual amounts due from our tenants. Such cumulative excess amounts are
included in accounts receivable and were $20.0 million and $13.8 million, net
of
allowances, at December 31, 2006 and 2005, respectively. In
the
case of a lease recognized on a straight-line basis, we
will
generally provide an allowance for
straight-line accounts receivable when certain conditions or indicators of
adverse collectibility are present (e.g., lessee payment delinquencies,
bankruptcy indicators, etc.). At December 31, 2006 and 2005, the allowance
for
straight-line accounts receivable was $7.2 million and $6.7 million,
respectively.
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.
In
accordance with SFAS
No.
115, Accounting
for Certain Investments in Debt and Equity Securities,
during
the year ended December 31, 2005, we recorded a $3.4 million provision for
impairment to write-down our 760,000 share investment in Sun Healthcare Group,
Inc. (“Sun”) common stock to its then current fair market value. During the year
ended December 31, 2006, we sold our remaining 760,000 shares of Sun’s common
stock for approximately $7.6 million, realizing a gain on the sale of these
securities of approximately $2.7 million.
We
record
dividend and accretion income on preferred stock based upon whether the amount
and timing of collections are both probable and reasonably estimable. We
recognize accretion income on a prospective basis using the effective interest
method to the redemption date of the security.
Our
investment in Advocat Series B preferred stock was classified as an
available-for-sale security. The face value plus the value of the accrued
dividends, which had previously been written down to zero due to impairment,
were accreted into income ratably through the Omega redemption date (September
30, 2007). The cumulative amount recognized as income was limited to the fair
market value of the preferred stock. The difference between the fair market
value of the preferred stock and the accretive value of the security was
recorded as other comprehensive income on the balance sheet. The Advocat Series
B preferred stock was exchanged for the Advocat Series C preferred stock on
October 20, 2006. See Note 5 – Other Investments.
F-10
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
At
December 31, 2006, we had one preferred stock investment security (i.e., Series
C preferred shares of Advocat, a publicly traded company). This security is
classified as a held-to-maturity security and was acquired in the Advocat
restructuring. It was initially recorded at fair value and will be accreted
to
its mandatory redemption value. See Note 5 – Other Investments.
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.
Deferred
Financing Costs
Deferred
financing costs are 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, $2.1 million and $1.9 million in
2006,
2005 and 2004, respectively, is classified as “interest - amortization of
deferred financing costs” in our audited consolidated statements of operations.
When financings are terminated, unamortized amounts paid, as well as, charges
incurred for the termination, are expensed at the time the termination is made.
Gains
and
losses from the extinguishment of debt are presented as interest expense within
income from continuing operations in the accompanying consolidated financial
statements.
Revenue
Recognition
Rental
income is recognized as earned over the terms of the related master leases.
Such
income generally includes periodic increases based on pre-determined formulas
(i.e., such as increases in the Consumer Price Index (“CPI”)) as defined in the
master leases. Certain master leases contain provisions relating to specific
and
determinable increases in rental payments over the term of the leases. Rental
income, under lease arrangements with specific and determinable increases,
is
recognized over the term of the lease on a straight-line basis. Recognition
of
rental income commences when control of the facility has been given to the
tenant. Mortgage interest income is recognized as earned over the terms of
the
related mortgage notes.
Reserves
are taken against earned revenues from leases and mortgages when collection
of
amounts due becomes questionable or when negotiations for restructurings of
troubled operators lead to lower expectations regarding ultimate collection.
When collection is uncertain, lease revenues are recorded as received, after
taking into account application of security deposits. The recording of any
related straight-line rent is suspended until past due amounts have been paid.
In the event the straight-line rent is deemed uncollectible, an allowance for
loss for the straight-line rent asset will be recognized. Interest income on
impaired mortgage loans is recognized as received after taking into account
application of security deposits.
Gains
or
losses on sales of real estate assets are recognized pursuant to the provisions
of SFAS No. 66, Accounting
for Sales of Real Estate.
The
specific timing of the recognition of the sale and the related gain or loss
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.
Assets
Held for Sale and Discontinued Operations
When
a
formal plan to sell real estate is adopted the real estate is classified as
“assets held for sale,” with the net carrying amount adjusted to the lower of
cost or estimated fair value, less cost of disposal. Depreciation of the
facilities is excluded from operations after management has committed to a
plan
to sell the asset. Pursuant to SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,
long-lived assets sold or designated as held for sale are reported as
discontinued operations in our financial statements
for all
periods presented. We had six assets held for sale as of December 31, 2006
with
a combined net book value of $3.6 million.
F-11
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Derivative
Instruments
SFAS
No.
133, Accounting
for Derivative Instruments and Hedging Activities,
as
amended, (“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. The ineffective portion of a derivative’s change
in fair value will be immediately recognized in earnings.
At
December 31, 2005, we had one derivative instrument accounted for at fair value
resulting from the conversion feature of a redeemable convertible preferred
stock security in Advocat, a publicly traded company, to convert that security
into Advocat common stock at a fixed exchange rate. On October 20, 2006, we
restructured our relationship with Advocat (the “Second Advocat Restructuring”)
such that we no longer own the redeemable convertible preferred stock security
in Advocat. As a result, at December 31, 2006, 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, restricted stock and for fiscal year 2004, the conversion of
our
Series C preferred stock.
Federal
and State Income Taxes
So
long
as we qualify as a REIT, we will not be subject to Federal income taxes on
our
income. We have accrued a tax liability relating to potential “related party
tenant” issues (see Note 10 – Taxes). To the extent that we have foreclosure
income from our owned and operated assets, we will incur federal tax at a rate
of 35%. To date, our owned and operated assets have generated losses, and
therefore, no provision for federal income tax is necessary. We
are
permitted to own up to 100% of a “taxable REIT subsidiary” (“TRS”). Currently,
we have two TRSs that are taxable as corporations and that pay federal, state
and local income tax on their net income at the applicable corporate rates.
These TRSs had a net operating loss carry-forward as of December 31, 2006 of
$12
million. This loss carry-forward was fully reserved with a valuation allowance
due to uncertainties regarding realization.
Stock-Based
Compensation
Our
company grants stock options to employees and directors with an exercise price
equal to the fair value of the shares at the date of the grant. Through December
31, 2005, in accordance with the provisions of Accounting Principles Board
(“APB”) Opinion No. 25, Accounting
for Stock Issued to Employees, compensation
expense was not recognized for these stock option grants. We adopted
Financial
Accounting Standards Board (“FASB”) Statement No. 123 (revised 2004),
Share-Based
Payment
(“FAS
No. 123R”) on January 1, 2006. Accordingly, beginning in 2006, the grant date
fair value of stock options granted is recognized as compensation cost over
the
vesting period. No stock options were granted in 2006.
SFAS
No.
148, Accounting
for Stock-Based Compensation – Transition and
Disclosure,
requires certain disclosures related to our stock-based compensation
arrangements.
F-12
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
The
following table presents the effect on net income and earnings per share if
we
had applied the fair value recognition provisions of FAS No. 123R to our
stock-based compensation granted prior to January 1, 2006.
Year
Ended December 31,
|
||||||||||
2006
|
2005
|
2004
|
||||||||
(in
thousands, except per share amounts)
|
||||||||||
Net
income (loss) to common stockholders
|
$
|
45,774
|
$
|
25,355
|
$
|
(36,715
|
)
|
|||
Add:
Stock-based compensation expense included in net income (loss) to
common
stockholders
|
4,517
|
1,141
|
1,115
|
|||||||
50,291
|
26,496
|
(35,600
|
)
|
|||||||
Less:
Stock-based compensation expense determined under the fair value
based
method for all awards
|
4,517
|
1,319
|
1,365
|
|||||||
Pro
forma net income (loss) to common stockholders
|
$
|
45,774
|
$
|
25,177
|
$
|
(36,965
|
)
|
|||
Earnings
per share:
|
||||||||||
Basic,
as reported
|
$
|
0.78
|
$
|
0.49
|
$
|
(0.81
|
)
|
|||
Basic,
pro forma
|
$
|
0.78
|
$
|
0.49
|
$
|
(0.81
|
)
|
|||
Diluted,
as reported
|
$
|
0.78
|
$
|
0.49
|
$
|
(0.81
|
)
|
|||
Diluted,
pro forma
|
$
|
0.78
|
$
|
0.48
|
$
|
(0.81
|
)
|
No
stock
options were issued during 2006 and 2005. For options issued during 2004 and
prior years, fair value was calculated on the grant dates using the
Black-Scholes options-pricing model with the following assumptions.
Significant
Weighted-Average Assumptions:
|
|
|
|
|
Risk-free
Interest Rate at time of Grant
|
|
|
2.50
|
%
|
Expected
Stock Price Volatility
|
|
|
3.00
|
%
|
Expected
Option Life in Years (a)
|
|
|
4
|
|
Expected
Dividend Payout
|
|
|
5.00
|
%
|
(a) |
Expected
life is based on contractual expiration
dates
|
Effects
of Recently Issued Accounting Standards
FAS
123R Adoption
In
December 2004, the FASB issued FAS No. 123R which supersedes APB Opinion No.
25,
Accounting
for Stock Issued to Employees,
and
amends FAS No. 95, Statement
of Cash Flows.
We
adopted FAS No. 123R on January 1, 2006 using the modified prospective
transition method. The
recorded expense in 2006 as a result of this adoption was $3
thousand.
FIN
48 Evaluation
In
July
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes
(“FIN
48”). FIN 48 is an interpretation of FASB Statement No. 109, Accounting
for Income Taxes,
and it
seeks to reduce the diversity in practice associated with certain aspects of
measurement and recognition in accounting for income taxes. In addition, FIN
48
will require expanded disclosure with respect to the uncertainty in income
taxes
and is effective as of the beginning of our 2007 fiscal year. We are currently
evaluating the impact of adoption of FIN 48 on our financial
statements.
FAS
157 Evaluation
In
September 2006, the FASB issued 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 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those years. Provisions of FAS No. 157 are required
to be
applied prospectively as of the beginning of the fiscal year in which FAS No.
157 is applied. We are evaluating the impact that FAS No. 157 will have on
our
financial statements.
F-13
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 6 - Concentration of
Risk).
Reclassifications
Certain
reclassifications have been made in the prior year financial statements to
conform to the 2006 presentation.
NOTE
3 - PROPERTIES
Leased
Property
Our
leased real estate properties, represented by 228 long-term care facilities
and
two rehabilitation hospitals at December 31, 2006, 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,
|
|||||||
2006
|
2005
|
||||||
(in
thousands)
|
|||||||
Buildings
|
$
|
1,166,010
|
$
|
934,341
|
|||
Land
|
71,155
|
56,151
|
|||||
1,237,165
|
990,492
|
||||||
Less
accumulated depreciation
|
(188,188
|
)
|
(156,198
|
)
|
|||
Total
|
$
|
1,048,977
|
$
|
834,294
|
The
future minimum estimated rents due for the remainder of the initial terms of
the
leases are as follows:
(in
thousands)
|
||||
2007
|
$
|
133,958
|
||
2008
|
132,868
|
|||
2009
|
134,454
|
|||
2010
|
134,322
|
|||
2011
|
124,632
|
|||
Thereafter
|
404,852
|
|||
$
|
1,065,086
|
Below
is
a summary of the significant lease transactions that occurred in
2006.
Advocat,
Inc.
On
October 20, 2006, we restructured our relationship with Advocat (the “Second
Advocat Restructuring”) by entering into a Restructuring Stock Issuance and
Subscription Agreement with Advocat (the “2006 Advocat Agreement”). Pursuant to
the 2006 Advocat Agreement, we exchanged the Advocat Series B preferred stock
and subordinated note issued to us in November 2000 in connection with a
restructuring because Advocat was in default on its obligations to us (the
“Initial Advocat Restructuring”) for 5,000 shares of Advocat’s Series C
non-convertible, redeemable (at our option after September 30, 2010) preferred
stock with a face value of approximately $4.9 million and a dividend rate of
7%
payable quarterly, and a secured non-convertible subordinated note in the amount
of $2.5 million maturing September 30, 2007 and bearing interest at 7% per
annum. As part of the Second Advocat Restructuring, we also amended our
Consolidated Amended and Restated Master Lease by and between one of its
subsidiaries, as lessor, and a subsidiary of Advocat, as lessee, to commence
a
new 12-year lease term through September 30, 2018 (with a renewal option for
an
additional 12 year term) and Advocat agreed to increase the master lease annual
rent by approximately $687,000 to approximately $14 million commencing on
January 1, 2007.
F-14
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
The
Second Advocat Restructuring has been accounted for as a new lease in accordance
with FASB Statement No. 13, Accounting
for Leases
(“FAS
No. 13”) and FASB Technical Bulletin No. 88-1, Issues
Relating to Accounting for Leases
(“FASB
TB No. 88-1”). The fair value of the assets exchanged in the restructuring
(i.e., the Series B non-voting redeemable convertible preferred stock and the
secured convertible subordinated note, with a fair value of $14.9 million and
$2.5 million, respectively, at October 20, 2006) in excess of the fair value
of
the assets received (the Advocat Series C non-convertible redeemable preferred
stock and the secured non-convertible subordinated note, with a fair value
of
$4.1 million and $2.5 million, respectively, at October 20, 2006) have been
recorded as a lease inducement asset of approximately $10.8 million in the
fourth quarter of 2006 and is included in accounts receivable - net on our
consolidated balance sheet. The $10.8 million lease inducement asset will
be
amortized as a reduction to rental income on a straight-line basis over the
term
of the new master lease. The exchange of securities also resulted in a gain
in
the fourth quarter of 2006 of approximately $3.6 million representing: (i)
the
fair value of the secured convertible subordinated note of $2.5 million,
previously reserved; and (ii) the realization of the gain on investments
previously classified as other comprehensive income of approximately $1.1
million relating to the Series
B
non-voting redeemable convertible preferred stock.
Guardian
LTC Management, Inc.
On
September 1, 2006, we completed a $25.0 million investment with subsidiaries
of
Guardian LTC Management, Inc. (“Guardian”), an existing operator of ours. The
transaction involved the purchase and leaseback of a skilled nursing facility
(“SNF”) in Pennsylvania and termination of a purchase option on a combination
SNF and rehabilitation hospital in West Virginia owned by us. The facilities
were included in an existing master lease with Guardian with an increase in
contractual annual rent of approximately $2.6 million in the first year and
the
master lease now includes 17 facilities. In addition, the master lease term
was
extended from October 2014 through August 2016.
In
accordance with FASB Statement No. 13, Accounting
Leases
(“FAS
No. 13”) and FASB Technical Bulletin No. 88-1, Issues
Relating to Accounting for Leases
(“FASB
TB No. 88-1”), $19.2 million of the $25.0 million transaction amount will be
accounted for as a lease inducement and is classified within accounts receivable
- net on our consolidated balance sheets. The lease inducement will be amortized
as a reduction to rental income on a straight-line basis over the term of the
new master lease. The remaining payment to Guardian of $5.8 million will be
allocated to the purchase of the Pennsylvania SNF.
Litchfield
Transaction
On
August
1, 2006, we completed a transaction with Litchfield Investment Company, LLC
and
its affiliates (“Litchfield”) to purchase 30 SNFs and one independent living
center for a total investment of approximately $171 million. The facilities
total 3,847 beds and are located in the states of Colorado (5), Florida (7),
Idaho (1), Louisiana (13), and Texas (5). The facilities were subject to master
leases with three national healthcare providers, which are existing tenants
of
the Company. The tenants are Home Quality Management, Inc. (“HQM”), Nexion
Health, Inc. (“Nexion”), and Peak Medical Corporation, which was acquired by Sun
Healthcare Group, Inc. (“Sun”) in December of 2005.
Simultaneously
with the close of the purchase transaction, the seven HQM facilities were
combined into an Amended and Restated Master Lease containing 13 facilities
between us and HQM. In addition, the 18 Nexion facilities were combined into
an
Amended and Restated Master Lease containing 22 facilities between us and
Nexion.
We
entered into a Master Lease, Assignment and Assumption Agreement with Litchfield
on the six Sun facilities. These six facilities are currently under a master
lease that expires on September 30, 2007. A portion of the acquisition price
totaling $1.6 million was allocated to a lease intangible associated with our
assumption of the Sun lease. This amount is being amortized as an increase
to
rental income over the remaining term of the lease which ends September 30,
2007.
F-15
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Haven
Eldercare, LLC
During
the three months ending March 31, 2006, Haven Eldercare, LLC (“Haven”), an
existing operator of ours, entered into a $39 million first mortgage loan with
General Electric Capital Corporation (“GE Loan”). Haven used the $39 million of
proceeds to partially repay on a $62 million mortgage it has with us.
Simultaneously, we subordinated the payment of our remaining $23 million on
the
mortgage note, due in October 2012, to that of the GE Loan. As a result of
this
transaction, the interest rate on our remaining mortgage note to Haven rose
from
10% to approximately 15%, with annual escalators.
In
conjunction with the above transactions and the application of FIN 46R, we
consolidated the financial statements and related real estate of this Haven
entity into our financial statements. The consolidation resulted in the
following changes to our consolidated balance sheet as of December 31, 2006:
(1)
an increase in total gross investments of $39.0 million; (2) an increase in
accumulated depreciation of $1.6 million; (3) an increase in accounts
receivable-net of $0.1 million relating to straight-line rent; (4) an increase
in other long-term borrowings of $39.0 million; and (5) a reduction of $1.5
million in cumulative net earnings for the twelve months ended December 31,
2006
due to the increased depreciation expense offset by straight-line rental
revenue. General Electric Capital Corporation and Haven’s other creditors do not
have recourse to our assets. We have an option to purchase the mortgaged
facilities for a fixed price in 2012. Our results of operations reflect the
effects of the consolidation of this entity, which is being accounted for
similarly to our other purchase-leaseback transactions.
Acquisitions
The
table
below summarizes the acquisitions completed during the years ended December
31,
2006 and 2005. The purchase price includes estimated transaction costs. The
amount allocated to land, buildings, and below-market lease liability was $15.2
million, $163.6 million and $1.6 million, respectively, for the 2006
acquisitions and $19.7 million, $246.8 million and $0 million, respectively,
for
the 2005 acquisitions.
2006
Acquisitions
|
||
100%
Interest Acquired
|
Acquisition
Date
|
Purchase
Price ($000’s)
|
Thirty
one facilities in CO, FL, ID, LA, TX
|
August
1, 2006
|
$171,400
|
One
Facility in PA
|
September
1, 2006
|
5,800
|
2005
Acquisitions
|
||
100%
Interest Acquired
|
Acquisition
Date
|
Purchase
Price ($000’s)
|
Thirteen
facilities in OH
|
January
13, 2005
|
$79,300
|
Two
facilities in TX
|
June
1, 2005
|
9,500
|
Five
facilities in PA and OH
|
June
28, 2005
|
49,600
|
Three
facilities in TX
|
November
1, 2005
|
12,800
|
Eleven
facilities in OH
|
December
16, 2005
|
115,300
|
F-16
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
The
acquired properties are included in our results of operations from the
respective date of acquisition. The following unaudited pro forma results of
operations reflect these transactions as if each had occurred on January 1
of
the year of the acquisition and the immediately preceding year. In our opinion,
all significant adjustments necessary to reflect the effects of the acquisitions
have been made.
Pro
forma
Year
Ended December 31,
|
||||||||||
2006
|
2005
|
2004
|
||||||||
(in
thousands, except per share amount, unaudited)
|
||||||||||
Revenues
|
$
|
146,683
|
$
|
145,369
|
$
|
116,344
|
||||
Net
income
|
$
|
56,862
|
$
|
42,110
|
$
|
24,232
|
||||
Earnings
per share – pro forma:
|
||||||||||
Earnings
(loss) per share – Basic
|
$
|
0.80
|
$
|
0.55
|
$
|
(0.72
|
)
|
|||
Earnings
(loss) per share – Diluted
|
$
|
0.80
|
$
|
0.55
|
$
|
(0.72
|
)
|
Assets
Sold or Held for Sale
·
|
We
had six assets held for sale as of December 31, 2006 with a net
book value
of approximately $3.6 million. We had eight assets held for sale
as of
December 31, 2005 with a combined net book value of $5.8 million,
which
includes a reclassification of five assets with a net book value
of $4.6
million that were sold or reclassified as held for sale during
2006.
|
·
|
During
the three
months ended March 31, 2006, a
$0.1 million provision for impairment charge was recorded to reduce
the
carrying value to its sales price of one facility that was under
contract
to be sold that was subsequently sold during the second quarter
of
2006.
During the three months ended December 31, 2006, a $0.4 million
impairment
charge was recorded to reduce the carrying value of two
facilities, currently under contract to be sold in the first quarter
of
2007, to their respective sales
price.
|
·
|
During
the year ended December 31, 2005, a combined $9.6 million provision
for
impairment charge was recorded to reduce the carrying value on
several
facilities, some of which were subsequently closed, to their estimated
fair values.
|
2006
Asset Sales
·
|
For
the three-month period ending December 31, 2006, we sold an ALF
in Ohio
resulting in an accounting gain of approximately $0.4
million.
|
·
|
For
the three-month period ending June 30, 2006, we sold two SNFs in
California resulting in an accounting loss of approximately $0.1
million.
|
·
|
For
the three-month period ending March 31, 2006, we sold a SNF in
Illinois
resulting in an accounting loss of approximately $0.2
million.
|
2005
and 2004 Asset Sales
Alterra
Healthcare Corporation
On
December 1, 2005, AHC Properties, Inc., a subsidiary of Alterra Healthcare
Corporation (“Alterra”) exercised its option to purchase six ALFs. We received
cash proceeds of approximately $20.5 million, resulting in a gain of
approximately $5.6 million.
F-17
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
Alden
Management Services, Inc.
On
June
30, 2005, we sold four SNFs to subsidiaries of Alden Management Services, Inc.,
who previously leased the facilities from us. All four facilities are located
in
Illinois. The sales price totaled approximately $17 million. We received net
cash proceeds of approximately $12 million plus a secured promissory note of
approximately $5.4 million. The sale resulted in a non-cash accounting loss
of
approximately $4.2 million.
Other
2005 and 2004 Asset Sales
·
|
In
November 2005, we sold a SNF in Florida for net cash proceeds of
approximately $14.1 million, resulting in a gain of approximately
$5.8
million.
|
·
|
In
August 2005, we sold 50.4 acres of undeveloped land, located in
Ohio, for
net cash proceeds of approximately $1 million. The sale resulted
in a gain
of approximately $0.7 million.
|
·
|
In
March 2005, we sold three facilities, located in Florida and California,
for their approximate net book value realizing cash proceeds of
approximately $6 million, net of closing costs and other
expenses.
|
·
|
During
2004, we sold six closed facilities, realizing proceeds of approximately
$5.7 million, net of closing costs and other expenses, resulting
in a net
gain of approximately $3.3 million.
|
In
accordance with SFAS No. 144, all related revenues and expenses as well as
the
realized gains, losses and provisions for impairment from the above mentioned
facilities are included within discontinued operations in our consolidated
statements of operations for their respective time periods. In addition,
facilities not previously classified as held for sale as of December 31,
2005,
that have been sold or classified as held for sale during 2006, have been
reclassified to held for sale on our consolidated balance sheet as of December
31, 2005.
NOTE
4 - MORTGAGE NOTES RECEIVABLE
Mortgage
notes receivable relate to nine 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 five 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, 2006, we have no foreclosed property and none of our mortgages
were in foreclosure proceedings. At December 31, 2006 and December 31, 2005,
no
mortgage notes were impaired and there were no reserves for uncollectible
mortgage notes.
Below
is
a summary of the significant mortgage transactions that occurred in 2006 and
2005.
Hickory
Creek Healthcare Foundation, Inc.
On
June
16, 2006, we received approximately $10 million in proceeds on a mortgage loan
payoff. We held mortgages on 15 facilities located in Indiana, representing
619
beds.
Haven
Eldercare, LLC
During
the three months ended March 31, 2006, Haven Eldercare, LLC (“Haven”), an
existing operator of ours, entered into a $39 million first mortgage loan with
General Electric Capital Corporation (“GE Loan”). Haven used the $39 million of
proceeds to partially repay on a $62 million mortgage it has with us.
Simultaneously, we subordinated the payment of our remaining $23 million of
the
mortgage note, due in October 2012, to that of the GE Loan. As a result of
this
transaction, the interest rate on our remaining mortgage note to Haven rose
from
10% to approximately 15%, with annual escalators. In accordance with FIN 46R,
we
consolidated the financial statements and related real estate of the Haven
entity that is the debtor under our mortgage note. See Note 3 –
Properties.
F-18
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
Mariner
Health Care, Inc.
On
February 1, 2005, Mariner Health Care, Inc. (“Mariner”) exercised its right to
prepay in full the $59.7 million aggregate principal amount owed to us under
a
promissory note secured by a mortgage with an interest rate of 11.57%, together
with the required prepayment premium of 3% of the outstanding principal balance,
an amendment fee and all accrued and unpaid interest.
At
December 31, 2006, all mortgages were structured as fixed-rate mortgages. The
outstanding principal amounts of mortgage notes receivable, net of allowances,
were as follows:
December
31,
|
||||||||
2006
|
2005
|
|||||||
(in
thousands)
|
||||||||
Mortgage
note due 2014; monthly payment of $63,707, including interest at
11.00%
|
6,454
|
6,496
|
||||||
Mortgage
note due 2010; monthly payment of $124,833, including interest at
11.50%
|
12,587
|
12,634
|
||||||
Mortgage
note due 2016; monthly interest only payment of $118,931 at
11.50%
|
10,730
|
10,732
|
||||||
Mortgage
note paid off 2nd
quarter 2006, interest rate was 10.00%
|
—
|
9,991
|
||||||
Mortgage
note due 2012; interest only at 10% (1)
|
—
|
61,750
|
||||||
Other
mortgage notes
|
2,115
|
2,919
|
||||||
Total
mortgages—net (2)
|
$
|
31,886
|
$
|
104,522
|
(1) |
As
a
result of the application of FIN 46R in 2006, we consolidated the
Haven
entity that was the debtor on this mortgage note. Our balance sheet
at
December 31, 2006 reflects real estate assets of $62 million, reflecting
the real estate owned by the Haven
entity.
|
(2) |
Mortgage
notes are shown net of allowances of $0.0 million in 2006 and
2005.
|
NOTE
5 - OTHER INVESTMENTS
A
summary
of our other investments is as follows:
At
December 31,
|
|||||||
2006
|
2005
|
||||||
(in
thousands)
|
|||||||
Notes
receivable(1)
|
$
|
17,071
|
$
|
21,039
|
|||
Notes
receivable allowance
|
(1,512
|
)
|
(2,412
|
)
|
|||
Marketable
securities and other
|
6,519
|
10,291
|
|||||
Total
other investments
|
$
|
22,078
|
$
|
28,918
|
(1)
|
Includes
notes receivable deemed impaired in 2006 and 2005 of $0 million
and $1.8
million, respectively.
|
F-19
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For
the
year ended December 31, 2006 and 2005, the following transactions impacted
our
other investments:
Advocat
Subordinated Debt and Convertible Preferred Stock Investments
·
Under
our
2000 restructuring agreement with Advocat, we received the following: (i)
393,658 shares of Advocat’s Series B non-voting, redeemable (on or after
September 30, 2007), convertible preferred stock, which was convertible
into up
to 706,576 shares of Advocat’s common stock (representing 9.9% of the
outstanding shares of Advocat’s common stock on a fully diluted, as-converted
basis and accruing dividends at 7% per annum); and (ii) a secured convertible
subordinated note in the amount of $1.7 million bearing interest at 7%
per annum
with a September 30, 2007 maturity, (collectively the “Initial Advocat
Securities”). On October 20, 2006, we restructured our relationship with Advocat
(the “Second Advocat Restructuring”) by entering into a Restructuring Stock
Issuance and Subscription Agreement with Advocat (the “2006 Advocat Agreement”).
Pursuant to the 2006 Advocat Agreement, we exchanged the Initial Advocat
Securities issued to us in November 2000 for 5,000 shares of Advocat’s Series C
non-convertible, redeemable (at our option after September 30, 2010) preferred
stock with a face value of approximately $4.9 million and a dividend rate
of 7%
payable quarterly, and a secured non-convertible subordinated note in the
amount
of $2.5 million maturing September 30, 2007 and bearing interest at 7%
per
annum.
·
In
accordance with FAS No. 115, the Advocat Series B security was a compound
financial instrument. During the period of our ownership of this security,
the
embedded derivative value of the conversion feature was recorded separately
at
fair market value in accordance with FAS No. 133. The non-derivative portion
of
the security was classified as an available-for-sale investment and was
stated
at its fair value with unrealized gains or losses recorded in accumulated
other
comprehensive income. At December 31, 2005, the fair value of the conversion
feature was $1.1 million and the fair value of the non-derivative portion
of the
security was $4.3 million. As a result of the Second Advocat Restructuring,
we
recorded a gain of $1.1 million associated with the exchange of the Advocat
Series B preferred stock. See Note 3 – Properties.
·
In
accordance with FAS No. 114 and FAS No. 118, the $1.7 million Advocat secured
convertible subordinated note was fully reserved and
accounted for using the cost-recovery method applying cash received against
the
outstanding principal balance prior to recording interest income. As a
result of
the Second Advocat Restructuring, in 2006 a $2.5 million gain associated
with
the exchange of this note was recorded. See Note 3–Properties.
·
As
a
result of the Second Advocat Restructuring, we obtained 5,000 shares of
Advocat
Series C non-convertible redeemable preferred stock. This security was
initially
recorded at its estimated fair value of $4.1 million. In accordance with
FAS No.
115, we have classified this security as held-to-maturity. Accordingly,
the
carrying value of this security will be accreted to its mandatory redemption
value of $4.9 million. At December 31, 2006, the carrying value of this
security
was $4.1 million.
·
Also,
as
a result of the Second Advocat Restructuring, we obtained a secured
non-convertible subordinated note from Advocat in the amount of $2.5 million.
This note was recorded at its estimated fair value of $2.5 million. At
December
31, 2006, the carrying value of the note was $2.5 million.
Sun
Healthcare Common Stock Investment
·
Under
our
2004 restructuring agreement with Sun, we received the right to convert deferred
base rent owed to us, totaling approximately $7.8 million, into 800,000 shares
of Sun’s common stock, subject to certain non-dilution provisions and the right
of Sun to pay cash in an amount equal to the value of that stock in lieu
of
issuing stock to us.
·
In
March
2004, we exercised our right to convert the deferred base rent into fully
paid
and non-assessable shares of Sun’s common stock. In April 2004, we received a
stock certificate for 760,000 restricted shares of Sun’s common stock and cash
in the amount of approximately $0.5 million in exchange for the remaining
40,000
shares of Sun’s common stock. In July 2004, Sun registered these shares with the
SEC. During the period of our ownership of this security, we accounted for
the
760,000 shares as “available for sale” marketable securities with changes in
market value recorded in other comprehensive income.
·
|
In
accordance with FASB Statement No. 115, Accounting
for Certain Investments in Debt and Equity Securities (“FAS
No. 115”), in June 2005, we recorded a $3.4 million provision for
impairment to write-down our 760,000 share investment in Sun common
stock
to its then current fair market value of $4.9 million. At December
31,
2005, the fair value of our Sun stock investment was $5.0
million.
|
·
|
During
the three months ended September 30, 2006, we sold our remaining
760,000
shares of Sun’s common stock for approximately $7.6 million, realizing a
gain on the sale of these securities of approximately $2.7
million.
|
Notes
Receivable
At
December 31, 2006, we had 11 notes receivable totaling $15.6 million, net of
allowance, with maturities ranging from on demand to 2016. At December 31,
2005,
we had 13 notes receivable totaling $18.6 million, net of allowance, with
maturities ranging from on demand to 2014.
F-20
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE
6 - CONCENTRATION OF RISK
As
of
December 31, 2006, our portfolio of domestic investments consisted of 239
healthcare facilities, located in 27 states and operated by 32 third-party
operators. Our gross investment in these facilities, net of impairments and
before reserve for uncollectible loans, totaled approximately $1.3 billion
at
December 31, 2006, with approximately 98% of our real estate investments related
to long-term care facilities. This portfolio is made up of 222 long-term
healthcare facilities, two rehabilitation hospitals owned and leased to third
parties, fixed rate mortgages on 9 long-term healthcare facilities and six
facilities held for sale. At December 31, 2006, we also held miscellaneous
investments of approximately $22 million, consisting primarily of secured loans
to third-party operators of our facilities.
At
December 31, 2006, approximately 25% of our real estate investments were
operated by two public companies: Sun (17%) and Advocat (8%). Our largest
private company operators (by investment) were CommuniCare Health Services,
Inc.
(“CommuniCare”) (15%), Haven (9%), HQM (8%), Guardian (7%), Nexion (6%) and
Essex Healthcare Corporation (6%). No other operator represents more than 4%
of
our investments. The three states in which we had our highest concentration
of
investments were Ohio (22%), Florida (14%) and Pennsylvania (9%) at December
31,
2006.
For
the
year ended December 31, 2006, our revenues from operations totaled $135.7
million, of which approximately $25.1 million were from Sun (19%), $20.3 million
from CommuniCare (15%) and $15.3 million from Advocat (11%). No other operator
generated more than 9% of our revenues from operations for the year ended
December 31, 2006.
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.
NOTE
7 - LEASE AND MORTGAGE DEPOSITS
We
obtain
liquidity deposits and letters of credit from most operators pursuant to our
lease and mortgage contracts with the operators. These generally represent
the
rental and mortgage interest for periods ranging from three to six months with
respect to certain of its investments. The liquidity deposits may be applied
in
the event of lease and loan defaults, subject to applicable limitations under
bankruptcy law with respect to operators filing under Chapter 11 of the United
States Bankruptcy Code. At December 31, 2006, we held $4.1 million in such
liquidity deposits and $16.9 million in letters of credit. 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
8 - BORROWING ARRANGEMENTS
Secured
Borrowings
At
December 31, 2006, we had $150.0 million outstanding under our $200 million
revolving senior secured credit facility (the “New Credit Facility”) and $2.5
million was utilized for the issuance of letters of credit, leaving availability
of $47.5 million. The $150.0 million of outstanding borrowings had a blended
interest rate of 6.60% at December 31, 2006. The New Credit Facility, entered
into on March 31, 2006, is being provided by Bank of America, N.A., as
Administrative Agent, Deutsche Bank Trust Company Americas, UBS Securities
LLC,
General Electric Capital Corporation, LaSalle Bank N.A., and Citicorp North
America, Inc. and will be used for acquisitions and general corporate
purposes.
The
New
Credit Facility replaced our previous $200 million senior secured credit
facility (the “Prior Credit Facility”), that was terminated on March 31, 2006.
The New Credit Facility matures on March 31, 2010, and includes an “accordion
feature” that permits us to expand our borrowing capacity to $300 million during
our first two years. 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.
F-21
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
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, 2006, we were in
compliance with all property level and corporate financial
covenants.
At
December 31, 2005, we had a $200 million revolving senior secured credit
facility (“Credit Facility”) of which $58.0 million was outstanding and $3.9
million was utilized for the issuance of letters of credit, leaving availability
of $138.1 million. On April 26, 2005, we amended our Credit Facility to reduce
both LIBOR and Base Rate interest spreads (as defined in the Credit Facility)
by
50 basis points for borrowings outstanding. The $58.0 million of outstanding
borrowings had a blended interest rate of 7.12% at December 31,
2005.
Unsecured
Borrowings
$100
Million Aggregate Principal Amount of 6.95% Unsecured Notes Tender and
Redemption
On
December 16, 2005, we initiated a tender offer and consent solicitation for
all
of our outstanding $100 million aggregate principal amount 6.95% notes due
2007
(the “2007 Notes”). On December 30, 2005, we accepted for purchase 79.3% of the
aggregate principal amount of the 2007 Notes outstanding that were tendered.
On
December 30, 2005, our Board of Directors also authorized the redemption of
all
outstanding 2007 Notes that were not otherwise tendered. On December 30, 2005,
upon our irrevocable funding of the full redemption price for the 2007 Notes
and
certain other acts required by the Indenture governing the 2007 Notes, the
Trustee of the 2007 Notes certified in writing to us (the “Certificate of
Satisfaction and Discharge”) that the Indenture was satisfied and discharged as
of December 30, 2005, except for certain provisions. In accordance with SFAS
No.
140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities,
we
removed 79.3% of the aggregate principal amount of the 2007 Notes, which were
tendered in our tender offer and consent solicitation, and the corresponding
portion of the funds held in trust by the Trustee to pay the tender price from
our balance sheet and recognized $2.8 million of additional interest expense
associated with the tender offer. On January 18, 2006, we completed the
redemption of the remaining 2007 Notes not otherwise tendered. In connection
with the redemption and in accordance with SFAS No. 140, we recognized $0.8
million of additional interest expense in the first quarter of 2006. As of
January 18, 2006, none of the 2007 Notes remained outstanding.
$175
Million Aggregate Principal Amount of 7% Unsecured Notes
Issuance
On
December 30, 2005, we closed on a private offering of $175 million of 7% senior
unsecured notes due 2016 (“2016 Notes”) at an issue price of 99.109% of the
principal amount of the notes (equal to a per annum yield to maturity of
approximately 7.125%), resulting in gross proceeds to us of approximately $173.4
million. The 2016 Notes are unsecured senior obligations to us, which have
been
guaranteed by our subsidiaries. The 2016 Notes were issued in a private
placement to qualified institutional buyers under Rule 144A under the Securities
Act of 1933 (the “Securities Act”). A portion of the proceeds of this private
offering was used to pay the tender price and redemption price of the 2007
Notes. On February 24, 2006, we filed a registration statement on Form S-4
under
the Securities Act with the SEC offering to exchange up to $175 million
aggregate principal amount of our registered 7% Senior Notes due 2016 (the
“2016
Exchange Notes”), for all of our outstanding unregistered 2016 Notes. The terms
of the 2016 Exchange Notes are identical to the terms of the 2016 Notes, except
that the 2016 Exchange Notes are registered under the Securities Act and
therefore freely tradable (subject to certain conditions). The 2016 Exchange
Notes represent our unsecured senior obligations and are guaranteed by all
of
our subsidiaries with unconditional guarantees of payment that rank equally
with
existing and future senior unsecured debt of such subsidiaries and senior to
existing and future subordinated debt of such subsidiaries. In April 2006,
upon
the expiration of the 2016 Notes Exchange Offer, $175 million aggregate
principal amount of 2016 Notes were exchanged for the 2016 Exchange
Notes.
$50
Million Aggregate Principal Amount of 7% Unsecured Notes
Issuance
On
December 2, 2005, we completed a privately placed offering of an additional
$50
million aggregate principal amount of 7% senior notes due 2014 (the “2014 Add-on
Notes”) at an issue price of 100.25% of the principal amount of the notes (equal
to a per annum yield to maturity of approximately 6.95%), resulting in gross
proceeds to us of approximately $50.1 million. The terms of the 2014 Add-on
Notes offered were substantially identical to our existing $200 million
aggregate principal amount of 7% senior notes due 2014 issued in March 2004.
The
2014 Add-on Notes were issued through a private placement to qualified
institutional buyers under Rule 144A under the Securities Act. After giving
effect to the issuance of the $50 million aggregate principal amount of this
offering, we had outstanding $310 million aggregate principal amount of 7%
senior notes due 2014. On February 24, 2006, we filed a registration statement
on Form S-4 under the Securities Act with the SEC offering to exchange up to
$50
million aggregate principal amount of our registered 7% Senior Notes due 2014
(the “2014 Add-on Exchange Notes”), for all of our outstanding unregistered 2014
Add-on Notes. The terms of the 2014 Add-on Exchange Notes are identical to
the
terms of the 2014 Add-on Notes, except that the 2014 Add-on Exchange Notes
are
registered under the Securities Act and therefore freely tradable (subject
to
certain conditions). The 2014 Add-on Exchange Notes represent our unsecured
senior obligations and are guaranteed by all of our subsidiaries with
unconditional guarantees of payment that rank equally with existing and future
senior unsecured debt of such subsidiaries and senior to existing and future
subordinated debt of such subsidiaries. In May 2006, upon the expiration of
the
2014 Add-on Notes Exchange Offer, $50 million aggregate principal amount of
2014
Add-on Notes were exchanged for the 2014 Add-on Exchange Notes.
F-22
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Other
Long-Term Borrowings
During
the three months ended March 31, 2006, Haven used the $39 million of proceeds
from the GE Loan to partially repay a portion of a $62 million mortgage it
has
with us. Simultaneously, we subordinated the payment of its remaining $23
million on the mortgage note to that of the GE Loan. In conjunction with the
above transactions and the application of FIN 46R, we consolidated the financial
statements of this Haven entity into our financial statements, which contained
the long-term borrowings with General Electric Capital Corporation of $39.0
million. The loan has an interest rate of approximately seven percent and is
due
in 2012. The lender of the $39.0 million does not have recourse to our assets.
See Note – 3
Properties; Leased Property.
The
following is a summary of our long-term borrowings:
December
31,
|
|||||||
2006
|
2005
|
||||||
(in
thousands)
|
|||||||
Unsecured
borrowings:
|
|||||||
6.95%
Notes due January 2006
|
$
|
—
|
$
|
20,682
|
|||
7%
Notes due August 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 August 2014
|
1,148
|
1,306
|
|||||
Discount
on 7% Notes due January 2016
|
(1,417
|
)
|
(1,559
|
)
|
|||
Other
long-term borrowings
|
2,410
|
2,800
|
|||||
526,141
|
508,229
|
||||||
Secured
borrowings:
|
|||||||
Revolving
lines of credit
|
150,000
|
58,000
|
|||||
Totals
|
$
|
676,141
|
$
|
566,229
|
Real
estate investments with a gross book value of approximately $268 million are
pledged as collateral for outstanding secured borrowings at December 31,
2006.
The
required principal payments, excluding the premium/discount on the 7% Notes,
for
each of the five years following December 31, 2006 and the aggregate due
thereafter are set forth below:
(in
thousands)
|
||||
2007
|
$
|
415
|
||
2008
|
435
|
|||
2009
|
465
|
|||
2010
|
150,495
|
|||
2011
|
290
|
|||
Thereafter
|
524,310
|
|||
Totals
|
$
|
676,410
|
F-23
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE
9 - FINANCIAL INSTRUMENTS
At
December 31, 2006 and 2005, the carrying amounts and fair values of our
financial instruments were as follows:
2006
|
2005
|
||||||||||||
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||
Assets:
|
(in
thousands)
|
||||||||||||
Cash
and cash equivalents
|
$
|
729
|
$
|
729
|
$
|
3,948
|
$
|
3,948
|
|||||
Restricted
cash
|
4,117
|
4,117
|
5,752
|
5,752
|
|||||||||
Mortgage
notes receivable – net
|
31,886
|
31,975
|
104,522
|
105,981
|
|||||||||
Other
investments
|
22,078
|
20,996
|
28,918
|
29,410
|
|||||||||
Totals
|
$
|
58,810
|
$
|
57,817
|
$
|
143,140
|
$
|
145,091
|
|||||
Liabilities:
|
|||||||||||||
Revolving
lines of credit
|
$
|
150,000
|
$
|
150,000
|
$
|
58,000
|
$
|
58,000
|
|||||
6.95%
Notes
|
—
|
—
|
20,682
|
20,674
|
|||||||||
7.00%
Notes due 2014
|
310,000
|
317,116
|
310,000
|
315,007
|
|||||||||
7.00%
Notes due 2016
|
175,000
|
182,826
|
175,000
|
172,343
|
|||||||||
(Discount)/Premium
on 7.00% Notes – net
|
(269
|
)
|
(121
|
)
|
(253
|
)
|
(86
|
)
|
|||||
Other
long-term borrowings
|
41,410
|
43,868
|
2,800
|
2,791
|
|||||||||
Totals
|
$
|
676,141
|
$
|
693,689
|
$
|
566,229
|
$
|
568,729
|
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
in 2006
and a redeemable convertible preferred security in 2005; (iii)
an embedded
derivative of the redeemable convertible preferred security in
2005; (iv)
a subordinated debt instrument of a publicly traded company; and
(v) a
marketable common stock security held for resale in 2005. 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 embedded derivative
is
estimated using a
financial pricing model and market data derived from the underlying
issuer’s common stock. 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 carrying values of our borrowings under variable
rate
agreements approximate their fair
values.
|
·
|
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.
|
F-24
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
From
time
to time, we may utilize interest rate swaps and caps to fix interest rates
on
variable rate debt and reduce certain exposures to interest rate fluctuations.
We do not use derivatives for trading or speculative purposes. We have a policy
of only entering into contracts with major financial institutions based upon
their credit ratings and other factors. At December 31, 2005 and 2006, we had
no
derivative instruments relating to interest rate swaps and caps on our balance
sheet.
To
manage
interest rate risk, we may employ options, forwards, interest rate swaps, caps
and floors or a combination thereof depending on the underlying exposure. We
may
employ swaps, forwards or purchased options to hedge qualifying forecasted
transactions. Gains and losses related to these transactions are deferred and
recognized in net income as interest expense in the same period or periods
that
the underlying transaction occurs, expires or is otherwise terminated.
We
account for derivative financial instruments under the guidance of SFAS No.
133,
Accounting
for Derivative Instruments and Hedging Activities,
and
SFAS No. 138, Accounting
for Certain Instruments and Certain Hedging Activities, an Amendment of
Statement No. 133.
These
financial accounting standards require us to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted
to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in Other Comprehensive Income until
the hedge item is recognized in earnings. The ineffective portion of a
derivative’s change in fair value will be immediately recognized in
earnings.
NOTE
10 - TAXES
We
were
organized to qualify for taxation as a REIT under Sections 856 through 860
of
the Internal Revenue Code. So
long
as we qualify as a REIT and, among other things, we distribute 90% of our
taxable income, we will not be subject to Federal income taxes on our income,
except as described below. For
tax year
2006, preferred and common dividend payments of approximately $67 million made
throughout 2006 satisfy the 2006 REIT requirements relating to qualifying
income. We
are
permitted to own up to 100% of a “taxable REIT subsidiary” (“TRS”). Currently,
we have two TRSs that are taxable as corporations and that pay federal, state
and local income tax on their net income at the applicable corporate
rates.
These
TRSs had net operating loss carry-forwards as of December 31, 2006, 2005 and
2004 of $12 million, $14 million and $15 million, respectively. These loss
carry-forwards were fully reserved with a valuation allowance due to
uncertainties regarding realization.
Except
with respect to the potential Advocat “related party tenant” issue discussed
below, we believe we have conducted, and we intend to continue to conduct,
our
operations so as to qualify as a REIT. Qualification as a REIT involves the
satisfaction of numerous requirements, some on an annual and some on a quarterly
basis, established under highly technical and complex provisions of the Internal
Revenue Code for which there are only limited judicial and administrative
interpretations and involve the determination of various factual matters and
circumstances not entirely within our control. 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.
In
November 2000, Advocat, an operator of various skilled nursing facilities owned
by or mortgaged to us, was in default on its obligations to us. As a result,
we
entered into an agreement with Advocat with respect to the restructuring of
Advocat’s obligations pursuant to leases and mortgages for the facilities then
operated by Advocat (the “Initial Advocat Restructuring”). As part of the
Initial Advocat Restructuring in 2000, Advocat issued to us (i) 393,658 shares
of Advocat’s Series B non-voting, redeemable (on or after September 30, 2007),
convertible preferred stock, which was convertible into up to 706,576 shares
of
Advocat’s common stock (representing 9.9% of the outstanding shares of Advocat’s
common stock on a fully diluted, as-converted basis and accruing dividends
at 7%
per annum), and (ii) a secured convertible subordinated note in the amount
of
$1.7 million bearing interest at 7% per annum with a September 30, 2007
maturity.
F-25
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Subsequent
to the Initial Advocat Restructuring, Advocat’s operations and financial
condition have improved and there has been a significant increase in the market
value of Advocat’s common stock from approximately $0.31 per share at the time
of the Initial Advocat Restructuring to the closing price on October 20, 2006
of
$18.84. As a result of the significant increase in the value of the common
stock
underlying the Series B preferred stock of Advocat held by us, on October 20,
2006 we again restructured our relationship with Advocat (the “Second Advocat
Restructuring”) by entering into a Restructuring Stock Issuance and Subscription
Agreement with Advocat (the “2006 Advocat Agreement”). Pursuant to the 2006
Advocat Agreement, we exchanged the Advocat Series B preferred stock and
subordinated note issued in the Initial Advocat Restructuring for 5,000 shares
of Advocat’s Series C non-convertible, redeemable (at our option after September
30, 2010) preferred stock with a face value of approximately $4.9 million and
a
dividend rate of 7% payable quarterly, and a secured non-convertible
subordinated note in the amount of $2.5 million maturing September 30, 2007
and
bearing interest at 7% per annum. As part of the Second Advocat Restructuring,
we also amended our Consolidated Amended and Restated Master Lease by and
between one of our subsidiaries, as lessor, and a subsidiary of Advocat, as
lessee, to commence a new 12-year lease term through September 30, 2018 (with
a
renewal option for an additional 12 year term) and Advocat has agreed to
increase the master lease annual rent by approximately $687,000 to approximately
$14 million commencing on January 1, 2007.
Advocat
Related Party Tenant Issue
Management
believes that certain of the terms of the Advocat Series B preferred stock
previously held by us could be interpreted as affecting our compliance with
federal income tax rules applicable to REITs regarding related party tenant
income.
The
market value for Advocat’s common stock has increased significantly since the
completion of the Initial Advocat Restructuring. In connection with exploring
the potential disposition of the Advocat Series B preferred stock as part of
the
Second Advocat Restructuring, we were advised by our tax counsel that due to
the
structure of the Initial Advocat Restructuring, Advocat may be deemed to be
a
“related party tenant” under applicable federal income tax rules and, in such
event, rental income from Advocat would not be qualifying income under the
gross
income tests that are applicable to REITs.
In
order
to maintain qualification as a REIT, we annually must satisfy certain tests
regarding the source of our gross income. The applicable federal income tax
rules provide a “savings clause” for REITs that fail to satisfy the REIT gross
income tests, if such failure is due to reasonable cause. A REIT that qualifies
for the savings clause will retain its REIT status but will pay a tax under
section 857(b)(5) and related interest.
On
December 15, 2006, we submitted to the IRS a request for a closing agreement
to
resolve the “related party tenant” issue. Since that time, we have had
additional conversations with the IRS, who has encouraged us to move forward
with the process of obtaining a closing agreement, and we have submitted
additional documentation in support of the issuance of a closing agreement
with
respect to this matter. While we believe there are valid arguments that Advocat
should not be deemed a “related party tenant,” the matter still is not free from
doubt, and we believe it is in our best interest to proceed with the request
for
a closing agreement with the IRS in order to resolve the matter, minimize
potential interest charges and obtain assurances regarding our continuing REIT
status. If obtained, a closing agreement will establish that any failure to
satisfy the gross income tests was due to reasonable cause. In the event that
it
is determined that the “savings clause” described above does not apply, we could
be treated as having failed to qualify as a REIT for one or more taxable
years.
As
a
result of the potential related party tenant issue described above,
we have
recorded a $2.3
million, $2.4 million and $0.4 million provision for income taxes,
including related interest expense,
for the
years ended December 31, 2006, 2005 and 2004, respectively.
The
amount accrued represents the estimated liability and interest, which remains
subject to final resolution and therefore is subject to change. In addition,
in
October 2006, in connection with the Second Advocat Restructuring we have been
advised by tax counsel that we will not receive any non-qualifying related
party
tenant income from Advocat in future fiscal years. Accordingly, we do not expect
to incur tax expense associated with related party tenant income in future
periods commencing January 1, 2007.
F-26
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE
11 - RETIREMENT ARRANGEMENTS
Our
company has a 401(k) Profit Sharing Plan covering all eligible employees. Under
this plan, employees are eligible to make contributions, and we, at our
discretion, may match contributions and make a profit sharing
contribution.
We
have a
Deferred Compensation Plan which is an unfunded plan under which we can award
units that result in participation in the dividends and future growth in the
value of our common stock. There are no outstanding units as of December 31,
2006.
Amounts
charged to operations with respect to these retirement arrangements totaled
approximately $62,700, $55,400 and $52,800 in 2006, 2005 and 2004,
respectively.
NOTE
12 - STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
Stockholders’
Equity
5.175
Million Common Stock Offering
On
November 21, 2005, we closed an underwritten public offering of 5,175,000 shares
of Omega common stock at $11.80 per share, less underwriting discounts. The
sale
included 675,000 shares sold in connection with the exercise of an
over-allotment option granted to the underwriters. We received approximately
$58
million in net proceeds from the sale of the shares, after deducting
underwriting discounts and before estimated offering expenses.
8.625%
Series B Preferred Redemption
On
May 2,
2005, we fully redeemed our 8.625% Series B Cumulative Preferred Stock (NYSE:OHI
PrB) (the “Series B Preferred Stock”). We redeemed the 2.0 million shares of
Series B Preferred Stock at a price of $25.55104, comprising the $25 liquidation
value and accrued dividend. Under FASB-EITF Issue D-42, ‘‘The Effect on the
Calculation of Earnings per Share for the Redemption or Induced Conversion
of
Preferred Stock,” the repurchase of the Series B Preferred Stock resulted in a
non-cash charge to our 2005 net income available to common shareholders of
approximately $2.0 million reflecting the write-off of the original issuance
costs of the Series B Preferred Stock.
4.025
Million Primary Share Common Stock Offering
On
December 15, 2004, we closed an underwritten public offering of 4,025,000 shares
of our common stock at a price of $11.96 per share, less underwriting discounts.
The offering included 525,000 shares sold in connection with the exercise of
an
over-allotment option granted to the underwriters. We received approximately
$46
million in net proceeds from the sale of the shares, after deducting
underwriting discounts and before estimated offering expenses.
9.25%
Series A Preferred Redemption
On
April
30, 2004, we fully redeemed all of the outstanding 2.3 million shares of our
Series A Cumulative
Preferred Stock (the “Series A Preferred Stock”)
at a
price of $25.57813, comprised of the $25 per share liquidation value and accrued
dividend. Under FASB-EITF Issue D-42, ‘‘The Effect on the Calculation of
Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,”
the repurchase of the Series A Preferred Stock resulted in a non-cash charge
to
our 2004 net income available to common stockholders of approximately $2.3
million.
F-27
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
8.375%
Series D Preferred Stock Offering
On
February 10, 2004, we closed on the sale of 4,739,500 shares of our 8.375%
Series D cumulative redeemable preferred stock (the “Series D Preferred Stock”)
at a price of $25 per share. The Series D Preferred Stock is listed on the
NYSE
under the symbol “OHI PrD.” Dividends on the Series D Preferred Stock are
cumulative from the date of original issue and are payable quarterly. At
December 31, 2006, the aggregate liquidation preference of the Series D
Preferred Stock was $118.5 million. (See Note 13 - Dividends).
Series
C Preferred Stock Redemption, Conversion and Repurchase
On
July
14, 2000, Explorer Holdings, L.P., (“Explorer”), a private equity investor,
completed an investment of $100.0 million in our company in exchange for
1,000,000 shares of our Series C convertible preferred stock (the “Series C
Preferred Stock”). Shares of the Series C Preferred Stock were convertible into
common stock at any time by the holder at an initial conversion price of $6.25
per share of common stock. The shares of Series C Preferred Stock were entitled
to receive dividends at the greater of 10% per annum or the dividend payable
on
shares of common stock, with the Series C Preferred Stock participating on
an
“as converted” basis. Dividends on the Series C Preferred Stock were cumulative
from the date of original issue and are payable quarterly.
On
February 5, 2004, we announced that Explorer, our then largest stockholder,
granted us the option to repurchase up to 700,000 shares of our Series C
Preferred Stock, which were convertible into our common shares held by Explorer
at a negotiated purchase price of $145.92 per share of Series C Preferred Stock
(or $9.12 per common share on an as converted basis). Explorer further agreed
to
convert any remaining Series C Preferred Stock into our common
stock.
We
used
approximately $102.1 million of the net proceeds from the Series D Preferred
Stock offering to repurchase 700,000 shares of our Series C Preferred Stock
from
Explorer. In connection with the closing of the repurchase, Explorer converted
its remaining 348,420 shares of Series C Preferred Stock into approximately
5.6
million shares of our common stock. Following the repurchase and conversion,
Explorer held approximately 18.1 million of our common shares.
The
combined repurchase and conversion of the Series C Preferred Stock reduced
our
preferred dividend requirements, increased our market capitalization and
facilitated future financings by simplifying our capital structure. Under
FASB-EITF Issue D-42, ‘‘The Effect on the Calculation of Earnings per Share for
the Redemption or Induced Conversion of Preferred Stock,” the repurchase of the
Series C Preferred Stock resulted in a non-cash charge to our 2004 net income
available to common stockholders of approximately $38.7 million.
18.1
Million Secondary and 2.7 Million Share Primary Offering of Our Common
Stock
On
March
8, 2004, we announced the closing of an underwritten public offering of 18.1
million shares of our common stock at a price of $9.85 per share owned by
Explorer (the “Secondary Offering”). As a result of the Secondary Offering,
Explorer no longer owned any shares of our common stock. We did not receive
any
proceeds from the sale of the shares sold by Explorer.
In
connection with the Secondary Offering, we issued approximately 2.7 million
additional shares of our common stock at a price of $9.85 per share, less
underwriting discounts (the “Over-Allotment Offering”), to cover over-allotments
in connection with the Secondary Offering. We received net proceeds of
approximately $23 million from the Over-Allotment Offering.
Stock
Options
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.
Effective January 1, 2006, we adopted FAS No. 123R using the modified
prospective method. Accordingly, we have not restated prior period amounts.
The
additional expense recorded in 2006 as a result of this adoption is
approximately $3 thousand. Under the provisions of FAS No. 123R, the
“Unamortized restricted stock awards” line on our consolidated balance sheet, a
contra-equity line representing the amount of unrecognized share-based
compensation costs, is no longer presented. Accordingly, effective January
1,
2006, the balance recorded for “Unamortized restricted stock awards” as of
December 31, 2005 was reversed through the “Common stock and additional
paid-in-capital” line on our consolidated balance sheet.
F-28
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Under
the
terms of our 2000 Stock Incentive Plan (the “2000 Plan”), we reserved 3,500,000
shares of common stock. The exercise price per share of an option under the
2000
Plan cannot be reduced after the date of grant, nor can an option be cancelled
in exchange for an option with a lower exercise price per share. The 2000 Plan
provides for non-employee directors to receive options that vest over three
years while other grants vest over the period required in the agreement
applicable to the individual recipient. Directors, officers, employees and
consultants are eligible to participate in the 2000 Plan. At December 31, 2006,
there were outstanding options for 48,913 shares of common stock granted to
eight eligible participants under the 2000 Plan. Additionally, 355,655 shares
of
restricted stock have been granted under the provisions of the 2000 Plan, and
as
of December 31, 2006, there were no shares of unvested restricted stock
outstanding under the 2000 Plan.
At
December 31, 2006, under the 2000 Plan, there were options for 47,244 shares
of
common stock currently exercisable with a weighted-average exercise price of
$12.70, with exercise prices ranging from $2.96 to $37.20. There were 559,960
shares available for future grants as of December 31, 2006. A breakdown of
the
options outstanding under the 2000 Plan as of December 31, 2006, by price range,
is presented below:
Option
Price
Range
|
Number
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Life (Years)
|
Number
Exercisable
|
Weighted
Average Price on Options Exercisable
|
|||||||||||
$2.96
-$3.81
|
11,918
|
$
|
3.41
|
3.44
|
11,918
|
$
|
3.41
|
|||||||||
$6.02
-$9.33
|
22,330
|
$
|
6.67
|
5.14
|
20,661
|
$
|
6.46
|
|||||||||
$20.25
-$37.20
|
14,665
|
$
|
29.04
|
1.59
|
14,665
|
$
|
29.04
|
On
April
20, 2004, our Board of Directors approved the 2004 Stock Incentive Plan (the
“2004 Plan”), which was subsequently approved by our stockholders at our annual
meeting held on June 3, 2004. Under the terms of the 2004 Plan, we reserved
3,000,000 shares of common stock. The exercise price per share of an option
under the 2004 Plan cannot be less than fair market value (as defined in the
2004 Plan) on the date of grant. The exercise price per share of an option
under
the 2004 Plan cannot be reduced after the date of grant, nor can an option
be
cancelled in exchange for an option with a lower exercise price per share.
Directors, officers, employees and consultants are eligible to participate
in
the 2004 Plan. As of December 31, 2006, a total of 350,480 shares of restricted
stock and 317,500 restricted stock units have been granted under the 2004 Plan,
and as of December 31, 2006, there were no outstanding options to purchase
shares of common stock under the 2004 Plan.
At
December 31, 2006, options outstanding (48,913) have a weighted-average exercise
price of $12.58, with exercise prices ranging from $2.96 to $37.20. For the
year
ended December 31, 2004, 9,000 options were granted at a weighted average price
per share of $9.33. There were no options granted in 2005 or 2006. The following
is a summary of option activity under the 2000 Plan:
Stock
Options
|
Number
of
Shares |
Exercise
Price
|
Weighted-
Average Price |
Weighted-
Average Remaining Contractual Term |
Aggregate
Intrinsic
Value
|
|||||||||||
Outstanding
at December 31, 2003
|
2,282,630
|
|
$
2.320 - $ 37.205
|
$
|
3.202
|
6.8
|
||||||||||
Granted
during
2004
|
9,000
|
9.330
- 9.330
|
9.330
|
|||||||||||||
Exercised
|
(1,713,442
|
)
|
2.320
- 7.750
|
2.988
|
||||||||||||
Cancelled
|
(8,005
|
)
|
3.740
- 9.330
|
6.914
|
||||||||||||
Outstanding
at December 31, 2004
|
570,183
|
2.320
- 37.205
|
3.891
|
6.0
|
||||||||||||
Exercised
|
(336,910
|
)
|
2.320
- 9.330
|
2.843
|
||||||||||||
Cancelled
|
(5,833
|
)
|
3.410
- 3.410
|
3.410
|
||||||||||||
Outstanding
at December 31, 2005
|
227,440
|
2.760
- 37.205
|
5.457
|
4.6
|
||||||||||||
Exercised
|
(174,191
|
)
|
2.760
- 9.330
|
2.979
|
||||||||||||
Cancelled
|
(4,336
|
)
|
22.452
- 25.038
|
24.594
|
||||||||||||
Outstanding
at December 31, 2006
|
48,913
|
$ 2.960
- $ 37.205
|
$
|
12.583
|
3.1
|
$
|
417,368
|
|||||||||
Exercisable
at December 31, 2006
|
47,244
|
$
2.960-
$37.205
|
$
|
12.698
|
3.7
|
$
|
403,357
|
F-29
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
The
total
intrinsic value of options exercised during the years ended December 31, 2006,
2005 and 2004 was $1.7, million, $3.2 million and $12.5 million, respectively.
The total fair value of options vested during the years ended December 31,
2006,
2005 and 2004 was $0.0 million, $0.2 million and $0.2 million,
respectively.
Cash
received from the exercise under all stock-based payment arrangements for the
year ended 2006, 2005 and 2004 was $0.9 million, $0.4 million and $1.7 million,
respectively. Cash used to settle equity instruments granted under stock-based
payment arrangements for the year ended 2006, 2005 and 2004, was $0.7 million,
$1.4 million and 2.1 million, respectively.
Restricted
Stock
On
September 10, 2004, we entered into restricted stock agreements with four
executive officers under the 2004 Plan. A total of 317,500 shares of restricted
stock were granted, which equated to approximately $3.3 million of deferred
compensation (based on grant-date fair value). The shares vest thirty-three
and
one-third percent (33 1/3%) on each of January 1, 2005, January 1, 2006 and
January 1, 2007 so long as the executive officer remains employed on the vesting
date, with vesting accelerating upon a qualifying termination of employment
or
upon the occurrence of a change of control (as defined in the applicable
restricted stock agreements). As a result of the grant, we recorded $1.1 million
of non-cash compensation expense for the years ended December 31, 2006, 2005
and
2004, respectively. The total fair value of shares vested during the years
ended
December 31, 2006, 2005 and 2004 was $1.1 million, $1.1 million and $0.0
million, respectively.
For
the
year ended December 31, 2006, we issued 2,179 shares of restricted common stock
to each non-employee director and an additional 2,000 shares of restricted
common stock to the Chairman of the Board under the 2004 Plan for a total of
12,895 shares. These shares represent a payment of the portion of the directors’
annual retainer that is payable in shares of our common stock.
Restricted
Stock
|
Number
of Shares
|
Weighted-Average
Grant-Date Fair Value
|
|||||
Non-vested
at December 31, 2005
|
218,666
|
$
|
10.56
|
||||
Granted
during
2006
|
7,000
|
12.59
|
|||||
Vested
|
(108,170
|
)
|
10.55
|
||||
Non-vested
at December 31, 2006
|
117,496
|
$
|
10.68
|
Performance
Restricted Stock Units
On
September 10, 2004, we entered into performance restricted stock unit agreements
with our four executive officers under the 2004 Plan. A total of 317,500
restricted stock units were issued under the 2004 Plan and will fully vest
into
shares of common stock when our company attains $0.30 per share of adjusted
funds from operations (as defined in the applicable restricted stock unit
agreements), (“AFFO”) for two (2) consecutive quarters, with vesting
accelerating upon a qualifying termination of employment or upon the occurrence
of a change of control (as defined in the applicable restricted stock unit
agreements). The performance restricted stock units expire on December 31,
2007
if the performance criteria has not been met. Pursuant to the terms of the
performance restricted stock unit agreements, each of the executive officers
will not receive the vested shares attributable to the performance restricted
stock units until the earlier of January 1, 2008, such executive officer is
terminated without cause or quits for good reason (as defined in the performance
restricted stock unit agreement), or the death or disability (as defined in
performance restricted stock unit agreement) of the executive officer. Under
our
current method of accounting for stock-based compensation, the expense related
to the restricted stock units will be recognized when it becomes probable that
the vesting requirements will be met.
As
of
September 30, 2006, we achieved the vesting target as defined in the 2004 Plan,
and therefore, in accordance with FAS No. 123R (i.e., compensation expense
for a
performance-based stock award shall be recognized when the satisfaction of
the
performance conditions that cause the award to vest are probable to occur),
we
recorded approximately $3.3 million as compensation expense (based on grant-date
fair value) associated with the performance restricted stock units for the
year
ended December 31, 2006.
F-30
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Performance
Restricted Stock Units
|
Number
of Units
|
Weighted-Average
Grant-Date Fair Value
|
|||||
Non-vested
at December 31, 2005
|
317,500
|
$
|
10.54
|
||||
Vested
|
(317,500
|
)
|
10.54
|
||||
Non-vested
at December 31, 2006
|
—
|
$
|
—
|
In
accordance with FASB
Statement No. 128, Earnings
per Share,
(“FAS
No. 128”), the
restricted stock unit shares are included in the computation of basic EPS from
the date of vesting on a weighted-average basis. See Note 17 - Earnings per
Share.
NOTE
13 - RELATED PARTY TRANSACTIONS
Explorer
Holdings, L.P.
On
February 5, 2004, we entered into a Repurchase and Conversion Agreement with
our
then largest stockholder, Explorer, pursuant to which Explorer granted us an
option to repurchase up to 700,000 shares of our Series C Preferred Stock at
a
price of $145.92 per share (or $9.12 per share of common stock on an
as-converted basis), on the condition that we purchase a minimum of $100 million
on or prior to February 27, 2004. Explorer also agreed to convert all of its
remaining shares of Series C Preferred Stock into shares of our common stock
upon exercise of the repurchase option.
On
February 10, 2004, we sold in a registered direct placement 4,739,500 shares
of
our Series D Preferred Stock at a price of $25 per share to a number of
institutional investors and other purchasers for net proceeds, after fees and
expenses, of approximately $114.9 million. Following the closing of the Series
D
Preferred Stock offering, we used approximately $102.1 million of the net
proceeds to repurchase 700,000 shares of our Series C Preferred Stock from
Explorer pursuant to the repurchase option. In connection with this transaction,
Explorer converted its remaining 348,420 shares of Series C Preferred Stock
into
5,574,720 shares of our common stock. The balance of the net proceeds from
the
offering was used to redeem approximately 600,000 shares of our Series A
Preferred Stock.
On
February 12, 2004, we registered Explorer’s 18,118,246 shares of common stock
(that includes the 5.6 million shares from the conversion) with the SEC.
Explorer sold all of these registered shares pursuant to the registration
statement.
In
connection with our repurchase of a portion of Explorer’s Series C Preferred
Stock, our results of operations for the first quarter of 2004 included a
non-recurring reduction in net income attributable to common stockholders of
approximately $38.7 million. This amount reflects the sum of: (i) the difference
between the deemed redemption price of $145.92 per share of our Series C
Preferred Stock and the carrying amount of $100 per share of our Series C
Preferred Stock multiplied by the number of shares of the Series C Preferred
Stock repurchased upon exercise of our option to repurchase shares of Series
C
Preferred Stock; and (ii) the cost associated with the original issuance of
our
Series C Preferred Stock that was previously classified as additional paid-in
capital, pro-rated for the repurchase.
NOTE
14 - DIVIDENDS
In
order
to qualify as a REIT, we are required to distribute dividends (other than
capital gain dividends) to our stockholders in an amount at least equal to
(A)
the sum of (i) 90% of our “REIT taxable income” (computed without regard to the
dividends paid deduction and our net capital gain), and (ii) 90% of the net
income (after tax), if any, from foreclosure property, minus (B) the sum of
certain items of non-cash income. In addition, if we dispose of any built-in
gain asset during a recognition period, we will be required to distribute at
least 90% of the built-in gain (after tax), if any, recognized on the
disposition of such asset. Such distributions must be paid in the taxable year
to which they relate, or in the following taxable year if declared before we
timely file our tax return for such year and paid on or before the first regular
dividend payment after such declaration. In addition, such distributions are
required to be made pro rata, with no preference to any share of stock as
compared with other shares of the same class, and with no preference to one
class of stock as compared with another class except to the extent that such
class is entitled to such a preference. To the extent that we do not distribute
all of our net capital gain or do distribute at least 90%, but less than 100%
of
our “REIT taxable income,” as adjusted, we will be subject to tax thereon at
regular ordinary and capital gain corporate tax rates. In addition, our New
Credit Facility has certain financial covenants that limit the distribution
of
dividends paid during a fiscal quarter to no more than 95% of our aggregate
cumulative funds from operations (“FFO”) as defined in the loan agreement
governing the New Credit Facility (the “Loan Agreement”), unless a greater
distribution is required to maintain REIT status. The Loan Agreement defines
FFO
as net income (or loss) plus depreciation and amortization and shall be adjusted
for charges related to: (i) restructuring our debt; (ii) redemption of preferred
stock; (iii) litigation charges up to $5.0 million; (iv) non-cash charges for
accounts and notes receivable up to $5.0 million; (v) non-cash compensation
related expenses; (vi) non-cash impairment charges; and (vii) tax liabilities
in
an amount not to exceed $8.0 million.
F-31
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
Common
Dividends
On
January 16, 2007, the Board of Directors declared a common stock dividend of
$0.26 per share, an increase of $0.01 per common share compared to the prior
quarter. The common dividend was paid February 15, 2007 to common stockholders
of record on January 31, 2007.
On
October 24, 2006, the Board of Directors declared a common stock dividend of
$0.25 per share, an increase of $0.01 per common share compared to the prior
quarter, which was paid November 15, 2006 to common stockholders of record
on
November 3, 2006.
On
July
17, 2006, the Board of Directors declared a common stock dividend of $0.24
per
share. The common dividend was paid August 15, 2006 to common stockholders
of
record on July 31, 2006.
On
April
18, 2006, the Board of Directors declared a common stock dividend of $0.24
per
share, an increase of $0.01 per common share compared to the prior quarter.
The
common dividend was paid May 15, 2006 to common stockholders of record on April
28, 2006.
On
January 17, 2006, the Board of Directors declared a common stock dividend of
$0.23 per share, an increase of $0.01 per common share compared to the prior
quarter. The common stock dividend was paid February 15, 2006 to common
stockholders of record on January 31, 2006.
Series
D Preferred Dividends
On
January 16, 2007, 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 15, 2007 to preferred stockholders of record on January 31, 2007.
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, 2006 through January 31, 2007.
On
October 24, 2006, the Board of Directors declared the regular quarterly
dividends of approximately $0.52344 per preferred share on the Series D
Preferred Stock that were paid November 15, 2006 to preferred stockholders
of
record on November 3, 2006.
On
July
17, 2006, 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, 2006
to
preferred stockholders of record on July
31,
2006.
On
April
18, 2006, 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,
2006
to
preferred stockholders of record on
April
28, 2006.
On
January 17, 2006, 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, 2006 to preferred stockholders of record on January
31,
2006.
F-32
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Series
B Preferred Dividends
In
March
2005, our Board of Directors authorized the redemption of all outstanding 2.0
million shares of our Series B Preferred Stock. The Series B Preferred Stock
was
redeemed on May 2, 2005 for $25 per share, plus $0.55104 per share in accrued
and unpaid dividends through the redemption date, for an aggregate redemption
price of $25.55104 per share.
Per
Share Distributions
Per
share
distributions by our company were characterized in the following manner for
income tax purposes:
2006
|
2005
|
2004
|
||||||||
Common
|
||||||||||
Ordinary
income
|
$
|
0.560
|
$
|
0.550
|
$
|
—
|
||||
Return
of capital
|
0.400
|
0.300
|
0.720
|
|||||||
Long-term
capital gain
|
—
|
—
|
—
|
|||||||
Total
dividends paid
|
$
|
0.960
|
$
|
0.850
|
$
|
0.720
|
||||
Series
A Preferred
|
||||||||||
Ordinary
income
|
$
|
—
|
$
|
—
|
$
|
0.901
|
||||
Return
of capital
|
—
|
—
|
0.255
|
|||||||
Long-term
capital gain
|
—
|
—
|
—
|
|||||||
Total
dividends paid
|
$
|
—
|
$
|
—
|
$
|
1.156
|
||||
Series
B Preferred
|
||||||||||
Ordinary
income
|
$
|
—
|
$
|
1.090
|
$
|
1.681
|
||||
Return
of capital
|
—
|
—
|
0.475
|
|||||||
Long-term
capital gain
|
—
|
—
|
—
|
|||||||
Total
dividends paid
|
$
|
—
|
$
|
1.090
|
$
|
2.156
|
||||
Series
C Preferred
|
||||||||||
Ordinary
income
|
$
|
—
|
$
|
—
|
$
|
2.120
|
||||
Return
of capital
|
—
|
—
|
0.600
|
|||||||
Long-term
capital gain
|
—
|
—
|
—
|
|||||||
Total
dividends paid
|
$
|
—
|
$
|
—
|
$
|
2.720
|
||||
Series
D Preferred
|
||||||||||
Ordinary
income
|
$
|
2.094
|
$
|
2.094
|
$
|
1.184
|
||||
Return
of capital
|
—
|
—
|
0.334
|
|||||||
Long-term
capital gain
|
—
|
—
|
—
|
|||||||
Total
dividends paid
|
$
|
2.094
|
$
|
2.094
|
$
|
1.518
|
NOTE
15 - LITIGATION
We
are
subject to various legal proceedings, claims and other actions arising out
of
the normal course of business. While any legal proceeding or claim has an
element of uncertainty, management believes that the outcome of each lawsuit,
claim or legal proceeding that is pending or threatened, or all of them
combined, will not have a material adverse effect on our consolidated financial
position or results of operations.
We
and
several of our wholly-owned subsidiaries have been named as defendants in
professional liability claims related to our former owned and operated
facilities. Other third-party managers responsible for the day-to-day operations
of these facilities have also been named as defendants in these claims. In
these
suits, patients of certain previously owned and operated facilities have alleged
significant damages, including punitive damages against the defendants. The
majority of these lawsuits representing the most significant amount of exposure
were settled in 2004. There currently is one lawsuit pending that is in the
discovery stage, and we are unable to predict the likely outcome of this lawsuit
at this time.
F-33
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
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
settlement of our claim against the defendants, we agreed in the fourth quarter
of 2005 to accept a lump sum cash payment of $2.4 million. The cash proceeds
were offset by related expenses incurred of $0.8 million, resulting in a net
gain of $1.6 million paid December 22, 2005.
During
2005, we accrued $1.1 million to settle a dispute relating to capital
improvement requirements associated with a lease that expired June 30,
2005.
NOTE
16 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The
following summarizes quarterly results of operations for the years ended
December 31, 2006 and 2005.
March
31
|
June
30
|
September
30
|
December
31
|
||||||||||
(in
thousands, except per share amounts)
|
|||||||||||||
2006
|
|||||||||||||
Revenues
|
$
|
32,067
|
$
|
32,314
|
$
|
35,151
|
$
|
36,161
|
|||||
Income
from continuing operations
|
10,494
|
17,565
|
14,751
|
13,232
|
|||||||||
(Loss)
income from discontinued operations
|
(319
|
)
|
(75
|
)
|
(128
|
)
|
177
|
||||||
Net
income
|
10,175
|
17,490
|
14,623
|
13,409
|
|||||||||
Net
income available to common
|
7,694
|
15,009
|
12,143
|
10,928
|
|||||||||
Income
from continuing operations per share:
|
|||||||||||||
Basic
income from continuing
operations
|
$
|
0.14
|
$
|
0.26
|
$
|
0.21
|
$
|
0.18
|
|||||
Diluted
income from continuing
operations
|
$
|
0.14
|
$
|
0.26
|
$
|
0.21
|
$
|
0.18
|
|||||
Net
income available to common per share:
|
|||||||||||||
Basic
net income
|
$
|
0.13
|
$
|
0.26
|
$
|
0.21
|
$
|
0.18
|
|||||
Diluted
net
income
|
$
|
0.13
|
$
|
0.26
|
$
|
0.20
|
$
|
0.18
|
|||||
Cash
dividends paid on common stock
|
$
|
0.23
|
$
|
0.24
|
$
|
0.24
|
$
|
0.25
|
|||||
2005
|
|||||||||||||
Revenues
|
$
|
28,131
|
$
|
26,165
|
$
|
26,997
|
$
|
28,351
|
|||||
Income
from continuing operations
|
12,402
|
5,604
|
9,811
|
9,538
|
|||||||||
(Loss)
income from discontinued operations
|
(2,752
|
)
|
(3,157
|
)
|
(4,127
|
)
|
11,434
|
||||||
Net
income
|
9,650
|
2,447
|
5,684
|
20,972
|
|||||||||
Net
income (loss) available to common
|
6,091
|
(2,430
|
)
|
3,203
|
18,491
|
||||||||
Income
from continuing operations per share:
|
|||||||||||||
Basic
income from continuing
operations
|
$
|
0.17
|
$
|
0.01
|
$
|
0.14
|
$
|
0.13
|
|||||
Diluted
income from continuing
operations
|
$
|
0.17
|
$
|
0.01
|
$
|
0.14
|
$
|
0.13
|
|||||
Net
income (loss) available to common per share:
|
|||||||||||||
Basic
net income
(loss)
|
$
|
0.12
|
$
|
(0.05
|
)
|
$
|
0.06
|
$
|
0.34
|
||||
Diluted
net income
(loss)
|
$
|
0.12
|
$
|
(0.05
|
)
|
$
|
0.06
|
$
|
0.34
|
||||
Cash
dividends paid on common stock
|
$
|
0.20
|
$
|
0.21
|
$
|
0.22
|
$
|
0.22
|
F-34
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE
17 - 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 restrictive stock units.
The
following tables set forth the computation of basic and diluted earnings per
share:
Year
Ended December 31,
|
||||||||||
2006
|
2005
|
2004
|
||||||||
(in
thousands, except per share amounts)
|
||||||||||
Numerator:
|
||||||||||
Income
from continuing operations
|
$
|
56,042
|
$
|
37,355
|
$
|
13,371
|
||||
Preferred
stock dividends
|
(9,923
|
)
|
(11,385
|
)
|
(15,807
|
)
|
||||
Preferred
stock conversion/redemption charges
|
—
|
(2,013
|
)
|
(41,054
|
)
|
|||||
Numerator
for income (loss) available to common from continuing operations
- basic
and diluted
|
46,119
|
23,957
|
(43,490
|
)
|
||||||
(Loss)
gain from discontinued operations
|
(345
|
)
|
1,398
|
6,775
|
||||||
Numerator
for net income (loss) available to common per share - basic and
diluted
|
$
|
45,774
|
$
|
25,355
|
$
|
(36,715
|
)
|
|||
Denominator:
|
||||||||||
Denominator
for net income per share - basic
|
58,651
|
51,738
|
45,472
|
|||||||
Effect
of dilutive securities:
|
||||||||||
Restricted
stock and restricted stock units
|
74
|
86
|
—
|
|||||||
Stock
option incremental shares
|
20
|
235
|
—
|
|||||||
Denominator
for net income per share - diluted
|
58,745
|
52,059
|
45,472
|
Earnings
per share - basic:
|
||||||||||
Income
(loss) available to common from continuing operations
|
$
|
0.79
|
$
|
0.46
|
$
|
(0.96
|
)
|
|||
Income
(loss) from discontinued operations
|
(0.01
|
)
|
0.03
|
0.15
|
||||||
Net
income (loss) per share - basic
|
$
|
0.78
|
$
|
0.49
|
$
|
(0.81
|
)
|
|||
Earnings
per share - diluted:
|
||||||||||
Income
(loss) available to common from continuing operations
|
$
|
0.79
|
$
|
0.46
|
$
|
(0.96
|
)
|
|||
Income
(loss) from discontinued operations
|
(0.01
|
)
|
0.03
|
0.15
|
||||||
Net
income (loss) per share - diluted
|
$
|
0.78
|
$
|
0.49
|
$
|
(0.81
|
)
|
For
the
year ended December 31, 2004, there were 683,399 stock options and restricted
stock shares excluded as all such effects were anti-dilutive.
F-35
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE
18 - 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 sold during 2006
or
currently classified as held-for-sale as income from discontinued operations
for
all periods presented. We incurred a net loss of $0.3 million from discontinued
operations in 2006. We incurred net gain of $1.4 million and $6.8 million for
2005 and 2004, respectively, in the accompanying consolidated statements of
operations.
The
following table summarizes the results of operations of the facilities sold
or
held- for- sale for the years ended December 31, 2006, 2005 and 2004,
respectively.
Year
Ended December 31,
|
||||||||||
2006
|
2005
|
2004
|
||||||||
(in
thousands)
|
||||||||||
Revenues
|
||||||||||
Rental
income
|
$
|
372
|
$
|
4,443
|
$
|
6,121
|
||||
Other
income
|
—
|
24
|
53
|
|||||||
Subtotal
revenues
|
372
|
4,467
|
6,174
|
|||||||
Expenses
|
||||||||||
Depreciation
and amortization
|
150
|
1,421
|
2,709
|
|||||||
General
and Administrative
|
40
|
—
|
—
|
|||||||
Provision
for uncollectible accounts receivable
|
152
|
—
|
—
|
|||||||
Provisions
for impairment
|
541
|
9,617
|
—
|
|||||||
Subtotal
expenses
|
883
|
11,038
|
2,709
|
|||||||
(Loss)
income before gain on sale of assets
|
(511
|
)
|
(6,571
|
)
|
3,465
|
|||||
Gain
on assets sold - net
|
166
|
7,969
|
3,310
|
|||||||
(Loss)
gain from discontinued operations
|
$
|
(345
|
)
|
$
|
1,398
|
$
|
6,775
|
NOTE
19 - SUBSEQUENT EVENTS
Increase
in Credit Facility
Pursuant
to Section 2.01 of our Credit Agreement, dated as of March 31, 2006, as amended,
by and among OHI Asset, LLC, a Delaware limited liability company, OHI Asset
(ID), LLC, a Delaware limited liability company, OHI Asset (LA), LLC, a Delaware
limited liability company, OHI Asset (TX), LLC, a Delaware limited liability
company, OHI Asset (CA), LLC, a Delaware limited liability company, Delta
Investors I, LLC a Maryland limited liability company, Delta Investors II,
LLC,
a Maryland limited liability company and Texas Lessor - Stonegate, LP, a
Maryland limited partnership, the Lenders identified therein, and Bank of
America, N.A., as Administrative Agent (the “Credit Agreement”), we are
permitted under certain circumstances to increase our available borrowing base
under the Credit Agreement from $200 million up to an aggregate of $300
million.. Effective as of February 22, 2007, we exercised our right to increase
our available revolving commitment under Section 2.01 of the Credit Agreement
from $200 million to $255 million and we consented to the addition of 18 our
properties to the borrowing base assets under the Credit Agreement.
Asset
Sale
On
December 22, 2006, Residential Care VIII, LLC, a subsidiary of American Senior
Communities, LLC, notified us of their intent to exercise their option to
purchase two facilities. The two facilities were classified on our December
31,
2006 consolidated balance sheet as assets held for sale with a net book value
of
approximately $1.9 million. On January 31, 2007, we received gross cash proceeds
of approximately $3.6 million.
F-36
SCHEDULE
III REAL ESTATE AND ACCUMULATED DEPRECIATION
|
||||||||||||
OMEGA
HEALTHCARE INVESTORS, INC.
|
||||||||||||
December
31, 2006
|
(3)
|
|||||||||||||||||||||||||||||||
Gross
Amount at
Which Carried
|
|||||||||||||||||||||||||||||||
Cost
Capitalized
|
at
Close of
|
Life on
Which
|
|||||||||||||||||||||||||||||
Initial
Cost to
|
Subsequent
|
Period
|
Depreciation
|
||||||||||||||||||||||||||||
Company
|
to
|
Buildings
|
in
Latest
|
||||||||||||||||||||||||||||
Buildings
|
Acquisition
|
and
Land
|
(4)
|
Income
|
|||||||||||||||||||||||||||
and
Land
|
Improvements
|
Accumulated
|
Date
of
|
Date
|
Statements
|
||||||||||||||||||||||||||
Description
(1)
|
Encumbrances
|
Improvements
|
Improvements
|
Impairment
|
Other
|
Total
|
Depreciation
|
Renovation
|
Acquired
|
is
Computed
|
|||||||||||||||||||||
Sun
Healthcare Group, Inc.:
|
|||||||||||||||||||||||||||||||
Alabama
(LTC)
|
(2)
|
|
23,584,956
|
-
|
-
|
-
|
23,584,956
|
6,628,477
|
1997
|
33
years
|
|||||||||||||||||||||
California
(LTC, RH)
|
(2)
|
|
39,013,223
|
66,575
|
-
|
-
|
39,079,798
|
10,277,900
|
1964
|
1997
|
33
years
|
||||||||||||||||||||
Colorado
(LTC, AL)
|
|
38,563,002
|
38,563,002
|
429,694
|
2006
|
39
years
|
|||||||||||||||||||||||||
Idaho
(LTC)
|
(2)
|
|
21,776,277
|
-
|
-
|
-
|
21,776,277
|
2,635,608
|
1997-1999
|
33
years
|
|||||||||||||||||||||
Massachusetts
(LTC)
|
(2)
|
|
8,300,000
|
-
|
-
|
-
|
8,300,000
|
2,352,366
|
1997
|
33
years
|
|||||||||||||||||||||
North
Carolina (LTC)
|
(2)
|
|
22,652,488
|
56,951
|
-
|
-
|
22,709,439
|
8,389,556
|
1982-1991
|
1994-1997
|
30
years to 33 years
|
||||||||||||||||||||
Ohio
(LTC)
|
(2)
|
|
11,653,451
|
20,247
|
-
|
-
|
11,673,698
|
3,129,164
|
1995
|
1997
|
33
years
|
||||||||||||||||||||
Tennessee
(LTC)
|
(2)
|
|
7,905,139
|
37,234
|
-
|
-
|
7,942,373
|
3,064,951
|
1994
|
30
years
|
|||||||||||||||||||||
Washington
(LTC)
|
(2)
|
|
10,000,000
|
1,798,843
|
-
|
-
|
11,798,843
|
5,536,845
|
2005
|
1995
|
20
years
|
||||||||||||||||||||
West
Virginia (LTC)
|
(2)
|
|
24,751,206
|
42,238
|
-
|
-
|
24,793,444
|
6,481,373
|
1997-1998
|
33
years
|
|||||||||||||||||||||
Total
Sun
|
208,199,742
|
2,022,088
|
-
|
-
|
210,221,830
|
48,925,934
|
|||||||||||||||||||||||||
CommuniCare
Health Services:
|
|||||||||||||||||||||||||||||||
Ohio
(LTC, AL)
|
$
|
165,003,208
|
$
|
531,383
|
$
|
-
|
$
|
-
|
$
|
165,534,591
|
$
|
9,730,829
|
1998-2005
|
33
years to 39 years
|
|||||||||||||||||
Pennsylvania
(LTC)
|
20,286,067
|
-
|
-
|
-
|
20,286,067
|
890,649
|
2005
|
39
years
|
|||||||||||||||||||||||
Total
CommuniCare
|
185,289,275
|
531,383
|
-
|
-
|
185,820,658
|
10,621,478
|
|||||||||||||||||||||||||
Haven
Healthcare:
|
|||||||||||||||||||||||||||||||
Connecticut
(LTC)
|
38,762,737
|
1,648,475
|
(4,958,643
|
)
|
-
|
35,452,569
|
5,712,272
|
1999-2004
|
33
years to 39 years
|
||||||||||||||||||||||
Massachusetts
(LTC)
|
7,190,684
|
-
|
-
|
-
|
7,190,684
|
174,170
|
2006
|
39
years
|
|||||||||||||||||||||||
New
Hampshire (LTC, AL)
|
21,619,505
|
-
|
-
|
-
|
21,619,505
|
1,906,502
|
1998
|
39
years
|
|||||||||||||||||||||||
Rhode
Island (LTC)
|
38,739,811
|
-
|
-
|
-
|
38,739,811
|
983,813
|
2006
|
39
years
|
|||||||||||||||||||||||
Vermont
(LTC)
|
14,145,776
|
81,501
|
-
|
-
|
14,227,277
|
953,787
|
2004
|
39
years
|
|||||||||||||||||||||||
Total
Haven
|
120,458,513
|
1,729,976
|
(4,958,643
|
)
|
-
|
117,229,846
|
9,730,544
|
||||||||||||||||||||||||
HQM,
Inc.:
|
|||||||||||||||||||||||||||||||
Florida
(LTC)
|
85,805,338
|
1,791,201
|
-
|
-
|
87,596,539
|
7,365,547
|
1998-2006
|
33
years to 39 years
|
|||||||||||||||||||||||
Kentucky
(LTC)
|
10,250,000
|
522,075
|
-
|
-
|
10,772,075
|
2,162,919
|
1999
|
33
years
|
|||||||||||||||||||||||
Total
HQM
|
96,055,338
|
2,313,276
|
-
|
-
|
98,368,614
|
9,528,466
|
|||||||||||||||||||||||||
Advocat,
Inc.:
|
|||||||||||||||||||||||||||||||
Alabama
(LTC)
|
11,588,534
|
808,961
|
-
|
-
|
12,397,495
|
5,272,456
|
1975-1985
|
1992
|
31.5
years
|
||||||||||||||||||||||
Arkansas
(LTC)
|
36,052,810
|
6,122,100
|
(36,350
|
)
|
-
|
42,138,560
|
16,480,644
|
1984-1985
|
1992
|
31.5
years
|
|||||||||||||||||||||
Florida
(LTC)
|
1,050,000
|
1,920,000
|
(970,000
|
)
|
-
|
2,000,000
|
316,749
|
1992
|
31.5
years
|
||||||||||||||||||||||
Kentucky
(LTC)
|
15,151,027
|
1,562,375
|
-
|
-
|
16,713,402
|
5,829,700
|
1972-1994
|
1994-1995
|
33
years
|
||||||||||||||||||||||
Ohio
(LTC)
|
5,604,186
|
250,000
|
-
|
-
|
5,854,186
|
2,063,913
|
1984
|
1994
|
33
years
|
||||||||||||||||||||||
Tennessee
(LTC)
|
9,542,121
|
-
|
-
|
-
|
9,542,121
|
4,209,458
|
1986-1987
|
1992
|
31.5
years
|
||||||||||||||||||||||
West
Virginia (LTC)
|
5,437,221
|
348,642
|
-
|
-
|
5,785,863
|
2,013,545
|
1994-1995
|
33
years
|
|||||||||||||||||||||||
Total
Advocat
|
84,425,899
|
11,012,078
|
(1,006,350
|
)
|
-
|
94,431,627
|
36,186,465
|
||||||||||||||||||||||||
F-37
Guardian
LTC Management, Inc.
|
|||||||||||||||||||||||||||||||
Ohio
(LTC)
|
6,548,435
|
-
|
-
|
-
|
6,548,435
|
329,329
|
2004
|
39
years
|
|||||||||||||||||||||||
Pennsylvania
(LTC, AL)
|
75,436,912
|
-
|
-
|
-
|
75,436,912
|
3,613,671
|
2004-2006
|
39
years
|
|||||||||||||||||||||||
West
Virginia (LTC)
|
3,995,581
|
-
|
-
|
-
|
3,995,581
|
196,253
|
2004
|
39
years
|
|||||||||||||||||||||||
Total
Guardian
|
85,980,928
|
-
|
-
|
-
|
85,980,928
|
4,139,253
|
|||||||||||||||||||||||||
Nexion
Health:
|
|||||||||||||||||||||||||||||||
Louisiana
(LTC)
|
(2)
|
|
55,638,965
|
-
|
-
|
-
|
55,638,965
|
1,943,222
|
1997
|
33
years
|
|||||||||||||||||||||
Texas
(LTC)
|
24,571,806
|
-
|
-
|
-
|
24,571,806
|
550,590
|
2005-2006
|
39
years
|
|||||||||||||||||||||||
Total
Nexion Health
|
80,210,771
|
-
|
-
|
-
|
80,210,771
|
2,493,812
|
|||||||||||||||||||||||||
Essex
Healthcare:
|
|||||||||||||||||||||||||||||||
Ohio
(LTC)
|
79,353,622
|
-
|
-
|
-
|
79,353,622
|
4,177,705
|
2005
|
39
years
|
|||||||||||||||||||||||
Total
Essex
|
79,353,622
|
-
|
-
|
-
|
79,353,622
|
4,177,705
|
|||||||||||||||||||||||||
Other:
|
|||||||||||||||||||||||||||||||
Arizona
(LTC)
|
24,029,032
|
1,863,709
|
(6,603,745
|
)
|
-
|
19,288,996
|
4,433,829
|
2005
|
1998
|
33
years
|
|||||||||||||||||||||
California
(LTC)
|
(2)
|
|
20,577,181
|
1,008,313
|
-
|
-
|
21,585,494
|
5,513,220
|
1997
|
33
years
|
|||||||||||||||||||||
Colorado
(LTC)
|
14,170,968
|
196,017
|
-
|
-
|
14,366,985
|
3,301,966
|
1998
|
33
years
|
|||||||||||||||||||||||
Florida
(LTC, AL)
|
58,367,881
|
746,398
|
-
|
-
|
59,114,279
|
11,479,569
|
1993-1998
|
27
years to 37.5 years
|
|||||||||||||||||||||||
Georgia
(LTC)
|
10,000,000
|
-
|
-
|
-
|
10,000,000
|
921,291
|
1998
|
37.5
years
|
|||||||||||||||||||||||
Illinois
(LTC)
|
13,961,501
|
444,484
|
-
|
-
|
14,405,985
|
3,872,888
|
1996-1999
|
30
years to 33 years
|
|||||||||||||||||||||||
Indiana
(LTC, AL)
|
15,142,300
|
2,305,705
|
(1,843,400
|
)
|
-
|
15,604,605
|
4,941,517
|
1980-1994
|
1992-1999
|
30
years to 33 years
|
|||||||||||||||||||||
Iowa
(LTC)
|
14,451,576
|
1,280,688
|
(29,156
|
)
|
-
|
15,703,108
|
4,071,865
|
1996-1998
|
30
years to 33 years
|
||||||||||||||||||||||
Massachusetts
(LTC)
|
30,718,142
|
932,328
|
(8,257,521
|
)
|
-
|
23,392,949
|
5,138,955
|
1999
|
33
years
|
||||||||||||||||||||||
Missouri
(LTC)
|
12,301,560
|
-
|
(149,386
|
)
|
-
|
12,152,174
|
2,788,561
|
1999
|
33
years
|
||||||||||||||||||||||
Ohio
(LTC)
|
2,648,252
|
186,187
|
-
|
-
|
2,834,439
|
658,159
|
1999
|
33
years
|
|||||||||||||||||||||||
Pennsylvania
(LTC)
|
14,400,000
|
-
|
-
|
-
|
14,400,000
|
3,716,661
|
2005
|
39
years
|
|||||||||||||||||||||||
Texas
(LTC)
|
(2)
|
|
55,662,091
|
1,361,842
|
-
|
-
|
57,023,933
|
10,312,566
|
1997-2005
|
33
years to 39 years
|
|||||||||||||||||||||
Washington
(AL)
|
5,673,693
|
-
|
-
|
-
|
5,673,693
|
1,232,807
|
1999
|
33
years
|
|||||||||||||||||||||||
Total
Other
|
292,104,177
|
10,325,671
|
(16,883,208
|
)
|
-
|
285,546,640
|
62,383,854
|
||||||||||||||||||||||||
Total
|
$
|
1,232,078,265
|
$
|
27,934,472
|
($22,848,201
|
)
|
$
|
0
|
$
|
1,237,164,536
|
$
|
188,187,511
|
|||||||||||||||||||
(1)
The real estate included in this schedule is being used in either
the
operation of long-term care facilities (LTC), assisted living facilities
(AL) or
rehabilitation hospitals (RH) located in the states
indicated.
|
|||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||
(2)
Certain of the real estate indicated are security for the BAS Healthcare
Financial Services line of credit and term loan borrowings totaling
$150,000,000 at December 31, 2006.
|
|||||||||||||||||||||||||||||||
Year
Ended December 31,
|
|||||||||||||||||||||||||||||||
(3)
|
2004
|
|
|
2005
|
|
|
2006
|
||||||||||||||||||||||||
Balance
at beginning of period
|
$
|
599,654,665
|
$
|
720,368,296
|
$
|
990,492,285
|
|||||||||||||||||||||||||
Additions
during period:
|
|||||||||||||||||||||||||||||||
Acquisitions
|
114,286,825
|
252,609,901
|
178,906,047
|
||||||||||||||||||||||||||||
Conversion
from mortgage
|
-
|
13,713,311
|
-
|
||||||||||||||||||||||||||||
Impairment
|
-
|
-
|
-
|
||||||||||||||||||||||||||||
Improvements
|
6,426,806
|
3,821,320
|
6,817,638
|
||||||||||||||||||||||||||||
Consolidation
under FIN 46R (a)
|
-
|
-
|
61,750,000
|
||||||||||||||||||||||||||||
Disposals/other
|
-
|
(20,543
|
)
|
(801,434
|
)
|
||||||||||||||||||||||||||
Balance
at close of period
|
$
|
720,368,296
|
$
|
990,492,285
|
$
|
1,237,164,536
|
|||||||||||||||||||||||||
_______________________________
(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 reflects gross
real
estate assets of $61,750,000, reflecting the real estate owned
by the
VIE.
|
|||||||||||||||||||||||||||||||
F-38
(4)
|
2004
|
2005
|
2006
|
||||||||||||||||||||||||||||
Balance
at beginning of period
|
$
|
114,305,220
|
$
|
132,727,879
|
$
|
156,197,300
|
|||||||||||||||||||||||||
Additions
during period:
|
|||||||||||||||||||||||||||||||
Provisions
for depreciation
|
18,422,659
|
23,469,421
|
31,990,211
|
||||||||||||||||||||||||||||
Provisions
for depreciation, Discontinued Ops.
|
-
|
||||||||||||||||||||||||||||||
Dispositions/other
|
-
|
||||||||||||||||||||||||||||||
Balance
at close of period
|
$
|
132,727,879
|
$
|
156,197,300
|
$
|
188,187,511
|
|||||||||||||||||||||||||
The
reported amount of our real estate at December 31, 2006 is less
than the
tax basis of the real estate by approximately $39.0
million.
|
F-39
SCHEDULE
IV MORTGAGE LOANS ON REAL ESTATE
|
||||||||||
OMEGA
HEALTHCARE INVESTORS, INC.
|
||||||||||
December
31, 2006
|
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
|
||||||||
Florida
(4 LTC facilities)
|
11.50%
|
|
February
28, 2010
|
Interest
plus $4,400 of principal payable monthly
|
None
|
12,891,454
|
12,587,005
|
|||||||||||||||
Florida
(2 LTC facilities)
|
11.50%
|
|
June
1, 2016
|
Interest
payable monthly
|
None
|
12,590,000
|
10,730,939
|
|||||||||||||||
Ohio
(1 LTC facility)
|
11.00%
|
|
October
31, 2014
|
Interest
plus $3,900 of principal payable monthly
|
None
|
6,500,000
|
6,453,694
|
|||||||||||||||
Texas
(1 LTC facility)
|
11.00%
|
|
November
30, 2011
|
Interest
plus $19,900 of principal payable monthly
|
None
|
2,245,745
|
1,229,971
|
|||||||||||||||
Utah
(1 LTC facility)
|
12.00%
|
|
November
30, 2011
|
Interest
plus $20,800 of principal payable monthly
|
None
|
1,917,430
|
884,812
|
|||||||||||||||
$
|
36,144,629
|
$
|
31,886,421
|
|||||||||||||||||||
(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)
|
2004
|
2005
|
2006
|
|||||||||||||||||||
Balance
at beginning of period
|
$
|
119,783,915
|
$
|
118,057,610
|
$
|
104,522,341
|
||||||||||||||||
Additions
during period - Placements
|
6,500,000
|
61,750,000
|
-
|
|||||||||||||||||||
Deductions
during period - collection of principal/other
|
(8,226,305
|
)
|
(61,571,958
|
)
|
(10,885,920
|
)
|
||||||||||||||||
Allowance
for loss on mortgage loans
|
-
|
-
|
-
|
|||||||||||||||||||
Conversion
to purchase leaseback
|
-
|
(13,713,311
|
)
|
-
|
||||||||||||||||||
Consolidation
under FIN 46R (a)
|
-
|
-
|
(61,750,000
|
)
|
||||||||||||||||||
Balance
at close of period
|
$
|
118,057,610
|
$
|
104,522,341
|
$
|
31,886,421
|
||||||||||||||||
(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.
|
F-40
Prospectus
$2,900,000
Shares
______________
Common
Stock
_____,
2007
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
31. Other Expenses of Issuance and Distribution.
The
following is a statement of estimated expenses in connection with the
distribution of the shares of our common stock being registered hereby, other
than underwriting discounts and commissions, if any:
$
|
________
|
|||
Printing
and Engraving Expenses
|
$
|
________
|
||
Accounting
Fees and Expenses
|
$
|
________
|
||
Legal
Fees and Expenses
|
$
|
________
|
||
$
|
________
|
|||
Total
|
$
|
________
|
The
foregoing items, except for the SEC Registration Fee, are
estimated.
Item
32. Sales to Special Parties.
None.
Item
33. Recent Sales of Unregistered Securities.
$175
Million Aggregate Principal Amount of 7% Unsecured Notes
Issuance
On
December 30, 2005, we closed on a private offering of $175 million of 7% senior
unsecured notes due 2016 (“2016 Notes”) at an issue price of 99.109% of the
principal amount of the notes (equal to a per annum yield to maturity of
approximately 7.125%), resulting in gross proceeds to us of approximately $173.4
million and commissions to the placement agents of $3,578,750. The placement
agents for this offering were Deutsche Bank Securities, Banc of America
Securities LLC and UBS Investment Bank. The 2016 Notes are unsecured senior
obligations to us, which have been guaranteed by our subsidiaries. The 2016
Notes were issued in a private placement to qualified institutional buyers
under
Rule 144A under the Securities Act of 1933 (the “Securities Act”) and thus were
exempt from registration. A portion of the proceeds of this private offering
was
used to pay the tender price and redemption price of the 2007 Notes.
On
February 24, 2006, we filed a registration statement on Form S-4 under the
Securities Act with the SEC offering to exchange up to $175 million aggregate
principal amount of our registered 7% Senior Notes due 2016 (the “2016 Exchange
Notes”), for all of our outstanding unregistered 2016 Notes. The terms of the
2016 Exchange Notes are identical to the terms of the 2016 Notes, except that
the 2016 Exchange Notes are registered under the Securities Act and therefore
freely tradable (subject to certain conditions). The 2016 Exchange Notes
represent our unsecured senior obligations and are guaranteed by all of our
subsidiaries with unconditional guarantees of payment that rank equally with
existing and future senior unsecured debt of such subsidiaries and senior to
existing and future subordinated debt of such subsidiaries. In April 2006,
upon
the expiration of the 2016 Notes Exchange Offer, $175 million aggregate
principal amount of 2016 Notes were exchanged for the 2016 Exchange
Notes.
$50
Million Aggregate Principal Amount of 7% Unsecured Notes
Issuance
On
December 2, 2005, we completed a privately placed offering of an additional
$50
million aggregate principal amount of 7% senior notes due 2014 (the “2014 Add-on
Notes”) at an issue price of 100.25% of the principal amount of the notes (equal
to a per annum yield to maturity of approximately 6.95%), resulting in gross
proceeds to us of approximately $50.1 million and commissions to the placement
agents of $1,025,056.25. The placement agents for this offering were Deutsche
Bank Securities, Banc of America Securities LLC and UBS Investment Bank. The
terms of the 2014 Add-on Notes offered were substantially identical to our
existing $200 million aggregate principal amount of 7% senior notes due 2014
issued in March 2004. The 2014 Add-on Notes were issued through a private
placement to qualified institutional buyers under Rule 144A under the Securities
Act and thus were exempt from registration. After giving effect to the issuance
of the $50 million aggregate principal amount of this offering, we had
outstanding $310 million aggregate principal amount of 7% senior notes due
2014.
II-1
On
February 24, 2006, we filed a registration statement on Form S-4 under the
Securities Act with the SEC offering to exchange up to $50 million aggregate
principal amount of our registered 7% Senior Notes due 2014 (the “2014 Add-on
Exchange Notes”), for all of our outstanding unregistered 2014 Add-on Notes. The
terms of the 2014 Add-on Exchange Notes are identical to the terms of the 2014
Add-on Notes, except that the 2014 Add-on Exchange Notes are registered under
the Securities Act and therefore freely tradable (subject to certain
conditions). The 2014 Add-on Exchange Notes represent our unsecured senior
obligations and are guaranteed by all of our subsidiaries with unconditional
guarantees of payment that rank equally with existing and future senior
unsecured debt of such subsidiaries and senior to existing and future
subordinated debt of such subsidiaries. In May 2006, upon the expiration of
the
2014 Add-on Notes Exchange Offer, $50 million aggregate principal amount of
2014
Add-on Notes were exchanged for the 2014 Add-on Exchange Notes.
$60
Million 7% Senior Unsecured Notes Offering
On
October 29, 2004, we completed a privately placed offering of an additional
$60
million aggregate principal amount of 7% senior notes due 2014 (the “Additional
Notes”) at an issue price of 102.25% of the principal amount of the Additional
Notes (equal to a per annum yield to maturity of approximately 6.67%), resulting
in gross proceeds of approximately $61 million and commissions to the placement
agents of $1,227,000. The placement agents for this offering were Deutsche
Bank
Securities, Banc of America Securities LLC and UBS Investment Bank. The terms
of
the Additional Notes offered were substantially identical to our existing $200
million aggregate principal amount of 7% senior notes due 2014 issued in March
2004. The Additional Notes were issued through a private placement to qualified
institutional buyers under Rule 144A under the Securities Act and in offshore
transactions pursuant to Regulation S under the Securities Act and thus were
exempt from registration.
On
December 21, 2004, we filed a registration statement on Form S-4 under the
Securities Act with the SEC offering to exchange (the “Additional Notes Exchange
Offer”) up to $60 million aggregate principal amount of our registered 7% Senior
Notes due 2014 (the “Additional Exchange Notes”), for all of our outstanding
unregistered Additional Notes. The terms of the Additional Exchange Notes are
identical to the terms of the Additional Notes, except that the Additional
Exchange Notes are registered under the Securities Act and therefore freely
tradable (subject to certain conditions). The Additional Exchange Notes
represent our unsecured senior obligations and are guaranteed by all of our
subsidiaries with unconditional guarantees of payment that rank equally with
existing and future senior unsecured debt of such subsidiaries and senior to
existing and future subordinated debt of such subsidiaries. In March 2005,
upon
the expiration of the Additional Notes Exchange Offer, $60 million aggregate
principal amount of Additional Notes were exchanged for the Additional Exchange
Notes.
$200
Million 7% Senior Unsecured Notes Offering
Effective
March 22, 2004, we closed a private offering of $200 million aggregate principal
amount of 7% senior unsecured notes due 2014 (the “Initial Notes”) and paid
commissions to the placement agents of $4,900,000. The placement agents for
this
offering were Deutsche Bank Securities, Banc of America Securities LLC and
UBS
Investment Bank. We used proceeds from the offering of the Initial Notes to
replace and terminate our prior credit facility. These notes were issued through
a private placement to qualified institutional buyers under Rule 144A under
the
Securities Act and in offshore transactions pursuant to Regulation S under
the
Securities Act and thus were exempt from registration.
On
June
21, 2004, we filed a registration statement on Form S-4, as amended on July
26,
2004 and August 25, 2004, under the Securities Act with the SEC offering to
exchange (the “Exchange Offer”) up to $200 million aggregate principal amount of
our registered 7% Senior Notes due 2014 (the “Exchange Notes”), for all of our
outstanding unregistered Initial Notes. In September 2004, upon the expiration
of the Exchange Offer, $200 million aggregate principal amount of Exchange
Notes
were exchanged for the unregistered Initial Notes. As a result of the Exchange
Offer, no Initial Notes remain outstanding. The terms of the Exchange Notes
are
identical to the terms of the Initial Notes, except that the Exchange Notes
are
registered under the Securities Act and therefore freely tradable (subject
to
certain conditions). The Exchange Notes represent our unsecured senior
obligations and have been guaranteed by all of our subsidiaries with
unconditional guarantees of payment that rank equally with existing and future
senior unsecured debt of such subsidiaries and senior to existing and future
subordinated debt of such subsidiaries. Following the completion of the Add-on
Notes Exchange Offer discussed above, the Add-on Notes Exchange Notes will
trade
together with the Exchange Notes and the Additional Exchange Notes as a single
class of securities.
II-2
Item
34. Indemnification of Directors and Officers.
The
articles of incorporation and bylaws of the registrant provide for
indemnification of directors and officers to the full extent permitted by
Maryland law.
Section
2-418 of the General Corporation Law of the State of Maryland generally permits
indemnification of any director or officer with respect to any proceedings
unless it is established that: (a) the act or omission of the director or
officer was material to the matter giving rise to the proceeding and was either
committed in bad faith or the result of active or deliberate dishonesty; (b)
the
director or officer actually received an improper personal benefit in money,
property or services; or (c) in the case of criminal proceedings, the director
or officer had reasonable cause to believe that the act or omission was
unlawful. The indemnity may include judgments, penalties, fines, settlements,
and reasonable expenses actually incurred by the director or officer in
connection with the proceedings; provided, however, that if the proceeding
is
one by, or in the right of, the corporation, indemnity is permitted only for
reasonable expenses and not with respect to any proceeding in which the director
shall have been adjudged to be liable to the corporation. The termination of
any
proceeding by judgment, order or settlement does not create a presumption that
the director did not meet the requisite standard of conduct required for
permitted indemnification. The termination of any proceeding by conviction,
or
plea of nolo contendere or its equivalent, or an entry of an order of probation
prior to judgment, creates a rebuttable presumption that the director or officer
did not meet that standard of conduct.
The
company has entered into indemnity agreements with the officers and directors
of
the company that provide that the company will, subject to certain conditions,
pay on behalf of the indemnified party any amount which the indemnified party
is
or becomes legally obligated to pay because of any act or omission or neglect
or
breach of duty, including any actual or alleged error or misstatement or
misleading statement, which the indemnified party commits or suffers while
acting in the capacity as an officer or director of the company.
Insofar
as indemnification for liabilities arising under the Securities Act is permitted
to directors and officers of the registrant pursuant to the above-described
provisions, the registrant understands that the Commission is of the opinion
that such indemnification contravenes federal public policy as expressed in
said
act and therefore is unenforceable.
Item
35. Treatment of Proceeds from Stock Being Registered.
None.
Item
36. Financial Statements and Exhibits.
Financial
Statements:
|
|
Index
to consolidated financial statements
|
F-1
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets as of December 31, 2006 and December 31, 2005
|
F-3
|
Consolidated
Statements of Operations for the years ended December 31, 2006, 2005
and
2004
|
F-4
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2006,
2005 and 2004
|
F-5
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006, 2005
and
2004
|
F-7
|
Notes
to Consolidated Financial Statements
|
F-8
|
Schedule
III - Real Estate and Accumulated Depreciation
|
F-37
|
Schedule
IV - Mortgage Loans on Real Estate
|
F-40
|
II-3
EXHIBIT
NUMBER
|
DESCRIPTION
|
|
1.1
|
Form
of Underwriting Agreement**
|
|
3.1
|
Amended
and Restated Bylaws, as amended as of January 16,
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).
|
|
4.4
|
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).
|
II-4
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).
|
|
5.1
|
Opinion
of Powell Goldstein LLP as to the legality of the securities registered
hereby.**
|
|
8.1
|
Opinion
of Powell Goldstein LLP regarding certain tax
matters.**
|
|
10.1
|
Amended
and Restated Secured Promissory Note between Omega Healthcare Investors,
Inc. and Professional Health Care Management, Inc. dated as of September
1, 2001. (Incorporated by reference to Exhibit 10.6 to the Company’s 10-Q
for the quarterly period ended September 30, 2001).
|
|
10.2
|
Settlement
Agreement between Omega Healthcare Investors, Inc., Professional
Health
Care Management, Inc., Living Centers - PHCM, Inc. GranCare, Inc.,
and
Mariner Post-Acute Network, Inc. dated as of September 1, 2001.
(Incorporated by reference to Exhibit 10.7 to the Company’s Form 10-Q for
the quarterly period ended September 30, 2001).
|
|
10.3
|
Form
of Directors and Officers Indemnification Agreement. (Incorporated
by
reference to Exhibit 10.11 to the Company’s Form 10-Q for the quarterly
period ended June 30, 2000).
|
|
10.4
|
1993
Amended and Restated Stock Option Plan. (Incorporated by reference
to
Exhibit 10.4 to the Company’s Form 10-K for the year ended December 31,
2006).+
|
|
10.5
|
2000
Stock Incentive Plan (as amended January 1, 2001). (Incorporated
by
reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarterly
period ended September 30, 2003).+
|
|
10.6
|
Amendment
to 2000 Stock Incentive Plan. (Incorporated by reference to Exhibit
10.6
to the Company’s Form 10-Q for the quarterly period ended June 30,
2000).+
|
II-5
10.7
|
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).+
|
|
10.8
|
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).+
|
|
10.9
|
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).+
|
|
10.10
|
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).+
|
|
10.11
|
Form
of Restricted Stock Award. (Incorporated by reference to Exhibit
10.5 to
the Company’s Current Report on Form 8-K, filed on September 16,
2004).+
|
|
10.12
|
Form
of Performance Restricted Stock Unit Agreement. (Incorporated by
reference
to Exhibit 10.6 to the Company’s current report on Form 8-K, filed on
September 16, 2004).+
|
|
10.13
|
Put
Agreement, effective as of October 12, 2004, by and between American
Health Care Centers, Inc. and Omega Healthcare Investors, Inc.
(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K, filed on October 18, 2004).
|
|
10.14
|
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).
|
|
10.15
|
Purchase
Agreement, dated as of October 28, 2004, effective November 1, 2004,
among
Omega, OHI Asset (PA) Trust, Guardian LTC Management, Inc. and the
licensees named therein. (Incorporated by reference Exhibit 10.1
to the
Company’s current report on Form 8-K, filed on November 8,
2004).
|
|
10.16
|
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).
|
|
10.17
|
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).
|
|
10.18
|
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).
|
|
10.19
|
Schedule
of 2007 Omega Healthcare Investors, Inc. Executive Officers Salaries
and
Bonuses. (Incorporated by reference to Exhibit 10.19 to the Company’s Form
10-K, filed on February 23, 2007). +
|
|
10.20
|
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). +
|
|
10.21
|
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., Pavillion North Partners, Inc., and The
Suburban Pavillion, 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).
|
II-6
10.22
|
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).
|
|
10.23
|
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).
|
|
10.24
|
Credit
Agreement, dated as of March 13, 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).
|
|
10.25
|
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).
|
|
10.26
|
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).
|
|
10.27
|
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).
|
|
10.28
|
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).
|
|
10.29
|
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).
|
|
21
|
Subsidiaries
of the Registrant. (Incorporated by reference to Exhibit 21 of the
Company’s Form 10-Kfor the year ended December 31,
2006).
|
|
23.1
|
Consent
of Ernst & Young LLP, independent registered public accounting
firm.*
|
|
23.2
|
Consent
of Powell Goldstein LLP (included in Exhibit 5.1 and Exhibit 8.1
filed
herewith).**
|
* |
Exhibits
that are filed herewith.
|
** |
To
be filed by amendment.
|
+ |
Management
contract or compensatory plan, contract or
arrangement.
|
Item
37. Undertakings.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions referred to in Item 15 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will
be governed by the final adjudication of such issue.
II-7
The
undersigned registrant hereby undertakes that:
For
purposes
of determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of
this
registration statement in reliance upon Rule 430A and contained in
a form
of prospectus filed by the registrant pursuant to Rule 424(b) (1)
or (4)
or 497(h) under the Securities Act shall be deemed to be part of
this
registration statement as of the time it was declared
effective.
|
For
the purpose of determining any liability under the Securities Act
of 1933,
each post-effective amendment that contains a form of prospectus
shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
|
II-8
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant certifies
that
it has reasonable grounds to believe that it meets all the requirements for
filing on Form S-11 and has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Timonium, State of Maryland, on this 12th
day of
March 2007.
OMEGA HEALTHCARE INVESTORS, INC. | ||
|
|
|
By: | /s/ C. Taylor Pickett | |
C. Taylor Pickett |
||
Chief Executive Officer |
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed below by the following persons in the capacities
indicated and on the date indicated.
Signature
|
Position
|
Date
|
||
/s/
C. Taylor Pickett
|
Chief
Executive Officer and Director
|
March
12, 2007
|
||
C.
Taylor Pickett
|
(Principal
Executive Officer)
|
|||
/s/
Robert O. Stephenson
|
Chief
Financial Officer
|
March
12, 2007
|
||
Robert O. Stephenson |
(Principal
Financial and Accounting Officer)
|
|||
/s/
Bernard J. Korman
|
Chairman
of the Board of Directors
|
March
12, 2007
|
||
Bernard
J. Korman
|
||||
/s/
Thomas F. Franke
|
Director
|
March
12, 2007
|
||
Thomas
F. Franke
|
||||
/s/
Harold J. Kloosterman
|
Director
|
March
12, 2007
|
||
Harold J. Kloosterman |
||||
/s/
Edward Lowenthal
|
Director
|
March
12, 2007
|
||
Edward
Lowenthal
|
||||
/s/
Stephen D. Plavin
|
Director
|
March
12, 2007
|
||
Stephen D. Plavin |
II-9
EXHIBIT
INDEX
EXHIBIT
NUMBER
|
DESCRIPTION
|
|
1.1
|
Form
of Underwriting Agreement**
|
|
3.1
|
Amended
and Restated Bylaws, as amended as of January 16,
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).
|
|
4.4
|
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).
|
|
5.1
|
Opinion
of Powell Goldstein LLP as to the legality of the securities registered
hereby.**
|
|
8.1
|
Opinion
of Powell Goldstein LLP regarding certain tax
matters.**
|
|
10.1
|
Amended
and Restated Secured Promissory Note between Omega Healthcare Investors,
Inc. and Professional Health Care Management, Inc. dated as of September
1, 2001. (Incorporated by reference to Exhibit 10.6 to the Company’s 10-Q
for the quarterly period ended September 30, 2001).
|
|
10.2
|
Settlement
Agreement between Omega Healthcare Investors, Inc., Professional
Health
Care Management, Inc., Living Centers - PHCM, Inc. GranCare, Inc.,
and
Mariner Post-Acute Network, Inc. dated as of September 1, 2001.
(Incorporated by reference to Exhibit 10.7 to the Company’s Form 10-Q for
the quarterly period ended September 30, 2001).
|
|
10.3
|
Form
of Directors and Officers Indemnification Agreement. (Incorporated
by
reference to Exhibit 10.11 to the Company’s Form 10-Q for the quarterly
period ended June 30, 2000).
|
|
10.4
|
1993
Amended and Restated Stock Option Plan. (Incorporated by reference
to
Exhibit 10.4 to the Company’s Form 10-K for the year ended December 31,
2006).+
|
|
10.5
|
2000
Stock Incentive Plan (as amended January 1, 2001). (Incorporated
by
reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarterly
period ended September 30, 2003).+
|
|
10.6
|
Amendment
to 2000 Stock Incentive Plan. (Incorporated by reference to Exhibit
10.6
to the Company’s Form 10-Q for the quarterly period ended June 30,
2000).+
|
|
10.7
|
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).+
|
|
10.8
|
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).+
|
10.9
|
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).+
|
|
10.10
|
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).+
|
|
10.11
|
Form
of Restricted Stock Award. (Incorporated by reference to Exhibit
10.5 to
the Company’s Current Report on Form 8-K, filed on September 16,
2004).+
|
|
10.12
|
Form
of Performance Restricted Stock Unit Agreement. (Incorporated by
reference
to Exhibit 10.6 to the Company’s current report on Form 8-K, filed on
September 16, 2004).+
|
|
10.13
|
Put
Agreement, effective as of October 12, 2004, by and between American
Health Care Centers, Inc. and Omega Healthcare Investors, Inc.
(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K, filed on October 18, 2004).
|
|
10.14
|
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).
|
|
10.15
|
Purchase
Agreement, dated as of October 28, 2004, effective November 1, 2004,
among
Omega, OHI Asset (PA) Trust, Guardian LTC Management, Inc. and the
licensees named therein. (Incorporated by reference Exhibit 10.1
to the
Company’s current report on Form 8-K, filed on November 8,
2004).
|
|
10.16
|
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).
|
|
10.17
|
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).
|
|
10.18
|
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).
|
|
10.19
|
Schedule
of 2007 Omega Healthcare Investors, Inc. Executive Officers Salaries
and
Bonuses. (Incorporated by reference to Exhibit 10.190 to the Company’s
Form 10-K, filed on February 23, 2007. +
|
|
10.20
|
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). +
|
|
10.21
|
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., Pavillion North Partners, Inc., and The
Suburban Pavillion, 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).
|
|
10.22
|
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).
|
|
10.23
|
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).
|
10.24
|
Credit
Agreement, dated as of March 13, 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).
|
|
10.25
|
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).
|
|
10.26
|
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).
|
|
10.27
|
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).
|
|
10.28
|
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).
|
|
10.29
|
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).
|
|
21
|
Subsidiaries
of the Registrant. (Incorporated by reference to Exhibit 21 of the
Company’s Form 10-Kfor the year ended December 31,
2006).
|
|
23.1
|
Consent
of Ernst & Young LLP, independent registered public accounting
firm.*
|
|
23.2
|
Consent
of Powell Goldstein LLP (included in Exhibit 5.1 and Exhibit 8.1
filed
herewith).**
|
* |
Exhibits
that are filed herewith.
|
** |
To
be filed by amendment.
|
+ |
Management
contract or compensatory plan, contract or
arrangement.
|