S-11/A: Registration statement for securities to be issued by real estate companies
Published on March 27, 2007
As
filed with the Securities and Exchange Commission on
March 27, 2007
Registration
No. 333-141242
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Amendment
No. 1
to
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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|
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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
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CALCULATION
OF REGISTRATION
FEE
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||||||||
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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
(2)(3)
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||||
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Common
Stock, par value $.10 per share
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7,130,000(1)
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$
17.21
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$122,707,300
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$3,768
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||||
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(1)
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Includes
930,000 shares of the Registrant's common stock which may be issued
upon
exercise of a 30 day option granted to underwriters to cover
over-allotments, if any.
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(2)
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A
registration fee of $3,768 was paid with this Amendment No.
1 to 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 20, 2007 for 7,130,000
shares.
|
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(3)
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$1,522
of the registration fee was previously paid in connection with
the initial
filing of this Registration Statement on March 13,
2007.
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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.
The
information in this preliminary prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed
with the
Securities and Exchange Commission is effective. This preliminary prospectus
is
not an offer to sell these securities and we are not soliciting offers
to buy
these securities in any jurisdiction where the offer or sale is not
permitted.
| PRELIMINARY PROSPECTUS |
Subject
to Completion
|
March
27,
2007
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6,200,000
Shares
OMEGA
HEALTHCARE INVESTORS, INC.
Common
Stock
We
are
offering for sale 6,200,000 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 26, 2007, the last reported sale price of our common stock on
the NYSE was $17.72 per share.
Investing
in our common stock involves a high degree of risk. Before buying any shares,
you should read the discussion of material risks of investing in our common
stock in “Risk factors” beginning on page 9 of this
prospectus.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
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Per
Share
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Total
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||||
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Public
offering price
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$
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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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|||
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Proceeds,
before expenses, to us
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$
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$
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|||
The
underwriters may also purchase up to an additional 930,000 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
March ,
2007.
Sole
Book Running Manager
UBS
Investment Bank
Co-Managers
| Banc of America Securities LLC | ||
| Deutsche Bank Securities | ||
| Stifel Nicolaus | ||
You
should rely only on the information contained in this prospectus. We have
not,
and the underwriters have not, authorized anyone to provide you with
additional information or information different from that contained in this
prospectus. We
are
offering to sell, and seeking offers to buy, shares of our common stock only
in
jurisdictions where offers and sales are permitted. The information contained
in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of shares of common
stock.
TABLE
OF CONTENTS
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ii
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i
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Dividends
payable by REITs do not qualify for the reduced tax rates applicable
for
some dividends.
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25 |
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REIT
distribution requirements could adversely affect our ability
to execute
our business plan.
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25 |
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Complying
with REIT requirements with respect to our TRS limits our flexibility
in
operating or
managing
certain properties through our TRS.
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25 |
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We
may not be able to find a suitable tenant for our healthcare
property,
which could reduce
our
cash flow.
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26 |
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Complying
with REIT requirements may cause us to forgo otherwise attractive
opportunities.
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26 |
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Complying
with REIT requirements may force us to liquidate otherwise
attractive
investments.
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26 |
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New
legislation or administrative or judicial action, in each instance
potentially with retroactive effect,
could
make it more difficult or impossible for us to qualify as
a
REIT.
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27 |
| CAUTIONARY LANGUAGE REGARDING FORWARD_LOOKING STATEMENTS |
28
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| USE OF PROCEEDS |
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| PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY |
30
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31
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| SELECTED CONSOLIDATED FINANCIAL DATA |
32
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| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
34
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| BUSINESS |
58
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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.
ii
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
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 and rehabilitation and acute
care facilities. We have historically financed investments through borrowings
under our revolving credit facilities, private placements or public offerings
of
debt or equity securities, the assumption of secured indebtedness, or a
combination of these methods.
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 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.
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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.
For
the year ended December 31, 2006, we generated
operating revenue of $135.7 million, net income of $55.7 million, and $76.7
million of funds from operations, or FFO. FFO is not a financial measure
recognized under generally accepted accounting principles in the United States
of America, or GAAP, and, therefore, 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. For more information with respect
to
FFO and a reconciliation of FFO to GAAP net income, see footnote 2 in the
section entitled “Summary Historical Financial Information.”
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
|
Number
of
Beds(1)
|
Number
of
Facilities
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Occupancy
Percentage
(1)
|
Gross
Investment
(in
thousands)
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|||||||||
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Purchase/Leaseback(2)
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|||||||||||||
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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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|||||||
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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.(4)
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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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|||||||||
1
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Investment
Structure/Operator
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Number
of
Beds
|
Number
of
Facilities
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Occupancy
Percentage
(1)
|
Gross
Investment
(in
thousands)
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|||||||||
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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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|||||||||
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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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|||||||||
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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(5)
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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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|||||||||
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Skilled
Healthcare(6)
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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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|||||||||
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Healthcare
Management Services(6)
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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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|||||||||
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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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||||||||||
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Assets
Held for Sale
|
|||||||||||||
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Active
Facilities(7)
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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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|||||||||
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Closed
Facility
|
—
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1
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—
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125
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|||||||||
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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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||||||||||
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Fixed
Rate Mortgages(3)
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|||||||||||||
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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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|||||||||
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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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|||||||||
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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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|||||||||
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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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|||||||||
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1,120
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9
|
80
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31,886
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||||||||||
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Total
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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. Some
of these purchase options could result in us receiving less than
fair
market value for such facility. As of the date of this prospectus,
leases
applicable to approximately 9.16% of our total gross investments
contain
purchase options. The purchase options relating to .16% are currently
exercisable, the purchase options relating to .70% are exercisable
at
specified times during the next four years, and the purchase options
relating to 8.30% are exercisable in ten
years.
|
| (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.
|
2
OUR 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.
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
gross investment value), no single tenant holds greater than 10% of our
portfolio (by gross investment value).
Significant
Number of Long-term Leases and Mortgage Loans. A
large
portion of the properties in our core portfolio are subject
to long-term lease and mortgage agreements. At December 31, 2006,
approximately 94% 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 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
effect of an investment in such facility on our ability to qualify
as a
REIT;
|
| · |
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.
3
OUR INDUSTRY
We
are a
REIT that invests in income-producing healthcare facilities, principally
long-term care facilities located in the United States. Within the 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 December
2006, there were approximately 16,000 nursing homes with approximately
1.7 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.
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
2005, 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.
4
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, 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 of 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.
Restatement
In
December 2006, we filed an amended Annual Report on Form 10-K/A to correct
our
previously issued historical consolidated financial statements as of December
31, 2005 and 2004, and for each of the three years in the period ended
December
31, 2005, for errors in previously reported amounts related to income tax
matters and asset values, as well as the recording of straight-line rental
income. Please see the sections of this prospectus entitled "Certain federal
income tax consequences - Taxation of Omega" and "Risk Factors - Tax
Risks" for additional information.
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
|
6,200,000
shares.
|
|
|
Common
stock to be outstanding immediately after the offering
|
66,300,859 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 60,100,859 shares outstanding as of March 26, 2007 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
|
| · |
930,000
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
|
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 (1)
|
17,495
|
18,129
|
18,842
|
23,856
|
32,113
|
|||||||||||
|
Funds
from operations(2)
|
(15,025
|
)
|
25,091
|
(18,474
|
)
|
42,663
|
76,683
|
|||||||||
|
Twelve
months ended
December
31, 2006
|
|||||||
|
Actual
|
As
adjusted(3)
|
||||||
|
Balance
sheet data:
|
(in
thousands)
|
||||||
|
Cash
|
$
|
729
|
|
729 | |||
|
Gross
investment
|
1,294,697
|
1,294,697 | |||||
|
Total
assets
|
1,175,370
|
1,175,370 | |||||
|
Total
debt(4)
|
676,141
|
572,270 | |||||
|
Stockholders’
equity
|
465,454
|
569,325 | |||||
(1)
Excludes
amounts included in discontinued operations
(2)
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 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.
7
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.
|
|
(3)
|
As
adjusted basis giving effect to our sale of the common stock in
this
offering at an assumed offering price of $17.72 per share and the
receipt
of the estimated net proceeds of this sale of $103.9 million, the
assumed
application of the approximately $103.9 million of net proceeds
to repay a
portion of our outstanding borrowings under our
senior revolving credit facility.
|
|
(4)
|
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 or limit our ability to collect, in full or at all,
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.
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
9
Risk
Factors
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.
10
Risk
Factors
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.’’
If
an operator files bankruptcy, our leases with the operator
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.
|
11
Risk
Factors
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 their ability to meet their obligations to us
which could
adversely affect our
revenues.
|
| · |
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.
|
12
Risk
Factors
| · |
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.
Federal
and state 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.
|
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
13
Risk
Factors
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 due to
competition for qualified employees have resulted in lower revenues for some
of
our operators and may affect the ability of our tenants to meet their payment
obligations to us.
The
healthcare industry is highly competitive and we expect that it may become
more
competitive in the future. Our operators are competing with numerous other
companies providing similar healthcare services or alternatives such as home
health agencies, life care at home, community-based service programs, retirement
communities and convalescent centers. We cannot be certain the operators of
all
of our facilities will be able to achieve occupancy and rate levels that will
enable them to meet all of their obligations to us. Our operators may encounter
increased competition in the future that could limit their ability to attract
residents or expand their businesses and therefore affect their ability to
pay
their lease or mortgage payments.
The
market for qualified nurses, healthcare professionals and other key personnel
is
highly competitive and our operators may experience difficulties in attracting
and retaining qualified personnel. Increases in labor costs due to higher wages
and greater benefits required to attract and retain qualified healthcare
personnel incurred by our operators could affect their ability to pay their
lease or mortgage payments. This situation could be particularly acute in
certain states that have enacted legislation establishing minimum staffing
requirements.
14
Risk
Factors
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.
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 and as of December 31, 2006 we still have
not
concluded that our internal control over financial reporting is effective.
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.
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.
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 results of operations, 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 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 in this Prospectus may
make
it more difficult for
15
Risk
Factors
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 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.
The
availability of equity capital to us will depend, in part, on the market
price
of our common stock which, in turn, will depend upon various market conditions
and other factors that may change from time to time
including:
| · |
the
extent of investor interest;
|
| · |
the
general reputation of REITs and the attractiveness of their equity
securities in comparison to other equity securities, including securities
issued by other real estate-based
companies;
|
| · |
our
financial performance and that of our
operators;
|
| · |
the
contents of analyst reports about us and the REIT
industry;
|
| · |
general
stock and bond market conditions, including changes in interest rates
on
fixed income securities, which may lead prospective purchasers of
our
common stock to demand a higher annual yield from future
distributions;
|
| · |
our
failure to maintain or increase our dividend, which is dependent,
to a
large part, on growth of funds from operations which in turn depends
upon
increased revenues from additional investments and rental increases;
and
|
| · |
other
factors such as governmental regulatory action and changes in REIT
tax
laws.
|
The
market value of the equity securities of a REIT is generally based upon the
market’s perception of the REIT’s growth potential and its current and potential
future earnings and cash distributions. Our failure to meet the market’s
expectation with regard to future earnings and cash distributions would likely
adversely affect the market price of our common stock.
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 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.
16
Risk
Factors
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.
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.
The
geographic
concentration of our investments could leave
us vulnerable to an economic downturn, regulatory changes or acts of nature
in
those areas, resulting in a decrease in our revenues or otherwise negatively
impacting our results of operations.
For
the
year ended December 31, 2006, the three states in which we had our highest
concentration of investments were Ohio (22%), Florida (14%) and Pennsylvania
(9%). As a result of this concentration, the conditions of local economies
and
real estate markets, changes in governmental rules and regulations, particularly
with respect to Medicaid, acts of nature and other factors that may result
in a
decrease in demand for long-term care services in these states could have
an
adverse effect on our operators’ revenues, costs and results of operations,
which may limit their ability to meet their obligations to us. In addition,
since some of these investments are located in Florida, our operators are
particularly susceptible to revenue loss, cost increase or damage caused
by
hurricanes or other severe weather conditions or natural disasters. Any
significant loss due to a natural disaster may not be covered by insurance
and
may lead to an increase in the cost of insurance for our
operators.
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.
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 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;
|
| · |
limit
our ability to satisfy the distribution requirements applicable
to
REITs;
|
|
·
|
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
18
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.
19
Risk
Factors
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.
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.
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.
20
Risk
Factors
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.
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.
|
21
Risk
Factors
| · |
The
issuance of debt securities exchangeable for our common
stock.
|
| · |
The
exercise of warrants we may issue in the
future.
|
| · |
Lenders
sometimes ask for warrants or other rights to acquire shares in connection
with providing financing. We cannot assure you that our lenders will
not
request such rights.
|
There
are no assurances of our ability to pay dividends in the
future.
In
2001,
our Board of Directors suspended dividends on our common stock and all series
of
preferred stock in an effort to generate cash to address then impending debt
maturities. In 2003, we paid all accrued but unpaid dividends on all series
of
preferred stock and reinstated dividends on our common stock and all series
of
preferred stock. However, our ability to pay dividends may be adversely affected
if any of the risks described above were to occur. Our payment of dividends
is
subject to compliance with restrictions contained in our 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.
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.
In
the
fourth quarter of 2006, we were advised by tax counsel that, due to certain
provisions of the Series B preferred stock issued to us by Advocat in
2000 in
connection with a restructuring, Advocat may be considered to be a “related
party tenant” under the rules applicable to REITs and, in such event, rental
income received by us from Advocat would not be qualifying income for
purposes
of the REIT gross income tests. While we believe that there are valid
arguments
that Advocat should not be a “related party
22
Risk
Factors
tenant,”
if Advocat is so treated, we would have failed to satisfy the 95% gross
income
tests during certain prior taxable years. Such a failure would have prevented
us
from maintaining REIT tax status during such years and from re-electing
tax
status for a number of taxable years. In such event, our failure to satisfy
the
REIT gross income tests would not result in the loss of REIT status,
however, if
the failure was due to reasonable cause and not to willful neglect, and
we pay a
tax on the non-qualifying income. Accordingly, on the advice of tax counsel
in
order to resolve the matter, minimize potential penalties, and obtain
assurances
regarding our continued REIT tax status, we submitted to the IRS a request
for a
closing agreement on December 15, 2006, which agreement would conclude
that any
failure to satisfy the gross income tests would be due to reasonable
cause and
not to willful neglect. Since that time, we have had ongoing conversations
with
the IRS and we have submitted additional documentation in furtherance
of the
issuance of a closing agreement, but, to date, we have not yet entered
into a
closing agreement with respect to the related party tenant issue with
the IRS.
We intend to continue to pursue a closing agreement with the
IRS.
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.
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.
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. Our
policy has been and is to operate in a such manner as to qualify as a REIT
for
Federal income tax purposes. 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.
We
have
received an opinion of Powell Goldstein LLP to the effect that, in the
event
that Advocat is considered to be a “related party tenant” under the applicable
REIT rules, our failure to meet the gross income tests for each applicable
year
as a result of our receipt of the Advocat stock in the 2000 restructuring
and
our ownership of such stock thereafter through the date of the Second
Advocat
Restructuring will be found to be due to reasonable cause and not due
to willful
neglect. Further, such opinion states to the effect that from and including
the Company's taxable year December 31, 1992, the Company was and is
organized
in conformity with the requirements for its actual method of operation
through
the date hereof has permited, and its proposed method of operations as
described
in this
23
Risk
Factors
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 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.
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 our Taxable REIT
Subsidiaries, or TRSs, which would 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 also may 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, including timing differences, between taxable
income and available cash). As a result, 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. Accordingly, satisfying the REIT requirements could have an adverse
effect on our business results and profitability.
24
Risk
Factors
The
Jobs
and Growth Tax Relief Reconciliation Act of 2003 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 with
respect to
certain limited portions of such dividends, if at all. 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.
REIT
distribution requirements could adversely affect our ability to execute
our
business plan.
We
generally must distribute annually at least 90% of our taxable income,
subject
to certain adjustments and excluding any net capital gain, in order
for federal
corporate income tax not to apply to earnings that we distribute.
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.
To the extent that we satisfy this distribution requirement, but
distribute less
than 100% of our taxable income, we will be subject to federal corporate
income
tax on our undistributed taxable income. In addition, we will be
subject to a 4%
nondeductible excise tax if the actual amount that we pay out to
our
stockholders in a calendar year is less than a minimum amount specified
under
federal tax laws. We intend to make distributions to our stockholders
to comply
with the REIT requirements of the Internal Revenue Code.
Complying
with REIT requirements with respect to our TRS limits
our
flexibility in operating or managing certain properties through our
TRS.
A
TRS may
not directly or indirectly operate or manage a healthcare facility.
For REIT
qualification purposes, the definition of a "healthcare facility"
means a
hospital, nursing facility, assisted living facility, congregate
care facility,
qualified continuing care facility, or other licensed facility which
extends
medical or nursing or ancillary services to patients and which, immediately
before the termination, expiration, default, or breach of the lease
of or
mortgage secured by such facility, was operated by a provider of
such services
which was eligible for participation in the Medicare program under
Title XVIII
of the Social Security Act with respect to such facility. Thus, compliance
with
the REIT requirements may limit our flexibility in executing our
business plan.
Moreover, if the IRS were to treat a subsidiary corporation of ours
as directly
or indirectly operating or managing a healthcare facility, such subsidiary
would
not qualify as a TRS, which could jeopardize our REIT qualification
under the
REIT gross asset tests.
We
may not be able to find a suitable tenant for our healthcare
property, which could reduce our cash flow.
We
may
not be able to find another qualified tenant for a property if
we have to
replace a tenant. Accordingly, if we are unable to find a qualified
tenant for
one or more of our properties, rental payments could cease which
could have a
significant impact on our operating results and financial condition,
in
25
Risk
Factors
which
case we could be required to sell such properties or terminate our
qualification
as a REIT. While
the
REIT rules regarding foreclosure property allow us to acquire certain
qualified
healthcare property as the result of the termination or expiration
of a lease
(other than by reason of default, or the imminence of default, on the
lease) of
such property and, in connection with such acquisition, to operate
a qualified
healthcare facility through, and in certain circumstances derive income
from, a
qualified independent contractor for a period of two years (or up to
six years
if extensions are granted), once such period ends, the REIT rules prohibit
the
direct or indirect operation or management of such facility through
our TRS. If
the IRS were to treat our TRS as directly or indirectly operating or
managing a
qualified healthcare facility, such subsidiary would not qualify as
a TRS, which
could jeopardize our REIT qualification under the REIT gross asset
tests.
Complying
with REIT requirements may cause us to forgo otherwise attractive opportunities.
To
qualify as a REIT for federal income tax purposes, we continually must
satisfy
tests concerning, among other things, the sources of our income, the
nature and
diversification of our assets, the amounts we distribute to our stockholders
and
the ownership of our stock. We may be unable to pursue investments
that would be
otherwise advantageous to us in order to satisfy the source-of-income,
asset-diversification or distribution requirements for qualifying as
a REIT.
Thus, compliance with the REIT requirements may hinder our ability
to make
certain attractive investments.
Complying
with REIT requirements may force us to liquidate otherwise attractive
investments.
To
qualify as a REIT for federal income tax purposes, we must ensure that
at the
end of each calendar quarter, at least 75% of the value of our assets
consists
of cash, cash items, government securities and qualified REIT real
estate
assets, including certain mortgage loans and mortgage backed securities.
The
remainder of our investment in securities (other than government securities
and
qualified real estate assets) generally cannot include more than 10%
of the
outstanding voting securities of any one issuer or more than 10% of
the total
value of the outstanding securities of any one issuer. In addition,
in general,
no more than 5% of the value of our assets (other than government securities
and
qualified real estate assets) can consist of the securities of any
one issuer,
and no more than 20% of the value of our total securities can be represented
by
securities of one or more TRSs. See “Federal Income Tax Considerations—Taxation
of Omega.” If we fail to comply with these requirements at the end of any
calendar quarter, we must correct the failure within 30 days after
the end of
the calendar quarter or qualify for certain statutory relief provisions
to avoid
losing our REIT qualification and suffering adverse tax consequences.
As a
result, we may be required to liquidate from our portfolio otherwise
attractive
investments. These actions could have the effect of reducing our income
and
amounts available for distribution to our stockholders.
26
Risk
Factors
New
legislation or administrative or judicial action, in each instance
potentially
with retroactive effect, could make it more difficult or impossible
for us to
qualify as a REIT.
You
should recognize that the present federal income tax treatment of REITs
may be
modified, possibly with retroactive effect, by legislative, judicial
or
administrative action at any time, which could affect the federal income
tax
treatment of an investment in us. The federal income tax rules that
affect REITs
constantly are under review by persons involved in the legislative
process, the
IRS and the U.S. Treasury Department, which results in statutory changes
as well
as frequent revisions to regulations and interpretations. Revisions
in federal
tax laws and interpretations thereof could cause us to change our investments
and commitments and affect the tax considerations of an investment
in us. 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.
27
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.
28
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 $103.9 million ($119.5 million
if the underwriters’ over-allotment option is exercised in full), assuming a
public offering price of $17.72 per share. We intend to use all of the net
proceeds of this offering to repay indebtedness outstanding under our Credit
Facility, which currently bears an interest rate of 6.82% and matures on
March
31, 2010. We entered into our 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. Bank of America N.A., an affiliate of Banc
of
America Securities LLC, is the administrative agent and a lender under our
senior revolving credit facility; UBS Loan Finance LLC, an affiliate of UBS
Securities LLC, and Deutsche Bank AG, an affiliate of Deutsche Bank Securities
Inc., are lenders under our senior revolving credit facility. UBS Securities
LLC, Banc of America Securities LLC and Deutsche Bank Securities Inc. are
underwriters of this offering of our common stock. If and to the extent there
are net proceeds remaining after we have repaid all indebtedness under our
Credit Facility, we will use these proceeds for working capital and general
corporate purposes.
29
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
|
$
|
11.95
|
$
|
10.31
|
$
|
0.20
|
||||
|
Second
Quarter
|
13.65
|
10.58
|
0.21
|
|||||||
|
Third
Quarter
|
14.28
|
12.39
|
0.22
|
|||||||
|
Fourth
Quarter
|
13.98
|
11.66
|
0.22
|
|||||||
|
Year
ended December 31, 2006
|
||||||||||
|
First
Quarter
|
$
|
14.03
|
$
|
12.36
|
$
|
0.23
|
||||
|
Second
Quarter
|
13.92
|
11.15
|
0.24
|
|||||||
|
Third
Quarter
|
15.50
|
12.56
|
0.24
|
|||||||
|
Fourth
Quarter
|
18.00
|
14.81
|
0.25
|
|||||||
The
closing price on March 26, 2007 was $17.72 per share. As of March 26, 2007
there
were 60,100,859 shares of common stock outstanding with 2,960
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 in this prospectus.
30
The
following table sets forth our capitalization as of December 31, 2006:
| · |
On
an actual basis; and
|
| · |
As
adjusted to give effect to our sale of the common stock in this
offering at an assumed offering price of $17.72 per share and the
assumed
application of the approximately $103.9 million of net
proceeds
to
repay borrowings outstanding under our 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
|
As
adjusted
|
||||||
|
(in
thousands)
|
|||||||
|
Cash
|
$ |
729
|
$ | 729 | |||
|
Debt:
|
|||||||
|
Credit
Facility
|
150,000
|
46,129 | |||||
|
7.00%
senior notes due 2014
|
310,000
|
310,000 | |||||
|
Premium
on new 7.00% senior notes due 2014
|
1,148
|
1,148 | |||||
|
Discount
on 7% Note due 2016
|
(1,417
|
)
|
(1,417 | ) | |||
|
7.00%
senior notes due 2016
|
175,000
|
175,000 | |||||
|
Other
long-term borrowings
|
41,410
|
41,410 | |||||
|
Total
Debt
|
676,141
|
572,270 | |||||
|
Stockholders’
Equity:
|
|||||||
|
Preferred
Stock, $1.00 par value; authorized - 20,000 shares:
|
|||||||
|
Issued
and Outstanding - 4,740 shares Series D with an aggregate liquidation
preference of $118,488 as December 31, 2006
|
118,488
|
118,488 | |||||
|
Common
Stock, $0.10 par value:
|
|||||||
|
Authorized
- 100,000 shares
|
|||||||
|
Issued
and Outstanding - 59,703 as of December 31, 2006; pro forma as
adjusted 65.903 shares
|
5,970
|
6,590 | |||||
|
Additional
paid in capital
|
694,207
|
||||||
|
Cumulative
net earnings
|
292,766
|
797,458 | |||||
|
Cumulative
dividends paid
|
(602,910
|
)
|
292,766 | ||||
|
Cumulative
dividends - redemption
|
(43,067
|
)
|
(602,910 | ) | |||
|
Total
Stockholders’ Equity
|
465,454
|
569,325 | |||||
|
Total
Capitalization
|
$ |
1,141,595
|
$ | 1,141,595 | |||
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;
|
| · |
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
|
| · |
930,000
shares
of
our common stock that may be purchased by underwriters to cover
over-allotments, if any.
|
31
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,
|
||||||||||||||||
|
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||
|
Operating data:
Revenues from core operations |
$
|
80,572 |
$
|
76,803 |
$
|
86,972
|
$
|
109,644
|
$
|
135,693
|
||||||
|
Revenues
from nursing home operations
|
42,203
|
4,395
|
—
|
—
|
—
|
|||||||||||
|
Total
revenues
|
$
|
122,775 |
$
|
81,198 |
$
|
86,972 |
$
|
109,644
|
$
|
135,693
|
||||||
|
Income
(loss) from continuing operations
|
$
|
(2,561
|
) |
$
|
27,770
|
$
|
13,371
|
$
|
37,355
|
$
|
56,042
|
|||||
|
Net
income (loss) available to common
|
(32,801
|
) |
3,516
|
(36,715
|
) |
25,355
|
45,774
|
|||||||||
|
Per
share amounts:
|
||||||||||||||||
|
Income
(loss) from continuing operations:
Basic
|
$
|
(0.65
|
) |
$
|
0.21
|
$
|
(0.96
|
) |
$
|
0.46
|
$
|
0.79
|
||||
|
Diluted
|
|
(0.65
|
) |
0.20
|
(0.96
|
) |
|
0.46
|
|
0.79
|
||||||
|
Net
income (loss) available to common:
Basic
|
$
|
(0.94
|
) |
$
|
0.09
|
$
|
(0.81
|
) |
$
|
0.49
|
$
|
0.78
|
||||
|
Diluted
|
(0.94 | ) | 0.09 |
(0.81
|
) |
0.49
|
0.78
|
|||||||||
|
Dividends,
Common Stock(1)
|
— | 0.15 |
0.72
|
0.85
|
0.96
|
|||||||||||
|
Dividends,
Series A Preferred(1)
|
—
|
6.94
|
1.16
|
— |
—
|
|||||||||||
|
Dividends,
Series B Preferred(1)
|
—
|
6.47
|
2.16
|
1.09 |
—
|
|||||||||||
| Dividends, Series C Preferred(2) |
—
|
29.81
|
2.72
|
—
|
—
|
|||||||||||
|
Dividends,
Series D Preferred(1)
|
—
|
—
|
1.52
|
2.09
|
2.09
|
|||||||||||
|
Weighted-average
common shares outstanding,
basic
|
34,739
|
37,189
|
45,472
|
51,738
|
58,651
|
|||||||||||
|
Weighted-average
common shares outstanding,
diluted
|
34,739
|
38,154
|
45,472
|
52,059
|
58,745
|
|||||||||||
|
Other
financial data:
|
||||||||||||||||
| Depreciation and amortization (3) | 17,495 | 18,129 |
18,842
|
23,856
|
32,113
|
|||||||||||
| Funds from operations(4) | (15,025 | ) | 25,091 |
(18,474
|
) |
42,663
|
76,683
|
|||||||||
|
Year
Ended December 31,
|
||||||||||||||||
|
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||
|
Balance
sheet data:
Gross
investments
|
$
|
860,188
|
$
|
821,244
|
$
|
940,747
|
$
|
1,129,753
|
$
|
1,294,697
|
||||||
|
Total
assets
|
811,096 | 736,775 |
849,576
|
1,036,042
|
1,175,370
|
|||||||||||
|
Revolving
lines of credit
|
177,000 | 177,074 |
15,000
|
58,000
|
150,000
|
|||||||||||
|
Other
long-term borrowings
|
129,462 | 103,520 |
364,508
|
508,229
|
526,141
|
|||||||||||
|
Stockholders’
equity
|
482,995 | 440,130 |
442,935
|
440,943
|
465,454
|
|||||||||||
| (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
|
|
(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
|
32
Selected
consolidated financial data
|
|
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.
|
33
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 in this prospectus.
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
34
Management’s
discussion and analysis of financial condition and results of
operations
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.
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
35
Management’s
discussion and analysis of financial condition and results of
operations
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.
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
36
Management’s
discussion and analysis of financial condition and results of
operations
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).
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
37
Management’s
discussion and analysis of financial condition and results of
operations
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.
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
38
Management’s
discussion and analysis of financial condition and results of
operations
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 our 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.
|
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 ALF
for cash
proceeds of approximately $1.6 million in the
aggregate.
|
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.
39
Management’s
discussion and analysis of financial condition and results of
operations
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, one of our existing operators.
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 we own in West Virginia. 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.
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),
40
Management’s
discussion and analysis of financial condition and results of
operations
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.
|
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.
41
Management’s
discussion and analysis of financial condition and results of
operations
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.
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 included elsewhere
in
this prospectus. 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, typically 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
42
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, $13.8 million and
$8.6
million, net of allowances, at December 31, 2006, 2005 and 2004, 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
43
Management’s
discussion and analysis of financial condition and results of
operations
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).
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 included elsewhere in this prospectus.
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.
|
44
Management’s
discussion and analysis of financial condition and results of
operations
|
·
|
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.
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 was $13.7 million, compared
to $8.6
million for the same period in 2005. The increase was primarily
due to
$3.4 million of restricted stock amortization expense and compensation
expense related to the performance restricted stock units,
$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 in this
prospectus).
|
|
·
|
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 in this
prospectus).
|
45
Management’s
discussion and analysis of financial condition and results of
operations
|
·
|
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 in this
prospectus).
|
|
·
|
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
million
principal amount of our 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.
|
|
·
|
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, we will not be subject to Federal income taxes on
our
income to the extent that we distribute such income to our shareholders,
except
as described below. For tax year 2006, preferred and common dividend payments
of
approximately $67 million made throughout 2006 satisfy the 2006 REIT
distribution requirements. 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.
In the fourth quarter of 2006, we were advised by tax counsel that, due to certain provisions of the Series B preferred stock issued to us by Advocat in 2000 in connection with a restructuring, Advocat may be considered to be a “related party tenant” under the rules applicable to REITs and, in such event, rental income received by us from Advocat would not be qualifying income for purposes of the REIT gross income tests. While we believe that there are valid arguments that Advocat should not be a “related party tenant,” if Advocat is so treated, we would have failed to satisfy the 95% gross income tests during certain prior taxable years. Such a failure would have prevented us from maintaining REIT tax status during such years and from re-electing tax status for a number of taxable years. In such event, our failure to satisfy the REIT gross income tests would not result in the loss of REIT status, however, if the failure was due to reasonable cause and not to willful neglect, and we pay a tax on the non-qualifying income. Accordingly, on the advice of tax counsel in order to resolve the matter, minimize potential penalties, and obtain assurances regarding our continued REIT tax status, we submitted to the IRS a request for a closing agreement on December 15, 2006, which agreement would conclude that any failure to satisfy the gross income tests would be due to reasonable cause and not to willful neglect. Since that time, we have had ongoing conversations with the IRS and we have submitted additional documentation in furtherance of the issuance of a closing agreement, but, to date, we have not yet entered into a closing agreement with respect to the related party tenant issue with the IRS. We intend to continue to pursue a closing agreement with the IRS.
As
a
result of the potential related party tenant issue described above and further
discussed in Note 10 - Taxes
to
our consolidated financial statements for the year ended December 31, 2006
included elsewhere in this prospectus, 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
46
Management’s
discussion and analysis of financial condition and results of
operations
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.
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 in this prospectus.
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.
47
Management’s
discussion and analysis of financial condition and results of
operations
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 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 included elsewhere in this prospectus. 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 included elsewhere in this prospectus. 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.
|
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.
|
48
Management’s
discussion and analysis of financial condition and results of
operations
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 was $8.6 million, compared
to $8.8
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.
|
|
·
|
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 million
principal amount of our 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 to our consolidated
financial
statements for the year ended December 31, 2006 included elsewhere
in this
prospectus).
|
|
·
|
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.
|
49
Management’s
discussion and analysis of financial condition and results of
operations
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 in this prospectus, 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 distribution requirements
(which require that we distribute at least 90% of our REIT taxable
income for the taxable year and meet certain other conditions in order to
qualify as a REIT). Further, 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.
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.
50
Management’s
discussion and analysis of financial condition and results of
operations
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.
|
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, which matures in March 2010 and Haven’s $39
million first mortgage loan with General electric Capital Corporation
that
expires in 2012.
|
51
Management’s
discussion and analysis of financial condition and results of
operations
Bank
Credit Agreements
At
December 31, 2006, we had $150.0 million outstanding under our $200 million
revolving senior secured credit facility, or the 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 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
Credit Facility replaced our previous $200 million senior secured credit
facility, or the Prior Credit Facility, that was terminated on March 31,
2006.
The 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
52
Management’s discussion and analysis of financial condition and results of operations
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.
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
53
Management’s
discussion and analysis of financial
condition and results of operations
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 in this
prospectus.
Dividends
In
order
to qualify as a REIT, we are required to make distributions (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 corporate level
income tax thereon at regular corporate tax rates. In addition, our Credit
Facility has certain financial covenants that limit the distribution of
dividends paid during a fiscal quarter to no more than 95% of our aggregate
cumulative funds from operations, or FFO, as defined in the loan agreement
governing the 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.
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.
54
Management’s
discussion and analysis of financial condition and results of
operations
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.
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:
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normal
recurring expenses;
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·
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debt
service payments;
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|
·
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preferred
stock dividends;
|
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·
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common
stock dividends; and
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·
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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 included elsewhere in this prospectus.
55
Management’s
discussion and analysis of financial condition and results of
operations
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.
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 $3,000.
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.
56
Management’s
discussion and analysis of financial condition and results of
operations
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We
are
exposed to various market risks, including the potential loss arising from
adverse changes in interest rates. We do not enter into derivatives or other
financial instruments for trading or speculative purposes, but we seek to
mitigate the effects of fluctuations in interest rates by matching the term
of
new investments with new long-term fixed rate borrowing to the extent
possible.
The
following disclosures of estimated fair value of financial instruments are
subjective in nature and are dependent on a number of important assumptions,
including estimates of future cash flows, risks, discount rates and relevant
comparable market information associated with each financial instrument. The
use
of different market assumptions and estimation methodologies may have a material
effect on the reported estimated fair value amounts. Accordingly, the estimates
presented below are not necessarily indicative of the amounts we would realize
in a current market exchange.
Mortgage
notes receivable
- The
fair
value of mortgage notes receivable is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Notes receivable
- The
fair
value of notes receivable is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Borrowings
under lines of credit arrangement -
The
carrying amount approximates fair value because the borrowings are interest
rate
adjustable.
Senior
unsecured notes
- The
fair
value of the senior unsecured notes is estimated by discounting the future
cash
flows using the current borrowing rate available for the similar
debt.
The
market value of our long-term fixed rate borrowings and mortgages is subject
to
interest rate risks. Generally, the market value of fixed rate financial
instruments will decrease as interest rates rise and increase as interest rates
fall. The estimated fair value of our total long-term borrowings at December
31,
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.
57
OVERVIEW
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, and rehabilitation and acute
care
facilities. We have historically financed investments through borrowings
under
our revolving credit facilities, private placements or public offerings of
debt
or equity securities, the assumption of secured indebtedness, or a combination
of these methods.
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 is made up of:
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·
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228
long-term healthcare facilities and two rehabilitation hospitals
owned and
leased to third parties; and
|
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fixed
rate mortgages on nine 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.
For the year ended December 31, 2006, we generated operating revenue of $135.7 million, net income of $55.7 million, and $76.7 million of funew from operations, or FFO. FFO is not a financial measure recognized under generally accepted accounting principles in the United States of America, or GAAP, and, therefore, 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. For more information with respect to FFO and a reconciliation of FFO to GAAP net income, see footnote 2 in the section entitled “Summary Historical Financial Information.”
For the year ended December 31, 2006, we generated operating revenue of $135.7 million, net income of $55.7 million, and $76.7 million of funew from operations, or FFO. FFO is not a financial measure recognized under generally accepted accounting principles in the United States of America, or GAAP, and, therefore, 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. For more information with respect to FFO and a reconciliation of FFO to GAAP net income, see footnote 2 in the section entitled “Summary Historical Financial Information.”
DESCRIPTION
OF THE BUSINESS
Investment
Strategy. We
maintain a diversified portfolio of long-term healthcare facilities and
mortgages on long-term 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:
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the
quality and experience of management and the creditworthiness of
the
operator of the facility;
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the
facility’s historical and forecasted cash flow and its ability to meet
operational needs, capital expenditure requirements and lease or
debt
service obligations, providing a competitive return on our
investment;
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the
construction quality, condition and design of the
facility;
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the
geographic area of the
facility;
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58
Management’s discussion and analysis of financial condition and results of operations
|
·
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the
tax, growth, regulatory and reimbursement environment of the jurisdiction
in which the facility is located;
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·
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the
occupancy and demand for similar healthcare facilities in the same
or
nearby communities; and
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the
payor mix of private, Medicare and Medicaid
patients.
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One
of
our fundamental investment strategies is to obtain contractual rent escalations
under long-term, non-cancelable, “triple-net” leases and fixed-rate mortgage
loans, and to obtain substantial liquidity deposits. Additional security is
typically provided by covenants regarding minimum working capital and net worth,
liens on accounts receivable and other operating assets, and various provisions
for cross-default, cross-collateralization and corporate/personal guarantees,
when appropriate.
We
prefer
to invest in equity ownership of properties. Due to regulatory, tax or other
considerations, we 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.
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 January 1, 2007, 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 January 1, 2007,
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.
59
Business
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 and Results of Operations; 2006
Taxes”).
In the fourth quarter of 2006, we were advised by tax counsel that, due to certain provisions of the Series B preferred stock issued to us by Advocat in 2000 in connection with a restructuring, Advocat may be considered to be a “related party tenant” under the rules applicable to REITs and, in such event, rental income received by us from Advocat would not be qualifying income for purposes of the REIT gross income tests. 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. While we believe that there are valid arguments that Advocat should not be a “related party tenant,” if Advocat is so treated, we would have failed to satisfy the 95% gross income tests during certain prior taxable years. Such a failure would have prevented us from maintaining REIT tax status during such years and from re-electing tax status for a number of taxable years. In such event, our failure to satisfy the REIT gross income tests would not result in the loss of REIT status, however, if the failure was due to reasonable cause and not to willful neglect, and we pay a tax on the non-qualifying income. Accordingly, on the advice of tax counsel in order to resolve the matter, minimize potential penalties, and obtain assurances regarding our continued REIT tax status, we submitted to the IRS a request for a closing agreement on December 15, 2006, which agreement would conclude that any failure to satisfy the gross income tests would be due to reasonable cause and not to willful neglect. Since that time, we have had ongoing conversations with the IRS and we have submitted additional documentation in furtherance of the issuance of a closing agreement, but, to date, we have not yet entered into a closing agreement with respect to the related party tenant issue with the IRS. We intend to continue to pursue a closing agreement with the IRS. 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
60
Business
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 maintaining our qualifications as a REIT) 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;
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4,739,500
shares of Series D cumulative redeemable preferred stock;
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An
aggregate of 11,917,736 shares of common stock in registered
public
offerings;
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$310
million in aggregate principal amount of 7% senior notes due 2014;
and
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$175
million in aggregate principal amount of 7% senior notes
due 2016.
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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.
Insurance.
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
61
Business
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:
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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;
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·
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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.
|
PROPERTIES
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 the 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(1)
|
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
|
|||||||||
62
Business
|
Investment
Structure/Operator
|
Number
of
Beds(1)
|
Number
of
Facilities
|
Occupancy
Percentage(1)
|
Gross
Investment
(in
thousands)
|
|||||||||
|
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. Some
of these purchase options could result in us receiving less than
fair
market value for such facility. As of the date of this prospectus,
leases
applicable to approximately 9.16% of our total gross investments
contain
purchase options. The purchase options relating to .16% are currently
exercisable, the purchase options relating to .70% are exercisable
at
specified times during the next four years, and the purchase options
relating to 8.30% are exercisable in ten
years.
|
| (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.
|
63
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 94% 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.
64
Business
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.
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.
65
Management
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
|
||
| Michael Ritz | 38 | Chief Accounting Officer | ||
|
Robert
O. Stephenson
|
43
|
Chief
Financial Officer
|
(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.
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 (“NYSE”) listing standards for
independence.
Each
of
the members of the Audit Committee is financially literate, as required of
audit
committee members by the 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.
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).
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.
Michael
Ritz is the Chief Accounting Officer and has served in this capacity since
February 28, 2007. 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.
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.
EXECUTIVE
COMPENSATION
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.
68
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.
|
|
·
|
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;
|
|
·
|
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
70
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.
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:
|
·
|
Assist
in attracting and retaining talented and well-qualified
executives;
|
|
·
|
Reward
performance and initiative;
|
|
·
|
Be
competitive with other healthcare real estate investment
trusts;
|
|
·
|
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;
|
|
·
|
Align
the interests of our executive officers with the interests of our
stockholders; and
|
|
·
|
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
71
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.
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.
72
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 33⅓% 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.
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.
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 $1.0 million to any of the named executive
officers unless the compensation is paid pursuant to a plan that is
performance-related, non-discretionary and has been approved by our
stockholders. We did not pay any compensation during 2006 that would be subject
to Section 162(m). We believe that, because we qualify as a REIT under the
Internal Revenue Code and therefore are not subject to federal income taxes
on
our income to the extent distributed, the payment of compensation that does
not
satisfy the requirements of Section 162(m) will not generally affect our net
income, although to the extent that compensation does not qualify for deduction
under Section 162(m), a larger portion of stockholder distributions may be
subject to federal income taxation as dividend income rather than return of
capital. We do not believe that Section 162(m) will materially affect the
taxability of stockholder distributions, although no assurance can be given
in
this regard due to the variety of factors that affect the tax position of each
stockholder. For these reasons, Section 162(m) does not directly govern the
Compensation Committee’s compensation policy and practices.
|
Compensation
Committee of the Board of Directors
/s/
Thomas F. Franke
/s/
Harold J. Kloosterman
/s/
Bernard J. Korman
/s/
Edward Lowenthal
/s/
Stephen D. Plavin
|
74
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Thomas
F.
Franke, Harold J. Kloosterman, Bernard J. Korman, Edward Lowenthal and Stephen
D. Plavin were members of the Compensation Committee for the year ended December
31, 2006 and during such period, there were no Compensation Committee interlocks
or insider participation in compensation decisions.
SUMMARY
COMPENSATION TABLE
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
(1)
|
Stock
Awards
($)
(2)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Change
in Pension Value and Non-qualified Deferred Compensation
Earnings
|
All
Other Compen-
sation
($)
(3)
|
Total
($)
|
|||||||||||||||||||
|
Taylor
Pickett (CEO)
|
2006
|
$
|
515,000
|
$
|
463,500
|
$
|
1,317,500
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
343,211
|
$
|
2,639,211
|
|||||||||||
|
Robert
Stephenson (CFO)
|
2006
|
$
|
255,000
|
$
|
114,750
|
$
|
632,400
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
168,172
|
$
|
1,170,322
|
|||||||||||
|
Dan
Booth (COO)
|
2006
|
$
|
317,000
|
$
|
158,500
|
$
|
790,500
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
208,566
|
$
|
1,474,566
|
|||||||||||
|
Lee
Crabill (Sr. VP Operations)
|
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 $10.54 times the
number of
units earned.
|
| (3) |
This
amount
includes: (i)
dividends
on units paid in January 2007 (see footnote 2
above);
|
|
(ii)
|
interest
earned on dividends on units paid in January 2007 (see footnote 2
above);
|
|
(iii)
|
dividends
on restricted stock that was paid during 2006, which vested on January
1,
2007; and
|
| (iv) |
401(k)
matching contributions.
|
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END
|
Option
Awards
|
Stock
Awards
|
|||||||||||||||||||||||||||
|
Name
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
Option
Exercise Price
($)
|
Option
Expiration
Date
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
(1)
|
Market
Value of Shares or Units of Stock
That
Have Not Vested
($)
(2)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested
(#)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested
($)
|
|||||||||||||||||||
|
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 $17.72.
|
OPTION
EXERCISES AND STOCK VESTED
|
Option
Awards
|
Stock
Awards
|
||||||||||||
|
Name
|
Number
of
Shares Acquired on Exercise (#)
|
Value
Realized on Exercise
($)(1)
|
Number
of
Shares Acquired on Vesting (#)
|
Value
Realized on Vesting ($)
|
|||||||||
|
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.
|
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.
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.
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.
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.
80
Directors
and executive officers
DIRECTOR
COMPENSATION
|
Name
|
Fees
earned or paid in cash
($)
(1)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan Compensation
($)
|
Change
in Pension Value and Non-Qualified Deferred Compensation
Earnings
|
All
Other Compensation
($)
|
Total
($)
|
|||||||||||||||
|
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, the Audit Committee Chairman receives
an
annual payment of $10,000, 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 and the non-employee Chairman receives an annual
grant
of 3,000 shares of restricted common stock on January 1 of each year he serves
as Chairman. 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 July 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.
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.
82
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.
|
|
(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.
|
84
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.
85
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:
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the
designation and stated value per share of such preferred stock and
the
number of shares offered;
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the
amount of liquidation preference per
share;
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the
initial public offering price at which such preferred stock will
be
issued;
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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;
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any
redemption or sinking fund
provisions;
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any
conversion rights; and
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any
additional voting, dividend, liquidation, redemption, sinking fund
and
other rights, preferences, privileges, limitations and
restrictions.
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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
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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
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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),
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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.
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.
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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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.
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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.
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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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
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our
assets including, without limitation, any voting securities of a
subsidiary to a related person;
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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.
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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.
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
91
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.
92
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. 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. Powell
Goldstein LLP is not obligated to advise us or the holders of our securities
of
any subsequent changes in the matters stated, represented, or assumed in
connection with the following discussion, or any subsequent change in the
applicable law.
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. Our
policy has been and is to operate in such a manner as to qualify as a REIT
for
Federal income tax purposes. 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.
In
the
fourth quarter of 2006, we were advised by tax counsel that, due to certain
provisions of the Series B preferred stock issued to us by Advocat in 2000
in
connection with a restructuring, Advocat may be considered to be a “related
party tenant” under the rules applicable to REITs and, in such event, rental
income received by us from Advocat would not be qualifying income for purposes
of the REIT gross income tests. While we believe that there are valid arguments
that Advocat should not be a “related party tenant,” if Advocat is so treated,
we would have failed to satisfy the 95% gross income tests during certain
prior
taxable years. Such a failure would have prevented us from maintaining
REIT tax
status during such years and from re-electing tax status for a number of
taxable
years. In such event, our failure to satisfy the REIT gross income tests
would
not result in the loss of REIT status, however, if the failure was due
to
reasonable cause and not to willful neglect, and we pay a tax on the
non-qualifying income. Accordingly, on the advice of tax counsel in order
to
resolve the matter, minimize potential penalties, and obtain assurances
regarding our continued REIT tax status, we submitted to the IRS a request
for a
closing
agreement on December 15, 2006, which agreement would conclude that any
failure
to satisfy the gross income tests would be due to reasonable cause and
not to
willful neglect. Since that time, we have had ongoing conversations with
the IRS
and we have submitted additional documentation in furtherance of the issuance
of
a closing agreement, but, to date, we have not yet entered into a closing
agreement with respect to the related party tenant issue with the IRS.
We intend
to continue to pursue a closing agreement with the IRS.
We
have
received an opinion of Powell Goldstein LLP to the effect that, in the
event
that Advocat is considered to be a “related party tenant” under the applicable
REIT rules, our failure to meet the gross income tests for each applicable
year
as a result of our receipt of the Advocat stock in the 2000 restructuring
and
our ownership of such stock thereafter through the date of the Second Advocat
Restructuring will be found to be due to reasonable cause and not due to
willful
neglect. Further, such opinion states to the effect that from and including
the
Company's taxable year December 31, 1992, the Company was and is organized
in
conformity with the requirements for its actual method of operation through
the
date hereof has permited, and its proposed method of operations as described
in
this Registration Statement will permit the Company to meet the
requirements for qualification and taxation as a REIT. A copy of this
opinion is filed as an exhibit to the registration statement of which this
prospectus is a part. It must be emphasized that the opinion of Powell
Goldstein
LLP is based on various assumptions relating to our organization and operation,
and is conditioned upon representations and covenants made by our management
regarding our income and assets, and the past, present, and future conduct
of
our business operations. While we intend to operate so that we qualify
as a
REIT, given the highly complex nature of the rules governing REITs, the
ongoing
factual determinations, and the possibility of future changes in our
circumstances, no assurance can be given by Powell Goldstein LLP or by
us that
we will so qualify for any particular year. The opinion of Powell Goldstein
LLP
is expressed as of the date issued, and will not cover subsequent periods.
Powell Goldstein LLP is not obligated to advise us or the holders of our
securities of any subsequent change in the matters stated, represented
or
assumed, or of any subsequent change of applicable law. You should be aware
that
opinions of counsel are not binding on the IRS or any court, and no assurance
can be given that the IRS will not challenge or a court will not rule contrary
to the conclusion set forth in such opinions.
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 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 by us to customers in the ordinary course
of business, (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 beginning on the date on which such asset
was
acquired by us, then we will be subject to tax at the highest regular corporate
rate on such 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). Ninth,
if
we should violate the asset tests (other than certain de minimis violations)
or
other requirements applicable to REITs, as described below, and yet maintain
our
qualification as a REIT because there is reasonable cause for the failure
and
other applicable requirements are met, we may be subject to an excise tax.
In
that case, the amount of the excise tax will be at least $50,000 per failure,
and, in the case of certain asset test failures, will be determined as the
amount of net income generated by the assets in question multiplied by the
highest corporate tax rate (currently 35%) if that amount exceeds $50,000
per
failure. Tenth, we may be required to pay monetary penalties to the IRS in
certain circumstances, including if we fail to meet record keeping requirements
intended to monitor our compliance with rules relating to the composition
of a
REIT’s stockholders, as described below in “—Requirements for
Qualification—General.” Eleventh, the earnings of our subsidiaries, including
any TRS, are subject to federal corporate income tax to the extent that such
subsidiaries are subchapter C corporations. In addition, we and our subsidiaries
may be subject to a variety of taxes, including payroll taxes and state,
local,
and foreign income, property and other taxes on our assets and operations.
We
could also be subject to tax in situations and on transactions not presently
contemplated.
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 its election to be taxed as
a REIT
pursuant to 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 pension funds and
certain
tax-exempt 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.
To
monitor compliance with the share ownership requirements, we generally are
required to maintain records regarding the actual ownership of our shares.
To do
so, we must demand written statements each year from the record holders of
significant percentages of our stock pursuant to which the record holders
must
disclose the actual owners of the shares (i.e., the persons required to include
our dividends in their gross income). We must maintain a list of those persons
failing or refusing to comply with this demand as part of our records. We
could
be subject to monetary penalties if we fail to comply with these record-keeping
requirements. If you fail or refuse to comply with the demands, you will
be
required by Treasury regulations to submit a statement with your tax return
disclosing your actual ownership of our shares and other information.
95
In
addition, a corporation generally may not elect to become a REIT
unless its
taxable year is the calendar year. We have adopted December 31 as
our
year-end and thereby satisfy this requirement.
Other
Failures.
We may
avoid disqualification in the event of a failure to meet certain
requirements
for REIT qualification, other than the asset tests and 95% and 75%
gross income
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.
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 may, however, directly perform
certain services that are “usually or customarily rendered” in connection with
the rental of space for occupancy only and are not otherwise considered
“rendered to the occupant” of the property. In addition, we may provide a
minimal amount of “non-customary” services to the tenants of a property, other
than through an independent contractor, as long as our income from the services
does not exceed 1% of our income from the related property. For
purposes of this test, we are we are deemed to have received income from
such
non-customary services in an amount at least 150% of the direct cost of
providing the services. Moreover, except in certain instances, such as in
connection with the operation or management of a healthcare facility, we
are
generally permitted to provide services to tenants or others through a TRS
without disqualifying the rental income received from tenants for purposes
of
the income tests.
We
may
directly or indirectly receive distributions from TRSs or other corporations
that are not REITs or qualified REIT subsidiaries. These distributions
generally
are treated as dividend income to the extent of the earnings and profits
of the
distributing corporation. Such distributions will generally constitute
qualifying income for purposes of the 95% gross income test, but not for
purposes of the 75% gross income test.
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
we acquire as the result of 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 we acquired the related loan or lease at a time when the
default was
not imminent or anticipated; and
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for
which we make a proper election to treat the property as foreclosure
property.
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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. Foreclosure
property also includes certain qualified healthcare property acquired by
a REIT
as the result of the termination or expiration of a lease of such property
(other than by reason of a default, or the imminence of a default, on the
lease). In general, we may operate a qualified healthcare facility acquired
in
this manner through, and in certain circumstances may derive
income
from, an independent contractor for two years (or up to six years if extensions
are granted). For purposes of this rule, a "qualified healthcare property"
means
a hospital, nursing facility, assisted living facility, congregate care
facility, qualified continuing care facility, or other licensed facility
which
extends medical or nursing or ancillary services to patients and which
is
operated by a provider which is eligible for participation in the Medicare
program with respect to such facility, along with any real property or
personal
property necessary or incidental to the use of any such facility. This
grace
period terminates and foreclosure property ceases to be foreclosure property
on
the first day:
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on
which a lease is entered into for the property that, by its terms,
will
give rise to income that does not qualify for purposes of the 75%
gross
income test, or any amount is received or accrued, directly or indirectly,
pursuant to a lease entered into on or after such day that will give
rise
to income that does not qualify for purposes of the 75% gross income
test;
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on
which any construction takes place on the property, other than completion
of a building or any other improvement, where more than 10% of the
construction was completed before default became imminent; or
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which
is more than 90 days after the day on which the REIT acquired the
property
and the property is used in a trade or business which we conduct,
other
than through an independent contractor from whom the REIT itself
does not
derive or receive any income. Income
that we derive from an independent contractor with respect to a
qualified
healthcare facility is disregarded if such income is derived pursuant
to a
lease in effect at the time we acquire the facility, through renewal
of
such a lease according to its terms, or through a lease entered
into on
substantially similar
terms.
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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). We treated gross
income from foreclosure properties as qualifying income for purposes of the
annual REIT income tests upon making the election on the tax return. In all
cases of foreclosure
property, we utilized an independent contractor to conduct day-to-day operations
in order to maintain REIT status. Because
of the limitations imposed on TRS activities by the REIT rules, we have not
operated healthcare facilities through a taxable REIT subsidiary. For
non-healthcare properties operated through a 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 2006 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 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,” and
the
instrument is properly identified as a hedge, along with the risk it hedges,
within prescribed time periods any periodic income or gain from the
disposition of that contract should be excluded altogether for
purposes of the 95% gross income test, but would be treated as non-qualifying
income for purposes of 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
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.
A TRS may not directly or indirectly operate or manage a healthcare facility. The Code defines a "healthcare facility" generally to mean a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients. If the IRS were to treat a subsidiary corporation of ours as directly or indirectly operating or managing a healthcare facility, such subsidiary would not qualify as a TRS, which could jeopardize our REIT qualification under the REIT 5% and 10% gross asset tests.
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) certain
rental agreements pursuant to which one or more payments are to be made in
subsequent years (other than agreements between a REIT and certain persons
related to the REIT under attribution rules); (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, the portion of the loan amount that
exceeds the value of the associated real property will not be a qualifying
real
estate asset under the federal income tax laws.
After
initially meeting the asset tests at the close of any quarter, we will not
lose
our status as a REIT for failure to satisfy any of the asset tests at the end
of
a later quarter solely by reason of changes in asset values. If the failure
to
satisfy the asset tests results from an acquisition of securities or other
property during a quarter, the failure can be cured by disposition of sufficient
nonqualifying assets within 30 days after the close of that
quarter.
For
our
tax years beginning after 2004, subject to certain de
minimis
exceptions, we may avoid REIT disqualification in the event of certain failures
under the asset tests, provided that (i) we file a schedule with a description
of each asset that caused the failure, (ii) the failure was due to reasonable
cause and not willful neglect, (iii) we dispose of the assets within 6 months
after the last day of the quarter in which the identification of the failure
occurred (or the requirements of the rules are otherwise met within such
period), and (iv) we pay a tax on the failure equal to the greater of (A)
$50,000 per failure, and (B) the product of the net income generated by the
assets that caused the failure for the period beginning on the date of the
failure and ending on the date we dispose of the asset (or otherwise satisfy
the
requirements) multiplied by the highest applicable corporate tax rate.
Annual
distribution requirements.
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 in our organizational documents. 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:
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85%
of our REIT ordinary income for such year;
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95%
of our REIT capital gain income for such year; and
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any
undistributed taxable income from prior periods,
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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.
Our
calculation of our taxable income, and therefore our compliance with the
REIT
distribution requirements, depends on our proper determination of the
depreciation deductions available to us. 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.
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.
A qualified REIT subsidiary is a corporation, other than a TRS, that
is not treated as a separate corporation, and all assets, liabilities, and
items of income, deduction, and credit of a qualified REIT subsidiary are
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 event that a qualified REIT subsidiary of ours ceases to be wholly-owned—for
example, if any equity interest in the subsidiary is acquired by a person
other
than us or another disregarded subsidiary, including a qualified REIT
subsidiary, of ours—the subsidiary’s separate existence would no longer be
disregarded for federal income tax purposes. Instead, the subsidiary would
have
multiple owners and would be treated as either a partnership or a taxable
corporation. Such an event could, depending on the circumstances, adversely
affect our ability to satisfy the various asset and gross income requirements
applicable to REITs, including the requirement that REITs generally may not
own,
directly or indirectly, more than 10% of the securities of another corporation.
See “—Asset Tests” and “—Income Tests.”
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 (that
are 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 (through 2010) 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 generally will be
eligible for such special 15% tax rate if you are an individual, trust or
estate. 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.
In general, capital gains recognized by individuals, trusts and estates upon the sale or disposition of our stock will be subject to a maximum federal income tax rate of 15% (through 2010) if the stock is held for more than one year, and will be taxed at ordinary income rates (of up to 35% through 2010) if the stock is held for one year or less. Gains recognized by stockholders that are corporations are subject to federal income tax at a maximum rate of 35%, whether or not such gains are classified as long-term capital gains. Capital losses recognized by a stockholder upon the disposition of our stock that was held for more than one year at the time of disposition will be considered long-term capital losses, and are generally available only to offset capital gain income of the stockholder but not ordinary income (except in the case of individuals, who may offset up to $3,000 of ordinary income each year). In addition, any loss upon a sale or exchange of shares of our stock by a stockholder who has held the shares for six months or less, after applying holding period rules, will be treated as a long-term capital loss to the extent of distributions that we make that are required to be treated by the stockholder as long-term capital gain.
If
an
investor recognizes a loss upon a subsequent disposition of our stock or
other
securities in an amount that exceeds a prescribed threshold, it is possible
that
the provisions of Treasury regulations involving “reportable transactions” could
apply, with a resulting requirement to separately disclose the loss-generating
transaction to the IRS. These regulations, though directed towards “tax
shelters,” are broadly written and apply to transactions that would not
typically be considered tax shelters. The Code imposes significant penalties
for
failure to comply with these requirements. You should consult your tax
advisor
concerning any possible disclosure obligation with respect to the receipt
or
disposition of our stock or securities or transactions that we might undertake
directly or indirectly. Moreover, you should be aware that we and other
participants in the transactions in which we are involved (including their
advisors) might be subject to disclosure or other requirements pursuant
to these
regulations.
Distributions
that we make and gain arising from the sale or exchange by a domestic
stockholder of our stock will not be treated as passive activity income.
As a
result, stockholders will not be able to apply any “passive losses” against
income or gain relating to our stock. To the extent that distributions
we make
do not constitute a return of capital, they will be treated as investment
income
for purposes of computing the investment interest
limitation.
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 or you have otherwise used our stock in an unrelated trade
or
business. 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, meaning
that:
|
| · |
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.
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 withholding equal to 30% of the gross amount of
the distribution 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.
|
In
general, a Non-U.S. Stockholder will not be considered to be engaged in
a U.S.
trade or business solely as a result of its ownership of our stock. 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).
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 to you 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 qualified
investment entity” 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 qualified investment entity,” defined
generally to include 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. We believe that we are and it is currently
anticipated that we will remain a “domestically controlled qualified
investment entity,” 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:
| · |
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.
Under
proposed legislation, amounts paid to us by one or more of our TRSs in
consideration of a lease of certain qualified healthcare properties would
qualify as rents from real property for purposes of the REIT income
qualification tests, provided that the qualified healthcare property is operated
on behalf of such TRS by a person that is an eligible independent contractor,
as
defined in the Code. Additionally, certain foreign currency gains would be
qualifying income for purposes of the REIT income tests. This legislation
is
merely proposed and has not been enacted, and no assurances can be provided
that
it will be enacted as currently proposed or at all.
FOREIGN,
STATE, AND LOCAL TAXES
We
may be
and you may be subject to foreign, 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 foreign, state, and local tax treatment
of us
may not conform to the federal income tax consequences discussed above. Prospective
investors should consult their tax advisors regarding the application and
effect
of state, local and foreign income and other tax laws on an investment in
our
stock.
106
We
are
offering the shares of our common stock described in this prospectus through
the
underwriters named below. UBS
Securities LLC, Banc of America Securities LLC, Deutsche Bank Securities
Inc.
and Stifel, Nicolaus & Company, Incorporated 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
|
||
| UBS Securities LLC | |||
| Banc of America Securities LLC | |||
| Deutsche Bank Securities Inc. | |||
| Stifel, Nicolaus & Company, Incorporated | |||
|
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 930,000 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.
107
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 930,000 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 $0.5 million.
In
compliance with NASD guidelines, the maximum commission or discount to be
received by any NASD member or dependent broker-dealer may not exceed 8%
of the
aggregate amount of the securities offered pursuant to this
prospectus.
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 UBS Securities LLC, 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 [90] days after the date of this prospectus.
At any time and without public notice, UBS Securities LLC 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 [90]-day restricted period described
above and ends on the last day of the [90]-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 [90]-day restricted
period, the Company announces that it will release earnings results during
the
16-day period beginning on the last day of the [90]-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 (i)
within
3 business days preceding the 15th calendar day before the last day of the
termination of the [90]-day restricted period, the Company delivers to UBS
Securities LLC 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” and
(ii)
within the meaning of Rule 2711(f)(4) of the National Association of Securities
Dealers, Inc. and (ii) the safe harbor provided by Rule 139 under the Securities
Act is available in the manner contemplated by Rule 2711(f)(4) of the National
Association of Securities Dealers, Inc.
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.
108
Underwriting
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;
|
| · |
purchases
to cover positions created by short
sales;
|
| · |
imposition
of penalty bids;
|
| · |
syndicate
covering transactions; and
|
| · |
passive
market making.
|
Stabilizing
transactions consist of bids or purchases made for the purpose of preventing
or
retarding a decline in the market price of our common stock while this
offering
is in progress. These transactions may also include making short sales
of our
common stock, which involve the sale by the underwriters of a greater number
of
shares of common stock than they are required to purchase in this offering.
Short sales may be “covered short sales,” which are short positions in an amount
not greater than the underwriters’ over-allotment option referred to above, or
may be “naked short sales,” which are short positions in excess of that
amount.
The
underwriters may close out any covered short position either by exercising
their
over-allotment option, in whole or in part, or by purchasing shares in
the open
market. In making this determination, the underwriters will consider, among
other things, the price of shares available for purchase in the open market
compared to the price at which they may purchase shares through 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 that there may be downward
pressure on the price of the common stock in the open market that could
adversely affect investors who purchased 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 representative has 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 common stock 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.
In
addition, in connection with this offering, certain of the underwriters
(and
selling group members) may engage in passive market making transactions
in our
common stock on The New York Stock Exchange prior to the pricing and completion
of this offering. Passive market making consists of displaying bids on
The New
York Stock Exchange no higher than the bid prices of independent market
makers
and making purchases at prices no higher than these independent bids and
effected in response to order flow. Net purchases by a passive market maker
on
each day are generally limited to a specified percentage of the
109
Underwriting
passive
market maker’s average daily trading volume in the common stock during a
specified period and must be discontinued when such limit is reached. Passive
market making may cause the price of our common stock to be higher than the
price that otherwise would exist in the open market in the absence of these
transactions. If passive market making is commenced, it may be discontinued
at
any time.
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.
The
underwriters and their affiliates may, from time to time, engage in transactions
with us and perform services for us in the ordinary course of their business.
Bank
of
America, N.A., an affiliate of Banc of America Securities LLC, is the
administrative agent and a lender under our senior revolving credit facility
and
UBS Loan Finance LLC, an affiliate of UBS Securities LLC and Deutsche Bank
AG, an affiliate of Deutsche Bank Securities Inc., are lenders under our
Credit
Facility and will receive more than 10% of the proceeds of the offering
in
connection with the repayment of this facility. Each of UBS Securities
LLC,
Deutsche Bank Securities Inc. and Banc of America Securities LLC acted
as
initial purchasers in connection with our previously issued $310 million
aggregate principal amount of 7% Senior Notes due 2014, and $175 million
aggregate principal amount of 7% Senior Notes due 2014 for which they
received customary discounts and commissions. UBS Securities LLC, Deutsche
Bank
Securities Inc. and Banc of America Securities LLC acted as underwriters
in
connection with a March 2004 public offering of our common stock, for which
they
received customary discounts and commissions. UBS Securities LLC, Deutsche
Bank
Securities Inc., Banc of America Securities LLC and Legg Mason Wood Walker,
Incorporated acted as underwriters in connection with a December 2004 offering
of our common stock and a November 2005 offering of our common stock, for
which
they received customary discounts and commissions.
110
Notice
to investors
European
economic area
With
respect to each Member State of the European Economic Area which has
implemented
Prospectus Directive 2003/71/EC, including any applicable implementing
measures,
from and including the date on which the Prospectus Directive is implemented
in
that Member State, the offering of our common stock in this offering
is only
being made: (a) to legal entities which are authorized or regulated to
operate
in the financial markets or, if not so authorized or regulated, whose
corporate
purpose is solely to invest in securities; (b) to any legal entity which
has two
or more of (1) an average of at least 250 employees during the last financial
year; (2) a total balance sheet of more than €43,000,000
and (3) an annual net turnover of more than €50,000,000,
as
shown in its last annual or consolidated accounts; or (c) in any other
circumstances which do not require the publication by the Issuer of a
prospectus
pursuant to Article 3 of the Prospectus Directive.
United
Kingdom
Shares
of
our common stock may not be offered or sold and will not be offered or
sold to
any persons in the United Kingdom other than to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing
of
investments (as principal or as agent) for the purposes of their businesses
and
in compliance with all applicable provisions of the FSMA with respect
to
anything done in relation to shares of our common stock in, from or otherwise
involving the United Kingdom. In addition, any invitation
or inducement to engage in investment activity (withing the meaning of
Section
21 of the FSMA) in connection with the issue or sale of shares of our
common
stock may only be communicated or caused to be communicated or will only
be
communicated or caused to be communicated in circumstances in which Section
21(1) of the FSMA does not apply to the Company. Without limitation to
the other
restrictions referred
to herein, this offering circular is directed only at (1) persons outside
the
United Kingdom, (2) persons have professional experience in matters relating
to
investments who fall within the definition of “investment professionals” in
Article 19(5) of the Financial Services and Markets act 2000 (Financial
Promotion) Order 2005; or (3) high net worth bodies corporate, unincorporated
associations and partnerships and trustees of high value trusts as described
in
Article 49(2) of the Financial Services and Markets act 2000 (Financial
Promotion) Order 2005. Without limitation to the other restrictions referred
to
herein, any investment or investment activity to which this offering
circular
relates is available only to, and will be engaged in only with, such
persons,
and persons within the United Kingdom who receive this communication
(other than
persons who fall within (2) or (3) above) should not rely or act upon
this
communication.
Switzerland
Shares
of
our common stock may be offered in Switzerland only on the basis of a
non-public
offering. This prospectus does not constitute an issuance prospectus
according
to articles 652a or 1156 of the Swiss Federal Code of Obligations or
a listing
prospectus according to article 32 of the Listing Rules of the Swiss
exchange.
The shares of our common stock may not be offered or distributed on a
professional basis in or from Switzerland and neither this prospectus
nor any
other offering material relating to shares of our common stock may be
publicly
issued in connection with any such offer or distribution. The shares
have not
been and will not be approved by any Swiss regulatory authority. In particular,
the shares are not and will not be registered with or supervised by the
Swiss
Federal Banking Commission, and investors may not claim protection under
the
Swiss Investment Fund Act.
111
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. Skadden, Arps,
Slate, Meagher & Flom, LLP, New York, New York is counsel for the
underwriters in connection with this offering.
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.
112
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-9
|
|
Notes
to Consolidated Financial Statements
|
F-10
|
|
Schedule
III - Real Estate and Accumulated Depreciation
|
F-42
|
|
Schedule
IV - Mortgage Loans on Real Estate
|
F-45
|
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
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
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
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
|
(continued)
F-5
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY (continued)
(in
thousands, except per share amounts)
|
Common
Stock
Par
Value
|
Additional
Paid-in
Capital
|
Preferred
Stock
|
Cumulative
Net
Earnings
|
||||||||||
|
Balance
at December 31, 2005 (56,872 common shares)
|
5,687
|
657,920
|
118,488
|
237,069
|
|
Impact
of adoption of FAS No. 123(R)
|
—
|
(1,167
|
)
|
—
|
—
|
||||||||
|
Issuance
of common stock:
|
|||||||||||||
|
Grant
of restricted stock (7 shares at $12.59 per share)
|
1
|
(1
|
)
|
—
|
—
|
||||||||
|
Amortization
of restricted stock
|
—
|
4,517
|
—
|
—
|
|||||||||
|
Vesting
of restricted stock (grants 90 shares)
|
9
|
(247
|
)
|
—
|
—
|
||||||||
|
Dividend
reinvestment plan (2,558 shares at $12.967 per share)
|
256
|
32,840
|
—
|
—
|
|||||||||
|
Exercised
options (170 shares at an average exercise price of $2.906 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-6
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
|
(continued)
F-7
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY (continued)
(in
thousands, except per share amounts)
|
Cumulative
Dividends |
Unamortized
Restricted Stock Awards
|
Accumulated
Other Comprehensive Loss
|
Total
|
||||||||||
|
Balance
at December 31, 2005 (56,872 common shares)
|
(579,108
|
)
|
(1,167
|
)
|
2,054
|
440,943
|
|
Impact
of adoption of FAS No. 123(R)
|
—
|
1,167
|
—
|
—
|
|||||||||
|
Issuance
of common stock:
|
|||||||||||||
|
Grant
of restricted stock (7 shares at $12.590 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-8
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-9
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
F-10
Notes
to Consolidated Financial Statements
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.
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.
F-11
Notes
to Consolidated Financial Statements
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). 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
F-12
Notes
to Consolidated Financial Statements
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.
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 -
F-13
Notes
to Consolidated Financial Statements
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.
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,
F-14
Notes
to Consolidated Financial Statements
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-15
Notes
to Consolidated Financial Statements
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
F-16
Notes
to Consolidated Financial Statements
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.
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
|
|||
F-17
Notes
to Consolidated Financial Statements
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.
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.
F-18
Notes
to Consolidated Financial Statements
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.
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.
F-19
Notes
to Consolidated Financial Statements
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
|
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.
|
F-20
Notes
to Consolidated Financial Statements
|
·
|
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.
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.
F-21
Notes
to Consolidated Financial Statements
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.
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.
|
F-22
Notes
to Consolidated Financial Statements
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.
|
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.
F-23
Notes
to Consolidated Financial Statements
·
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.
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
F-24
Notes
to Consolidated Financial Statements
$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.
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.
F-25
Notes
to Consolidated Financial Statements
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
F-26
Notes
to Consolidated Financial Statements
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.
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-27
Notes
to Consolidated Financial Statements
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.
|
F-28
Notes
to Consolidated Financial Statements
|
·
|
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.
|
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
F-29
Notes
to Consolidated Financial Statements
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.
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
F-30
Notes
to Consolidated Financial Statements
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.
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.
F-31
Notes
to Consolidated Financial Statements
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.
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.
F-32
Notes
to Consolidated Financial Statements
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.
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
F-33
Notes
to Consolidated Financial Statements
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
|
|||||||||
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.
F-34
Notes
to Consolidated Financial Statements
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.
|
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.
F-35
Notes
to Consolidated Financial Statements
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)
F-36
Notes
to Consolidated Financial Statements
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.
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-37
Notes
to Consolidated Financial Statements
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
F-38
Notes
to Consolidated Financial Statements
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.
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-39
Notes
to Consolidated Financial Statements
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-40
Notes
to Consolidated Financial Statements
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-41
|
SCHEDULE
III REAL ESTATE AND ACCUMULATED DEPRECIATION
|
|
|||||||||||
|
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
|
|||||||||||||||||||||||||
F-42
|
SCHEDULE
III REAL ESTATE AND ACCUMULATED DEPRECIATION
|
|
|||||||||||
|
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
|
|||||||||||||||||||||
|
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
|
||||||||||||||||||||||||
|
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
|
|||||||||||||||||||
F-43
|
(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.
|
|||||||||||||||||||||||||||||||
|
(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-44
|
SCHEDULE
IV MORTGAGE LOANS ON REAL ESTATE
|
||||||||||
|
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-45
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:
|
$
|
3,768
|
|||
|
Printing
and Engraving Expenses
|
$
|
30,000
|
||
|
Accounting
Fees and Expenses
|
$
|
40,000
|
||
|
Legal
Fees and Expenses
|
$
|
100,000
|
||
|
$
|
5,000
|
|||
|
Total
|
$
|
178,768
|
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
II-1
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.
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.
II-2
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.
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.
II-3
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-4
|
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-5
|
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).
|
II-6
|
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).
|
II-7
|
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).
|
|
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).
|
II-8
|
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).*
|
|
24
|
Power
of Attorney.*
|
| * |
Exhibits
that are filed herewith.
|
| ** |
Previously
filed.
|
| + |
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.
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-9
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 Amendement No.1 to registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Timonium, State of Maryland, on this 27th
day
of
March 2007.
| OMEGA HEALTHCARE INVESTORS, INC. | ||
| |
|
|
| By: | /s/ C. Taylor Pickett | |
|
C. Taylor Pickett |
||
| Chief Executive Officer | ||
POWER OF
ATTORNEY
KNOW
ALL MEN
BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints C. Taylor Pickett and Robert O. Stephenson, or either of them,
his
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and
all
capacities, to sign any or all amendments to this registration statement
and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto each
of
said attorneys-in-fact and agents, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in an about
the
premises, as fully as to all intents and purposes as he might or could do
in
person, hereby ratifying and confirming all that each of said attorneys-in-fact
and agents, or his or her substitute or substitutes, may lawfully do or cause
to
be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Amendent
No.1 to 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 27,
2007
|
||
|
C.
Taylor Pickett
|
(Principal
Executive Officer)
|
|||
|
/s/
Robert O. Stephenson
|
Chief
Financial Officer
|
March 27,
2007
|
||
|
Robert O. Stephenson |
(Principal
Financial and Accounting Officer)
|
|||
|
/s/
Bernard J. Korman
|
Chairman
of the Board of Directors
|
March 27,
2007
|
||
|
Bernard
J. Korman
|
||||
|
/s/
Thomas F. Franke
|
Director
|
March 27,
2007
|
||
|
Thomas
F. Franke
|
||||
|
/s/
Harold J. Kloosterman
|
Director
|
March 27,
2007
|
||
|
Harold J. Kloosterman |
||||
|
/s/
Edward Lowenthal
|
Director
|
March 27,
2007
|
||
|
Edward
Lowenthal
|
||||
|
/s/
Stephen D. Plavin
|
Director
|
March 22,
2007
|
||
|
Stephen D. Plavin |
II-10