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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 1-11316
OMEGA HEALTHCARE
INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 38-3041398
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
9690 DEERECO ROAD, SUITE 100, TIMONIUM, MD 21093
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(410) 427-1700
(TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----- ----
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).
YES X NO
----- ----
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK AS OF MAY 3, 2004.
COMMON STOCK, $.10 PAR VALUE 46,340,599
(CLASS) (NUMBER OF SHARES)
OMEGA HEALTHCARE INVESTORS, INC.
FORM 10-Q
MARCH 31, 2004
TABLE OF CONTENTS
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
March 31, 2004 (unaudited) and December 31, 2003................. 2
Consolidated Statements of Operations (unaudited)
Three months ended March 31, 2004 and 2003....................... 3
Consolidated Statements of Cash Flows (unaudited)
Three months ended march 31, 2004 and 2003....................... 4
Notes to Consolidated Financial Statements
March 31, 2004 (unaudited)....................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 29
Item 4. Controls and Procedures.............................................. 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 31
Item 2. Changes in Securities and Use of Proceeds............................ 31
Item 3. Defaults Upon Senior Securities...................................... 31
Item 4. Submission of Matters to a Vote of Security Holders.................. 31
Item 6. Exhibits and Reports on Form 8-K..................................... 31
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2004 2003
--------------------------------
(UNAUDITED) (SEE NOTE)
ASSETS
Real estate properties
Land and buildings at cost............................... $ 692,365 $ 692,454
Less accumulated depreciation............................ (139,437) (134,477)
------------------------------
Real estate properties - net........................... 552,928 557,977
Mortgage notes receivable - net.......................... 119,225 119,815
------------------------------
672,153 677,792
Other investments - net..................................... 29,965 29,787
------------------------------
Total investments........................................ 702,118 707,579
Cash and cash equivalents................................... 62,315 3,094
Accounts receivable - net................................... 2,818 1,893
Interest rate cap........................................... -- 5,537
Other assets................................................ 20,006 8,562
------------------------------
Total assets............................................. $ 787,257 $ 726,665
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving lines of credit................................... $ 10,000 $ 177,074
Unsecured borrowings........................................ 300,000 100,000
Other long-term borrowings.................................. 3,520 3,520
Accrued expenses and other liabilities...................... 23,787 9,836
------------------------------
Total liabilities........................................ 337,307 290,430
------------------------------
Preferred stock............................................. 225,988 212,342
Common stock and additional paid-in-capital................. 546,227 485,196
Cumulative net earnings..................................... 163,977 174,275
Cumulative dividends paid................................... (447,499) (431,123)
Cumulative dividends - redemption........................... (38,743) --
Accumulated other comprehensive loss........................ -- (4,455)
------------------------------
Total stockholders' equity............................... 449,950 436,235
------------------------------
Total liabilities and stockholders' equity............... $ 787,257 $ 726,665
==============================
NOTE - The balance sheet at December 31, 2003 has been derived from the audited
consolidated financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See notes to consolidated financial statements.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
-----------------------------
REVENUES
Rental income....................................................... $ 17,123 $ 16,419
Mortgage interest income............................................ 3,366 4,392
Other investment income - net....................................... 641 990
Litigation settlement............................................... -- 2,187
Miscellaneous....................................................... 406 321
-----------------------------
21,536 24,309
EXPENSES
Nursing home revenues and expenses of owned and operated
assets - net..................................................... -- 1,333
Depreciation and amortization....................................... 5,224 5,208
Interest............................................................ 4,693 4,420
Interest - amortization of deferred financing costs................. 454 692
Interest - refinancing costs........................................ 19,106 --
General and administrative.......................................... 1,514 1,629
Legal............................................................... 490 558
Provisions for impairment........................................... -- 4,618
-----------------------------
31,481 18,458
-----------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS............................... (9,945) 5,851
(Loss) gain from discontinued operations............................... (353) 134
-----------------------------
NET (LOSS) INCOME...................................................... (10,298) 5,985
Preferred stock dividends.............................................. (4,687) (5,029)
Series C preferred stock conversion charges............................ (38,743) --
-----------------------------
NET (LOSS) INCOME AVAILABLE TO COMMON.................................. $ (53,728) $ 956
=============================
(LOSS) INCOME PER COMMON SHARE:
Basic:
(Loss) income from continuing operations............................ $ (1.29) $ 0.02
Net (loss) income................................................... $ (1.30) $ 0.03
Diluted:
(Loss) income from continuing operations............................ $ (1.29) $ 0.02
Net (loss) income................................................... $ (1.30) $ 0.03
Dividends declared and paid per common share........................... $ 0.17 $ --
=============================
Weighted-average shares outstanding, basic............................. 41,459 37,145
=============================
Weighted-average shares outstanding, diluted........................... 41,459 37,145
=============================
COMPONENTS OF OTHER COMPREHENSIVE INCOME:
Net (loss) income...................................................... $ (10,298) $ 5,985
Unrealized gain (loss) on hedging contracts......................... 4,455 (623)
-----------------------------
Total comprehensive (loss) income...................................... $ (5,843) $ 5,362
=============================
See notes to consolidated financial statements.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2004 2003
--------------------------
OPERATING ACTIVITIES
Net (loss) income....................................................... $(10,298) $ 5,985
Adjustment to reconcile net income to cash provided by operating
activities:
Depreciation and amortization...................................... 5,224 5,208
Provisions for impairment.......................................... -- 4,618
Refinancing costs.................................................. 12,728 --
Amortization for deferred finance costs............................ 353 691
Loss on assets sold - net.......................................... 351 --
Amortization of derivatives........................................ 101 1
Adjustment of derivatives to fair value............................ (257) --
Adjustment for discontinued operations and other................... (11) 132
Net change in accounts receivable....................................... (925) (1,003)
Net change in other assets.............................................. 77 1,002
Net change in operating assets and liabilities.......................... (1,121) (3,339)
--------------------------
Net cash provided by operating activities............................... 6,222 13,295
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of real estate investments .......................... 85 --
Capital improvements and funding of other investments................... (420) (32)
Proceeds from other investments and assets held for sale - net.......... 1,872 621
Investments in other investments and assets held for sale - net......... (2,100) (3,150)
Collection of mortgage principal........................................ 590 476
--------------------------
Net cash provided by (used in) investing activities..................... 27 (2,085)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from new financing............................................. 10,000 --
Proceeds from credit line borrowings.................................... 13,700 --
Payments of credit line borrowings...................................... (190,774) --
Proceeds from long-term borrowings...................................... 200,000 --
Payments of long-term borrowings........................................ -- (118)
Proceeds from sale of interest rate cap................................. 3,460 --
Receipts from Dividend Reinvestment Plan................................ 40 --
Receipts from exercised options......................................... 1,868 --
Dividends paid.......................................................... (11,735) --
Proceeds from preferred stock offering.................................. 13,645 --
Proceeds from common stock offering..................................... 22,368 --
Deferred financing costs paid........................................... (9,600) (321)
--------------------------
Net cash provided by (used in) financing activities..................... 52,972 (439)
--------------------------
Increase in cash and cash equivalents................................... 59,221 10,771
Cash and cash equivalents at beginning of period........................ 3,094 14,340
--------------------------
Cash and cash equivalents at end of period.............................. $ 62,315 $ 25,111
==========================
Interest paid during the period......................................... $ 6,973 $ 5,601
==========================
See notes to consolidated financial statements.
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
MARCH 31, 2004
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for Omega
Healthcare Investors, Inc. have been prepared in accordance with accounting
principles generally accepted in the United States ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In our opinion,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Certain reclassifications have been
made to the 2003 financial statements for consistency with the presentation
adopted for 2004. Such reclassifications have no effect on previously reported
earnings or equity.
In January 2003, the FASB issued Financial Interpretation Number ("FIN")
46, Consolidation of Variable Interest Entities an Interpretation of ARB No. 51.
FIN 46 is an interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements and addresses consolidation by business enterprises of
variable interest entities. As of March 31, 2004, we do not have any entities
that meet the definition of a variable interest entity under FIN 46; therefore,
the provisions of FIN 46 do not have an impact on our results of operations or
financial position.
Operating results for the three-month period ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. For further information, refer to the financial statements
and footnotes included in our annual report on Form 10-K for the year ended
December 31, 2003.
NOTE 2 - PROPERTIES
In the ordinary course of our business activities, we periodically evaluate
investment opportunities and extend credit to customers. We also regularly
engage in lease and loan extensions and modifications. Additionally, we actively
monitor and manage our investment portfolio with the objectives of improving
credit quality and increasing returns. In connection with portfolio management,
we engage in various collection and foreclosure activities.
When we acquire real estate pursuant to a foreclosure, lease termination or
bankruptcy proceeding and do not immediately re-lease or sell the properties to
new operators, the assets are included on the balance sheet as "real estate
properties," and the value of such assets is reported at the lower of cost or
estimated fair value.
Upon adoption of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, as of January 1, 2002, long-lived assets sold or designated
as held for sale after January 1, 2002 are reported as discontinued operations
in our financial statements.
The table below summarizes our number of properties and investment by
category for the quarter ended March 31, 2004:
TOTAL
PURCHASE/ MORTGAGES OWNED & CLOSED HEALTHCARE
FACILITY COUNT LEASEBACK RECEIVABLE OPERATED FACILITIES FACILITIES
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003...................... 153 51 1 6 211
Properties closed................................. - - - - -
Properties sold/mortgages paid.................... - - - (2) (2)
Transition leasehold interest..................... - - - - -
Properties leased/mortgages placed................ - - - - -
Properties transferred to purchase/leaseback...... 1 - (1) - -
- -----------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2004....................... 154 51 - 4 209
=======================================================================================================================
INVESTMENT ($000'S)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003...................... $682,562 $119,815 $ 5,295 $4,597 $812,269
Properties closed................................. - - - - -
Properties sold/mortgages paid.................... - - - (509) (509)
Transition leasehold interest..................... - - - - -
Properties leased/mortgages placed................ - - - - -
Properties transferred to purchase/leaseback...... 5,295 - (5,295) - -
Impairment on properties.......................... - - - - -
Capex and other................................... 420 (590) - - (170)
- -----------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2004....................... $688,277 $119,225 $ - $4,088 $811,590
=======================================================================================================================
PURCHASE/LEASEBACKS
A summary of the lease transactions which occurred in the first quarter of
2004 is as follows:
SUN HEALTHCARE GROUP, INC.
o Effective January 1, 2004, we re-leased five skilled nursing facilities
("SNFs") to an existing operator under a new Master Lease, which has a
five-year term and an initial annual lease rate of $0.75 million. Four
former Sun Healthcare Group, Inc. ("Sun") SNFs, three located in Illinois
and one located in Indiana, representing an aggregate of 449 beds, were
part of the transaction. The fifth SNF in the transaction, located in
Illinois and representing 128 beds, was the last remaining owned and
operated facility in our portfolio.
o On March 1, 2004, we entered into an agreement with Sun regarding 51
properties that are leased to various affiliates of Sun. Under the terms of
a master lease agreement, Sun will continue to operate and occupy 23
long-term care facilities, five behavioral properties and two hospital
properties through December 31, 2013. One property, located in Washington
and formerly operated by a Sun affiliate, has already been closed and the
lease relating to that property has been terminated. With respect to the
remaining 20 facilities, 17 have already been transitioned to new operators
and three are in the process of being transferred to new operators.
o Effective March 1, 2004, we re-leased two SNFs formerly leased by Sun
located in California and representing 117 beds, to a new operator under a
Master Lease, which has a ten-year term. The commencement date of the first
re-lease is March 1, 2004 and has an initial annual lease rate of
approximately $0.12 million. The commencement date of the second re-lease
is expected to be May 1, 2004, subject to licensing, and has an initial
annual lease rate of approximately $0.1 million.
CLAREMONT HEALTHCARE HOLDINGS, INC.
o Effective March 8, 2004, we re-leased three SNFs formerly leased by
Claremont Health Care Holdings, Inc. ("Claremont") located in Florida and
representing 360 beds, to an existing operator at an initial annual lease
rate of $2.5 million. These facilities were added to an existing Master
Lease, the initial term of which has been extended ten years to February,
2014. The aggregate annual lease rate under this Master Lease, inclusive of
the $2.5 million, is $3.9 million.
Subsequent to the first quarter, we acquired three new facilities. (See
Note 12 - Subsequent Events). A summary of the lease transaction follows:
HAVEN HEALTHCARE
o Effective April 1, 2004, we purchased three SNFs, representing 399 beds,
for a total investment of $26.0 million. Two of the facilities are located
in Vermont, with the third located in Connecticut. The facilities were
combined into an existing Master Lease with Haven Healthcare ("Haven"), a
current operator. Rent under the Master Lease was increased by
approximately $2.7 million for the first lease year commencing April 1,
2004, with annual increases thereafter. The term of the Master Lease had
been increased to ten years on January 1, 2004 and runs through December
31, 2013, followed by two ten-year renewal options. We received a security
deposit equivalent to three months of incremental rent.
MORTGAGES RECEIVABLE
Mortgage interest income is recognized as earned over the terms of the
related mortgage notes. Reserves are taken against earned revenues from mortgage
interest when collection of amounts due become questionable or when negotiations
for restructurings of troubled operators lead to lower expectations regarding
ultimate collection. When collection is uncertain, mortgage interest income on
impaired mortgage loans is recognized as received after taking into account
application of security deposits.
On April 6, 2004, we received approximately $4.6 million in proceeds on a
mortgage loan payoff from Tiffany Care Centers, Inc. We held mortgages on five
facilities located in Missouri, representing 319 beds, which produced
approximately $0.5 million of annual interest revenue in 2003.
No provisions for loss on mortgages or notes receivable were recorded
during the three-months ended March 31, 2004 and 2003, respectively.
OWNED AND OPERATED ASSETS
At March 31, 2004, we no longer own any facilities that were previously
recovered from customers. Effective January 1, 2004, our remaining owned and
operated asset was re-leased to an existing operator. This facility, located in
Illinois, was re-leased under a new Master Lease, which encompasses four
additional facilities.
CLOSED FACILITIES
During the three months ended March 31, 2004, we sold two facilities, one
located in Iowa and the other located in Florida, realizing proceeds of
approximately $85 thousand, net of closing costs and other expenses, resulting
in a net loss of approximately $351 thousand. In accordance with SFAS No. 144,
the $351 thousand realized net loss is included within discontinued operations
in our consolidated statements of operations. (See Note 11 - Discontinued
Operations).
At March 31, 2004, there are four closed properties that are not currently
under contract for sale. At this time, it is determined that no provisions for
impairments are needed on the four remaining investments. We intend to sell the
facilities as soon as practicable; however, there can be no assurance if, or
when, these sales will be completed on terms that allow us to realize the
carrying value of the assets. These properties are included in "Land and
buildings at cost" in our consolidated balance sheet. (See Note 12 - Subsequent
Events).
OTHER NON-CORE ASSETS
o In connection with refinancing our $225 million senior secured credit
facility, we sold our $200 million interest rate cap on March 31, 2004. Net
proceeds from the sale totaled approximately $3.5 million and resulted in a
loss of approximately $6.5 million, which was recorded in the first quarter
of 2004 and is included in interest refinancing costs in our consolidated
statement of operations.
o Under our restructuring agreement with Sun, we received the right to
convert deferred base rent owed to us, totaling approximately $7.8 million,
into 800,000 shares of Sun's common stock, subject to certain non-dilution
provisions and the right of Sun to pay cash in an amount equal to the value
of that stock in lieu of issuing stock to us.
On March 30, 2004, we notified Sun of our intention to exercise our right
to convert the deferred base rent into fully paid and non-assessable shares
of Sun's common stock. On April 16, 2004, we received a stock certificate
for 760,000 restricted shares of Sun's common stock and cash in the amount
of approximately $0.5 million in exchange for the remaining 40,000 shares
of Sun's common stock.
NOTE 3 - CONCENTRATION OF RISK
As of March 31, 2004, our portfolio of investments consisted of 209
healthcare facilities, located in 28 states and operated by 40 third-party
operators. Our gross investment in these facilities, net of impairments and
before reserve for uncollectible loans, totaled $811.6 million at March 31,
2004, with 97.1% of our real estate investments related to long-term care
facilities. This portfolio is made up of 152 long-term healthcare facilities and
two rehabilitation hospitals owned and leased to third parties, fixed rate
mortgages on 51 long-term healthcare facilities and four long-term healthcare
facilities that were recovered from customers and are currently closed. At March
31, 2004, we also held other investments of approximately $30.0 million,
including $23.0 million of notes receivable, net of allowance.
Approximately 40.2% of our real estate investments are operated by four
public companies: Sun (19.3%), Advocat, Inc. (12.8%), Mariner Health Care, Inc.
(7.4%) and Emeritus Corporation (0.7%). The three largest private operators
represent 6.8%, 4.5% and 3.9%, respectively, of our investments. No other
operator represents more than 3.0% of our investments. The three states in which
we have our highest concentration of investments are Florida (15.5%), California
(8.2%) and Illinois (7.2%).
NOTE 4 - 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.
On March 29, 2004, our Board of Directors declared regular quarterly
dividends for all classes of preferred stock, payable May 17, 2004 to preferred
stockholders of record on April 30, 2004. Series B and Series D preferred
stockholders of record on April 30, 2004 will be paid dividends in the amount of
$0.53906 and $0.47109, per preferred share, respectively, on May 17, 2004. The
liquidation preference for each of our 8.625% Series B preferred stock ("Series
B preferred stock") and 8.375% Series D cumulative redeemable preferred stock
("Series D preferred stock") is $25.00. Regular quarterly preferred dividends
represent dividends for the period February 1, 2004 through April 30, 2004 for
the Series B preferred stock and February 10, 2004 through April 30, 2004 for
the Series D preferred stock.
In March 2004, our Board of Directors also authorized the redemption of all
shares outstanding of our 9.25% Series A preferred stock ("Series A preferred
stock") (NYSE:OHI PrA; CUSIP: 681936209). We expect the shares to be redeemed on
April 30, 2004 for $25.00 per share, plus $0.57813 per share in accrued and
unpaid dividends through the redemption date, for an aggregate redemption price
of $25.57813 per share. Dividends on the shares of Series A preferred stock will
cease to accrue from and after the redemption date, after which the Series A
preferred stock will no longer be outstanding and holders of the Series A
preferred stock will have only the right to receive the redemption price.
A notice of redemption and related materials was mailed to holders of
Series A preferred stock on March 29, 2004. EquiServe Trust Company
("EquiServe"), located at 66 Brooks Drive, Braintree, MA 02184, will act as our
redemption agent. Requests for copies of the materials or questions relating to
the notice of redemption and related materials should be directed to EquiServe
at 800-251-4215 or to Bob Stephenson, our Chief Financial Officer, at
410-427-1700. On or before the redemption date, we will deposit with EquiServe
the aggregate redemption price, to be held in trust for the benefit of the
holders of the Series A preferred stock. Holders of the Series A preferred stock
who hold shares through the Depository Trust Company will be redeemed in
accordance with the Depository Trust Company's procedures.
On April 20, 2004, our Board of Directors announced a common stock dividend
of $0.18 per share, which is a $0.01 per share, or 5.9%, increase over the
previous quarter's dividend. The common stock dividend will be paid May 17, 2004
to common stockholders of record on April 30, 2004. At the date of this filing,
we had approximately 46.3 million common shares outstanding.
NOTE 5 - EARNINGS PER SHARE
The computation of basic earnings per common share ("EPS") is computed by
dividing net income available to common stockholders by the weighted-average
number of common stock outstanding during the period. Diluted EPS reflects the
potential dilution that could occur from shares issuable through stock-based
compensation, including stock options and the conversion of our 10% Convertible
Series C preferred stock ("Series C preferred stock") in 2003.
For the three-month period ended March 31, 2004 and 2003, there were no
dilutive effects from stock options in-the-money.
NOTE 6 - STOCK-BASED COMPENSATION
We account for stock options using the intrinsic value method as defined by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Under the terms of the 2000 Stock Incentive Plan ("Incentive Plan"),
we reserved 3,500,000 shares of common stock for grants to be issued during a
period of up to ten years. Options are exercisable at the market price at the
date of grant, expire five years after date of grant for over 10% owners and ten
years from the date of grant for less than 10% owners. Directors' shares vest
over three years while other grants vest over five years or as defined in an
employee's contract. Directors, officers and employees are eligible to
participate in the Incentive Plan. At March 31, 2004, there were 1,244,059
outstanding options granted to 21 eligible participants. Additionally, 353,545
shares of restricted stock have been granted under the provisions of the
Incentive Plan and as of March 31, 2004, there were no shares of restricted
stock outstanding. The market value of the restricted shares on the date of the
award was recorded as unearned compensation-restricted stock, with the
unamortized balance shown as a separate component of stockholders' equity.
Unearned compensation is amortized to expense generally over the vesting period.
Statement of Financial Accounting Standard No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, which was effective
January 1, 2003, requires certain disclosures related to our stock-based
compensation arrangements. The following table presents the effect on net income
and earnings per share if we had applied the fair value recognition provisions
of SFAS No. 123, Accounting for Stock-Based Compensation, to our stock-based
compensation.
THREE MONTHS ENDED
MARCH 31,
----------------------------
2004 2003
----------------------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net (loss) income available to common stockholders.............. $(53,728) $ 956
Add: Stock-based compensation expense included in net
(loss) income available to common stockholders.............. -- --
----------------------------
(53,728) 956
Less: Stock-based compensation expense determined under
the fair value based method for all awards.................. 6 66
----------------------------
Pro forma net (loss) income available to common stockholders.... $(53,734) $ 890
============================
Earnings per share:
Basic, as reported.............................................. $ (1.30) $ 0.03
============================
Basic, pro forma................................................ $ (1.30) $ 0.02
============================
Diluted, as reported............................................ $ (1.30) $ 0.03
============================
Diluted, pro forma.............................................. $ (1.30) $ 0.02
============================
At March 31, 2004, options currently exercisable (387,184) have a
weighted-average exercise price of $5.22, with exercise prices ranging from
$2.32 to $37.20. There are 562,070 shares available for future grants as of
March 31, 2004.
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
NOTE 7 - FINANCING ACTIVITIES AND BORROWING ARRANGEMENTS
SERIES C PREFERRED STOCK REPURCHASE
On February 5, 2004, we announced that Explorer Holdings L.P., our then
largest stockholder ("Explorer"), granted us the option to repurchase up to
700,000 of our Series C preferred stock (which were convertible into Omega
common shares) held by Explorer at a negotiated purchase price of $145.92 per
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
common stock.
SERIES D PREFERRED STOCK OFFERING
On February 10, 2004, we announced the closing of the sale of 4,739,500
shares of Series D cumulative redeemable preferred stock. The preferred stock
was issued at $25 per share and trades on the NYSE under the symbol "OHI PrD."
SERIES C PREFERRED STOCK REDEMPTION AND CONVERSION
We used approximately $102.1 million of the net proceeds from the Series D
preferred stock offering to repurchase 700,000 shares of our Series C preferred
stock from Explorer. In connection with the closing of the repurchase, Explorer
converted its remaining 348,420 Series C preferred stock into approximately 5.6
million shares of Omega common stock. Following the repurchase and conversion,
Explorer held approximately 18.1 million common shares.
The combined repurchase and conversion of the Series C preferred stock
reduced our preferred dividend requirements, increased our market capitalization
and facilitated future financings by simplifying our capital structure. Under
FASB-EITF Issue D-42, "The Effect on the Calculation of Earnings per Share for
the Redemption or Induced Conversion of Preferred Stock," the repurchase of the
Series C preferred stock resulted in a non-cash charge to net income available
to common shareholders of approximately $38.7 million.
18.1 MILLION SECONDARY AND 2.7 MILLION PRIMARY OFFERING OF OMEGA COMMON STOCK
On March 8, 2004, we announced the closing of the underwritten public
offering of 18.1 million shares of Omega common stock at $9.85 per share owned
by Explorer. As a result of the offering, Explorer no longer owns any Omega
common stock. We did not receive any proceeds from the sale of the shares sold
by Explorer.
In connection with the 18.1 million common stock offering, we issued
approximately 2.7 million additional shares of Omega common stock at a price of
$9.85 per share, less underwriting discounts, to cover over-allotments in
connection with the 18.1 million secondary offering. We received net proceeds of
approximately $22.4 million from this offering.
$200 MILLION 7% SENIOR UNSECURED NOTES OFFERING AND $125 MILLION CREDIT FACILITY
Effective March 22, 2004, we closed on a private offering of $200 million
of 7% senior unsecured notes due 2014 (the "Notes") and a $125 million revolving
senior secured credit facility ("New Credit Facility") provided by Bank of
America, N.A., Deutsche Bank AG, UBS Loan Finance, LLC and GE Healthcare
Financial Services.
We used proceeds from the Notes offering to replace our previous $225
million senior secured credit facility and $50 million acquisition credit
facility, which have been terminated. The remaining proceeds will be used for
working capital and general corporate purposes. The New Credit Facility will be
used for acquisitions and general corporate purposes. In connection with the
termination of the $225 million senior secured credit facility and $50 million
acquisition credit facility, we recorded a charge of approximately $12.6
million, of which $6.3 million consisted of non-cash charges relating to
deferred financing costs of the previous credit facilities. The Notes are
unsecured senior obligations of Omega, which have been guaranteed by all of our
subsidiaries. The Notes were issued in a private placement contemplating resales
in accordance with Rule 144A under the Securities Act of 1933, as amended (the
"Act"). The Notes have not been registered under the Act.
$200 MILLION INTEREST RATE CAP SALE
In connection with the repayment and termination of our $225 million senior
secured credit facility, we sold our $200 million interest rate cap on March 31,
2004. Net proceeds from the sale totaled approximately $3.5 million and resulted
in a loss of approximately $6.5 million, which was recorded in the first quarter
of 2004.
BANK CREDIT AGREEMENTS
We have one $125 million revolving senior secured credit facility. At March
31, 2004, $10.0 million was outstanding under the New Credit Facility and $12.1
million was utilized for the issuance of letters of credit, leaving availability
of $102.9 million. The $10.0 million of outstanding borrowings had an interest
rate of 4.09% at March 31, 2004.
We are required to meet certain property level financial covenants and
corporate financial covenants, including prescribed leverage, fixed charge
coverage, minimum net worth, limitation on additional indebtedness and
limitations on dividend payout on our long-term borrowings. As of March 31,
2004, we were in compliance with all property level and corporate financial
covenants.
NOTE 8 - RELATED PARTY TRANSACTIONS
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 $145.92 per share (or $9.12 per share of common stock on an as-converted
basis), provided 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 share 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 8.375% Series D cumulative preferred stock at $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. We anticipate using the balance of the net
proceeds of the offering to redeem approximately 600,000 shares of our Series A
preferred stock. (See Note 12 - Subsequent Events).
As a result of the Series D preferred stock offering, the application of
the proceeds received from the offering to fund the exercise of our repurchase
option and the conversion of the remaining Series C preferred stock into shares
of our common stock:
o No Series C preferred stock is outstanding, and we plan to re-classify the
remaining authorized shares of Series C preferred stock as authorized but
unissued preferred stock, without designation as to class;
o 4,739,500 shares of our Series D preferred stock, with an aggregate
liquidation preference of $118,487,500, have been issued; and
o Explorer held 18,118,246 shares of our common stock, representing
approximately 41.5% of our outstanding common stock.
On February 5, 2004, we received a request from Explorer, pursuant to its
registration rights agreement with us, requesting that we prepare and file with
the SEC a registration statement registering Explorer's shares of our common
stock on a shelf basis permitting sales from time to time as determined by
Explorer. Accordingly, on February 12, 2004 we filed a registration statement
with the SEC registering Explorer's 18,118,246 shares of common stock. Explorer
sold all of these registered shares in this offering.
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. This non-recurring reduction in net
income attributable to common stockholders reduced our earnings per share and
our reportable funds from operations for the first quarter of 2004.
NOTE 9 - 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 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.
NOTE 10 - ACCOUNTING FOR DERIVATIVES
We utilized an interest rate cap to reduce certain exposures to interest
rate fluctuations. We do not use derivatives for trading or speculative
purposes. We have a policy of only entering into contracts with major financial
institutions based upon their credit ratings and other factors. When viewed in
conjunction with the underlying and offsetting exposure that the derivatives are
designed to hedge, we have not sustained a material loss from those instruments
nor do we anticipate any material adverse effect on our net income or financial
position in the future from the use of derivatives.
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. GAAP requires 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 or liabilities through earnings or
recognized in other comprehensive income until the hedge item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.
In September 2002, we entered into a 61-month, $200.0 million interest rate
cap with a strike of 3.50% that was designated as a cash flow hedge. On March
31, 2004, we sold the $200.0 million interest rate cap, realizing net proceeds
of approximately $3.5 million, resulting in a loss of approximately $6.5
million, which was recorded during the first quarter of 2004 and is included
within the $19.1 million interest expense associated with refinancing
activities. An adjustment of $4.5 million to other comprehensive income was
recorded as a result of this transaction.
NOTE 11 - DISCONTINUED OPERATIONS
The implementation of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, as of January 1, 2002, resulted in the
presentation of the net operating results on facilities sold during 2004 as
income from discontinued operations for all periods presented. We incurred a net
loss from discontinued operations of $353 thousand in the accompanying
consolidated statements of operations.
The following table summarizes the results of operations of facilities
sold during the three months ended March 31, 2004 and 2003, respectively.
THREE MONTHS ENDED
MARCH 31,
--------------------------
2004 2003
--------------------------
(IN THOUSANDS)
REVENUES
Rental income........................................... $ -- $ 255
--------------------------
-- 255
--------------------------
EXPENSES
Depreciation and amortization........................... 2 121
--------------------------
2 121
--------------------------
(Loss) income before (loss) gain on sale of assets.......... (2) 134
(Loss) gain on assets sold - net............................ (351) --
--------------------------
(LOSS) GAIN FROM DISCONTINUED OPERATIONS.................... $ (353) $ 134
==========================
NOTE 12 - SUBSEQUENT EVENTS
NEW INVESTMENTS
HAVEN HEALTHCARE, INC.
o Effective April 1, 2004, we purchased three SNFs, representing 399 beds,
for a total investment of $26.0 million. Two of the facilities are located
in Vermont, with the third located in Connecticut. The facilities were
combined into an existing Master Lease with Haven Healthcare ("Haven"), a
current operator. Rent under the Master Lease was increased by
approximately $2.7 million for the first lease year commencing April 1,
2004, with annual increases thereafter. The term of the Master Lease had
been increased to ten years on January 1, 2004 and runs through December
31, 2013, followed by two ten-year renewal options. We received a security
deposit equivalent to three months of incremental rent.
SENIOR MANAGEMENT
o Effective May 1, 2004, we purchased two SNFs, representing 477 beds, for a
total investment of $9.4 million. The purchase price includes funds for
capital expenditures, additional bed licenses and transaction costs. Both
facilities are located in Texas and were combined into an existing Master
Lease with Senior Management, a current operator. Rent under the Master
Lease was increased by approximately $1.0 million for the first lease year
commencing May 1, 2004, with annual increases thereafter. The term of the
Master Lease has been increased to ten years, and is followed by two
ten-year renewal options. During the first lease year, Senior Management
will fund a security deposit equivalent to approximately four months of
incremental rent.
ASSET DISPOSITION
o On April 30, 2004, we sold one closed SNF, located in Illinois, for net
proceeds of approximately $50 thousand, resulting in a loss of
approximately $137 thousand. At the time of this filing, we have three
remaining closed facilities with a total net book value of approximately
$1.8 million.
FINANCING ACTIVITIES
o On April 30, 2004, we redeemed our $57.5 million 9.25% Series A preferred
stock.
o On April 30, 2004, we exercised our right to increase the revolving
commitments under our existing $125 million credit facility by an
additional $50 million, to $175 million. All other terms of the credit
facility, which closed on March 22, 2004, remain the same, including the
term which runs through March 22, 2008.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS, REIMBURSEMENT ISSUES AND OTHER FACTORS AFFECTING
FUTURE RESULTS
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this document. This document
contains forward-looking statement within the meaning of the federal securities
laws, including statements regarding potential financings and potential future
changes in reimbursement. These statements relate to our expectations, beliefs,
intentions, plans, objectives, goals, strategies, future events, performance and
underlying assumptions and other statements other than statements of historical
facts. In some cases, you can identify forward-looking statements by the use of
forward-looking terminology including "may," "will," "anticipates," "expects,"
"believes," "intends," "should" or comparable terms or the negative thereof.
These statements are based on information available on the date of this filing
and only speak as to the date hereof and no obligation to update such
forward-looking statements should be assumed. Our actual results may differ
materially from those reflected in the forward-looking statements contained
herein as a result of a variety of factors, including, among other things:
(i) 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;
(ii) 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;
(iii)our ability to sell closed assets on a timely basis and at terms that
allow us to realize the carrying value of these assets;
(iv) our ability to negotiate appropriate modifications to the terms of our
existing credit facilities;
(v) our ability to complete the proposed refinancing with respect to our
existing credit facilities;
(vi) our ability to manage, re-lease or sell any owned and operated facilities;
(vii) the availability and cost of capital;
(viii) competition in the financing of healthcare facilities;
(ix) regulatory and other changes in the healthcare sector;
(x) the effect of economic and market conditions generally and, particularly,
in the healthcare industry;
(xi) changes in interest rates;
(xii) the amount and yield of any additional investments;
(xiii) changes in tax laws and regulations affecting real estate investment
trusts; and
(xiv) changes in the ratings of our debt and preferred securities.
OVERVIEW
As of March 31, 2004, our portfolio of investments consisted of 209
healthcare facilities, located in 28 states and operated by 40 third-party
operators. Our gross investment in these facilities, net of impairments and
before reserve for uncollectible loans, totaled $811.6 million at March 31,
2004, with 97.1% of our real estate investments related to long-term care
facilities. This portfolio is made up of 152 long-term healthcare facilities and
two rehabilitation hospitals owned and leased to third parties, fixed rate
mortgages on 51 long-term healthcare facilities and four long-term healthcare
facilities that were recovered from customers and are currently closed. At March
31, 2004, we also held other investments of approximately $30.0 million,
including $23.0 million of notes receivable, net of allowance.
HIGHLIGHTS
The following significant highlights occurred during the three-month period
ended March 31, 2004.
FINANCING AND BORROWING
o Issued $118.5 million of 8.375% Series D cumulative redeemable preferred
stock ("Series D preferred stock").
o Completed an 18.1 million share secondary offering and the sale of 2.7
million common shares, which resulted in significant shareholder
diversification and a large increase in institutional investors.
o Issued $200 million 7% 10-year senior unsecured notes (the "Notes").
o Closed on a new $125 million revolving credit facility.
o Sold our $200 million interest rate cap in connection with our repayment
and termination of the $225 million senior secured credit facility,
realizing net proceeds of approximately $3.5 million, resulting in a loss
of approximately $6.5 million.
o Received rating agency upgrades from both Moody's and S&P.
o Scheduled the April 30, 2004 redemption of the 9.25% Series A preferred
stock ("Series A preferred stock").
DIVIDENDS
o Increased common dividends 5.9% to $0.18 per common share.
RE-LEASING
o Re-leased our last owned and operated facility.
o Completed the restructuring of Sun Healthcare Group, Inc.'s ("Sun")
portfolio.
ASSET SALES
o Sold two closed facilities, realizing proceeds of approximately $85
thousand, net of closing costs and other expenses, resulting in a loss of
approximately $351 thousand.
MEDICARE REIMBURSEMENT
Nearly all of our properties are used as healthcare facilities; therefore,
we are directly affected by the risk associated with the healthcare industry.
Our lessees and mortgagors, as well as any facilities owned and operated for our
own account, derive a substantial portion of their net operating revenues from
third-party payors, including the Medicare and Medicaid programs. These programs
are highly regulated by federal, state and local laws, rules and regulations and
subject to frequent and substantial change. The Balanced Budget Act of 1997
("Balanced Budget Act") significantly reduced spending levels for the Medicare
and Medicaid programs. Due to the implementation of the terms of the Balanced
Budget Act, effective July 1, 1998, the majority of skilled nursing facilities
("SNFs") shifted from payments based on reasonable cost to a prospective payment
system for services provided to Medicare beneficiaries. Under the prospective
payment system, SNFs are paid on a per diem prospective case-mix adjusted basis
for all covered services. Implementation of the prospective payment system has
affected each long-term care facility to a different degree, depending upon the
amount of revenue it derives from Medicare patients.
Legislation adopted in 1999 and 2000 increased Medicare payments to nursing
facilities and specialty care facilities on an interim basis. Section 101 of the
Balanced Budget Refinement Act of 1999 ("Balanced Budget Refinement Act")
included a 20% increase for 15 patient acuity categories (known as Resource
Utilization Groups ("RUGS")) and a 4% across the board increase of the adjusted
federal per diem payment rate. The 20% increase was implemented in April 2000
and will remain in effect until the implementation of refinements in the current
RUG case-mix classification system to more accurately estimate the cost of
non-therapy ancillary services. The 4% increase was implemented in April 2000
and expired October 1, 2002.
The Benefits Improvement and Protection Act of 2000 ("Benefits Improvement
and Protection Act") included a 16.7% increase in the nursing component of the
case-mix adjusted federal periodic payment rate and a 6.7% increase in the 14
RUG payments for rehabilitation therapy services. The 16.7% increase was
implemented in April 2000 and expired October 1, 2002. The 6.7% increase is an
adjustment to the 20% increase granted in the Balanced Budget Refinement Act and
spreads the funds directed at three of those 15 RUGs to an additional 11
rehabilitation RUGs. The increase was implemented in April 2001 and will remain
in effect until the implementation of refinements in the current RUG case-mix
classification system.
The expiration of the 4% and 16.7% increases under these statutes as of
October 1, 2002 has had an adverse impact on the revenues of the operators of
nursing facilities and has negatively impacted some operators' ability to
satisfy their monthly lease or debt payments to us. Medicare reimbursement could
be further reduced when the Centers for Medicare & Medicaid Services ("CMS")
completes its RUG refinement, thereby triggering the sunset of the temporary 20%
and 6.7% increases also established under these statutes.
On August 4, 2003, CMS published the payment rates for SNFs for federal
fiscal year 2004 (effective on October 1, 2003). CMS announced that the SNF
update would be a 3.0% increase in Medicare payments for federal fiscal year
2004. In addition, CMS announced that the two temporary payment increases - the
20% and 6.7% add-ons for certain payment categories - will continue to be
effective for federal fiscal year 2004.
Also in the August 4, 2003 announcement, CMS confirmed its intention to
incorporate a forecast error adjustment that takes into account previous years'
update errors. According to CMS, there was a cumulative SNF market basket, or
inflation adjustment, forecast error of 3.26% for federal fiscal years 2000
through 2002. As a result, CMS has increased the national payment rate by an
additional 3.26% above the 3.0% increase for federal fiscal year 2004.
Due to the temporary nature of the 20% and 6.7% payment increases
established under the Balanced Budget Refinement Act and Benefits Improvement
and Protection Act, we cannot be assured that the federal reimbursement will
remain at levels comparable to present levels and that such reimbursement will
be sufficient for our lessees or mortgagors to cover all operating and fixed
costs necessary to care for Medicare and Medicaid patients. We also cannot be
assured that there will be any future legislation to increase payment rates for
SNFs. If payment rates for SNFs are not increased in the future, some of our
lessees and mortgagors may have difficulty meeting their payment obligations to
us.
MEDICAID AND OTHER THIRD-PARTY REIMBURSEMENT
Each state has its own Medicaid program that is funded jointly by the state
and federal government. Federal law governs how each state manages its Medicaid
program, but there is wide latitude for states to customize Medicaid programs to
fit the needs and resources of its citizens. Rising Medicaid costs and
decreasing state revenues caused by current 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 early
2003, many states 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 providers, or reductions in
Medicaid enrollee benefits, including long-term care benefits. We cannot predict
the extent to which Medicaid rate freezes or cuts or benefit reductions will
ultimately be adopted, the number of states that will adopt them nor the impact
of such adoption on our operators. However, extensive Medicaid rate cuts or
freezes or benefit reductions could have a material adverse effect on our
operators' liquidity, financial condition and results of operations, which could
affect adversely their ability to make lease or mortgage payments to us.
On May 28, 2003, the federal Jobs and Growth Tax Relief Reconciliation Act
("Tax Relief Act") was signed into law, which included an increase in Medicaid
federal funding for five fiscal quarters (April 1, 2003 through June 30, 2004).
In addition, the Tax Relief Act provides state fiscal relief for federal fiscal
years 2003 and 2004 to assist states with funding shortfalls. It is anticipated
that these temporary federal funding provisions could mitigate state Medicaid
funding reductions through federal fiscal year 2004.
In addition, private payors, including managed care payors, are
increasingly demanding discounted fee structures and the assumption by
healthcare providers of all or a portion of the financial risk of operating a
healthcare facility. Efforts to impose greater discounts and more stringent cost
controls are expected to continue. Any changes in reimbursement policies which
reduce reimbursement levels could adversely affect the revenues of our lessees
and mortgagors and thereby adversely affect those lessees' and mortgagors'
abilities to make their monthly lease or debt payments to us.
POTENTIAL RISKS FROM BANKRUPTCIES
Our lease arrangements with operators who operate more than one of our
facilities are generally made pursuant to a single master lease ("Master Lease")
covering all of that operator's facilities. Although each lease or Master Lease
provides that we may terminate the Master Lease upon the bankruptcy or
insolvency of the tenant, the Bankruptcy Reform Act of 1978, as amended,
("Bankruptcy Act") provides that a trustee in a bankruptcy or reorganization
proceeding under the Bankruptcy Act, or a debtor-in-possession in a
reorganization, has the power and the option to assume or reject the unexpired
lease obligations of a debtor-lessee. In the event that the unexpired lease is
assumed on behalf of the debtor-lessee, all the rental obligations generally
would be entitled to a priority over other unsecured claims. However, the court
also has the power to modify a lease if a debtor-lessee, in a reorganization,
were required to perform certain provisions of a lease that the court determined
to be unduly burdensome. It is not possible to determine at this time whether or
not any of our leases or Master Leases contains any such provision. If a lease
is rejected, the lessor has a general unsecured claim 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 or 15% of the remaining term of such
lease, not to exceed three years.
Generally, with respect to our mortgage loans, the imposition of an
automatic stay under the Bankruptcy Act precludes us from exercising foreclosure
or other remedies against the debtor. Pre-petition creditors generally do not
have rights to the cash flows from the properties underlying the mortgages. The
timing of the collection from mortgagors in bankruptcy depends on negotiating an
acceptable settlement with the mortgagor (and subject to approval of the
bankruptcy court) or 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 or rejection because it is not an executory contract or a lease.
Second, the mortgagee's loan may be divided into (1) a secured loan for the
portion of the mortgage debt that does not exceed the value of the property and
(2) a general unsecured loan for the portion of the mortgage debt that exceeds
the value of the property. A secured creditor such as ourselves is entitled to
the recovery of interest and costs 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 and allowed costs may not be paid during the
bankruptcy proceeding, but accrue until confirmation of a plan of reorganization
or such other time as the court orders. If the value of the collateral held by a
senior creditor is less than the secured debt, 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 rejected or assumed with all of
its benefits and burdens intact, the terms of a mortgage, including the rate of
interest and timing of principal payments, may be modified if the debtor is able
to affect a "cramdown" under the Bankruptcy Act.
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 to
government programs 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.
CONCENTRATION OF RISK
Approximately 40.2% of our real estate investments are operated by four
public companies: Sun (19.3%), Advocat, Inc. (12.8%), Mariner Health Care, Inc.
(7.4%) and Emeritus Corporation (0.7%). The three largest private operators
represent 6.8%, 4.5% and 3.9%, respectively, of our investments. No other
operator represents more than 3.0% of our investments. The three states in which
we have our highest concentration of investments are Florida (15.5%), California
(8.2%) and Illinois (7.2%).
HEALTHCARE INVESTMENT RISKS
The possibility that the healthcare facilities will not generate income
sufficient to meet operating expenses or will yield returns lower than those
available through investments in comparable real estate or other investments are
additional risks of investing in healthcare-related real estate. Income from
properties and yields from investments in such properties may be affected by
many factors, including changes in governmental regulation (such as zoning
laws), general or local economic conditions (such as fluctuations in interest
rates and employment conditions), the available local supply and demand for
improved real estate, a reduction in rental income as the result of an inability
to maintain occupancy levels, natural disasters (such as earthquakes and floods)
or similar factors.
GENERAL REAL ESTATE RISKS
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. Thus, if the operation of any of our properties
becomes unprofitable due to competition, age of improvements or other factors
such that the lessee or borrower becomes unable to meet its obligations on the
lease or mortgage loan, the liquidation value of the property may be
substantially less, particularly relative to the amount owing on any related
mortgage loan, than would be the case if the property were readily adaptable to
other uses.
RISKS RELATED TO OWNED AND OPERATED ASSETS
As a consequence of the financial difficulties encountered by a number of
our operators, over the last several years we recovered various long-term care
assets, pledged as collateral for the operators' obligations, either in
connection with a restructuring or settlement with certain operators or pursuant
to foreclosure proceedings. We are typically required to hold applicable
licenses and are responsible for the regulatory compliance at our owned and
operated facilities. In general, the risks of third-party claims such as patient
care and personal injury claims are higher with respect to our owned and
operated property as compared with our leased and mortgaged assets. During the
first quarter of 2004, our last owned and operated facility was re-leased to an
existing operator. However, there can be no assurance that we will not recover
assets from operators in the future that will be owned and operated facilities.
During 2003, the number of owned and operated assets were abated as we
re-leased, sold or closed all but one of these facilities. In addition, in
connection with the recovery of these assets, we often fund working capital and
deferred capital expenditure needs for a transitional period until license
transfers and other regulatory matters are completed and reimbursement from
third-party payors recommences. As of January 1, 2004, we re-leased our
remaining owned and operated facility. As of March 31, 2004, we had four closed
facilities in our portfolio. Our management intends to sell these assets as
promptly as possible, consistent with achieving valuations that reflect our
management's estimate of fair value of the assets. We do not know, however, if,
or when, the dispositions will be completed or whether the dispositions will be
completed on terms that will enable us to realize the fair value of such assets.
(See Note 12 - Subsequent Events).
We and several of our wholly-owned subsidiaries have been named as
defendants in professional liability claims related to our owned and operated
facilities prior to their re-leasing or sale. 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.
CRITICAL ACCOUNTING POLICIES AND 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.
We have identified four significant accounting policies which we believe
are critical accounting policies. These critical accounting policies are those
that have the most impact on the reporting of our financial condition and those
requiring significant judgments and estimates. With respect to these critical
accounting policies, we believe the application of judgments and assessments is
consistently applied and produces financial information that fairly presents the
results of operations for all periods presented. The four critical accounting
policies are:
REVENUE RECOGNITION
With the exception of one Master Lease, rental income and mortgage interest
income are recognized as earned over the terms of the related Master Leases and
mortgage notes, respectively. Such income includes periodic increases based on
pre-determined formulas (i.e., such as increases in the Consumer Price Index
("CPI")) as defined in the Master Leases and mortgage loan agreements. Reserves
are taken against earned revenues from leases and mortgages when collection of
amounts due become questionable or when negotiations for restructurings of
troubled operators lead to lower expectations regarding ultimate collection.
When collection is uncertain, lease revenues are recorded as received, after
taking into account application of security deposits. Interest income on
impaired mortgage loans is recognized as received after taking into account
application of security deposits.
The one Master Lease not recognized as earned over the term of the lease is
recognized on a straight-line basis. We recognize the minimum base rental
revenue under Master Lease on a straight-line basis over the terms of the
related lease. Accrued straight-line rents represent the rental revenue
recognized in excess of rents due under the lease agreements at the balance
sheet date.
ASSET IMPAIRMENT
Management periodically but not less than annually evaluates the real
estate investments 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 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 less than
the carrying values of the assets. If the sum of the expected future
undiscounted cash flow, including sales proceeds, is less than carrying value,
then an adjustment is made to the net carrying value of the leased properties
and other long-lived assets to the present value of expected future undiscounted
cash flows. 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.
LOAN IMPAIRMENT
Management periodically but not less than annually evaluates the
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, 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.
ACCOUNTS RECEIVABLE
Accounts receivable consists primarily of lease and mortgage interest
payments. Amounts recorded include estimated provisions for loss related to
uncollectible accounts and disputed items. On a monthly basis, we review the
contractual payment versus actual cash payment received and the contractual
payment due date versus actual receipt date. When management identifies
delinquencies, a judgment is made as to the amount of provision, if any, that is
needed.
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 consolidated financial statements and accompanying notes.
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
REVENUES
Our revenues for the three months ended March 31, 2004 totaled $21.5
million, a decrease of $2.8 million from the first quarter of 2003. The decrease
during the period was primarily the result of a $2.2 million litigation
settlement in 2003 and $0.4 million revenue, which was related to the sale of a
Baltimore, MD asset sold in April 2003.
Detail changes in revenues during the three months ended March 31, 2004 are
as follows:
o Rental income for the three months ended March 31, 2004 totaled $17.1
million, an increase of $0.7 million over 2003 rental income primarily due
to scheduled contractual increases.
o Mortgage interest income for the three months ended March 31, 2004 totaled
$3.4 million, decreasing $1.0 million due to the restructuring of two
Integrated Health Services, Inc. mortgages during the second quarter of
2003.
o Other investment income for the three months ended March 31, 2004 totaled
$0.6 million, decreasing $0.4 million due to the impact of the sale of the
Baltimore asset.
o In 2000, we filed suit against a title company (later adding a law firm as
a defendant), seeking damages based on claims of breach of contract and
negligence, among other things, as a result of the alleged failure to file
certain Uniform Commercial Code financing statements in our favor. We filed
a subsequent suit seeking recovery under title insurance policies written
by the title company. The defendants denied the allegations made in the
lawsuits. In settlement of our claims against the defendants, we agreed in
the first quarter of 2003 to accept a lump sum cash payment of $3.2
million. The cash proceeds were offset by related expenses incurred of $1.0
million resulting in a net gain of $2.2 million.
EXPENSES
Our expenses for the three months ended March 31, 2004 totaled $31.5
million, increasing approximately $13.0 million from expenses of $18.5 million
during the comparable period in 2003. The increase during the period was
primarily the result of $19.1 million refinancing costs recorded in 2004, offset
by a $4.6 million provision for impairment recorded in 2003.
Effective January 1, 2004, our remaining owned and operated asset was
re-leased to an existing operator. This facility, located in Illinois, was
re-leased under a new Master Lease, which encompasses four additional
facilities. As a result, our nursing home expenses, net of nursing home
revenues, for owned and operated assets decreased to $0 million from $1.3
million in 2003 due to the re-leasing efforts on our remaining owned and
operated asset in January 2004.
An analysis of significant changes in our expenses during the three months
ended March 31, 2004 and 2003 is as follows:
o Our general and administrative expenses for 2004 totaled $1.5 million as
compared to $1.6 million for 2003, a decrease of $0.1 million. The decrease
is due to lower consulting costs, primarily related to the owned and
operated facilities and cost reductions due to reduced staffing, travel and
other employee-related expenses.
o Our legal expenses for 2004 totaled $0.5 million as compared to $0.6
million in 2003. The decrease is largely attributable to a reduction of
legal costs associated with our owned and operated facilities due to the
releasing efforts, sales and/or closures of 32 owned and operated assets
since December 31, 2001.
o Our interest expense, including amortization of deferred financing costs,
for the three months ended March 31, 2004 and 2003 was approximately $5.1
million. In addition, for the three months ended March 31, 2004, we
recorded $19.1 million of refinancing-related charges. 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. In addition, the sale of a $200 million interest rate
cap supporting our $225 million credit facility resulted in a loss of
approximately $6.5 million, which was also included in the $19.1 million
interest costs.
o Provisions for impairment of $0 million and $4.6 million are included in
expenses for 2004 and 2003, respectively. The 2003 provision of $4.6
million was to reduce the carrying value of a closed building to its fair
value less costs to dispose. The building is being actively marketed for
sale; however, there can be no assurance if, or when, such sale will be
completed or whether such sales will be completed on terms that allow us to
realize the carrying value of the asset.
OTHER
o During the three-month period ended March 31, 2004, we sold two closed
facilities in two separate transactions. We realized proceeds of
approximately $85 thousand, net of closing costs and other expenses,
resulting in a loss of approximately $351 thousand.
o In March 2004, we sold our $200 million interest rate cap in the first
quarter, realizing net proceeds of approximately $3.5 million, resulting in
an accounting loss of approximately $6.5 million.
LOSS FROM DISCONTINUED OPERATIONS
Discontinued operations relates to properties we disposed of in the first
quarter of 2004 that are accounted for as discontinued operations under SFAS No.
144. The sale of two closed facilities resulted in a net loss of approximately
$351 thousand. In accordance with SFAS No. 144, the $351 thousand realized net
loss is reflected in our consolidated statements of operations as discontinued
operations. (See Note 11 - Discontinued Operations).
FUNDS FROM OPERATIONS
Our funds from operations ("FFO") for the three months ended March 31,
2004, on a diluted basis was a deficit of $48.2 million, a decrease of $57.1
million as compared to $8.9 million for the same period in 2003. Funds from
operations is net earnings available to common stockholders, excluding the
effects of asset dispositions, plus depreciation and amortization associated
with real estate investments. Diluted funds from operations is the lower of
funds from operations and funds from operations adjusted for the assumed
conversion of Series C preferred stock and the exercise of in-the-money stock
options. We consider FFO to be one performance measure which is helpful to
investors of real estate companies because, along with cash flows from operating
activities, financing activities and investing activities, it provides investors
with an understanding of our ability to incur and service debt and to make
expenditures. Funds from operations in and of itself does not represent cash
generated from operating activities in accordance with GAAP and therefore should
not be considered an alternative to net earnings as an indication of operating
performance, or to net cash flow from operating activities as determined by GAAP
in the United States, as a measure of liquidity and is not necessarily
indicative of cash available to fund cash needs.
In February 2004, NAREIT informed its member companies that it was adopting
the position of the Securities and Exchange Commission ("SEC") with respect to
asset impairment charges and would no longer recommend that impairment
write-downs be excluded from FFO. In the tables included in this disclosure, we
have applied this interpretation and have not excluded asset impairment charges
in calculating our FFO. As a result, our basic FFO, diluted FFO and FFO per
diluted share and adjusted 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 reflecting the impact of asset
impairment charges (the SEC's interpretation) for the three months ended March
31, 2004 and 2003:
THREE MONTHS ENDED
MARCH 31,
2004 2003
-------------------------
(IN THOUSANDS)
NET (LOSS) INCOME AVAILABLE TO COMMON........................ $(53,728) $ 956
Add back loss from real estate dispositions(1)........... 351 --
-------------------------
(53,377) 956
Elimination of non-cash items included in net income (loss):
Depreciation and amortization(2)......................... 5,225 5,329
-------------------------
FUNDS FROM OPERATIONS, BASIC................................. (48,152) 6,285
Series C Preferred Dividends................................. -- 2,621
-------------------------
FUNDS FROM OPERATIONS, DILUTED............................... $(48,152) $ 8,906
=========================
(1) The addition of loss from real estate dispositions includes the facilities
classified as discontinued operations in our consolidated financial
statements. The 2004 net loss add back is related to the facilities
classified as discontinued operations.
(2) The add back of depreciation and amortization includes the facilities
classified as discontinued operations in our consolidated financial
statements. The 2004 and 2003 depreciation and amortization related to the
facilities classified as discontinued operations is $0 and $121 thousand,
respectively.
PORTFOLIO DEVELOPMENTS
The partial expiration of certain Medicare rate increases has had an
adverse impact on the revenues of the operators of nursing home facilities and
has negatively impacted some operators' ability to satisfy their monthly lease
or debt payment to us. In several instances, we hold security deposits that can
be applied in the event of lease and loan defaults, subject to applicable
limitations under bankruptcy law with respect to operators seeking protection
under Chapter 11 of the Bankruptcy Act.
SUN HEALTHCARE GROUP, INC.
o Effective January 1, 2004, we re-leased five SNFs to an existing operator
under a new Master Lease, which has a five-year term and an initial annual
lease rate of $0.75 million. Four former Sun SNFs, three located in
Illinois and one located in Indiana, representing an aggregate of 449 beds,
were part of the transaction. The fifth SNF in the transaction, located in
Illinois and representing 128 beds, was the last remaining owned and
operated facility in our portfolio.
o On March 1, 2004, we entered into an agreement with Sun regarding 51
properties that are leased to various affiliates of Sun. Under the terms of
a master lease agreement, Sun will continue to operate and occupy 23
long-term care facilities, five behavioral properties and two hospital
properties through December 31, 2013. One property, located in Washington
and formerly operated by a Sun affiliate, has already been closed and the
lease relating to that property has been terminated. With respect to the
remaining 20 facilities, 17 have already been transitioned to new operators
and three are in the process of being transferred to new operators.
o Effective March 1, 2004, we re-leased two SNFs formerly leased by Sun
located in California and representing 117 beds, to a new operator under a
Master Lease, which has a ten-year term. The commencement date of the first
re-lease is March 1, 2004 and has an initial annual lease rate of
approximately $0.12 million. The commencement date of the second re-lease
is expected to be May 1, 2004, subject to licensing, and has an initial
annual lease rate of approximately $0.1 million.
o Under our restructuring agreement with Sun, we received the right to
convert deferred base rent owed to us, totaling approximately $7.8 million,
into 800,000 shares of Sun's common stock, subject to certain non-dilution
provisions and the right of Sun to pay cash in an amount equal to the value
of that stock in lieu of issuing stock to us.
o On March 30, 2004, we notified Sun of our intention to exercise our right
to convert the deferred base rent into fully paid and non-assessable shares
of Sun's common stock. On April 16, 2004, we received a stock certificate
for 760,000 restricted shares of Sun's common stock and cash in the amount
of approximately $0.5 million in exchange for the remaining 40,000 shares
of Sun's common stock.
CLAREMONT HEALTHCARE HOLDINGS, INC.
o Effective March 8, 2004, we re-leased three SNFs formerly leased by
Claremont Health Care Holdings, Inc. ("Claremont") located in Florida and
representing 360 beds, to an existing operator at an initial annual lease
rate of $2.5 million. These facilities were added to an existing Master
Lease, the initial term of which has been extended ten years to February,
2014. The aggregate annual lease rate under this Master Lease, inclusive of
the $2.5 million, is $3.9 million.
o Separately, we continue our ongoing restructuring discussions with
Claremont regarding the two facilities Claremont currently leases from us.
At the time of this filing, we cannot determine the timing or outcome of
these discussions. Due to the significant uncertainty of collection, we
recognize revenue from Claremont on a cash-basis as it is received.
TIFFANY CARE CENTERS, INC.
o On April 6, 2004, we received approximately $4.6 million in proceeds on a
mortgage loan payoff. We held mortgages on five facilities located in
Missouri, representing 319 beds, which produced approximately $0.5 million
of annual interest revenue in 2003.
Subsequent to the first quarter, we acquired three new facilities. (See
Note 12 - Subsequent Events). A summary of the lease transaction follows:
HAVEN HEALTHCARE
o Effective April 1, 2004, we purchased three SNFs, representing 399 beds,
for a total investment of $26.0 million. Two of the facilities are located
in Vermont, with the third located in Connecticut. The facilities were
combined into an existing Master Lease with Haven Healthcare ("Haven"), a
current operator. Rent under the Master Lease was increased by
approximately $2.7 million for the first lease year commencing April 1,
2004, with annual increases thereafter. The term of the Master Lease had
been increased to ten years on January 1, 2004 and runs through December
31, 2013, followed by two ten-year renewal options. We received a security
deposit equivalent to three months of incremental rent.
ASSET DISPOSITIONS IN 2004
OTHER ASSETS
o In connection with refinancing our $225 million senior secured credit
facility, we sold our $200 million interest rate cap on March 31, 2004. Net
proceeds from the sale totaled approximately $3.5 million and resulted in a
loss of approximately $6.5 million, which was recorded in the first quarter
of 2004.
CLOSED FACILITIES
o We sold two closed facilities realizing proceeds of approximately $85
thousand, net of closing costs, resulting in a net loss of approximately
$351 thousand. In accordance with SFAS No. 144, the $351 thousand realized
net loss is included within discontinued operations in our consolidated
statements of operations. (See Note 2 - Properties; Closed Facilities; Note
11 - Discontinued Operations; Note 12 - Subsequent Events).
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, we had total assets of $787.3 million, stockholders'
equity of $450.0 million and debt of $313.5 million, representing approximately
41.1% of total capitalization. In addition, as of March 31, 2004, we had an
aggregate of $350 thousand of scheduled principal payments in 2004.
The following table shows the amounts due in connection with the
contractual obligations described below as of March 31, 2004.
PAYMENTS DUE BY PERIOD
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----------------------------------------------------------
(IN THOUSANDS)
Long-term debt(1)................. $313,520 $ 350 $ 111,050 $ 700 $201,420
Other long-term liabilities....... 987 201 602 184 -
----------------------------------------------------------
Total......................... $314,507 $ 551 $ 111,652 $ 884 $201,420
==========================================================
(1) The $313.5 million includes the $100.0 million 6.95% Notes, which mature in
August 2007, the $125 million credit facility borrowing, which matures in
March 2008 and $200 million 7.0% Notes, which mature in April 2014.
FINANCING ACTIVITIES AND BORROWING ARRANGEMENTS
SERIES C PREFERRED STOCK REPURCHASE
On February 5, 2004, we announced that Explorer Holdings L.P., our then
largest stockholder ("Explorer"), granted us the option to repurchase up to
700,000 of our Series C preferred stock (which were convertible into Omega
common shares) held by Explorer at a negotiated purchase price of $145.92 per
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
common stock.
SERIES D PREFERRED STOCK OFFERING
On February 10, 2004, we announced the closing of the sale of 4,739,500
shares of 8.375% Series D preferred stock. The preferred stock was issued at $25
per share and trades on the NYSE under the symbol "OHI PrD."
SERIES C PREFERRED STOCK REDEMPTION AND CONVERSION
We used approximately $102.1 million of the net proceeds from the Series D
preferred stock offering to repurchase 700,000 shares of our Series C preferred
stock from Explorer. In connection with the closing of the repurchase, Explorer
converted its remaining 348,420 Series C preferred stock into approximately 5.6
million shares of Omega common stock. Following the repurchase and conversion,
Explorer held approximately 18.1 million common shares.
The combined repurchase and conversion of the Series C preferred stock
reduced our preferred dividend requirements, increased our market capitalization
and facilitated future financings by simplifying our capital structure. Under
FASB-EITF Issue D-42, "The Effect on the Calculation of Earnings per Share for
the Redemption or Induced Conversion of Preferred Stock," the repurchase of the
Series C preferred stock resulted in a non-cash charge to net income available
to common shareholders of approximately $38.7 million.
18.1 MILLION SECONDARY AND 2.7 MILLION PRIMARY OFFERING OF OMEGA COMMON STOCK
On March 8, 2004, we announced the closing of the underwritten public
offering of 18.1 million shares of Omega common stock at $9.85 per share owned
by Explorer. As a result of the offering, Explorer no longer owns any Omega
common stock. We did not receive any proceeds from the sale of the shares sold
by Explorer.
In connection with the 18.1 million common stock offering, we issued
approximately 2.7 million additional shares of Omega common stock at a price of
$9.85 per share, less underwriting discounts, to cover over-allotments in
connection with the 18.1 million secondary offering. We received net proceeds of
approximately $22.4 million from this offering.
$200 MILLION 7% SENIOR UNSECURED NOTES OFFERING AND $125 MILLION CREDIT FACILITY
Effective March 22, 2004, we closed on a private offering of $200 million
of 7% senior unsecured notes due 2014 and a $125 million revolving senior
secured credit facility ("New Credit Facility") provided by Bank of America,
N.A., Deutsche Bank AG, UBS Loan Finance, LLC and GE Healthcare Financial
Services.
We used proceeds from the Notes offering to replace our previous $225
million senior secured credit facility and $50 million acquisition credit
facility, which have been terminated, with the remainder to be used for working
capital and general corporate purposes. The New Credit Facility will be used for
acquisitions and general corporate purposes. In connection with the termination
of the $225 million senior secured credit facility and $50 million acquisition
credit facility, we recorded a charge of approximately $12.6 million, of which
$6.3 million consisted of non-cash charges relating to deferred financing costs
of the previous credit facilities. The Notes are unsecured senior obligations of
Omega, which have been guaranteed by all of our subsidiaries. The Notes were
issued in a private placement contemplating resales in accordance with Rule 144A
under the Securities Act of 1933, as amended (the "Act"). The Notes have not
been registered under the Act.
$200 MILLION INTEREST RATE CAP SALE
In connection with our repayment and termination of the $225 million senior
secured credit facility, we sold our $200 million interest rate cap on March 31,
2004. Net proceeds from the sale totaled approximately $3.5 million and resulted
in a loss of approximately $6.5 million, which was recorded in the first quarter
of 2004 and included in the $19.1 million of interest expense associated with
refinancing activities.
BANK CREDIT AGREEMENTS
We have one $125 million revolving senior secured credit facility. At March
31, 2004, $10.0 million was outstanding under the New Credit Facility and $12.1
million was utilized for the issuance of letters of credit, leaving availability
of $102.9 million. The $10.0 million of outstanding borrowings had an interest
rate of 4.09% at March 31, 2004.
We are required to meet certain property level financial covenants and
corporate financial covenants, including prescribed leverage, fixed charge
coverage, minimum net worth, limitation on additional indebtedness and
limitations on dividend payout on our long-term borrowings. As of March 31,
2004, we were in compliance with all property level and corporate financial
covenants.
DIVIDENDS
In order to qualify as a real estate investment trust ("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.
On March 29, 2004, our Board of Directors declared its regular quarterly
dividends for all classes of preferred stock, payable May 17, 2004 to preferred
stockholders of record on April 30, 2004. Series B and Series D preferred
stockholders of record on April 30, 2004 will be paid dividends in the amount of
$0.53906 and $0.47109, per preferred share, respectively, on May 17, 2004. The
liquidation preference for each of our Series B and D preferred stock is $25.00.
Regular quarterly preferred dividends represent dividends for the period
February 1, 2004 through April 30, 2004 for the Series B preferred stock and
February 10, 2004 through April 30, 2004 for the Series D preferred stock. Total
dividend payments for both classes of preferred stock are approximately $3.3
million.
Our Board of Directors also authorized the redemption of all shares
outstanding of its Series A preferred stock (NYSE:OHI PrA; CUSIP: 681936209). We
expect the shares to be redeemed on April 30, 2004 for $25.00 per share, plus
$0.57813 per share in accrued and unpaid dividends through the redemption date,
for an aggregate redemption price of $25.57813 per share. Dividends on the
shares of Series A preferred stock will cease to accrue from and after the
redemption date, after which the Series A preferred stock will no longer be
outstanding and holders of the Series A preferred stock will have only the right
to receive the redemption price. The total dividend payment for the Series A
preferred stock is approximately $1.3 million.
A notice of redemption and related materials was mailed to holders of
Series A preferred stock on March 29, 2004. EquiServe Trust Company
("EquiServe"), located at 66 Brooks Drive, Braintree, MA 02184, will act as our
redemption agent. Requests for copies of the materials or questions relating to
the notice of redemption and related materials should be directed to EquiServe
at 800-251-4215 or to Bob Stephenson, our Chief Financial Officer, at
410-427-1700. On or before the redemption date, we will deposit with EquiServe
the aggregate redemption price, to be held in trust for the benefit of the
holders of the Series A preferred stock. Holders of the Series A preferred stock
who hold shares through the Depository Trust Company will be redeemed in
accordance with the Depository Trust Company's procedures.
On April 20, 2004, our Board of Directors announced a common stock dividend
of $0.18 per share, which is a $0.01 per share, or 5.9%, increase over the
previous quarter's dividend. The common stock dividend will be paid May 17, 2004
to common stockholders of record on April 30, 2004. At the date of this release,
we had approximately 46.3 million commons shares outstanding.
LIQUIDITY
We believe our liquidity and various sources of available capital,
including funds from operations, our existing availability under our New Credit
Facility and expected proceeds from planned asset sales are adequate to finance
operations, meet recurring debt service requirements and fund future investments
through the next twelve months.
ITEM 3 - 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 market value of our long-term fixed rate borrowings and mortgages are
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 March 31, 2004 was $267.4 million. A one percent increase in interest rates
would result in a decrease in the fair value of long-term borrowings by
approximately $16.3 million.
We utilize interest rate swaps and caps to fix interest rates on variable
rate debt and reduce certain exposures to interest rate fluctuations. We do not
use derivatives for trading or speculative purposes. We have a policy of only
entering into contracts with major financial institutions based upon their
credit ratings and other factors. When viewed in conjunction with the underlying
and offsetting exposure that the derivatives are designed to hedge, we have not
sustained a material loss from those instruments nor do we anticipate any
material adverse effect on our net income or financial position in the future
from the use of derivatives.
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. GAAP requires us to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedge
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings.
In September 2002, we entered into a 61-month, $200.0 million interest rate
cap with a strike of 3.50% that was designated as a cash flow hedge. On March
31, 2004, we sold the $200.0 million interest rate cap, realizing net proceeds
of approximately $3.5 million, resulting in a loss of approximately $6.5
million, which was recorded during the first quarter of 2004 and is included in
the $19.1 million of interest expense associated with refinancing activities. An
adjustment of $4.5 million to other comprehensive income was recorded as a
result of this transaction.
ITEM 4 - CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer are
responsible for establishing and maintaining disclosure controls and procedures
as defined in the rules promulgated under the Securities and Exchange Act of
1934, as amended. We evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of March 31, 2004 and, based on that
evaluation, our principal executive officer and principal financial officer have
concluded that these controls and procedures were effective as of March 31,
2004. No changes in our internal control over financial reporting were
identified as having occurred in the fiscal quarter ending March 31, 2004 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Disclosure controls and procedures are the controls and other procedures
designed to ensure that information that we are required to disclose in our
reports under the Exchange Act is recorded, processed, summarized and reported
within the time periods required. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
we are required to disclose in the reports that we file under the Exchange Act
is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
See Note 9 - Litigation to the Consolidated Financial Statements in PART I,
Item 1 hereto, which is hereby incorporated by reference in response to this
item.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
- ------------------------------------------------------------------------------------------------
PERIOD TOTAL NUMBER OF AVERAGE PRICE TOTAL NUMBER OF MAXIMUM NUMBER OF
SHARES PURCHASED PAID PER SHARE SHARES PURCHASED SHARES THAT MAY
AS PART OF YET BE PURCHASED
PUBLICLY UNDER THE PLANS OR
ANNOUNCED PLANS PROGRAMS
OR PROGRAMS
- ------------------------------------------------------------------------------------------------
January 2004 -0- N/A N/A N/A
- ------------------------------------------------------------------------------------------------
February 2004 700,000 shares of $145.92 (or N/A N/A
Series C $9.12 per
Convertible common share
Preferred Stock on an as
(11,200,000 converted
shares of common basis)
stock on an as
converted basis)
(a)
- ------------------------------------------------------------------------------------------------
March 2004 -0- N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Total 700,000 shares of $145.92 (or N/A N/A
Series C $9.12 per
Convertible common share
Preferred Stock on an as
converted
basis)
- ------------------------------------------------------------------------------------------------
(a) On February 5, 2004, we entered into a Repurchase and Conversion Agreement
with Explorer Holdings, L.P ("Explorer"), pursuant to which Explorer
granted us an option to repurchase up to 700,000 shares of Series C
preferred stock at $145.92 per share (or $9.12 per share of common stock on
an as converted basis). On February 10, 2004, we exercised our option and
repurchased 700,000 shares of Series C preferred stock from Explorer
pursuant to the repurchase option.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None this period.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None this period.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The following Exhibits are filed herewith:
Exhibit Description
31.1 Certification of the Chief Executive Officer under Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer under Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer under Section 906 of
the Sarbanes - Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer under Section 906 of
the Sarbanes - Oxley Act of 2002.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed or furnished during the
quarter ended March 31, 2004:
o On January 27, 2004, Omega Healthcare Investors, Inc. furnished a Current
Report on Form 8-K pursuant to Item 9 announcing its agreement in principle
for lease restructuring with Sun Healthcare Group, Inc.
o On January 29, 2004, Omega Healthcare Investors, Inc. furnished a Current
Report on Form 8-K pursuant to Item 12 announcing its results of operations
and financial condition as of and for the quarter ended and year ended
December 31, 2003.
o On February 5, 2004, Omega Healthcare Investors, Inc. filed a Current
Report on Form 8-K pursuant to Item 5 announcing that it had revised its
historical financial statements and containing its revised consolidated
financial statements as of and for the periods ended December 31, 2002 and
2001.
o On February 5, 2004, Omega Healthcare Investors, Inc. filed a Current
Report on Form 8-K pursuant to Item 5 announcing that it had entered into a
Repurchase and Conversion Agreement with Explorer Holdings, L.P.
o On February 10, 2004, Omega Healthcare Investors, Inc. filed a Current
Report on Form 8-K pursuant to Item 7 setting forth the material documents
relating to its offering of Series D preferred stock.
o On February 23, 2004, Omega Healthcare Investors, Inc. filed a Current
Report on Form 8-K pursuant to Item 5 announcing that it issued a press
release announcing the proposed secondary offering by Explorer Holdings,
L.P. of 18,118,246 shares of Omega common stock in an underwritten public
offering, plans for a proposed private placement of approximately $200
million in principal amount of unsecured notes and a proposed refinancing
of Omega's existing senior credit facility.
o On March 4, 2004, Omega Healthcare Investors, Inc. filed a Current Report
on Form 8-K pursuant to Item 5 announcing that Explorer Holdings, L.P. has
priced the public offering of its 18,118,246 shares of Omega common stock
at $9.85 per share.
o On March 8, 2004, Omega Healthcare Investors, Inc. filed a Current Report
on Form 8-K pursuant to Item 5 announcing that it had entered into firm
commitments with Bank of America, N.A., Deutsche Bank AG and UBS Loan
Finance, LLC to obtain a new $125 million revolving senior credit facility.
o On March 11, 2004, Omega Healthcare Investors, Inc. filed a Current Report
on Form 8-K pursuant to Item 5 announcing the closing of the underwritten
public offering of 18,116,246 shares of Omega common stock, the resignation
of the Explorer director designees, the appointment of Bernard Korman as
non-executive chairman of the Board of Directors, and the re-lease of five
skilled nursing facilities and the sale of one closed facility.
o On March 26, 2004, Omega Healthcare Investors, Inc. filed a Current Report
on Form 8-K pursuant to Item 5 announcing the sale of $200 million
aggregate principal amount of 7% senior notes due 2014 in a private
placement and that it entered into a new $125 million revolving senior
secured credit facility.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMEGA HEALTHCARE INVESTORS, INC.
Registrant
Date: May 4, 2004 By: /S/ C. TAYLOR PICKETT
---------------------
C. Taylor Pickett
Chief Executive Officer
Date: May 4, 2004 By: /S/ ROBERT O. STEPHENSON
------------------------
Robert O. Stephenson
Chief Financial Officer