We were incorporated in the State of
Maryland on March 31, 1992. We are a self-administered real estate
investment trust (“REIT”), investing in income-producing healthcare facilities,
principally long-term care facilities located in the United
States. We provide lease or mortgage financing to qualified operators
of skilled nursing facilities (“SNFs”) and, to a lesser extent, assisted living
facilities (“ALFs”), independent living facilities (“ILFs”) and rehabilitation
and acute care facilities. We have historically financed investments through
borrowings under our revolving credit facilities, private placements or public
offerings of debt or equity securities, the assumption of secured indebtedness,
or a combination of these methods. In July 2008, we assumed operating
responsibilities for 14 of our SNFs and one of our ALFs due to the bankruptcy of
one of our operators/tenants. In September 2008, we entered into an
agreement to lease these facilities to a new operator/tenant. The new
operator/tenant assumed operating responsibility for 13 of the 15 facilities
effective September 1, 2008. We continue to be responsible for the
two remaining facilities as of December 31, 2009 that are in the process of
being transitioned to the new operator pending approval by state
regulators.
As of December 31, 2009, our portfolio
of investments consisted of 295 healthcare facilities, located in 32 states and
operated by 35 third-party operators. This portfolio was made up
of:
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265
SNFs, seven ALFs, five specialty
facilities;
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fixed
rate mortgages on 14 long-term healthcare
facilities;
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two
SNFs owned and operated by us; and
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two
closed SNFs held-for-sale.
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As of December 31, 2009, our gross
investments in these facilities, net of impairments and before reserve for
uncollectible loans, totaled approximately $1.8 billion. In addition,
we also held miscellaneous investments of approximately $32.8 million at
December 31, 2009, consisting primarily of secured loans to third-party
operators of our facilities.
In
November 2009, we entered into a securities purchase agreement with
CapitalSource Inc. (“CapitalSource”) and several of its affiliates to purchase
certain CapitalSource subsidiaries owning 80 long term care facilities for
approximately $565 million. The purchase price includes a purchase
option to acquire entities owning an additional 63 facilities for approximately
$295 million.
Pursuant
to this Purchase Agreement, on December 22, 2009, we purchased entities owning
40 facilities and an option (the “Option”) to purchase certain CapitalSource
subsidiaries owning 63 additional facilities. The total purchase
price paid at the December 22, 2009 closing was approximately $294.1 million,
consisting of (i) $184.2 million in cash; (ii) 2,714,959 shares of Omega common
stock and (iii) approximately $59.4 million of assumed 6.8% mortgage debt
maturing on December 31, 2011. In February 2010, we used proceeds
from our $200 million 7½% note offering to repay the assumed mortgage
debt.
Our filings with the Securities and
Exchange Commission (“SEC”), including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports are accessible free of charge on our website at
www.omegahealthcare.com.
The following table summarizes our
revenues by asset category for 2009, 2008 and 2007. (See Item 7 –
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Note 3 – Properties and Note 5 – Mortgage Notes
Receivable).
Revenues by Asset Category
(in thousands)
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Year
Ended December 31,
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2009
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2008
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2007
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Core
assets:
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Lease rental income
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$ |
164,468 |
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$ |
155,765 |
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$ |
152,061 |
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Mortgage interest income
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11,601 |
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9,562 |
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3,888 |
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Total core asset revenues
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176,069 |
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165,327 |
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155,949 |
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Other
asset revenue
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2,502 |
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2,031 |
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2,821 |
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Miscellaneous
income
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437 |
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2,234 |
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788 |
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Total revenue before owned and
operated assets
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179,008 |
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169,592 |
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159,558 |
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Owned
and operated asset revenue
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18,430 |
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24,170 |
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— |
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Total revenue
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$ |
197,438 |
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$ |
193,762 |
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$ |
159,558 |
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The following table summarizes our real
estate assets by asset category as of December 31, 2009 and 2008.
Assets
by Category
(in
thousands)
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As
of December 31,
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2009
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2008
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Core
assets:
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Leased assets
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$ |
1,669,843 |
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$ |
1,372,012 |
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Mortgaged
assets
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100,223 |
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100,821 |
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Total core
assets
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1,770,066 |
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1,472,833 |
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Other
assets
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32,800 |
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29,864 |
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Total real estate assets before
held for sale assets
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1,802,866 |
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1,502,697 |
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Held
for sale assets
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877 |
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150 |
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Total real estate
assets
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$ |
1,803,743 |
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$ |
1,502,847 |
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Investment
Strategy. We maintain a diversified portfolio of long-term
healthcare facilities and mortgages on healthcare facilities located throughout
the United States. In making investments, we generally have focused
on established, creditworthy, middle-market healthcare operators that meet our
standards for quality and experience of management. We have sought to diversify
our investments in terms of geographic locations and operators.
In evaluating potential investments and
future returns, we consider such factors as:
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the
quality and experience of management and the creditworthiness of the
operator of the facility;
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the
facility's historical and forecasted cash flow and its ability to meet
operational needs, capital expenditure requirements and lease or debt
service obligations,
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the
construction quality, condition and design of the
facility;
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the
geographic area of the facility;
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the
tax, growth, regulatory and reimbursement environment of the jurisdiction
in which the facility is located;
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the
occupancy and demand for similar healthcare facilities in the same or
nearby communities; and
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the
payor mix of private, Medicare and Medicaid
patients.
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One of our fundamental investment
strategies is to obtain contractual rent escalations under long-term,
non-cancelable, "triple-net" leases and fixed-rate mortgage loans, and to obtain
substantial liquidity deposits. Additional security is typically
provided by covenants regarding minimum working capital and net worth, liens on
accounts receivable and other operating assets, and various provisions for
cross-default, cross-collateralization and corporate/personal guarantees, when
appropriate.
We prefer to invest in equity ownership
of properties. Due to regulatory, tax or other considerations, we may
pursue alternative investment structures, which can achieve returns comparable
to equity investments. The following summarizes the primary
investment structures we typically use. The average annualized yields
described below reflect existing contractual arrangements. However,
in view of the ongoing financial challenges in the long-term care industry, we
cannot assure you that the operators of our facilities will meet their payment
obligations in full or when due. Therefore, the annualized yields as
of January 1, 2010 set forth below are not necessarily indicative of or a
forecast of actual yields, which may be lower.
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Purchase/Leaseback. In
a purchase/leaseback transaction, we purchase the property from the
operator and lease it back to the operator over terms typically ranging
from 5 to 15 years, plus renewal options. The leases originated
by us generally provide for minimum annual rentals which are subject to
annual formula increases based upon such factors as increases in the
Consumer Price Index (“CPI”). The average annualized yield from
leases was approximately 11.1% at January 1,
2010.
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Fixed-Rate
Mortgage. These mortgages have a fixed interest rate for
the mortgage term and are secured by first mortgage liens on the
underlying real estate and personal property of the mortgagor. The average
annualized yield on these investments was approximately 11.4% at January
1, 2010.
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The table set forth in Item 2 –
Properties contains information regarding our real estate properties, their
geographic locations, and the types of investment structures as of December 31,
2009.
Borrowing
Policies. We may incur additional indebtedness and have
historically sought to maintain an annualized total debt-to-EBITDA ratio in the
range of 4 to 5 times. We intend to periodically review our policy
with respect to our total debt-to-EBITDA ratio and to modify the policy as our
management deems prudent in light of prevailing market
conditions. Our strategy generally has been to match the maturity of
our indebtedness with the maturity of our investment assets and to employ
long-term, fixed-rate debt to the extent practicable in view of market
conditions in existence from time to time.
We may use proceeds of any additional
indebtedness to provide permanent financing for investments in additional
healthcare facilities. We may obtain either secured or unsecured
indebtedness and may obtain indebtedness that may be convertible into capital
stock or be accompanied by warrants to purchase capital stock. Where
debt financing is available on terms deemed favorable, we generally may invest
in properties subject to existing loans, secured by mortgages, deeds of trust or
similar liens on properties.
If we need capital to repay
indebtedness as it matures, we may be required to liquidate investments in
properties at times which may not permit realization of the maximum recovery on
these investments. This could also result in adverse tax consequences
to us. We may be required to issue additional equity interests in our
company, which could dilute your investment in our company. (See Item
7 – Management’s Discussion and Analysis of Financial Condition and Results of
Operations; Liquidity and Capital Resources).
Policies With
Respect To Certain Activities. If our Board of
Directors determines that additional funding is required, we may raise such
funds through additional equity offerings, debt financing, and retention of cash
flow (subject to provisions in the Internal Revenue Code concerning taxability
of undistributed REIT taxable income) or a combination of these
methods.
Borrowings may be in the form of bank
borrowings, secured or unsecured, and publicly or privately placed debt
instruments, purchase money obligations to the sellers of assets, long-term,
tax-exempt bonds or financing from banks, institutional investors or other
lenders, or securitizations, any of which indebtedness may be unsecured or may
be secured by mortgages or other interests in our assets. Holders of
such indebtedness may have recourse to all or any part of our assets or may be
limited to the particular asset to which the indebtedness relates.
We have authority to offer our common
stock or other equity or debt securities in exchange for property and to
repurchase or otherwise reacquire our shares or any other securities and may
engage in such activities in the future.
Subject to the percentage of ownership
limitations and gross income and asset tests necessary for REIT qualification,
we may invest in securities of other REITs, other entities engaged in real
estate activities or securities of other issuers, including for the purpose of
exercising control over such entities.
We may engage in the purchase and sale
of investments. We do not underwrite the securities of other
issuers.
Our officers and directors may change
any of these policies without a vote of our stockholders.
In the opinion of our management, our
properties are adequately covered by insurance.
Competition. The
healthcare industry is highly competitive and will likely become more
competitive in the future. We face competition from
other REITs, investment companies, private equity and hedge fund investors,
healthcare operators, lenders, developers and other institutional investors,
some of whom have greater resources and lower costs of capital than us.
Our operators compete on a
local and regional basis with operators of facilities that provide comparable
services. The basis
of competition for our operators includes the quality of care provided,
reputation, the physical appearance of a facility, price, the range of services
offered, family preference, alternatives for healthcare delivery, the supply of
competing properties, physicians, staff, referral sources, location and the size
and demographics of the population and surrounding areas.
Increased competition makes it more
challenging for us to identify and successfully capitalize on opportunities that
meet our objectives. Our ability to compete is also impacted by national and
local economic trends, availability of investment alternatives, availability and
cost of capital, construction and renovation costs, existing laws and
regulations, new legislation and population trends. For additional information
on the risks associated with our business, please see Item 1A — Risk
Factors below.
The following is a general summary of
the material U.S. federal income tax considerations applicable to us and to the
holders of our securities and our election to be taxed as a REIT. It is not tax
advice. The summary is not intended to represent a detailed description of the
U.S. federal income tax consequences applicable to a particular stockholder in
view of any person’s particular circumstances, nor is it intended to represent a
detailed description of the U.S. federal income tax consequences applicable to
stockholders subject to special treatment under the federal income tax laws such
as insurance companies, tax-exempt organizations, financial institutions,
securities broker-dealers, investors in pass-through entities, expatriates and
taxpayers subject to alternative minimum taxation.
The following discussion, to the extent
it constitutes matters of law or legal conclusions (assuming the facts,
representations, and assumptions upon which the discussion is based are
accurate), accurately represents some of the material U.S. federal income tax
considerations relevant to ownership of our securities. The sections of the
Internal Revenue Code (the “Code”) relating to the qualification and operation
as a REIT are highly technical and complex. The following discussion sets forth
certain material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its stockholders. The information in this section is
based on the Code; current, temporary, and proposed Treasury regulations
promulgated under the Code; the legislative history of the Code; current
administrative interpretations and practices of the Internal Revenue Service
(“IRS”); and court decisions, in each case, as of the date of this report. In
addition, the administrative interpretations and practices of the IRS include
its practices and policies as expressed in private letter rulings, which are not
binding on the IRS, except with respect to the particular taxpayers who
requested and received those rulings.
General.
We have elected to be taxed as a REIT, under Sections 856 through 860 of the
Code, beginning with our taxable year ended December 31, 1992. We believe that
we have been organized and operated in such a manner as to qualify for taxation
as a REIT. We intend to continue to operate in a manner that will allow us to
maintain our qualification as a REIT, but no assurance can be given that we have
operated or will be able to continue to operate in a manner so as to qualify or
remain qualified as a REIT.
The sections of the Code that govern
the federal income tax treatment of a REIT are highly technical and complex. The
following sets forth certain material aspects of those sections. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
If we qualify for
taxation as a REIT, we generally will not be subject to federal corporate income
taxes on our net income that is currently distributed to stockholders. However,
we will be subject to certain federal income taxes as follows: First, we will be
taxed at regular corporate rates on any undistributed REIT taxable income,
including undistributed net capital gains; provided, however, that if we have a
net capital gain, we will be taxed at regular corporate rates on our
undistributed REIT taxable income, computed without regard to net capital gain
and the deduction for capital gains dividends, plus a 35% tax on undistributed
net capital gain, if our tax as thus computed is less than the tax computed in
the regular manner. Second, under certain circumstances, we may be subject to
the “alternative minimum tax” on our items of tax preference that we do not
distribute or allocate to our stockholders. Third, if we have (i) net income
from the sale or other disposition of “foreclosure property,” which is held
primarily for sale to customers in the ordinary course of business, or (ii)
other nonqualifying income from foreclosure property, we will be subject to tax
at the highest regular corporate rate on such income. Fourth, if we have net
income from prohibited transactions (which are, in general, certain sales or
other dispositions of property (other than foreclosure property) held primarily
for sale to customers in the ordinary course of business by us, i.e., when we
are acting as a dealer), such income will be subject to a 100% tax. Fifth, if we
should fail to satisfy the 75% gross income test or the 95% gross income test
(as discussed below), but have nonetheless maintained our qualification as a
REIT because certain other requirements have been met, we will be subject to a
100% tax on an amount equal to (a) the gross income attributable to the greater
of the amount by which we fail the 75% or 95% test, multiplied by (b) a fraction
intended to reflect our profitability. Sixth, if we should fail to distribute by
the end of each year at least the sum of (i) 85% of our REIT ordinary income for
such year, (ii) 95% of our REIT capital gain net income for such year, and (iii)
any undistributed taxable income from prior periods, we will be subject to a 4%
excise tax on the excess of such required distribution over the amounts actually
distributed. Seventh, we will be subject to a 100% excise tax on transactions
with a taxable REIT subsidiary (“TRS”) that are not conducted on an arm’s-length
basis. Eighth, if we acquire any asset, which is defined as a “built-in gain
asset” from a C corporation that is not a REIT (i.e., generally a corporation
subject to full corporate-level tax) in a transaction in which the basis of the
built-in gain asset in our hands is determined by reference to the basis of the
asset (or any other property) in the hands of the C corporation, and we
recognize gain on the disposition of such asset during the 10-year period, which
is defined as the “recognition period,” beginning on the date on which such
asset was acquired by us, then, to the extent of the built-in gain (i.e., the
excess of (a) the fair market value of such asset on the date such asset was
acquired by us over (b) our adjusted basis in such asset on such date), our
recognized gain will be subject to tax at the highest regular corporate rate.
The results described above with respect to the recognition of built-in gain
assume that we will not make an election pursuant to Treasury Regulations
Section 1.337(d)-7(c)(5).
Requirements for
Qualification. The Code defines a REIT as a corporation, trust or
association: (1) which is managed by one or more trustees or directors; (2) the
beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation, but for Sections 856 through 859 of the Code; (4) which
is neither a financial institution nor an insurance company subject to the
provisions of the Code; (5) the beneficial ownership of which is held by 100 or
more persons; (6) during the last half year of each taxable year not more than
50% in value of the outstanding stock of which is owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities); and (7) which meets certain other tests, described below,
regarding the nature of its income and assets and the amount of its annual
distributions to stockholders. The Code provides that conditions (1) to (4),
inclusive, must be met during the entire taxable year and that condition (5)
must be met during at least 335 days of a taxable year of twelve months, or
during a proportionate part of a taxable year of less than twelve months. For
purposes of conditions (5) and (6), pension funds and certain other tax-exempt
entities are treated as individuals, subject to a “look-through” exception in
the case of condition (6).
Income
Tests. To maintain our qualification as a REIT, we annually must satisfy
two gross income requirements. First, at least 75% of our gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived directly or indirectly from investments relating to real property or
mortgages on real property (including generally “rents from real property,”
interest on mortgages on real property, and gains on sale of real property and
real property mortgages, other than property described in Section 1221(a)(1) of
the Code) and income derived from certain types of temporary investments.
Second, at least 95% of our gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from such real property
investments, dividends, interest and gain from the sale or disposition of stock
or securities other than property held for sale to customers in the ordinary
course of business.
Rents received by us will qualify as
“rents from real property” in satisfying the gross income requirements for a
REIT described above only if several conditions are met. First, the amount of
the rent must not be based in whole or in part on the income or profits of any
person. However, any amount received or accrued generally will not be excluded
from the term “rents from real property” solely by reason of being based on a
fixed percentage or percentages of receipts or sales. Second, the Code provides
that rents received from a tenant (other than rent from a tenant that is a TRS
that meets the requirements described below) will not qualify as “rents from
real property” in satisfying the gross income tests if we, or an owner (actually
or constructively) of 10% or more of the value of our stock, actually or
constructively owns 10% or more of such tenant, which is defined as a related
party tenant. Third, if rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15% of the total rent
received under the lease, then the portion of rent attributable to such personal
property will not qualify as “rents from real property.” Finally, for rents
received to qualify as “rents from real property,” we generally must not operate
or manage the property or furnish or render services to the tenants of such
property, other than through an independent contractor from which we derive no
revenue. We may, however, directly perform certain services that are “usually or
customarily rendered” in connection with the rental of space for occupancy only
and are not otherwise considered “rendered to the occupant” of the property. In
addition, we may provide a minimal amount of “non-customary” services to the
tenants of a property, other than through an independent contractor, as long as
our income from the services does not exceed 1% of our income from the related
property. Furthermore, we may own up to 100% of the stock of a TRS, which may
provide customary and non-customary services to our tenants without tainting our
rental income from the related properties. For our tax years beginning after
2004, rents for customary services performed by a TRS or that are received from
a TRS and are described in Code Section 512(b)(3) no longer need to meet the
100% excise tax safe harbor. Instead, such payments avoid the excise tax if we
pay the TRS at least 150% of its direct cost of furnishing such services.
Beginning in 2009, we were allowed to include as qualified rents from real
property rental income that is paid to us by a TRS with respect to a lease of a
health care facility to the TRS provided that the facility is operated and
managed by an “eligible independent contractor,” although none of our facilities
were leased to any of our TRSs.
The term “interest” generally does not
include any amount received or accrued (directly or indirectly) if the
determination of such amount depends in whole or in part on the income or
profits of any person. However, an amount received or accrued generally will not
be excluded from the term “interest” solely by reason of being based on a fixed
percentage or percentages of gross receipts or sales. In addition, an amount
that is based on the income or profits of a debtor will be qualifying interest
income as long as the debtor derives substantially all of its income from the
real property securing the debt from leasing substantially all of its interest
in the property, but only to the extent that the amounts received by the debtor
would be qualifying “rents from real property” if received directly by a
REIT.
If a loan contains a provision that
entitles us to a percentage of the borrower’s gain upon the sale of the real
property securing the loan or a percentage of the appreciation in the property’s
value as of a specific date, income attributable to that loan provision will be
treated as gain from the sale of the property securing the loan, which generally
is qualifying income for purposes of both gross income tests.
Interest on debt secured by mortgages
on real property or on interests in real property generally is qualifying income
for purposes of the 75% gross income test. However, if the highest principal
amount of a loan outstanding during a taxable year exceeds the fair market value
of the real property securing the loan as of the date we agreed to originate or
acquire the loan, a portion of the interest income from such loan will not be
qualifying income for purposes of the 75% gross income test, but will be
qualifying income for purposes of the 95% gross income test. The portion of the
interest income that will not be qualifying income for purposes of the 75% gross
income test will be equal to the portion of the principal amount of the loan
that is not secured by real property.
Prohibited
Transactions. We will incur a 100% tax on the net income derived from any
sale or other disposition of property, other than foreclosure property, that we
hold primarily for sale to customers in the ordinary course of a trade or
business. We believe that none of our assets is primarily held for sale to
customers and that a sale of any of our assets would not be in the ordinary
course of our business. Whether a REIT holds an asset primarily for sale to
customers in the ordinary course of a trade or business depends, however, on the
facts and circumstances in effect from time to time, including those related to
a particular asset. Nevertheless, we will attempt to comply with the terms of
safe-harbor provisions in the federal income tax laws prescribing when an asset
sale will not be characterized as a prohibited transaction. The Code also
provides a number of alternative exceptions from the 100% tax on ”prohibited
transactions” if certain requirements have been satisfied with respect to
property disposed of by the REIT. These requirements relate primarily to the
number and/or amount of properties disposed of by the REIT, the period of time
the property has been held by the REIT, and/or aggregate expenditures made by
the REIT with respect to the property being disposed of. The conditions needed
to meets these requirements have been lowered for taxable years beginning in
2009. However, we cannot assure you that we will be able to comply with the
safe-harbor provisions or that we will be able to avoid the 100% tax on
prohibited transactions if we were to dispose of an owned property that
otherwise may be characterized as property that we hold primarily for sale to
customers in the ordinary course of a trade or business.
Foreclosure
Property. We will be subject to tax at the maximum corporate rate on any
income from foreclosure property, other than income that otherwise would be
qualifying income for purposes of the 75% gross income test, less expenses
directly connected with the production of that income. However, gross income
from foreclosure property is treated as qualifying for purposes of the 75% and
95% gross income tests. Foreclosure property is any real property, including
interests in real property, and any personal property incident to such real
property:
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that
is acquired by a REIT as the result of i) the REIT having bid on such
property at foreclosure, or having otherwise reduced such property to
ownership or possession by agreement or process of law, after there was a
default, or ii) default was imminent on a lease of such property or on
indebtedness that such property
secured;
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for
which the related loan or lease was acquired by the REIT at a time when
the default was not imminent or anticipated;
and
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for
which the REIT makes a proper election to treat the property as
foreclosure property.
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Such property generally ceases to be
foreclosure property at the end of the third taxable year following the taxable
year in which the REIT acquired the property, or longer (for a total of up to
six years) if an extension is granted by the Secretary of the Treasury. In the
case of a “qualified health care property” acquired solely as a result of
termination of a lease, but not in connection with default or an imminent
default on the lease, the initial grace period terminates on the second (rather
than third) taxable year following the year in which the REIT acquired the
property (unless the REIT establishes the need for and the Secretary of the
Treasury grants one or more extension, not exceeding six years in total
including the original two year period, to provide for the orderly leasing or
liquidation of the REIT’s interest in the qualified health care property). This
grace period terminates and foreclosure property ceases to be foreclosure
property on the first day:
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on
which a lease is entered into for the property that, by its terms, will
give rise to income that does not qualify for purposes of the 75% gross
income test, or any amount is received or accrued, directly or indirectly,
pursuant to a lease entered into on or after such day that will give rise
to income that does not qualify for purposes of the 75% gross income
test;
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on
which any construction takes place on the property, other than completion
of a building or any other improvement, where more than 10% of the
construction was completed before default became imminent;
or
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·
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which
is more than 90 days after the day on which the REIT acquired the property
and the property is used in a trade or business which is conducted by the
REIT, other than through an independent contractor from whom the REIT
itself does not derive or receive any
income.
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In July 2008, we assumed operating
responsibilities for the 15 properties due to the bankruptcy of Haven Eldercare,
LLC (“Haven facilities”) one of our operators/tenants, as described in Item 7 –
Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Portfolio and Other Developments. In September 2008, we entered
into an agreement to lease these facilities to a new operator/tenant. Effective
September 1, 2008, the new operator/tenant assumed operating responsibility for
13 of the 15 facilities. We are in the process of addressing state regulatory
requirements necessary to transfer the final two properties to the new
operator/tenant, and as a result, we retained operating responsibility for two
properties as of December 31, 2009. We made an election on our 2008 federal
income tax return to treat the Haven facilities as foreclosure properties.
Because we acquired possession in connection with a foreclosure, the Haven
facilities are eligible to be treated as foreclosure property until the end of
2011. Although the Secretary of Treasury may extend the foreclosure property
period until the end of 2014, there can be no assurance that we will receive
such an extension. So long as the two remaining Haven facilities
qualify as foreclosure property, our gross income from the properties will be
qualifying income for the 75% and 95% gross income tests, but we will generally
be subject to corporate income tax at the highest rate on the net income from
the properties. If the two remaining Haven facilities were to inadvertently fail
to qualify as foreclosure property, we would likely recognize nonqualifying
income from such property for purposes of the 75% and 95% gross income tests,
which could cause us to fail to qualify as a REIT. In addition, any gain from a
sale of such property could be subject to the 100% prohibited transactions tax.
Although we intend to sell or lease the remaining Haven facilities to one or
more unrelated third parties prior to the end of 2011, no assurance can be
provided that we will accomplish that objective.
Since the year 2000, the
definition of foreclosure property has included any “qualified health care
property,” as defined in Code Section 856(e)(6) acquired by us as the result of
the termination or expiration of a lease of such property. We have from time to
time operated qualified healthcare facilities acquired in this manner for up to
two years (or longer if an extension was granted). However, we do not currently
own any property with respect to which we have made foreclosure property
elections other than the remaining Haven properties discussed in the prior
paragraph. Properties that we had taken back in a foreclosure or bankruptcy and
operated for our own account were treated as foreclosure properties for income
tax purposes, pursuant to Code Section 856(e). Gross income from foreclosure
properties was classified as “good income” for purposes of the annual REIT
income tests upon making the election on the tax return. Once made, the income
was classified as “good” for a period of three years, or until the properties
were no longer operated for our own account. In all cases of foreclosure
property, we utilized an independent contractor to conduct day-to-day operations
to maintain REIT status. In certain cases we operated these facilities through a
taxable REIT subsidiary. For those properties operated through the taxable REIT
subsidiary, we utilized an eligible independent contractor to conduct day-to-day
operations to maintain REIT status. As a result of the foregoing, we do not
believe that our participation in the operation of nursing homes increased the
risk that we would fail to qualify as a REIT. Through our 2009 taxable year, we
had not paid any tax on our foreclosure property because those properties had
been producing losses. We cannot predict whether, in the future, our income from
foreclosure property will be significant and/or whether we could be required to
pay a significant amount of tax on that income.
Hedging
Transactions. From time to time, we may enter into hedging transactions
with respect to one or more of our assets or liabilities. Our hedging activities
may include entering into interest rate swaps, caps and floors, options to
purchase these items, and futures and forward contracts. To the extent that we
enter into an interest rate swap or cap contract, option, futures contract,
forward rate agreement, or any similar financial instrument to hedge our
indebtedness incurred to acquire or carry “real estate assets,” any periodic
income or gain from the disposition of that contract should be qualifying income
for purposes of the 95% gross income test, but not the 75% gross income test.
Accordingly, our income and gain from our interest rate swap agreements
generally is qualifying income for purposes of the 95% gross income test, but
not the 75% gross income test. To the extent that we hedge with other types of
financial instruments, or in other situations, it is not entirely clear how the
income from those transactions will be treated for purposes of the gross income
tests. We have structured and intend to continue to structure any hedging
transactions in a manner that does not jeopardize our status as a REIT. For tax
years beginning after 2004, we were no longer required to include income from
hedging transactions in gross income (i.e., not included in either the numerator
or the denominator) for purposes of the 95% gross income test and we are no
longer required to include in gross income (i.e., not included in either the
numerator or the denominator) for purposes of the 75% gross income test any
gross income from any hedging transaction entered into after July 30,
2008.
TRS
Income. A TRS may earn income that would not be qualifying income if
earned directly by the parent REIT. Both the subsidiary and the REIT must
jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS
directly or indirectly owns more than 35% of the voting power or value of the
stock will automatically be treated as a TRS. Overall, no more than 25% (20%
prior to 2009) of the value of a REIT’s assets may consist of securities of one
or more TRSs. However, a TRS does not include a corporation which directly or
indirectly (i) operates or manages a health care (or lodging) facility, or (ii)
provides to any other person (under a franchise, license, or otherwise) rights
to any brand name under which a health care (or lodging) facility is operated.
Beginning in 2009, however, a TRS will be able to own or lease a health care
facility provided that the facility is operated and managed by an “eligible
independent contractor.” A TRS will pay income tax at regular corporate rates on
any income that it earns. In addition, the new rules limit the deductibility of
interest paid or accrued by a TRS to its parent REIT to assure that the TRS is
subject to an appropriate level of corporate taxation. The rules also impose a
100% excise tax on transactions between a TRS and its parent REIT or the REIT’s
operators that are not conducted on an arm’s-length basis. A stated
above, we do not lease any of our facilities to any of our TRSs.
Failure to
Satisfy Income Tests. If we fail to satisfy one or both of the 75% or 95%
gross income tests for any taxable year, we may nevertheless qualify as a REIT
for such year if we are entitled to relief under certain provisions of the Code.
These relief provisions will be generally available if our failure to meet such
tests was due to reasonable cause and not due to willful neglect, we attach a
schedule of the sources of our income to our tax return, and any incorrect
information on the schedule was not due to fraud with intent to evade tax. It is
not possible, however, to state whether in all circumstances we would be
entitled to the benefit of these relief provisions. Even if these relief
provisions apply, we would incur a 100% tax on the gross income attributable to
the greater of the amounts by which we fail the 75% and 95% gross income tests,
multiplied by a fraction intended to reflect our profitability and we would file
a schedule with descriptions of each item of gross income that caused the
failure.
Resolution of
Related Party Tenant Issue. In the fourth quarter of 2006, we determined
that, due to certain provisions of the Series B preferred stock issued to us by
Advocat, Inc. (“Advocat”) in 2000 in connection with a restructuring, Advocat
may have been considered to be a “related party tenant” under the rules
applicable to REITs. As a result, we (1) took steps in 2006 to restructure our
relationship with Advocat and ownership of Advocat securities in order to avoid
having the rent received from Advocat classified as received from a “related
party tenant” in taxable years after 2006, and (2) submitted a request to the
IRS on December 15, 2006, that in the event that rental income received by us
from Advocat would not be qualifying income for purposes of the REIT gross
income tests, such failure during taxable years prior to 2007 was due to
reasonable cause. During 2007, we entered into a closing agreement with the IRS
covering all affected taxable periods prior to 2007, which stated that our
failure to meet the 95% gross income tests as a result of the Advocat rental
income being considered to be received from a “related party tenant” was due to
reasonable cause. In connection with reaching this agreement with the IRS, we
paid to the IRS penalty income taxes and interest totaling approximately $5.6
million for the tax years 2002 through 2006. We had previously accrued $5.6
million of income tax liabilities as of December 31, 2006. Based on our
execution of the closing agreement with the IRS and the restructuring of our
relationship with Advocat, we believe that we have fully resolved all tax issues
relating to rental income received from Advocat prior to 2007 and have been
advised by tax counsel that we will not receive any non-qualifying related party
tenant income from Advocat in 2007 and future fiscal years. Accordingly, we do
not expect to incur tax expense associated with related party tenant income in
the periods commencing January 1, 2007.
Asset
Tests. At the close of each quarter of our taxable year, we must also
satisfy the following tests relating to the nature of our assets. First, at
least 75% of the value of our total assets must be represented by real estate
assets (including (i) our allocable share of real estate assets held by
partnerships in which we own an interest and (ii) stock or debt instruments held
for less than one year purchased with the proceeds of a stock offering or
long-term (at least five years) debt offering of our company), cash, cash items
and government securities. Second, of our investments not included in the 75%
asset class, the value of our interest in any one issuer’s securities may not
exceed 5% of the value of our total assets. Third, we may not own more than 10%
of the voting power or value of any one issuer’s outstanding securities. Fourth,
no more than 25% (20% prior to 2009) of the value of our total assets may
consist of the securities of one or more TRSs. Fifth, no more than 25% of the
value of our total assets may consist of the securities of TRSs and other
non-TRS taxable subsidiaries and other assets that are not qualifying assets for
purposes of the 75% asset test.
For purposes of the second and third
asset tests described below the term “securities” does not include our equity or
debt securities of a qualified REIT subsidiary, a TRS, or an equity interest in
any partnership, since we are deemed to own our proportionate share of each
asset of any partnership of which we are a partner. Furthermore, for purposes of
determining whether we own more than 10% of the value of only one issuer’s
outstanding securities, the term “securities” does not include: (i) any loan to
an individual or an estate; (ii) any Code Section 467 rental agreement; (iii)
any obligation to pay rents from real property; (iv) certain government issued
securities; (v) any security issued by another REIT; and (vi) our debt
securities in any partnership, not otherwise excepted under (i) through (v)
above, (A) to the extent of our interest as a partner in the partnership or (B)
if 75% of the partnership’s gross income is derived from sources described in
the 75% income test set forth above.
We may own up to 100% of the stock of
one or more TRSs. However, overall, no more than 25% (20% prior to 2009) of the
value of our assets may consist of securities of one or more TRSs, and no more
than 25% of the value of our assets may consist of the securities of TRSs and
other non-TRS taxable subsidiaries (including stock in non-REIT C corporations)
and other assets that are not qualifying assets for purposes of the 75% asset
test. If the outstanding principal balance of a mortgage loan exceeds the fair
market value of the real property securing the loan, a portion of such loan
likely will not be a qualifying real estate asset for purposes of the 75% test.
The nonqualifying portion of that mortgage loan will be equal to the portion of
the loan amount that exceeds the value of the associated real
property.
After initially meeting the asset tests
at the close of any quarter, we will not lose our status as a REIT for failure
to satisfy any of the asset tests at the end of a later quarter solely by reason
of changes in asset values. If the failure to satisfy the asset tests results
from an acquisition of securities or other property during a quarter, the
failure can be cured by disposition of sufficient nonqualifying assets within 30
days after the close of that quarter.
For our tax years beginning after 2004,
subject to certain de minimis exceptions, we may avoid REIT disqualification in
the event of certain failures under the asset tests, provided that (i) we file a
schedule with a description of each asset that caused the failure, (ii) the
failure was due to reasonable cause and not willful neglect, (iii) we dispose of
the assets within 6 months after the last day of the quarter in which the
identification of the failure occurred (or the requirements of the rules are
otherwise met within such period), and (iv) we pay a tax on the failure equal to
the greater of (A) $50,000 per failure, and (B) the product of the net income
generated by the assets that caused the failure for the period beginning on the
date of the failure and ending on the date we dispose of the asset (or otherwise
satisfy the requirements) multiplied by the highest applicable corporate tax
rate.
Annual
Distribution Requirements. To qualify as a REIT, we are required to
distribute dividends (other than capital gain dividends) to our stockholders in
an amount at least equal to (A) the sum of (i) 90% of our “REIT taxable income”
(computed without regard to the dividends paid deduction and our net capital
gain) and (ii) 90% of the net income (after tax), if any, from foreclosure
property, minus (B) the sum of certain items of noncash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before we timely file our tax return for such
year and paid on or before the first regular dividend payment after such
declaration. In addition, such distributions are required to be made pro rata,
with no preference to any share of stock as compared with other shares of the
same class, and with no preference to one class of stock as compared with
another class except to the extent that such class is entitled to such a
preference. To the extent that we do not distribute all of our net capital gain,
or distribute at least 90%, but less than 100% of our “REIT taxable income,” as
adjusted, we will be subject to tax thereon at regular ordinary and capital gain
corporate tax rates.
Furthermore, if we fail to distribute
during a calendar year, or by the end of January following the calendar year in
the case of distributions with declaration and record dates falling in the last
three months of the calendar year, at least the sum of:
• 85% of
our REIT ordinary income for such year;
• 95% of
our REIT capital gain income for such year; and
• any
undistributed taxable income from prior periods,
we will incur a 4% nondeductible excise
tax on the excess of such required distribution over the amounts we actually
distribute. We may elect to retain and pay income tax on the net long-term
capital gain we receive in a taxable year. If we so elect, we will be treated as
having distributed any such retained amount for purposes of the 4% excise tax
described above. We have made, and we intend to continue to make, timely
distributions sufficient to satisfy the annual distribution requirements. We may
also be entitled to pay and deduct deficiency dividends in later years as a
relief measure to correct errors in determining our taxable income. Although we
may be able to avoid income tax on amounts distributed as deficiency dividends,
we will be required to pay interest to the IRS based upon the amount of any
deduction we take for deficiency dividends.
The availability to us of, among other
things, depreciation deductions with respect to our owned facilities depends
upon the treatment by us as the owner of such facilities for federal income tax
purposes, and the classification of the leases with respect to such facilities
as “true leases” rather than financing arrangements for federal income tax
purposes. The questions of whether (1) we are the owner of such facilities and
(ii) the leases are true leases for federal tax purposes, are essentially
factual matters. We believe that we will be treated as the owner of each of the
facilities that we lease, and such leases will be treated as true leases for
federal income tax purposes. However, no assurances can be given that the IRS
will not successfully challenge our status as the owner of our facilities
subject to leases, and the status of such leases as true leases, asserting that
the purchase of the facilities by us and the leasing of such facilities merely
constitute steps in secured financing transactions in which the lessees are
owners of the facilities and we are merely a secured creditor. In such event, we
would not be entitled to claim depreciation deductions with respect to any of
the affected facilities. As a result, we might fail to meet the 90% distribution
requirement or, if such requirement is met, we might be subject to corporate
income tax or the 4% excise tax.
Reasonable Cause
Savings Clause. We may avoid disqualification in the event of a failure
to meet certain requirements for REIT qualification if the failures are due to
reasonable cause and not willful neglect, and if the REIT pays a penalty of
$50,000 for each such failure. This reasonable cause safe harbor is not
available for failures to meet the 95% and 75% gross income tests, the rules
with respect to ownership of securities of more than 10% of a single issuer, and
the new rules provided for failures of the asset tests.
Failure to
Qualify. If we fail to qualify as a REIT in any taxable year, and the
reasonable cause relief provisions do not apply, we will be subject to tax
(including any applicable alternative minimum tax) on our taxable income at
regular corporate rates. Distributions to stockholders in any year in which we
fail to qualify will not be deductible and our failure to qualify as a REIT
would reduce the cash available for distribution by us to our stockholders. In
addition, if we fail to qualify as a REIT, all distributions to stockholders
will be taxable as ordinary income, to the extent of current and accumulated
earnings and profits, and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, we would also be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification was lost. It is not possible to state whether in
all circumstances we would be entitled to such statutory relief. Failure to
qualify could result in our incurring indebtedness or liquidating investments to
pay the resulting taxes.
Other Tax
Matters. We own and operate a number of properties through qualified REIT
subsidiaries, (“QRSs”). The QRSs are treated as qualified REIT subsidiaries
under the Code. Code Section 856(i) provides that a corporation which is a
qualified REIT subsidiary shall not be treated as a separate corporation, and
all assets, liabilities, and items of income, deduction, and credit of a
qualified REIT subsidiary shall be treated as assets, liabilities and such items
(as the case may be) of the REIT. Thus, in applying the tests for REIT
qualification described above, the QRSs will be ignored, and all assets,
liabilities and items of income, deduction, and credit of such QRSs will be
treated as our assets, liabilities and items of income, deduction, and
credit.
In the case of a REIT that is a partner
in a partnership, the REIT is treated as owning its proportionate share of the
assets of the partnership and as earning its allocable share of the gross income
of the partnership for purposes of the applicable REIT qualification tests.
Thus, our proportionate share of the assets, liabilities, and items of income of
any partnership, joint venture, or limited liability company that is treated as
a partnership for federal income tax purposes in which we own an interest,
directly.
All of our properties are used as
healthcare facilities, and as a result, we are directly affected by the risk
associated with government regulation and reimbursement. Our operators, as well
as any facilities that may be owned and operated for our own account from time
to time, derive a substantial portion of their net operating revenues from
third-party payors, including the Medicare and Medicaid programs. In addition,
our operators are subject to extensive federal, state and local regulation
including, but not limited to, laws and regulations relating to licensure,
operations, facilities, professional staff and insurance. These laws and
regulations are subject to frequent and substantial change, which may be applied
retroactively. Changes in government laws and regulations, interpretations,
increased regulatory enforcement activity and regulatory noncompliance by an
operator can significantly affect the operator’s ability to operate its facility
or facilities and could adversely affect such operator’s ability to meet its
contractual and financial obligations to us.
Reimbursement.
The recent downturn in the U.S. economy and other factors could result in
significant cost-cutting at both the federal and state levels, resulting in a
reduction of reimbursement rates and levels to our operators under both the
Medicare and Medicaid programs. In addition, Congress currently is considering
options for healthcare reform legislation, and some of the options under
consideration would impact SNFs and could result in decreases in payments to
SNFs or otherwise diminish the financial condition of individual SNFs. Although
the House of Representatives and the Senate each passed health reform bills in
late 2009, the two bills are different. We cannot predict whether
healthcare reform legislation will be enacted into law, and if healthcare reform
legislation is enacted, we cannot predict the ultimate content or timing of this
legislation. We also cannot predict the effect that any such legislation may
have on our operators.
We currently believe that our operator
coverage ratios are adequate and that our operators can absorb moderate
reimbursement rate reductions under Medicaid and Medicare and still meet their
obligations to us. However, significant limits on the scope of services
reimbursed and on reimbursement rates and fees could have a material adverse
effect on an operator’s results of operations and financial condition, which
could adversely affect the operator’s ability to meet its obligations to
us.
Medicaid.
Each state has its own Medicaid program that is funded jointly by the state and
the U.S. federal government. Federal law governs how each state manages its
Medicaid program, but there is wide latitude for states to customize Medicaid
programs to fit the needs and resources of their citizens. Currently, Medicaid
is the single largest source of financing for long-term care in the United
States.
Current market and economic conditions
will likely have a significant impact on state budgets and healthcare spending.
Fiscal conditions have continued to deteriorate, and many states are
experiencing significant budget gaps. The budget deficits are exacerbated by
increased enrollment in Medicaid during 2009 and anticipated increased
enrollment in fiscal year 2010. Since the profit margins on Medicaid patients
are generally relatively low, substantial reductions in Medicaid reimbursement
could adversely affect our operators’ results of operations and financial
condition, which in turn could negatively impact us.
The American Recovery and Reinvestment
Act of 2009 (“ARRA”), which was signed into law on February 17, 2009, provides
for enhanced federal Medicaid matching rates that may provide some relief to
states. Because states have discretion with respect to their Medicaid programs,
some states may address budget shortfalls outside of Medicaid by reallocating
state funds that otherwise would have been spent on Medicaid expenditures. As a
result, the impact of the ARRA Medicaid funding on our operators will depend on
how states choose to use the funding.
In 2007 and early 2008, the Center for
Medicare & Medicaid Services (“CMS”) issued a number of Medicaid rules that
have the potential to reduce the funding available under state Medicaid programs
to reimburse long-term care providers. Several of these rules were rescinded on
June 30, 2009, including rules related to specialized transportation to schools
for children covered by Medicaid, outpatient hospital services and certain
provisions related to targeted case management services. In addition, CMS
delayed until June 30, 2010 the enforcement of certain provisions of a
regulation related to healthcare-related taxes. However, other regulatory
provisions have been implemented, including a reduction in the maximum allowable
healthcare-related taxes that states can impose on providers (reduced from 6
percent to 5.5 percent). This rule could result in lower taxes for providers,
but also could result in less overall funding for state Medicaid programs by
limiting the ability of states to fund the non-federal share of the Medicaid
program. As a result, the operators of our properties could potentially
experience reductions in Medicaid funding, which could adversely impact their
ability to meet their obligations to us.
Medicare.
Medicare is a social insurance program administered by the U.S. federal
government, providing health insurance to people who are aged 65 and over, or
who meet special criteria. Similar to the Medicaid program, the Medicare program
may be subject to future reform and cost-cutting measures in response to the
recent downturn in U.S. economic and market conditions.
On July 31, 2009, CMS announced a final
rule on Medicare’s prospective payment system for SNFs for fiscal year 2010. The
final rule includes a reduction in payments to nursing homes equal to $1.05
billion, or 3.3 percent, resulting from a recalibration of the case-mix indices.
However, CMS estimates that the fiscal year 2010 market basket adjustment of 2.1
percent, or $660 million, will partially offset the $1.05 billion adjustment,
resulting in an aggregate decrease in Medicare payments to SNFs during fiscal
year 2010 of approximately $360 million, or 1.1 percent. The changes may have
different impacts on individual SNFs, depending in part on the characteristics
of the patient populations of individual facilities. Our operators may receive
reduced Medicare payments as a result of the final rule, which could have an
adverse effect on their ability to satisfy their financial obligations. The 2010
fiscal year began on October 1, 2009 and ends on September 30,
2010.
In addition to the recalibration of the
case mix indices and payment update, CMS finalized a revised case-mix
classification system, the RUG-IV, and implementation schedule for fiscal year
2011. The change in case-mix classification methodology has the potential to
impact reimbursement, although the ultimate impact of the RUG-IV classification
model on reimbursement to the individual operators of our facilities is
unknown.
The 2009 fiscal year ended on September
30, 2009. On August 8, 2008, CMS published a final rule on Medicare’s
prospective payment system for SNFs for fiscal year 2009. At the time, CMS
estimated that these payment policies would increase aggregate Medicare payments
to SNFs during fiscal year 2009 by $780 million (compared to fiscal year
2008).
Medicare law currently includes therapy
caps, which limit the physical therapy, speech-language therapy and occupational
therapy services that a Medicare beneficiary can receive during a calendar year.
These caps do not apply to therapy services covered under Medicare Part A in
SNFs, although the caps apply in most other instances involving patients in SNFs
or long-term care facilities who receive therapy services covered under Medicare
Part B. Congress implemented a temporary therapy cap exceptions process, which
permitted medically necessary therapy services to exceed the payment
limits. However, the therapy caps exceptions process expired on
December 31, 2009. If the therapy caps exceptions process is not
reinstated, this could have material adverse effects on our operators’ financial
condition and operations, which could adversely impact their ability to meet
their obligations to us.
Quality of Care
Initiatives. CMS has implemented a number of initiatives focused on the
quality of care provided by nursing homes that could affect our operators. For
instance, in February 2008, CMS made publicly available on its website the names
of all 136 nursing homes targeted in its Special Focus Facility program for
underperforming nursing homes. CMS plans to update the list regularly. As
another example, in December 2008, CMS released quality ratings for all of the
nursing homes that participate in Medicare or Medicaid. Facility rankings,
ranging from five stars (“much above average”) to one star (“much below
average”) will be updated on a monthly basis. In the event any of our operators
do not maintain the same or superior levels of quality care as their
competitors, patients could choose alternate facilities, which could adversely
impact our operators’ revenues. In addition, the reporting of such information
could lead to future reimbursement policies that reward or penalize facilities
on the basis of the reported quality of care parameters.
The Office of Inspector General (“OIG”)
of the Department of Health and Human Services also has carried out a number of
projects focused on the quality of care provided by nursing homes. For example,
in September 2008, the OIG released a report based on an analysis of data from
CMS’ Online Survey and Certification Reporting System (“OSCAR”), which contains
the results of all state nursing home surveys. The report notes that over 91
percent of nursing homes surveyed were cited for deficiencies and complaints
between 2005 and 2007. The most common deficiencies cited involved quality of
care, resident assessments and quality of life. A greater percentage of
for-profit nursing homes were cited than not-for-profit and government nursing
homes. In addition, the OIG’s Work Plan for fiscal year 2010, which describes
projects that the OIG plans to address during the fiscal year, includes a number
of projects related to nursing homes.
Fraud and Abuse
Laws and Regulations. There are various extremely complex civil and
criminal federal and state laws governing a wide array of referrals,
relationships and arrangements prohibiting fraud by healthcare providers. Many
of these laws raise issues that have not been clearly interpreted. Governments
are devoting increasing attention and resources to anti-fraud initiatives
against healthcare providers. The federal anti-kickback statute is a criminal
statute that prohibits the knowing and willful offer, payment, solicitation or
receipt of any remuneration in return for, to induce, or to arrange for the
referral of individuals for any item or service payable by a federal or state
healthcare program. There is also a civil analogue. States also have enacted
similar statutes covering Medicaid payments and some states have broader
statutes. Some enforcement efforts have targeted relationships between SNFs and
ancillary providers, relationships between SNFs and referral sources for SNFs
and relationships between SNFs and facilities for which the SNFs serve as
referral sources. The federal self-referral law, commonly known as the “Stark
Law,” is a civil statute that prohibits certain referrals by physicians to
entities providing “designated health services” if these physicians have
financial relationships with the entities. Some of the services provided in SNFs
are classified as designated health services. There are also criminal provisions
that prohibit filing false claims or making false statements to receive payment
or certification under Medicare and Medicaid, as well as failing to refund
overpayments or improper payments. Violation of the anti-kickback statute or
Stark Law may form the basis for a False Claims Act violation. In addition, the
federal False Claims Act allows a private individual with knowledge of fraud to
bring a claim on behalf of the federal government and earn a percentage of the
federal government’s recovery. Because of these incentives, these so-called
“whistleblower” suits have become more frequent. The violation of any fraud and
abuse law or regulation by an operator could result in the imposition of fines
or other penalties that could jeopardize that operator’s ability to make lease
or mortgage payments to us or to continue operating its facility.
Privacy
Laws. Our operators are subject to federal, state and local laws and
regulations designed to protect confidentiality and security of patient health
information, including the privacy and security provisions in the federal Health
Insurance Portability and Accountability Act of 1996 and the corresponding
regulations promulgated, known as HIPAA. HIPAA was amended by the American
Recovery and Reinvestment Act of 2009, known as the Stimulus Bill to increase
penalties for HIPAA violations, imposing stricter requirements on healthcare
providers, in most cases requiring notifications if there is a breach of an
individual’s protected health information including public announcements if the
breach affects a significant number of individuals, and expanding possibilities
for enforcement. Our operators may have to expend significant funds to secure
the health information they hold, including upgrading their computer systems. If
our operators are found in violation of HIPAA such operators may be required to
pay large penalties. Compliance with public notification requirements in the
event of a breach could cause reputational harm to their business. Obligations
to pay large penalties or tarnishing of reputation could adversely affect the
ability of our operators to pay their obligations to us.
Licensing,
Certification and Other Laws and Regulations. Our operators and
facilities are subject to the regulatory and licensing requirements of federal,
state and local authorities and are periodically audited to confirm compliance.
Failure to obtain licensure or loss or suspension of licensure would prevent a
facility from operating or result in a suspension of reimbursement payments
until all licensure issues are resolved and the necessary licenses obtained or
reinstated. For example, some of our facilities may be unable to satisfy current
and future state certificate of need requirements and may for this reason be
unable to continue operating in the future. In such event, our revenues from
those facilities could be reduced or eliminated for an extended period of time
or permanently.
Additional
federal, state and local laws affect how our operators conduct their operations,
including federal and state laws designed to protect the confidentiality and
security of patient health information, laws protecting consumers against
deceptive practices, and laws generally affecting our operators’ management of
property and equipment and how our operators conduct their operations (including
laws and regulations involving: fire, health and safety; quality of services,
care and food service; residents’ rights, including abuse and neglect laws; and
the health standards set by the federal Occupational Safety and Health
Administration). We are unable to predict the effect that potential changes in
these requirements could have on the revenues of our operators, and thus their
ability to meet their obligations to us.
Legislative and
Regulatory Developments. Each year, legislative
proposals are introduced or proposed in Congress and in some state legislatures
that would result in major changes in the healthcare system, either nationally
or at the state level. We are unable to predict accurately whether any proposals
will be adopted, or if adopted, what effect, if any, these proposals would have
on our operators or our business.
As of February 23, 2010, the executive
officers of our company were as follows:
C. Taylor Pickett (48) is the Chief Executive
Officer and has served in this capacity since June 2001. Mr. Pickett is also a
Director and has served in this capacity since May 30, 2002. Mr.
Pickett’s term as a Director expires in 2011. Prior to joining our
company, Mr. Pickett served as the Executive Vice President and Chief Financial
Officer from January 1998 to June 2001 of Integrated Health Services, Inc., a
public company specializing in post-acute healthcare services. He also served as
Executive Vice President of Mergers and Acquisitions from May 1997 to December
1997 of Integrated Health Services, Inc. Prior to his roles as Chief
Financial Officer and Executive Vice President of Mergers and Acquisitions, Mr.
Pickett served as the President of Symphony Health Services, Inc. from January
1996 to May 1997.
Daniel J. Booth (46) is the
Chief Operating Officer and has served in this capacity since October 2001.
Prior to joining our company, Mr. Booth served as a member of Integrated Health
Services’ management team since 1993, most recently serving as Senior Vice
President, Finance. Prior to joining Integrated Health Services, Mr. Booth was
Vice President in the Healthcare Lending Division of Maryland National Bank (now
Bank of America).
R. Lee Crabill, Jr. (56) is the Senior Vice
President of Operations of our company and has served in this capacity since
July 2001. Mr. Crabill served as a Senior Vice President of Operations at
Mariner Post-Acute Network, Inc. from 1997 through 2000. Prior to that, he
served as an Executive Vice President of Operations at Beverly
Enterprises.
Robert O. Stephenson (46) is
the Chief Financial Officer and has served in this capacity since August 2001.
Prior to joining our company, Mr. Stephenson served from 1996 to July 2001 as
the Senior Vice President and Treasurer of Integrated Health Services,
Inc. Prior to Integrated Health Services, Mr. Stephenson held various
positions at CSX Intermodal, Inc., Martin Marietta Corporation and Electronic
Data Systems.
Michael D. Ritz (41) is the
Chief Accounting Officer and has served in this capacity since February
2007. Prior to joining our company, Mr. Ritz served as the Vice
President, Accounting & Assistant Corporate Controller from April 2005 until
February 2007 and the Director, Financial Reporting from August 2002 until April
2005 for Newell Rubbermaid Inc. Prior to his time with Newell
Rubbermaid Inc., Mr. Ritz served as the Director of Accounting and Controller of
Novavax Inc. from July 2001 through August 2002.
As of December 31, 2009, we had 19
full-time employees, including the five executive officers listed
above.
Following
are some of the risks and uncertainties that could cause the Company’s financial
condition, results of operations, business and prospects to differ materially
from those contemplated by the forward-looking statements contained in this
report or the Company’s other filings with the SEC. These risks
should be read in conjunction with the other risks described in this report
including but not limited to those described under “Taxation” and “Government
Regulation Reimbursement” under Item 1 above. The risks described
below are not the only risks facing the Company and there may be additional
risks of which the Company is not presently aware or that the Company currently
considers unlikely to significantly impact the Company. Our business,
financial condition, results of operations or liquidity could be materially
adversely affected by any of these risks, and, as a result, the trading price of
our common stock could decline.
We have
grouped the following risk factors into three general categories:
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Risks
Related to the Operators of our
Facilities;
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Risks
Related to Us and Our Operations;
and
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Risks
Related to Our Stock.
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Risks
Related to the Operators of Our Facilities
Our
financial position could be weakened and our ability to make distributions and
fulfill our obligations with respect to our indebtedness could be limited if any
of our major operators become unable to meet their obligations to us or fail to
renew or extend their relationship with us as their lease terms expire or their
mortgages mature, or if we become unable to lease or re-lease our facilities or
make mortgage loans on economically favorable terms. We have no operational
control over our operators. Adverse developments concerning our
operators could arise due to a number of factors, including those listed
below.
The
bankruptcy or insolvency of our operators could limit or delay our ability to
recover on our investments.
We are
exposed to the risk that our operators may not be able to meet their lease,
mortgage and other obligations to us or other third parties, which could result
in their bankruptcy or insolvency. Further, the current economic climate that
exists in the United States serves to heighten and increase this
risk. Although our lease agreements and loan agreements typically
provide us with the right to terminate the agreement, evict an operator,
foreclose on our collateral, demand immediate payment and exercise other
remedies, title 11 of the United States Code, as amended and supplemented (the
“Bankruptcy Code”), would limit or, at a minimum, delay our ability to collect
unpaid pre-bankruptcy rents and mortgage payments and to pursue other remedies
against a bankrupt operator.
Leases. A
bankruptcy filing by one of our lessee operators would typically prevent us from
collecting unpaid pre-bankruptcy rents or evicting the operator, absent approval
of the bankruptcy court. The Bankruptcy Code provides a lessee with
the option to assume or reject an unexpired lease within certain specified
periods of time. Generally, a lessee is required to pay all rent
arising between its bankruptcy filing and the assumption or rejection of the
lease (although such payments will likely be delayed as a result of the
bankruptcy filing). If one of our lessee operators chooses to assume
its lease with us, the operator must cure all monetary defaults existing under
the lease (including payment of unpaid pre-bankruptcy rents) and provide
adequate assurance of its ability to perform its future obligations under the
lease. If one of our lessee operators opts to reject its lease with
us, we would have a claim against such operator for unpaid and future rents
payable under the lease, but such claim would be subject to a statutory “cap”
and would generally result in a recovery substantially less than the face value
of such claim. Although the operator’s rejection of the lease would
permit us to recover possession of the leased facility, we would still face
losses, costs and delays associated with re-leasing the facility to a new
operator.
Several
other factors could impact our rights under leases with bankrupt
operators. First, the operator could seek to assign its lease with us
to a third party. The Bankruptcy Code generally disregards
anti-assignment provisions in leases to permit assignment of unexpired leases to
third parties (provided all monetary defaults under the lease are cured and the
third party can demonstrate its ability to perform its obligations under the
lease). Second, in instances in which we have entered into a master
lease agreement with an operator that operates more than one facility, there
exists the risk that the bankruptcy court could determine that the master lease
was comprised of separate, divisible leases (each of which could be separately
assumed or rejected), rather than a single, integrated lease (which would have
to be assumed or rejected in its entirety). Finally, there exists the
risk that the bankruptcy court could re-characterize our lease agreement as a
disguised financing arrangement, which could require us to receive bankruptcy
court approval to foreclose or pursue other remedies with respect to the
facility.
Mortgages. A
bankruptcy filing by an operator to whom we have made a mortgage loan would
typically prevent us from collecting unpaid pre-bankruptcy mortgage payments and
foreclosing on our collateral, absent approval of the bankruptcy
court. As an initial matter, we could ask the bankruptcy court to
order the operator to make periodic payments or provide other financial
assurances to us during the bankruptcy case (known as “adequate protection”),
but the ultimate decision regarding “adequate protection” (including the timing
and amount) rests with the bankruptcy court. In addition, we would
have to receive bankruptcy court approval before we could commence or continue
any foreclosure action against the operator’s facility. The
bankruptcy court could withhold such approval, especially if the operator can
demonstrate that the facility is necessary for an effective reorganization and
that we have a sufficient “equity cushion” in the facility. If the
bankruptcy court does not either grant us “adequate protection” or permit us to
foreclose on our collateral, we may not receive any loan payments until after
the bankruptcy court confirms a plan of reorganization for the
operator. Even if the bankruptcy court permits us to foreclose on the
facility, we would still be subject to the losses, costs and other risks
associated with a foreclosure sale, including possible successor liability under
government programs, indemnification obligations and suspension or delay of
third-party payments. Should such events occur, our income and cash
flow from operations would be adversely affected.
Failure
by our operators to comply with various local, state and federal government
regulations may adversely impact their ability to make debt or lease payments to
us.
Our
operators are subject to numerous federal, state and local laws and regulations
that are subject to frequent and substantial changes (sometimes applied
retroactively) resulting from legislation, adoption of rules and regulations,
and administrative and judicial interpretations of existing law. The ultimate
timing or effect of these changes cannot be predicted. These changes may have a
dramatic effect on our operators’ costs of doing business and on the amount of
reimbursement by both government and other third-party payors. The failure of
any of our operators to comply with these laws, requirements and regulations
could adversely affect their ability to meet their obligations to us. In
particular:
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Medicare and Medicaid.
A significant portion of our SNF and nursing home operators’ revenue is
derived from governmentally-funded reimbursement programs, primarily
Medicare and Medicaid. Failure to maintain certification and accreditation
in these programs would result in a loss of funding from such programs.
See the risk factor entitled “Our operators depend on reimbursement from
governmental and other third party payors and reimbursement rates from
such payors may be reduced” for further
discussion.
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Licensing and
Certification. Our operators and facilities are subject to
regulatory and licensing requirements of federal, state and local
authorities and are periodically audited by these
authorities. Failure to obtain licensure or loss or suspension
of licensure would prevent a facility from operating or result in a
suspension of reimbursement payments until all licensure issues have been
resolved and the necessary licenses obtained or reinstated. In such event,
our revenues from these facilities could be reduced or eliminated for an
extended period of time or permanently. In addition, licensing and
Medicare and Medicaid laws also require operators of nursing homes and
assisted living facilities to comply with extensive standards governing
operations. Federal and state agencies administering those laws regularly
inspect such facilities and investigate complaints. Our operators and
their managers receive notices of potential sanctions and remedies from
time to time, and such sanctions have been imposed from time to time on
facilities operated by them. If our operators are unable to cure
deficiencies, which have been identified or which are identified in the
future, such sanctions may be imposed. If imposed, the resulting sanctions
may adversely affect our operators’ revenues, potentially jeopardizing
their ability to meet their obligations to
us.
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Fraud and Abuse Laws and
Regulations. There are various extremely complex civil and criminal
federal and state laws governing a wide array of referrals, relationships
and arrangements and prohibiting fraud by healthcare providers. Many of
these laws raise issues that have not been clearly interpreted.
Governments are devoting increasing attention and resources to anti-fraud
initiatives against healthcare providers. The federal anti-kickback
statute is a criminal statute that prohibits the knowing and willful
offer, payment, solicitation or receipt of any remuneration in return for,
to induce, or to arrange for the referral of individuals for any item or
service payable by a federal or state healthcare program. There is also a
civil analogue. States also have enacted similar statutes covering
Medicaid payments and some states have broader statutes. Some enforcement
efforts have targeted relationships between SNFs and ancillary providers,
relationships between SNFs and referral sources for SNFs and relationships
between SNFs and facilities for which the SNFs serve as referral sources.
The federal self-referral law, commonly known as the “Stark Law,” is a
civil statute that prohibits certain referrals by physicians to entities
providing “designated health services” if these physicians have financial
relationships with the entities. Some of the services provided in SNFs are
classified as designated health services. There are also criminal
provisions that prohibit filing false claims or making false statements to
receive payment or certification under Medicare and Medicaid, as well as
failing to refund overpayments or improper payments. Violation of the
anti-kickback statute or Stark Law may form the basis for a False Claims
Act violation. In addition, the federal False Claims Act allows a private
individual with knowledge of fraud to bring a claim on behalf of the
federal government and earn a percentage of the federal government’s
recovery. Because of these incentives, these so-called “whistleblower”
suits have become more frequent. The violation of any of these laws or
regulations by an operator may result in the imposition of fines or other
penalties, including exclusion from Medicare, Medicaid, and all other
federal and state healthcare programs. Such fines or penalties could
jeopardize that operator’s ability to make lease or mortgage payments to
us or to continue operating its
facility.
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Privacy
Laws. Our operators are subject to federal, state and local laws
and regulations designed to protect confidentiality and security of
patient health information, including the privacy and security provisions
in the federal Health Insurance Portability and Accountability Act of 1996
and the corresponding regulations promulgated, known as HIPAA. HIPAA was
amended by the American Recovery and Reinvestment Act of 2009, known as
the Stimulus Bill, to increase penalties for HIPAA violations. These
changes include the imposition of stricter requirements on healthcare
providers, requiring notifications in most cases if there is a breach of
an individual’s protected health information (including public
announcements if the breach affects a significant number of individuals)
and the expansion of possibilities for enforcement. Our operators may have
to expend significant funds to secure the health information they hold,
including upgrading their computer systems. If our operators are found in
violation of HIPAA, such operators may be required to pay large penalties.
Compliance with public notification requirements in the event of a breach
could cause reputational harm to their business. Obligations to pay large
penalties or tarnishing of reputation could adversely affect the ability
of our operators to pay their obligations to us.
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Other Laws. Other
federal, state and local laws and regulations that impact how our
operators conduct their operations include: (i) laws protecting consumers
against deceptive practices; (ii) laws generally affecting our operators’
management of property and equipment and how our operators generally
conduct their operations, such as fire, health and safety laws; (iii) laws
affecting assisted living facilities mandating quality of services and
care, including food services; and (iv) resident rights (including abuse
and neglect laws) and health standards set by the federal Occupational
Safety and Health Administration. We cannot predict the effect that the
additional costs of complying with these laws may have on the revenues of
our operators, and thus their ability to meet their obligations to
us.
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Legislative
and Regulatory Developments. Each
year, legislative and regulatory proposals are introduced at the federal
and state levels that would result in major changes in the healthcare
system. We cannot accurately predict whether any proposals will be
adopted, and if adopted, what effect (if any) these proposals would have
on our operators, and as a result, our
business.
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Healthcare Reform. The
U.S. Congress is currently debating legislation that, if enacted into law,
would make significant changes to the healthcare system. Although the
House of Representatives and the Senate each passed healthcare reform
bills in late 2009, the two bills are different. We cannot predict whether
healthcare reform legislation will be enacted into law, and if healthcare
reform legislation is enacted, we cannot predict the ultimate content or
timing of this legislation. We also cannot predict the effect that any
such legislation may have on our
operators.
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Our
operators depend on reimbursement from governmental and other third-party payors
and reimbursement rates from such payors may be reduced.
Changes
in the reimbursement rate or methods of payment from third-party payors,
including the Medicare and Medicaid programs, or the implementation of other
measures to reduce reimbursements for services provided by our operators has in
the past, and could in the future, result in a substantial reduction in our
operators’ revenues and operating margins. Additionally, net revenue realizable
under third-party payor agreements can change after examination and retroactive
adjustment by payors during the claims settlement processes or as a result of
post-payment audits. Payors may disallow requests for reimbursement based on
determinations that certain costs are not reimbursable or reasonable or because
additional documentation is necessary or because certain services were not
covered or were not medically necessary. There also continue to be new
legislative and regulatory proposals that could impose further limitations on
government and private payments to healthcare providers. In some cases, states
have enacted or are considering enacting measures designed to reduce their
Medicaid expenditures and to make changes to private healthcare insurance. We
cannot assure you that adequate reimbursement levels will continue to be
available for the services provided by our operators, which are currently being
reimbursed by Medicare, Medicaid or private third-party payors. In its January
2010 meeting, the Medicare Payment Advisory Commission (“MedPAC”), a commission
chartered by Congress to advise Congress on Medicare payment policies,
recommended elimination of the 2011 market basket update for SNFs. We cannot
estimate at this time whether the Centers for Medicare and Medicaid Services
will adopt the MedPAC recommendations. We currently believe that our operator
coverage ratios are strong and that our operators can absorb moderate
reimbursement rate reductions and still meet their financial obligations to us.
However, significant limits on the scope of services reimbursed and on
reimbursement rates could have a material adverse effect on our operators’
liquidity, financial condition and results of operations, which could cause the
revenues of our operators to decline and jeopardize their ability to meet their
obligations to us.
Government
budget deficits could lead to a reduction in Medicare and Medicaid
reimbursement.
The
downturn in the U.S. economy has negatively affected state budgets, which may
put pressure on states to decrease reimbursement rates for our operators with
the goal of decreasing state expenditures under their state Medicaid programs.
The need to control Medicaid expenditures may be exacerbated by the potential
for increased enrollment in Medicaid due to unemployment and declines in family
incomes. These potential reductions could be compounded by the potential for
federal cost-cutting efforts that could lead to reductions in reimbursement to
our operators under both the Medicare and Medicaid programs. Potential
reductions in Medicare and Medicaid reimbursement to our operators could reduce
the cash flow of our operators and their ability to make rent or mortgage
payments to us. Since the profit margins on Medicaid patients are generally
relatively low, more than modest reductions in Medicaid reimbursement could
place some operators in financial distress, which in turn could adversely affect
us.
We
may be unable to find a replacement operator for one or more of our leased
properties.
From time to time, we may need to find a replacement operator for one or more of
our leased properties for a variety of reasons, including upon the expiration of
the term of the applicable lease or upon a default by the applicable operator.
During any period that we are attempting to locate one or more replacement
operators, there could be a decrease or cessation of rental payments on the
applicable property or properties. We cannot assure you that any of our current
or future operators will elect to renew their respective leases with us upon
expiration of the terms thereof. Similarly, we cannot assure you that
we will be able to locate a suitable replacement operator or, if we are
successful in locating a replacement operator, that the rental payments from the
new operator would not be significantly less than the existing rental payments.
Our ability to locate a suitable replacement operator may be significantly
delayed or limited by various state licensing, receivership, certificate of need
or other laws, as well as by Medicare and Medicaid change-of-ownership rules. We
also may incur substantial additional expenses in connection with any such
licensing, receivership or change-of-ownership proceedings. Any such delays,
limitations and expenses could materially delay or impact our ability to collect
rent, to obtain possession of leased properties or otherwise to exercise
remedies for default and could have an adverse effect on our
business.
A
prolonged economic slowdown could adversely impact our operating
income and earnings, as well as the results of operations of our operators,
which could impair their ability to meet their obligations
to us.
The
current economic slowdown has resulted in continued concerns regarding the
adverse impact caused by inflation, deflation, increased unemployment, volatile
energy costs, geopolitical issues, the availability and cost of credit, the U.S.
mortgage market, a distressed real estate market, market volatility and weakened
business and consumer confidence. This difficult operating environment could
have an adverse impact on the ability of our operators to maintain occupancy
rates, which could harm their financial condition. Any sustained period of
increased payment delinquencies, foreclosures or losses by our operators under
our leases and loans could adversely affect our income from investments in our
portfolio.
Certain
third parties may not be able to satisfy their obligations to us or our
operators due to continued uncertainty in the capital markets.
As a
result of current economic conditions, including uncertainty in the capital
markets, credit markets have tightened significantly such that the ability to
obtain new capital has become more challenging and more expensive. In addition,
several large financial institutions have either recently failed or become
dependent on the assistance of the U.S. federal government to continue to
operate as a going concern. Interest rate fluctuations, financial market
volatility or credit market disruptions could limit the ability of our operators
to obtain credit to finance their businesses on acceptable terms, which could
adversely affect their ability to satisfy their obligations to us. Similarly, if
any of our other counterparties, such as letter of credit issuers, insurance
carriers, banking institutions, title companies and escrow agents, experience
difficulty in accessing capital or other sources of funds or fails to remain a
viable entity, it could have an adverse effect on our business.
Our
operators may be subject to significant legal actions that could result in their
increased operating costs and substantial uninsured liabilities, which may
affect their ability to meet their obligations to us.
As is
typical in the long-term healthcare industry, our operators are often subject to
claims for damages relating to the services that they provide. We can
give no assurance that the insurance coverage maintained by our operators will
cover all claims made against them or continue to be available at a reasonable
cost, if at all. In some states, insurance coverage for the risk of
punitive damages arising from professional liability and general liability
claims and/or litigation may not, in certain cases, be available to operators
due to state law prohibitions or limitations of availability. As a
result, our operators operating in these states may be liable for punitive
damage awards that are either not covered or are in excess of their insurance
policy limits. TC Healthcare, the entity operating facilities on our
behalf on an interim basis, may be named as a defendant in professional
liability claims related to the properties that were transitioned from Haven
Eldercare, LLC (“Haven facilities”) as described in Item 7 – Management’s
Discussion and Analysis of Financial Condition and Results of Operations
–Portfolio and Other Developments. In these suits, patients could
allege significant damages, including punitive damages. We currently
consolidate the financial results of TC Healthcare in our financial statements,
and as such, our financial results could suffer. Effective as of July
7, 2008, we took ownership and/or possession of the 15 former Haven facilities
and TC Healthcare, an entity in which we have a substantial economic interest,
subsequently began operating these facilities on our behalf through an
independent contractor.
We also
believe that there has been, and will continue to be, an increase in
governmental investigations of long-term care providers, particularly in the
area of Medicare/Medicaid false claims, as well as an increase in enforcement
actions resulting from these investigations. Insurance is not available to our
operators to cover such losses. Any adverse determination in a legal
proceeding or governmental investigation, whether currently asserted or arising
in the future, could have a material adverse effect on an operator’s financial
condition. If an operator is unable to obtain or maintain insurance
coverage, if judgments are obtained in excess of the insurance coverage, if an
operator is required to pay uninsured punitive damages, or if an operator is
subject to an uninsurable government enforcement action, the operator could be
exposed to substantial additional liabilities. Such liabilities could
adversely affect the operator’s ability to meet its obligations to
us.
In
addition, we may in some circumstances be named as a defendant in litigation
involving the services provided by our operators. Although we
generally have no involvement in the services provided by our operators, and our
standard lease agreements and loan agreements generally require our operators to
indemnify us and carry insurance to cover us in certain cases, a significant
judgment against us in such litigation could exceed our and our operators’
insurance coverage, which would require us to make payments to cover the
judgment.
Increased
competition as well as increased operating costs have resulted in lower revenues
for some of our operators and may affect the ability of our operators to meet
their payment obligations to us.
The
long-term healthcare industry is highly competitive and we expect that it may
become more competitive in the future. Our operators are competing
with numerous other companies providing similar healthcare services or
alternatives such as home health agencies, life care at home, community-based
service programs, retirement communities and convalescent
centers. Our operators compete on a number of different levels
including the quality of care provided, reputation, the physical appearance of a
facility, price, the range of services offered, family preference, alternatives
for healthcare delivery, the supply of competing properties, physicians, staff,
referral sources, location and the size and demographics of the population in
the surrounding areas. We cannot be certain that the operators of all
of our facilities will be able to achieve occupancy and rate levels that will
enable them to meet all of their obligations to us. Our operators may
encounter increased competition in the future that could limit their ability to
attract residents or expand their businesses and therefore affect their ability
to pay their lease or mortgage payments.
The
market for qualified nurses, healthcare professionals and other key personnel is
highly competitive and our operators may experience difficulties in attracting
and retaining qualified personnel. Increases in labor costs due to
higher wages and greater benefits required to attract and retain qualified
healthcare personnel incurred by our operators could affect their ability to pay
their lease or mortgage payments. This situation could be
particularly acute in certain states that have enacted legislation establishing
minimum staffing requirements.
We
may be unable to successfully foreclose on the collateral securing our mortgage
loans, and even if we are successful in our foreclosure efforts, we may be
unable to successfully find a replacement operator, or operate or occupy the
underlying real estate, which may adversely affect our ability to recover our
investments.
If an
operator defaults under one of our mortgage loans, we may foreclose on the loan
or otherwise protect our interest by acquiring title to the property. In such a
scenario, we may be required to make substantial improvements or repairs to
maximize the facility’s investment potential. Operators may contest enforcement
of foreclosure or other remedies, seek bankruptcy protection against our
exercise of enforcement or other remedies and/or bring claims for lender
liability in response to actions to enforce mortgage obligations. Even if we are
able to successfully foreclose on the collateral securing our mortgage loans, we
may be unable to expeditiously find a replacement operator, if at all, or
otherwise successfully operate or occupy the property, which could adversely
affect our ability to recover our investment.
Certain
of our operators account for a significant percentage of our real estate
investment and revenues.
At December 31, 2009, approximately 21%
of our real estate investments were operated by two public companies: Sun
Healthcare Group (“Sun”) (12%) and Advocat Inc. (“Advocat”) (9%). Our
largest private company operators (by investment) were CommuniCare Healthcare
Services (“CommuniCare”) (18%), Signature Holding II, LLC (8%), Guardian LTC
Management Inc. (7%) and Formation Capital Corporation (7%). No other
operator represents more than 5% of our investments.
For the year ended December 31, 2009,
our revenues from operations totaled $197.4 million, of which approximately
$35.3 million were from CommuniCare (18%), $30.9 million from Sun (16%) and
$22.3 million from Advocat (11%). No other operator generated more
than 9% of our revenues from operations for the year ended December 31,
2009. In addition, our owned and operated assets generated $18.4
million (9%) of revenue in 2009.
On a pro forma basis as if the December
2009 acquisition of certain subsidiaries owned by CapitalSource Inc. had been
completed as of January 1, 2009, our pro forma revenues for the year ended
December 31, 2009 were $227.8 million, of which approximately $30.9 million
would have been from Sun (14%), $35.3 million from CommuniCare (15%) and $22.3
million from Advocat (10%). No other operator generated more than 9%
of pro forma revenues from operations for the year ended December 31,
2009.
We cannot
assure you that any of our operators will have sufficient assets, income or
access to financing to enable it them to satisfy their obligations to
us. Any failure by our operators, and specifically those operators
described above, to effectively conduct their operations could materially reduce
our revenues and net income, which could in turn reduce the amount of dividends
we pay and cause our stock price to decline.
Risks
Related to Us and Our Operations
We
rely on external sources of capital to fund future capital needs, and if we
encounter difficulty in obtaining such capital, we may not be able to make
future investments necessary to grow our business or meet maturing
commitments.
To
qualify as a REIT under the Internal Revenue Code (the “Code”), we are required,
among other things, to distribute at least 90% of our REIT taxable income each
year to our stockholders. Because of this distribution requirement,
we may not be able to fund, from cash retained from operations, all future
capital needs, including capital needed to make investments and to satisfy or
refinance maturing commitments. As a result, we rely on external
sources of capital, including debt and equity financing. If we are
unable to obtain needed capital at all or only on unfavorable terms from these
sources, we might not be able to make the investments needed to grow our
business, or to meet our obligations and commitments as they mature, which could
negatively affect the ratings of our debt and even, in extreme circumstances,
affect our ability to continue operations. Our access to capital
depends upon a number of factors over which we have little or no control,
including the performance of the national and global economies
generally; competition in the healthcare industry; issues facing the healthcare
industry, including regulations and government reimbursement policies; our
operators’ operating costs; the ratings of our debt and preferred securities;
the market’s perception of our growth potential; the market value of our
properties; our current and potential future earnings and cash distributions;
and the market price of the shares of our capital stock. Difficult
capital market conditions in our industry during the past several years,
exacerbated by the recent economic downturn, and our need to stabilize our
portfolio have limited and may continue to limit our access to
capital. While we currently have sufficient cash flow from operations
to fund our obligations and commitments, we may not be in position to take
advantage of future investment opportunities in the event that we are unable to
access the capital markets on a timely basis or we are only able to obtain
financing on unfavorable terms.
Current
economic conditions and turbulence in the credit markets may create challenges
in securing third-party borrowings or refinancing our existing debt, and may
cause market rental rates and property values to decline.
Current
economic conditions, the availability and cost of credit, turmoil in the
mortgage market and declining real estate markets have contributed to increased
volatility and diminished expectations for real estate markets and the economy
as a whole going forward. Many economists are predicting continued deterioration
in economic conditions in the United States, along with significant increases in
unemployment and vacancy rates at commercial properties. In the event that the
constriction within the credit markets persists, we may face challenges in
securing third-party borrowings or refinancing our existing debt in the
future.
Additionally,
should such economic conditions continue for a prolonged period of time, the
value of our commercial real estate assets and our ability to achieve market
rental rates would decline significantly. In the near-term, we
believe that we are well positioned to withstand this downturn; however, no
assurances can be given that current economic conditions and the effects of the
credit crisis will not have a material adverse effect on our business, financial
condition and results of operations.
Our
ability to raise capital through equity sales is dependent, in part, on the
market price of our common stock, and our failure to meet market expectations
with respect to our business could negatively impact the market price of our
common stock and availability of equity capital.
As with
other publicly-traded companies, the availability of equity capital will depend,
in part, on the market price of our common stock which, in turn, will depend
upon various market conditions and other factors that may change from time to
time including:
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the
extent of investor interest;
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the
general reputation of REITs and the attractiveness of their equity
securities in comparison to other equity securities, including securities
issued by other real estate-based
companies;
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our
financial performance and that of our
operators;
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the
contents of analyst reports about us and the REIT
industry;
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general
stock and bond market conditions, including changes in interest rates on
fixed income securities, which may lead prospective purchasers of our
common stock to demand a higher annual yield from future
distributions;
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our
failure to maintain or increase our dividend, which is dependent, to a
large part, on growth of funds from operations which in turn depends upon
increased revenues from additional investments and rental increases;
and
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other
factors such as governmental regulatory action and changes in REIT tax
laws.
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The
market value of the equity securities of a REIT is generally based upon the
market’s perception of the REIT’s growth potential and its current and potential
future earnings and cash distributions. Our failure to meet the
market’s expectation with regard to future earnings and cash distributions would
likely adversely affect the market price of our common stock and, as a result,
the availability of equity capital to us.
We
are subject to risks associated with debt financing, which could negatively
impact our business and limit our ability to make distributions to our
stockholders and to repay maturing debt.
The
financing required to make future investments and satisfy maturing commitments
may be provided by borrowings under our credit facilities, private or public
offerings of debt, the assumption of secured indebtedness, mortgage financing on
a portion of our owned portfolio or through joint ventures. To the
extent we must obtain debt financing from external sources to fund our capital
requirements, we cannot guarantee such financing will be available on favorable
terms, if at all. In addition, if we are unable to refinance or
extend principal payments due at maturity or pay them with proceeds from other
capital transactions, our cash flow may not be sufficient to make distributions
to our stockholders and repay our maturing debt. Furthermore, if
prevailing interest rates, changes in our debt ratings or other factors at the
time of refinancing result in higher interest rates upon refinancing, the
interest expense relating to that refinanced indebtedness would increase, which
could reduce our profitability and the amount of dividends we are able to
pay. Moreover, additional debt financing increases the amount of our
leverage. The degree of leverage could have important consequences to
stockholders, including affecting our investment grade ratings and our ability
to obtain additional financing in the future, and making us more vulnerable to a
downturn in our results of operations or the economy generally.
Unforeseen
costs associated with the acquisition of new properties could reduce our
profitability.
Our
business strategy contemplates future acquisitions that may not prove to be
successful. For example, we might encounter unanticipated
difficulties and expenditures relating to our acquired properties, including
contingent liabilities, or our newly acquired properties might require
significant management attention that would otherwise be devoted to our ongoing
business. As a further example, if we agree to provide funding to
enable healthcare operators to build, expand or renovate facilities on our
properties and the project is not completed, we could be forced to become
involved in the development to ensure completion or we could lose the
property. Such costs may negatively affect our results of
operations.
We can provide you with no assurance
that the contemplated CapitalSource acquisitions will occur.
The acquisition of certain subsidiaries
owned by CapitalSource Inc. that we expect to occur in the second quarter of
2010 is subject to a number of closing conditions, including but not limited to
approval of the U.S. Department of Housing and Urban Development. In
addition, we are not obligated to exercise the option we currently hold to
acquire certain other CapitalSource subsidiaries owning 63 additional
facilities. Accordingly, there can be no assurance as to whether or
when either of these closings will occur.
We
may not be able to adapt our management and operational systems to integrate and
manage our growth without additional expense
Our December 2009 acquisition of
certain CapitalSource subsidiaries has significantly increased the number of
long-term care facilities in our investment portfolio and the number of states
in which we own facilities. We will likely acquire additional
CapitalSource subsidiaries, which will further expand the size and scope of our
portfolio. We cannot assure you that we will be able to adapt our
management, administrative, accounting and operational systems to integrate and
manage the facilities we have acquired and those that we may acquire under our
existing cost structure in a timely manner. Our failure to timely
integrate and manage the acquisition of the CapitalSource subsidiaries and
future acquisitions or developments could have a material adverse effect on our
results of operations and financial condition.
We
may be subject to additional risks in connection with our past and future
acquisitions of long-term care facilities.
We may be subject to additional risks
in connection with past and future acquisitions of long-term care facilities,
including but not limited to the facilities we recently acquired from
CapitalSource Inc., such as the following:
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we
have no previous business experience with the operators of a number of the
facilities we have acquired or may acquire in the
future;
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the
facilities may underperform due to various factors, including unfavorable
terms and conditions of the lease agreements that we assume or may assume,
disruptions caused by the management of the operators of the facilities or
changes in economic conditions impacting the facilities and/or the
operators;
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diversion
of our management’s attention away from other business
concerns;
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exposure
to any undisclosed or unknown potential liabilities relating to the
facilities; and
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potential
underinsured losses on the
facilities.
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We cannot assure you that we will be
able to manage the facilities we have acquired or may acquire in the future
without encountering difficulties or that any such difficulties will not have a
material adverse effect on us.
Our
assets may be subject to impairment charges.
We
periodically, but not less than annually, evaluate our real estate investments
and other assets for impairment indicators. The judgment regarding the existence
of impairment indicators is based on factors such as market conditions, operator
performance and legal structure. If we determine that a significant
impairment has occurred, we are required to make an adjustment to the net
carrying value of the asset, which could have a material adverse affect on our
results of operations and funds from operations in the period in which the
write-off occurs.
We
may not be able to sell certain closed facilities for their book
value.
From time
to time, we close facilities and actively market such facilities for sale. To
the extent we are unable to sell these properties for our book value, we may be
required to take a non-cash impairment charge or loss on the sale, either of
which would reduce our net income.
Our
substantial indebtedness could adversely affect our financial
condition.
We have
substantial indebtedness and we may increase our indebtedness in the
future. Our substantial level of indebtedness could have important
consequences to our stockholders. For example, it could:
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limit
our ability to satisfy our obligations with respect to holders of our
capital stock;
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increase
our vulnerability to adverse changes in general economic, industry and
competitive conditions;
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limit
our ability to borrow additional funds for working capital, capital
expenditures, acquisitions, debt service requirements, execution of our
business plan or other general corporate purposes on satisfactory terms or
at all.
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require
us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness and leases, thereby reducing the availability
of our cash flow to fund working capital, capital expenditures and other
general corporate requirements, or to carry out other aspects of our
business plan;
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require
us to pledge as collateral substantially all of our
assets;
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require
us to maintain certain debt coverage and financial ratios at specified
levels, thereby reducing our financial
flexibility;
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limit
our ability to make material acquisitions or take advantage of business
opportunities that may arise;
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expose
us to fluctuations in interest rates, to the extent our borrowings bear
variable rates of interests;
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result
in a possible downgrade of our credit
rating;
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limit
our flexibility in planning for, or reacting to, changes in our business
and industry in which we operate;
and
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place
us at a competitive disadvantage compared to our competitors that have
less debt.
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Covenants
in our debt documents limit our operational flexibility, and a covenant breach
could materially adversely affect our operations.
The terms
of our loan agreements and note indentures require us to comply with a number of
customary financial and other covenants which may limit our management’s
discretion by restricting our ability to, among other things, incur additional
debt, redeem our capital stock, enter into certain transactions with affiliates,
pay dividends and make other distributions, make investments and other
restricted payments and create liens. Any additional financing we may
obtain could contain similar or more restrictive covenants. Our
continued ability to incur indebtedness and conduct our operations is subject to
compliance with these financial and other covenants. Breaches of these covenants
could result in defaults under the instruments governing the applicable
indebtedness, in addition to any other indebtedness cross-defaulted against such
instruments. Any such breach could materially adversely affect our business,
results of operations and financial condition.
We
have now, and may have in the future, exposure to contingent rent
escalators.
We receive revenue primarily by leasing
our assets under leases that are long-term triple-net leases in which the rental
rate is generally fixed with annual rent escalations, subject to certain
limitations. Certain leases contain escalators contingent on changes
in the Consumer Price Index. If the Consumer Price Index does not
increase, our revenues may not increase.
We
are subject to particular risks associated with real estate ownership, which
could result in unanticipated losses or expenses.
Our business is subject to many risks
that are associated with the ownership of real estate. For example,
if our operators do not renew their leases, we may be unable to re-lease the
facilities at favorable rental rates. Other risks that are associated
with real estate acquisition and ownership include, without limitation, the
following:
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general
liability, property and casualty losses, some of which may be
uninsured;
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the
inability to purchase or sell our assets rapidly to respond to changing
economic conditions, due to the illiquid nature of real estate and the
real estate market;
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leases
which are not renewed or are renewed at lower rental amounts at
expiration;
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the
exercise of purchase options by operators resulting in a reduction of our
rental revenue;
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costs
relating to maintenance and repair of our facilities and the need to make
expenditures due to changes in governmental regulations, including the
Americans with Disabilities Act;
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environmental
hazards created by prior owners or occupants, existing tenants, mortgagors
or other persons for which we may be
liable;
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acts
of God affecting our properties;
and
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acts
of terrorism affecting our
properties.
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Our
real estate investments are relatively illiquid.
Real
estate investments are relatively illiquid and generally cannot be sold
quickly. In addition, some of our properties serve as collateral for
our secured debt obligations and cannot be readily sold. Additional
factors that are specific to our industry also tend to limit our ability to vary
our portfolio promptly in response to changes in economic or other
conditions. For example, all of our properties are ‘‘special
purpose’’ properties that cannot be readily converted into general residential,
retail or office use. In addition, transfers of operations of nursing
homes and other healthcare-related facilities are subject to regulatory
approvals not required for transfers of other types of commercial operations and
other types of real estate. Thus, if the operation of any of our
properties becomes unprofitable due to competition, age of improvements or other
factors such that our operator becomes unable to meet its obligations to us,
then the liquidation value of the property may be substantially less,
particularly relative to the amount owing on any related mortgage loan, than
would be the case if the property were readily adaptable to other
uses. Furthermore, the receipt of liquidation proceeds or the
replacement of an operator that has defaulted on its lease or loan could be
delayed by the approval process of any federal, state or local agency necessary
for the transfer of the property or the replacement of the operator with a new
operator licensed to manage the facility. In addition, certain
significant expenditures associated with real estate investment, such as real
estate taxes and maintenance costs, are generally not reduced when circumstances
cause a reduction in income from the investment. Should such events
occur, our income and cash flows from operations would be adversely
affected.
As
an owner or lender with respect to real property, we may be exposed to possible
environmental liabilities.
Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner of real property or a secured lender, such as us,
may be liable in certain circumstances for the costs of investigation, removal
or remediation of, or related releases of, certain hazardous or toxic substances
at, under or disposed of in connection with such property, as well as certain
other potential costs relating to hazardous or toxic substances, including
government fines and damages for injuries to persons and adjacent
property. Such laws often impose liability based on the owner’s
knowledge of, or responsibility for, the presence or disposal of such
substances. As a result, liability may be imposed on the owner in
connection with the activities of an operator of the property. The
cost of any required investigation, remediation, removal, fines or personal or
property damages and the owner’s liability therefore could exceed the value of
the property and/or the assets of the owner. In addition, the
presence of such substances, or the failure to properly dispose of or remediate
such substances, may adversely affect an operators’ ability to attract
additional residents and our ability to sell or rent such property or to borrow
using such property as collateral which, in turn, could negatively impact our
revenues.
Although
our leases and mortgage loans require the lessee and the mortgagor to indemnify
us for certain environmental liabilities, the scope of such obligations may be
limited. For instance, most of our leases do not require the lessee
to indemnify us for environmental liabilities arising before the lessee took
possession of the premises. Further, we cannot assure you that any
such mortgagor or lessee would be able to fulfill its indemnification
obligations.
The
industry in which we operate is highly competitive. Increasing investor interest
in our sector and consolidation at the operator of REIT level could increase
competition and reduce our profitability.
Our
business is highly competitive and we expect that it may become more competitive
in the future. We compete for healthcare facility investments with
other healthcare investors, including other REITs, some of which have greater
resources and lower costs of capital than we do. Increased
competition makes it more challenging for us to identify and successfully
capitalize on opportunities that meet our business goals. If we
cannot capitalize on our development pipeline, identify and purchase a
sufficient quantity of healthcare facilities at favorable prices, or if we are
unable to finance such acquisitions on commercially favorable terms, our
business, results of operations and financial condition may be materially
adversely affected. In addition, if our cost of capital should
increase relative to the cost of capital of our competitors, the spread that we
realize on our investments may decline if competitive pressures limit or prevent
us from charging higher lease or mortgage rates.
We
may be named as defendants in litigation arising out of professional liability
and general liability claims relating to our previously owned and operated
facilities that if decided against us, could adversely affect our financial
condition.
We and
several of our wholly-owned subsidiaries were named as defendants in
professional liability and general liability claims related to our owned and
operated facilities prior to 2005. Other third-party managers
responsible for the day-to-day operations of these facilities were also named as
defendants in these claims. In these suits, patients of certain
previously owned and operated facilities have alleged significant damages,
including punitive damages, against the defendants. Although all of
these prior suits have been settled, we or our affiliates could be named as
defendants in similar suits related to our owned and operated assets resulting
from the transition of the Haven facilities as described in Item 7 –
Management’s Discussion and Analysis of Financial Condition and Results of
Operations –Portfolio and Other Developments. There can be no
assurance that we would be successful in our defense of such potential matters
or in asserting our claims against various managers of the subject facilities or
that the amount of any settlement or judgment would be substantially covered by
insurance or that any punitive damages will be covered by
insurance.
Our
charter and bylaws contain significant anti-takeover provisions which could
delay, defer or prevent a change in control or other transactions that could
provide our stockholders with the opportunity to realize a premium over the
then-prevailing market price of our common stock.
Our
articles of incorporation and bylaws contain various procedural and other
requirements which could make it difficult for stockholders to effect certain
corporate actions. Our Board of Directors is divided into three
classes and the members of our Board of Directors are elected for terms that are
staggered. Our Board of Directors also has the authority to issue
additional shares of preferred stock and to fix the preferences, rights and
limitations of the preferred stock without stockholder
approval. These provisions could discourage unsolicited acquisition
proposals or make it more difficult for a third party to gain control of us,
which could adversely affect the market price of our securities and/or result in
the delay, deferral or prevention of a change in control or other transactions
that could provide our stockholders with the opportunity to realize a premium
over the then-prevailing market price of our common stock.
We
may change our investment strategies and policies and capital
structure.
Our Board
of Directors, without the approval of our stockholders, may alter our investment
strategies and policies if it determines that a change is in our stockholders’
best interests. The methods of implementing our investment strategies
and policies may vary as new investments and financing techniques are
developed.
Our
success depends in part on our ability to retain key personnel and our ability
to attract or retain other qualified personnel.
Our
future performance depends to a significant degree upon the continued
contributions of our executive management team and other key
employees. The loss of the services of our current executive
management team could have an adverse impact on our
operations. Although we have entered into employment agreements with
the members of our executive management team, these agreements may not assure
their continued service. In addition, our future success depends, in
part, on our ability to attract, hire, train and retain other qualified
personnel. Competition for qualified employees is intense, and we
compete for qualified employees with companies with greater financial
resources. Our failure to successfully attract, hire, retain and
train the people we need would significantly impede our ability to implement our
business strategy.
Failure
to maintain effective internal control over financial reporting could have a
material adverse effect on our business, results of operations, financial
condition and stock price.
Pursuant
to the Sarbanes-Oxley Act of 2002, we are required to provide a report by
management on internal control over financial reporting, including management's
assessment of the effectiveness of such control. Changes to our business will
necessitate ongoing changes to our internal control systems and processes.
Internal control over financial reporting may not prevent or detect
misstatements due to inherent limitations, including the possibility of human
error, the circumvention or overriding of controls, or fraud. Therefore, even
effective internal controls can provide only reasonable assurance with respect
to the preparation and fair presentation of financial statements. In addition,
projections of any evaluation of effectiveness of internal control over
financial reporting to future periods are subject to the risk that the control
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. If we fail to
maintain the adequacy of our internal controls, including any failure to
implement required new or improved controls, or if we experience difficulties in
their implementation, our business, results of operations and financial
condition could be materially adversely harmed, we could fail to meet our
reporting obligations and there could be a material adverse effect on our stock
price.
If
we fail to maintain our REIT status, we will be subject to federal income tax on
our taxable income at regular corporate rates.
We were
organized to qualify for taxation as a REIT under Sections 856 through 860 of
the Code. We believe that we have operated in such a manner as to
qualify for taxation as a REIT under the Code and intend to continue to operate
in a manner that will maintain our qualification as a
REIT. Qualification as a REIT involves the satisfaction of numerous
requirements, some on an annual and some on a quarterly basis, established under
highly technical and complex provisions of the Code for which there are only
limited judicial and administrative interpretations and involve the
determination of various factual matters and circumstances not entirely within
our control. We cannot assure you that we will at all times satisfy
these rules and tests.
If we
were to fail to qualify as a REIT in any taxable year, as a result of a
determination that we failed to meet the annual distribution requirement or
otherwise, we would be subject to federal income tax, including any applicable
alternative minimum tax, on our taxable income at regular corporate rates with
respect to each such taxable year for which the statute of limitations remains
open. Moreover, unless entitled to relief under certain statutory
provisions, we also would be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification is
lost. This treatment would significantly reduce our net earnings and
cash flow because of our additional tax liability for the years involved, which
could significantly impact our financial condition.
We
generally must distribute annually at least 90% of our taxable income to our
stockholders to maintain our REIT status. To the extent that we do
not distribute all of our net capital gain or do distribute at least 90%, but
less than 100% of our “REIT taxable income,” as adjusted, we will be subject to
tax thereon at regular ordinary and capital gain corporate tax
rates.
Even
if we remain qualified as a REIT, we may face other tax liabilities that reduce
our cash flow.
Even if
we remain qualified for taxation as a REIT, we may be subject to certain
federal, state and local taxes on our income and assets, including taxes on any
undistributed income, tax on income from some activities conducted as a result
of a foreclosure, and state or local income, property and transfer
taxes. Any of these taxes would decrease cash available for the
payment of our debt obligations. In addition, to meet REIT
qualification requirements, we may hold some of our non-healthcare assets
through taxable REIT subsidiaries or other subsidiary corporations that will be
subject to corporate level income tax at regular rates.
Qualifying
as a REIT involves highly technical and complex provisions of the Internal
Revenue Code and complying with REIT requirements may affect our
profitability.
Qualification
as a REIT involves the application of technical and intricate Internal Revenue
Code provisions. Even a technical or inadvertent violation could jeopardize our
REIT qualification. To qualify as a REIT for federal income tax purposes, we
must continually satisfy tests concerning, among other things, the nature and
diversification of our assets, the sources of our income and the amounts we
distribute to our stockholders. Thus, we may be required to liquidate
otherwise attractive investments from our portfolio, or be unable to pursue
investments that would be otherwise advantageous to us, to satisfy the asset and
income tests or to qualify under certain statutory relief
provisions. We may also be required to make distributions to
stockholders at disadvantageous times or when we do not have funds readily
available for distribution (e.g., if we have assets which generate mismatches
between taxable income and available cash). Having to comply with the
distribution requirement could cause us to: (i) sell assets in adverse market
conditions; (ii) borrow on unfavorable terms; or (iii) distribute amounts that
would otherwise be invested in future acquisitions, capital expenditures or
repayment of debt. As a result, satisfying the REIT requirements
could have an adverse effect on our business results and
profitability.
Risks
Related to Our Stock
In addition to the risks related to our
operators and our operations described above, the following are additional risks
associated with our stock.
The
market value of our stock could be substantially affected by various
factors.
Market
volatility may adversely affect the market price of our common
stock. As with other publically traded securities, the share price of
our stock depends on many factors, which may change from time to time,
including:
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the
market for similar securities issued by
REITs;
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changes
in estimates by analysts;
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our
ability to meet analysts’
estimates;
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prevailing
interest rates;
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general
economic and market conditions; and
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our
financial condition, performance and
prospects.
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Our
issuance of additional capital stock, warrants or debt securities, whether or
not convertible, may reduce the market price for our outstanding securities,
including our common stock, and dilute the ownership interests of existing
stockholders.
We cannot
predict the effect, if any, that future sales of our capital stock, warrants or
debt securities, or the availability of our securities for future sale, will
have on the market price of our securities, including our common
stock. Sales of substantial amounts of our common stock or preferred
shares, warrants or debt securities convertible into or exercisable or
exchangeable for common stock in the public market, or the perception that such
sales might occur, could negatively impact the market price of our stock and the
terms upon which we may obtain additional equity financing in the
future.
In
addition, we may issue additional capital stock in the future to raise capital
or as a result of the following:
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the
issuance and exercise of options to purchase our common stock or other
equity awards under remuneration plans. We may also issue equity to our
employees in lieu of cash bonuses or to our directors in lieu of
director’s fees);
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the
issuance of shares pursuant to our dividend reinvestment and direct stock
purchase plan;
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the
issuance of debt securities exchangeable for our common
stock;
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the
exercise of warrants we may issue in the
future;
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lenders
sometimes ask for warrants or other rights to acquire shares in connection
with providing financing, and wee cannot assure you that our lenders will
not request such rights; and
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the
sales of securities convertible into our common stock could dilute the
interests of existing common
stockholders.
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There
are no assurances of our ability to pay dividends in the future.
In 2001,
our Board of Directors suspended dividends on shares of our common stock and all
series of preferred stock in an effort to generate cash to address
then-impending debt maturities. In 2003, we paid all accrued but
unpaid dividends on all shares of series of preferred stock and reinstated
dividends on shares of our common stock and all series of preferred
stock. However, our ability to pay dividends may be adversely
affected if any of the risks described herein were to occur. Our
payment of dividends is subject to compliance with restrictions contained in our
credit agreements, the indentures governing our senior notes and our preferred
stock. All dividends will be paid at the discretion of our Board of
Directors and will depend upon our earnings, our financial condition,
maintenance of our REIT status and such other factors as our Board of Directors
may deem relevant from time to time. There are no assurances of our
ability to pay dividends in the future. In addition, our dividends in
the past have included, and may in the future include, a return of
capital.
Holders
of our outstanding preferred stock have liquidation and other rights that are
senior to the rights of the holders of our common stock.
Our Board
of Directors has the authority to designate and issue preferred stock that may
have dividend, liquidation and other rights that are senior to those of our
common stock. As of the date of this filing, 4,339,500 shares of our
8.375% Series D cumulative redeemable preferred stock (“Series D Preferred
Stock”) were issued and outstanding. The aggregate liquidation
preference with respect to the outstanding Series D Preferred Stock is
approximately $108.5 million, and annual dividends on our outstanding Series D
Preferred Stock were approximately $9.1 million. Holders of our
Series D Preferred Stock are generally entitled to cumulative dividends before
any dividends may be declared or set aside on our common stock. Upon
our voluntary or involuntary liquidation, dissolution or winding up, before any
payment is made to holders of our common stock, holders of our Series D
Preferred Stock are entitled to receive a liquidation preference of $25 per
share, plus any accrued and unpaid distributions. This preference
will reduce the remaining amount of our assets, if any, available to distribute
to holders of our common stock. In addition, holders of our Series D
Preferred Stock have the right to elect two additional directors to our Board of
Directors if six quarterly preferred dividends are in arrears. If
this were to occur, the holders of our Series D Preferred Stock would have
significant control over our affairs, and their interests may differ from those
of our other stockholders.
Legislative
or regulatory action could adversely affect purchasers of our
stock.
In recent
years, numerous legislative, judicial and administrative changes have been made
in the provisions of the federal income tax laws applicable to investments
similar to an investment in our stock. Changes are likely to continue
to occur in the future, and we cannot assure you that any of these changes will
not adversely affect our stockholder’s stock. Any of these changes
could have an adverse effect on an investment in our stock or on market value or
resale potential. Stockholders are urged to consult with their own
tax advisor with respect to the impact that recent legislation may have on their
investment and the status of legislative, regulatory or administrative
developments and proposals and their potential effect.
A
downgrade of our credit rating could impair our ability to obtain additional
debt financing on favorable terms, if at all, and significantly reduce the
trading price of our common stock.
Our senior notes have credit ratings of
Ba3 from Moody’s Investors Service and BB+ from Standard & Poor’s Ratings
Service. If any of these rating agencies downgrade our credit rating,
or place our rating under watch or review for possible downgrade, this could
make it more difficult or expensive for us to obtain additional debt financing,
and the trading price of our common stock may decline. Factors that
may affect our credit rating include, among other things, our financial
performance, our success in raising sufficient equity capital, adverse changes
in our debt and fixed charge coverage ratios, our capital structure and level of
indebtedness and pending or future changes in the regulatory framework
applicable to our operators and our industry. We cannot assure you
that these credit agencies will not downgrade our credit rating in the
future.
None.
At December 31, 2009, our real estate
investments included long-term care facilities and rehabilitation hospital
investments, either in the form of purchased facilities that are leased to
operators or other affiliates, mortgages on facilities that are operated by the
mortgagors or their affiliates and facilities subject to leasehold
interests. The facilities are located in 32 states and are operated
by 35 operators. We use the term “operator” to refer to our tenants
and mortgagees and their affiliates who manage and/or operate our
properties. In some cases, our tenants and mortgagees contract with a
healthcare operator to operate the facilities. The following table
summarizes our property investments as of December 31, 2009:
|
Investment
Structure/Operator
|
|
Number
of
Beds
|
|
|
Number
of
Facilities
|
|
|
Occupancy
Percentage(1)
|
|
|
Gross
Investment
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase/Leaseback(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CommuniCare Health Services,
Inc.
|
|
|
3,599 |
|
|
|
28 |
|
|
|
86 |
|
|
$ |
241,236 |
|
|
Sun Healthcare Group,
Inc
|
|
|
4,574 |
|
|
|
40 |
|
|
|
88 |
|
|
|
217,712 |
|
|
Signature Holding II,
LLC
|
|
|
2,087 |
|
|
|
18 |
|
|
|
84 |
|
|
|
142,464 |
|
|
Advocat, Inc
|
|
|
3,933 |
|
|
|
36 |
|
|
|
81 |
|
|
|
141,151 |
|
|
Guardian LTC Management,
Inc.
|
|
|
1,676 |
|
|
|
23 |
|
|
|
90 |
|
|
|
125,971 |
|
|
Formation Capital,
LLC.
|
|
|
1,619 |
|
|
|
14 |
|
|
|
84 |
|
|
|
123,730 |
|
|
Nexion Health
Inc
|
|
|
2,072 |
|
|
|
19 |
|
|
|
78 |
|
|
|
80,385 |
|
|
Essex Healthcare
Corporation
|
|
|
1,273 |
|
|
|
13 |
|
|
|
80 |
|
|
|
79,564 |
|
|
TenInOne Acquisition Group,
LLC.
|
|
|
1,516 |
|
|
|
10 |
|
|
|
77 |
|
|
|
78,183 |
|
|
Alpha Healthcare Properties,
LLC
|
|
|
954 |
|
|
|
8 |
|
|
|
94 |
|
|
|
55,834 |
|
|
Airamid Health Management,
LLC
|
|
|
998 |
|
|
|
9 |
|
|
|
90 |
|
|
|
55,345 |
|
|
Sava Senior Care,
LLC
|
|
|
640 |
|
|
|
4 |
|
|
|
86 |
|
|
|
39,148 |
|
|
Mark Ide Limited Liability
Company
|
|
|
1,029 |
|
|
|
10 |
|
|
|
74 |
|
|
|
36,449 |
|
|
Gulf Coast Master Tenant I,
LLC.
|
|
|
815 |
|
|
|
6 |
|
|
|
82 |
|
|
|
33,934 |
|
|
Conifer Care Communities,
Inc
|
|
|
319 |
|
|
|
4 |
|
|
|
94 |
|
|
|
24,692 |
|
|
StoneGate Senior Care
LP
|
|
|
646 |
|
|
|
6 |
|
|
|
80 |
|
|
|
21,781 |
|
|
Infinia Properties of Arizona,
LLC
|
|
|
281 |
|
|
|
4 |
|
|
|
88 |
|
|
|
20,480 |
|
|
Trans Health,
Inc
|
|
|
381 |
|
|
|
3 |
|
|
|
85 |
|
|
|
20,098 |
|
|
TC Healthcare(3)
|
|
|
275 |
|
|
|
2 |
|
|
|
88 |
|
|
|
14,795 |
|
|
Rest Haven Nursing Center,
Inc
|
|
|
166 |
|
|
|
1 |
|
|
|
94 |
|
|
|
14,400 |
|
|
Washington N&R,
LLC
|
|
|
239 |
|
|
|
2 |
|
|
|
78 |
|
|
|
12,152 |
|
|
Triad Health Management of
Georgia II, LLC
|
|
|
300 |
|
|
|
2 |
|
|
|
94 |
|
|
|
10,000 |
|
|
Ensign Group,
Inc
|
|
|
271 |
|
|
|
3 |
|
|
|
92 |
|
|
|
9,656 |
|
|
Lakeland Investors,
LLC
|
|
|
240 |
|
|
|
1 |
|
|
|
94 |
|
|
|
9,625 |
|
|
Southwest LTC
|
|
|
260 |
|
|
|
2 |
|
|
|
59 |
|
|
|
8,590 |
|
|
Community Eldercare Services,
LLC.
|
|
|
120 |
|
|
|
1 |
|
|
|
72 |
|
|
|
8,133 |
|
|
Prestige Care,
Inc
|
|
|
90 |
|
|
|
1 |
|
|
|
87 |
|
|
|
7,389 |
|
|
Hickory Creek Healthcare
Foundation, Inc
|
|
|
138 |
|
|
|
2 |
|
|
|
79 |
|
|
|
7,250 |
|
|
Longwood Management
Corporation
|
|
|
185 |
|
|
|
2 |
|
|
|
95 |
|
|
|
6,448 |
|
|
Emeritus
Corporation
|
|
|
52 |
|
|
|
1 |
|
|
|
91 |
|
|
|
5,674 |
|
|
Elite Senior Living,
Inc
|
|
|
105 |
|
|
|
1 |
|
|
|
69 |
|
|
|
5,525 |
|
|
HMS Holdings at Texarkana,
LLC
|
|
|
123 |
|
|
|
1 |
|
|
|
66 |
|
|
|
4,710 |
|
|
Waters (The) of Williamsport,
LLC
|
|
|
96 |
|
|
|
1 |
|
|
|
59 |
|
|
|
4,332 |
|
|
Generations Healthcare,
Inc
|
|
|
60 |
|
|
|
1 |
|
|
|
73 |
|
|
|
3,007 |
|
|
|
|
|
31,132 |
|
|
|
279 |
|
|
|
84 |
|
|
|
1,669,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
Held for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed Facility
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
877 |
|
|
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
877 |
|
|
Fixed
- Rate Mortgages(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CommuniCare Health Services,
Inc
|
|
|
1,059 |
|
|
|
8 |
|
|
|
91 |
|
|
|
76,571 |
|
|
Advocat Inc
|
|
|
383 |
|
|
|
4 |
|
|
|
86 |
|
|
|
12,407 |
|
|
Parthenon Healthcare,
Inc
|
|
|
251 |
|
|
|
2 |
|
|
|
76 |
|
|
|
11,245 |
|
|
|
|
|
1,693 |
|
|
|
14 |
|
|
|
88 |
|
|
|
100,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
32,825 |
|
|
|
295 |
|
|
|
84 |
|
|
$ |
1,770,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents
the most recent data provided by our operators.
(2) Certain
of our lease agreements contain purchase options that permit the lessees to
purchase the underlying properties from us.
(3) TC
Healthcare is an interim operator engaged to operate the former Haven
facilities
(4) In
general, many of our mortgages contain prepayment provisions that permit
prepayment of the outstanding principal amounts thereunder.
The
following table presents the concentration of our facilities by state as of
December 31, 2009:
|
|
|
Number
of
Facilities
|
|
|
Number
of
Beds
|
|
|
Gross
Investment
(in
thousands)
|
|
|
%
of
Gross
Investment
|
|
|
Ohio
|
|
|
48 |
|
|
|
5,335 |
|
|
$ |
338,606 |
|
|
|
19.1 |
|
|
Florida
|
|
|
38 |
|
|
|
4,549 |
|
|
|
244,556 |
|
|
|
13.8 |
|
|
Pennsylvania
|
|
|
25 |
|
|
|
2,281 |
|
|
|
172,250 |
|
|
|
9.7 |
|
|
Texas
|
|
|
27 |
|
|
|
3,443 |
|
|
|
139,395 |
|
|
|
7.9 |
|
|
Tennessee
|
|
|
13 |
|
|
|
1,858 |
|
|
|
88,295 |
|
|
|
5.0 |
|
|
Maryland
|
|
|
7 |
|
|
|
909 |
|
|
|
69,928 |
|
|
|
3.9 |
|
|
Colorado
|
|
|
9 |
|
|
|
1,029 |
|
|
|
64,801 |
|
|
|
3.7 |
|
|
West
Virginia
|
|
|
10 |
|
|
|
1,151 |
|
|
|
56,963 |
|
|
|
3.2 |
|
|
Louisana
|
|
|
14 |
|
|
|
1,520 |
|
|
|
55,343 |
|
|
|
3.1 |
|
|
Alabama
|
|
|
10 |
|
|
|
1,153 |
|
|
|
46,125 |
|
|
|
2.6 |
|
|
Massachusetts
|
|
|
7 |
|
|
|
772 |
|
|
|
45,436 |
|
|
|
2.6 |
|
|
Arkansas
|
|
|
11 |
|
|
|
1,072 |
|
|
|
44,791 |
|
|
|
2.5 |
|
|
Rhode
Island
|
|
|
4 |
|
|
|
558 |
|
|
|
40,168 |
|
|
|
2.3 |
|
|
Kentucky
|
|
|
10 |
|
|
|
851 |
|
|
|
37,489 |
|
|
|
2.1 |
|
|
California
|
|
|
11 |
|
|
|
919 |
|
|
|
34,756 |
|
|
|
2.0 |
|
|
Connecticut
|
|
|
5 |
|
|
|
472 |
|
|
|
34,601 |
|
|
|
2.0 |
|
|
Georgia
|
|
|
4 |
|
|
|
633 |
|
|
|
27,940 |
|
|
|
1.6 |
|
|
North
CarolinaGeorgia
|
|
|
5 |
|
|
|
662 |
|
|
|
23,301 |
|
|
|
1.3 |
|
|
Idaho
|
|
|
4 |
|
|
|
377 |
|
|
|
22,679 |
|
|
|
1.3 |
|
|
New
Hampshire
|
|
|
3 |
|
|
|
216 |
|
|
|
22,605 |
|
|
|
1.3 |
|
|
Arizona
|
|
|
4 |
|
|
|
281 |
|
|
|
20,480 |
|
|
|
1.2 |
|
|
Nevada
|
|
|
3 |
|
|
|
381 |
|
|
|
20,098 |
|
|
|
1.1 |
|
|
Indiana
|
|
|
6 |
|
|
|
533 |
|
|
|
19,936 |
|
|
|
1.1 |
|
|
Washington
|
|
|
2 |
|
|
|
194 |
|
|
|
17,473 |
|
|
|
1.0 |
|
|
Vermont
|
|
|
2 |
|
|
|
275 |
|
|
|
14,795 |
|
|
|
0.8 |
|
|
Illinois
|
|
|
4 |
|
|
|
466 |
|
|
|
14,406 |
|
|
|
0.8 |
|
|
Mississippi
|
|
|
2 |
|
|
|
181 |
|
|
|
12,607 |
|
|
|
0.7 |
|
|
Missouri
|
|
|
2 |
|
|
|
239 |
|
|
|
12,152 |
|
|
|
0.7 |
|
|
Iowa
|
|
|
2 |
|
|
|
201 |
|
|
|
10,854 |
|
|
|
0.6 |
|
|
Alaska
|
|
|
1 |
|
|
|
90 |
|
|
|
7,389 |
|
|
|
0.4 |
|
|
Wisconsin
|
|
|
1 |
|
|
|
105 |
|
|
|
5,525 |
|
|
|
0.3 |
|
|
New
Mexico
|
|
|
1 |
|
|
|
119 |
|
|
|
5,200 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
295 |
|
|
|
32,825 |
|
|
$ |
1,770,943 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographically Diverse Property
Portfolio. Our portfolio of
properties is broadly diversified by geographic location. We have
healthcare facilities located in 32 states. In addition, the majority
of our 2009 rental and mortgage income was derived from facilities in states
that require state approval for development and expansion of healthcare
facilities. We believe that such state approvals may limit
competition for our operators and enhance the value of our
properties.
Large Number of Tenants. Our facilities are
operated by 35 different public and private healthcare
providers. Except for CommuniCare (18%) and Sun (12%) which together
hold approximately 30% of our portfolio (by investment), no other single tenant
holds greater than 9% of our portfolio (by investment).
Significant Number of Long-term
Leases and Mortgage Loans. A large portion of our
core portfolio consists of long-term lease and mortgage
agreements. At December 31, 2009, approximately 82% of our leases and
mortgages had primary terms that expire in 2014 or later. The
majority of our leased real estate properties are leased under provisions of
master lease agreements. We also lease facilities under single
facility leases. The initial terms, on both type of leases, typically
range from 5 to 15 years, plus renewal options. Substantially all of
the leases provide for minimum annual rents that are subject to annual increases
based upon increases in the CPI or fixed rate increases. Under the
terms of the leases, the lessee is responsible for all maintenance, repairs,
taxes and insurance on the leased properties.
Encumbered Assets.
As of December 31, 2009, we had $253.5 million aggregate principal amount of
secured debt outstanding, which was secured by 92 of our facilities with an
aggregate gross investment value of $505.4 million. Subsequent to
year end, we repaid the $59.4 million of mortgage debt assumed in connection
with the CapitalSource acquisition, thereby reducing the number of facilities
encumbered by 12 and total gross investment by $86.3 million.
In 1999, we filed suit against a former
tenant seeking damages based on claims of breach of contract. The
defendants denied the allegations made in the lawsuit. In June 2008,
we were awarded damages in a jury trial. The case was then settled
prior to appeal. In settlement of our claim against the defendants,
we agreed in January 2009 to accept a lump sum cash payment of $6.8
million. The cash proceeds were offset by related expenses incurred
of $2.3 million, resulting in a net gain of $4.5 million paid in January
2009. We recorded this gain during the first quarter of
2009.
We and
several of our wholly-owned subsidiaries were named as defendants in
professional liability claims related to our owned and operated facilities prior
to 2005. Other third-party managers responsible for the day-to-day
operations of these facilities have also been named as defendants in these
claims. In these suits, patients of certain previously owned and
operated facilities have alleged significant damages, including punitive damages
against the defendants. While any legal proceeding or claim has an
element of uncertainty, management believes that the outcome of each lawsuit,
claim or legal proceeding that is pending or threatened, or all of them
combined, will not have a material adverse effect on our consolidated financial
position or results of operations. All of these suits have been
settled.
On
January 7, 2010, LCT SE Texas Holdings, L.L.C. (“LCT”), an affiliate of Mariner
Health Care and the lessee of four facilities located in the Houston
area (the “LCT Facilities”), filed a petition in the District Court of Harris
County, Texas (No. 2010-01120) against four landlord entities (the “CSE
Entities”), the member interests of which we purchased as part of the Capital
Source transaction in December, 2009 pursuant to a Stock Purchase Agreement (the
“Purchase Agreement”). The petition relates to a right of first refusal (“ROFR)
under the master lease between LCT and the CSE Entities. The petition alleges,
among other things, that (i) the notice of the acquisition of the member’s
interests of the CSE Entities was not proper under the ROFR
provision in the master lease, (ii) the purchase price allocated to
the member’s interests of the CSE Entities (or the LCT Facilities) pursuant to
the Purchase Agreement and specified in the notice to LCT of its ROFR, if
any, was not a bona fide offer, did not represent “true
market value”, and failed to trigger the ROFR, and (iii) we tortiously
interfered with LCT’s right to exercise the ROFR. The petition seeks
a declaratory adjudication with respect to the identified claims above, a claim
for specific performance permitting LCT to exercise its ROFR, and unspecified
actual and punitive damages relating to breach of the master lease by the CSE
Entities and tortious interference against us. We believe that the litigation is
defensible. In addition, under the Purchase Agreement and related transaction
documents, CapitalSource has agreed to indemnify us for any losses, including
reasonable legal expenses, incurred by us in connection with this
litigation.
No matters were submitted to
stockholders during the fourth quarter of the year covered by this
report.
PART
II
Our
shares of common stock are traded on the New York Stock Exchange under the
symbol “OHI.” The following table sets forth, for the periods shown,
the high and low prices as reported on the New York Stock Exchange Composite for
the periods indicated and cash dividends per common share:
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
Dividends
Per
Share
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
Dividends
Per
Share
|
|
|
First
|
|
$ |
16.420 |
|
|
$ |
11.150 |
|
|
$ |
0.30 |
|
First
|
|
$ |
19.200 |
|
|
$ |
14.720 |
|
|
$ |
0.29 |
|
|
Second
|
|
|
17.400 |
|
|
|
13.560 |
|
|
|
0.30 |
|
Second
|
|
|
19.230 |
|
|
|
15.970 |
|
|
|
0.30 |
|
|
Third
|
|
|
19.010 |
|
|
|
14.510 |
|
|
|
0.30 |
|
Third
|
|
|
19.660 |
|
|
|
15.630 |
|
|
|
0.30 |
|
|
Fourth
|
|
|
20.080 |
|
|
|
14.390 |
|
|
|
0.30 |
|
Fourth
|
|
|
19.750 |
|
|
|
9.300 |
|
|
|
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.20 |
|
|
|
|
|
|
|
|
|
|
|
$ |
1.19 |
|
The
closing price for our common stock on the New York Stock Exchange on February
23, 2010 was $18.75 per share. As of February 23, 2010 there were
88,742,301 shares of common stock outstanding with 2,836 registered
holders.
The following table provides
information about all equity awards under our company’s 2004 Stock Incentive
Plan, 2000 Stock Incentive Plan and 1993 Amended and Restated Stock Option and
Restricted Stock Plan as of December 31, 2009.
Equity Compensation Plan
Information
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Plan
category
|
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(1)
|
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
(2)
|
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column (a)
(3)
|
|
|
Equity
compensation plans approved by security holders
|
|
|
266,655 |
|
|
$ |
9.45 |
|
|
|
2,303,020 |
|
|
Equity
compensation plans not approved by security holders
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total
|
|
|
266,655 |
|
|
$ |
9.45 |
|
|
|
2,303,020 |
|
|
(1)
|
Reflects
18,663 shares issuable upon the exercise of outstanding options and
247,992 shares issuable in respect of performance restricted stock units
that vest over the years 2008 through
2010.
|
|
(2)
|
No
exercise price is payable with respect to the performance restricted stock
rights, and accordingly the weighted-average exercise price is calculated
based solely on outstanding
options.
|
|
(3)
|
Reflects
shares of Common Stock remaining available for future issuance under our
2000 and 2004 Stock Incentive
Plans.
|
Issuer Purchases of Equity
Securities
During the fourth quarter of 2009,
36,907 shares of our common stock were purchased from employees to pay the
withholding taxes associated with employee exercising of stock
options.
Common
Stock
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
Period
|
|
Total
Number of Shares Purchased (1)
|
|
|
Average
Price Paid per Share
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
|
Maximum
Number (or Approximate Dollar Value) of Shares that May be Purchased Under
these Plans or Programs
|
|
|
October
1, 2009 to October 31, 2009
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
November
1, 2009 to November 30, 2009
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
December
1, 2009 to December 31, 2009
|
|
|
36,907 |
|
|
|
19.45 |
|
|
|
- |
|
|
|
- |
|
|
Total
|
|
|
36,907 |
|
|
$ |
19.45 |
|
|
|
- |
|
|
$ |
- |
|
|
(1)
|
Represents
shares purchased from employees to pay the withholding taxes related to
the exercise of employee stock options. The shares were not part of a
publicly announced repurchase plan or
program.
|
The following table sets forth our
selected financial data and operating data for our company on a historical
basis. The following data should be read in conjunction with our
audited consolidated financial statements and notes thereto and Management’s
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere herein. Our historical operating results may not
be comparable to our future operating results.
|
|
|
Year
Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(in
thousands, except per share amounts)
|
|
|
Operating
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from core
operations
|
|
$ |
179,008 |
|
|
$ |
169,592 |
|
|
$ |
159,558 |
|
|
$ |
135,513 |
|
|
$ |
109,535 |
|
|
Revenues
from nursing home operations
|
|
|
18,430 |
|
|
|
24,170 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total
revenues
|
|
$ |
197,438 |
|
|
$ |
193,762 |
|
|
$ |
159,558 |
|
|
$ |
135,513 |
|
|
$ |
109,535 |
|
|
Income
from continuing operations
|
|
$ |
82,111 |
|
|
$ |
77,691 |
|
|
$ |
67,598 |
|
|
$ |
55,905 |
|
|
$ |
37,289 |
|
|
Net
income available to common shareholders
|
|
|
73,025 |
|
|
|
70,551 |
|
|
|
59,451 |
|
|
|
45,774 |
|
|
|
25,355 |
|
|
Per
share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations:
Basic
|
|
$ |
0.87 |
|
|
$ |
0.93 |
|
|
$ |
0.88 |
|
|
$ |
0.78 |
|
|
$ |
0.46 |
|
|
Diluted
|
|
|
0.87 |
|
|
|
0.93 |
|
|
|
0.88 |
|
|
|
0.78 |
|
|
|
0.46 |
|
|
Net
income available to common:
Basic
|
|
$ |
0.87 |
|
|
$ |
0.94 |
|
|
$ |
0.90 |
|
|
$ |
0.78 |
|
|
$ |
0.49 |
|
|
Diluted
|
|
|
0.87 |
|
|
|
0.94 |
|
|
|
0.90 |
|
|
|
0.78 |
|
|
|
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends, Common Stock(1)
|
|
$ |
1.20 |
|
|
$ |
1.19 |
|
|
$ |
1.08 |
|
|
$ |
0.96 |
|
|
$ |
0.85 |
|
|
Dividends, Series B
Preferred(1)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1.09 |
|
|
Dividends, Series D
Preferred(1)
|
|
|
2.09 |
|
|
|
2.09 |
|
|
|
2.09 |
|
|
|
2.09 |
|
|
|
2.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding,
basic
|
|
|
83,556 |
|
|
|
75,127 |
|
|
|
65,858 |
|
|
|
58,651 |
|
|
|
51,738 |
|
|
Weighted-average
common shares outstanding,diluted
|
|
|
83,649 |
|
|
|
75,213 |
|
|
|
65,886 |
|
|
|
58,745 |
|
|
|
52,059 |
|
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Balance
Sheet Data
Gross
investments
|
|
$ |
1,803,743 |
|
|
$ |
1,502,847 |
|
|
$ |
1,322,964 |
|
|
$ |
1,294,306 |
|
|
$ |
1,129,405 |
|
|
Total
assets
|
|
|
1,655,033 |
|
|
|
1,364,467 |
|
|
|
1,182,287 |
|
|
|
1,175,370 |
|
|
|
1,036,042 |
|
|
Revolving
lines of credit
|
|
|
94,100 |
|
|
|
63,500 |
|
|
|
48,000 |
|
|
|
150,000 |
|
|
|
58,000 |
|
|
Other
long-term borrowings
|
|
|
644,049 |
|
|
|
484,697 |
|
|
|
525,709 |
|
|
|
526,141 |
|
|
|
508,229 |
|
|
Stockholders’
equity
|
|
|
865,227 |
|
|
|
787,988 |
|
|
|
586,127 |
|
|
|
465,454 |
|
|
|
440,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Dividends
per share are those declared and paid during such
period.
|
The following discussion should be read
in conjunction with the financial statements and notes thereto appearing
elsewhere in this document. This document contains forward-looking
statements within the meaning of the federal securities laws, including
statements regarding potential financings and potential future changes in
reimbursement. These statements relate to our expectations, beliefs,
intentions, plans, objectives, goals, strategies, future events, performance and
underlying assumptions and other statements other than statements of historical
facts. In some cases, you can identify forward-looking statements by
the use of forward-looking terminology including, but not limited to, terms such
as “may,” “will,” “anticipates,” “expects,” “believes,” “intends,” “should” or
comparable terms or the negative thereof. These statements are based
on information available on the date of this filing and only speak as to the
date hereof and no obligation to update such forward-looking statements should
be assumed. Our actual results may differ materially from those
reflected in the forward-looking statements contained herein as a result of a
variety of factors, including, among other things:
|
(i)
|
those
items discussed under “Risk Factors” in Item 1A
herein;
|
|
(ii)
|
uncertainties
relating to the business operations of the operators of our assets,
including those relating to reimbursement by third-party payors,
regulatory matters and occupancy
levels;
|
|
(iii)
|
the
ability of any operators in bankruptcy to reject unexpired lease
obligations, modify the terms of our mortgages and impede our ability to
collect unpaid rent or interest during the process of a bankruptcy
proceeding and retain security deposits for the debtors’
obligations;
|
|
(iv)
|
our
ability to sell closed or foreclosed assets on a timely basis and on terms
that allow us to realize the carrying value of these
assets;
|
|
(v)
|
our
ability to manage, re-lease or sell any owned and operated
facilities;
|
|
(vi)
|
the
availability and cost of capital;
|
|
(vii)
|
changes
in our credit ratings and the ratings of our debt and preferred
securities;
|
|
(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, including the potential impact of a general
economic slowdown on governmental budgets and healthcare reimbursement
expenditures;
|
|
(xi)
|
changes
in the financial position of our
operators;
|
|
(xii)
|
changes
in interest rates;
|
|
(xiii)
|
the
amount and yield of any additional investments;
and
|
|
(xiv)
|
changes
in tax laws and regulations affecting real estate investment trusts; and
our ability to maintain our status as a real estate investment
trust
|
We have one reportable segment
consisting of investments in healthcare related real estate
properties. Our core business is to provide financing and capital to
the long-term healthcare industry with a particular focus on skilled nursing
facilities located in the United States. Our core portfolio consists
of long-term leases and mortgage agreements. All of our leases are
“triple-net” leases, which require the tenants to pay all property-related
expenses. Our mortgage revenue derives from fixed-rate mortgage
loans, which are secured by first mortgage liens on the underlying real estate
and personal property of the mortgagor. In July 2008, we assumed
operating responsibilities for 15 of our facilities due to the bankruptcy of one
of our operator/tenants. In September, we entered into an agreement
to lease these facilities to a new operator/tenant. The new
operator/tenant assumed operating responsibility for 13 of the 15 facilities
effective September 1, 2008. We continue to be responsible for the
two remaining facilities as of December 31, 2009 that are in the process of
being transitioned to the new operator pending approval by state
regulators.
Our
consolidated financial statements include the accounts of Omega, all direct and
indirect wholly owned subsidiaries; as well as TC Healthcare, a new entity and
interim operator created to operate the 15 facilities we assumed as a result of
the bankruptcy of one our tenant/operators). We consolidate the
financial results of TC Healthcare into our financial statements based on the
application of the applicable consolidation accounting literature. We
include the operating results and assets and liabilities of these facilities for
the period of time that TC Healthcare was responsible for the operations of the
facilities. Thirteen of these facilities were transitioned from TC
Healthcare to a new tenant/operator on September 1, 2008, however, TC Healthcare
continues to be responsible for two facilities as of December 31, 2009 that are
in the process of being transitioned to the new operator/tenant pending approval
by state regulators. The operating revenues and expenses and related
operating assets and liabilities of the owned and operated facilities are shown
on a gross basis in our Consolidated Statements of Income and Consolidated
Balance Sheets, respectively. All inter-company accounts and
transactions have been eliminated in consolidation of the financial
statements.
Our
portfolio of investments at December 31, 2009, consisted of 295 healthcare
facilities (including two closed facilities held for sale), located in 32 states
and operated by 35 third-party operators. Our gross investment in
these facilities totaled approximately $1.8 billion at December 31, 2009, with
99% of our real estate investments related to long-term healthcare
facilities. This portfolio is made up of (i) 265 SNFs, (ii) seven
ALFs, (iii) five specialty facilities, (iv) fixed rate mortgages on 14 SNFs, (v)
two SNFs that are owned and operated by us and (vi) two SNFs that are currently
held for sale. At December 31, 2009, we also held other investments
of approximately $32.8 million, consisting primarily of secured loans to
third-party operators of our facilities.
In
November 2009, we entered into a securities purchase agreement with
CapitalSource Inc. (“CapitalSource”) and several of its affiliates to purchase
certain CapitalSource subsidiaries owning 80 long term care facilities for
approximately $565 million. The purchase price includes a purchase
option to acquire entities owning an additional 63 facilities for approximately
$295 million. See Portfolio and Other Developments for additional
details.
The
recent downturn in the U.S. economy and other factors could result in
significant cost-cutting at both the federal and state levels, resulting in a
reduction of reimbursement rates and levels to our operators under both the
Medicare and Medicaid programs. Current market and economic
conditions may have a significant impact on state budgets and health care
spending. The states with the most significant projected budget deficits in
which we own facilities and the percentage of our gross investments in such
states as of December 31, 2009 are as follows: Alabama (2.6%), Arizona (1.2%),
California (2.0%), Florida (13.8%), New Hampshire (1.3%) and Rhode Island
(2.3%). These deficits, exacerbated by the potential for increased
enrollment in Medicaid due to rising unemployment levels and declining family
incomes, could cause states to reduce state expenditures under their respective
state Medicaid programs by lowering reimbursement rates.
We
currently believe that our operator coverage ratios are strong and that our
operators can absorb moderate reimbursement rate reductions under Medicaid and
Medicare and still meet their obligations to us. However, significant
limits on the scope of services reimbursed and on reimbursement rates and fees
could have a material adverse effect on an operator’s results of operations and
financial condition, which could adversely affect the operator’s ability to meet
its obligations to us.
2009
and Recent Highlights
Acquisition
and Other Investments
See Portfolio and Other Developments
for 2009 acquisitions and other investments.
$200
Million Senior Notes
On February 9, 2010, the Company issued
and sold $200 million aggregate principal amount of its 7½% Senior Notes due
2020 (the “2020 Notes”). The 2020 Notes were sold at an issue price of 98.278%
of the principal amount of the 2020 Notes resulting in gross proceeds to the
Company of approximately $197 million. See “Liquidity and Capital
Resources – Financing Activities and Borrowing Arrangements” below.
$100
Million Term Loan
On December 18, 2009, a wholly
owned subsidiary of the Company entered into a secured Credit Agreement with
GECC, as Administrative Agent and a Lender, providing for a new five-year $100
million term loan (the “Term Loan”) maturing December 31, 2014. See
“Liquidity and Capital Resources – Financing Activities and Borrowing
Arrangements” below.
$200
Million Revolving Credit Facility
On June 30, 2009, the Company entered
into a new $200 million revolving senior secured credit facility (the “Bank
Credit Agreements”). See “Liquidity and Capital Resources – Financing Activities
and Borrowing Arrangements” below.
Equity
Shelf Program
On June 12, 2009, we entered into
separate Equity Distribution Agreements (collectively, the "Equity Distribution
Agreements") with each of UBS Securities LLC, Deutsche Bank Securities Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, each as sales agents
and/or principal (the "Managers"). Under the terms of the Equity
Distribution Agreements, we may sell shares of our common stock, from time to
time, through or to the Managers having an aggregate gross sales price of
up to $100,000,000 (the “Equity Shelf Program”). Sales of the shares,
if any, will be made by means of ordinary brokers’ transactions on the New York
Stock Exchange at market prices, or as otherwise agreed with the
applicable Manager. We will pay each Manager compensation
for sales of the shares equal to 2% of the gross sales price per share of shares
sold through such Manager, as sales agent, under the applicable Equity
Distribution Agreement. During the year ended December 31,
2009, 1.4 million shares of our common stock were issued through the Equity
Shelf Program for net proceeds of approximately $23.0 million, net of $0.5
million of commissions.
Amendment
to Charter to Increase Authorized Common Stock
On May 28, 2009, we amended our
Articles of Incorporation to increase the number of authorized shares of our
common stock from 100,000,000 to 200,000,000 shares. The Board of
Directors previously approved the amendment, subject to stockholder approval,
and the amendment was approved by our stockholders at the Annual Meeting of
Stockholders held on May 21, 2009.
Dividend
Reinvestment and Common Stock Purchase Plan
We have a
Dividend Reinvestment and Common Stock Purchase Plan (the “DRSPP”) that allows
for the reinvestment of dividends and the optional purchase of our common
stock. Effective May 15, 2009, we reinstated the optional cash
purchase component of our DRSPP, which we had temporarily suspended in October
2008.
For the year ended December 31, 2009,
we issued 1.7 million shares of common stock for approximately $27.2 million in
net proceeds. For the year ended December 31, 2008, we issued 2.1
million shares of common stock for approximately $34.1 million in net
proceeds.
Dividends
On January 20, 2010, the Board of
Directors declared a common stock dividend of $0.32 per share, increasing the
quarterly common dividend by $0.02 per share over the prior
quarter. The common dividends were paid on February 16, 2010 to
common stockholders of record on January 29, 2010. Prior thereto, in
2009 we paid quarterly dividends of $0.30 per share of common stock in
2009.
On January 20, 2010, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on our 8.375% Series D cumulative redeemable preferred stock
(the “Series D Preferred Stock”), that were paid February 16, 2010 to preferred
stockholders of record on January 29, 2010. The liquidation
preference for our Series D Preferred Stock is $25.00 per
share. Regular quarterly preferred dividends for the Series D
Preferred Stock represent dividends for the period November 1, 2009 through
January 31, 2010. We also paid regular quarterly dividends of
approximately $0.52344 per preferred share on the Series D preferred stock in
2009.
The partial expiration of certain
Medicare rate increases has had an adverse impact on the revenues of the
operators of nursing home facilities and has negatively impacted some operators’
ability to satisfy their monthly lease or debt payment to us. See
Item 1 Business - Government Regulation and Reimbursement above for further
discussion. In several instances, we hold security deposits that can
be applied in the event of lease and loan defaults, subject to applicable
limitations under bankruptcy law with respect to operators seeking protection
under title 11 of the United States Code, 11 U.S.C. §§ 101-1532, as amended and
supplemented, (the “Bankruptcy Code”).
CapitalSource
Transactions
Completed
First Closing
On December 22, 2009, we purchased
entities owning 40 facilities and an option (the “Option”) to purchase entities
owning 63 additional facilities. The consideration consisted of: (i)
approximately $184.2 million in cash; (ii) 2,714,959 shares of Omega common
stock and (iii) assumption of approximately $59.4 million of 6.8% mortgage debt
maturing on December 31, 2011. We incurred approximately $1.6 million
in transaction costs. We valued the 2,714,959 shares of our common
stock at approximately $52.8 million on December 22, 2009.
The 40 facilities owned by the entities
acquired on December 22, 2009, representing 5,264 available beds located in 12
states, are part of 15 in-place triple net leases among 12
operators. The 15 leases generate approximately $31 million of
annualized straight-line rental revenue.
The
following table summarizes the fair value of the consideration exchanged on
December 22, 2009 for the acquisition of the 40 facilities and the purchase
options:
|
|
|
Fair
Value of Consideration
|
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
Cash
|
|
$ |
184.2 |
|
|
Assumed
6.8% debt
|
|
|
59.4 |
|
|
Omega
common stock
|
|
|
52.8 |
|
|
Total
consideration paid at December 22, 2009
|
|
$ |
296.4 |
|
We are in
the process of gathering the information necessary to complete the purchase
price allocation of the December 22, 2009 acquisition. We have
performed a preliminary allocation of the fair value of the assets purchased and
liabilities assumed as part of the transaction as well as the purchase
option. Based on our preliminary allocation we have allocated
approximately $275 million to Land and building at cost and $25 million to Other
Assets for the Option on our Consolidated Balance Sheet. We allocated
approximately $30 million to land and $245 million to
buildings. Based on our evaluation of the assumed in-place leases, we
estimate that we assumed approximately $11.9 million above market leases and
$15.9 million in below market lease. We have included the (a) $11.9
million in above market leases in Other Assets and (b) the $15.9 million in
below market leases in Accrued expenses and other liabilities on our
Consolidated Balance Sheet, respectively. We estimate that the net
amortization of the above and below market lease for years 1 through 5 will be
less than $100,000 annually.
As part
of the consideration, we also assumed approximately $59.4 million in 6.8%
mortgage debt that matures on December 31, 2011. Based on our
evaluation, we estimate that the $59.4 million mortgage debt being assumed is at
market rates based on the terms of comparable debt. In February 2010,
we used proceeds from our $200 million 7 ½ % bond offering to repay the mortgage
debt.
Anticipated
Second Closing
At the second closing, we will acquire
entities owning 40 additional facilities for approximately $270 million,
consisting of: (i) $67 million in cash; (ii) assumption of $20 million of 9.0%
subordinated debt maturing in December 2021; (iii) assumption of $53 million,
6.41% (weighted-average) HUD debt maturing between January 2036 and May 2040;
and (iv) the anticipated assumption of $130 million, 4.85% HUD debt generally
maturing in 2039. The second closing is expected to occur in the
second quarter of 2010 subject to HUD approval and the other normal terms and
conditions.
The 40 additional facilities,
representing 4,882 available beds, located in 2 states are part of 13 in-place
triple net leases among 2 operators. The 13 leases generate
approximately $30 million of annualized revenue.
Option
to Purchase Additional 63 Facilities
We may exercise our option to purchase
the CapitalSource subsidiaries owning 63 additional facilities on or before
December 31, 2011, for an estimated aggregate consideration of approximately
$295 million, consisting of: (i) $30 million in cash, and (ii) $265 million of
debt, which debt shall either be paid off at closing or assumed by us, subject
to the consent of the applicable lenders of such debt. The Option
payment of $25 million is refundable in limited circumstances, such as breach of
contract. The 63 facilities owned by the entities subject to the
Option, representing 6,529 available beds located in 19 states, are part of 30
in-place triple net leases among 18 operators. The 30 leases generate
approximately $34 million of annualized revenue.
The consummation of the second closing
under Purchase Agreement with CapitalSource and the potential exercise of the
Option are subject to customary closing conditions, and there can be no
assurance as to when or whether such transactions will be
consummated. The purchase price payable at each such closing is also
subject to certain adjustments, including but not limited to a dollar-for-dollar
increase or decrease of the cash consideration to the extent the assumed debt is
less than or greater than the amount set forth in the purchase agreement, and an
upward or downward adjustment to prorate certain items of accrued and prepaid
income and expense of the CapitalSource subsidiaries to be
acquired.
Assets
Held for Sale
At December 31, 2009, we had two
SNFs classified as held-for-sale with a net book value of approximately $0.9
million.
Asset
Sales
In 2009, we sold a facility and other
assets for approximately $0.9 million resulting in a net gain of approximately
$0.8 million.
Formation
Capital
Commencing in February 2008, the assets
of the Haven Healthcare (“Haven”) facilities were marketed for sale via an
auction process conducted through proceedings established by the bankruptcy
court. The auction process failed to produce a qualified buyer. As a
result, and pursuant to our rights as ordered by the bankruptcy court, we credit
bid certain of the indebtedness that Haven owed us in exchange for taking
ownership of and transitioning certain of Haven’s assets to a new entity in
which we have a substantial ownership interest, all of which was approved by the
bankruptcy court on July 4, 2008. Effective July 7, 2008, we took
ownership and/or possession of 15 facilities previously operated by
Haven. On August 6, 2008, we entered into a Master Transaction
Agreement (“MTA”) with affiliates of Formation Capital (“Formation”) whereby
Formation agreed to lease the 15 former Haven facilities under a master lease
with us. Effective September 1, 2008, we completed the operational
transfer of 13 of the former Haven facilities to affiliates of Formation, in
accordance with the terms of the MTA. The 13 facilities are located in
Connecticut (5), Rhode Island (4), New Hampshire (3) and Massachusetts (1) and
are part of a master lease. As part of the transaction, Genesis Healthcare
(“Genesis”) entered into a long-term management agreement with Formation to
oversee the day-to-day operations of each of these facilities and with
permission of us, closed one of the five Connecticut facilities in 2009. In
December 2008, we amended the master lease with Formation to include two
additional facilities that were purchased in West Virginia.
The following is our discussion of the
consolidated results of operations, financial position and liquidity and capital
resources, which should be read in conjunction with our audited consolidated
financial statements and accompanying notes.
Year
Ended December 31, 2009 compared to Year Ended December 31, 2008
Operating
Revenues
Our operating revenues for the year
ended December 31, 2009, were $197.4 million, an increase of $3.7 million over
the same period in 2008. Detailed changes in operating revenues for
the year ended December 31, 2009 are as follows:
|
·
|
Rental
income was $164.5 million, an increase of $8.7 million over the same
period in 2008. The increase is primarily due to: (i)
additional rental income from the full year 2009 impact from acquisitions
of seven SNFs, one ALF and one rehabilitation hospital in April 2008, four
SNFs, one ALF and one ILF in September 2008 and two SNFs in December 2008,
which were all leased to existing operators and (ii) additional rental
income from the acquisitions of 40 SNFs in December 2009 among 11 new
operators and one existing operator
|
|
·
|
Mortgage
interest income totaled $11.6 million, an increase of $2.0 million over
the same period in 2008. The increase was primarily related to
the full year effect of the mortgage financing of seven new facilities in
April 2008.
|
|
·
|
Other
investment income totaled $2.5 million, an increase of $0.5 million over
the same period in 2008. The increase was primarily due to an
increase in Other investments compared to
2008.
|
|
·
|
Miscellaneous
revenue was $0.4 million, a decrease of $1.8 million over the same period
in 2008. The primary reason for the decrease was the payment of
late fees and penalties in 2008 related to Haven’s bankruptcy in
2008.
|
|
·
|
Nursing
home revenues of owned and operated assets was $18.4 million in 2009, a
decrease of $5.7 million over the same period in 2008. The
decrease is due to the timing of ownership of the facilities in 2009
compared to 2008. See Note 1 – Organization and Basis of
Presentation for additional information regarding the consolidation of
this entity.
|
Operating
Expenses
Operating expenses for the year ended
December 31, 2009, were $81.6 million, a decrease of approximately $7.5 million
over the same period in 2008. Detailed changes in our operating
expenses for the year ended December 31, 2009 versus the same period in 2008 are
as follows:
|
·
|
Our
depreciation and amortization expense was $44.7 million, compared to $39.9
million for the same period in 2008. The increase is due to (i)
the full year 2009 impact from acquisitions of seven SNFs, one ALF and one
rehabilitation hospital in April 2008, four SNFs, one ALF and one ILF in
September 2008 and two SNFs in December 2008 and (ii) the acquisitions of
40 SNFs in December 2009.
|
|
·
|
Our
general and administrative expense, when excluding stock-based
compensation expense related to restricted stock units, was $9.8 million,
compared to $9.6 million for the same period in
2008.
|
|
·
|
Our
restricted stock-based compensation expense was $1.9 million, a decrease
of $0.2 million over the same period in 2008. The decrease was
primarily due to the timing of the scheduled vesting of the performance
stock portion of the stock plan.
|
|
·
|
In
2009, we recorded $1.6 million of acquisition cost related to expenses
incurred in the due diligence for the acquisitions we made in the fourth
quarter of 2009.
|
|
·
|
In
2009, we recorded $0.2 million of impairment charge, compared to $5.6
million for the same period in 2008, primarily related to the timing of
facility closures.
|
|
·
|
In
2009, we recorded $2.8 million of provision for uncollectible accounts
receivable associated with Formation. The provision consisted
of (i) $1.8 million associated with lease incentives and (ii) $1.0 million
in straight-line receivables. In 2008, we recorded $4.3 million
of provision for uncollectible accounts receivable associated with
Haven. The provision consisted of (i) $3.3 million associated
with straight-line receivables and (ii) $1.0 million in pre-petition
contractual receivables.
|
|
·
|
Nursing
home expenses of owned and operated assets was $20.6 million in 2009, a
decrease of $7.0 million over the same period in 2008. The
decrease is due to the timing of ownership of the facilities in 2009
compared to 2008. See Note 1 – Organization and Basis of
Presentation for additional information regarding the consolidation of
this entity.
|
Other
Income (Expense)
For the year ended December 31, 2009,
our total other net expenses were $34.5 million as compared to $39.0 million for
the same period in 2008, a decrease of $4.5 million. The decrease was
primarily due to: (i) a net increase of $4.0 million associated with cash
received for a legal settlement in 2009 compared to the same period of 2008, and
(ii) lower average outstanding borrowings and rates on credit facility,
partially offset by (i) $0.5 million associated with the write-off of
unamortized deferred financing costs related to replacing the former $255
million credit facility during the second quarter of 2009 and (ii) $0.4 million
interest expense incurred on the $159 million secured borrowings we entered into
in December 2009.
2009
Taxes
So long as we qualify as a REIT, we
generally will not be subject to Federal income taxes on the REIT taxable income
that we distribute to stockholders, subject to certain
exceptions. For tax year 2009, preferred and common dividend payments
of $109.2 million made throughout 2009 satisfy the 2009 REIT requirements
relating to qualifying income. We are permitted to own up to 100% of
a taxable REIT subsidiary (“TRS”). Currently, we have one TRS that is
taxable as a corporation and that pays federal, state and local income tax on
its net income at the applicable corporate rates. The TRS had a net
operating loss carry-forward as of December 31, 2009 of $1.1
million. The loss carry-forward was fully reserved with a valuation
allowance due to uncertainties regarding realization. We recorded
interest and penalty charges associated with tax matters as income tax
expense.
Income
from continuing operations
Income from continuing operations for
the year ended December 31, 2009 was $82.1 million compared to $77.7 million for
the same period in 2008. The increase in income from continuing
operations is the result of the factors described above.
2009
Discontinued Operations
Discontinued operations generally
relate to properties we disposed of or plan to dispose of and have no continuing
involvement or cash flows with the operator. These assets are
included in assets held for sale – net in our consolidated balance sheet prior
to their sale/disposal.
For the year ended December 31, 2009,
no revenue or expense were generated from discontinued operations.
For the year ended December 31, 2008,
discontinued operations include the one month revenue of $15 thousand and a gain
of $0.4 million on the sale of one SNF.
For additional information, see Note 19
– Discontinued Operations.
Funds
From Operations
Our funds
from operations available to common stockholders (“FFO”), for the year ended
December 31, 2009, was $117.0 million, compared to $98.1 million for the same
period in 2008.
We
calculate and report FFO in accordance with the definition and interpretive
guidelines issued by the National Association of Real Estate Investment Trusts
(“NAREIT”), and, consequently, FFO is defined as net income available to common
stockholders, adjusted for the effects of asset dispositions and certain
non-cash items, primarily depreciation and amortization. We believe
that FFO is an important supplemental measure of our operating
performance. Because the historical cost accounting convention used
for real estate assets requires depreciation (except on land), such accounting
presentation implies that the value of real estate assets diminishes predictably
over time, while real estate values instead have historically risen or fallen
with market conditions. The term FFO was designed by the real estate
industry to address this issue. FFO herein is not necessarily
comparable to FFO of other REITs that do not use the same definition or
implementation guidelines or interpret the standards differently from
us.
We use
FFO as one of several criteria to measure the operating performance of our
business. We further believe that by excluding the effect of
depreciation, amortization and gains or losses from sales of real estate, all of
which are based on historical costs and which may be of limited relevance in
evaluating current performance, FFO can facilitate comparisons of operating
performance between periods and between other REITs. We offer this
measure to assist the users of our financial statements in evaluating our
financial performance under GAAP, and FFO should not be considered a measure of
liquidity, an alternative to net income or an indicator of any other performance
measure determined in accordance with GAAP. Investors and potential
investors in our securities should not rely on this measure as a substitute for
any GAAP measure, including net income.
The following table presents our FFO
results for the years ended December 31, 2009 and 2008:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
Net
income available to common
|
|
$ |
73,025 |
|
|
$ |
70,551 |
|
|
Deduct gain from real estate
dispositions(1)
|
|
|
(753 |
) |
|
|
(12,292 |
) |
|
|
|
|
72,272 |
|
|
|
58,259 |
|
|
Elimination
of non-cash items included in net income:
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization(2)
|
|
|
44,694 |
|
|
|
39,890 |
|
|
Funds
from operations available to common stockholders
|
|
$ |
116,966 |
|
|
$ |
98,149 |
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
deduction of the gain from real estate dispositions includes the
facilities classified as discontinued operations in our consolidated
financial statements. The gain deducted includes $0.0 million
and $0.4 million gain related to facilities classified as discontinued
operations for the year ended December 31, 2009 and 2008,
respectively.
|
|
(2)
|
The
add back of depreciation and amortization includes the facilities
classified as discontinued operations in our consolidated financial
statements. FFO for 2009 and 2008 includes depreciation and
amortization of $0, respectively, related to facilities classified as
discontinued operations.
|
Year
Ended December 31, 2008 compared to Year Ended December 31, 2007
Operating
Revenues
Our operating revenues for the year
ended December 31, 2008, were $193.8 million, an increase of $34.2 million over
the same period in 2007. Detailed changes in operating revenues for
the year ended December 31, 2008 are as follows:
|
·
|
Rental
income was $155.8 million, an increase of $3.7 million over the same
period in 2007. The increase is primarily due to: (i)
additional rental income from the acquisitions of one SNF in January 2008,
seven SNFs, one ALF and one rehabilitation hospital in April 2008 and four
SNFs, one ALF and one ILF in September 2008, which were all leased to
existing operators and (ii) an amendment to an existing operator’s lease
that extended the terms of the lease agreement and increased the annual
rent starting in the first quarter of 2008. Offsetting the
increase were (i) the first quarter 2007 reversal of approximately $5.0
million in allowance for straight-line rent, resulting from an improvement
in one of our operator’s financial condition in 2007, (ii) the 2008
reduction of rent related to the bankruptcy of Haven and (iii) the sale of
the two rehabilitation hospitals in
2008.
|
|
·
|
Mortgage
interest income totaled $9.6 million, an increase of $5.7 million over the
same period in 2007. The increase was primarily the result of
the mortgage financing of seven new facilities in April
2008.
|
|
·
|
Other
investment income totaled $2.0 million, a decrease of $0.8 million over
the same period in 2007. The primary reason for the decrease
was the payoff of notes from our existing
operators.
|
|
·
|
Miscellaneous
revenue was $2.2 million, an increase of $1.4 million over the same period
in 2007. The primary reason for the increase was the payment of
the Haven facilities’ late fees and penalties related to their
bankruptcy.
|
|
·
|
Nursing
home revenues of owned and operated assets was $24.2 million in 2008
compared to no revenue in 2007. See Note 1 – Organization and
Basis of Presentation for additional information regarding the
consolidation of this entity.
|
Operating
Expenses
Operating expenses for the year ended
December 31, 2008, were $89.0 million, an increase of approximately $40.5
million over the same period in 2007. Detailed changes in our
operating expenses for the year ended December 31, 2008 versus the same period
in 2007 are as follows:
|
·
|
Our
depreciation and amortization expense was $39.9 million, compared to $36.0
million for the same period in 2007. The increase is due to the
acquisitions of one SNF in January 2008, seven SNFs, one ALF and one
rehabilitation hospital in April 2008 and four SNFs, one ALF and one ILF
in September 2008.
|
|
·
|
Our
general and administrative expense, when excluding stock-based
compensation expense related to restricted stock units, was $9.6 million,
compared to $9.7 million for the same period in
2007.
|
|
·
|
Our
restricted stock-based compensation expense was $2.1 million, an increase
of $0.7 million over the same period in 2007. The increase
primarily related to four additional months of expense in 2008 versus
2007. In May 2007, we entered into a new restricted stock
agreement with executives of the
Company.
|
|
·
|
In
2008, we recorded $5.6 million of impairment charge, compared to $1.4
million for the same period in 2007, primarily related to the timing of
facility closures.
|
|
·
|
In
2008, we recorded $4.3 million of provision for uncollectible accounts
receivable associated with Haven. The provision consisted of
$3.3 million associated with straight-line receivables and $1.0 million in
pre-petition contractual
receivables.
|
|
·
|
Nursing
home expenses of owned and operated assets was $27.6 million in 2008
compared to no expense in 2007. See Note 1 – Organization and
Basis of Presentation for additional information regarding the
consolidation of this entity.
|
Other
Income (Expense)
For the year ended December 31, 2008,
our total other net expenses were $39.0 million as compared to $43.8 million for
the same period in 2007, a decrease of $4.9 million. The decrease was
primarily due to lower average LIBOR interest rates on our outstanding
borrowings and $0.5 million associated with cash received for a legal settlement
in the second quarter of 2008.
2008
Taxes
So long as we qualify as a REIT, we
generally will not be subject to Federal income taxes on the REIT taxable income
that we distribute to stockholders, subject to certain
exceptions. For tax year 2008, preferred and common dividend payments
of $98.1 million made throughout 2008 satisfy the 2008 REIT requirements
relating to qualifying income. We are permitted to own up to 100% of
a TRS. Currently, we have one TRS that is taxable as a corporation
and that pays federal, state and local income tax on its net income at the
applicable corporate rates. The TRS had a net operating loss
carry-forward as of December 31, 2008 of $1.1 million. The loss
carry-forward was fully reserved with a valuation allowance due to uncertainties
regarding realization. We recorded interest and penalty charges
associated with tax matters as income tax expense.
Income
from continuing operations
Income from continuing operations for
the year ended December 31, 2008 was $77.7 million compared to $67.6 million for
the same period in 2007. The increase in income from continuing
operations is the result of the factors described above.
2008
Discontinued Operations
Discontinued operations relate to
properties we disposed of or plan to dispose of and are currently classified as
assets held for sale.
For the year ended December 31, 2008,
discontinued operations include the one month revenue of $15 thousand and a gain
of $0.4 million on the sale of one SNF.
For the year ended December 31, 2007,
discontinued operations include the revenue of $0.2 million and expense of $31
thousand and a gain of $1.6 million on the sale of four SNFs and two
ALFs.
For additional information, see Note 19
– Discontinued Operations.
Funds
From Operations
Our funds
from operations available to common stockholders, for the year ended December
31, 2008, was $98.1 million, compared to $93.5 million for the same period in
2007.
The following table presents our FFO
results for the years ended December 31, 2008 and 2007:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in
thousands)
|
|
|
Net
income available to common
|
|
$ |
70,551 |
|
|
$ |
59,451 |
|
|
Deduct gain from real estate
dispositions(1)
|
|
|
(12,292 |
) |
|
|
(1,994 |
) |
|
|
|
|
58,259 |
|
|
|
57,457 |
|
|
Elimination
of non-cash items included in net income:
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization(2)
|
|
|
39,890 |
|
|
|
36,056 |
|
|
Funds
from operations available to common stockholders
|
|
$ |
98,149 |
|
|
$ |
93,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
deduction of the gain from real estate dispositions includes the
facilities classified as discontinued operations in our consolidated
financial statements. The gain deducted includes $0.4 million
gain and $1.6 million gain related to facilities classified as
discontinued operations for the year ended December 31, 2008 and 2007,
respectively.
|
|
(2)
|
The add back of depreciation and
amortization includes the facilities classified as discontinued operations
in our consolidated financial statements. FFO for 2008 and 2007
includes depreciation and amortization of $0 and $28 thousand,
respectively, related to facilities classified as discontinued
operations.
|
At December 31, 2009, we had total
assets of $1.7 billion, stockholders’ equity of $865.2 million and debt of
$738.1 million, representing approximately 46.0% of total
capitalization.
The
following table shows the amounts due in connection with the contractual
obligations described below as of December 31, 2009.
|
|
|
Payments due by period
|
|
|
|
|
Total
|
|
|
Less
than
1
year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than
5
years
|
|
|
|
|
(in
thousands)
|
|
|
Debt(1)
|
|
$ |
738,454 |
|
|
$ |
- |
|
|
$ |
153,454 |
|
|
$ |
410,000 |
|
|
$ |
175,000 |
|
|
Purchase
obligations (2)
|
|
|
270,397 |
|
|
|
270,397 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Operating
lease obligations(3)
|
|
|
2,982 |
|
|
|
288 |
|
|
|
599 |
|
|
|
632 |
|
|
|
1,463 |
|
|
Total
|
|
$ |
1,011,833 |
|
|
$ |
270,685 |
|
|
$ |
154,053 |
|
|
$ |
410,632 |
|
|
$ |
176,463 |
|
|
(1)
|
The
$738.5 million includes $59.4 million of 6.8% mortgage debt due December
31, 2011, $310 million aggregate principal amount of 7% Senior Notes due
April 2014, $100 million aggregate principal amount of 6.5% Term Loan due
December 2014, $175 million aggregate principal amount of 7% Senior Notes
due January 2016 and $94.1 million in borrowings under the new $200
million revolving senior secured credit facility (the “2009 Credit
Facility”) that matures in June 2012. Does not include $200
million of 7 ½% senior notes due 2020 issued in February
2010.
|
|
(2)
|
Represents
approximate purchase price to be paid in connection with the second
closing under the purchase agreement with
CapitalSource.
|
|
(3)
|
Relates
primarily to the lease at the corporate
headquarters.
|
Financing
Activities and Borrowing Arrangements
Bank
Credit Agreements
On June 30, 2009, we entered into a new
$200 million revolving senior secured credit facility (the “2009 Credit
Facility”). The 2009 Credit Facility is being provided by Bank of
America, N.A., Deutsche Bank Trust Company Americas, UBS Loan Finance LLC and
General Electric Capital Corporation pursuant to a credit agreement, dated as of
June 30, 2009 (the “2009 Credit Agreement”), among the Omega subsidiaries named
therein (“Borrowers”), the lenders named therein, and Bank of America, N.A., as
administrative agent.
At December 31, 2009, we had $94.1
million outstanding under the 2009 Credit Facility and no letters of credit
outstanding, leaving availability of $105.9 million. The $94.1
million of outstanding borrowings had a blended interest rate of 6% at December
31, 2009, and is currently priced at LIBOR plus 400 basis points. The
2009 Credit Facility will be used for acquisitions and general corporate
purposes.
At December 31, 2008, we had $63.5
million outstanding under our previous $255.0 million senior secured credit
facility (the “Prior Credit Facility”) and no letters of credit outstanding,
leaving availability of $191.5 million as of December 31, 2008. The
$63.5 million of outstanding borrowings had a blended interest rate of 2.0% at
December 31, 2008.
For the years ended December 31, 2009
and 2008, the weighted average interest rates were 2.91% and 3.89%,
respectively.
The 2009 Credit Facility replaces our
previous $255 million senior secured credit facility that was terminated on June
30, 2009. The 2009 Credit Facility matures on June 30, 2012, and
includes an “accordion feature” that permits us to expand our borrowing capacity
to $300 million in certain circumstances during the first two
years.
In the second quarter of 2009, we
recorded a one-time, non-cash charge of approximately $0.5 million relating to
the write-off of unamortized deferred financing costs associated with the
replacement of the Prior Credit Facility. At December 31, 2009, we
incurred approximately $4.6 million in deferred financing cost related to
establishing the 2009 Credit Facility.
The interest rates per annum applicable
to the 2009 Credit Facility are the reserve-adjusted LIBOR Rate, with a floor of
200 basis points (the “Eurodollar Rate”), plus the applicable margin (as defined
below) or, at our option, the base rate, which will be the highest of (i) the
rate of interest publicly announced by the administrative agent as its prime
rate in effect, (ii) the federal funds effective rate from time to time plus
0.50% and (iii) the Eurodollar Rate for a Eurodollar Loan with an interest
period of one month plus 1.25%, in each case, plus the applicable
margin. The applicable margin with respect to the 2009 Credit
Facility is determined in accordance with a performance grid based on our
consolidated leverage ratio. The applicable margin may range from
4.75% to 3.75% in the case of Eurodollar Rate advances, from 3.5% to 2.5% in the
case of base rate advances, and from 4.75% to 3.75% in the case of letter of
credit fees. The default rate on the 2009 Credit Facility is 3.00%
above the interest rate otherwise applicable to base rate loans. We
are also obligated to pay a commitment fee of 0.50% on the unused portion of our
2009 Credit Facility. In certain circumstances set forth in the 2009
Credit Agreement, we may prepay the 2009 Credit Facility at any time in whole or
in part without fees or penalty.
Omega and its subsidiaries that are not
Borrowers under the 2009 Credit Facility guarantee the obligations of our
Borrower subsidiaries under the 2009 Credit Facility. All obligations
under the 2009 Credit Facility and the related guarantees are secured by a
perfected first priority lien on certain real properties and all improvements,
fixtures, equipment and other personal property relating thereto of the Borrower
subsidiaries under the 2009 Credit Facility, and an assignment of leases, rents,
sale/refinance proceeds and other proceeds flowing from the real
properties.
The 2009 Credit Facility contains
customary affirmative and negative covenants, including, among others,
limitations on investments; limitations on liens; limitations on mergers,
consolidations, and transfers of assets; limitations on sales of assets;
limitations on transactions with affiliates; and limitations on our transfer of
ownership and management. In addition, the 2009 Credit Facility
contains financial covenants including, without limitation, with respect to
maximum leverage ratio, minimum fixed charge coverage ratio, minimum tangible
net worth and maximum distributions. As of December 31, 2009, we were in compliance with
all affirmative and negative covenants, including financial
covenants.
$100
Million Term Loan
On December 18, 2009, a wholly owned
subsidiary of ours entered into a secured Credit Agreement with General Electric
Capital Corporation (“GECC”), as Administrative Agent and a Lender, providing
for a new five-year $100 million term loan (the “Term Loan”) maturing December
31, 2014. The Term Loan will bear interest at the reserve-adjusted
LIBOR Rate (the “Eurodollar Rate”) plus 5.5% per annum, but in no event will the
Eurodollar Rate be less than 1.0% per annum. Until December 31, 2011,
scheduled monthly payments on the Term Loan include interest
only. Commencing January 1, 2012, monthly installment payments will
include principal and interest based on a 30-year amortization schedule and an
assumed annual interest rate of 6.5%, with a balloon payment of the remaining
balance due at maturity. We have guaranteed the obligations of the
borrower under the Term Loan. In addition, all obligations under the
Term Loan and guarantee are secured by a perfected first priority lien on 18
long term care facilities under a master lease with one of our existing
operators, and an assignment of leases and rents. We have also
pledged our ownership interest in the borrower. At December 31, 2009,
we incurred approximately $2.6 million in deferred financing cost related to
establishing the loan.
$59
million Mortgage Debt
In connection with the December 22,
2009 closing under our purchase agreement with CapitalSource, we also assumed
$59.4 million face value of 6.8% mortgage debt maturing on December 31, 2011
with a one year extension right. In February 2010, we used proceeds
from our $200 million 7 ½% note offering to repay the assumed mortgage
debt.
$200
Million Senior Notes
Subsequent to year end, on February 9,
2010, we issued and sold $200 million aggregate principal amount of our 7½%
Senior Notes due 2020 (the “2020 Notes”).The 2020 Notes were sold at an issue
price of 98.278% of the principal amount, resulting in gross proceeds of
approximately $197 million. We
used the net proceeds from the sale of the 2020 Notes, after discounts and
expenses, to (i) repay outstanding borrowings of approximately $59 million of
debt assumed in connection with our previously reported December 22, 2009
acquisition of certain subsidiaries of CapitalSource Inc., (ii) repay
outstanding borrowings under our revolving credit facility, and (iii) for
working capital and general corporate purposes, including the acquisition of
healthcare-related properties such as the pending acquisition of additional
facilities under our previously reported purchase agreement with CapitalSource
Inc. The 2020 Notes are guaranteed by substantially all of our
subsidiaries as of the date of issuance.
Equity
Financing
2.7
Million Share Common Stock Issuance
On December 22, 2009, we issued 2.7
million shares of our common stock as part of the consideration paid for the
December 22, 2009 acquisition from CapitalSource.
Equity
Shelf Program
On June 12, 2009, we entered into
separate Equity Distribution Agreements (collectively, the "Equity Distribution
Agreements") with each of UBS Securities LLC, Deutsche Bank Securities Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, each as sales agents
and/or principal (the "Managers"). Under the terms of the Equity
Distribution Agreements, we may sell shares of our common stock, from time to
time, through or to the Managers having an aggregate gross sales price of
up to $100,000,000 (the “Equity Shelf Program”). Sales of the shares,
if any, will be made by means of ordinary brokers’ transactions on the New York
Stock Exchange at market prices, or as otherwise agreed with the
applicable Manager. We will pay each Manager compensation
for sales of the shares equal to 2% of the gross sales price per share of shares
sold through such Manager, as sales agent, under the applicable Equity
Distribution Agreement. During the year ended December 31,
2009, 1.4 million shares of our common stock were issued through the Equity
Shelf Program for net proceeds of approximately $23.0 million, net of $0.5
million of commissions.
Amendment
to Charter to Increase Authorized Common Stock
On May 28, 2009, we amended our
Articles of Incorporation to increase the number of authorized shares of our
common stock from 100,000,000 to 200,000,000 shares.
Dividend
Reinvestment and Common Stock Purchase Plan
We have a Dividend Reinvestment and
Common Stock Purchase Plan (the “DRSPP”) that allows for the reinvestment of
dividends and the optional purchase of our common stock. Effective
May 15, 2009, we reinstated the optional cash purchase component of our DRSPP,
which we had temporarily suspended in October 2008.
For the twelve- month period ended
December 31, 2009, we issued 1.7 million shares of common stock for
approximately $27.2 million in net proceeds. For the twelve- month
period ended December 31, 2008, we issued 2.1 million shares of common stock for
approximately $34.1 million in net proceeds.
Dividends
In order to qualify as a REIT, we are
required to distribute dividends (other than capital gain dividends) to our
stockholders in an amount at least equal to (A) the sum of (i) 90% of our "REIT
taxable income" (computed without regard to the dividends paid deduction and our
net capital gain), and (ii) 90% of the net income (after tax), if any, from
foreclosure property, minus (B) the sum of certain items of non-cash income. In
addition, if we dispose of any built-in gain asset during a recognition period,
we will be required to distribute at least 90% of the built-in gain (after tax),
if any, recognized on the disposition of such asset. Such distributions must be
paid in the taxable year to which they relate, or in the following taxable year
if declared before we timely file our tax return for such year and paid on or
before the first regular dividend payment after such declaration. In addition,
such distributions are required to be made pro rata, with no preference to any
share of stock as compared with other shares of the same class, and with no
preference to one class of stock as compared with another class except to the
extent that such class is entitled to such a preference. To the extent that we
do not distribute all of our net capital gain or do distribute at least 90%, but
less than 100% of our "REIT taxable income," as adjusted, we will be subject to
tax thereon at regular ordinary and capital gain corporate tax
rates. In addition, our Credit Facility has certain financial
covenants that limit the distribution of dividends paid during a fiscal quarter
to no more than 95% of our aggregate cumulative FFO as defined in the credit
agreement, unless a greater distribution is required to maintain REIT
status. The Credit Agreement defines FFO as net income (or loss) plus
depreciation and amortization and shall be adjusted for charges related to: (i)
restructuring our debt; (ii) redemption of preferred stock; (iii) litigation
charges up to $5.0 million; (iv) non-cash charges for accounts and notes
receivable up to $5.0 million; (v) non-cash compensation related expenses; (vi)
non-cash impairment charges; and (vii) tax liabilities in an amount not to
exceed $8.0 million. In 2009, we paid dividends of $1.20 per share of
common stock and $2.09 per share of preferred stock. In 2009, we paid
a total of $109.2 million in dividends to common and preferred
stockholders.
Common
Dividends
On January 20, 2010, the Board of
Directors declared a common stock dividend of $0.32 per share, increasing the
quarterly common dividend by $0.02 per share over the prior
quarter. The common dividends were paid on February 16, 2010 to
common stockholders of record on January 29, 2010.
On October 20, 2009, the Board of
Directors declared a common stock dividend of $0.30 per share, to be paid
November 16, 2009 to common stockholders of record on November 2,
2009.
On July 15, 2009, the Board of
Directors declared a common stock dividend of $0.30 per share that was paid
August 17, 2009 to common stockholders of record on July 31, 2009.
On April 15, 2009, the Board of
Directors declared a common stock dividend of $0.30 per share that was paid May
15, 2009 to common stockholders of record on April 30, 2009.
On January 15, 2009, the Board of
Directors declared a common stock dividend of $0.30 per share that was paid on
February 17, 2009 to common stockholders of record on January 30,
2009.
Series
D Preferred Dividends
On January 20, 2010, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on its 8.375% Series D cumulative redeemable preferred stock
(the “Series D Preferred Stock”), that were paid February 16, 2010 to preferred
stockholders of record on January 29, 2010. The liquidation
preference for our Series D Preferred Stock is $25.00 per
share. Regular quarterly preferred dividends for the Series D
Preferred Stock represent dividends for the period November 1, 2009 through
January 31, 2010.
On October 20, 2009, the Board of
Directors declared the regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D preferred stock that were paid November 16, 2009
to preferred stockholders of record on November 2, 2009.
On July 15, 2009, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D Preferred Stock that were paid August 17, 2009
to preferred stockholders of record on July 31, 2009.
On April 15, 2009, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D Preferred Stock that were paid May 15, 2009 to
preferred stockholders of record on April 30, 2009.
On January 15, 2009, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D Preferred Stock that were paid February 17, 2009
to preferred stockholders of record on January 30, 2009.
Liquidity
We believe our liquidity and various
sources of available capital, including cash from operations, our existing
availability under our Credit Facility and expected proceeds from mortgage
payoffs are more than adequate to finance operations, meet recurring debt
service requirements and fund future investments through the next twelve
months.
We
regularly review our liquidity needs, the adequacy of cash flow from operations,
and other expected liquidity sources to meet these needs. We believe
our principal short-term liquidity needs are to fund:
· normal
recurring expenses;
· debt
service payments;
· preferred
stock dividends;
· common
stock dividends; and
· growth
through acquisitions of additional properties.
The
primary source of liquidity is our cash flows from
operations. Operating cash flows have historically been determined
by: (i) the number of facilities we lease or have mortgages on; (ii) rental and
mortgage rates; (iii) our debt service obligations; and (iv) general and
administrative expenses. The timing, source and amount of cash flows
provided by financing activities and used in investing activities are sensitive
to the capital markets environment, especially to changes in interest
rates. Changes in the capital markets environment may impact the
availability of cost-effective capital and affect our plans for acquisition and
disposition activity. Current economic conditions reduced the
availability of cost-effective capital in recent quarters, and accordingly our
level of new investments has decreased. As economic conditions and
capital markets stabilize, we look forward to funding new investments as
conditions warrant. However, we cannot predict the timing or level of
future investments.
Cash and
cash equivalents totaled $2.2 million as of December 31, 2009, an increase of
$2.0 million as compared to the balance at December 31, 2008. The
following is a discussion of changes in cash and cash equivalents due to
operating, investing and financing activities, which are presented in our
Consolidated Statement of Cash Flows.
Operating
Activities –
Net cash flow from operating activities generated $147.2 million for the year
ended December 31, 2009, as compared to $89.3 million for the same period in
2008, an increase of $57.9 million. The increase is primarily
due to (i) income from new investments made in 2009, and (ii) in 2009, we
collected the cash used in 2008 to operate the facilities we assumed as a result
of the bankruptcy of one of our former tenant/operators in 2008.
Investing
Activities – Net cash flow used in investing activities was an outflow of
$209.0 million for the year ended December 31, 2009, as compared to an outflow
of $187.1 million for the same period in 2008. The increase in cash
outflow from investing activities of $21.9 million relates primarily to: (i)
acquisition of $159.5 million in real estate and payment of $25.0 million for a
purchase option acquired 2009 compared to the acquisition of $112.8 million in
real estate and a $74.9 million mortgage loan placed with one of our operators
in 2008; (ii) the investment of $23.2 million in capital improvements and
renovations in 2009 compared to $17.5 million in 2008; offset by (i) the
decrease in net proceeds for the sales of real estate of $31.0 million primarily
related to the sale of two facilities in 2008, (ii) the increase in net other
investment in 2009 compared to 2008 and (iii) a net decrease in collection of
mortgage principal of $5.2 million in 2009 compared to 2008.
Financing
Activities – Net cash flow from financing activities was an inflow of
$63.7 million for the year ended December 31, 2009 as compared to an inflow of
$96.0 million for the year ended December 31, 2008. The decrease of
$32.3 million in cash inflow from financing activities was primarily due to: (i)
$100.0 million in secured borrowings issued to fund a portion of the new
investments acquired in 2009, (ii) a net proceeds of approximately $30.6 million
from our credit facilities primarily related to the funding of the new
investment, compared to a net proceeds from our credit facility of approximately
$15.5 million in 2008, (iii) $23.0 million net proceeds from our common stocks
issued through the Equity Shelf Program, offset by (iv) $7.2 million in payments
of deferred financing costs associated with the 2009 Credit Facility and GE Term
Loan in 2009, (v) a decrease in net proceeds from the common stock offering of
$195.7 million, (vi) an increase in dividend payments of $11.2 million in 2009
due to additional shares outstanding, (vii) a decrease in dividend reinvestment
proceeds of $6.8 million due to the temporary suspension of the optional cash
purchase component our DRSPP in October 2008 which was later reinstated in May
2009 and (viii) the retirement of approximately $41.0 million in other
borrowings primarily related to the Haven mortgage. In 2008, we
also paid $7.6 million to purchase a portion of our Series D preferred
stock.
The preparation of financial statements
in conformity with generally accepted accounting principles (“GAAP”) in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Our
significant accounting policies are described in Note 2 – Summary of Significant
Accounting Policies. These policies were followed in preparing the
consolidated financial statements for all periods presented. Actual
results could differ from those estimates.
We have identified four significant
accounting policies that we believe are critical accounting
policies. These critical accounting policies are those that have the
most impact on the reporting of our financial condition and those requiring
significant assumptions, judgments and estimates. With respect to
these critical accounting policies, we believe the application of judgments and
assessments is consistently applied and produces financial information that
fairly presents the results of operations for all periods
presented. The four critical accounting policies are:
Revenue
Recognition
We have various different investments
that generate revenue, including leased and mortgaged properties, as well as,
other investments, including working capital loans. We recognized
rental income and mortgage interest income and other investment income as earned
over the terms of the related master leases and notes,
respectively.
Substantially all of our leases contain
provisions for specified annual increases over the rents of the prior year and
are generally computed in one of three methods depending on specific provisions
of each lease as follows: (i) a specific annual increase over the prior year’s
rent, generally 2.5%; (ii) an increase based on the change in pre-determined
formulas from year to year (i.e., such as increases in the Consumer Price Index
(“CPI”)); or (iii) specific dollar increases over prior
years. Revenue under lease arrangements with fixed and determinable
increases is recognized over the term of the lease on a straight-line
basis. The authoritative guidance does not provide for the
recognition of contingent revenue until all possible contingencies have been
eliminated. We consider the operating history of the lessee, the
payment history, the general condition of the industry and various other factors
when evaluating whether all possible contingencies have been
eliminated. We do not include contingent rents as income until the
contingencies are resolved.
In the case of rental revenue
recognized on a straight-line basis, we generally record reserves against earned
revenues from leases when collection becomes questionable or when negotiations
for restructurings of troubled operators result in significant uncertainty
regarding ultimate collection. The amount of the reserve is estimated
based on what management believes will likely be collected. We
continually evaluate the collectability of our straight-line rent
assets. If it appears that we will not collect future rent due under
our leases, we will record a provision for loss related to the straight-line
rent asset.
Recognizing rental income on a
straight-line basis may cause recognized revenue to exceed contractual amounts
due from our tenants. Such cumulative excess amounts are included in
accounts receivable and were $51.0 million and $43.1 million, net of allowances,
at December 31, 2009 and 2008, respectively.
Gains on
sales of real estate assets are recognized under the FASB guidance of Accounting
for Sales of Real Estate. The specific timing of the recognition of
the sale and the related gain is measured against the various criteria in the
guidance related to the terms of the transactions and any continuing involvement
associated with the assets sold. To the extent the sales criteria are
not met, we defer gain recognition until the sales criteria are
met.
Nursing
home revenues of owned and operated assets consist of long-term care revenues,
rehabilitation therapy services revenues, temporary medical staffing services
revenues and other ancillary services revenues. The revenues are recognized as
services are provided. Revenues are recorded net of provisions for
discount arrangements with commercial payors and contractual allowances with
third-party payors, primarily Medicare and Medicaid. Revenues
realizable under third-party payor agreements are subject to change due to
examination and retroactive adjustment. Estimated third-party payor
settlements are recorded in the period the related services are rendered. The
methods of making such estimates are reviewed periodically, and differences
between the net amounts accrued and subsequent settlements or estimates of
expected settlements are reflected in the current period results of operations.
Laws and regulations governing the Medicare and Medicaid programs are extremely
complex and subject to interpretation. For additional information,
see Note 4 – Owned and Operated Assets.
Depreciation
and Asset Impairment
Under GAAP, real estate assets are
stated at the lower of depreciated cost or fair value, if deemed
impaired. Depreciation is computed on a straight-line basis over the
estimated useful lives of 20 to 40 years for buildings and improvements and
three to 10 years for furniture, fixtures and equipment. Management
periodically, but not less than annually, evaluates our real
estate investments for impairment indicators, including the evaluation of our
assets’ useful lives. The judgment regarding the existence of
impairment indicators is based on factors such as, but not limited to, market
conditions, operator performance and legal structure. If indicators
of impairment are present, management evaluates the carrying value of the
related real estate investments in relation to the future undiscounted cash
flows of the underlying facilities. Provisions for impairment losses
related to long-lived assets are recognized when expected future undiscounted
cash flows are determined to be permanently less than the carrying values of the
assets. An adjustment is made to the net carrying value of the leased
properties and other long-lived assets for the excess of historical cost over
fair value. The fair value of
the real estate investment is determined by market research, which includes
valuing the property as a nursing home as well as other alternative uses. All impairments are
taken as a period cost at that time, and depreciation is adjusted going forward
to reflect the new value assigned to the asset.
If we decide to sell rental properties
or land holdings, we evaluate the recoverability of the carrying amounts of the
assets. If the evaluation indicates that the carrying value is not
recoverable from estimated net sales proceeds, the property is written down to
estimated fair value less costs to sell. Our estimates of cash flows
and fair values of the properties are based on current market conditions and
consider matters such as rental rates and occupancies for comparable properties,
recent sales data for comparable properties, and, where applicable, contracts or
the results of negotiations with purchasers or prospective
purchasers.
For the years ended December 31, 2009,
2008, and 2007, we recognized impairment losses of $0.2 million, $5.6 million
and $1.4 million, respectively, including amounts classified within discontinued
operations. The impairments are primarily the result of closing
facilities or updating the estimated proceeds we expect for the sale of closed
facilities.
Loan
Impairment
Management, periodically but not less
than annually, evaluates our outstanding loans and notes
receivable. When management identifies potential loan impairment
indicators, such as non-payment under the loan documents, impairment of the
underlying collateral, financial difficulty of the operator or other
circumstances that may impair full execution of the loan documents, and
management believes it is probable that all amounts will not be collected under
the contractual terms of the loan, the loan is written down to the present value
of the expected future cash flows. In cases where expected future
cash flows are not readily determinable, the loan is written down to the fair
value of the collateral. The fair value of the loan is determined by
market research, which includes valuing the property as a nursing home as well
as other alternative uses.
We
account for impaired loans using (a) the cost-recovery method, and/or (b) the
cash basis method. We generally utilize the cost recovery method for
impaired loans for which impairment reserves were recorded. We
utilize the cash basis method for impairment loans for which no impairment
reserves were recorded because the net present value of the discounted cash
flows and/or the underlying collateral supporting the loan were equal to or
exceeded the book value of the loans. Under the cost recovery method,
we apply cash received against the outstanding loan balance prior to recording
interest income. Under the cash basis method, we apply cash received
to interest income. As of December 31, 2009 and 2008, we had loan
loss reserve totaling $2.2 million, in both periods. In 2009, 2008
and 2007 we did not record provisions for loan losses or charge-offs related to
our mortgage or note receivable portfolios. For additional
information see Note 5 – Mortgage Notes Receivable and Note 6 – Other
Investments.
Assets
Held for Sale and Discontinued Operations
The operating results of specified real
estate assets that have been sold, or otherwise qualify as held for disposition,
are reflected as assets held for sale in our balance sheet. Assets
that qualify as held for sale may also be considered as a discontinued operation
if, (a) the operation and cash flows of the asset have been or will be
eliminated from future operations and (b) we will not have significant
involvement with the asset after its disposition. For assets that qualify as
discontinued operations, we have reclassified the operations of those assets to
discontinued operations in the consolidated statements of income for all periods
presented and assets held for sale in the consolidated balance sheet for all
periods presented.
We had two assets held for sale as of
December 31, 2009 with a net book value of $0.9 million neither of which are
classified as discontinued operations.
For the year ended December 31, 2008,
we had one asset held for sale with a net book value of $0.2
million. Discontinued operations includes the one month revenue of
$15 thousand and the gain of $0.4 million on the sale of one SNF.
For the year ended December 31, 2007,
we had three assets held for sale with a combined net book value of $2.9
million. Discontinued operations includes the revenue of $0.2 million
and expense of $31 thousand for 6 facilities. It also includes the
gain of $1.6 million on the sale of six SNFs and two ALFs.
Effects
of Recently Issued Accounting Standards
Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities
In June 2008, the FASB issued guidance
on Determining Whether Instruments Granted in Share-Based Payment Transactions
are Participating Securities. In this new
guidance, the FASB concluded that all outstanding unvested share-based payment
awards that contain rights to non-forfeitable dividends or dividend equivalents
that participate in undistributed earnings with common shareholders and,
accordingly, are considered participating securities that shall be included in
the two-class method of computing basic and diluted EPS. The guidance does not
address awards that contain rights to forfeitable dividends. We adopted this
standard on January 1, 2009, and retrospectively adjusted basic EPS data for all
periods presented to reflect the two-class method of computing
EPS. The impact of the adoption of this guidance on earnings per
share was less than $0.01 per share for the periods presented.
Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly
In April 2009, the FASB issued guidance
on Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly. This new guidance provides additional guidance for
estimating fair value in accordance with Fair Value Measurements, when the
volume and level of activity for the asset or liability have significantly
decreased. This new guidance also includes guidance on identifying circumstances
that indicate a transaction is not orderly. It emphasizes that even
if there has been a significant decrease in the volume and level of activity for
the asset or liability and regardless of the valuation technique(s) used, the
objective of a fair value measurement remains the same. Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants at the measurement date under current market
conditions. We adopted the standard in the second quarter of 2009 and
determined that the adoption had no material effect on our financial position or
results of operations.
Fair
Value Measurements
On January 1, 2008, we adopted new
guidance for Fair Value Measurements. This new guidance defines fair
value, establishes a methodology for measuring fair value and expands the
required disclosure for fair value measurements. It emphasizes that
fair value is a market-based measurement, not an entity-specific measurement,
and states that a fair value measurement should be determined based on the
assumptions that market participants would use in pricing the asset or
liability. The guidance applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those pronouncements that fair value is the relevant measurement
attribute. Accordingly, this statement does not require any new fair
value measurements. The standard applies prospectively to new fair
value measurements performed after the required effective dates, which are as
follows: (i) on January 1, 2008, the standard applied to our measurements of the
fair values of financial instruments and recurring fair value measurements of
non-financial assets and liabilities; and (ii) on January 1, 2009, the standard
applied to all remaining fair value measurements, including non-recurring
measurements of non-financial assets and liabilities such as measurement of
potential impairments of goodwill, other intangible assets and other long-lived
assets. It also applies to fair value measurements of non-financial assets
acquired and liabilities assumed in business combinations. We
evaluated the guidance and determined that the adoption had no impact on our
consolidated financial statements.
Revised
Business Combinations
On December 4, 2007, the FASB issued
revised guidance on Business Combinations. The new guidance will
significantly change the accounting for and reporting of business combination
transactions. The guidance requires companies to recognize, with
certain exception, 100 percent of the fair value of the assets acquired,
liabilities assumed and non-controlling interest in acquisitions of less than a
100 percent controlling interest when the acquisition constitutes a change in
control; measure acquirer shares issued as consideration for a business
combination at fair value on the date of the acquisition; recognize contingent
consideration arrangements at their acquisition date fair value, with subsequent
change in fair value generally reflected in earnings; recognition of
reacquisition loss and gain contingencies at their acquisition date fair value;
and expense as incurred, acquisition related transaction costs. The
guidance is effective for fiscal years beginning after December 15, 2008 and
early adoption is prohibited. We adopted the guidance on January 1,
2009, which will impact the accounting only for acquisitions occurring
prospectively. We incurred $1.6 million associated with the
CapitalSource transaction.
Subsequent
Events
In the second quarter of 2009, we
adopted FASB new guidance on Subsequent
Events. The new guidance establishes the accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. The adoption
did not have a material impact on our financial statements.
We are exposed to various market risks,
including the potential loss arising from adverse changes in interest
rates. We do not enter into derivatives or other financial
instruments for trading or speculative purposes, but we seek to mitigate the
effects of fluctuations in interest rates by matching the term of new
investments with new long-term fixed rate borrowing to the extent
possible.
The following disclosures of estimated
fair value of financial instruments are subjective in nature and are dependent
on a number of important assumptions, including estimates of future cash flows,
risks, discount rates and relevant comparable market information associated with
each financial instrument. Readers are cautioned that many of the
statements contained in these paragraphs are forward-looking and should be read
in conjunction with our disclosures under the heading “Statement Regarding
Forward-Looking Disclosure” set forth above. The use of different market
assumptions and estimation methodologies may have a material effect on the
reported estimated fair value amounts. Accordingly, the estimates presented
below are not necessarily indicative of the amounts we would realize in a
current market exchange.
Mortgage notes receivable - The fair value
of mortgage notes receivable is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Notes receivable - The fair value
of notes receivable is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Borrowings under variable rate
agreements - Our variable rate debt as of December 31, 2009 includes our
credit facility, our $100 million term loan, and $59 million of mortgage debt
assumed from CapitalSource that was paid off subsequent to year end. The fair
value of our borrowings under variable rate agreements are estimated using an
expected present value technique based on expected cash flows discounted using
the current credit-adjusted risk-free rate.
Senior unsecured notes - The fair value of the
senior unsecured notes is estimated by discounting the future cash flows using
the current borrowing rate available for the similar debt.
The market value of our long-term fixed
rate borrowings and mortgages is subject to interest rate
risks. Generally, the market value of fixed rate financial
instruments will decrease as interest rates rise and increase as interest rates
fall. The estimated fair value of our total long-term borrowings at
December 31, 2009 was approximately $490.9 million. A one percent
increase in interest rates would result in a decrease in the fair value of
long-term borrowings by approximately $18.2 million at December 31,
2009. The estimated fair value of our total long-term borrowings at
December 31, 2008 was approximately $406.0 million, and a one percent increase
in interest rates would have resulted in a decrease in the fair value of
long-term borrowings by approximately $17.6 million.
While we currently do not engage in
hedging strategies, we may engage in such strategies in the future, depending on
management’s analysis of the interest rate environment and the costs and risks
of such strategies.
The consolidated financial statements
and the report of Ernst & Young LLP, Independent Registered Public
Accounting Firm, on such financial statements are filed as part of this report
beginning on page F-1. The summary of unaudited quarterly results of
operations for the years ended December 31, 2009 and 2008 is included in Note 17
to our audited consolidated financial statements, which is incorporated herein
by reference in response to Item 302 of Regulation S-K.
None.
Evaluation
of Disclosure Controls and Procedures
Disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) are controls and other procedures that are designed to
provide reasonable assurance that the information that we are required to
disclose in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
In connection with the preparation of
our Form 10-K as of and for the year ended December 31, 2009, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2009. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective at the reasonable assurance
level as of December 31, 2009.
Management’s
Report on Internal Control over Financial Reporting
Our management is responsible for
establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(f) or
15d-15(f) promulgated under the Exchange Act as a process designed by, or under
the supervision of, a company’s principal executive and principal financial
officers and effected by a company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP and includes those policies and
procedures that:
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
company;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company’s assets that
could have a material effect on the financial
statements.
|
All internal control systems, no matter
how well designed, have inherent limitations and can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our company have been
detected. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
In connection with the preparation of
our Form 10-K, our management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2009. In making that
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on management’s assessment, management
believes that, as of December 31, 2009, our internal control over financial
reporting was effective based on those criteria.
Pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, we have included above a report of management's
assessment of the design and effectiveness of our internal controls as part of
this Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Our
independent registered public accounting firm also reported on the effectiveness
of internal control over financial reporting. The independent registered public
accounting firm's attestation report is included in our 2009 financial
statements under the caption entitled "Report of Independent Registered Public
Accounting Firm" and is incorporated herein by reference.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the quarter ended December 31, 2009 identified in
connection with the evaluation of our disclosure controls and procedures
described above that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART
III
The information required by this item
is incorporated herein by reference to our Company’s definitive proxy statement
for the 2010 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A.
For information regarding executive
officers of our Company, see Item 1 – Business – Executive Officers of Our
Company.
Code of Business Conduct and
Ethics. We have adopted a written Code of Business Conduct and
Ethics (“Code of Ethics”) that applies to all of our directors and employees,
including our chief executive officer, chief financial officer, chief accounting
officer and controller. A copy of our Code of Ethics is available on
our website at www.omegahealthcare.com and print copies are available upon
request without charge. You can request print copies by contacting
our Chief Financial Officer in writing at Omega Healthcare Investors, Inc., 200
International Circle, Suite 3500, Hunt Valley, Maryland 21030 or by telephone at
410-427-1700. Any amendment to our Code of Ethics or any waiver of
our Code of Ethics will be disclosed on our website at www.omegahealthcare.com
promptly following the date of such amendment or waiver.
The information required by this item
is incorporated herein by reference to our Company's definitive proxy statement
for the 2010 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission (“SEC”) pursuant to Regulation 14A.
The information required by this item
is incorporated herein by reference to our Company's definitive proxy statement
for the 2010 Annual Meeting of Stockholders, to be filed with the SEC pursuant
to Regulation 14A.
The information required by this item,
if any, is incorporated herein by reference to our Company's definitive proxy
statement for the 2010 Annual Meeting of Stockholders, to be filed with the SEC
pursuant to Regulation 14A.
The information required by this item
is incorporated herein by reference to our Company's definitive proxy statement
for the 2010 Annual Meeting of Stockholders, to be filed with the SEC pursuant
to Regulation 14A.
PART
IV
(a)(1) Listing of Consolidated
Financial Statements
|
Title of Document
|
Page
Number
|
|
|
F-1
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
(a)(2) Listing of Financial Statement
Schedules. The following consolidated financial statement schedules are included
herein:
|
Schedule
III – Real Estate and Accumulated Depreciation
|
F-34
|
|
Schedule
IV – Mortgage Loans on Real
Estate
|
F-35
|
All other schedules for which provision
is made in the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable
or have been omitted because sufficient information has been included in the
notes to the Financial Statements.
(a)(3) Listing of Exhibits — See Index
to Exhibits beginning on Page I-1 of this report.
(b) Exhibits —
See Index to Exhibits beginning on Page I-1 of this report.
|
(c)
|
Financial
Statement Schedules — The following consolidated financial statement
schedules are included herein:
|
The Board
of Directors and Shareholders
of Omega
Healthcare Investors, Inc.
We have audited the accompanying
consolidated balance sheets of Omega Healthcare Investors, Inc. as of December
31, 2009 and 2008, and the related consolidated statements of income,
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2009. Our audits also included the financial statement
schedules listed in the Index at Item 15(a). These financial statements and
schedules are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Omega Healthcare Investors, Inc. at December
31, 2009 and 2008, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2009, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), Omega Healthcare Investors Inc.’s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 1, 2010 expressed an
unqualified opinion thereon.
/s/ Ernst
& Young LLP
Baltimore,
Maryland
March 1,
2010
The Board
of Directors and Shareholders
of Omega
Healthcare Investors, Inc.
We have audited Omega Healthcare
Investors, Inc.’s internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Omega Healthcare Investors, Inc.’s management is
responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion
on the company’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, Omega Healthcare
Investors, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Omega Healthcare Investors, Inc. as
of December 31, 2009 and 2008, and the related consolidated statements of
income, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2009 and our report dated March 1, 2010 expressed an
unqualified opinion thereon.
/s/ Ernst
& Young LLP
Baltimore,
Maryland
March 1,
2010
OMEGA
HEALTHCARE INVESTORS, INC.
NOTE
1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization
Omega
Healthcare Investors, Inc. (“Omega”), a Maryland corporation, is a
self-administered real estate investment trust (“REIT”). From the
date that we commenced operations in 1992, we have invested primarily in
income-producing healthcare facilities, which include long-term care nursing
homes, assisted living facilities, independent living facilities and
rehabilitation hospitals. In July 2008, we assumed operating
responsibilities for 14 of our skilled nursing facilities (“SNFs”) and one of
our assisted living facilities (“ALFs”) due to the bankruptcy of one of our
operators/tenants. In September 2008, we entered into an agreement to
lease these facilities to a new operator/tenant. The new
operator/tenant assumed operating responsibility for 13 of the 15 facilities
effective September 1, 2008. We continue to be responsible for the
two remaining facilities as of December 31, 2009 that are in the process of
being transitioned to the new operator pending approval by state
regulators.
We have
one reportable segment consisting of investments in healthcare related real
estate properties. Our business is to provide financing and capital
to the long-term healthcare industry with a particular focus on skilled nursing
facilities (“SNFs”) located in the United States. Our core portfolio
consists of long-term lease and mortgage agreements. All of our
leases are “triple-net” leases, which require the tenants to pay all property
related expenses. Our mortgage revenue derives from fixed-rate
mortgage loans, which are secured by first mortgage liens on the underlying real
estate and personal property of the mortgagor.
Substantially
all depreciation expenses reflected in the consolidated statements of income
relate to the ownership of our investment in real estate. At December
31, 2009, we have investments in 295 healthcare facilities located throughout
the United States, including two closed facilities held for sale.
Consolidation
Our
consolidated financial statements include the accounts of Omega and all direct
and indirect wholly owned subsidiaries as well as entities that we consolidate
due to the application of Financial Accounting Standards Board (“FASB”)’s
Consolidation of Variable Interest Entities. All inter-company
accounts and transactions have been eliminated in consolidation of the financial
statements.
The
guidance addresses the consolidation by business enterprises of Variable
Interest Entities (“VIEs”). We consolidate all VIEs for which we are
the primary beneficiary. Generally, a VIE is an entity with one or
more of the following characteristics: (a) the total equity investment at risk
is not sufficient to permit the entity to finance its activities without
additional subordinated financial support; (b) as a group the holders of the
equity investment at risk lack (i) the ability to make decisions about an
entity’s activities through voting or similar rights, (ii) the obligation to
absorb the expected losses of the entity, or (iii) the right to receive the
expected residual returns of the entity; or (c) the equity investors have voting
rights that are not proportional to their economic interests, and substantially
all of the entity’s activities either involve, or are conducted on behalf of, an
investor that has disproportionately few voting rights. Consolidation
rules requires a VIE to be consolidated in the financial statements of the
entity that is determined to be the primary beneficiary of the
VIE. The primary beneficiary generally is the entity that will
receive a majority of the VIEs expected losses, receive a majority of the VIEs
expected residual returns, or both.
During
the first quarter of 2006, an entity of Haven Eldercare, LLC (“Haven”), formerly
one of our operators, entered into a $39.0 million first mortgage loan with GE
Capital (collectively, “GE Loan”). Haven used the $39.0 million in
proceeds to partially repay on a $61.8 million mortgage it had with
us. Simultaneously, we subordinated the payment of our remaining
$22.8 million mortgage note, to that of the GE Loan. The mortgage
agreement included a purchase option allowing us to purchase the facilities for
$61.8 million. The Haven entity was engaged in the ownership and
rental of six SNFs and one ALF. In accordance with consolidation
rules, we determined that we were the primary beneficiary of the Haven entity
and consolidated the financial statements and related real estate of the Haven
entity starting in 2006. In January 2008, we purchased the $39.0
million GE loan from GE Capital.
On July
7, 2008, we took ownership and/or possession through bankruptcy proceedings of
15 facilities previously operated by Haven, including all of the facilities
previously mortgaged to the Haven entity that we consolidated and TC Healthcare
I, LLC. (“TC Healthcare”), a new entity and an interim operator in which we have
a substantial economic interest was formed and began operating these facilities
on our behalf through an independent contractor. As a result of the
bankruptcy proceedings, the mortgage with the Haven entity was retired in
exchange for our ownership of the facilities. Accordingly, effective
July 7, 2008, we were no longer required to consolidate the Haven entity into
our financial statements. Our 2008 results of operation reflect the
impact of the consolidation of this Haven entity through July 6,
2008. However, pursuant to consolidation rules and effective July 7,
2008, we determined that we were the primary beneficiary of TC Healthcare and
were required to consolidate the financial position and results of operations of
TC Healthcare. Effective September 1, 2008, we transitioned/leased 13
of the 15 facilities that were being operated by TC Healthcare to a new
operator/tenant and ceased consolidation of those facilities
operations. TC Healthcare continues to be responsible for the
operations of two facilities as of December 31, 2009 which are in the process of
being transitioned to the new operator/tenant pending regulatory approval by the
state. For additional information relating to our consolidation of TC
Healthcare, including revenues, expenses, assets and liabilities (see Note 4 –
Owned and Operated Assets).
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting
Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles (“GAAP”) in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Real
Estate Investments and Depreciation
We allocate the purchase price of
properties to net tangible and identified intangible assets acquired based on
their fair values in accordance with the provisions of Business
Combinations. In making estimates of fair values for purposes of
allocating purchase price, we utilize a number of sources, including independent
appraisals that may be obtained in connection with the acquisition or financing
of the respective property and other market data. We also consider
information obtained about each property as a result of its pre-acquisition due
diligence, marketing and leasing activities in estimating the fair value of the
tangible and intangible assets acquired. All costs of significant
improvements, renovations and replacements are capitalized. In
addition, we capitalize leasehold improvements when certain criteria are met,
including when we supervise construction and will own the
improvement. Expenditures for maintenance and repairs are charged to
operations as they are incurred.
Depreciation is computed on a
straight-line basis over the estimated useful lives ranging from 20 to 40 years
for buildings and improvements and three to 10 years for furniture, fixtures and
equipment. Leasehold interests are amortized over the shorter of
useful life or term of the lease, with lives ranging from five to 15
years.
As of December 31, 2009 and 2008,
we had identified conditional asset retirement obligations primarily related to
the future removal and disposal of asbestos that is contained within certain of
our real estate investment properties. The asbestos is appropriately contained,
and we believe we are compliant with current environmental regulations. If these
properties undergo major renovations or are demolished, certain environmental
regulations are in place, which specify the manner in which asbestos must be
handled and disposed. We are required to record the fair value of these
conditional liabilities if they can be reasonably estimated. As of
December 31, 2009 and 2008, sufficient information was not available to
estimate our liability for conditional asset retirement obligations as the
obligations to remove the asbestos from these properties have indeterminable
settlement dates. As such, no liability for conditional asset retirement
obligations was recorded on our accompanying consolidated balance sheets as of
December 31, 2009 and 2008.
In-Place
Leases
The fair value of in-place leases
consists of the following components as applicable (1) the estimated cost
to replace the leases, and (2) the above/below market cash flow of the
leases, determined by comparing the projected cash flows of the leases in place
to projected cash flows of comparable market-rate leases (referred to as Lease
Intangibles). Lease Intangible assets and liabilities are classified
as lease contracts above and below market value, respectively, and amortized on
a straight-line basis as decreases and increases, respectively, to rental
revenue over the remaining term of the underlying leases. Should a tenant
terminate its lease, the unamortized portions of these costs are written
off.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
Owned
and Operated Assets
Real estate properties that are
operated pursuant to a foreclosure proceeding are included within "real estate
properties" and are reported at the time of foreclosure at the lower of carrying
cost or fair value.
Asset
Impairment
Management periodically, but not less
than annually, evaluates our real
estate investments for impairment indicators, including the evaluation of our
assets’ useful lives. The judgment regarding the existence of
impairment indicators is based on factors such as, but not limited to, market
conditions, operator performance and legal structure. If indicators
of impairment are present, management evaluates the carrying value of the
related real estate investments in relation to the future undiscounted cash
flows of the underlying facilities. Provisions for impairment losses
related to long-lived assets are recognized when expected future undiscounted
cash flows are determined to be less than the carrying values of the
assets. An adjustment is made to the net carrying value of the real
estate investments for the excess of carrying value over fair value. The fair value of
the real estate investment is determined by market research, which includes
valuing the property as a nursing home as well as other alternative uses. All impairments are
taken as a period cost at that time, and depreciation is adjusted going forward
to reflect the new value assigned to the asset.
If we decide to sell real estate
properties or land holdings, we evaluate the recoverability of the carrying
amounts of the assets. If the evaluation indicates that the carrying
value is not recoverable from estimated net sales proceeds, the property is
written down to estimated fair value less costs to sell. Our
estimates of cash flows and fair values of the properties are based on current
market conditions and consider matters such as rental rates and occupancies for
comparable properties, recent sales data for comparable properties, and, where
applicable, contracts or the results of negotiations with purchasers or
prospective purchasers.
For the years ended December 31, 2009,
2008, and 2007 we recognized impairment losses of $0.2 million, $5.6 million and
$1.4 million, respectively, including amounts classified within discontinued
operations. The impairments are primarily the result of closing
facilities or updating the estimated proceeds we expect for the sale of closed
facilities.
Loan
Impairment
Management, periodically but not less
than annually, evaluates our outstanding mortgage notes and other notes
receivable. When management identifies potential loan impairment
indicators, such as non-payment under the loan documents, impairment of the
underlying collateral, financial difficulty of the operator or other
circumstances that may impair full execution of the loan documents, and
management believes it is probable that all amounts will not be collected under
the contractual terms of the loan, the loan is written down to the present value
of the expected future cash flows. In cases where expected future
cash flows are not readily determinable, the loan is written down to the fair
value of the collateral. The fair value of the loan is determined by
market research, which includes valuing the property as a nursing home as well
as other alternative uses.
We
currently account for impaired loans using (a) the cost-recovery method, and/or
(b) the cash basis method. We generally utilize the cost recovery
method for impaired loans for which impairment reserves were
recorded. We utilize the cash basis method for impairment loans for
which no impairment reserves were recorded because the net present value of the
discounted cash flows expected under the loan and/or the underlying collateral
supporting the loan were equal to or exceeded the book value of the
loans. Under the cost recovery method, we apply cash received against
the outstanding loan balance prior to recording interest
income. Under the cash basis method, we apply cash received to
interest income. As of December 31, 2009 and 2008, we had loan loss
reserves totaling $2.2 million, in both periods. In 2009, 2008
and 2007 we did not record provisions for loan losses or charge-offs related to
our mortgage or note receivable portfolios. For additional
information see Note 5 – Mortgage Notes Receivable and Note 6 – Other
Investments.
Cash
and Cash Equivalents
Cash and cash equivalents consist of
cash on hand and highly liquid investments with a maturity date of three months
or less when purchased. These investments are stated at cost, which
approximates fair value.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - Continued
Restricted
Cash
Restricted cash consists primarily of
funds escrowed for tenants’ security deposits required by us pursuant to certain
contractual terms (see Note 8 – Lease and Mortgage Deposits).
Accounts
Receivable
Accounts receivable includes:
contractual receivables, straight-line rent receivables and lease inducements,
net of an estimated provision for losses related to uncollectible and disputed
accounts. Contractual receivables relate to the amounts currently
owed to us under the terms of the lease agreement. Straight-line
receivables relates to the difference between the rental revenue recognized on a
straight-line basis and the amounts due to us contractually. Lease
inducements result from value provided by us to the lessee at the inception or
renewal of the lease and will be amortized as a reduction of rental revenue over
the non cancellable lease term. On a quarterly basis, we review the
collection of our contractual payments and determine the appropriateness of our
allowance for uncollectible contractual rents. In the case of a lease
recognized on a straight-line basis or existence of lease inducements, we
generally provide an allowance for straight-line accounts receivable or the
lease inducements when certain conditions or indicators of adverse
collectability are present.
A summary
of our net receivables by type is as follows:
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Contractual
receivables
|
|
$ |
2,818 |
|
|
$ |
2,358 |
|
|
Straight-line
receivables
|
|
|
52,395 |
|
|
|
43,636 |
|
|
Lease
inducements
|
|
|
29,020 |
|
|
|
30,561 |
|
|
Allowance
|
|
|
(2,675 |
) |
|
|
(1,518 |
) |
|
Accounts
receivable – net
|
|
$ |
81,558 |
|
|
$ |
75,037 |
|
We continuously evaluate the payment
history and financial strength of our operators and have historically
established allowance reserves for straight-line rent adjustments for operators
that do not meet our requirements. We consider factors such as
payment history, the operator’s financial condition as well as current and
future anticipated operating trends when evaluating whether to establish
allowance reserves.
In December 2009, we began discussions
with Formation Capital (“Formation”) regarding the potential modification of its
lease agreement. The potential modification includes removing the
Connecticut facilities from the lease agreement, reducing annual rent and
transitioning the Connecticut facilities to another
operator. Although, we have not agreed to a revised lease as of
December 31, 2009, we evaluated the recoverability of the straight-line rent and
lease inducements associated with Connecticut facilities and have recorded a
$2.8 million provision for uncollectible accounts associated with straight-line
receivables and lease inducements. In addition, in 2009, we wrote-off
$1.6 million of receivables that were previously fully reserved, including the
lease inducement associated with Formation.
Accounts receivable from owned and
operated assets consist of amounts due from Medicare and Medicaid programs,
other government programs, managed care health plans, commercial insurance
companies and individual patients. Amounts recorded include estimated provisions
for loss related to uncollectible accounts and disputed items. For
additional information, see Note 4 – Owned and Operated Assets.
Comprehensive
Income
We report Comprehensive Income using
guidelines established by FASB for the reporting and display of comprehensive
income and its components in financial statements. Comprehensive
income includes net income and all other non-owner changes in stockholders’
equity during a period including unrealized gains and losses on equity
securities classified as available-for-sale and unrealized fair value
adjustments on certain derivative instruments.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Deferred
Financing Costs
External costs incurred from placement
of our debt are capitalized and amortized on a straight-line basis over the
terms of the related borrowings which approximate the effective interest method.
Amortization of financing costs totaling $2.5 million, $2.0 million and $2.0
million in 2009, 2008 and 2007, respectively, is classified as “interest -
amortization of deferred financing costs” in our consolidated statements of
income. When financings are terminated, unamortized amounts paid, as
well as charges incurred for the termination, are expensed at the time the
termination is made. Gains and losses from the extinguishment of debt
are presented within income from continuing operations in the accompanying
consolidated financial statements.
Revenue
Recognition
We have various different investments
that generate revenue, including leased and mortgaged properties, as well as
other investments, including working capital loans. We recognize
rental income and mortgage interest income and other investment income as earned
over the terms of the related master leases and notes,
respectively.
Substantially all of our leases contain
provisions for specified annual increases over the rents of the prior year and
are generally computed in one of three methods depending on specific provisions
of each lease as follows: (i) a specific annual increase over the prior year’s
rent, generally 2.5%; (ii) an increase based on the change in pre-determined
formulas from year to year (i.e., such as increases in the Consumer Price Index
(“CPI”)); or (iii) specific dollar increases over prior
years. Revenue under lease arrangements with fixed and determinable
increases is recognized over the term of the lease on a straight-line
basis. The authoritative guidance does not provide for the
recognition of contingent revenue until all possible contingencies have been
eliminated. We consider the operating history of the lessee, the
payment history, the general condition of the industry and various other factors
when evaluating whether all possible contingencies have been
eliminated. We do not include contingent rents as income until the
contingencies have been resolved.
In the case of rental revenue
recognized on a straight-line basis, we generally record reserves against earned
revenues from leases when collection becomes questionable or when negotiations
for restructurings of troubled operators result in significant uncertainty
regarding ultimate collection. The amount of the reserve is estimated
based on what management believes will likely be collected. We
continually evaluate the collectability of our straight-line rent
assets. If it appears that we will not collect future rent due under
our leases, we will record a provision for loss related to the straight-line
rent asset.
Recognizing rental income on a
straight-line basis may cause recognized revenue to exceed contractual amounts
due from our tenants. Such cumulative excess amounts are included in
accounts receivable and were $51.0 million and $43.1 million, net of allowances,
at December 31, 2009 and 2008, respectively.
Gains on
sales of real estate assets are recognized under the FASB guidance of Accounting
for Sales of Real Estate. The specific timing of the recognition of
the sale and the related gain is measured against the various criteria in the
guidance related to the terms of the transactions and any continuing involvement
associated with the assets sold. To the extent the sales criteria are
not met, we defer gain recognition until the sales criteria are
met.
Nursing
home revenues of owned and operated assets consist of long-term care revenues,
rehabilitation therapy services revenues, temporary medical staffing services
revenues and other ancillary services revenues. The revenues are recognized as
services are provided. Revenues are recorded net of provisions for
discount arrangements with commercial payors and contractual allowances with
third-party payors, primarily Medicare and Medicaid. Revenues
realizable under third-party payor agreements are subject to change due to
examination and retroactive adjustment. Estimated third-party payor
settlements are recorded in the period the related services are rendered. The
methods of making such estimates are reviewed periodically, and differences
between the net amounts accrued and subsequent settlements or estimates of
expected settlements are reflected in the current period results of operations.
Laws and regulations governing the Medicare and Medicaid programs are extremely
complex and subject to interpretation. For additional information,
see Note 4 – Owned and Operated Assets.
Assets
Held for Sale and Discontinued Operations
The operating results of specified real
estate assets that have been sold, or otherwise qualify as held for disposition,
are reflected as assets held for sale in our consolidated balance
sheets. Assets that qualify as held for sale may also be considered
as a discontinued operation if, (a) the operation and cash flows of the asset
have been or will be eliminated from future operations and (b) we will not have
significant involvement with the asset after its disposition. For assets that
qualify as discontinued operations, we have reclassified the operations of those
assets to discontinued operations in the consolidated statements of income for
all periods presented and assets held for sale in the consolidated balance
sheets for all periods presented. We had two assets held for sale as
of December 31, 2009 with a net book value of $0.9 million neither of which are
classified as discontinued operations. For additional information,
see Note 19 – Discontinued Operations.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Derivative
Instruments
From time to time we may use
derivatives financial instruments to manage interest rates. These
instruments include options, forwards, interest rate swaps, caps or floors or a
combination thereof depending on the underlying exposure. We do not
use derivatives for trading or speculative purposes. On the date we
enter into a derivative, the derivative is designated as a hedge of the
identified exposure. We measure the effectiveness of its hedging
relationships both at the hedge inception and on an ongoing basis.
All derivatives are recognized on the
balance sheet at fair value. Derivatives that are not hedges are
adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
are either offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedge item is recognized in earnings. Gains and
losses related to hedged transaction are deferred and recognized as interest
expense in the period or periods that the underlying transaction occurs, expires
or is otherwise terminated. The ineffective portion of a derivative’s change in
fair value will be immediately recognized in earnings.
At December 31, 2009 and 2008, we had
no derivative instruments.
Earnings
Per Share
Basic earnings per common share (“EPS”)
is computed by dividing net income available to common stockholders by the
weighted-average number of shares of common stock outstanding during the
year. Diluted EPS reflects the potential dilution that could occur
from shares issuable through stock-based compensation, including stock options
and restricted stock. For additional information, see Note 18 –
Earnings Per Share.
Income
Taxes
We were organized to qualify for
taxation as a REIT under Section 856 through 860 of the Internal Revenue
Code. So long as we qualify as a REIT; we will not be subject to
Federal income taxes on the REIT taxable income that we distributed to
shareholders, subject to certain exceptions. In 2009, we paid
preferred and common dividend payments of $109.2 million which satisfies the
2009 REIT requirements relating to qualifying income. We are
permitted to own up to 100% of a taxable REIT subsidiary
(“TRS”). Currently, we have one TRS that is taxable as a corporation
and that pays federal, state and local income tax on its net income at the
applicable corporate rates. The loss carry-forward of $1.1 million
was fully reserved with a valuation allowance due to uncertainties regarding
realization. We record interest and penalty charges associated with
tax matters as income tax. For additional information on income
taxes, see Note 11 – Taxes.
Stock-Based
Compensation
In June 2008, the FASB issued guidance
on Determining Whether Instruments Granted in Share-Based Payment Transactions
are Participating Securities. In this new
guidance, the FASB concluded that all outstanding unvested share-based payment
awards that contain rights to non-forfeitable dividends or dividend equivalents
that participate in undistributed earnings with common shareholders and,
accordingly, are considered participating securities that shall be included in
the two-class method of computing basic and diluted EPS. The guidance does not
address awards that contain rights to forfeitable dividends. We adopted this
standard on January 1, 2009, and retrospectively adjusted basic EPS data for all
periods presented to reflect the two-class method of computing
EPS. The impact of the adoption of this guidance on earnings per
share was less than $0.01 per share for the periods presented.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
Effects
of Recently Issued Accounting Standards
Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly
In April 2009, the FASB issued guidance
on Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly. This new guidance provides additional guidance for
estimating fair value in accordance with Fair Value Measurements, when the
volume and level of activity for the asset or liability have significantly
decreased. This new guidance also includes guidance on identifying circumstances
that indicate a transaction is not orderly. It emphasizes that even
if there has been a significant decrease in the volume and level of activity for
the asset or liability and regardless of the valuation technique(s) used, the
objective of a fair value measurement remains the same. Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants at the measurement date under current market
conditions. We adopted the standard in the second quarter of 2009 and
determined that the adoption had no material effect on our financial position or
results of operations.
Fair
Value Measurements
On January 1, 2008, we adopted new
guidance for Fair Value Measurements. This new guidance defines fair
value, establishes a methodology for measuring fair value and expands the
required disclosure for fair value measurements. It emphasizes that
fair value is a market-based measurement, not an entity-specific measurement,
and states that a fair value measurement should be determined based on the
assumptions that market participants would use in pricing the asset or
liability. The guidance applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those pronouncements that fair value is the relevant measurement
attribute. Accordingly, this statement does not require any new fair
value measurements. The standard applies prospectively to new fair
value measurements performed after the required effective dates, which are as
follows: (i) on January 1, 2008, the standard applied to our measurements of the
fair values of financial instruments and recurring fair value measurements of
non-financial assets and liabilities; and (ii) on January 1, 2009, the standard
applied to all remaining fair value measurements, including non-recurring
measurements of non-financial assets and liabilities such as measurement of
potential impairments of goodwill, other intangible assets and other long-lived
assets. It also applies to fair value measurements of non-financial assets
acquired and liabilities assumed in business combinations. We
evaluated the guidance and determined that the adoption had no impact on our
consolidated financial statements.
Revised
Business Combinations
On December 4, 2007, the FASB issued
revised guidance on Business Combinations. The new guidance will
significantly change the accounting for and reporting of business combination
transactions. The guidance requires companies to recognize, with
certain exception, 100 percent of the fair value of the assets acquired,
liabilities assumed and non-controlling interest in acquisitions of less than a
100 percent controlling interest when the acquisition constitutes a change in
control; measure acquirer shares issued as consideration for a business
combination at fair value on the date of the acquisition; recognize contingent
consideration arrangements at their acquisition date fair value, with subsequent
change in fair value generally reflected in earnings; recognition of
reacquisition loss and gain contingencies at their acquisition date fair value;
and expense as incurred, acquisition related transaction costs. The
guidance is effective for fiscal years beginning after December 15, 2008 and
early adoption is prohibited. We adopted the guidance on January 1,
2009, which will impact the accounting only for acquisitions occurring
prospectively.
Subsequent
Events
In the second quarter of 2009, we
adopted FASB’s new guidance on Subsequent
Events. The new guidance establishes the accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. The adoption
did not have a material impact on our financial statements.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
Risks
and Uncertainties
Our company is subject to certain risks
and uncertainties affecting the healthcare industry as a result of healthcare
legislation and growing regulation by federal, state and local governments.
Additionally, we are subject to risks and uncertainties as a result of changes
affecting operators of nursing home facilities due to the actions of
governmental agencies and insurers to limit the growth in cost of healthcare
services (see Note 7 – Concentration of Risk).
Reclassifications
Certain amounts in the prior year have
been reclassified to conform to the 2009 presentation and to reflect the results
of discontinued operations. Such reclassifications have no effect on
previously reported earnings or equity. See Note 19 – Discontinued
Operations for a discussion of discontinued operations.
NOTE
3 - PROPERTIES
Leased
Property
Our
leased real estate properties, represented by 267 SNFs, seven ALFs and five
specialty facilities at December 31, 2009, are leased under provisions of single
leases and master leases with initial terms typically ranging from 5 to 15
years, plus renewal options. Substantially all of the leases and
master leases provide for minimum annual rentals that are typically subject to
annual increases based upon fixed escalators or the lesser of a fixed amount or
increases derived from changes in CPI. Under the terms of the leases,
the lessee is responsible for all maintenance, repairs, taxes and insurance on
the leased properties.
A summary
of our investment in leased real estate properties is as follows:
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
Buildings
|
|
$ |
1,547,282 |
|
|
$ |
1,279,266 |
|
|
Land
|
|
|
122,561 |
|
|
|
92,746 |
|
|
|
|
|
1,669,843 |
|
|
|
1,372,012 |
|
|
Less
accumulated depreciation
|
|
|
(296,441 |
) |
|
|
(251,854 |
) |
|
Total
|
|
$ |
1,373,402 |
|
|
$ |
1,120,158 |
|
The future minimum estimated rents due
for the remainder of the initial terms of the leases are as follows at December
31, 2009:
|
|
|
(in
thousands)
|
|
|
2010
|
|
$ |
191,699 |
|
|
2011
|
|
|
195,389 |
|
|
2012
|
|
|
191,984 |
|
|
2013
|
|
|
194,691 |
|
|
2014
|
|
|
170,588 |
|
|
Thereafter
|
|
|
663,416 |
|
|
Total
|
|
$ |
1,607,767 |
|
Below is
a summary of the significant lease transactions that occurred in
2009.
2009
Acquisitions
In November 2009, we entered into a
securities purchase agreement (“Purchase Agreement”) with CapitalSource Inc.
(NYSE: CSE) and several of its affiliates to purchase entities owning 80 long
term care facilities for approximately $565 million. The purchase
price includes a purchase option (“Option”) to acquire entities owning an
additional 63 facilities for approximately $295 million.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Completed
First Closing
On December 22, 2009, we purchased
entities owning 40 facilities and an option (the “Option”) to purchase entities
owning 63 additional facilities. The consideration consisted of: (i)
approximately $184.2 million in cash; (ii) 2,714,959 shares of Omega common
stock and (iii) assumption of approximately $59.4 million of 6.8% mortgage debt
maturing on December 31, 2011. We incurred approximately $1.6 million
in transaction costs. We valued the 2,714,959 shares of our common
stock at approximately $52.8 million on December 22, 2009.
The 40 facilities owned by the entities
acquired on December 22, 2009, representing 5,264 available beds located in 12
states, are part of 15 in-place triple net leases among 12
operators. The 15 leases generate approximately $31 million of
annualized straight-line rental revenue.
The
following table summarizes the fair value of the consideration exchanged on
December 22, 2009 for the acquisition of the 40 facilities and the purchase
options:
|
|
|
Fair
Value of Consideration
|
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
Cash
|
|
$ |
184.2 |
|
|
Assumed
6.8% debt
|
|
|
59.4 |
|
|
Omega
common stock
|
|
|
52.8 |
|
|
Total
consideration paid at December 22, 2009
|
|
$ |
296.4 |
|
We are in
the process of gathering the information necessary to complete the purchase
price allocation of the December 22, 2009 acquisition. We have
performed a preliminary allocation of the fair value of the assets purchased and
liabilities assumed as part of the transaction as well as the purchase
option. Based on our preliminary allocation we have allocated
approximately $275 million to Land and building at cost and $25 million to Other
Assets for the Option on our Consolidated Balance Sheet. We allocated
approximately $30 million to land and $245 million to
buildings. Based on our evaluation of the assumed in-place leases, we
estimate that we assumed approximately $11.9 million above market leases and
$15.9 million in below market lease. We have included the (a) $11.9
million in above market leases in Other Assets and (b) the $15.9 million in
below market leases in Accrued expenses and other liabilities on our
Consolidated Balance Sheet, respectively. We estimate that the net
amortization of the above and below market lease for years 1 through 5 will be
less than $100,000 annually.
As part
of the consideration, we also assumed approximately $59.4 million in 6.8%
mortgage debt that matures on December 31, 2011. Based on our
evaluation, we estimate that the $59.4 million mortgage debt being assumed is at
market rates based on the terms of comparable debt. In February 2010,
we used proceeds from our $200 million 7 ½ % bond offering to repay the mortgage
debt.
The
acquired facilities are included in our results of operations from the date of
acquisition, December 22, 2009. The following unaudited pro forma
results of operation reflect the CapitalSource transaction as if it occurred on
January 1 of the immediately preceding year. In the opinion of
management, all significant necessary adjustments to reflect the effect of the
acquisition have been made. The following pro forma information is
not indicative of future operations.
|
|
|
Pro Forma
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands, except per share amount, unaudited)
|
|
|
Revenues
|
|
$ |
227,754 |
|
|
$ |
224,815 |
|
|
Net
income available to common
|
|
|
75,580 |
|
|
|
72,975 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share – diluted:
|
|
|
|
|
|
|
|
|
|
Net income available to common –
as reported
|
|
$ |
0.87 |
|
|
$ |
0.94 |
|
|
Net income available to common –
pro forma
|
|
$ |
0.88 |
|
|
$ |
0.94 |
|
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
Anticipated
Second Closing
At the second closing, we will acquire
entities owning 40 additional facilities for approximately $270 million,
consisting of: (i) $67 million in cash; (ii) assumption of $20 million of 9.0%
subordinated debt maturing in December 2021; (iii) assumption of $53 million,
6.41% (weighted-average) HUD debt maturing between January 2036 and May 2040;
and (iv) the anticipated assumption of $130 million, 4.85% HUD debt generally
maturing in 2039. The second closing is expected to occur on or about
April 1, 2010 subject to HUD approval and the other normal terms and
conditions.
The 40 additional facilities,
representing 4,882 available beds, located in 2 states are part of 13 in-place
triple net leases among 2 operators. The 13 leases generate
approximately $30 million of annualized revenue.
Option
to Purchase Additional 63 Facilities
We may exercise our option to purchase
the CapitalSource subsidiaries owning 63 additional facilities on or before
December 31, 2011, for an estimated aggregate consideration of approximately
$295 million, consisting of: (i) $30 million in cash, and (ii) $265 million of
debt, which debt shall either be paid off at closing or assumed by us, subject
to the consent of the applicable lenders of such debt. The Option
payment of $25 million is refundable in limited circumstances, such as breach of
contract. The 63 facilities owned by the entities subject to the
Option, representing 6,529 available beds located in 19 states, are part of 30
in-place triple net leases among 18 operators. The 30 leases generate
approximately $34 million of annualized revenue.
The consummation of the second closing
under Purchase Agreement with CapitalSource and the potential exercise of the
Option are subject to customary closing conditions, and there can be no
assurance as to when or whether such transactions will be
consummated The purchase price payable at each such closing is also
subject to certain adjustments, including but not limited to a dollar-for-dollar
increase or decrease of the cash consideration to the extent the assumed debt is
less than or greater than the amount set forth in the purchase agreement, and an
upward or downward adjustment to prorate certain items of accrued and prepaid
income and expense of the CapitalSource subsidiaries to be
acquired.
2008
Acquisitions
On
December 31, 2008, we purchased two (2) SNFs from an unrelated third party for
$19.5 million and leased those facilities to an existing operator,
Formation. The facilities were added to Formation’s existing master
lease and will increase cash rent by $2.4 million annually starting in
2009. The $19.5 million was allocated to building and personal
property of $18.7 million and $0.8 million, respectively.
In
September 2008, we purchased four (4) SNFs, one (1) ALF and one (1) independent
living facility (“ILF”) for $40.0 million from subsidiaries of an existing
tenant, and leased those facilities back to the tenant. The
facilities were added to the tenant’s existing master lease and will increase
cash rent by $4.0 million annually. The $40.0 million acquisition
price was allocated $2.4 million to land, $35.4 million to building and $2.2
million to personal property.
In April
2008, we purchased seven (7) SNFs, one (1) ALF and one rehab hospital for $47.4
million from an unrelated third party and leased the facilities to an existing
tenant of ours. The facilities were added to the tenant’s existing
master lease and will increase cash rent by $4.7 million
annually. The $47.4 million acquisition price was allocated $6.6
million to land, $38.9 million to building and $1.9 million to personal
property.
In
January 2008, we purchased one (1) SNF for $5.2 million from an unrelated third
party and leased the facility to an existing tenant of ours. The
facility was added to the tenant’s existing master lease and increased cash rent
by $0.5 million annually. The $5.2 million acquisition price was
allocated $0.4 million to land, $4.5 million to building and $0.3 million to
personal property.
In
January 2008, we purchased from GE Capital a $39.0 million first mortgage loan
on seven (7) facilities operated by Haven due October 2012. Prior to
the acquisition of this first mortgage, we had a $22.8 million second mortgage
on these facilities. In July 2008, we acquired these properties from
Haven through a credit bid with the United States Bankruptcy
Court. These facilities were part of the Haven’s chapter 11
proceeding being jointly administered in the United States Bankruptcy Court for
the District of Connecticut, New Haven Division that began in November
2007. We consolidated the Haven entity which owned these facilities
into our financial statements in accordance with guidance for consolidating
variable interest entities because we determined that the Haven entity was a VIE
and that we were the primary beneficiary, see Note 1 – Organization and Basis of
Presentation for additional information. In 2007, the Haven
facilities represented approximately 8% of our operating revenue.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
2007
Acquisitions
During
the third quarter of 2007, we completed a transaction with Litchfield Investment
Company, LLC and its affiliates (“Litchfield”) to purchase five (5) SNFs for a
total investment of $39.5 million. The facilities total 645 beds and
are located in Alabama (1), Georgia (2), Kentucky (1) and Tennessee
(1). We also provided a $2.5 million loan in the form of a
subordinated note as part of the transaction, which was repaid in full during
the fourth quarter 2007. Simultaneously with the close of the
purchase transaction, the facilities were combined into an Amended and Restated
Master Lease with Signature Holding II, LLC (formerly known as Home Quality
Management, Inc.) The Amended and Restated Master Lease was extended
until July 31, 2017. The investment allocated to land, building and
personal property is $6.3 million, $32.1 million and $1.1 million,
respectively.
During
the third quarter of 2007, we continued our restructure of a five (5) facility
master lease with USA Healthcare whereby we have agreed to sell three (3)
facilities and reduce the overall annual rent on the master lease by $0.4
million. During the fourth quarter of 2007, two (2) of the facilities
were sold for approximately $2.8 million in cash proceeds and the overall annual
rent on the master lease is reduced by $0.4 million.
Assets
Sold or Held for Sale
|
·
|
At
December 31, 2009, we had two SNFs classified as held-for-sale with a net
book value of approximately $0.9
million.
|
|
·
|
At
December 31, 2008, we had one SNF classified as held-for-sale with a net
book value of approximately $0.2 million. In 2008, a $0.2
million impairment charge was recorded to reduce the carrying value of our
held-for-sale facility to its estimated fair
value.
|
2009
Asset
Sales
In 2009,
we sold a facility and other assets for approximately $0.9 million resulting in
a net gain of approximately $0.8 million.
2008
Asset
Sales
|
·
|
On
January 31, 2008, we sold one SNF in California for approximately $1.5
million resulting in a gain of approximately $0.4 million, which was
included in our gain (loss) from discontinued operations. For
additional information, see Note 19 – Discontinued
Operations.
|
|
·
|
On
February 1, 2008, we sold a SNF in California for approximately $1.5
million resulting in a gain of approximately $46
thousand.
|
|
·
|
On
July 1, 2008, we sold two rehabilitation hospitals in California for
approximately $29.0 million resulting in a gain of approximately $12.3
million.
|
|
·
|
On
September 29, 2008, we sold one SNF in Texas for approximately $0.1
million resulting in a loss of approximately $0.5
million.
|
2007
Asset
Sales
|
·
|
In
November 2007, we sold two SNFs in Iowa for approximately $2.8 million
resulting in a gain of $0.4
million.
|
|
·
|
In
May 2007, we sold two SNFs in Texas for their net book values, generating
cash proceeds of approximately $1.8
million.
|
|
·
|
In
March 2007, we sold a SNF in Arkansas for approximately $0.7 million
resulting in a loss of $15 thousand. The results of this
operation and the related loss are included in discontinued
operations.
|
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
|
·
|
In
February 2007, we sold a closed SNF in Illinois for approximately $0.1
million resulting in a loss of $35 thousand. The results of
this operation and the related loss are included in discontinued
operations.
|
|
·
|
In
January 2007, we sold two ALFs in Indiana for approximately $3.6 million
resulting in a gain of approximately $1.7 million. The results
of these operations and the related gains are included in discontinued
operations.
|
NOTE
4 – OWNED AND OPERATED ASSETS
At December 31, 2009, we own and
operate two facilities with a total of 275 operating beds that were previously
recovered from a bankrupt operator/tenant.
Since November 2007, affiliates of
Haven Healthcare (“Haven”), one of our operators/lessees/mortgagors, operated
under Chapter 11 bankruptcy protection. Commencing in February 2008,
the assets of the Haven facilities were marketed for sale via an auction process
to be conducted through proceedings established by the bankruptcy
court. The auction process failed to produce a qualified
buyer. As a result, and pursuant to our rights as ordered by the
bankruptcy court, Haven moved the bankruptcy court to authorize us to credit bid
certain of the indebtedness that it owed to us in exchange for taking ownership
of and transitioning certain of its assets to a new entity in which we have a
substantial ownership interest, all of which was approved by the bankruptcy
court on July 4, 2008. Effective as of July 7, 2008, we took
ownership and/or possession of 15 facilities previously operated by Haven and TC
Healthcare, a new entity and an interim operator, in which we have a substantial
economic interest, began operating these facilities on our behalf through an
independent contractor.
On August 6, 2008, we entered into a
Master Transaction Agreement (“MTA”) with affiliates of Formation Capital
(“Formation”) whereby Formation agreed (subject to certain closing conditions,
including the receipt of licensure) to lease 14 SNFs and one ALF facility under
a master lease. These facilities were formerly leased to
Haven.
Effective September 1, 2008, we
completed the operational transfer of 12 SNFs and one ALF to affiliates of
Formation, in accordance with the terms of the MTA. The 13 facilities
are located in Connecticut (5), Rhode Island (4), New Hampshire (3) and
Massachusetts (1). As part of the transaction, Genesis Healthcare
(“Genesis”) has entered into a long-term management agreement with Formation to
oversee the day-to-day operations of each of these facilities. The two remaining
facilities in Vermont, which are currently being operated by TC Healthcare, will
transfer to Formation/Genesis upon the appropriate regulatory approvals expected
sometime in the near future. Our consolidated financial statements
include the financial position and results of operations of TC Healthcare from
July 7, 2008 to December 31, 2009. As of December 31, 2009, our gross
investment in land and buildings for the two properties operated by TC
Healthcare was approximately $14.8 million.
Nursing home revenues, expenses, assets
and liabilities included in our consolidated financial statements that relate to
such owned and operated assets are set forth in the tables below.
|
|
|
For
Year Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
Nursing
home revenues (1)
|
|
$ |
18,430 |
|
|
$ |
24,170 |
|
|
|
|
|
|
|
|
|
|
|
|
Nursing
home expenses (2)
|
|
|
20,632 |
|
|
|
27,601 |
|
|
Loss
from nursing home operations
|
|
$ |
(2,202 |
) |
|
$ |
(3,431 |
) |
|
(1)
|
Nursing
revenues and expenses includes revenues and expenses for 15 facilities for
the period July 7, 2008 through August 31, 2008 and two facilities from
September 1, 2008 through December 31,
2009.
|
|
(2)
|
Includes $0.9 million related to
employee severance in 2008.
|
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
NOTE
5 - MORTGAGE NOTES RECEIVABLE
As of December 31, 2009, mortgage notes
receivable relate to five fixed-rate mortgages on 14 long-term care
facilities. The mortgage notes are secured by first mortgage liens on
the borrowers' underlying real estate and personal property. The
mortgage notes receivable relate to facilities located in three states, operated
by three independent healthcare operating companies. We monitor
compliance with mortgages and when necessary have initiated collection,
foreclosure and other proceedings with respect to certain outstanding
loans.
The
outstanding principal amounts of mortgage notes receivable, net of allowances,
were as follows:
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Mortgage
note due 2014; monthly payment of $66,914, including interest at
11.00%
|
|
$ |
6,643 |
|
|
$ |
6,701 |
|
|
Mortgage
note due 2018; monthly payment of $641,007, including interest at
11.00%
|
|
|
69,928 |
|
|
|
69,928 |
|
|
Mortgage
note due 2010; monthly payment of $124,833, including interest at
11.50%
|
|
|
12,407 |
|
|
|
12,474 |
|
|
Mortgage
note due 2016; monthly interest only payment of $116,993 at
11.50%
|
|
|
11,245 |
|
|
|
11,095 |
|
|
Other
mortgage notes
|
|
|
— |
|
|
|
623 |
|
|
Total mortgages — net (1)
|
|
$ |
100,223 |
|
|
$ |
100,821 |
|
|
(1)
|
Mortgage
notes are shown net of allowances of $0.0 million in 2009 and
2008.
|
2009
Mortgage Note Activity
Other
Mortgage Activity
In late 2009, we began discussion with
a mortgagee regarding final payment of the $12.4 million balance due on a
mortgage that relates to four facilities and that matures February 28,
2010. The mortgagee is current on all interest and other
obligations. Through these discussions, we determined that the
mortgagee was not likely to raise the capital necessary to repay the
mortgage. We have evaluated the mortgage for impairment due to the
mortgagee likely inability to repay the amount due. Our evaluation
indicates that although the loan is impaired, no impairment reserve is required
because the collateral supporting the loan exceeds the net mortgage balance due
to us. In February 2010, the mortgagee surrendered ownership of the
properties to us. We are currently in negotiation with the facilities
current operator as well as other operators to secure a longer-term lease
contract. The current rental income received from the third party
operator approximates the historic interest income for the
mortgage.
2008
Mortgage Note Activity
In January 2008, we purchased from GE
Capital a $39.0 million mortgage loan due October 2012 on seven facilities then
operated by Haven. Prior to the acquisition of this mortgage, we had
a $22.8 million second mortgage on these facilities, resulting in a combined
$61.8 million mortgage on these facilities immediately following the purchase
from GE Capital. In conjunction with the above-noted mortgage and the
application of consolidation rules for variable interest entities, we
consolidated the financial statements and real estate of the Haven entity that
was the obligor under this mortgage loan into our financial
statements. On July 7, 2008, we took ownership and/or possession of
the Haven facilities and a new entity assumed operations of the
facilities. As a result of our taking ownership and/or possession of
the Haven facilities, effective July 7, 2008, the mortgage note was retired and
we were no longer required to consolidate the Haven entity.
On April 18, 2008, and simultaneous
with the amendment and extension of the master lease with CommuniCare Health
Services (“CommuniCare”), we entered into a first mortgage loan with CommuniCare
in the amount of $74.9 million. This mortgage loan matures on April
30, 2018 and carries an interest rate of 11% per year. The $74.9
million mortgage included $4.9 million in funds placed in escrow for the
purchase of a facility that was pending environmental and other studies prior to
closure. In December 2008, CommuniCare notified us of their decision
not to purchase the additional facility and the escrow agent returned the
escrowed funds to us. As of December 31, 2008, the outstanding
mortgage note was $69.9 million. CommuniCare used the proceeds of the
mortgage loan to acquire seven (7) SNFs located in Maryland, totaling 965 beds
from several unrelated third parties. The mortgage loan is secured by
a lien on the seven (7) facilities. The mortgage properties are
cross-collateralized with the master lease agreement.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
NOTE
6 - OTHER INVESTMENTS
A summary of our other investments is
as follows:
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
Notes
receivable, net
|
|
$ |
28,243 |
|
|
$ |
25,337 |
|
|
Marketable
securities and other
|
|
|
4,557 |
|
|
|
4,527 |
|
|
Total other investments
|
|
$ |
32,800 |
|
|
$ |
29,864 |
|
At
December 31, 2009, we had 10 notes receivable, with maturities ranging from on
demand to 2018. At December 31, 2008, we had 9 notes receivable, with
maturities ranging from on demand to 2018. At December 31, 2009 and
2008, we had total reserves of approximately $2.2 million on two
notes.
In December 2009, we began discussion
with Formation Capital regarding a modification to the lease agreement due to
the continued operating weakness in the Connecticut facilities. The
potential modification includes removing the Connecticut facilities from the
lease agreement, reducing annual rent and transitioning the Connecticut
facilities to another operator. The lease agreement and working
capital agreement are cross defaulted. At December 31, 2009, we have
not agreed to a revised lease. However, as a result of the potential
modification of the lease and the potential for changes to the contractual
payments required by the working capital loan agreements, we determined that the
working capital notes were impaired. Although we considered the
working capital notes impaired, no reserve for impairment was
recorded. We expect full repayment of all balances due and accruing
in the future relating to the working capital notes. Additionally, as
of December 31, 2009, the working capital notes were fully
collateralized.
For the year ended December 31, 2009
and 2008, apart from the normal scheduled monthly loan payments, we had the
following transactions that impacted our other investments:
2008
and 2009 Transactions
Nexion
Health Inc. Cherry Creek Participation Loan
In October 2009, we entered into a loan
agreement with Nexion for approximately $3.6 million for a 39.8% stake in a $9.1
million note, with a discount of $0.1 million off the face amount yielding
10.6%. The interest rate is at 6.5% and the note matures in August
2010.
Essex
Note Payoff
In August 2009, we received
approximately $2.2 million in proceeds on a loan payoff.
Haven
Properties Debtor-in-Possession Financing Agreement
In January 2008, Haven entered into a
debtors-in-possession financing (“DIP”) agreement with us and one other
financial institution (collectively, the “DIP Lenders”), in which our initial
participation was approximately $5.0 million of a $50 million total
commitment. The agreement was originally scheduled to mature in June
2008 and yield an interest rate of the greater of prime plus 3% or 9.5%
annually. On June 4, 2008, the DIP Lenders and Haven amended the DIP
agreement (the “Amended DIP”) which, among other things, extended the term to
allow Haven additional time to sell its assets. As collateral for the
Amended DIP, we received the right to use all facility accounts receivable
generated from the Omega facilities from June 4, 2008 to satisfy any of our
post-June 3, 2008 advances. As of December 31, 2008, we had collected
all outstanding balances on the DIP agreement and had $0.2 million net
outstanding related to the Amended DIP as of December 31, 2009.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Formation
Capital Note
We amended a loan agreement with
Formation pursuant to which we agreed to provide Formation up to $23.0 million
working capital. The loan matures on December 31, 2011. As
of December 31, 2009, $20.8 million was outstanding.
Alden
Management Note Payoff
In May 2008, we received approximately
$0.8 million in proceeds on a loan payoff.
Mark
Ide Limited Liability Company Note Payoff
In May 2008, we received approximately
$1.3 million in proceeds on a loan payoff.
Nexion
Health, Inc. Note Payoff
In February 2008, we received
approximately $0.1 million in proceeds on a loan payoff.
NOTE
7 - CONCENTRATION OF RISK
As of December 31, 2009, our portfolio
of domestic investments consisted of 295 healthcare facilities, located in 32
states and operated by 35 third-party operators. Our gross investment
in these facilities, net of impairments and before reserve for uncollectible
loans, totaled approximately $1.8 billion at December 31, 2009, with
approximately 99% of our real estate investments related to long-term care
facilities. This portfolio is made up of 265 SNFs, seven ALFs, five
specialty facilities, fixed rate mortgages on 14 SNFS, two SNFS that are owned
and operated and two closed facilities that are held for sale. At
December 31, 2009, we also held miscellaneous investments of approximately $32.8
million, consisting primarily of secured loans to third-party operators of our
facilities.
At December 31, 2009, approximately 21%
of our real estate investments were operated by two public companies: Sun
Healthcare Group, Inc (“Sun”) (12%) and Advocat (9%). Our largest
private company operators (by investment) were CommuniCare (18%), Signature
Holding II, LLC (8%), Guardian LTC Management Inc. (7%) and Formation Capital
Corporation, LLC (7%). No other operator represents more than 5% of
our investments. The three states in which we had our highest
concentration of investments were Ohio (19%), Florida (14%) and Pennsylvania
(10%) at December 31, 2009.
For the year ended December 31, 2009,
our revenues from operations totaled $197.4 million, of which approximately
$35.3 million were from CommuniCare (18%), $30.9 million from Sun (16%) and
$22.3 million from Advocat (11%). Our owned and operated assets
generated $18.4 million (9%) of revenue in 2009. No other operator
generated more than 9% of our revenues from operations for the year ended
December 31, 2009.
Sun and Advocat are subject to the
reporting requirements of the SEC and are required to file with the SEC annual
reports containing audited financial information and quarterly reports
containing unaudited interim financial information. Sun’s and
Advocat’s filings with the SEC can be found at the SEC’s website at
www.sec.gov. We are providing this data for information purposes
only, and you are encouraged to obtain Sun’s and Advocat’s publicly available
filings from the SEC.
NOTE
8 - LEASE AND MORTGAGE DEPOSITS
We obtain liquidity deposits and
letters of credit from most operators pursuant to our lease and mortgage
contracts with the operators. These generally represent the rental
and mortgage interest for periods ranging from three to six months with respect
to certain of its investments. At December 31, 2009, we held $9.5
million in such liquidity deposits and $31.3 million in letters of
credit. The liquidity deposits may be applied in the event of lease
and loan defaults, subject to applicable limitations under bankruptcy law with
respect to operators filing under Chapter 11 of the United States Bankruptcy
Code. Liquidity deposits are recorded as restricted cash on our
consolidated balance sheets. Additional security for rental and
mortgage interest revenue from operators is provided by covenants regarding
minimum working capital and net worth, liens on accounts receivable and other
operating assets of the operators, provisions for cross default, provisions for
cross-collateralization and by corporate/personal guarantees.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
NOTE
9 - BORROWING ARRANGEMENTS
Secured
Borrowings
On June 30, 2009, we entered into a new
$200 million revolving senior secured credit facility (the “2009 Credit
Facility”). The 2009 Credit Facility is being provided by Bank of
America, N.A., Deutsche Bank Trust Company Americas, UBS Loan Finance LLC and
General Electric Capital Corporation pursuant to a credit agreement, dated as of
June 30, 2009 (the “2009 Credit Agreement”), among the Omega subsidiaries named
therein (“Borrowers”), the lenders named therein, and Bank of America, N.A., as
administrative agent.
At December 31, 2009, we had $94.1
million outstanding under the 2009 Credit Facility and no letters of credit
outstanding, leaving availability of $105.9 million. The $94.1
million of outstanding borrowings had a blended interest rate of 6% at December
31, 2009, and is currently priced at LIBOR plus 400 basis points. The
2009 Credit Facility will be used for acquisitions and general corporate
purposes.
At December 31, 2008, we had $63.5
million outstanding under our previous $255.0 million senior secured credit
facility (the “Prior Credit Facility”) and no letters of credit outstanding,
leaving availability of $191.5 million as of December 31, 2008. The
$63.5 million of outstanding borrowings had a blended interest rate of 2.0% at
December 31, 2008.
For the years ended December 31, 2009
and 2008, the weighted average interest rates were 2.91% and 3.89%,
respectively.
The 2009 Credit Facility replaces our
previous $255 million senior secured credit facility that was terminated on June
30, 2009. The 2009 Credit Facility matures on June 30, 2012, and
includes an “accordion feature” that permits us to expand our borrowing capacity
to $300 million in certain circumstances during the first two
years.
In the second quarter of 2009, we
recorded a one-time, non-cash charge of approximately $0.5 million relating to
the write-off of unamortized deferred financing costs associated with the
replacement of the Prior Credit Facility. We incurred approximately
$4.6 million in deferred financing cost related to establishing the 2009 Credit
Facility.
The interest rates per annum applicable
to the 2009 Credit Facility are the reserve-adjusted LIBOR Rate, with a floor of
200 basis points (the “Eurodollar Rate”), plus the applicable margin (as defined
below) or, at our option, the base rate, which will be the highest of (i) the
rate of interest publicly announced by the administrative agent as its prime
rate in effect, (ii) the federal funds effective rate from time to time plus
0.50% and (iii) the Eurodollar Rate for a Eurodollar Loan with an interest
period of one month plus 1.25%, in each case, plus the applicable
margin. The applicable margin with respect to the 2009 Credit
Facility is determined in accordance with a performance grid based on our
consolidated leverage ratio. The applicable margin may range from
4.75% to 3.75% in the case of Eurodollar Rate advances, from 3.5% to 2.5% in the
case of base rate advances, and from 4.75% to 3.75% in the case of letter of
credit fees. The default rate on the 2009 Credit Facility is 3.00%
above the interest rate otherwise applicable to base rate loans. We
are also obligated to pay a commitment fee of 0.50% on the unused portion of our
2009 Credit Facility. In certain circumstances set forth in the 2009
Credit Agreement, we may prepay the 2009 Credit Facility at any time in whole or
in part without fees or penalty.
Omega and its subsidiaries that are not
Borrowers under the 2009 Credit Facility guarantee the obligations of our
Borrower subsidiaries under the 2009 Credit Facility. All obligations
under the 2009 Credit Facility and the related guarantees are secured by a
perfected first priority lien on certain real properties and all improvements,
fixtures, equipment and other personal property relating thereto of the Borrower
subsidiaries under the 2009 Credit Facility, and an assignment of leases, rents,
sale/refinance proceeds and other proceeds flowing from the real
properties.
The 2009 Credit Facility contains
customary affirmative and negative covenants, including, among others,
limitations on investments; limitations on liens; limitations on mergers,
consolidations, and transfers of assets; limitations on sales of assets;
limitations on transactions with affiliates; and limitations on our transfer of
ownership and management. In addition, the 2009 Credit Facility
contains financial covenants including, without limitation, with respect to
maximum leverage ratio, minimum fixed charge coverage ratio, minimum tangible
net worth and maximum distributions. As of December 31, 2009, we were in compliance with
all affirmative and negative covenants, including financial
covenants.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
$100
Million Term Loan
On December 18, 2009, a wholly owned
subsidiary of ours entered into a secured credit agreement with General Electric
Capital Corporation (“GECC”), as Administrative Agent and a Lender, providing
for a new five-year $100 million term loan (the “Term Loan”) maturing December
31, 2014. The Term Loan will bear interest at the reserve-adjusted
LIBOR Rate (the “Eurodollar Rate”) plus 5.5% per annum, but in no event will the
Eurodollar Rate be less than 1.0% per annum. Until December 31, 2011,
scheduled monthly payments on the Term Loan include interest
only. Commencing January 1, 2012, monthly installment payments will
include principal and interest based on a 30-year amortization schedule and an
assumed annual interest rate of 6.5%, with a balloon payment of the remaining
balance due at maturity. We have guaranteed the obligations of the
borrower under the Term Loan. In addition, all obligations under the
Term Loan and guarantee are secured by a perfected first priority lien on 18
long term care facilities under a master lease with one of our existing
operators, and an assignment of leases and rents. We have also
pledged our ownership interest in the borrower. At December 31, 2009,
we incurred approximately $2.6 million in deferred financing cost related to
establishing the loan.
$59
million Mortgage Debt
In connection with the December 22,
2009 closing under our purchase agreement with CapitalSource, we assumed $59.4
million of 6.8% mortgage debt maturing on December 31, 2011 with a one year
extension right. The mortgage debt is secured by 12 facilities per the terms of
the mortgage debt agreement. In February 2010, we used proceeds from
our $200 million 7 ½% note offering to repay the assumed mortgage
debt.
Unsecured
Borrowings
Other
Long-Term Borrowings
In January 2008, we purchased from GE
Capital a $39.0 million mortgage loan due October 2012 on seven facilities then
operated by Haven. Prior to the acquisition of this mortgage, we had
a $22.8 million second mortgage on these facilities, resulting in a combined
$61.8 million mortgage on these facilities immediately following the purchase
from GE Capital. In conjunction with the above-noted mortgage and
purchase option and the application of accounting guidance related to variable
interest entities, we consolidated the financial statements and real estate of
the Haven entity that was the obligor under this mortgage loan into our
financial statements. On July 7, 2008, we took ownership and/or
possession of the Haven facilities and TC Healthcare assumed operations of the
facilities. As a result of our taking ownership and/or possession of
the Haven facilities, effective July 7, 2008, the mortgage note was retired and
we were no longer required to consolidate the Haven entity. See Note
1 – Organization and Basis of Presentation for additional discussion regarding
the impact of the consolidation of the Haven entity on our financial
statements.
The
following is a summary of our long-term borrowings:
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
Unsecured
borrowings:
|
|
|
|
|
|
|
|
7% Notes due April 2014
|
|
$ |
310,000 |
|
|
$ |
310,000 |
|
|
7% Notes due January 2016
|
|
|
175,000 |
|
|
|
175,000 |
|
|
Premium on 7% Notes due April
2014
|
|
|
673 |
|
|
|
831 |
|
|
Discount on 7% Notes due
January 2016
|
|
|
(978 |
) |
|
|
(1,134 |
) |
|
|
|
|
484,695 |
|
|
|
484,697 |
|
|
Secured
borrowings:
|
|
|
|
|
|
|
|
|
|
6.8% CapitalSource mortgage
note due December 2011
|
|
|
59,354 |
|
|
|
— |
|
|
6.5% Term loan due December
2014
|
|
|
100,000 |
|
|
|
— |
|
|
Revolving lines of credit
|
|
|
94,100 |
|
|
|
63,500 |
|
|
Totals
|
|
$ |
738,149 |
|
|
$ |
548,197 |
|
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
The required principal payments,
excluding the premium/discount on the 7% Notes, for each of the five years
following December 31, 2009 and the aggregate due thereafter are set forth
below:
|
|
|
(in
thousands)
|
|
|
2010
|
|
$ |
— |
|
|
2011
|
|
|
59,354 |
|
|
2012
|
|
|
94,100 |
|
|
2013
|
|
|
— |
|
|
2014
|
|
|
410,000 |
|
|
Thereafter
|
|
|
175,000 |
|
|
Totals
|
|
$ |
738,454 |
|
See Note
20 – Subsequent Event for information regarding additional borrowings after
December 31, 2009.
NOTE
10 - FINANCIAL INSTRUMENTS
At December 31, 2009 and 2008, the
carrying amounts and fair values of our financial instruments were as
follows:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Assets:
|
|
(in
thousands)
|
|
|
Cash and cash equivalents
|
|
$ |
2,170 |
|
|
$ |
2,170 |
|
|
$ |
209 |
|
|
$ |
209 |
|
|
Restricted cash
|
|
|
9,486 |
|
|
|
9,486 |
|
|
|
6,294 |
|
|
|
6,294 |
|
|
Mortgage notes receivable –
net
|
|
|
100,223 |
|
|
|
98,251 |
|
|
|
100,821 |
|
|
|
93,892 |
|
|
Other investments
|
|
|
32,800 |
|
|
|
29,725 |
|
|
|
29,864 |
|
|
|
25,343 |
|
|
Totals
|
|
$ |
144,679 |
|
|
$ |
139,632 |
|
|
$ |
137,188 |
|
|
$ |
125,738 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving lines of credit
|
|
$ |
94,100 |
|
|
$ |
94,100 |
|
|
$ |
63,500 |
|
|
$ |
59,550 |
|
|
6.50% Term loan
|
|
|
100,000 |
|
|
|
100,000 |
|
|
|
— |
|
|
|
— |
|
|
6.80% CapitalSource Mortgage
Note
|
|
|
59,354 |
|
|
|
59,354 |
|
|
|
— |
|
|
|
— |
|
|
7.00% Notes due 2014
|
|
|
310,000 |
|
|
|
314,615 |
|
|
|
310,000 |
|
|
|
268,712 |
|
|
7.00% Notes due 2016
|
|
|
175,000 |
|
|
|
176,506 |
|
|
|
175,000 |
|
|
|
137,285 |
|
|
(Discount)/premium on 7.00%
Notes – net
|
|
|
(305 |
) |
|
|
(215 |
) |
|
|
(303 |
) |
|
|
(37 |
) |
|
Totals
|
|
$ |
738,149 |
|
|
$ |
744,360 |
|
|
$ |
548,197 |
|
|
$ |
465,510 |
|
Fair value estimates are subjective in
nature and are dependent on a number of important assumptions, including
estimates of future cash flows, risks, discount rates and relevant comparable
market information associated with each financial instrument (see Note 2 –
Summary of Significant Accounting Policies). The use of different
market assumptions and estimation methodologies may have a material effect on
the reported estimated fair value amounts. Accordingly, the estimates
presented above are not necessarily indicative of the amounts we would realize
in a current market exchange.
The following methods and assumptions
were used in estimating fair value disclosures for financial
instruments.
|
·
|
Cash
and cash equivalents: The carrying amount of cash and cash
equivalents and restricted cash reported in the balance sheet approximates
fair value because of the short maturity of these instruments (i.e., less
than 90 days).
|
|
·
|
Mortgage
notes receivable: The fair values of the mortgage notes
receivables are estimated using a discounted cash flow analysis, using
interest rates being offered for similar loans to borrowers with similar
credit ratings.
|
|
·
|
Other
investments: Other investments are primarily comprised of: (i)
notes receivable; and (ii) an investment in redeemable non-convertible
preferred security of an unconsolidated business accounted for using the
cost method of accounting. The fair values of notes receivable
are estimated using a discounted cash flow analysis, using interest rates
being offered for similar loans to borrowers with similar credit
ratings. The fair value of the investment in the unconsolidated
business is estimated using discounted cash flow and volatility
assumptions or, if available, quoted market
value.
|
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
|
·
|
Revolving
lines of credit: The fair value of our borrowings under
variable rate agreements are estimated using an expected present value
technique based on expected cash flows discounted using the current
credit-adjusted risk-free rate.
|
|
·
|
Senior
notes and other long-term borrowings: The fair value of our
borrowings under fixed rate agreements are estimated based on open market
trading activity provided by a third
party.
|
NOTE
11 – TAXES
We were organized, have operated, and
intend to continue to operate in a manner that enables us to qualify for
taxation as a REIT under Sections 856 through 860 of the Internal Revenue
Code. On a quarterly and annual basis we perform several analyses to
test our compliance within the REIT taxation rules. In order to
qualify as a REIT, we are required to: (i) distribute dividends (other than
capital gain dividends) to our stockholders in an amount at least equal to (A)
the sum of (a) 90% of our "REIT taxable income" (computed without regard to the
dividends paid deduction and our net capital gain), and (b) 90% of the net
income (after tax), if any, from foreclosure property, minus (B) the sum of
certain items of non-cash income on an annual basis, (ii) ensure that at least
75% and 95%, respectively of our gross income is generated from qualifying
sources that are described in the REIT tax law, (iii) ensure that at least 75%
of our assets consist of qualifying assets, such as real property, mortgages,
and other qualifying assets described in the REIT tax law, (iv) ensure that we
do not own greater than 10% of the voting or value of any one security, (v)
ensure that we don’t own either debt or equity securities of another company
that are in excess of 5% of our total assets and (vi) ensure that no more that
20% of our assets are invested in one or more taxable REIT subsidiaries. In
addition to the income and asset tests, the REIT rules require that no less than
100 shareholders own shares or an interest in the REIT and that five or fewer
individuals do not own (directly or indirectly) more than 50% of the shares or
proportionate interest in the REIT. If we fail to qualify as a REIT
in any tax year, we will be subject to federal income tax on our taxable income
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent years.
We are also subject to federal taxation
of 100% of the derived net income if we sell or dispose of property, other than
foreclosure property, that we held primarily for sale to customers in the
ordinary course of a trade or business. We believe that we do not
hold assets for sale to customers in the ordinary course of business and that
none of the assets currently held for sale or that have been sold would be
considered a prohibited transaction within the REIT taxation rules.
So long as we qualify as a REIT we
generally will not be subject to Federal income taxes on the REIT taxable income
that we distribute to stockholders, subject to certain exceptions. In
2009, we paid preferred and common dividend payments of $109.2 million which
satisfies the 2009 REIT requirements relating to the distribution of our REIT
Taxable Income. On a quarterly and annual basis we tested our
compliance within the REIT taxation rules described above to ensure that we were
in compliance with the rules.
In July 2008, we assumed operating
responsibilities for the 15 Haven facilities due to the bankruptcy of one of our
operators/tenants. In September 2008, we entered into an agreement to
lease these facilities to a new operator/tenant. Effective September
1, 2008, the new operator/tenant assumed operating responsibility for 13 of the
15 facilities, and, as a result, we retained operating responsibility for two
properties as of December 31, 2008. We are in the process of
addressing state regulatory requirements necessary to transfer the final two
properties to the new operator/tenant. We made an election on our
2008 federal income tax return to treat the Haven facilities as foreclosure
properties. Because we acquired possession in connection with a
foreclosure, the Haven facilities are eligible to be treated as foreclosure
property until the end of 2011. Although the Secretary of Treasury
may extend the foreclosure property period until the end of 2014, there can be
no assurance that we will receive such an extension. So long as the
Haven facilities qualify as foreclosure property, our gross income from the
properties will be qualifying income for the 75% and 95% gross income tests, but
we will generally be subject to corporate income tax at the highest rate on the
net income from the properties. If one or more of the Haven
facilities were to inadvertently fail to qualify as foreclosure property, we
would likely recognize nonqualifying income from such property for purposes of
the 75% and 95% gross income tests, which could cause us to fail to qualify as a
REIT. In addition, any gain from a sale of such property could be
subject to the 100% prohibited transactions tax. Although we intend
to sell or lease the remaining Haven facilities to one or more unrelated third
parties prior to the end of 2011, no assurance can be provided that we will
accomplish that objective. Since the year 2000, the definition of
foreclosure property has included any “qualified health care property,” as
defined in Code Section 856(e)(6) acquired by us as the result of the
termination or expiration of a lease of such property. We have from
time to time operated qualified healthcare facilities acquired in this manner
for up to two years (or longer if an extension was granted), including the Haven
properties mentioned in the previous paragraph. Properties that we
had taken back in a foreclosure or bankruptcy and operated for our own account
were treated as foreclosure properties for income tax purposes, pursuant to
Internal Revenue Code Section 856(e). Gross income from foreclosure
properties was classified as “good income” for purposes of the annual REIT
income tests upon making the election on the tax return. Once made,
the income was classified as “good” for a period of three years, or until the
properties were no longer operated for our own account. In all cases
of foreclosure property, we utilized an independent contractor to conduct
day-to-day operations to maintain REIT status. In certain cases we
operated these facilities through a taxable REIT subsidiary. For
those properties operated through the taxable REIT subsidiary, we utilized an
eligible independent contractor to conduct day-to-day operations to maintain
REIT status. As a result of the foregoing, we do not believe that our
participation in the operation of nursing homes increased the risk that we would
fail to qualify as a REIT. Through our 2009 taxable year, we had not
paid any tax on our foreclosure property because those properties had been
producing losses. We cannot predict whether, in the future, our
income from foreclosure property will be significant and/or whether we could be
required to pay a significant amount of tax on that income.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Subject to
the limitation described above under the REIT asset test rules, we are permitted
to own up to 100% of the stock of one or more TRSs. Currently, we
have one TRS that is taxable as a corporation and that pays federal, state and
local income tax on its net income at the applicable corporate
rates. The TRS had a net operating loss carry-forward as of December
31, 2009 and 2008 of $1.1 million. The loss carry-forward was fully
reserved at December 31, 2009 and 2008 with a valuation allowance due to
uncertainties regarding realization. There is currently no activity
in the TRS.
NOTE
12 - RETIREMENT ARRANGEMENTS
Our company has a 401(k) Profit Sharing
Plan covering all eligible employees. Under this plan, employees are
eligible to make contributions, and we, at our discretion, may match
contributions and make a profit sharing contribution.
We have a Deferred Compensation Plan
which is an unfunded plan under which we can award units that result in
participation in the dividends and future growth in the value of our common
stock. As of December 31, 2009 we had $39 thousand in liabilities
associated with the Deferred Compensation Plan.
Amounts charged to operations with
respect to these retirement arrangements totaled approximately $156,600,
$151,500 and $77,600 in 2009, 2008 and 2007, respectively.
NOTE 13 – STOCKHOLDERS’
EQUITY
Stockholders’
Equity
2.7
Million Share Common Stock Issuance
On December 22, 2009, we issued 2.7
million shares of our common stock as part of the consideration paid at the
December 22, 2009 closing under our purchase agreement with
CapitalSource. The closing price of our common stock on December 22,
2009 was $19.45 per share.
Equity
Shelf Program
On June 12, 2009, we entered into
separate Equity Distribution Agreements (collectively, the "Equity Distribution
Agreements") with each of UBS Securities LLC, Deutsche Bank Securities Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, each as sales agents
and/or principal (the "Managers"). Under the terms of the Equity
Distribution Agreements, we may sell shares of our common stock, from time to
time, through or to the Managers having an aggregate gross sales price of
up to $100,000,000 (the “Equity Shelf Program”). Sales of the shares,
if any, will be made by means of ordinary brokers’ transactions on the New York
Stock Exchange at market prices, or as otherwise agreed with the
applicable Manager. We will pay each Manager compensation
for sales of the shares equal to 2% of the gross sales price for shares sold
through such Manager, as sales agent, under the applicable Equity
Distribution Agreement. During the year ended December 31,
2009, 1.4 million shares of our common stock were issued through the Equity
Shelf Program for net proceeds of approximately $23.0 million, net of $0.5
million of commissions.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Amendment
to Charter to Increase Authorized Common Stock
On May 28, 2009, we amended our
Articles of Incorporation to increase the number of authorized shares of our
common stock from 100,000,000 to 200,000,000 shares.
Dividend
Reinvestment and Common Stock Purchase Plan
We have a Dividend Reinvestment and
Common Stock Purchase Plan (the “DRSPP”) that allows for the reinvestment of
dividends and the optional purchase of our common stock. Effective
May 15, 2009, we reinstated the optional cash purchase component of our DRSPP,
which we had temporarily suspended in October 2008.
For the year ended December 31, 2009,
we issued 1.7 million shares of common stock for approximately $27.2 million in
net proceeds. For the year ended December 31, 2008, we issued 2.1
million shares of common stock for approximately $34.1 million in net
proceeds.
Purchase
of 400,000 shares of Series D Preferred Stock
On October 16, 2008, we purchased
400,000 shares of our Series D Preferred Stock (NYSE:OHI PrD) at a price of
$18.90 per share. The liquidation preference for the Series D
Preferred Stock (“Series D”) is $25.00 per share. The purchase of the
Series D Preferred Stock shares resulted in a fourth quarter 2008 gain of
approximately $2.1 million, net of a non-cash charge $0.3 million reflecting the
write-off of the pro-rata portion of the original issuance costs of the Series D
Preferred Stock.
6.0
Million Share Common Stock Offering
On September 19, 2008, we closed an
underwritten public offering of 6.0 million shares our common stock at $16.37
per share. The net proceeds, after deducting underwriting discounts
and offering expenses, were approximately $96.9 million. The net
proceeds were used to repay indebtedness under our senior credit facility and
for working capital and general corporate purposes.
5.9
Million Common Stock Offering
On May 6, 2008, we have issued 5.9
million shares of our common stock at $16.93 per share in a registered direct
placement to a number of institutional investors. The net proceeds
from the offering were approximately $98.8 million, after deducting the
placement agent’s fee and other estimated offering expense. The net
proceeds were used to repay indebtedness under our senior credit
facility.
NOTE
14 –STOCK-BASED COMPENSATION
We offer stock-based compensation to
our employees that include stock options, restricted stock awards and
performance share awards. Under the terms of our 2000 Stock Incentive
Plan (the “2000 Plan”) and the 2004 Stock Incentive Plan (the “2004 Plan”), we
reserved 3,500,000 shares and 3,000,000 shares of common stock,
respectively.
Stock
Options
The 2000 and 2004 Plan allows for the
issuance of stock options to employees, directors and consultants at exercise
price equal to the Company’s common stock price on the date of
grant. The 2000 Plan and 2004 Plan do not allow for a reduction in
the exercise price after the date of grant, nor does it allow for an option to
be cancelled in exchange for an option with a lower exercise price per
share. At December 31, 2009, there were 18,663 options outstanding
under the 2000 Plan with a weighted average exercise price of $9.45 per
share. We have not issued stock option to employees, directors or
consultants since 2004.
Cash received from the exercise under
all stock-based payment arrangements for the year ended 2009, 2008 and 2007 was
$19,000, $0.1 million and $58,000, respectively. Cash used to pay
minimum tax withholdings for equity instruments granted under stock-based
payment arrangements for the year ended 2009, 2008 and 2007, was $0.7 million,
$2.7 million and $0.8 million, respectively.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Restricted
Stock
Restricted stock awards are
independent of stock option grants and are subject to forfeiture if the holder’s
service to us terminates prior to vesting. Prior to vesting,
ownership of the shares cannot be transferred. The restricted stock
has the same dividend and voting rights as the common stock. We
expense the cost of these awards ratably over their vesting period.
In May 2007, we granted 286,908
shares of restricted stock to five executive officers under the 2004
Plan. The restricted stock award vests one-seventh on December 31,
2007 and two-sevenths on December 31, 2008, December 31, 2009, and December 31,
2010, respectively, subject to continued employment on the vesting date (as
defined in the agreements filed with the SEC on May 8, 2007). As of
December 31, 2009, there were 81,974 shares of unvested restricted stock
outstanding.
In addition, in January of each year
we grant restricted stock to directors as part of the director
compensation. These shares vest ratably over a three year
period.
The following table summarizes the
activity in restricted stock for the years ended December 31, 2007, 2008 and
2009:
|
|
|
Number
of Shares
|
|
|
Weighted-Average
Grant-Date Fair Value per Share
|
|
|
Compensation
Cost (1)
(in
millions)
|
|
|
Non-vested
at December 31, 2006
|
|
|
117,496 |
|
|
$ |
10.68 |
|
|
|
|
|
Granted during 2007
|
|
|
295,408 |
|
|
|
17.07 |
|
|
$ |
5.0 |
|
|
Vested during 2007
|
|
|
(151,487 |
) |
|
|
12.34 |
|
|
|
|
|
|
Non-vested
at December 31, 2007
|
|
|
261,417 |
|
|
$ |
16.94 |
|
|
|
|
|
|
Granted during 2008
|
|
|
8,500 |
|
|
|
15.04 |
|
|
$ |
0.1 |
|
|
Vested during 2008
|
|
|
(89,475 |
) |
|
|
16.80 |
|
|
|
|
|
|
Non-vested
at December 31, 2008
|
|
|
180,442 |
|
|
$ |
16.92 |
|
|
|
|
|
|
Granted during 2009
|
|
|
11,900 |
|
|
|
15.79 |
|
|
$ |
0.2 |
|
|
Vested during 2009
|
|
|
(89,968 |
) |
|
|
16.90 |
|
|
|
|
|
|
Non-vested
at December 31, 2009
|
|
|
102,374 |
|
|
$ |
16.81 |
|
|
|
|
|
(1) Total
compensation cost to be recognized on the awards based on grant date fair
value.
Performance
Restricted Stock Units
Performance Restricted Stock Units
(“PRSU”) are subject to forfeiture if the employee terminates service prior to
vesting. Prior to vesting, ownership of the shares cannot be
transferred. The dividends on the PRSUs accumulate and if vested are
paid. We expense the cost of these awards ratably over their service
period.
In May 2007, we awarded in two types
of PRSU (annual and cliff vesting awards) to our five executives totaling
247,992 shares. One half of the PRSU awards are eligible for annual
vesting based on performance in equal increments on December 31, 2008, December
31, 2009, and December 31, 2010, respectively. The other half of the
PRSU awards cliff are eligible for vesting on December 31,
2010. Vesting on both types of awards requires achievement of total
shareholder return as defined in the agreements filed with the SEC on May 8,
2007. As of December 31, 2009, no shares have vested in respect of
these PRUs. All vested shares will be delivered to the executive on
January 2, 2011, provided that the executive is employed, or will be delivered
on the date of cessation of service as an employee if the employee was
terminated without cause or the employee terminated employment with
cause.
We used a Monte Carlo model to
estimate the fair value and derived service periods for PRSUs granted to the
executives in May 2007. The following are some of the significant
assumptions used in estimating the value of the awards:
|
Closing
stock price on date of grant
|
$17.06
|
|
20-day-average
stock price
|
$17.27
|
|
Risk-free
interest rate at time of grant
|
4.6%
to 5.1%
|
|
Expected
volatility
|
24.0%
to 29.4%
|
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
The following table summarizes the
activity in PRSU for the years ended December 31, 2007, 2008 and
2009:
|
|
|
Number
of Shares
|
|
|
Weighted-Average
Grant-Date Fair Value per Share
|
|
|
Non-vested
at December 31, 2006
|
|
|
- |
|
|
$ |
- |
|
|
Granted during 2007
|
|
|
247,992 |
|
|
|
7.28 |
|
|
Vested during 2007
|
|
|
- |
|
|
|
- |
|
|
Non-vested
at December 31, 2007
|
|
|
247,992 |
|
|
$ |
7.28 |
|
|
Granted during 2008
|
|
|
- |
|
|
|
- |
|
|
Vested during 2008
|
|
|
- |
|
|
|
- |
|
|
Non-vested
at December 31, 2008
|
|
|
247,992 |
|
|
$ |
7.28 |
|
|
Granted during 2009
|
|
|
- |
|
|
|
- |
|
|
Vested during 2009
|
|
|
- |
|
|
|
- |
|
|
Non-vested
at December 31, 2009
|
|
|
247,992 |
|
|
$ |
7.28 |
|
The following table summarizes the
unrecognized compensation cost at December 31, 2009 and the remaining
contractual term:
|
|
|
Unrecognized
Compensation Cost
(in
thousands)
|
|
|
Weighted
Average Service Period
(in
months)
|
|
|
|
|
|
|
|
Restricted
Stock
|
|
$ |
1,335 |
|
|
|
12 |
|
|
Performance
Restricted Stock Units
|
|
|
300 |
|
|
|
12 |
|
|
Total
|
|
$ |
1,635 |
|
|
|
12 |
|
NOTE
15 - DIVIDENDS
Common
Dividends
On January 20, 2010, the Board of
Directors declared a common stock dividend of $0.32 per share, increasing the
quarterly common dividend by $0.02 per share over the prior
quarter. The common dividends were paid on February 16, 2010 to
common stockholders of record on January 29, 2010.
On October 20, 2009, the Board of
Directors declared a common stock dividend of $0.30 per share, to be paid
November 16, 2009 to common stockholders of record on November 2,
2009.
On July 15, 2009, the Board of
Directors declared a common stock dividend of $0.30 per share that was paid
August 17, 2009 to common stockholders of record on July 31, 2009.
On April 15, 2009, the Board of
Directors declared a common stock dividend of $0.30 per share that was paid May
15, 2009 to common stockholders of record on April 30, 2009.
On January 15, 2009, the Board of
Directors declared a common stock dividend of $0.30 per share that was paid on
February 17, 2009 to common stockholders of record on January 30,
2009.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
Series
D Preferred Dividends
On January 20, 2010, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on its 8.375% Series D cumulative redeemable preferred stock
(the “Series D Preferred Stock”), that were paid February 16, 2010 to preferred
stockholders of record on January 29, 2010. The liquidation
preference for our Series D Preferred Stock is $25.00 per
share. Regular quarterly preferred dividends for the Series D
Preferred Stock represent dividends for the period November 1, 2009 through
January 31, 2010.
On October 20, 2009, the Board of
Directors declared the regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D preferred stock that were paid November 16, 2009
to preferred stockholders of record on November 2, 2009.
On July 15, 2009, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D Preferred Stock that were paid August 17, 2009
to preferred stockholders of record on July 31, 2009.
On April 15, 2009, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D Preferred Stock that were paid May 15, 2009 to
preferred stockholders of record on April 30, 2009.
On January 15, 2009, the Board of
Directors declared regular quarterly dividends of approximately $0.52344 per
preferred share on the Series D Preferred Stock that were paid February 17, 2009
to preferred stockholders of record on January 30, 2009.
Per
Share Distributions
Per share distributions by our company
were characterized in the following manner for income tax purposes
(unaudited):
|
|
|
Year
Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
Ordinary
income
|
|
$ |
0.885 |
|
|
$ |
0.987 |
|
|
$ |
0.765 |
|
|
Return
of capital
|
|
|
0.315 |
|
|
|
0.203 |
|
|
|
0.315 |
|
|
Long-term
capital gain
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total dividends paid
|
|
$ |
1.200 |
|
|
$ |
1.190 |
|
|
$ |
1.080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
income
|
|
$ |
2.094 |
|
|
$ |
2.094 |
|
|
$ |
2.094 |
|
|
Return
of capital
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Long-term
capital gain
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total dividends paid
|
|
$ |
2.094 |
|
|
$ |
2.094 |
|
|
$ |
2.094 |
|
For additional information regarding
dividends, see Note 9 – Borrowing Arrangements and Note 11 – Taxes.
NOTE
16 - LITIGATION
In 1999, we filed suit against a former
tenant seeking damages based on claims of breach of contract. The
defendants denied the allegations made in the lawsuit. In June 2008,
we were awarded damages in a jury trial. The case was then settled
prior to appeal. In settlement of our claim against the defendants,
we agreed in January 2009 to accept a lump sum cash payment of $6.8
million. The cash proceeds were offset by related expenses incurred
of $2.3 million, resulting in a net gain of $4.5 million paid in January
2009. We recorded this gain during the first quarter of
2009.
We and
several of our wholly-owned subsidiaries were named as defendants in
professional liability claims related to our owned and operated facilities prior
to 2005. Other third-party managers responsible for the day-to-day
operations of these facilities have also been named as defendants in these
claims. In these suits, patients of certain previously owned and
operated facilities have alleged significant damages, including punitive damages
against the defendants. While any legal proceeding or claim has an
element of uncertainty, management believes that the outcome of each lawsuit,
claim or legal proceeding that is pending or threatened, or all of them
combined, will not have a material adverse effect on our consolidated financial
position or results of operations. All of these suits have been
settled.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
On
January 7, 2010, LCT SE Texas Holdings, L.L.C. (“LCT”), an affiliate of Mariner
Health Care and the lessee of four facilities located in the Houston
area (the “LCT Facilities”), filed a petition in the District Court of Harris
County, Texas (No. 2010-01120) against four landlord entities (the “CSE
Entities”), the member interests of which we purchased as part of the Capital
Source transaction in December, 2009 pursuant to a Stock Purchase Agreement (the
“Purchase Agreement”). The petition relates to a right of first refusal (“ROFR)
under the master lease between LCT and the CSE Entities. The petition alleges,
among other things, that (i) the notice of the acquisition of the member’s
interests of the CSE Entities was not proper under the ROFR
provision in the master lease, (ii) the purchase price allocated to
the member’s interests of the CSE Entities (or the LCT Facilities) pursuant to
the Purchase Agreement and specified in the notice to LCT of its ROFR, if
any, was not a bona fide offer, did not represent “true
market value”, and failed to trigger the ROFR, and (iii) we tortiously
interfered with LCT’s right to exercise the ROFR. The petition seeks
a declaratory adjudication with respect to the identified claims above, a claim
for specific performance permitting LCT to exercise its ROFR, and unspecified
actual and punitive damages relating to breach of the master lease by the CSE
Entities and tortious interference against us. We believe that the litigation is
defensible. In addition, under the Purchase Agreement and related transaction
documents, CapitalSource has agreed to indemnify us for any losses, including
reasonable legal expenses, incurred by us in connection with this
litigation.
NOTE
17 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes quarterly
results of operations for the years ended December 31, 2009 and
2008.
|
|
|
March
31
|
|
|
June
30
|
|
|
September
30
|
|
|
December
31
|
|
|
|
|
(in
thousands, except per share amounts)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
49,160 |
|
|
$ |
49,152 |
|
|
$ |
49,753 |
|
|
$ |
49,373 |
|
|
Income from
continuing operations
|
|
|
24,912 |
|
|
|
19,822 |
|
|
|
21,138 |
|
|
|
16,239 |
|
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net
income
|
|
|
24,912 |
|
|
|
19,822 |
|
|
|
21,138 |
|
|
|
16,239 |
|
|
Net
income available to common
|
|
|
22,641 |
|
|
|
17,550 |
|
|
|
18,867 |
|
|
|
13,967 |
|
|
Income
from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income from continuing
operations
|
|
$ |
0.27 |
|
|
$ |
0.21 |
|
|
$ |
0.23 |
|
|
$ |
0.16 |
|
|
Diluted income from continuing
operations
|
|
$ |
0.27 |
|
|
$ |
0.21 |
|
|
$ |
0.22 |
|
|
$ |
0.16 |
|
|
Net
income available to common per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income
|
|
$ |
0.27 |
|
|
$ |
0.21 |
|
|
$ |
0.23 |
|
|
$ |
0.16 |
|
|
Diluted net income
|
|
$ |
0.27 |
|
|
$ |
0.21 |
|
|
$ |
0.22 |
|
|
$ |
0.16 |
|
|
Cash
dividends paid on common stock
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
40,866 |
|
|
$ |
43,735 |
|
|
$ |
59,999 |
|
|
$ |
49,162 |
|
|
Income from
continuing operations
|
|
|
16,788 |
|
|
|
17,122 |
|
|
|
28,072 |
|
|
|
15,709 |
|
|
Discontinued
operations
|
|
|
446 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net
income
|
|
|
17,234 |
|
|
|
17,122 |
|
|
|
28,072 |
|
|
|
15,709 |
|
|
Net
income available to common
|
|
|
14,753 |
|
|
|
14,641 |
|
|
|
25,592 |
|
|
|
15,565 |
|
|
Income
from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income from continuing
operations
|
|
$ |
0.21 |
|
|
$ |
0.20 |
|
|
$ |
0.33 |
|
|
$ |
0.19 |
|
|
Diluted income from continuing
operations
|
|
$ |
0.21 |
|
|
$ |
0.20 |
|
|
$ |
0.33 |
|
|
$ |
0.19 |
|
|
Net
income available to common per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income
|
|
$ |
0.21 |
|
|
$ |
0.20 |
|
|
$ |
0.33 |
|
|
$ |
0.19 |
|
|
Diluted net income
|
|
$ |
0.21 |
|
|
$ |
0.20 |
|
|
$ |
0.33 |
|
|
$ |
0.19 |
|
|
Cash
dividends paid on common stock
|
|
$ |
0.29 |
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
NOTE
18 - EARNINGS PER SHARE
The computation of basic EPS is
computed by dividing net income available to common stockholders by the
weighted-average number of shares of common stock outstanding during the
relevant period. Diluted EPS is computed using the treasury stock
method, which is net income divided by the total weighted-average number of
common outstanding shares plus the effect of dilutive common equivalent shares
during the respective period. Dilutive common shares reflect the
assumed issuance of additional common shares pursuant to certain of our
share-based compensation plans, including stock options, restricted stock and
performance restricted stock units.
The following tables set forth the
computation of basic and diluted earnings per share:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in
thousands, except per share amounts)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$ |
82,111 |
|
|
$ |
77,691 |
|
|
$ |
67,598 |
|
|
Preferred stock dividends
|
|
|
(9,086 |
) |
|
|
(9,714 |
) |
|
|
(9,923 |
) |
|
Preferred stock repurchase
gain
|
|
|
- |
|
|
|
2,128 |
|
|
|
- |
|
|
Numerator for income available
to common from continuing operations - basic and diluted
|
|
|
73,025 |
|
|
|
70,105 |
|
|
|
57,675 |
|
|
Discontinued operations
|
|
|
- |
|
|
|
446 |
|
|
|
1,776 |
|
|
Numerator for net income
available to common per share - basic and diluted
|
|
$ |
73,025 |
|
|
$ |
70,551 |
|
|
$ |
59,451 |
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings
per share
|
|
|
83,556 |
|
|
|
75,127 |
|
|
|
65,858 |
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
|
82 |
|
|
|
75 |
|
|
|
12 |
|
|
Stock option incremental
shares
|
|
|
10 |
|
|
|
11 |
|
|
|
16 |
|
|
Deferred stock
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
Denominator for diluted
earnings per share
|
|
|
83,649 |
|
|
|
75,213 |
|
|
|
65,886 |
|
|
Earnings
per share - basic:
|
|
|
|
|
|
|
|
|
|
|
Income available to common from
continuing operations
|
|
$ |
0.87 |
|
|
$ |
0.93 |
|
|
$ |
0.88 |
|
|
Discontinued operations
|
|
|
- |
|
|
|
0.01 |
|
|
|
0.02 |
|
|
Net income per share -
basic
|
|
$ |
0.87 |
|
|
$ |
0.94 |
|
|
$ |
0.90 |
|
|
Earnings
per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common from
continuing operations
|
|
$ |
0.87 |
|
|
$ |
0.93 |
|
|
$ |
0.88 |
|
|
Discontinued operations
|
|
|
- |
|
|
|
0.01 |
|
|
|
0.02 |
|
|
Net income per share -
diluted
|
|
$ |
0.87 |
|
|
$ |
0.94 |
|
|
$ |
0.90 |
|
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued
NOTE
19 – DISCONTINUED OPERATIONS
Accounting for the impairment or
disposal of long-lived assets requires the presentation of the net operating
results of facilities classified as discontinued operations for all periods
presented. For the year ended December 31, 2009, no revenue or
expense were generated from discontinued operations. For the year
ended December 31, 2008, discontinued operations includes one month revenue of
$15 thousand and a gain of $0.4 million on the sale of one SNF. For
the year ended December 31, 2007, discontinued operations includes the revenue
of $0.2 million and expense of $31 thousand for 6 facilities. It also
includes the gain of $1.6 million on the sale of six SNFs and two
ALFs.
The following table summarizes the
results of operations of the facilities sold or held- for- sale for the years
ended December 31, 2009, 2008 and 2007, respectively.
|
|
|
Year
Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in
thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$ |
— |
|
|
$ |
15 |
|
|
$ |
212 |
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
— |
|
|
|
— |
|
|
|
28 |
|
|
General and administrative
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
Subtotal expenses
|
|
|
— |
|
|
|
— |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before gain on sale of assets
|
|
|
— |
|
|
|
15 |
|
|
|
181 |
|
|
Gain
on assets sold – net
|
|
|
— |
|
|
|
431 |
|
|
|
1,595 |
|
|
Discontinued
operations
|
|
$ |
— |
|
|
$ |
446 |
|
|
$ |
1,776 |
|
NOTE
20 – SUBSEQUENT EVENT
We have reviewed subsequent events
through the date of the filing of this Form 10-K. The following
events occurred subsequent to December 31, 2009.
$200 Million Senior
Notes
On February 9, 2010, we issued and sold
$200 million aggregate principal amount of our 7½% Senior Notes due 2020 (the
“2020 Notes”).
The 2020 Notes were sold at an issue
price of 98.278% of the principal amount, resulting in gross proceeds of
approximately $197 million. We
used the net proceeds from the sale of the 2020 Notes, after discounts and
expenses, to (i) repay outstanding borrowings of approximately $59 million of
debt assumed in connection with our previously reported December 22, 2009
acquisition of certain subsidiaries of CapitalSource Inc., (ii) repay
outstanding borrowings under our revolving credit facility, and (iii) for
working capital and general corporate purposes, including the acquisition of
healthcare-related properties such as the pending acquisition of additional
facilities under our previously reported purchase agreement with CapitalSource
Inc. The 2020 Notes are guaranteed by substantially all of our
subsidiaries as of the date of issuance.
OMEGA
HEALTHCARE INVESTORS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -
Continued