10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 15, 2001
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-11316
OMEGA HEALTHCARE
INVESTORS, INC.
(Exact name of Registrant as specified in its charter)
Maryland 38-3041398
(State of Incorporation) (I.R.S. Employer Identification No.)
900 Victors Way, Suite 350, Ann Arbor, MI 48108
(Address of principal executive offices)
(734) 887-0200
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of March 31, 2001
Common Stock, $.10 par value 19,989,956
(Class) (Number of shares)
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3
See notes to condensed consolidated financial statements.
4
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2001
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements for
Omega Healthcare Investors, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals and impairment provisions to adjust the
carrying value of assets) considered necessary for a fair presentation have been
included. Certain reclassifications have been made to the 2000 financial
statements for consistency with the current presentation. Such reclassifications
have no effect on previously reported earnings or equity. Operating results for
the three-month period ended March 31, 2001 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001. For
further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 2000.
Note B - Properties
In the ordinary course of its business activities, the Company periodically
evaluates investment opportunities and extends credit to customers. It also
regularly engages in lease and loan extensions and modifications. Additionally,
the Company actively monitors and manages its investment portfolio with the
objectives of improving credit quality and increasing returns. In connection
with portfolio management, the Company engages in various collection and
foreclosure activities.
When the Company acquires real estate pursuant to a foreclosure, lease
termination or bankruptcy proceeding, and does not immediately re-lease the
properties to new operators, the assets are included on the balance sheet as
"real estate properties," and the value of such assets is reported at the lower
of cost or fair value. (See "Owned and Operated Assets" below). Additionally,
when a formal plan to sell real estate is adopted, the real estate is classified
as "Assets Held for Sale," with the net carrying amount adjusted to the lower of
cost or fair value, less cost of disposal.
Based on management's current review of the Company's portfolio, no
provision was recorded for the three-month period ended March 31, 2001. A
provision for impairment in the value of the Assets Held for Sale of $4.5
million was recorded for the three-month period ended March 31, 2000.
5
A summary of the number of properties by category for the quarter ended
March 31, 2001 follows:
Real Estate Dispositions
The Company disposed of four facilities during the three-month period ended
March 31, 2001. Assets sold consisted of three facilities in Indiana with a
total of 159 beds which were classified as Owned and Operated and one facility
in Massachusetts with 77 beds which was included in Assets Held for Sale. The
Company recognized a gain on the sale of the Owned and Operated real estate in
the amount of $0.6 million. The Company provided seller-financing in the amount
of $0.5 million for the property in Assets Held for Sale. The full amount of the
seller-financing has been reserved and will be recognized as collected. Sales
proceeds generated from these sales totaled $1.2 million. During the three-month
period ended March 31, 2000, the Company realized disposition proceeds of $0.2
million from the sale of one facility.
Notes and Mortgages Receivable
Income on notes and mortgages which are impaired will be recognized as cash
is received. No provision for loss on mortgages or notes receivable was recorded
during the three-month periods ended March 31, 2001 and 2000, respectively.
Effective February 1, 2001, four facilities owned by Professional Health
Care Management, Inc. ("PHCM") a subsidiary of Mariner Post-Acute Network, and
on which the Company held a first mortgage loan, were sold to Midtown Real
Estate Company, LLC ("Midtown"). PCHM loaned Midtown the entire purchase price,
and the Company assumed an undivided fifty percent interest in the acquisition
promissory note. The Company's fifty-percent interest, which totals $4.5
million, was credited against Mariner's obligations to the Company. The term of
the loan with Midtown is 15 years, with an initial yield of 12.4%.
6
Owned and Operated Assets
The Company owns 66 facilities that were recovered from customers and are
operated for the Company's own account. These facilities have 5,079 beds and are
located in seven states.
The Company intends to operate these owned and operated assets for its own
account until such time as these facilities' operations are stabilized and are
re-leasable or saleable at lease rates or sale prices that maximize the value of
these assets to the Company. Due to the deterioration in market conditions
affecting the long term care industry, the Company is unable to estimate when
such re-leasing and sales objectives might be achieved and now intends to
operate such facilities for an extended period. As a result, these facilities
and their respective operations are presented on a consolidated basis in the
Company's financial statements.
The revenues, expenses, assets and liabilities included in the Company's
condensed consolidated financial statements which relate to such owned and
operated assets are as follows:
(1) Nursing home revenues from these owned and operated assets are
recognized as services are provided.
(2) EBITDA represents earnings before interest, income taxes,
depreciation and amortization. It is considered by the Company
to be a meaningful measure of performance of its owned and
operated assets. EBITDA in and of itself does not represent
cash generated from operating activities in accordance with
GAAP and therefore should not be considered an alternative to
net earnings as an indication of operating performance or to
net cash flow from operating activities as determined by GAAP
as a measure of liquidity and is not necessarily indicative of
cash available to fund cash needs.
7
Assets Held for Sale
At March 31, 2001, the carrying value of assets held for sale totals $3.5
million (net of impairment reserves of $7.8 million). The Company intends to
sell the remaining facilities as soon as practicable. However, a number of other
companies are actively marketing portfolios of similar assets and, in light of
the existing conditions in the long-term care industry generally, it has become
more difficult to sell such properties and for potential buyers to obtain
financing for such acquisitions. Thus, there can be no assurance if or when such
sales will be completed or whether such sales will be completed on terms that
allow the Company to realize the fair value of the assets.
8
Segment Information
The following tables set forth the reconciliation of operating results and
total assets for the Company's reportable segments for the three-month periods
ended March 31, 2001 and 2000.
9
Note C - Concentration of Risk and Related Issues
As of March 31, 2001, the Company's portfolio of domestic investments
consisted of 261 healthcare facilities, located in 29 states and operated by 28
third-party operators. The Company's gross investments in these facilities
totaled $916.8 million at March 31, 2001. This portfolio is made up of 130
long-term healthcare facilities and 2 rehabilitation hospitals owned and leased
to third parties, fixed rate, participating and convertible participating
mortgages on 63 long-term healthcare facilities and 66 long-term healthcare
facilities that were recovered from customers and are currently operated through
third-party management contracts for the Company's own account, including 12
facilities subject to third-party leasehold interests. The Company also holds
miscellaneous investments and closed healthcare facilities held for sale of
approximately $56.8 million at March 31, 2001, including $22.3 million related
to two non-healthcare facilities leased by the United States Postal Service, an
$8.3 million investment in Omega Worldwide, Inc., Principal Healthcare Finance
Limited, an Isle of Jersey (United Kingdom) company and Principal Healthcare
Finance Trust, an Australian Unit Trust, and $15.5 million of notes receivable.
Seven public companies operate approximately 76.1% of the Company's
investments, including Sun Healthcare Group, Inc. (26.2%), Integrated Health
Services, Inc. (17.5%, including 10.4% as the manager for Lyric Health Care
LLC), Advocat, Inc. (11.6%), Kindred Healthcare, Inc.(formerly known as Vencor
Operating, Inc.) (5.8%), Genesis Health Ventures, Inc. (5.3%), Mariner
Post-Acute Network (6.0%) and Alterra Healthcare Corporation (3.7%). Kindred and
10
Genesis manage facilities for the Company's own account, included in Owned &
Operated Assets. The two largest private operators represent 3.4% and 3.2%,
respectively, of investments. No other operator represents more than 1.9% of
investments. The three states in which the Company has its highest concentration
of investments are Florida (15.5%), California (7.3%) and Illinois (7.2%).
Government Healthcare Regulation, Reimbursements and
Industry Concentration Risks
Nearly all of the Company's properties are used as healthcare facilities,
therefore, the Company is directly affected by the risk associated with the
healthcare industry. The Company's lessees and mortgagors, as well as the
facilities owned and operated for the Company's account, derive a substantial
portion of their net operating revenues from third-party payers, including the
Medicare and Medicaid programs. Such programs are highly regulated and subject
to frequent and substantial changes. In addition, private payers, including
managed care payers, are increasingly demanding discounted fee structures and
the assumption by healthcare providers of all or a portion of the financial risk
of operating a healthcare facility. Any changes in reimbursement policies which
reduce reimbursement levels could adversely affect revenues of the Company's
lessees and borrowers and thereby adversely affect those lessees' and borrowers'
abilities to make their monthly lease or debt payments to the Company.
The possibility that the healthcare facilities will not generate income
sufficient to meet operating expenses or will yield returns lower than those
available through investments in comparable real estate or other investments are
additional risks of investing in healthcare-related real estate. Income from
properties and yields from investments in such properties may be affected by
many factors, including changes in governmental regulation (such as zoning
laws), general or local economic conditions (such as fluctuations in interest
rates and employment conditions), the available local supply and demand for
improved real estate, a reduction in rental income as the result of an inability
to maintain occupancy levels, natural disasters (such as earthquakes and floods)
or similar factors.
Real estate investments are relatively illiquid and, therefore, tend to
limit the ability of the Company to vary its portfolio promptly in response to
changes in economic or other conditions. Thus, if the operation of any of the
Company's properties becomes unprofitable due to competition, age of
improvements or other factors such that the lessee or borrower becomes unable to
meet its obligations on the lease or mortgage loan, the liquidation value of the
property may be substantially less, particularly relative to the amount owing on
any related mortgage loan, than would be the case if the property were readily
adaptable to other uses.
Potential Risks from Bankruptcies
Generally, the Company's lease arrangements with a single operator who
operates more than one of the Company's facilities is designed pursuant to a
single master lease (a "Master Lease" or collectively, the "Master Leases").
Although each lease or Master Lease provides that the Company may terminate the
Master Lease upon the bankruptcy or insolvency of the tenant, the Bankruptcy
Reform Act of 1978 ("Bankruptcy Code") provides that a trustee in a bankruptcy
11
or reorganization proceeding under the Bankruptcy Code (or debtor-in-possession
in a reorganization under the Bankruptcy Code) has the power and the option to
assume or reject the unexpired lease obligations of a debtor-lessee. In the
event that the unexpired lease is assumed on behalf of the debtor-lessee, all
the rental obligations thereunder generally would be entitled to a priority over
other unsecured claims. However, the court also has the power to modify a lease
if a debtor-lessee in a reorganization were required to perform certain
provisions of a lease that the court determined to be unduly burdensome. It is
not possible at this time to determine whether or not a court would hold that
any lease or Master Lease contains any such provisions. If a lease is rejected,
the lessor has a general unsecured claim limited to any unpaid rent already due
plus an amount equal to the rent reserved under the lease, without acceleration,
for the greater of one year or 15% of the remaining term of such lease, not to
exceed the rent obligation for three years.
Generally, with respect to the Company's mortgage loans, the imposition of
an automatic stay under the Bankruptcy Code precludes the Company from
exercising foreclosure or other remedies against the debtor. A mortgagee also is
treated differently from a landlord in three key respects. First, the mortgage
loan is not subject to assumption or rejection because it is not an executory
contract or a lease. Second, the mortgagee's loan may be divided into (1) a
secured loan for the portion of the mortgage debt that does not exceed the value
of the property and (2) a general unsecured loan for the portion of the mortgage
debt that exceeds the value of the property. A secured creditor such as the
Company is entitled to the recovery of interest and costs only if and to the
extent that the value of the collateral exceeds the amount owed. If the value of
the collateral is less than the debt, a lender such as the Company would not
receive or be entitled to any interest for the time period between the filing of
the case and confirmation. If the value of the collateral does exceed the debt,
interest and allowed costs may not be paid during the bankruptcy proceeding but
accrue until confirmation of a plan or reorganization or some other time as the
court orders. Finally, while a lease generally would either be rejected or
assumed with all of its benefits and burdens intact, the terms of a mortgage,
including the rate of interest and timing of principal payments, may be modified
if the debtor is able to effect a "cramdown" under the Bankruptcy Code.
The receipt of liquidation proceeds or the replacement of an operator that
has defaulted on its lease or loan could be delayed by the approval process of
any federal, state or local agency necessary for the transfer of the property or
the replacement of the operator licensed to manage the facility. In addition,
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. In order to
protect its investments, the Company may take possession of a property or even
become licensed as an operator, which might expose the Company to successorship
liability to government programs or require the Company to indemnify subsequent
operators to whom it might transfer the operating rights and licenses. Third
party payors may also suspend payments to the Company following foreclosure
until the Company receives the required licenses to operate the facilities.
Should such events occur, the Company's income and cash flows from operations
would be adversely affected.
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Risks Related to Owned and Operated Assets
As a consequence of the financial difficulties encountered by a number of
the Company's operators, the Company has recovered various long-term care
assets, pledged as collateral for the operators' obligations, either in
connection with a restructuring or settlement with certain operators or pursuant
to foreclosure proceedings. Under normal circumstances, the Company would
classify such assets as "Assets Held for Sale" and seek to re-lease or otherwise
dispose of such assets as promptly as practicable. However, a number of
companies are actively marketing portfolios of similar assets and, in light of
the current conditions in the long-term care industry generally, it has become
more difficult both to sell such properties and for potential buyers to obtain
financing to acquire such properties. During 2000, $24.3 million of assets
previously classified as held for sale were reclassified to "Owned and Operated
Assets" as the timing and strategy for sale or, alternatively, re-leasing, were
revised in light of prevailing market conditions.
The Company is typically required to hold applicable leases and is
responsible for the regulatory compliance at its owned and operated facilities.
The Company's management contracts with third-party operators for such
properties provide that the third-party operator is responsible for regulatory
compliance, but the Company could be sanctioned for violation of regulatory
requirements. In addition, the risk of third-party claims such as patient care
and personal injury claims may be higher with respect to Company owned and
operated properties as compared to the Company's leased and mortgaged assets.
Note D - Dividends
On February 1, 2001, the Company announced the suspension of all common and
preferred dividends. This action is intended to preserve cash to facilitate the
Company's ability to obtain financing to fund its 2002 maturing indebtedness.
Prior to recommencing the payment of dividends on the Company's Common stock,
all accrued and unpaid dividends on the Company's Series A, B and C preferred
stock must be paid in full. The Company has made sufficient distributions to
satisfy the distribution requirements under the REIT rules to maintain its REIT
status for 2000 and intends to satisfy such requirements under the REIT rules
for 2001. The cumulative unaccrued and unpaid dividends relating to all series
of the preferred stock, excluding the November 15, 2000 Series C dividends
described below, total $4.9 million as of March 31, 2001.
On March 30, 2001, the Company exercised its option to pay the accrued
$4,666,667 Series C dividend from November 15, 2000 and the associated waiver
fee by issuing 48,420 Series C preferred shares to Explorer on April 2, 2001,
which are convertible into 774,722 shares of the Company's common stock at $6.25
per share. Such election resulted in an increase in the aggregate liquidation
preference of Series C Preferred Stock as of April 2, 2001 to $104,842,000.
During the three-month period ended March 31, 2000 the Company paid
dividends of $1.3 million and $1.1 million, respectively, on its 9.25% Series A
Cumulative Preferred Stock and 8.625% Series B Cumulative Preferred Stock.
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Note E - Earnings Per Share
The computation of basic earnings per share is determined based on the
weighted average number of common shares outstanding during the respective
periods. Diluted earnings per share reflect the dilutive effect, if any, of
stock options and, beginning in the third quarter of 2000, the assumed
conversion of the Series C Preferred Stock. The conversion of the Company's 1996
convertible debentures is anti-dilutive and therefore not assumed.
Note F - Omega Worldwide, Inc.
As of March 31, 2001 the Company holds a $5.4 million investment in Omega
Worldwide, Inc. ("Worldwide"), represented by 1,163,000 shares of common stock
and 260,000 shares of preferred stock. The Company also holds a $1.6 million
investment in Principal Healthcare Finance Limited, an Isle of Jersey (United
Kingdom) company, and a $1.3 million investment in Principal Healthcare Finance
Trust, an Australian Unit Trust. The Company has guaranteed repayment of
Worldwide borrowings pursuant to a revolving credit facility in exchange for an
initial 1% fee and an annual facility fee of 25 basis points. At March 31, 2001
borrowings of $1,350,000 were outstanding under Worldwide's revolving credit
facility. Worldwide's credit agreement calls for scheduled payments to be made
until fully repaid in June 2001. Under this agreement, no further borrowings may
be made by Worldwide under its revolving credit facility. The Company is
required to provide collateral in the amount of $8.8 million related to the
guarantee of Worldwide's obligations. Upon repayment by Worldwide of the
remaining outstanding balance under its revolving credit facility, the subject
collateral will be released in connection with the termination of the Company's
guarantee.
Additionally, the Company had a Services Agreement with Worldwide that
provided for the allocation of indirect costs incurred by the Company to
Worldwide. The allocation of indirect costs has been based on the relationship
of assets under the Company's management to the combined total of those assets
and assets under Worldwide's management. Upon expiration of this agreement on
June 30, 2000, the Company entered into a new agreement requiring quarterly
payments from Worldwide of $37,500 for the use of offices and certain
administrative and financial services provided by the Company. Upon the
reduction of the Company's accounting staff, the Service Agreement was
renegotiated again on November 1, 2000, requiring quarterly payments from
Worldwide of $32,500. Costs allocated to Worldwide for the three-month periods
ended March 31, 2001 and 2000 were $32,500 and $205,000, respectively.
Note G - Litigation
The Company is subject to various legal proceedings, claims and other
actions arising out of the normal course of business. While any legal proceeding
or claim has an element of uncertainty, management believes that the outcome of
14
each lawsuit claim or legal proceeding that is pending or threatened, or all of
them combined, will not have a material adverse effect on its consolidated
financial position or results of operations.
On June 20, 2000, the Company and its chief executive officer, chief
financial officer and chief operating officer were named as defendants in
certain litigation brought by Ronald M. Dickerman, in his individual capacity,
in the United States District Court for the Southern District of New York. In
the complaint, Mr. Dickerman contends that the Company and the named executive
officers violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder. Mr. Dickerman subsequently amended the
complaint to assert his claims on behalf of an unnamed class of plaintiffs. On
July 28, 2000, Benjamin LeBorys commenced a class action lawsuit making similar
allegations against the Company and certain of its officers and directors in the
United States District Court for the Southern District of New York. The cases
have been consolidated, and Mr. LeBorys has been named lead plaintiff. The
plaintiffs seek unspecified damages. The Company has reported the litigation to
its directors and officers liability insurer. The Company believes that the
litigation is without merit and is defending vigorously. The Company's Motion to
Dismiss was filed with the Court on February 16, 2001. The hearing on this
Motion is scheduled for May 23, 2001.
On June 21, 2000, the Company was named as a defendant in certain
litigation brought against it by Madison/OHI Liquidity Investors, LLC
("Madison"), a customer that claims that the Company has breached and/or
anticipatorily breached a commercial contract. Mr. Dickerman is a partner of
Madison and is a guarantor of Madison's obligations to the Company. Madison
claims damages as a result of the alleged breach of approximately $700,000.
Madison seeks damages as a result of the claimed anticipatory breach in the
amount of $15 million or, in the alternative, Madison seeks specific performance
of the contract as modified by a course of conduct that Madison alleges
developed between Madison and the Company. The Company contends that Madison is
in default under the contract in question. The Company believes that the
litigation is meritless. The Company is defending vigorously and on December 5,
2000, filed counterclaims against Madison and the guarantors, including Mr.
Dickerman, seeking repayment of approximately $8.5 million that Madison owes the
Company.
Karrington Health, Inc. brought suit against the Company alleging that the
Company repudiated and ultimately breached a financing contract to provide
$95,000,000 of financing for the development of 13 assisted living facilities.
Karrington seeks recovery of approximately $20,000,000 in damages it alleges to
have incurred as a result of the breach. The Company denies that it entered into
a valid and binding contract with Karrington and is vigorously defending the
litigation.
Note H - Borrowing Arrangements
The Company has a $175 million secured revolving credit facility that
expires on December 31, 2002. Borrowings under the facility bear interest at
2.5% to 3.25% over LIBOR, based on the Company's leverage ratio. Borrowings of
approximately $127 million are outstanding at March 31, 2001. Investments with a
gross book value of approximately $240 million are pledged as collateral for
this credit facility.
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The Company has a $75 million secured revolving credit facility that
expires on March 31, 2002 as to $10 million and June 30, 2005 as to $65 million.
Borrowings under the facility bear interest at 2.5% to 3.75% over LIBOR, based
on the Company's leverage ratio and collateral assigned. Borrowings of
approximately $68.6 million are outstanding at March 31, 2001. Investments with
a gross book value of approximately $90 million are pledged as collateral for
this credit facility.
During the quarter ended March 31, 2001, the Company repurchased $2.0
million of its 6.95% Notes maturing in June 2002. At March 31, 2001, $123
million of these notes remain outstanding.
As of March 31, 2001, the Company had an aggregate of $259 million of
outstanding debt which matures in 2002, including $123 million of 6.95% Notes
due June 2002 and $136 million on credit facilities expiring in 2002.
The Company is required to meet certain financial covenants, including
prescribed leverage and interest coverage ratios on its long-term borrowings.
The Company has $50 million of funding available through July 1, 2001
pursuant to an Investment Agreement with Explorer which can be used, upon
satisfaction of certain conditions, to fund growth. Following the drawing in
full or expiration of this commitment, Explorer will have the option to provide
up to an additional $50 million to fund growth for an additional twelve-month
period. (See Note D - Dividends)
Note I - Effect of New Accounting Pronouncements
The Company utilizes interest rate swaps to fix interest rates on variable
rate debt and reduce certain exposures to interest rate fluctuations. In June
1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 2000. The Company adopted the
new Statement effective January 1, 2001. The Statement requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedge item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
At March 31, 2001, the Company had two interest rate swaps with notional
amounts of $32 million each, based on 30-day London Interbank Offered Rates
(LIBOR). Under the terms of the first agreement, which expires in December 2001,
the Company receives payments when LIBOR exceeds 6.35% and pays the counterparty
when LIBOR is less than 6.35%. At March 31, 2001, 30-day Libor was 5.08 %. This
16
interest rate swap may be extended for an additional twelve months at the option
of the counterparty and therefore does not qualify for hedge accounting under
FASB No. 133. The fair value of this swap at January 1, and March 31, 2001 was a
liability of $351,344 and $745,138, respectively. The liability at January 1 was
recorded as a transition adjustment in other comprehensive income and is being
amortized over the initial term of the swap. Such amortization of $87,836,
together with the change in fair value of the swap during the quarter ended
March 31, 2001 of $393,794 is included in charge for derivative accounting in
the Company's Condensed Consolidated Statement of Operations.
Under the second agreement, which expires December 31, 2002, the Company
receives payments when LIBOR exceeds 4.89% and pays the counterparty when LIBOR
is less than 4.89%. The fair value of this interest rate swap at March 31, 2001
was a liability of $90,043, which is included in other comprehensive income as
required under FASB No. 133 for fully effective cash flow hedges.
The fair values of these interest rate swaps are included in accrued
expenses and other liabilities in the Company's Condensed Consolidated Balance
Sheet at March 31, 2001.
Note J - Subsequent Events
As of April 2, 2001, the Company issued 48,420 Series C preferred shares to
Explorer, which are convertible into 774,722 shares of the Company's common
stock at $6.25 per share. (See Note D - Dividends.)
In April, 2001 the Company was informed by TLC Healthcare, Inc. ("TLC")
that it could no longer meet its payroll and other operating obligations. The
Company had leases and mortgages with TLC representing eight properties with
1,049 beds and an initial investment of $27.5 million. As a result of this
action, one facility in Texas with 102 beds and an initial investment of $2.5
million was leased to a new operator, Lamar Healthcare, Inc. and four properties
in Illinois, Indiana and Ohio, with a total of 335 beds and an initial
investment of $13.5 million, were taken back and placed under management
agreements with Atrium Living Centers and Nexion Health Management, Inc. and
will be operated for the Company's own account and classified as Owned and
Operated Assets. The remaining three properties, with a total of 612 beds
located in Texas have either been closed or are in the process of being closed
and will be marketed for sale.
In April, 2001 the Company extended its forbearance agreement with Lyric
Healthcare LLC ("Lyric") through May 31, 2001, whereby the Company has received
$541,266 of the $860,000 monthly rent due under the Lyric leases. Discussions
are continuing with Lyric to reach a permanent restructuring agreement. The
Company's original investment in the ten facilities covered under the lease is
$95.4 million, with annual rent of $10.3 million.
17
On March 30, 2001 the Company announced that affiliates of Alden
Management, Inc. ("Alden") were delinquent in paying their lease, loan and
escrow payments on the four facilities it leases from the Company. During the
month of April, Alden resumed regularly scheduled lease payments to the Company,
and began making payments on a schedule designed to bring their past due amounts
current by August of 2001.
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Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
"Safe Harbor" Statement Under the United States Private Securities
Litigation Reform Act of 1995
Certain information contained in this report includes forward looking
statements. Forward looking statements include statements regarding the
Company's expectations, beliefs, intentions, plans, objectives, goals,
strategies, future events or performance and underlying assumptions and other
statements other than statements of historical facts. These statements may be
identified, without limitation, by the use of forward looking terminology such
as "may" "will" "anticipates" "expects" "believes" "intends" "should" or
comparable terms or the negative thereof. All forward looking statements
included herein are based on information available on the date hereof. Such
statements only speak as of the date hereof and no obligation to update such
forward looking statements should be assumed. Actual results may differ
materially from those reflected in such forward looking statements as a result
of a variety of factors, including, among other things: (i) the ability of the
Company to dispose of assets held for sale on a timely basis and at appropriate
prices; (ii) uncertainties relating to the operation of the Company's Owned and
Operated Assets, including those relating to reimbursement by third-party
payors, regulatory matters and occupancy levels; (iii) the general distress of
the healthcare industry; (iv) continued deterioration of the operating results
and financial condition of the Company's operators; (v) the ability of the
Company's operators in bankruptcy to reject unexpired lease obligations, modify
the terms of the Company's mortgages, and impede the ability of the Company to
collect unpaid rent or interest during the pendency of a bankruptcy proceeding
and retain security deposits for the debtor's obligations; (vi) the availability
and cost of capital; (vii) regulatory and other changes in the healthcare
sector; (viii) the ability of the Company to manage , re-lease or sell its owned
and operated facilities; (ix) competition in the financing of healthcare
facilities; (x) the effect of economic and market conditions and changes in
interest rates; (xi) the resumption of dividends; (xii) the amount and yield of
any additional investments; (xiii) changes in tax laws and regulations affecting
real estate investment trusts; access to the capital markets and the cost of
capital (xiv) changes in the ratings of the Company's debt securities; (xv) and
the risk factors set forth herein.
Following is a discussion of the consolidated results of operations,
financial position and liquidity and capital resources of the Company, which
should be read in conjunction with the condensed consolidated financial
statements and accompanying notes. (See Note B - Properties and Note C -
Concentration of Risk and Related Issues.)
Results of Operations
Revenues for the three-month period ended March 31, 2001 totaled $69.2
million, an increase of $12.0 million over the period ending March 31, 2000.
This increase is principally due to the inclusion of revenue from nursing home
operations for assets owned and operated for the Company's account recovered
pursuant to foreclosure and settlements with troubled operators in 2000.
Excluding nursing home revenues of Owned and Operated Assets, revenues were
$23.2 million for the three-month period ended March 31, 2001, a decrease of
$2.6 million from the comparable prior year period.
19
Rental income for the three-month period ended March 31, 2001 totaled $16.0
million, a decrease of $2.0 million over the same period in 2000. The decrease
is due to $1.2 million from reductions in lease revenue due to foreclosures,
bankruptcies and restructurings, and $1.1 million from reduced investments
caused by 2000 asset sales. These decreases are offset by $0.3 million relating
to contractual increases in rents that became effective in 2001 as defined under
the related agreements.
Mortgage interest income for the three-month period ended March 31, 2001
totaled $5.7 million, decreasing $0.3 million from the same period in 2000. The
decrease is due to $0.4 million from reductions due to foreclosures,
bankruptcies and restructurings and reduced investments caused by the payoffs of
mortgages in 2000. These decreases are offset by $0.1 million relating to
contractual increases in interest income that became effective in 2001 as
defined under the related agreements.
Nursing home revenues of owned and operated assets for the three-month
period ended March 31, 2001 totaled $46.0 million, increasing $14.6 million over
the same period in 2000. The increase is primarily due to the inclusion of 30
facilities formerly operated by RainTree Healthcare Corporation ("RainTree") for
the full three-month period ended March 31, 2001 versus one month during the
three-month period ended March 31, 2000.
Expenses for the three-month period ended March 31, 2001 totaled $65.6
million, increasing approximately $11.4 million over expenses of $54.2 million
for the three-month period ended March 31, 2000.
Nursing home expenses for owned and operated assets for the three-month
period ended March 31, 2001 increased to $46.5 million from $31.0 million for
the three-month period ended March 31, 2000. The increase is primarily due to
the inclusion of 30 facilities formerly operated by RainTree for the full
three-month period ended March 31, 2001 versus one month during the three-month
period ended March 31, 2000.
Interest expense for the three-month period ended March 31, 2001 was
approximately $9.7 million, compared with $11.1 million for the same period in
2000. The decrease in 2001 is primarily due to lower average outstanding
borrowings during the 2001 period, partially offset by higher average interest
rates.
The provision for depreciation and amortization of real estate totaled $5.5
million during the three-months ended March 31, 2001, decreasing $0.4 million
over the same period in 2000. The decrease primarily consists of $0.2 million
due to assets sold in 2000 and capital expenditures and impairment charges on
owned and operated properties, and a reduction in amortization of goodwill and
non-compete agreements of $0.2 million.
20
General and administrative expenses for the three-month period ended March
31, 2001 totaled $2.3 million as compared to $1.6 million for the same period in
2000, an increase of $0.7 million. The increase is due in part to the
incremental administrative costs incurred to manage the owned and operated
assets and increased consulting costs related to the foreclosure assets.
Legal expenses for the three-month period ended March 31, 2001 totaled $1.0
million, an increase of $0.9 million over the same period in 2000. The increase
is largely attributable to legal costs associated with the operator bankruptcy
filings and negotiations with the Company's troubled operators.
A provision for impairment of $4.5 million is included in expenses for the
three-month period ended March 31, 2000. This provision was to reduce assets
held for sale to fair value less cost to dispose. No provision for impairment
was recognized in the 2001 period.
During the three-month period ended March 31, 2001, the Company recognized
a gain on disposal of real estate of $0.6 million.
Funds from operations (FFO) for the three-month period ended March 31, 2001
on a fully diluted basis totaled $6.8 million, a decrease of approximately $5.3
million as compared to the $12.1 million for the same period in 2000 due to
factors mentioned above. FFO is net earnings available to common shareholders,
excluding any gains or losses from debt restructuring and the effects of asset
dispositions, plus depreciation and amortization associated with real estate
investments. The Company considers FFO to be one performance measure which is
helpful to investors of real estate companies because, along with cash flows
from operating activities, financing activities and investing activities, it
provides investors and understanding of the ability of the Company to incur and
service debt and to make expenditures. FFO in and of itself does not represent
cash generated from operating activities in accordance with GAAP and therefore
should not be considered an alternative to net earnings as an indication of
operating performance or to net cash flow from operating activities as
determined by GAAP as a measure of liquidity and is not necessarily indicative
of cash available to fund cash needs.
No provision for Federal income taxes has been made since the Company
continues to qualify as a real estate investment trust under the provisions of
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended.
Accordingly, the Company has not been subject to Federal income taxes on amounts
distributed to shareholders, as it distributed at least 95% (90% in 2001) of its
real estate investment trust taxable income and has met certain other
conditions.
Liquidity and Capital Resources
At March 31, 2001 the Company had total assets of $946.7 million,
shareholders' equity of $468.5 million, and long-term debt of $442.6 million,
representing approximately 46.8% of total capitalization. The Company has
revolving credit facilities in place, providing up to $250 million of financing,
of which $195.6 million was drawn at March 31, 2001, leaving $54.4 million
available for working capital and acquisition purposes.
21
As of March 31, 2001, the Company had an aggregate of $308 million of
outstanding debt which matures in 2002, including $123 million of 6.95% Notes
due June 2002 and $185 million on credit facilities expiring in 2002.
The Company has $50 million of funding available through July 1, 2001
pursuant to an Investment Agreement with Explorer Holdings, L.P. ("Explorer")
which can be used, upon satisfaction of certain conditions, to fund growth.
Following the drawing in full or expiration of this commitment, Explorer will
have the option to provide up to an additional $50 million to fund growth for an
additional twelve-month period.
The Company has historically distributed to shareholders a large portion of
the cash available from operations. The Company's historical policy has been to
make distributions on Common Stock of approximately 80% of FFO. Cash dividends
paid totaled $0.50 per common share for the three-month period ended March 31,
2000. No common dividends were paid during the first quarter of 2001.
On February 1, 2001, the Company announced the suspension of all common and
preferred dividends. This action is intended to preserve cash to facilitate the
Company's ability to obtain financing to fund the 2002 debt maturities.
Additionally, on March 30, 2001, the Company exercised its option to pay the
accrued $4,666,667 Series C dividend from November 15, 2000 and the associated
waiver fee by issuing 48,420 Series C preferred shares to Explorer on April 2,
2001, which are convertible into 774,722 shares of the Company's common stock at
$6.25 per share.
The Company anticipates that it will reinstate dividends on its common and
preferred stock when the Company determines that it has sufficient resources or
satisfactory plans to meet its 2002 debt maturities, but the Company can give no
assurance as to when the dividends will be reinstated or the amount of the
dividends if and when such payments are recommenced. Prior to recommencing the
payment of dividends on the Company's Common stock, all accrued and unpaid
dividends on the Company's Series A, B and C Preferred Stock must be paid in
full. The Company has made sufficient distributions to satisfy the distribution
requirements under the REIT rules to maintain its REIT status for 2000 and
intends to satisfy such requirements under the REIT rules for 2001.
Management believes the Company's liquidity and various sources of
available capital are adequate to finance operations, meet debt service
requirements and fund future investments through the next 12 months but is
taking immediate steps to secure a refinancing of such debt, including the
announced suspension of dividends and the pursuit of capital sources for
repayment or replacement of the 2002 debt maturities. As a result of the ongoing
financial challenges facing long-term care operators, the availability of the
external capital sources historically used by the Company has become extremely
limited and expensive, and, therefore, no assurance can be given that the
Company will be able to replace or extend the 2002 debt maturities, or that any
refinancing or replacement financing would be on favorable terms to the Company.
22
If the Company is unable to obtain refinancing or replacement financing, it may
be required to liquidate investments in properties at times which may not permit
realization of the maximum recovery on such investments. This could also result
in adverse tax consequences to the Company.
23
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to various market risks, including the potential
loss arising from adverse changes in interest rates. The Company does not enter
into derivatives or other financial instruments for trading or speculative
purposes, but the Company seeks to mitigate the effects of fluctuations in
interest rates by matching the term of new investments with new long-term fixed
rate borrowing to the extent possible.
The market value of the Company's long-term fixed rate borrowings and
mortgages are subject to interest rate risk. 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 the Company's total
long-term borrowings at March 31, 2001 was $408 million. A one percent increase
in interest rates would result in a decrease in the fair value of long-term
borrowings by approximately $5.5 million.
The Company is subject to risks associated with debt or preferred equity
financing, including the risk that existing indebtedness may not be refinanced
or that the terms of such refinancing may not be as favorable as the terms of
current indebtedness. If the Company were unable to refinance its 2002 debt
maturities or other indebtedness on acceptable terms, it might be forced to
dispose of properties on disadvantageous terms, which might result in losses to
the Company and might adversely affect the cash available for distribution to
shareholders, or to pursue dilutive equity financing. If interest rates or other
factors at the time of the refinancing result in higher interest rates upon
refinancing, the Company's interest expense would increase, which might affect
the Company's ability to make distributions to its shareholders.
The Company utilizes interest rate swaps to fix interest rates on variable
rate debt and reduce certain exposures to interest rate fluctuations. At March
31, 2001, the Company had two interest rate swaps with notional amounts of $32
million each, based on 30-day London Interbank Offered Rates (LIBOR). Under the
first $32 million agreement, the Company receives payments when LIBOR interest
rates exceed 6.35% and pays the counterparties when LIBOR rates are under 6.35%.
The amounts exchanged are based on the notional amounts. The $32 million
agreement expires in December, 2001 but may be extended for an additional year
by the counterparty.
Under the terms of the second agreement, which expires in December, 2002,
the Company receives payments when LIBOR rates exceed 4.89% and pays the
counterparties when LIBOR rates are under 4.89%. The combined fair value of the
interest rate swaps at March 31, 2001 was a deficit of $835,000. (See Note I -
Effect of New Accounting Pronouncements.)
24
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On March 30, 2001, the Company exercised its option to pay the accrued
$4,666,667 Series C dividend from November 15, 2000 and the associated waiver
fee by issuing 48,420 Series C preferred shares to Explorer on April 2, 2001,
which are convertible into 774,722 shares of the Company's common stock at $6.25
per share.
The shares of Series C Preferred are governed by the Articles Supplementary for
Series C Convertible Preferred Stock (the "Articles Supplementary") filed with
the State Department of Assessments and Taxation of Maryland on July 14, 2000.
The shares of Series C Preferred were issued without registration under the
Securities Act of 1933, as amended (the "Securities Act") because the issuance
did not involve a sale within the meaning of the Securities Act and/or in
reliance upon the private placement exemption provided by Section 4(2) of the
Securities Act.
25
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - There are no exhibits filed herewith.
(b) Reports on Form 8-K - none were filed.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMEGA HEALTHCARE INVESTORS, INC.
Registrant
Date: May 15, 2001 By: /s/ Thomas W. Erickson
------------------
Thomas W. Erickson
Interim Chief Executive Officer
Date: May 15, 2001 By: /s/ Richard M. FitzPatrick
----------------------
Richard M. FitzPatrick
Acting Chief Financial Officer
27