10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on July 28, 1997
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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.)
905 W. EISENHOWER CIRCLE, SUITE 110, ANN ARBOR, MI 48103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(734) 747-9790
(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
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INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK AS OF MARCH 31, 1998
COMMON STOCK, $.10 PAR VALUE 19,635,322
(CLASS) (NUMBER OF SHARES)
OMEGA HEALTHCARE INVESTORS, INC
FORM 10-Q
MARCH 31, 1998
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
BALANCE SHEETS
MARCH 31, 1998 (UNAUDITED)
AND DECEMBER 31, 1997...................................... 2
STATEMENTS OF OPERATIONS (UNAUDITED)-
THREE-MONTH PERIODS
ENDED MARCH 31, 1998 AND 1997.............................. 3
STATEMENT OF CASH FLOWS (UNAUDITED)-
THREE-MONTH PERIODS
ENDED MARCH 31, 1998 AND 1997.............................. 4
STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)-
THREE-MONTH PERIOD
ENDED MARCH 31, 1998 ...................................... 5
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998 (UNAUDITED)................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................. 9
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................... 13
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OMEGA HEALTHCARE INVESTORS, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
Note - The balance sheet at December 31, 1997, has been derived from audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See notes to condensed consolidated financial statements.
OMEGA HEALTHCARE INVESTORS, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In Thousands, Except Per Share Amounts)
See notes to condensed consolidated financial statements.
OMEGA HEALTHCARE INVESTORS, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In Thousands)
See notes to condensed consolidated financial statements.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
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 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) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31, 1998, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. 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, 1997.
NOTE B - PRINCIPAL HEALTHCARE FINANCE LIMITED AND OMEGA WORLDWIDE, INC.
In 1995 the Company sponsored the organization of Principal Healthcare
Finance Limited (Principal), an Isle of Jersey company, whose purpose is to
invest in nursing homes and long-term care facilities in the United Kingdom. The
Company had invested approximately $7 million for 4,327,500 ordinary shares of
Principal and owned approximately 43% of the outstanding ordinary shares at
December 31, 1997 together with a (pound)15 million principal amount
subordinated debenture due June 30, 2000 and warrants to purchase 10,555,000
ordinary shares. The Company also provided investment advisory and management
services to Principal and from time to time had advanced temporary loans to
Principal. At December 31, 1997 Principal owned and leased to operators 154
facilities representing approximately 7,200 nursing homes beds in England,
Scotland and Northern Ireland for which it had invested approximately (pound)215
million.
In November, 1997, the Company formed a separate company, Omega
Worldwide, Inc. (Worldwide) and determined to contribute substantially all of
its Principal assets to Worldwide in exchange for approximately 8.5 million
shares of Worldwide common stock, reserving in the Company only 990,000 ordinary
shares of Principal (approximately 9%). Of the 8,500,000 shares of Worldwide
received by the Company, approximately 5,200,000 were distributed on April 2,
1998 to the shareholders of the Company on the basis of one Worldwide share for
every 3.77 common shares of the Company held by shareholders of the Company on
the record date of February 1, 1998. Of the remaining 3,300,000 shares of
Worldwide received by the Company, approximately 1,000,000 shares or
approximately 9% of Worldwide are being held by the Company, and the other
2,300,000 shares were sold by the Company on April 3, 1998 for net proceeds of
approximately $16,250,000 in a
Secondary offering pursuant to a registration statement of Worldwide. The
market value of the distribution to shareholders approximates $39 million
or $1.99 per share. The proceeds from the secondary offering and other
consideration received by the Company in the exchange will exceed the carrying
value of the interests transferred by an amount in the range of $29 million to
$34 million. The carrying value of the interests transferred by the Company to
Worldwide will exceed the consideration received by an amount in the range of
$5 million to $10 million.
NOTE C - FIRST QUARTER REAL ESTATE INVESTMENTS
In January, 1998, the Company purchased five nursing homes containing
628 nursing beds in Florida, Illinois, Pennsylvania and New Hampshire from
subsidiaries of Integrated Health Services, Inc (NYSE:IHS) for $44,900,000. The
related lease agreement with Lyric Health Care Holdings, Inc., an affiliate of
IHS, has an initial term of thirteen years, with two options to renew for
thirteen years. Initial rents are $4,490,000 annually.
During February, 1998 the Company completed a Purchase/Leaseback with
Lake Park Nursing and Retirement Center, Inc. for one nursing home in Texas
with a total of 102 beds for a purchase consideration of approximately $2.4
million. The facility is operated by Senior Care Properties, Inc. The lease
provides initial annual rents of approximately $266,253 and an initial annual
yield of 10.90%.
On March 13, 1998 the Company placed a $12 million mortgage with
Integrated Health Services for two nursing homes in Georgia with a total of 304
beds. The mortgage provides initial annual revenues of approximately $1,152,000.
The initial annual yield on the investment is 9.6%.
In March, 1998, the Company purchased five nursing homes containing 734
nursing beds in Florida, Pennsylvania, and Ohio from subsidiaries of Integrated
Health Services, Inc. (NYSE:IHS) for a purchase price of $50,500,000. The
related lease agreement with Lyric Health Care Holdings II, Inc., has an initial
term of thirteen years, with two options to renew for thirteen years. Initial
rents are $4,949,000 annually.
NOTE D - ASSET CONCENTRATIONS
As of March 31, 1998, 90.5% of the Company's real estate investments
are related to long-term care facilities, 3.4% related to rehabilitation
hospitals and 2.7% to medical office facilities. The Company's facilities are
located in 28 states and are operated by 29 independent healthcare operating
companies. Approximately 67.6% of the Company's real estate investments are
operated by seven public companies, including Sun Healthcare Group, Inc.
(25.62%), Integrated Health Services, Inc. (13.35%), Advocat Inc. (12.7%),
Paragon Health Network, Inc. (6.62%) and 3 other public companies (9.3%). Of the
remaining independent operators, none operate investments in facilities
representing more than 5.4% of the total real estate investments. The three
largest states in which investments are located are Florida (13.4%), Indiana
(11.4%) and Texas (7.0%).
In the ordinary course of its business activities, the Company
periodically evaluates investment opportunities and extends credit to customers.
It also is regularly engaged in lease and loan extensions and modifications and
believes its management has the experience and expertise to
deal with such issues as may arise from time to time.
Through two subsidiaries (BritWill I and BritWill II) and an affiliated
partnership (BritWill Indiana Partnership) (the "BritWill Entities") Unison
Healthcare Corporation (the "Tenant") currently operates twenty nursing homes
representing approximately 2,000 licensed nursing beds with a total Company
investment of $43.5 million, or approximately 4.6% of the assets of the Company
at March 31, 1998. Fourteen of the facilities are leased in Indiana and Texas
and six facilities are subject to a mortgage loan of approximately $9 million.
At December 31, 1997 Unison was in default under several provisions of its lease
agreement and mortgage notes with the Company, including non-payment of rents
and interest totaling $1.5 million. Pursuant to due notice, the Company as of
January 2, 1998, terminated the leases with respect to fourteen properties and
accelerated the indebtedness with respect to six properties. Subsequently in
January 1998, the BritWill Entities filed for protection under the bankruptcy
code in order to stay the Company's recovery of possession of the premises.
At January 1, 1998, the Company held cash deposits totaling
approximately $3.9 million as security for the performance by the BritWill
Entities of their obligations and, in addition, held the guarantee of the Tenant
and the personal guarantee of its Chairman of the Board. In January, 1998, the
Company applied $1.6 million from the cash deposits held to reduce the mortgage
indebtedness and interest due thereunder; the Company continues to hold
approximately $2.3 million in liquidity and security deposits.
The Company has vigorously pursued its remedies under various
agreements, guarantees and undertakings, has applied to the bankruptcy court for
relief from the automatic bankruptcy stay and has also filed an action in
Federal court and then refiled in Texas court to enforce the guarantee of the
Chairman of the Board of Directors of the Tenant. The company has also requested
and been granted an order compelling payment in an amount equal to the monthly
rent which would have been payable by the BritWill Entities under the leases.
The BritWill Entities have made payments of $362,675 monthly for each month to
date in 1998.
Because the Company has been advised by bankruptcy counsel that
BritWill Entities lease certain Texas properties from an affiliated partnership
to which the automatic stay may be applicable, the Company has suspended its
Texas state foreclosure proceedings and its claim under the Tenant's guarantee,
pending action by the bankruptcy court to lift the automatic stay.
The Tenant requested that the Company enter into negotiations to
reinstate or renew its leases and reinstate the mortgage. While the Company has
continued to pursue its legal remedies in bankruptcy and in Texas state courts,
it has also begun negotiations with the Tenant and the holders of the Tenant's
senior and subordinated bonds. Such negotiations are in a preliminary stage and
no assurance can be given that such negotiations will achieve a result
satisfactory to the Company. The Company believes that there will be no material
adverse effect on its financial condition or results of operations as a result
of the bankruptcy and expects that it will either recover possession of its
assets in order to lease them to others or will come to agreement with respect
to their continued operation by the Tenant. However, there can be no assurance
that further adverse financial developments with the tenant or in the bankruptcy
proceeding will not occur.
NOTE E - PREFERRED STOCK
On April 28, 1998, the Company issued 2 million shares of 8.625% Series
B Cumulative Preferred Stock ("Preferred Stock") at $25 per share. Dividends on
the Preferred Stock are cumulative from the date of original issue and are
payable quarterly commencing on August 15, 1998. On April 7, 1997, the Company
issued 2.3 million shares of 9.25% Series A Cumulative Preferred Stock
at $25 per share. Dividends on the Series A Preferred Stock are cumulative
from the date of original issue and are payable quarterly.
NOTE F - NET EARNINGS PER SHARE
Net earnings per share is computed based on the weighted average number
of common shares outstanding during the respective periods. Per share amounts
for prior periods have been restated as required by the Financial Accounting
Standards Board Statement No. 128. Among the changes stemming from the new
pronouncement is a requirement to present both basic and diluted per share
amounts. Diluted earnings per share amounts reflect the dilutive effect of stock
options (99,683 shares and 62,472 shares for 1998 and 1997, respectively).
NOTE G - SUBSEQUENT EVENTS
During April, 1998 approximately $ 13.5 million of subordinated
convertible debentures were converted at a conversion price of $26.962 per share
for a total of 501,809 shares. In connection with the formation and
distribution of the shares of Omega Worldwide, Inc. as of April 2, 1998 the
conversion price was reduced in accordance with the Indenture from $28.625 per
share.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
"Safe Harbor" Statements Under the United States Private Securities
Litigation Reform Act of 1995. Statements contained in this document that are
not based on historical fact are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include statements regarding the Company's future development
activities, the future condition and expansion of the Company's markets, the
Company's ability to meet its liquidity requirements and the Company's growth
strategies, as well as other statements which may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "estimate,"
"anticipate," "continue," or similar terms, variations of those terms or the
negative of those terms. Statements that are not historical facts contained in
Management's Discussion and Analysis are forward-looking statements that involve
risks and uncertainties that could cause actual results to differ from projected
results. Some of the factors that could cause actual results to differ
materially include: The financial strength of the operators of the Company's
facilities
as it affects their continuing ability to meet their obligations to the Company
under the terms of the Company's agreements with such operators; changes in the
reimbursement levels under the Medicare and Medicaid programs; operators'
continued eligibility to participate in the Medicare and Medicaid programs;
changes in reimbursement by other third party payors; occupancy levels at the
Company's facilities; the availability and cost of capital; the strength and
financial resources of the Company's competitors; the Company's ability to make
additional real estate investments at attractive yields and changes in tax laws
and regulations affecting real estate investment trusts.
Following is a discussion of the consolidated financial condition and
results of operations of the Company, which should be read in conjunction with
the consolidated financial statements and accompanying notes.
RESULTS OF OPERATIONS
Revenues for the three-month period ending March 31, 1998 totaled $26.3
million an increase of $6.3 million over the period ending March 31, 1997. The
1998 revenue growth stems primarily from additional real estate investments of
approximately $216.6 million during the twelve-month period ending March 31,
1998. Total real estate investments of $ 888 million as of March 31, 1998 have
an average annualized yield of approximately 11.71%.
Expenses for the three-months ended March 31, 1998 totaled $14.1
million, an increase of $4.1 million over expenses for 1997. The provision for
depreciation and amortization for the three-month period ended March 31, 1998
totaled $5,127,000, increasing $1,558,000, over the same periods in 1997 as a
result of additional real estate investments.
Interest expense for the three-month period ended March 31, 1998 was
$7.6 million, compared with $5.3 million for the same period in 1997. The
increase in 1998 is primarily due to higher average outstanding borrowings
during the 1997 period, offset partially by slightly lower interest rates.
General and administrative expenses for the three-month period ended
March 31, 1998 totaled approximately $1,365,000. These expenses for the
three-month period were approximately 5.2% of revenues, as compared to 5.7% of
revenues for the 1997 three-month period.
Net earnings available to common shareholders were $10,817,000 for the
three-month period, an increase of approximately $828,000 over the 1997 period.
The increase stems from the various factors mentioned above, offset partially by
the payment of preferred stock dividends in the first quarter of 1998. Net
earnings per common share increased 3.8% to $.55 for the three-month period.
Funds from Operations ("FFO") totaled $16.1 million for the three-month
period ending March 31, 1998, representing an increase of approximately $2.3
million over the same period in 1997. FFO is net earnings available to common
shareholders, excluding any gains or losses from debt restructuring and sales of
property, plus depreciation and amortization associated with real
estate investments and charges to earnings for non-cash common stock based
compensation.
At all times, the Company intends to make and manage its investments
(including the sale or disposition of property or other investments) and to
operate in such a manner as to be consistent with the requirements of the
Internal Revenue Code of 1986, as amended (or regulations thereunder) to qualify
as a REIT, unless because of changes in circumstance or changes in the Code (or
regulations thereunder), the Board of Directors determines that it is no longer
in the best interests of the Company to qualify as a REIT. As such, it generally
will not pay federal income taxes on the portion of its income which is
distributed to shareholders.
LIQUIDITY AND CAPITAL RESOURCES
In April, 1998, the Company received approximately $17,250,000 gross
proceeds from the sale of shares of Worldwide (see Note B to the financial
statements). It also raised approximately $48 million from proceeds of the
issuance of Series B Preferred Stock (see Note E to the financial statements).
The Company continually seeks new investments in healthcare real estate
properties, primarily long-term care facilities, with the objective of
profitable growth and further diversification of the investment portfolio.
Permanent financing for future investments is expected to be provided through a
combination of both private placement and public offerings of debt and/or equity
securities. Management believes the Company's liquidity and various sources of
available capital are adequate to finance operations, fund future investments in
additional facilities, and meet debt service requirements.
The Company has demonstrated a strong capacity to access the capital
markets by raising more than the $1 billion in capital since it was organized in
1992. The Company raised more than $500 million in equity, including $130 from
the initial public offering in 1992, $73 million from a follow-on common stock
offering in 1994, $165 million from the Health Equity Properties acquisition in
1994 and three additional offerings, the latest represented by the offering of
preferred stock completed in April 1998. Additionally, over $600 million of debt
capital has been raised, some of which has been used to retire secured
borrowings with higher interest rates. In 1996, the Company completed a
placement of $95 million of 8.5% Convertible Subordinated Debentures due 2001,
and executed an agreement to increase it current bank line of credit facility by
$50 million and to extend the term of the revolving credit agreement to July
1999. In August 1997 the Company completed a $100 million 10-year senior note
offering priced to yield 6.99%. In September 1997 the Company completed the
second amended and restated loan agreement. The new agreement provides for total
permitted borrowings of up to $200 million, reduces interest rates on
borrowings, and extends the term of the agreement to September 2000.
As of March 31, 1998, the Company has total assets of $941 million,
shareholders' equity of $467 million, and long-term borrowings of $271 million,
representing 29% of the total capitalization. The Company anticipates eventually
attaining and then expects to generally maintain a long-term
debt-to-capitalization ratio of approximately 40%. At March 31, 1998, the
Company had available permitted borrowings of $10,167,000 under its revolving
line of credit arrangement.
In February 1997, the Company filed a Form S-4 shelf registration
statement with the Securities and Exchange Commission registering common stock
totaling $100 million to be issued in connection with future property
acquisitions. Additionally, on August 29, 1997 the Company filed a Form S-3
registration statement with the Securities and Exchange Commission permitting
the issuance of up to $200 million related to common stock, unspecified debt,
preferred stock and convertible securities.
The Company distributes a large portion of the cash available from
operations. Cash dividends paid totaled $0.67 per share for the three-month
period ending March 31, 1998 compared with $0.645 per share for the same period
in 1997. The current $.67 per quarter rate represents an annualized rate of
$2.68 per share. Omega's Board of Directors has declared a regular quarterly
dividend of $.67 per share to be paid May 15, 1998 to common shareholders of
record on April 30, 1998. Additionally, a regular quarterly preferred stock
dividend of $.578 per share was declared payable on May 15, 1998 to Series A
(9.25%) Cumulative Preferred shareholders of record on April 30, 1998.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(A) THE COMPANY'S ANNUAL MEETING OF SHAREHOLDERS WAS HELD ON
MAY 7, 1998.
(B) THE FOLLOWING DIRECTORS WERE RE-ELECTED AT THE MEETING FOR A
THREE-YEAR TERM:
Edward Lowenthal
Robert L. Parker
The following Directors were not elected at the meeting but their term of office
continued after the meeting:
Essel W. Bailey, Jr.
Martha A. Darling
James E. Eden
Thomas F. Franke
Harold J. Kloosterman
Bernard J. Korman
(C) IN ADDITION TO THE ELECTION OF DIRECTORS, STOCKHOLDERS WERE
REQUESTED TO VOTE ON THE APPROVAL OF THE COMPANY'S 1993 STOCK
OPTION AND RESTRICTED STOCK PLAN AS AMENDED AND RESTATED. THE
RESULTS OF THE VOTING ON THE TWO ISSUES WERE AS FOLLOWS:
(D) NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS - THE FOLLOWING EXHIBITS ARE FILED HEREWITH:
EXHIBIT DESCRIPTION
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27 Financial Data Schedule
(B) REPORTS ON FORM 8-K:
The following reports on Form 8-K were filed since December 31,
1997:
Form 8-K dated April 15, 1998: Report with the following exhibits:
Press Release dated April 2, 1998
Pro Forma Consolidated Statement of Operations Year Ended
December 31, 1997
Form 8-K dated April 27, 1998: Report with the following exhibits:
Underwriting Agreement
Omega Healthcare Investors, Inc. Articles Supplementary
Tax Opinion from Argue Pearson Harbison & Myers LLP
Form 8-K dated April 30, 1998: Report with the following exhibits:
First Amendment of Purchase Agreement, Master Lease
Agreement, Facility Leases and Guaranty between Delta
Investors I, LLC and Sun Healthcare Group, Inc.
First Amendment of Purchase Agreement, Master Lease
Agreement, Facility Leases and Guaranty between Delta
Investors II, LLC and Sun Healthcare Group, Inc.
Pro Forma Consolidated Statements of Operations for the Year
Ended December 31, 1997
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, 1998 By: /s/ ESSEL W. BAILEY, JR.
-----------------------------------
Essel W. Bailey, Jr.
President
Date: May 15, 1998 By: /s/ DAVID A. STOVER
-----------------------------------
David A. Stover
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
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27 FINANCIAL DATA SCHEDULE