10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 13, 1997
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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 SEPTEMBER 30, 1997
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
(State of Incorporation)
38-3041398
(I.R.S. Employer Identification No.)
905 W. EISENHOWER CIRCLE, SUITE 110, ANN ARBOR, MI 48103
(Address of principal executive offices)
(313) 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of October 31, 1997
COMMON STOCK, $.10 PAR VALUE
(Class)
19,248,806
(Number of shares)
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OMEGA HEALTHCARE INVESTORS, INC
FORM 10-Q
SEPTEMBER 30, 1997
INDEX
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, 1996 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.
2
OMEGA HEALTHCARE INVESTORS, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See notes to condensed consolidated financial statements.
3
OMEGA HEALTHCARE INVESTORS, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
NOTE -- During the nine-month period ended September 30, 1997, subordinated
convertible debentures totaling $26,720,000 were converted at a price of
$28.625 per share.
See notes to condensed consolidated financial statements.
4
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements 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 and nine-month periods
ended September 30, 1997, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1997. 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, 1996.
NOTE B -- PRINCIPAL HEALTHCARE FINANCE LIMITED
In July 1995, the Company became a primary sponsor of Principal Healthcare
Finance Limited (Principal). Principal is an Omega-affiliated company which
provides sale/leaseback financing to the healthcare and nursing home industry in
the United Kingdom. In October 1996, Principal completed a private placement of
equity primarily with U.K. institutional investors. Following the placement the
Company owns, directly or indirectly, non-voting shares of Principal
representing an aggregate equity investment of approximately $7 million. The
Company also has invested approximately $23 million in the form of a pounds
sterling denominated subordinated loan due December 31, 2000.
The Company has from time to time provided temporary advances to Principal.
Funds advanced to Principal bear interest at 9.25%, and are typically
outstanding for no more than ninety days. At September 30, 1997, the balance of
temporary advances to Principal is $12.7 million. In July 1997, the Company made
available to Principal a commitment for additional advances collateralized by a
mortgage of L30 million (approximately $48.9 million) on certain properties
owned by Principal. At September 30, 1997, L29.3 million ($47.8 million) is
outstanding under this commitment, with such investments classified as other
investments. On October 3, 1997, Principal repaid the entire outstanding balance
of temporary advances and mortgage loans.
In July, 1997, the Company provided Principal a guarantee of borrowings of
up to 46 million (approximately $75 million), pending its placement of permanent
financing for the purchase of a public company which operates nursing homes in
the United Kingdom, which homes have been leased to independent third party
nursing home operators. As of the date of this report, Principal has borrowed
substantially all of the funds available subject to such guarantee. The Company
received a fee for this guarantee of approximately $360,000, of which
approximately $260,000 was recognized as earned in the three-month period ended
September 30, 1997.
NOTE C -- THIRD QUARTER REAL ESTATE INVESTMENTS
During the 1997 third quarter, the Company consummated a purchase from Lake
Park Nursing and Retirement Center, Inc. of two skilled nursing facilities with
a total of 364 beds for the purchase consideration of $6,600,000. The facilities
are located in Texas and will be operated by Lake Park Nursing and Retirement
Center, Inc. The initial term of the lease is ten years, with two options to
extend for an additional ten years each. The lease provides initial monthly
rents of approximately $705,000.
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NOTE D -- ASSET CONCENTRATIONS
As of September 30, 1997, 95.6% of the Company's real estate investments
are related to long-term care facilities. The Company's facilities are located
in 26 states and are operated by 34 independent healthcare operating companies.
Approximately 59% of the Company's real estate investments are operated by 7
public companies: Sun Healthcare Group, Inc. (20.6% after giving consideration
to the merger with Regency Health Services, Inc. as described in Note J),
Advocat, Inc. (16.4%), Paragon Health Network, Inc., formerly GranCare, Inc.
(8.5%), Unison Healthcare Corp. (6.5%), Res-Care, Inc. (4.1%), Integrated Health
Services, Inc. (1.6%) and CMS Health South, formerly Horizon/CMS Healthcare
Corp. (1.4%). Of the remaining 26 independent operators, none operate
investments in facilities representing more than 7% of the total real estate
investments. The three largest states in which investments are located are
Indiana (14.7%), Florida (11.6%) and Texas (9.1%).
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.
On November 11, 1997 Unison HealthCare Corporation ("Unison") announced
that it had yet to make a $6.6 million interest payment due November 1, 1997 to
the holders of its 12 1/4% Senior Notes (with a grace period which expires on
November 30, 1997). Unison's press release indicates that they are pursuing
finance proposals and other alternatives to address liquidity issues. Unison is
currently 30 days past due with payments to the Company. The Company's
investment with Unison represents approximately $45 million related to
approximately 2,000 beds and 5.3% of total investments of the Company as of the
date of this report and approximately 6.0% of annualized revenues at the same
date. The Company holds $4 million in cash as additional security for payment
and performance by Unison and also holds the personal guarantee of a principal
shareholder of Unison in an amount not less than $5.2 million.
The Company has, on a periodic basis, received financial information on the
operating results of each individual facility which it has leased or with
respect to which it has a mortgage loan to Unison. Based upon that information,
the facilities which are security for the leases and loans to Unison appear to
provide cash flows exceeding the payments due to the Company. Coverages for the
Unison facilities in the Company's portfolio have been trending upward since
December 1996, as have the occupancy rates for those facilities.
The Company continues to monitor the situation at Unison so as to exercise
appropriate steps to protect the interests of the Company. The Company has
provided notice to Unison of payment and certain other defaults. The Company
believes there will be no material adverse effect on its financial position or
results of operations as a result of Unison's current financial situation.
However, there can be no assurance that there will be no further adverse
financial developments with Unison.
NOTE E -- PREFERRED STOCK
In April 1997, the Company issued 2.3 million shares of 9.25% Series A
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. The first dividend was paid on August 15, 1997.
NOTE F -- 6.95% UNSECURED NOTES
In August 1997 the Company completed the placement of $100 million of
unsecured notes bearing interest when issued at 6.95% and due 2007. The notes
were priced to yield 6.99%. Interest on the notes is payable semiannually on
February 1 and August 1.
NOTE G -- CONVERSION OF SUBORDINATED DEBENTURES
During the three-month period ended September 30, 1997, approximately $2.9
million of subordinated convertible debentures were converted at a conversion
price of $28.625 per share. At September 30, 1997, approximately 2,378,700
shares are reserved for issuance upon conversion of the remaining debentures.
NOTE H -- REVOLVING CREDIT FACILITY
On September 30, 1997, the Company consummated a second amended and
restated loan agreement with Fleet Bank, as agent, Harris Trust and Savings
Bank, Dresdner Bank AG and NBD Bank as co-agents,
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and the signatory banks thereto. The 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.
NOTE I -- NET EARNINGS PER SHARE
Net earnings per share is computed based on the weighted average number of
common shares outstanding during the respective periods. Though not yet all
declared, cumulative preferred dividends are reported as a reduction of net
operating earnings available for distribution to the holders of common shares of
stock. The inclusion of options using the treasury stock method and the assumed
conversion of debentures is not dilutive.
The Financial Accounting Standards Board issued statement No. 128,
"Earnings per Share". This new standard is not expected to have a material
effect on reported per share amounts, primarily because the assumed conversion
of debentures presently is anti-dilutive.
NOTE J -- SUBSEQUENT EVENTS
On October 8, 1997, the Company repaid its $25 million bank term loan upon
receipt of proceeds from repayment of advances and loans to Principal.
On October 8, 1997, the Company purchased from Regency Health Services,
Inc. twenty-four nursing homes and two rehabilitation hospitals, comprising
2,256 total beds for a purchase price of $85.8 million. The facilities are
located in California, North Carolina, Ohio and West Virginia. Simultaneously,
Sun Healthcare Group Inc., whose subsidiaries will operate these facilities
under an initial fourteen-year lease arrangement at an initial annual rental of
approximately $8.3 million, acquired Regency Health Services, Inc. This purchase
increases the Company's assets operated by Sun Healthcare Group, Inc. and
subsidiaries to approximately $227.4 million, representing 26.8% of total
investments at the date of this filing.
Sun Healthcare Group, Inc. is a public company and NYSE listed company and
therefore it files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Following is consolidated summarized financial information of Sun
Healthcare Group, Inc. and subsidiaries for the periods ended June 30, 1997,
December 31, 1996, and June 30, 1996, which were derived from reports filed with
the Commission:
On October 7, 1997 the Company provided a $10.7 million bridge loan in
connection to its commitment to purchase seven facilities in Iowa with 591 beds
from Five Star Care Corp. for total consideration of approximately $14 million.
The final funding of this commitment is expected to close before November 15,
1997. The 14-year lease will have an initial annual yield of 10.5%.
On October 15, 1997 the Company's Board of Directors declared a dividend
payable to common shareholders of record on October 31, 1997 to be paid on
November 14, 1997. Additionally, a regular quarterly dividend of $.578125 per
share was declared for holders of 9.25% Series A Cumulative Preferred Stock for
shareholders of record on October 31, 1997 to be paid November 14, 1997.
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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 and nine-month periods ending September 30,
1997 totaled $23.6 million and $66.1 million, respectively, an increase of $4.8
million and $12.4 million, respectively, over the periods ended September 30,
1996. The 1997 revenue growth stems primarily from additional real estate
investments of approximately $142.3 million during the twelve-month period ended
September 30, 1997. Additionally, revenue growth of approximately $1,500,000
stems from participating incremental net revenues which became effective in
1997. Gross real estate investments of $688 million as of September 30, 1997
have an average annualized yield of approximately 12.1%.
Expenses for the three-months ended September 30, 1997 totaled $11.8
million, an increase of $1,800,000 over expenses of $10.0 million for 1996.
Expenses for the nine-month period ended September 30, 1997 totaled $33.4
million, increasing $5,200,000 over the expenses of $28.2 million for the 1996
six-month period. The provision for depreciation and amortization for the
three-month and nine-month periods ended September 30, 1997 totaled $4,300,000
and $12,200,000 respectively, increasing $900,000 and $2,000,000 respectively,
over the same periods in 1996 as a result of additional investments.
Interest expense for the three-month and nine-month periods ended September
30, 1997 was $6.3 million and $17.7 million, respectively, compared with $5.6
million and $15.1 million, respectively, for the same periods in 1996. The
increase in 1997 is primarily due to higher average outstanding borrowings
during the 1997 period, partially offset by slightly lower interest rates.
General and administrative expenses for the three-month and nine-month
periods ended September 30, 1997 totaled approximately $1,200,000 and $3,500,000
respectively. These expenses for the three-month and nine-month periods were
approximately 5.0% and 5.3% of revenues, respectively, as compared to 5.3% and
5.4% of revenues for the 1996 three-month and nine-month periods.
Net earnings available to common shareholders were $10,474,000 and
$30,494,000 for the three-month and nine-month periods, an increase of
approximately $1.7 million and $5.0 million, respectively, over the 1996
periods. The increases stem from the various factors mentioned above, partially
offset by the obligation for cumulative preferred dividends in the second and
third quarters of 1997. Net earnings per common share increased 7.8% to $.55 for
the three-month period and 8.1% to $1.61 for the nine-month period.
8
Funds from Operations ("FFO") totaled $14.9 million and $43.2 million for
the three-month and nine-month periods ending September 30, 1997, representing
an increase of approximately $2.5 million and $7.0 million, respectively, over
the same periods in 1996. 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
As of September 30, 1997, the Company has total assets of $781 million,
shareholders' equity of $461 million, and long-term borrowings of $302 million,
representing 39% 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 September 30, 1997, the
Company had available permitted borrowings of $168.5 million under its revolving
line of credit arrangement, of which an additional $21 million was subsequently
drawn to fund additional investments.
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 $450 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 two additional offerings, the latest represented by the offering of
preferred stock completed in April 1997. 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 its 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 executed a Second
Amended and Restated Loan Agreement with its banks. 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.
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 $0.645 and $1.935 per share for the
three-month and nine-month periods ending September 30, 1997, compared with
$0.62 and $1.86 per share for the same periods in 1996. On October 15, 1997, the
Board of Directors declared a quarterly common dividend of $.645 per share,
payable on November 14, 1997 to common shareholders of record on October 31,
1997. The current $.645 per quarter rate represents an annualized rate of $2.58
per share. Additionally, a regular quarterly preferred stock dividend of $.578
per share was declared payable on November 14, 1997 to Series A (9.25%)
Cumulative Preferred shareholders of record on October 31, 1997.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS -- THE FOLLOWING EXHIBITS ARE FILED HEREWITH:
(B) REPORTS ON FORM 8-K:
The following reports on Form 8-K were filed since June 30, 1997:
Form 8-K dated August 5, 1997: Report with the following exhibits:
Underwriting Agreement dated July 31, 1997 relating to the 6.95%
Notes due 2007
Form of Supplemental Indenture No. 1 dated August 5, 1997 relating
to the 6.95% Notes due 2007
Form 8-K dated November 10, 1997: Report with the following exhibits:
Bylaws of Omega Healthcare Investors, Inc. as Amended and Restated
on October 15, 1997
Second Amended and Restated Loan Agreement by and among Omega
Healthcare Investors, Inc., the banks signatory hereto and Fleet Bank,
N.A., as agent for such banks, dated September 30, 1997
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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
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INDEX TO EXHIBITS