10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 15, 1998
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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 JUNE 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 June 30, 1997
COMMON STOCK, $.10 PAR VALUE
(Class)
19,065,324
(Number of shares)
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OMEGA HEALTHCARE INVESTORS, INC
FORM 10-Q
JUNE 30, 1997
INDEX
1
PART I -- 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 six-month period ended June 30, 1997, subordinated
convertible debentures totaling $23,785,000 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)
JUNE 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 six-month periods ended
June 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 - INVESTMENT AND ADVANCES TO PRINCIPAL HEALTHCARE FINANCE LIMITED
The Company has from time to time provided temporary advances to Principal
Healthcare Finance Limited (Principal), a partially-owned affiliate which
provides financing for United Kingdom nursing home operators. Funds advanced
bear interest at 9.25%, and are typically outstanding for no more than ninety
days. At June 30, 1997 the balance of temporary advances to Principal is $12.7
million. In July, the Company made available to Principal a commitment for
additional temporary advances collateralized by a mortgage of L30 million
(approximately $49.8 million) on certain properties. As of the date of this
report, L24.3 million (approximately $40.3 million) has been drawn by Principal
under this commitment.
The Company has also provided Principal a guarantee of borrowings of up to
L46 million (approximately $76.4 million), pending its placement of permanent
financing for a 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
will receive approximately $360,000 plus its costs incurred, as a fee for this
guarantee.
NOTE C -- SECOND QUARTER REAL ESTATE INVESTMENTS
On June 30, 1997 the Company placed a $10,250,000 convertible participating
mortgage loan on three nursing homes located in Kentucky with 283 beds.
NOTE D -- ASSET CONCENTRATIONS
As of June 30, 1997, 95.6% of the Company's real estate investments 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
58% of the Company's real estate investments are operated by 8 public companies:
Advocat, Inc. (16.5%), Sun Healthcare Group, Inc. (14.0%), GranCare, Inc.
(8.6%), Unison Healthcare Corp (6.6%), Regency Health Services, Inc. (5.4%),
Res-Care, Inc. (4.2%), Integrated Health Services, Inc. (1.6%) and Horizon/CMS
Healthcare Corp. (1.4%). Of the remaining 26 independent operators, none operate
investments in facilities representing more than 7.1% of the total real estate
investments.
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.
5
OMEGA HEALTHCARE INVESTORS, INC.
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, commencing on August 15, 1997, to shareholders of record on
July 31, 1997. Proceeds from the issuance of the Preferred Stock were used to
pay down a portion of the borrowings outstanding under the Company's revolving
credit agreement.
NOTE F -- CONVERSION OF SUBORDINATED DEBENTURES
During the three-month period ended June 30, 1997 approximately $2.2
million of subordinated convertible debentures were converted at a conversion
price of $28.625 per share. At June 30, 1997, 2,481,200 shares are reserved for
issuance upon conversion of the remaining debentures.
NOTE G -- 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
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 recently 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 as required under such standard is anti-dilutive.
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. 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 six-month periods ending June 30, 1997
totaled $22.5 million and $42.5 million, respectively, an increase of $4.8
million and $7.7 million, respectively, over the periods ended
6
OMEGA HEALTHCARE INVESTORS, INC.
June 30, 1996. The 1997 revenue growth stems primarily from additional real
estate investments of approximately $140 million during the twelve-month period
ended June 30, 1997. Additionally, revenue growth of approximately $1.0 million
stems from participating incremental net revenues which became effective in
1997. Gross real estate investments of $682 million as of June 30, 1997 have an
average annualized yield of 12.1%.
Expenses for the three-months ended June 30, 1997 totaled $11.6 million, an
increase of $2.4 million over expenses of $9.2 million for 1996. Expenses for
the six-month period ended June 30, 1997 totaled $21.6 million, increasing $3.4
million over the expenses of $18.2 million for the 1996 six-month period. The
provision for depreciation and amortization for the three-month and six-month
periods ending June 30, 1997 totaled $4.3 million and $7.9 million,
respectively, increasing by $0.9 million and $1.1 million, respectively, over
the same periods in 1996 as a result of additional investments.
Interest expense for the three-month and six-month periods ending June 30,
1997 was $6.1 million and $11.4 million, respectively, compared with $4.9
million and $9.5 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 six-month
periods ending June 30, 1997 totaled approximately $1.2 million and $2.3 million
an increase of approximately $425,000 over the six-month period ended June 30,
1996. These expenses for the three-month and six-month periods were
approximately 5.2% and 5.4% of revenues, respectively, as compared to 5.1% and
5.4% of revenues for the 1996 three-month and six-month periods.
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.
Net earnings available to common shareholders were $10,031,000 and
$20,020,000 for the three-month and six-month periods, an increase of
approximately $1.6 million and $3.4 million, respectively, over the 1996 periods
as a result of the various factors mentioned above, partially offset by the
obligation for cumulative preferred dividends in 1997. Net earnings per common
share increased $.04 (8.2%) to $.53 for the three-month period and $.08 (8.2%)
to $1.06 for the six-month period.
Cash provided by operating activities available for distribution and
investment (FAD) for the six-month period ending June 30, 1997 was $29,302,000,
an increase of $5,565,000 (23%) over the 1996 six-month period. FAD is net
earnings, excluding any gains or losses from debt restructuring and sales of
property, plus depreciation and amortization associated with real estate
investments, amortization of deferred financing cost and the net effect of all
other non-cash items included in net earnings available to common shareholders.
Funds From Operations (FFO) totaled $14.5 million and $28.3 million for the
three-month and six-month periods ending June 30, 1997, representing an increase
of $2.5 million and $4.5 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.
7
OMEGA HEALTHCARE INVESTORS, INC.
LIQUIDITY AND CAPITAL RESOURCES
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 an ability to access the capital markets by
raising more than $950 million in capital since it was organized in 1992. The
Company has 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 HEP acquisition in 1994 and $57 million
from a preferred stock offering completed in April 1997. Additionally, nearly
$500 million of debt capital has been raised, some of which has been used to
retire secured borrowing debt 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 revolving line of credit
facility by $50 million and to extend the term of the revolving credit agreement
to July 1999. The increase in the revolving line of credit facility allows for
an additional $25 million, plus the equivalent of $25 million in a pounds
sterling denominated term loan due in October, 2000 for a total permitted
borrowings of up to $150 million.
In February 1997, the Company filed two shelf registration statements with
the Securities and Exchange Commission permitting the issuance of up to $250
million of securities. The Company registered up to $150 million related to
common stock, unspecified debt, preferred stock, and convertible securities
which may be issued from time to time in connection with a Registration
Statement on Form S-3. After the preferred stock offering, approximately $94
million remains under this registration statement. Additionally, the Company
registered on Form S-4 common stock totaling $100 million to be issued in
connection with future property acquisitions.
As of June 30, 1997, the Company has total assets of approximately $732
million, shareholders' equity of $459 million, and long-term borrowings of $205
million, representing 28% 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 June 30, 1997 the Company had
available permitted additional borrowings of $74.1 million under its revolving
line of credit arrangement, of which approximately $35 million has been
subsequently drawn to fund additional investments.
The Company distributes a large portion of the cash available from
operations. Cash dividends paid totaled $0.645 and $1.29 per share for the
three-month and six-month periods ending June 30, 1997, compared with $0.62 and
$1.24 per share for the same periods in 1996. On July 16, 1997, the Board of
Directors declared a quarterly common dividend of $.645 per share, payable on
August 15, 1997 to common shareholders of record on August 4, 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 August 15, 1997 to Series A (9.25%) Cumulative Preferred
shareholders of record on July 31, 1997.
8
OMEGA HEALTHCARE INVESTORS, INC.
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 report on Form 8-K was filed since March 31, 1997
Form 8-K dated April 25, 1997: Report with exhibits in connection
with issuance of Class A Cumulative Preferred Stock
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
9
EXHIBIT INDEX