10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on April 13, 1999
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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, 1998
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) 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 June 30, 1998
COMMON STOCK, $.10 PAR VALUE 20,161,418
(Class) (Number of shares)
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OMEGA HEALTHCARE INVESTORS, INC
FORM 10-Q
JUNE 30, 1998
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, 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.
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)
4
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
5
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 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 and six-month periods ended June 30, 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 $30.7 million in Principal at December 31,
1997 of which L15 million was represented by an 11.8% subordinated note due June
30, 2000 and $7 million was represented by equity investment. The Company also
provided investment advisory and management services to Principal and from time
to time had advanced temporary loans to Principal.
In November, 1997, the Company formed a separate company, Omega Worldwide,
Inc. (Worldwide) and on April 2 it contributed substantially all of its
Principal assets to Worldwide in exchange for approximately 8.5 million shares
of Worldwide common stock and 260,000 shares of Series B preferred stock. The
Company retained 990,000 ordinary shares of Principal. 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 of Worldwide are 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. A non-recurring gain of $30.2 million was recorded
on the distribution and secondary offerings of Worldwide common shares.
NOTE C -- SECOND QUARTER REAL ESTATE INVESTMENTS
In April, 1998, an additional $15 million purchase consideration was funded
pursuant to an agreement reached with Sun Healthcare Group, Inc. following the
original funding of Regency Health Services in October 1997. This increases the
Company's investment in the Regency facilities to $100.8 million. The yield on
the additional investment is 9.50%. Rent on the additional investment is subject
to the same annual increases as the original investment.
In June, 1998, a $4.3 million Purchase/Leaseback was completed with Sun
Healthcare Group, Inc. The facility, located in West Virginia, has 120 beds. The
initial annual yield on the investment is 9.5%. The facility is operated by Sun.
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NOTE D -- ASSET CONCENTRATIONS
As of June 30, 1998, 94.1% of the Company's real estate investments are
related to long-term care facilities, 2.6% related to rehabilitation hospitals
and 3.3% to medical office facilities. The Company's facilities are located in
28 states and are operated by 29 independent healthcare operating companies.
Approximately 69% of the Company's real estate investments are operated by seven
public companies, including Sun Healthcare Group, Inc. (28.3%), Integrated
Health Services, Inc. (13.1%), Advocat Inc. (12.4%), Paragon Health Network,
Inc. (6.5%) and 3 other public companies (9.1%). Of the remaining operators,
none operate investments in facilities representing more than 5.3% of the total
real estate investments. The three largest states in which investments are
located are Florida (13.1%), Indiana (11.2%) and California (7.6%).
NOTE E -- OTHER PORTFOLIO MATTERS
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.
UNISON HEALTHCARE CORPORATION
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 $43.6 million, or approximately 4.8% of the assets of the Company
at June 30, 1998. Fourteen of the facilities are leased in Indiana and Texas and
six facilities are subject to a mortgage loan of approximately $9.1 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. In
May, Unison Healthcare Corporation (the parent company) filed for bankruptcy
reorganization with the Federal Court for the District of Arizona.
In June, Omega reached an agreement in principle with Unison and
representatives of its existing bondholders with respect to the preparation and
filing of a plan of reorganization of Unison and its subsidiaries. The plan will
involve the conversion of approximately $100 million of the existing senior
unsecured indebtedness and certain other indebtedness of Unison into equity
shares of the reorganized company. Omega has agreed to participate in the
reorganization process by recommending new directors, by reinstating terminated
leases, by purchasing and leasing back seven nursing homes owned by Unison in
Colorado and Arizona, and by investing approximately $3 million in preferred
shares of the reorganized company. Under the plan, Unison will release to Omega
certain nursing homes in Indiana and agree to payments to Omega with respect to
released properties. All existing and newly-financed properties will be subject
to a new master lease with a 14-year lease term with one 14-year extension. The
economic terms of existing properties will continue.
GRADUATE HOSPITAL AND GRADUATE HEALTH SYSTEM
On July 21, 1998, Allegheny Health, Education and Research Foundation
("AHERF") and related entities including Allegheny Hospitals, Centennial
("Centennial") filed voluntary Chapter 11 bankruptcy petitions in the United
States Bankruptcy Court for the Western District of Pennsylvania. On the same
date, AHERF filed an application to obtain bankruptcy court approval of its
Asset Purchase Agreement with Vanguard Health Systems and V-II Acquisition
("Vanguard"). The assets to be purchased by Vanguard include three (3) medical
office buildings and a parking garage all located in Philadelphia, Pennsylvania.
These properties are subject to two (2) operating leases between the Company and
The Graduate Hospital, which was acquired by Allegheny Hospitals, Centennial in
1997, and two (2) operating leases between the Company and Graduate Health
Systems, Inc. ("Operating Leases").
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The Operating Leases are in default for the rental payments due on July 1,
1998 and August 1, 1998. The Company has filed a Motion to Compel Payment of
Administrative Rent in the bankruptcy court and is seeking relief from the
automatic stay so that it can draw against the security deposits held by NBD
Bank, as escrow agent. The Company also intends to vigorously pursue its claim
for administrative rent in the AHERF bankruptcy case. Additionally, the Company
can exercise its various remedies against Graduate Health Systems since it is
not a debtor in the AHERF bankruptcy case. Based on the information available to
it as of August 14, 1998, the Company does not anticipate any loss under the
Operating Leases since Vanguard and other bidders are interested in purchasing
the properties covered by the Operating Leases, and all events of default must
be cured before the Operating Leases can be assumed by the Debtors and assigned
to a successful bidder.
NOTE F -- 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
("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 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. 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 (45,842 shares and 60,694 shares for 1998 and 1997, respectively). The
assumed conversion of convertible debentures is antidilutive.
NOTE H -- 6.95% UNSECURED NOTES
In June 1998, the Company completed the placement of $125 million of
unsecured notes bearing interest when issued at 6.95% and due June 2002. The
notes were priced to yield 7.04%. Net proceeds of approximately $124 million
were used to pay down the Company's credit facility.
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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," 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, 1998
totaled $27.9 million and $54.2 million, respectively, an increase of $5.4
million and $11.7 million, respectively, over the periods ending June 30, 1997.
The 1998 revenue growth stems primarily from additional real estate investments
of approximately $224.8 million during the twelve-month period ending June 30,
1998. Additionally, revenue growth of approximately $1 million stems from
participating incremental net revenues which became effective in 1998. Total
real estate investments of $962 million as of June 30, 1998 have an average
annualized yield of approximately 11.67%.
Expenses for the three-month and six-month periods ended June 30, 1998
totaled $15.2 million and $29.3 million, respectively, an increase of $3.6
million and $7.7 million, respectively, over expenses for 1997. The provision
for depreciation and amortization for the three-month and six-month periods
ended June 30, 1998 totaled $5.8 million and $11.0 million, respectively,
increasing $1.5 million and $3.1 million, respectively, over the same periods in
1997 as a result of additional real estate investments.
Interest expense for the three-month and six-month periods ended June 30,
1998 was $8.1 million and $15.7 million, respectively, compared with $6.1
million and $11.4 million, respectively, for the same periods in 1997. The
increase in 1998 is primarily due to higher average outstanding borrowings
during the 1998 period, offset partially by interest rate savings from
conversions of subordinated debentures and reduced spreads on line of credit
borrowings.
General and administrative expenses for the three-month and six-month
periods ended June 30, 1998 totaled approximately $1.3 million and $2.7 million,
respectively. These expenses for the three-month and six-month periods were
approximately 4.7% and 4.9% of revenues, respectively, as compared to 5.2% and
5.4% of revenues, respectively, for the 1997 three-month and six-month periods.
Net earnings available to common shareholders including the non-recurring
gain of $30.2 million were $40,916,000 and $51,733,000, respectively, for the
three-month and six-month periods. Net earnings available to common shareholders
excluding the non-recurring gain were $10,676,000 and $21,493,000, respectively,
for the three-month and six-month periods, an increase of approximately $645,000
and $1.5 million, respectively, over the 1997 periods. The increase stems from
the various factors mentioned above, offset partially by
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provision for additional preferred dividends on the new Series B preferred
shares. Net earnings per diluted common share excluding the non-recurring gain
increased 1.9% to $.53 and $1.08 for the three-month and six-month periods,
respectively.
Funds from Operations ("FFO") totaled $16.6 million and $32.7 million for
the three-month and six-month periods ending June 30, 1998, representing an
increase of approximately $2.1 million and $4.4 million over the same periods in
1997. FFO is net earnings available to common shareholders, excluding any gains
or losses from debt restructuring and sales of assets, plus depreciation and
amortization associated with real estate investments and charges to earnings for
non-cash common stock based compensation.
At the Company's Board of Directors meeting on July 15, 1998, management
was authorized to initiate a plan to dispose of certain properties judged to
have limited potential and to redeploy the proceeds. While management believes
there is no impairment of the carrying value of the assets to be sold,
redeployment of the proceeds in new investments is expected to result in lower
yields and reductions in funds from operations.
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
The Company has raised capital of approximately $190 million during the
first six months of 1998. 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 net proceeds
from the issuance of Series B Preferred Stock (see note F to the financial
statements) and $125 million from the issuance of unsecured notes (see Note H 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 $1.2 billion in capital since it was organized in
1992. The Company raised more than $500 million in equity, including $130
million 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 Series B preferred stock completed in April 1998. Additionally,
over $700 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
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. In
June 1998, the Company completed a $125 million 4-year senior note offering
priced to yield 7.04%.
As of June 30, 1998, the Company has total assets of $937 million,
shareholders' equity of $524 million, and long-term borrowings of $383 million,
representing 40.9% of the total capitalization. The Company expects to generally
maintain a long-term debt-to-capitalization ratio of approximately 40%. At June
30, 1998, the Company had available borrowings of up to $188,700,000 under its
revolving line of credit arrangement.
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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. During the second quarter of 1998, $175 million of
debt and preferred stock were issued pursuant to the Form S-3.
The Company distributes a large portion of the cash available from
operations. Cash dividends paid totaled $.67 and $1.34 per share for the
three-month and six-month periods ending June 30, 1998 compared with $.645 and
$1.29 per share for the same periods in 1997. The current $.67 per quarter rate
represents an annualized rate of $2.68 per share. Omega's Board of Directors
declared a regular quarterly dividend of $.67 per share to be paid August 14,
1998 to common shareholders of record on July 31, 1998. Additionally, regular
quarterly preferred stock dividends of $.578 per share and $.539 per share, were
declared payable on August 14, 1998 to Series A (9.25%), and Series B (8.625%)
Cumulative Preferred shareholders of record on July 31, 1998, respectively.
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PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
A Board of Directors meeting was held on July 7, 1998 in which Henry H.
Greer was appointed director of the Company with a term ending in 2001. Mr.
Greer was appointed a member of the Compensation Committee.
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 March 31, 1998:
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
Form 8-K dated June 9, 1998: Report with the following exhibits:
Underwriting Agreement dated June 5, 1998 relating to the 6.95%
Notes due 2002
Form of Supplemental Indenture No. 1 dated as of June 1, 1998
relating to the 6.95% Notes due 2002
Opinion of Counsel to the Registrant regarding tax consequences
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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
Exhibit Index
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