10-Q: Quarterly report pursuant to Section 13 or 15(d)

Published on August 5, 2015

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

(Mark One)

               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

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)

 

(IRS Employer

Identification No.)

 
200 International Circle, Suite 3500, Hunt Valley, MD 21030
(Address of principal executive offices)
 
(410) 427-1700
(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 ☒                                  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ☒                                   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one:)

 

Large accelerated filer   ☒                     Accelerated filer   ☐                     Non-accelerated filer   ☐                     Smaller reporting company   ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐                                   No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of July 30, 2015.

     
Common Stock, $.10 par value   183,816,001
(Class)   (Number of shares)

  

 
 

 

OMEGA HEALTHCARE INVESTORS, INC.

FORM 10-Q

June 30, 2015 

       
TABLE OF CONTENTS
 
      Page
      No.
PART I Financial Information    
       
Item 1. Financial Statements:    
  Consolidated Balance Sheets June 30, 2015 (unaudited) and December 31, 2014   2
       
  Consolidated Statements of Operations and Comprehensive Income (unaudited) Three and Six months ended June 30, 2015 and 2014   3
       
  Consolidated Statement of Changes in Equity (unaudited) Six months ended June 30, 2015   4
       
  Consolidated Statements of Cash Flows (unaudited) Six months ended June 30, 2015 and 2014   5
       
  Notes to Consolidated Financial Statements June 30, 2015 (unaudited)   6
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   35
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   50
       
Item 4. Controls and Procedures   50
       
PART II Other Information    
       
Item 1. Legal Proceedings   51
       
Item 1A. Risk Factors   51
       
Item 6. Exhibits   52

  

 
 

 

PART I – FINANCIAL INFORMATION

 

Item 1 - Financial Statements

 

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts) 

             
    June 30,     December 31,  
    2015     2014  
    (Unaudited)        
ASSETS                
Real estate properties                
Land and buildings   $ 6,513,674     $ 3,223,785  
Less accumulated depreciation     (898,734 )     (821,712 )
Real estate properties – net     5,614,940       2,402,073  
Investments in direct financing leases     571,377       539,232  
Mortgage notes receivable     682,255       648,079  
      6,868,572       3,589,384  
Other investments     82,955       48,952  
      6,951,527       3,638,336  
Assets held for sale – net     15,903       12,792  
Total investments     6,967,430       3,651,128  
                 
Cash and cash equivalents     25,154       4,489  
Restricted cash     21,545       29,076  
Accounts receivable – net     189,037       168,176  
Goodwill     543,093        
Other assets     67,417       68,776  
Total assets   $ 7,813,676     $ 3,921,645  
                 
LIABILITIES AND EQUITY                
Revolving line of credit   $ 351,000     $ 85,000  
Term loans     500,000       200,000  
Secured borrowings     263,068       251,454  
Unsecured borrowings – net     2,333,856       1,842,049  
Accrued expenses and other liabilities     271,584       141,815  
Deferred income taxes     16,852        
Total liabilities     3,736,360       2,520,318  
                 
Equity:                
Common stock $.10 par value authorized – 350,000 shares, issued and outstanding – 183,321 shares as of June 30, 2015 and 127,606 as of December 31, 2014     18,332       12,761  
Common stock – additional paid-in capital     4,503,180       2,136,234  
Cumulative net earnings     1,232,478       1,147,998  
Cumulative dividends paid     (2,047,257 )     (1,895,666 )
Accumulated other comprehensive income     2,839        
Total stockholders’ equity     3,709,572       1,401,327  
Noncontrolling interest     367,744        
Total equity     4,077,316       1,401,327  
Total liabilities and equity   $ 7,813,676     $ 3,921,645  

 

See notes to consolidated financial statements.

 

2
 

 

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

Unaudited

(in thousands, except per share amounts) 

     
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2015     2014     2015     2014  
Revenue                                
Rental income   $ 163,112     $ 96,242     $ 264,076     $ 192,160  
Income from direct financing leases     15,020       14,146       29,366       28,230  
Mortgage interest income     17,562       9,923       34,141       19,249  
Other investment income – net     2,017       1,489       3,548       3,162  
Total operating revenues     197,711       121,800       331,131       242,801  
                                 
Expenses                                
Depreciation and amortization     59,156       31,301       89,766       62,745  
General and administrative     10,308       6,297       16,322       12,794  
Acquisition costs     47,084       45       51,952       140  
Impairment loss on real estate properties     6,916       1,558       12,898       1,558  
Provisions for uncollectible mortgages, notes and accounts receivable     (7 )     2,761       (9 )     2,745  
Total operating expenses     123,457       41,962       170,929       79,982  
                                 
Income before other income and expense     74,254       79,838       160,202       162,819  
Other income (expense)                                
Interest income     7       17       200       25  
Interest expense     (38,248 )     (29,447 )     (70,607 )     (56,528 )
Interest – amortization of deferred financing costs     (1,826 )     (946 )     (3,179 )     (1,868 )
Interest – refinancing gain (costs)     1,016       (2,645 )     (8,361 )     (4,685 )
Total other expense     (39,051 )     (33,021 )     (81,947 )     (63,056 )
                                 
Income before gain on assets sold     35,203       46,817       78,255       99,763  
Gain on assets sold – net     8,802       -       8,802       2,883  
Income from continuing operations before income taxes     44,005       46,817       87,057       102,646  
Income taxes     (539 )     -       (539 )     -  
Net income     43,466       46,817       86,518       102,646  
Net income attributable to noncontrolling interest     (2,038 )     -       (2,038 )     -  
Net income available to common stockholders   $ 41,428     $ 46,817     $ 84,480     $ 102,646  
                                 
Net income   $ 43,466     $ 46,817     $ 86,518     $ 102,646  
Other comprehensive income -  foreign currency translation     2,839       -       2,839       -  
Total comprehensive income     46,305       46,817       89,357       102,646  
Less: comprehensive income attributable to noncontrolling interest     (133 )     -       (133 )     -  
Comprehensive income attributable to common stockholders   $ 46,172     $ 46,817     $ 89,224     $ 102,646  
                                 
Income per common share available to common stockholders:                                
Basic:                                
Net income available to common stockholders   $ 0.23     $ 0.37     $ 0.53     $ 0.82  
Diluted:                                
Net income   $ 0.22     $ 0.37     $ 0.53     $ 0.81  
                                 
Dividends declared and paid per common share   $ 0.18     $ 0.50     $ 1.07     $ 0.99  
                                 
Weighted-average shares outstanding, basic     182,697       126,474       158,521       125,467  
Weighted-average shares outstanding, diluted     194,482       127,436       164,644       126,130  
                                 

See notes to consolidated financial statements.

 

3
 

 

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Unaudited

(in thousands, except per share amounts) 

                                                                 
    Common Stock Par Value     Additional
Paid-in Capital
    Cumulative
Net Earnings
    Cumulative
Dividends Paid
    Accumulated Other Comprehensive Income     Total Stockholders’ Equity     Noncontrolling interest     Total
Equity
 
                                                                 
Balance at December 31, 2014 (127,606 common shares)   $ 12,761     $ 2,136,234     $ 1,147,998     $ (1,895,666 )   $     $ 1,401,327     $     $ 1,401,327  
Amortization of restricted stock           4,483                         4,483             4,483  
Vesting of equity compensation plan, net of tax withholdings (261 shares)     26       (7,008 )                       (6,982 )           (6,982 )
Dividend reinvestment plan (813 shares at an average of $37.07 per share)     81       30,030                         30,111             30,111  
Value of assumed options in merger/acquisition           109,346                         109,346             109,346  
Value of assumed other equity compensation plan in merger/acquisition           13,219                         13,219             13,219  
Grant of stock as payment of directors fees (4 shares at an average of $37.74 per share)           137                         137             137  
Deferred compensation directors           1,291                         1,291             1,291  
Issuance of common stock (10,925 shares at an average of $40.32 per share)     1,093       438,943                         440,036             440,036  
Issuance of common stock – merger – related (43,713 shares)     4,371       1,776,505                         1,780,876             1,780,876  
Common dividends declared ($1.07 per share)                       (151,591 )           (151,591 )           (151,591 )
OP Units issuance (9,165 units)                                         373,394       373,394  
Cash conversion of OP Units (176 units)                                         (6,038 )     (6,038 )
OP units distributions                                         (1,650 )     (1,650 )
OP units earnings                                         2,038       2,038  
Foreign currency translation                             2,839       2,839             2,839  
Net income                 84,480                   84,480             84,480  
Balance at June 30, 2015 (183,321 shares & 8,989 OP Units)   $ 18,332     $ 4,503,180     $ 1,232,478     $ (2,047,257 )   $ 2,839     $ 3,709,572     $ 367,744     $ 4,077,316  

 

See notes to consolidated financial statements.

 

4
 

 

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited (in thousands)

 

    Six Months Ended
June 30,
 
      2015       2014  
Cash flows from operating activities                
Net income   $ 86,518     $ 102,646  
Adjustment to reconcile net income to cash provided by operating activities:                
Depreciation and amortization     89,766       62,745  
Provision for impairment on real estate properties     12,898       1,558  
Provision for uncollectible mortgages, notes and accounts receivable     (9 )     2,745  
Amortization of deferred financing costs and refinancing costs     11,540       6,553  
Accretion of direct financing leases     (5,321 )     (4,764 )
Stock-based compensation     4,483       4,548  
Gain on assets sold – net     (8,802 )     (2,883 )
Amortization of acquired in-place leases - net     (2,883 )     (2,571 )
Change in operating assets and liabilities – net of amounts assumed/acquired:                
Accounts receivable, net     1,129       912  
Straight-line rent receivables     (15,871 )     (10,701 )
Lease inducements     (328 )     1,362  
Effective yield receivable on mortgage notes     (2,253 )     (584 )
Other operating assets and liabilities     22,225       5,189  
Net cash provided by operating activities     193,092       166,755  
Cash flows from investing activities                
Acquisition of real estate – net of liabilities assumed and escrows acquired     (183,784 )     (22,000 )
Cash acquired in merger     84,858        
Investment in construction in progress     (15,913 )      
Placement of mortgage loans     (4,701 )     (528,343 )
Proceeds from sale of real estate investments     26,846       3,924  
Capital improvements to real estate investments     (11,351 )     (8,362 )
Proceeds from other investments     14,206       2,345  
Investments in other investments     (36,600 )     (5,379 )
Collection of mortgage principal     1,735       117,522  
Net cash used in investing activities     (124,704 )     (440,293 )
Cash flows from financing activities                
Proceeds from credit facility borrowings     782,000       590,000  
Payments on credit facility borrowings     (516,000 )     (646,000 )
Receipts of other long-term borrowings     989,822       594,320  
Payments on other long-term borrowings     (1,587,591 )     (202,490 )
Payments of financing related costs     (26,123 )     (12,740 )
Receipts from dividend reinvestment plan     30,111       45,804  
Payments for exercised options and restricted stock – net     (6,982 )     (943 )
Net proceeds from issuance of common stock     440,036       57,152  
Dividends paid     (151,387 )     (125,492 )
Distributions to OP Unit Holders     (1,650 )      
Net cash (used in) provided by financing activities     (47,764 )     299,611  
                 
Increase in cash and cash equivalents     20,624       26,073  
Effect of foreign currency translation on cash and cash equivalents     41        
Cash and cash equivalents at beginning of period     4,489       2,616  
Cash and cash equivalents at end of period   $ 25,154     $ 28,689  
Interest paid during the period, net of amounts capitalized   $ 61,073     $ 50,378  
     
Non-cash investing and financing activities:  

     
Non- cash investing activities                
Non-cash acquisition of business (see Note 2 for details)   $ (3,602,614 )   $  
Total   $ (3,602,614 )   $  
Non-cash financing activities                
Assumed Aviv debt   $ 1,410,637     $  
Stock exchanged in merger     1,903,441        
OP Units exchanged in merger     373,394        
Total   $ 3,687,472     $  
                 

See notes to consolidated financial statements.

 

5
 

 

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

June 30, 2015

 

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Business Overview and Organization

 

Omega Healthcare Investors, Inc. (“Omega,” “we,” “our” or the “Company”) has one reportable segment consisting of investments in healthcare-related real estate properties located in the United States and the United Kingdom. Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities (“SNFs”). Our core portfolio consists of long-term leases and mortgage agreements. All of our leases are “triple-net” leases, which require the tenants to pay all property-related expenses. Our mortgage revenue derives from fixed-rate mortgage loans, which are secured by first mortgage liens on the underlying real estate and personal property of the mortgagor.

 

Omega was formed as a real estate investment trust (“REIT”) and incorporated in the State of Maryland on March 31, 1992. In April 2015, Aviv REIT, Inc., a Maryland corporation (“Aviv”), merged (the “Aviv Merger”) with and into a wholly owned subsidiary of Omega, pursuant to the terms of that certain Agreement and Plan of Merger, dated as of October 30, 2014 (the “Merger Agreement”), by and among the Company, Aviv, OHI Healthcare Properties Holdco, Inc., a Delaware corporation and a direct wholly-owned subsidiary of Omega (“Merger Sub”), OHI Healthcare Properties Limited Partnership, a Delaware limited partnership (“Omega OP”), and Aviv Healthcare Properties Limited Partnership, a Delaware limited partnership (the “Aviv OP”).

 

Prior to April 1, 2015 and in accordance with the Merger Agreement, Omega restructured the manner in which it holds its assets by converting to an umbrella partnership real estate investment trust structure (the “UPREIT Conversion”). As a result of the UPREIT Conversion and following the consummation of the Aviv Merger, substantially all of the Company’s assets are held by Omega OP.

 

Omega OP is governed by the Second Amended and Restated Agreement of Limited Partnership of OHI Healthcare Properties Limited Partnership, dated as of April 1, 2015 (the “Partnership Agreement”). Pursuant to the Partnership Agreement, the Company and Merger Sub are the general partners of Omega OP, and have exclusive control over Omega OP’s day-to-day management. As of June 30, 2015, the Company owned approximately 95% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and investors owned approximately 5% of the Omega OP Units.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements for Omega have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding 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 notes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the interim periods reported herein are not necessarily indicative of results to be expected for the full year. We have evaluated all subsequent events through the date of the filing of this Form 10-Q. These unaudited consolidated financial statements should be read in conjunction with the financial statements and the footnotes thereto included in our latest Annual Report on Form 10-K.

 

Our consolidated financial statements include the accounts of (i) Omega, (ii) Omega OP, and (iii) all direct and indirect wholly owned subsidiaries of Omega. All intercompany transactions and balances have been eliminated in consolidation, and our net earnings are reduced by the portion of net earnings attributable to noncontrolling interests.

  

6
 

 

Goodwill

 

Goodwill represents a purchase price in excess of the fair value of assets acquired and liabilities assumed and the cost associated with expanding our portfolio. Goodwill is not amortized. We assess goodwill for potential impairment during the fourth quarter of each fiscal year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the net assets of the entity. In evaluating goodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the entity is less than its carrying amount. If we conclude that it is more likely than not that the fair value of the entity is less than its carrying value, then we perform a two-step goodwill impairment test to identify potential impairment and measure the amount of impairment we will recognize, if any. We do not expect any of the goodwill to be deductible for tax purposes.

 

Redeemable Limited Partnership Unitholder Interests and Noncontrolling Interests

 

As of April 1, 2015 and after giving effect to the Aviv Merger, the Company owned approximately 138.8 million Omega OP Units and Aviv OP owned approximately 52.9 million Omega OP Units. Each of the Omega OP Units (other than the Omega OP Units owned by Omega) is redeemable at the election of the Omega OP Unit holder for cash equal to the then-fair market value of one share of Omega common stock, par value $0.10 per share (“Omega Common Stock”), subject to the Company’s election to exchange the Omega OP Units tendered for redemption for unregistered shares of Omega Common Stock on a one-for-one basis, subject to adjustment as set forth in the Partnership Agreement. Effective June 30, 2015, the Company (through Merger Sub, in its capacity as the general partner of Aviv OP) caused Aviv OP to make a distribution of Omega OP Units held by Aviv OP (or equivalent value) to Aviv OP investors (the “Aviv OP Distribution”) in connection with the liquidation of Aviv OP. As a result of the Aviv OP Distribution, Omega directly and indirectly owns approximately 95% of the outstanding Omega OP Units, and the other investors own approximately 5% of the outstanding Omega OP Units. As a part of the Aviv OP Distribution, Omega settled approximately 0.2 million units via cash settlement.

 

Noncontrolling Interests

 

Noncontrolling interests is the portion of equity in a subsidiary not attributable to a parent. We present the portion of any equity that we do not own in consolidated entities as noncontrolling interests and classify those interests as a component of total equity, separate from total stockholders’ equity, on our Consolidated Balance Sheets. Income attributable to the entity’s parent is included in net income attributable to common stockholders on our Consolidated Statements of Operations and Comprehensive Income. In addition, we include net income attributable to the noncontrolling interests in net income in our Consolidated Statements of Operations and Comprehensive Income.

 

As our ownership of a controlled subsidiary increases or decreases, any difference between the aggregate consideration paid to acquire the noncontrolling interests and our noncontrolling interest balance is recorded as a component of equity in additional paid-in capital, so long as we maintain a controlling ownership interest.

 

Foreign Operations

 

The U.S. dollar is the functional currency for our consolidated subsidiaries operating in the United States. The functional currency for our consolidated subsidiaries operating in countries other than the United States is the principal currency in which the entity primarily generates and expends cash. For our consolidated subsidiaries whose functional currency is not the U.S. dollar, we translate their financial statements into the U.S. dollar. We translate assets and liabilities at the exchange rate in effect as of the financial statement date. The resulting translation adjustments are included in Accumulated Other Comprehensive Income (“AOCI”) in the Consolidated Balance Sheets. Certain balance sheet items, primarily equity and capital-related accounts, are reflected at the historical exchange rate. Revenue and expense accounts are translated using an average exchange rate for the period.

  

7
 

 

We and certain of our consolidated subsidiaries may have intercompany and third-party debt that is not denominated in the entity’s functional currency. When the debt is remeasured against the functional currency of the entity, a gain or loss can result. The resulting adjustment is reflected in results of operations, unless it is intercompany debt that is deemed to be long-term in nature and then the adjustments are included in AOCI.

 

Accounts Receivable

 

Accounts receivable includes: contractual receivables, effective yield interest receivables, straight-line rent receivables and lease inducements, net of an estimated provision for losses related to uncollectible and disputed accounts. Contractual receivables relate to the amounts currently owed to us under the terms of our lease and loan agreements.  Effective yield interest receivables relate to the difference between the interest income recognized on an effective yield basis over the term of the loan agreement and the interest currently due to us according to the contractual agreement. Straight-line receivables relate to the difference between the rental revenue recognized on a straight-line basis and the amounts currently due to us according to the contractual agreement.  Lease inducements result from value provided by us to the lessee, at the inception or renewal of the lease, and are amortized as a reduction of rental revenue over the non-cancellable lease term. 

 

On a quarterly basis, we review our accounts receivable to determine their collectability. The determination of collectability of these assets requires significant judgment and is affected by several factors relating to the credit quality of our operators that we regularly monitor, including (i) payment history, (ii) the age of the contractual receivables, (iii) the current economic conditions and reimbursement environment, (iv) the ability of the tenant to perform under the terms of their lease and/or contractual loan agreements and (v) the value of the underlying collateral of the agreement.  If we determine collectability of any of our contractual receivables is at risk, we estimate the potential uncollectible amounts and provide an allowance.  In the case of a lease recognized on a straight-line basis or existence of lease inducements, we generally provide an allowance for straight-line accounts receivable and/or the lease inducements when certain conditions or indicators of adverse collectability are present.

 

A summary of our net receivables by type is as follows:

 

    June 30,
2015
  December 31,
2014
 
    (in thousands)
         
Contractual receivables   $ 7,374     $ 4,799  
Effective yield interest receivables     8,485       6,232  
Straight-line receivables     159,314       143,652  
Lease inducements     13,899       13,571  
Allowance     (35 )     (78 )
Accounts receivable – net   $ 189,037     $ 168,176  

 

We continuously evaluate the payment history and financial strength of our operators and have historically established allowance reserves for straight-line rent adjustments for operators that do not meet our requirements. We consider factors such as payment history and the operator’s financial condition as well as current and future anticipated operating trends when evaluating whether to establish allowance reserves.

  

Recent Accounting Pronouncements

 

In 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While ASU 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate or equipment. ASU 2014-09 is effective for the Company beginning January 1, 2018. We are continuing to evaluate this guidance; however, we do not expect its adoption to have a significant impact on our consolidated financial statements, as a substantial portion of our revenue consists of rental income from leasing arrangements, which are specifically excluded from ASU 2014-09.

 

8
 

 

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), which makes certain changes to both the variable interest model and the voting model, including changes to (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the variable interest entity characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. ASU 2015-02 is effective for us beginning January 1, 2016. We are continuing to evaluate this guidance; however, we do not expect its adoption to have a significant impact on our consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. Upon adoption, we will apply the new guidance on a retrospective basis and adjust the balance sheet of each individual period presented to reflect the period-specific effects of applying the new guidance. This guidance is effective for us beginning January 1, 2016. We are continuing to evaluate this guidance; however, we do not expect its adoption to have a significant impact on our consolidated financial statements.

  

NOTE 2 – PROPERTIES AND INVESTMENTS

 

In the ordinary course of our business activities, we periodically evaluate investment opportunities and extend credit to customers. We also regularly engage in lease and/or loan extensions and modifications. Additionally, we actively monitor and manage our investment portfolio with the objectives of improving credit quality and increasing investment returns. In connection with our portfolio management, we may engage in various collection and foreclosure activities.

 

Leased Property

 

Our leased real estate properties, represented by 775 SNFs, 81 assisted living facilities (“ALFs”), 16 specialty facilities and one medical office building at June 30, 2015, are leased under provisions of single or master leases with initial terms typically ranging from 5 to 15 years, plus renewal options. Substantially all of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of three methods depending on specific provisions of each lease as follows: (i) a specific annual percentage increase over the prior year’s rent, generally 2.5%; (ii) an increase based on the change in pre-determined formulas from year to year (i.e., such as increases in the Consumer Price Index (“CPI”)); or (iii) specific dollar increases over prior years. Under the terms of the leases, the lessee is responsible for all maintenance, repairs, taxes and insurance on the leased properties.

  

Acquisition of Care Homes in the United Kingdom in Q2 2015

 

On May 1, 2015, we closed on a purchase/leaseback transaction (the “Care Homes Transaction”) for 23 care homes located in the United Kingdom and operated by Healthcare Homes Holding Limited (“Healthcare Homes”). As part of the transaction, we acquired title to the 23 care homes with 1,018 registered beds and leased them back to Healthcare Homes pursuant to a 12-year master lease agreement with an initial annual cash yield of 7%, and annual escalators of 2.5%. The care homes, comparable to US ALFs, are located throughout the East Anglia region (north of London) of the United Kingdom. Healthcare Homes is headquartered in Colchester (Essex County), England. We recorded approximately $193.8 million of assets consisting of land ($20.7 million), building and site improvements ($152.1 million), furniture and fixtures ($5.3 million) and goodwill ($15.7 million). The Company’s estimated fair values of the care homes’ assets acquired and liabilities assumed at the date of acquisition are determined based on certain valuations and analyses that have yet to be finalized, and accordingly, the assets acquired and liabilities assumed, as detailed above, are subject to adjustment once the analyses are completed.

 

9
 

 

In 2015, the Company has incurred approximately $3.2 million in acquisition related costs associated with the Care Homes Transaction.

 

Aviv Merger in Q2 2015

 

On April 1, 2015, the Company closed the Aviv Merger, which was structured as a stock-for-stock merger. Under the terms of the Merger Agreement, each outstanding share of Aviv common stock was converted into 0.90 of a share of Omega common stock. In connection with the Aviv Merger, Omega issued approximately 43.7 million shares of common stock to former Aviv stockholders and holders of certain vested equity incentive awards of Aviv. As a result of the Aviv Merger, Omega acquired 342 facilities, two facilities subject to direct financing leases, one medical office building and three mortgages. The facilities are located in 31 states and are operated by 38 third-party operators. Omega also assumed certain outstanding equity awards and other debt and liabilities. Based on the closing price of Omega’s common stock on April, 1, 2015, we estimate the fair value of the consideration exchanged or assumed to be approximately $3.8 billion. The Company’s estimated fair values of Aviv’s assets acquired and liabilities assumed on the Aviv Merger date are determined based on certain valuations and analyses that have yet to be finalized, and accordingly, the assets acquired and liabilities assumed, as detailed below, are subject to adjustment once the analyses are completed.

 

The following table highlights the preliminary allocation of the assets acquired and liabilities assumed on April 1, 2015:

 

    (in thousands)  
Estimated fair value of assets acquired:        
Land and buildings   $ 3,125,660  
Investment in direct financing leases     26,823  
Mortgages notes receivable     31,278  
Other investments     11,590  
Total investments     3,195,351  
Goodwill     526,807  
Accounts receivables and other assets     15,127  
Cash acquired     84,858  
Fair value of total assets acquired   $ 3,822,143  
         
Estimated fair value of liabilities assumed:        
Accrued expenses and other liabilities   $ 134,671  
Debt     1,410,637  
Fair value of total liabilities assumed     1,545,308  
         
Value of shares and OP units exchanged(a)     2,276,835  
         
Fair value of consideration   $ 3,822,143  

 

(a)        Includes the fair value of stock compensation plans assumed.

 

In 2015, the Company has incurred approximately $48.5 million in acquisition related costs associated with the Aviv Merger.

  

$6.8 Million New Investment in Q1 2015

 

On January 28, 2015, we purchased one SNF from an unrelated third party for approximately $6.3 million in cash and leased it to an existing operator. The purchase and sale agreement includes a provision that requires us to make an additional payment of $0.5 million to the seller if certain financial metrics of the facility are achieved. We recorded the potential $0.5 million payment as part of the purchase price. The 93 bed SNF, located in Texas, was added to the operator’s existing master lease with an initial annual cash yield of 9.5%. We recorded approximately $6.8 million consisting of land ($0.1 million), building and site improvements ($6.1 million), and furniture and fixtures ($0.6 million). We have not recorded goodwill in connection with this transaction.

 

10
 

 

Pro Forma Acquisition Results

 

The facilities acquired in 2015 and 2014 are included in our results of operations from the date of acquisition. The following unaudited pro forma results of operations reflect the impact of acquisitions from the first two quarters of 2015 and 2014 as if they occurred on January 1, 2014. For a list of the 2014 transactions, refer to Note 3 – Properties in our 2014 Form 10-K. In the opinion of management, all significant necessary adjustments to reflect the effect of the acquisitions have been made.

 

    Pro Forma  
    Three Months Ended
June 30,
  Six Months Ended
June 30,
 
    2015   2014   2015     2014  
    (in thousands, except per share amounts, unaudited)  
                 
Pro Forma Revenues   $ 198,929     $ 188,239     $ 396,107     $ 375,766  
Pro Forma Net income   $ 43,853     $ 67,359     $ 106,447     $ 143,791  
                                 
Earnings per share – diluted:                                
Net income – as reported   $ 0.22     $ 0.37     $ 0.53     $ 0.81  
Net income – pro forma   $ 0.23     $ 0.37     $ 0.65     $ 0.79  

 

Asset Sales, Impairments and Other

 

In the first quarter of 2015, we initiated plans to construct a new single facility with an existing operator that would consolidate and replace three existing facilities. As a result, we recorded a total of $6.0 million in impairment charges related to three Florida SNFs to reduce their net book values to their estimated sales price. During the second quarter of 2015, we recorded an impairment of $6.9 million for a facility in Tennessee that is expected to be closed in the third quarter. To estimate the fair value of the facilities, we utilized a market approach and Level 3 inputs.

 

In the second quarter of 2015, we sold four facilities for total cash proceeds of $26.6 million, generating a gain of approximately $8.8 million. Two of the facilities sold were the result of lessees exercising their purchase option.

 

NOTE 3 – DIRECT FINANCING LEASES

 

The components of investments in direct financing leases consist of the following: 

                 
    June 30,     December 31,  
    2015     2014  
    (in thousands)  
Minimum lease payments receivable   $ 4,291,061     $ 4,244,067  
Estimated residual values            
Less unearned income     (3,719,684 )     (3,704,835 )
Investments in direct financing leases   $ 571,377     $ 539,232  
                 
Properties subject to direct financing leases     58       56  

 

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New Ark Investment Inc.

 

On November 27, 2013, we closed an aggregate $529 million purchase/leaseback transaction in connection with the acquisition of Ark Holding Company, Inc. (“Ark Holding”) by 4 West Holdings Inc. At closing, we acquired 55 SNFs and 1 ALF operated by Ark Holding and leased the facilities back to Ark Holding, now known as New Ark Investment Inc. (“New Ark”), pursuant to four 50-year master leases with rental payments yielding 10.6% per annum over the term of the leases. The purchase/leaseback transaction is being accounted for as a direct financing lease.

 

The lease agreements allow the tenant the right to purchase the facilities for a bargain purchase price plus closing costs at the end of the lease term. In addition, commencing in the 41st year of each lease, the tenant will have the right to prepay the remainder of its obligations thereunder for an amount equal to the sum of the unamortized portion of the original aggregate $529 million investment plus the net present value of the remaining payments under the lease and closing costs. In the event the tenant exercises either of these options, we have the right to purchase the properties for fair market value at the time.

 

The 56 facilities represent 5,623 licensed beds located in 12 states, predominantly in the southeastern United States. The 56 facilities are separated by region and divided amongst four cross-defaulted master leases. The four regions include the Southeast (39 facilities), the Northwest (7 facilities), Texas (9 facilities) and Indiana (1 facility).

 

Additionally, in 2014 we purchased 3 facilities and subsequently leased them to New Ark under a twelve-year master lease expiring in 2026. These leases are being accounted for as operating leases.

 

Aviv Merger

 

On April 1, 2015, the Company acquired two additional direct financing leases as a result of the Aviv Merger.

 

As of June 30, 2015, the following minimum rents are due under our direct financing leases for the next five years (in thousands):

 

Year 1 Year 2 Year 3 Year 4 Year 5
$49,345 $49,623 $50,529 $51,782 $53,060

 

NOTE 4 - MORTGAGE NOTES RECEIVABLE

 

As of June 30, 2015, mortgage notes receivable relate to 23 fixed-rate mortgages on 58 long-term care facilities. The mortgage notes are secured by first mortgage liens on the borrowers’ underlying real estate and personal property. The mortgage notes receivable relate to facilities located in eight states, operated by eight independent healthcare operating companies. We monitor compliance with mortgages and when necessary have initiated collection, foreclosure and other proceedings with respect to certain outstanding loans.

 

Mortgage interest income is recognized as earned over the terms of the related mortgage notes, using the effective yield method. Allowances are provided against earned revenues from mortgage interest when collection of amounts due becomes questionable or when negotiations for restructurings of troubled operators lead to lower expectations regarding ultimate collection. When collection is uncertain, mortgage interest income on impaired mortgage loans is recognized as received after taking into account application of security deposits.

   

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The outstanding principal amounts of mortgage notes receivable, net of allowances, were as follows:

 

    June 30,
2015
  December 31,
2014
 
    (in thousands)
         
Mortgage note due 2015; interest at 8.35%   $ 6,514     $  
Mortgage note due 2015; interest at 6.50%     763        
Two mortgage notes due 2018; interest at 11.00%     13,652        
Mortgage note due 2018; interest at 12.00%     1,028        
Mortgage note due 2020; interest at 8.00%     3,974        
Mortgage note due 2021; interest at 10.00%     1,090        
Mortgage note due 2021; interest at 10.51%     3,194       1,326  
Four mortgage notes due 2022; interest at 12.00%     7,460       7,395  
Mortgage note due 2023; interest at 9.00%     5,468        
Mortgage note due 2023; interest at 11.00%     69,928       69,928  
Mortgage note due 2024; interest at 9.64%     112,500       112,500  
Two mortgage notes due 2029; interest at 10.00%     417        
Mortgage note due 2029; including interest at 9.00%     413,987       414,550  
Mortgage note due 2030; interest at 10.82%     15,780       15,880  
Four mortgage notes due 2046; interest at 12.00%     26,500       26,500  
Mortgage notes receivable, gross     682,255       648,079  
Allowance for loss on mortgage notes receivable            
Total mortgages — net   $ 682,255     $ 648,079  

 

The following is a brief overview of the new mortgages entered into or assumed in 2015 or significant changes to mortgages previously reported.

 

Mortgage note due 2015

 

On April 1, 2015 in connection with the Aviv Merger, we acquired a loan from Aviv with a fair value of approximately $6.5 million. The loan is with a new operator and is secured by a lien on a 79 bed SNF located in Tennessee and a 32 bed SNF located in Missouri. The loan bears interest at 8.35% per year and matures in 2015.

  

Mortgage note due 2018

 

On April 1, 2015 in connection with the Aviv Merger, we acquired a loan from Aviv with a fair value of approximately $12.6 million. The loan is with a new operator and is secured by a lien on a 100 bed SNF located in Ohio. The loan bears interest at 11% per year which increases by 2% per year and matures in 2018.

 

Mortgage note due 2020

 

On April 1, 2015 in connection with the Aviv Merger, we acquired a loan from Aviv with a fair value of approximately $4.0 million. The loan is with a new operator and is secured by a lien on a 32 bed SNF located in Missouri, a 49 bed SNF located in Missouri and a 79 bed SNF located in Tennessee. The loan bears interest at 8% per year and matures in 2020.

 

Mortgage note due 2021

 

In September 2014, we entered into a $3.5 million mortgage loan with an existing operator. The loan is secured by a lien on a 120 bed SNF located in Michigan. As of June 30, 2015 approximately $1.1 million has been drawn on the note. The loan bears an initial annual cash interest rate of 10.0% per year and increases by 0.25% per year. The mortgage loan is used to fund renovations and matures in 2021.

 

13
 

 

Mortgage note due 2023

 

On April 1, 2015 in connection with the Aviv Merger, we acquired a loan from Aviv with a fair value of approximately $5.5 million. The loan is with a new operator and is secured by a leasehold interest in a SNF located in Ohio. The loan bears interest at 9% per year and matures in 2023.

 

NOTE 5 – OTHER INVESTMENTS

 

A summary of our other investments is as follows:

 

    June 30, 
2015
  December 31,
2014
 
    (in thousands)
         
Other investment note due 2014   $     $ 1,640  
Other investment notes due 2015; interest at 9.50%     341       891  
Other investment notes due 2015; interest at 10.00%     5,439       5,439  
Other investment note due 2016; interest at 7.25%     884        
Other investment note due 2016; interest at 10.00%     32        
Other investment notes due 2017; interest at 10.00%     23,363       24,800  
Other investment note due 2018; interest at 10.00%     179        
Other investment note due 2020; interest at 7.50%     4,707        
Other investment note due 2020; interest at 8.00%     656        
Other investment note due 2021; interest at 7.00%     78        
Other investment note due 2021; interest at 11.04%     992       1,053  
Other investment note due 2022; interest at 10.77%     2,022       2,110  
Other investment notes due 2022; interest at 11.04%     3,881       4,062  
Other investment note due 2023; interest at 10.00%     1,000       1,000  
Other investment notes due 2023; interest at 10.25%     1,117        
Other investment notes due 2023; interest at 10.51%     2,561       1,942  
Other investment notes due 2023; interest at 10.77%     6,956       5,705  
Other investment notes due 2023; interest at 11.04%     298       310  
Other investment note due 2030; interest at 6.66%     28,449        
Notes receivable, gross     82,955       48,952  
Allowance for loss on notes receivable            
Total other investments   $ 82,955     $ 48,952  

 

The following is a brief overview of the new notes entered into or assumed in 2015 or significant changes to notes previously reported.

 

Other Investment note due 2014

 

The $2.5 million working capital note that we entered into in May 2013 at 6% interest rate with an existing operator was paid off in March 2015.

 

Other Investment note due 2030

 

On June 30, 2015, we entered into a $50.0 million revolving credit facility with a new operator. The note bears interest at 6.66% and matures in May 2030.

 

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NOTE 6 – ASSETS HELD FOR SALE

 

    Properties Held For Sale  
    Number of
Properties
  Net Book Value
(in thousands)
     
December 31, 2014 (1)     4     $ 12,792  
Properties sold            
Properties added     1       4,085  
March 31, 2015 (2)     5       16,877  
Properties sold     (2 )     (6,973 )
Properties added     1       5,999  
June 30, 2015 (3)     4     $ 15,903  

 

(1)        Includes one parcel of land and three facilities.

(2)        Includes one parcel of land and four facilities.

(3)        Includes one parcel of land and three facilities.

 

In the first quarter of 2015, we reclassified one SNF in Alabama with a carrying value of approximately $4.1 million to assets held for sale. During the second quarter of 2015, the operator of the facility exercised their purchase option and purchased the facility for approximately $9.0 million.

 

In the second quarter of 2015, we reclassified one SNF in Pennsylvania with a carrying value of approximately $6.0 million to assets held for sale. See also, Note 2 Asset Sales, Impairments and Other.

  

NOTE 7 – INTANGIBLES

 

The following is a summary of our intangibles as of June 30, 2015 and December 31, 2014:

 

    June 30, 2015     December 31, 2014
    (in thousands)
Assets:                
Above market lease intangibles   $ 21,629     $ 14,576  
In-place lease intangibles     386        
Goodwill     543,093        
Accumulated amortization     (13,010 )     (12,166 )
Net intangible assets   $ 552,098     $ 2,410  
                 
Liabilities:                
Below market lease intangibles   $ 83,321     $ 57,054  
Accumulated amortization     (40,327 )     (36,620 )
Net intangible liabilities   $ 42,994     $ 20,434  

 

Above market lease intangibles and in-place lease intangibles, net of accumulated amortization, are included in other assets on our Consolidated Balance Sheets. Below market lease intangibles are included in accrued expenses and other liabilities on our Consolidated Balance Sheets. Goodwill was recorded in connection with the Aviv and Care Homes transactions and is shown as a separate line on our Consolidated Balance Sheets.

 

For the three and six months ended June 30, 2015 and 2014, our net amortization related to these intangibles was $1.7 million, $1.3 million, $2.9 million and $2.6 million, respectively. The estimated net amortization related to these intangibles for the remainder of 2015 and the subsequent four full years is as follows: remainder of 2015 – $2.9 million; 2016 – $4.9 million; 2017 – $3.9 million; 2018 – $3.7 million; and 2019 – $3.9 million.

 

15
 

 

NOTE 8 – CONCENTRATION OF RISK

 

As of June 30, 2015, our portfolio of real estate investments consisted of 936 healthcare facilities, located in 41 states and operated by 84 third-party operators. Our gross investment in these facilities, net of impairments and before reserve for uncollectible loans, totaled approximately $7.8 billion at June 30, 2015, with approximately 99% of our real estate investments related to long-term care facilities. Our portfolio is made up of 775 SNFs, 81 ALFs, 16 specialty facilities, one medical office building, fixed rate mortgages on 56 SNFs and two ALFs, and five SNFs that are closed/held-for-sale. At June 30, 2015, we also held miscellaneous investments of approximately $83.0 million, consisting primarily of secured loans to third-party operators of our facilities.

 

The three states in which we had our highest concentration of investments were Ohio (10%), Texas (9%) and Florida (8%), at June 30, 2015.

 

NOTE 9 – DIVIDENDS AND EQUITY

 

On July 15, 2015, the Board of Directors declared a common stock dividend of $0.55 per share, increasing the quarterly common dividend rate by $0.01 per share over the prior quarter. The common stock dividend is payable on August 17, 2015 to common stockholders of record as of the close of business on July 31, 2015.

 

On April 15, 2015, the Board of Directors declared a prorated dividend of $0.18 per share of Omega’s common stock in view of the recently closed Aviv Merger. The per share dividend amount payable by Omega represents dividends for April 2015, at a quarterly dividend rate of $0.54 per share of common stock, increasing the quarterly common dividend rate by $0.01 per share over the prior quarter. The $0.18 dividend was paid in cash on May 15, 2015 to stockholders of record as of the close of business on April 30, 2015.

  

On March 5, 2015, the Board of Directors declared a prorated dividend of $0.36 per share of Omega’s common stock in view of the pending acquisition of Aviv, pursuant to the Aviv Merger. The per share dividend amount represented dividends for February and March 2015, at a quarterly dividend rate of $0.54 per share of common stock, increasing the quarterly common dividend rate by $0.01 per share over the prior quarter. The dividend was paid in cash on April 7, 2015 to stockholders of record as of the close of business on March 31, 2015.

 

On January 14, 2015, the Board of Directors declared a common stock dividend of $0.53 per share, increasing the quarterly common dividend rate by $0.01 per share over the prior quarter, which was paid February 16, 2015 to common stockholders of record on February 2, 2015.

 

Increase of Authorized Omega Common Stock

 

On March 27, 2015, we amended our charter to increase the number of authorized shares of Omega capital stock from 220 million to 370 million and the number of authorized shares of Omega common stock from 200 million to 350 million.

 

10.925 Million Common Stock Offering

 

On February 9, 2015, we completed an underwritten public offering of 10.925 million shares of our common stock at $42.00 per share before underwriting and other offering expenses. The Company’s total net proceeds from the offering were approximately $440 million, after deducting underwriting discounts and commissions and other estimated offering expenses.

 

16
 

 

Dividend Reinvestment and Common Stock Purchase Plan

 

For the three-month period ended June 30, 2015, approximately 0.7 million shares of our common stock at an average price of $36.46 per share were issued through our Dividend Reinvestment and Common Stock Purchase Program for gross proceeds of approximately $24.7 million. For the six-month period ended June 30, 2015, approximately 0.8 million shares of our common stock at an average price of $37.07 per share were issued through our Dividend Reinvestment and Common Stock Purchase Program for gross proceeds of approximately $30.1 million.

 

See also, Note 2 Properties and Investments, for stock activity associated with the Aviv Merger. 

 

NOTE 10 – TAXES

 

Since our inception, we have elected to be taxed as a real estate investment trust (“REIT”) under the applicable provisions of the Internal Revenue Code (the “Code”). So long as we qualify as a REIT under the Code, we generally will not be subject to federal income taxes on the REIT taxable income that we distribute to stockholders, subject to certain exceptions. On a quarterly and annual basis, we test our compliance within the REIT taxation rules to ensure that we are in compliance with the REIT rules. We review our distributions and projected distributions each year to ensure we have met and will meet the annual REIT distribution requirements. In 2014 and 2013, we distributed dividends in excess of our taxable income. In 2015, we expect to distribute dividends in excess of our taxable income.

 

As a result of our UPREIT Conversion, our Company and its subsidiaries may be subject to income or franchise taxes in certain states and municipalities. Also, as a result of our UPREIT Conversion, we created five subsidiary REITs that will be subject to all of the REIT qualification rules set forth in the Code.

 

Subject to the limitation under the REIT asset test rules, we are permitted to own up to 100% of the stock of one or more taxable REIT subsidiaries (“TRSs”). We have also elected for four of our subsidiaries to be treated as TRSs. Three of our TRSs are subject to federal, state and local income taxes at the applicable corporate rates and the fourth is subject to foreign income taxes. As of June 30, 2015, one of our TRSs had a net operating loss carry-forward of approximately $1.0 million. The loss carry-forward is fully reserved with a valuation allowance as of June 30, 2015.

 

In connection with our acquisitions of Care Homes in May 2015, we acquired 10 legal entities consisting of 23 facilities. The tax basis in these legal entities acquired for United Kingdom taxes was approximately $82 million less than the purchase price. We recorded a preliminary initial deferred tax liability associated with the temporary tax basis difference of approximately $16 million.

 

During the second quarter of 2015, we recorded state and local income tax provision of approximately $0.4 million and provision for foreign income taxes of approximately $0.2 million.

  

NOTE 11 – STOCK-BASED COMPENSATION

 

The following is a summary of our stock-based compensation expense for the three- and six-month periods ended June 30, 2015 and 2014, respectively:

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2015   2014   2015   2014  
    (in thousands)  
                                 
Stock-based compensation expense   $ 2,873     $ 2,285     $ 4,483     $ 4,548  

 

17
 

  

Restricted Stock and Restricted Stock Units

 

Restricted stock and restricted stock units (“RSUs”) are subject to forfeiture if the holder’s service to us terminates prior to vesting, subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company. Prior to vesting, ownership of the shares/units cannot be transferred. The restricted stock has the same dividend and voting rights as our common stock. RSUs accrue dividend equivalents but have no voting rights. Restricted stock and RSUs are valued at the price of our common stock on the date of grant. We expense the cost of these awards ratably over their vesting period.

 

The RSUs assumed from Aviv as part of the Aviv Merger were valued at the closing price of our stock on the date of the transaction. The portion of the vesting accruing prior to the acquisition was recorded as part of the purchase price consideration. The expense associated with the vesting that will occur after the date of the transaction will be recorded as stock compensation expense ratably over the remaining life of the RSUs.

 

We awarded the following RSUs to employees or assumed them in the Aviv Merger.

 

Grant Assumption Date   RSUs Granted  
12 /31/2013 RSUs     213,741  
1 /1/2014 RSUs     122,137  
3 /31/2015 RSUs     123,693  
4 /1/2015 RSUs     39,914  
4 /1/2015 Assumed 2015 RSUs     10,644  
4 /1/2015 Assumed 2016 RSUs     19,825  
4 /1/2015 Assumed Multi-year RSUs     7,799  
          537,753  

 

December 31, 2013 RSUs - These RSUs vest ratably over the three year period ended December 31, 2014, 2015 and 2016 respectively, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company. In December 2014, 71,247 shares of restricted stock vested and were distributed to employees.

 

January 1, 2014 RSUs - These RSUs cliff vest on December 31, 2016 subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

 

March 31, 2015 RSUs - These RSUs cliff vest on December 31, 2017 subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

 

April 1, 2015 RSUs - These RSUs cliff vest on December 31, 2017 subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

  

April 1, 2015 Assumed 2015 RSUs - These RSUs were assumed in the Aviv Merger and cliff vest on December 31, 2015 subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

 

April 1, 2015 Assumed 2016 RSUs - These RSUs were assumed in the Aviv Merger and cliff vest on December 31, 2016 subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

 

April 1, 2015 Assumed Multi-year RSUs - These RSUs were assumed in the Aviv Merger and vest ratably over the periods ended December 31, 2015, 2016 and 2017 respectively, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

 

18
 

  

Performance Restricted Stock Units and LTIP Units

 

Performance restricted stock units (“PRSUs”) and LTIP Units are subject to forfeiture if the performance requirements are not achieved or if the holder’s service to us terminates prior to vesting, subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company. The PRSUs awarded in January 2011, January 2013, December 2013, January 2014, and the LTIP Units awarded in March 2015 and April 2015 have varying degrees of performance requirements to achieve vesting, and each PRSU and LTIP Units award represents the right to a variable number of shares of common stock or partnership units (each LTIP Unit once earned is convertible into one Omega OP Unit in Omega OP, subject to certain conditions). The vesting requirements are based on either the (i) total shareholders return (“TSR”) of Omega or (ii) Omega’s TSR relative to other real estate investment trusts in the MSCI U.S. REIT Index (“Relative TSR”). We expense the cost of these awards ratably over their service period.

 

Prior to vesting and the distribution of shares, ownership of the PRSUs cannot be transferred. The dividends on the PRSUs accumulate and if vested are paid when the shares are distributed to the employee. While each LTIP Unit is unearned, the employee receives a partnership distribution equal to 10% of the quarterly approved regular periodic distributions per Omega OP Unit. The remaining partnership distributions (which in the case of normal periodic distributions is equal to the total approved quarterly dividend on Omega’s common stock) on the LTIP Units accumulate, and if the LTIP Units are earned, the accumulated distributions are paid.

 

The number of shares or units earned under the TSR PRSUs or LTIP Units depends generally on the level of achievement of Omega’s TSR over the indicated performance period. We awarded the following TSR PRSUs and LTIP Units to employees:

 

  Name   Grant Date   PRSUs Granted   Performance Period (a)
  2013 Multi-Year TSR     1/1/2011     279,552     12/31/2011-12/31/2013  
  2014 Transition TSR     12/31/2013     77,371     12/31/2013-12/31/2014  
  2015 Transition TSR     12/31/2013     77,369     12/31/2013-12/31/2015  
  2016 Transition TSR     12/31/2013     115,785     12/31/2013-12/31/2016  
  2016 TSR     1/1/2014     154,584     1/1/2014-12/31/2016  
  2017 LTIP Units     3/31/2015     154,716     1/1/2015-12/31/2017  
  2017 LTIP Units     4/1/2015     54,151     1/1/2015-12/31/2017  
                913,528      

  

(a) The performance period is the period indicated.

 

2013 Multi-Year TSR - In January 2014, our Compensation Committee reviewed the performance and determined the performance targets were met at the “high” level. The 2013 Multi-Year TSR vested and were distributed 25% per quarter on the last day of each calendar quarter in 2014.

 

2014 Transition TSR - In January 2015, our Compensation Committee reviewed the performance and determined the performance targets were met at the “high” level and the shares were distributed in January 2015.

 

2015 Transition TSR - The number of 2015 Transition TSR PRSUs that are earned based on performance vest on December 31, 2015, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

 

2016 Transition TSR - The 2016 number of Transition TSR PRSUs that are earned based on performance vest on December 31, 2016, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

 

2016 TSR - The 2016 number of TSR PRSUs that are earned based on performance vest quarterly in 2017 in equal increments at the end of each quarter, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

 

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2017 LTIP Units - The number of 2017 LTIP Units that are earned based on performance vest quarterly in 2018 in equal increments, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

 

The number of shares earned under the Relative TSR PRSUs depended generally on the level of achievement of Omega’s TSR relative to other real estate investment trusts in the MSCI U.S. REIT Index over the performance period indicated. We awarded the following Relative TSR PRSUs to employees:

 

  Name   Grant Date   PRSUs Granted   Performance Period  
  2013 Relative TSR     1/1/2011     93,183     12/31/2011-12/31/2013  
  2014 Transition Relative TSR     12/31/2013     77,371     12/31/2013-12/31/2014  
  2015 Transition Relative TSR     12/31/2013     77,368     12/31/2013-12/31/2015  
  2016 Transition Relative TSR     12/31/2013     115,781     12/31/2013-12/31/2016  
  2016 Relative TSR     1/1/2014     154,584     1/1/2014-12/31/2016  
  2017 Relative TSR     3/31/2015     154,716     1/1/2015-12/31/2017  
  2017 Relative TSR     4/1/2015     54,151     1/1/2015-12/31/2017  
                727,154         

 

2013 Relative TSR - In January 2014, our Compensation Committee reviewed the performance and determined the performance targets were met at the “high” level. The 2013 Relative TSR PRSUs vested and were distributed 25% per quarter on the last day of each calendar quarter in 2014.

 

2014 Transition Relative TSR - The 2014 Transition Relative TSR PRSUs vested on December 31, 2014. In January 2015, our Compensation Committee reviewed the performance and determined that 61,769 shares were earned. The shares were distributed in January 2015.

 

2015 Transition Relative TSR - The number of 2015 Transition Relative TSR PRSUs that are earned based on performance vest on December 31, 2015, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

 

2016 Transition Relative TSR - The number of 2016 Transition Relative TSR PRSUs that are earned based on performance vest on December 31, 2016, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

 

2016 Relative TSR - The number of 2016 Relative TSR PRSUs that are earned based on performance vest quarterly in 2017 in equal increments, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

 

2017 Relative TSR - The number of 2017 Relative TSR PRSUs that are earned based on performance vest quarterly in 2018 in equal increments, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

 

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The following table summarizes our total unrecognized compensation cost as of June 30, 2015 associated with outstanding restricted stock, restricted stock units, PRSU awards, and LTIP Unit awards to employees:

 

    Grant Year   Shares/ Units   Grant Date
Average Fair
Value Per
Unit/ Share
  Total
Compensation
Cost
(in millions)
  Weighted
Average
Period of
Expense
Recognition
(in months)
  Unrecognized
Compensation
Cost
(in millions)
 
                                                 
Restricted stock units     2013       142,494     $ 29.80     $ 4.2       36     $ 3.2  
2015 Transition TSR     2013       77,369       7.48       0.6       24       0.1  
2016 Transition TSR     2013       115,785       8.67       1.0       36       0.5  
2015 Transition Relative TSR     2013       77,368       13.06       1.0       24       0.3  
2016 Transition Relative TSR     2013       115,781       14.25       1.7       36       0.8  
Restricted stock units     2014       122,137       29.80       3.6       36       1.8  
2016 TSR     2014       154,584       8.67       1.3       48       0.8  
2016 Relative TSR     2014       154,584       14.25       2.2       48       1.4  
2017 Restricted stock units     2015       123,693       40.57       5.0       33       4.6  
2017 LTIP Units     2015       154,716       14.66       2.3       45       2.1  
2017 Relative TSR     2015       154,716       22.50       3.5       45       3.2  
2017 Restricted stock units     2015       39,914       40.74       1.6       33       1.5  
2017 LTIP Units     2015       54,151       14.45       0.8       45       0.7  
2017 Relative TSR     2015       54,151       22.91       1.2       45       1.2  
Restricted stock units     2015       10,644       12.36       0.1       9       0.1  
Restricted stock units     2015       19,825       24.92       0.5       21       0.4  
Restricted stock units     2015       7,799       35.08       0.3       33       0.2  
Total             1,579,711     $ 19.63     $ 30.9             $ 22.9  

 

We used a Monte Carlo model to estimate the fair value for PRSUs and the LTIP Units granted to the employees.

 

Director Restricted Stock Grants

 

As of June 30, 2015, we had 23,649 shares of restricted stock outstanding to directors. The directors’ restricted shares are scheduled to vest over the next three years. As of June 30, 2015, the unrecognized compensation cost associated with outstanding director restricted stock grants is approximately $0.4 million.

 

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NOTE 12 – BORROWING ACTIVITIES AND ARRANGEMENTS

 

Secured and Unsecured Borrowings

 

The following is a summary of our long-term borrowings:

 

        Rate as of June 30,    

 

June 30,

 

 

December 31,

      Maturity     2015     2015     2014
            (in thousands)
Secured borrowings:                                
GE Term loan     2019       4.00 %   $ 180,000     $  
HUD mortgages assumed June 2010(1)     2040 - 2045                   126,319  
HUD mortgages assumed October 2011(1)     2036       4.91 %     26,253       26,658  
HUD mortgages assumed December 2011(1)     2044       3.06 %     56,815       57,416  
HUD mortgages assumed December 2012(1)     2041                   41,061  
Total secured borrowings                     263,068       251,454  
                                 
Unsecured borrowings:                                
Revolving line of credit     2018       1.48 %     351,000       85,000  
Term loan     2019       1.69 %     200,000       200,000  
Acquisition Term loan     2017       1.68 %     200,000        
Omega OP Term loan     2017       1.68 %     100,000        
                      851,000       285,000  
                                 
2020 notes     2020                   200,000  
2022 notes     2022       6.75 %     575,000       575,000  
2024 notes     2024       5.875 %     400,000       400,000  
2024 notes     2024       4.95 %     400,000       400,000  
2025 notes     2025       4.50 %     250,000       250,000  
2027 notes     2027       4.50 %     700,000        
Subordinated debt     2021       9.00 %     20,679       20,747  
                      2,345,679       1,845,747  
Discount - net                     (11,823 )     (3,698 )
Total unsecured borrowings                     3,184,856       2,127,049  
Total – net                   $ 3,447,924     $ 2,378,503  

 

(1) Reflects the weighted average annual contractual interest rate on the mortgages at June 30, 2015 excluding a 0.5% third-party administration fee.

 

Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As of June 30, 2015 and December 31, 2014, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.

 

HUD Mortgage Loans Payoff

 

On March 31, 2015, we paid approximately $154.3 million to retire 21 mortgage loans guaranteed by U.S. Department of Housing and Urban Development (“HUD”), totaling approximately $146.9 million. 18 loans had an all-in blended interest rate of 5.35% per annum with maturities between January 2040 and January 2045 and three loans had an all-in blended interest rate of 5.23% per annum with maturities between February 2040 and February 2045. The payoff resulted in a $2.3 million gain on the extinguishment of the debt due to the write-off of the $9.7 million unamortized debt premium recorded at the time of acquisition offset by a prepayment fee of approximately $7.4 million.

 

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On April 30, 2015, we paid approximately $9.1 million to retire one mortgage loan guaranteed by HUD. The loan was assumed as part of an acquisition in a prior year, and had an interest rate of 4.35% per annum with maturity on March 1, 2041. The payoff resulted in a $1.0 million gain on the extinguishment of the debt due to the write-off of the $1.5 million of fair market value adjustment recorded at the time of acquisition offset by a prepayment fee of approximately $0.5 million.

 

General Electric Term Loan

 

On April 1, 2015, as a result of the Aviv Merger, the Company assumed a $180 million secured term loan with General Electric Capital Corporation (“GE”). On each payment date, the Company pays interest only in arrears on any outstanding principal balance until February 1, 2017 when principal and interest will be paid in arrears based on a thirty year amortization schedule. The interest rate is based on LIBOR, with a floor of 50 basis points, plus a margin of 350 basis points. The interest rate at June 30, 2015 was 4.00%. The initial term expires in December 2019 with the full balance of the loan due at that time.

 

Bank Credit Facilities

 

On June 27, 2014, we entered into a $1.2 billion unsecured credit facility, comprised of a $1 billion senior unsecured revolving credit facility (the “Revolving Credit Facility”) and a $200 million senior unsecured term loan facility (the “Term Loan Facility” and, collectively, the “2014 Credit Facilities”).

 

On April 1, 2015, Omega entered into a First Amendment to Credit Agreement (the “First Amendment to Omega Credit Agreement”) which amended the 2014 Credit Facilities. Under the First Amendment to Omega Credit Agreement, Omega (i) increased the aggregate revolving commitment amount under the Revolving Credit Facility from $1 billion to $1.25 billion and (ii) obtained a $200 million senior unsecured incremental term loan facility (the “Acquisition Term Loan Facility”).

 

The Revolving Credit Facility is priced at LIBOR plus an applicable percentage (beginning at 130 basis points, with a range of 92.5 to 170 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings, plus a facility fee based on the same ratings (initially 25 basis points, with a range of 12.5 to 30 basis points). The Revolving Credit Facility is used for acquisitions and general corporate purposes. At June 30, 2015, we had a total of $351.0 million borrowings outstanding under the Revolving Credit Facility. The Revolving Credit Facility matures on June 27, 2018, subject to a one-time option by us to extend such maturity date by one year.

 

The Term Loan Facility is priced at LIBOR plus an applicable percentage (beginning at 150 basis points, with a range of 100 to 195 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. At June 30, 2015, we had a total of $200.0 million in borrowings outstanding under the Term Loan Facility. The Term Loan Facility matures on June 27, 2019.

 

The Acquisition Term Loan Facility is priced at LIBOR plus an applicable percentage (beginning at 150 basis points, with a range of 100 to 195 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. At June 30, 2015, we had a total of $200.0 million in borrowings outstanding under the Acquisition Term Loan Facility. The Acquisition Term Loan Facility matures on June 27, 2017, subject to Omega’s option to extend the maturity date of the Acquisition Term Loan Facility twice, the first extension until June 27, 2018 and the second extension until June 27, 2019.

 

Omega OP Term Loan Facility

 

On April 1, 2015, Omega OP entered into a $100 million senior unsecured term loan facility (the “Omega OP Term Loan Facility”). The Omega OP Term Loan Facility is priced at LIBOR plus an applicable percentage (beginning at 150 basis points, with a range of 100 to 195 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. The Omega OP Term Loan Facility matures on June 27, 2017, subject to Omega OP’s option to extend such maturity date twice, the first extension until June 27, 2018 and the second extension until June 27, 2019. At June 30, 2015, we had a total of $100.0 million borrowings outstanding under the Omega OP Term Loan Facility.

 

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$200 Million 7.5% Senior Notes due 2020 Redemption

 

On March 13, 2015, Omega redeemed all of its outstanding 7.5% Senior Notes due 2020 (the “2020 Notes”) at a redemption price of approximately $208.7 million, consisting of 103.750% of the principal amount, plus accrued and unpaid interest on such notes to, but not including, the date of redemption.

 

In connection with the redemption, during the first quarter of 2015, we recorded approximately $11.7 million redemption related costs and write-offs, including $7.5 million in prepayment fees for early redemption and $4.2 million of write-offs associated with unamortized deferred financing costs and discount. The consideration for the redemption of the 2020 Notes was funded from the net proceeds of the 10.925 million share common stock offering. See Note 9 Dividends and Equity for additional details.

 

Issuance of $700 Million of Senior Notes

 

On March 18, 2015, we sold $700 million aggregate principal amount of our 4.50% Senior Notes due 2027 (the “2027 Notes”). The 2027 Notes were sold at an issue price of 98.546% of their face value before the initial purchasers’ discount. The Company’s total net proceeds from the offering, after deducting initial purchasers’ discounts and other offering expenses, were approximately $683 million. The net proceeds of the offering were used for general corporate purposes, including the repayment of Aviv indebtedness on April 1, 2015 in connection with the Aviv Merger, and repayment of future maturities on Omega’s outstanding debt.

 

The 2027 Notes mature on April 1, 2027. The 2027 Notes bear an interest rate of 4.50% per annum, and are fully and unconditionally guaranteed, jointly and severally, by our existing and future subsidiaries that guarantee indebtedness for money borrowed by Omega in a principal amount at least equal to $50 million (including as of the date hereof our existing senior notes and the facilities under our credit agreement). The 2027 Notes are Omega’s unsecured senior obligations and rank equally in right of payment with all of Omega’s existing and future senior debt and is senior in right of payment to all of Omega’s existing and future subordinated debt. Omega may redeem some or all of the 2027 Notes prior to January 1, 2027 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium calculated by reference to U.S. treasuries with a maturity comparable to the remaining term of the 2027 Notes, and accrued and unpaid interest, if any, to, but not including, the applicable redemption date. The 2027 Notes will be redeemable at any time on or after January 1, 2027 at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date.

 

$250 Million of Senior Notes Exchange Offer

 

On June 17, 2015, we commenced an offer to exchange $250 million of our 4.50% Senior Notes due 2025 that have been registered under the Securities Act of 1933 (the “Exchange Notes”) for $250 million of our outstanding 4.50% Senior Notes due 2025, which were issued on September 11, 2014 in a private placement (the “Initial Notes”). The exchange offer was conducted upon the terms and subject to the conditions set forth in the prospectus dated June 17, 2015, and the related letter of transmittal.

 

All of the $250 million aggregate principal amount of the Initial Notes were validly tendered and not withdrawn prior to the expiration of the exchange offer, and were exchanged for Exchange Notes as of July 17, 2015, pursuant to the terms of the exchange offer. The Exchange Notes are identical in all material respects to the Initial Notes, except that the Exchange Notes have been registered under the Securities Act of 1933 and the provisions of the Initial Notes relating to transfer restrictions, registration rights and additional interest do not apply to the Exchange Notes.

 

Other Debt Repayments

 

In connection with the Aviv Merger on April 1, 2015, the Company assumed notes payable with a face amount of $650.0 million and a revolving credit facility with an outstanding balance of $525.0 million. In connection with the Aviv Merger, the Company repaid this debt assumed from Aviv on April 1, 2015. Due to the contractual requirements for early repayments; the Company paid approximately $705.6 million for the $650.0 million notes assumed. The amount repaid in connection with the revolving credit facility was $525.0 million.

 

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NOTE 13 – FINANCIAL INSTRUMENTS

 

At June 30, 2015 and December 31, 2014, the carrying amounts and fair values of our financial instruments were as follows:

 

    June 30, 2015     December 31, 2014  
   

Carrying

Amount

 

Fair

Value

 

Carrying

Amount

  Fair
Value
 
Assets:   (in thousands)  
Cash and cash equivalents   $ 25,154     $ 25,154     $ 4,489     $ 4,489  
Restricted cash     21,545       21,545       29,076       29,076  
Investments in direct financing leases     571,377       571,377       539,232       539,232  
Mortgage notes receivable – net     682,255       681,084       648,079       642,626  
Other investments – net     82,955       83,973       48,952       49,513  
Totals   $ 1,383,286     $ 1,383,133     $ 1,269,828     $ 1,264,936  
Liabilities:                                
Revolving line of credit   $ 351,000     $ 351,000     $ 85,000     $ 85,000  
Term loan     200,000       200,000       200,000       200,000  
Acquisition Term loan     200,000       200,000              
Omega OP Term loan     100,000       100,000              
7.50% notes due 2020 – net     —              198,235       264,269  
6.75% notes due 2022 – net     580,063       783,598       580,410       677,851  
5.875% notes due 2024 – net     400,000       470,977       400,000       449,242  
4.95% notes due 2024 – net     395,051       408,036       394,768       410,358  
4.50% notes due 2025 – net     247,994       250,275       247,889       244,053  
4.50% notes due 2027 – net     690,069       675,259              
GE Term loan due 2019     180,000       180,000              
HUD debt     83,068       81,657       251,454       266,434  
Subordinated debt     20,679       29,119       20,747       26,434  
Totals   $ 3,447,924     $ 3,729,921     $ 2,378,503     $ 2,623,641  

 

Fair value estimates are subjective in nature and are dependent on a number of important assumptions, including estimates of future cash flows, risks, discount rates and relevant comparable market information associated with each financial instrument (see Note 2 - Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2014). The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts.

  

The following methods and assumptions were used in estimating fair value disclosures for financial instruments.

  

Cash and cash equivalents and restricted cash: The carrying amount of cash and cash equivalents and restricted cash reported in the Consolidated Balance Sheet approximates fair value because of the short maturity of these instruments (i.e., less than 90 days) (Level 1).

 

Direct financing leases: The fair value of the investments in direct financing leases are estimated using a discounted cash flow analysis, using interest rates being offered for similar leases to borrowers with similar credit ratings (Level 3).

 

Mortgage notes receivable: The fair value of the mortgage notes receivables are estimated using a discounted cash flow analysis, using interest rates being offered for similar loans to borrowers with similar credit ratings (Level 3).

 

25
 

 

Other investments: Other investments are primarily comprised of notes receivable. The fair values of notes receivable are estimated using a discounted cash flow analysis, using interest rates being offered for similar loans to borrowers with similar credit ratings (Level 3).

 

Revolving line of credit and term loans: The fair value of our borrowings under variable rate agreements are estimated using an expected present value technique based on expected cash flows discounted using the current market rates (Level 3).

 

Senior notes and subordinated debt: The fair value of our borrowings under fixed rate agreements are estimated based on open market trading activity provided by a third party (Level 2).

  

HUD debt: The fair value of our borrowings under HUD debt agreements are estimated based on quotes obtained by HUD debt brokers (Level 2).

 

NOTE 14 – LITIGATION

 

We are subject to various legal proceedings, claims and other actions arising out of the normal course of business. While any legal proceeding or claim has an element of uncertainty, management believes that the outcome of each lawsuit, claim or legal proceeding that is pending or threatened, or all of them combined, will not have a material adverse effect on our consolidated financial position or results of operations.

 

As previously reported, four putative class actions were filed by purported stockholders of Aviv against Aviv, its directors, the Company and Merger Sub challenging the Aviv Merger and alleging that the disclosures in the Form S-4 filed with the Securities and Exchange Commission in connection with the Aviv Merger were inadequate to allow Aviv shareholders to make an informed decision whether to approve the Aviv Merger. On January 28, 2015, the court entered a stipulated consolidation order consolidating the four lawsuits into a single proceeding and on March 20, 2015, the court granted the defendants’ motions to dismiss the consolidated complaint. The time period for taking an appeal of the grant of the motions to dismiss has now expired and, as a result, we believe these matters are now concluded.

 

In addition to these lawsuits, Omega is aware of a derivative demand letter that was delivered to the Aviv board of directors by Gary Danley (“Danley”), who subsequently filed one of the aforementioned lawsuits. The allegations in the demand letter are substantially similar to the allegations in Danley’s complaint.

 

Omega believes that these actions have no merit and intends to defend vigorously against any further attempts to prosecute these claims.

   

NOTE 15 – EARNINGS PER SHARE

 

The computation of basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the relevant period. Diluted EPS is computed using the treasury stock method, which is net income divided by the total weighted-average number of common outstanding shares plus the effect of dilutive common equivalent shares during the respective period. Dilutive common shares reflect the assumed issuance of additional common shares pursuant to certain of our share-based compensation plans, including stock options, restricted stock and performance restricted stock units and the assumed issuance of additional shares related to Omega OP Units held by outside investors.

 

26
 

 

The following tables set forth the computation of basic and diluted earnings per share:

                     
   

Three Months Ended
June 30,

  Six Months Ended
June 30,
 
    2015   2014   2015     2014  
    (in thousands, except per share amounts)
Numerator:                                
Net income   $ 43,466     $ 46,817     $ 86,518     $ 102,646  
Less: Net income attributable to noncontrolling interests     (2,038 )           (2,038 )      
Net income available to common stockholders   $ 41,428     $ 46,817     $ 84,480     $ 102,646  

Denominator:

                             
Denominator for basic earnings per share     182,697       126,474       158,521       125,467  
Effect of dilutive securities:                                
Common stock equivalents     2,796       962       1,628       663  
Noncontrolling interest – OP units     8,989             4,495        
      Denominator for diluted earnings per share     194,482       127,436       164,644       126,130  
                                 
Earnings per share – basic:                                
Net income available to common stockholders   $ 0.23     $ 0.37     $ 0.53     $ 0.82  
Earnings per share – diluted:                                
Net income   $ 0.22     $ 0.37     $ 0.53     $ 0.81  

 

NOTE 16 – CONSOLIDATING FINANCIAL STATEMENTS

 

As of June 30, 2015, we had outstanding: (i) $575 million 6.75% Senior Notes due 2022, (ii) $400 million 5.875% Senior Notes due 2024, (iii) $400 million 4.95% Senior Notes due 2024, (iv) $250 million 4.5% Senior Notes due 2025 and (v) $700 million 4.5% Senior Notes due 2027 (collectively, the “Senior Notes”). The Senior Notes are fully and unconditionally guaranteed, jointly and severally, by each of our 100% owned subsidiaries that guarantee other indebtedness of Omega or any of the subsidiary guarantors. All of our subsidiaries that guarantee the Senior Notes also guarantee amounts outstanding under the 2014 Credit Facilities. Any subsidiary that we properly designate as an “unrestricted subsidiary” under the indentures governing the high-yield Senior Notes due 2022 and 2024 will not provide guarantees of the Senior Notes or the First Amendment to Omega Credit Agreement.

 

27
 

  

The following summarized condensed consolidating financial information segregates the financial information of the non-guarantor subsidiaries (which is comprised of 22 “unrestricted subsidiaries”) from the financial information of Omega Healthcare Investors, Inc. and the subsidiary guarantors under the Senior Notes. The results and financial position of acquired entities are included from the dates of their respective acquisitions.

 

As of June 30, 2015, the 22 subsidiaries were required by relevant documentation to be added as subsidiary guarantors, and are therefore presented as subsidiary guarantors in the following table. Such subsidiaries were formally joined as subsidiary guarantors under the relevant documentation, effective August 2015.

 

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATING BALANCE SHEETS

Unaudited

(in thousands, except per share amounts)

 

    June 30, 2015  
      Issuer & Subsidiary Guarantors      

Non-Guarantor Subsidiaries

      Elimination Company       Consolidated  
                                 
ASSETS                                
Real estate properties                                
Land and buildings   $ 6,216,154     $ 297,520     $ -     $ 6,513,674  
Less accumulated depreciation     (879,004 )     (19,730 )     -       (898,734 )
Real estate properties – net     5,337,150       277,790       -       5,614,940  
Investments in direct financing leases     571,377       -       -       571,377  
Mortgage notes receivable     682,255       -       -       682,255  
      6,590,782       277,790       -       6,868,572  
Other investments     82,955       -       -       82,955  
      6,673,737       277,790       -       6,951,527  
Assets held for sale – net     15,903       -       -       15,903  
Total investments     6,689,640       277,790       -       6,967,430  
                                 
Cash and cash equivalents     22,916       2,238       -       25,154  
Restricted cash     7,056       14,489       -       21,545  
Accounts receivable – net     183,681       5,356       -       189,037  
Goodwill     526,807       16,286       -       543,093  
Investment in affiliates     186,316       -       (186,316 )     -  
Intercompany receivable     -       1,692       (1,692 )     -  
Other assets     60,309       7,108       -       67,417  
Total assets   $ 7,676,725     $ 324,959     $ (188,008 )   $ 7,813,676  
                                 
LIABILITIES AND EQUITY                                
Revolving line of credit   $ 351,000     $ -     $ -     $ 351,000  
Term loan     500,000       -       -       500,000  
Secured borrowings     180,000       216,620       (133,552 )      263,068  
Unsecured borrowings – net     2,313,177       20,679       -     2,333,856  
Accrued expenses and other liabilities     258,071       13,513       -       271,584  
Deferred income taxes     -       16,852       -       16,852  
Total liabilities     3,602,248       267,664       (133,552 )     3,736,360  
                                 
Equity:                                
Common stock     18,332       -       -       18,332  
Equity investment in affiliates     -       46,318       (46,318 )     -  
Common stock – additional paid-in capital     4,503,180       -       -       4,503,180  
Cumulative net earnings     1,232,478       8,138       (8,138 )     1,232,478  
Cumulative dividends paid     (2,047,257 )     -       -       (2,047,257 )
Accumulated other comprehensive income     -       2,839       -       2,839  
Total stockholders’ equity     3,706,733       57,295       (54,456 )     3,709,572  
Noncontrolling interest     367,744       -       -       367,744  
Total equity     4,074,477       57,295       (54,456 )     4,077,316  
Total liabilities and equity   $ 7,676,725     $ 324,959     $ (188,008 )   $ 7,813,676  

 

28
 

 

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATING BALANCE SHEETS

Unaudited

(in thousands, except per share amounts)

 

    December 31, 2014  
      Issuer & Subsidiary Guarantors      

Non-Guarantor Subsidiaries

     

Elimination Company

      

Consolidated

 
                                 
ASSETS                                
Real estate properties                                
Land and buildings   $ 3,108,597     $ 115,188     $     $ 3,223,785  
Less accumulated depreciation     (805,679 )     (16,033 )           (821,712 )
Real estate properties – net     2,302,918       99,155             2,402,073  
Investments in direct financing leases     539,232                   539,232  
Mortgage notes receivable     648,079                   648,079  
      3,490,229       99,155             3,589,384  
Other investments     48,952                   48,952  
      3,539,181       99,155             3,638,336  
Assets held for sale – net     12,792                   12,792  
Total investments     3,551,973       99,155             3,651,128  
                                 
Cash and cash equivalents     4,489                   4,489  
Restricted cash     15,143       13,933             29,076  
Accounts receivable – net     163,610       4,566             168,176  
Investment in affiliates     7,941             (7,941 )      
Intercompany receivable           1,005       (1,005 )      
Other assets     60,820       7,956             68,776  
    Total assets   $ 3,803,976     $ 126,615     $ (8,946 )   $ 3,921,645  
                                 
LIABILITIES AND EQUITY                                
Revolving line of credit   $ 85,000     $     $     $ 85,000  
Term loan     200,000                   200,000  
Secured borrowings     167,379       84,075             251,454  
Unsecured borrowings – net     1,821,302       20,747             1,842,049  
Accrued expenses and other liabilities     128,968       12,847             141,815  
    Total liabilities     2,402,649       117,669             2,520,318  
                                 
Equity:                                
Common stock     12,761                   12,761  
Common stock – additional paid-in-capital     2,136,234                   2,136,234  
Cumulative net earnings     1,147,998       8,946       (8,946 )     1,147,998  
Cumulative dividends paid     (1,895,666 )                 (1,895,666 )
    Total stockholders’ equity     1,401,327       8,946       (8,946 )     1,401,327  
    Total liabilities and equity   $ 3,803,976     $ 126,615     $ (8,946 )   $ 3,921,645  

  

29
 

 

OMEGA HEALTHCARE INVESTORS, INC. 

CONSOLIDATING STATEMENTS OF OPERATIONS 

Unaudited 

(in thousands, except per share amounts) 

                                 
    Three Months Ended June 30, 2015     Six Months Ended June 30, 2015  
    Issuer &
Subsidiary
Guarantors
    Non –
Guarantor
Subsidiaries
   

 

Elimination

    Consolidated     Issuer &
Subsidiary
Guarantors
    Non –
Guarantor
Subsidiaries
   

 Elimination

    Consolidated  
Revenue                                                                
Rental income   $ 157,337     $ 5,775     $ -     $ 163,112     $ 254,950     $ 9,126     $ -     $ 264,076  
Income from direct financing leases     15,020       -       -       15,020       29,366       -       -       29,366  
Mortgage interest income     17,562       -       -       17,562       34,141       -       -       34,141  
Other investment income – net     2,017       -       -       2,017       3,548       -       -       3,548  
Total operating revenues     191,936       5,775       -       197,711       322,005       9,126       -       331,131  
                                                                 
Expenses                                                                
Depreciation and amortization     56,818       2,338       -       59,156       86,081       3,685       -       89,766  
General and administrative     10,277       31       -       10,308       16,257       65       -       16,322  
Acquisition costs     44,571       2,513       -       47,084       49,439       2,513       -       51,952  
Impairment loss on real estate properties     6,916       -       -       6,916       12,898       -       -       12,898  
Provision for uncollectible mortgages, notes and accounts receivable     (7 )     -       -       (7 )     (9 )     -       -       (9 )
Total operating expenses     118,575       4,882       -       123,457       164,666       6,263       -       170,929  
                                                                 
Income before other income and expense     73,361       893       -       74,254       157,339       2,863       -       160,202  
Other income (expense):                                                                
Interest income     3       4       -       7       192       8       -       200  
Interest expense     (35,984 )     (2,264 )     -       (38,248 )     (67,119 )     (3,488 )     -       (70,607 )
Interest – amortization of deferred financing costs     (1,820 )     (6 )     -       (1,826 )     (3,168 )     (11 )     -       (3,179 )
Interest – refinancing gain (costs)     1,016       -       -       1,016       (8,361 )     -       -       (8,361 )
Equity in earnings     (1,553 )     -       1,553       -       (808 )     -       808       -  
Total other expense     (38,338 )     (2,266 )     1,553       (39,051 )     (79,264 )     (3,491 )     808     (81,947 )
                                                                 
Income before gain on assets sold     35,023       (1,373 )     1,553       35,203       78,075       (628 )     808       78,255  
Gain on assets sold – net     8,802       -       -       8,802       8,802       -       -       8,802  
Income from continuing operations before income taxes     43,825       (1,373 )     1,553       44,005       86,877       (628 )     808       87,057  
Income taxes     (359 )     (180 )     -       (539 )     (359 )     (180 )     -       (539 )
Net income     43,466       (1,553 )     1,553       43,466       86,518       (808 )     808       86,518  
Net income attributable to noncontrolling interest     (2,038 )     73       (73 )     (2,038 )     (2,038 )     73       (73 )     (2,038 )
Net income available to common stockholders   $ 41,428     $ (1,480 )   $ 1,480     $ 41,428     $ 84,480     $ (735 )   $ 735     $ 84,480  

 

30
 

 

OMEGA HEALTHCARE INVESTORS, INC. 

CONSOLIDATING STATEMENTS OF OPERATIONS 

Unaudited 

(in thousands, except per share amounts)