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| OHI > SEC Filings for OHI > Form 10-K on 2-Mar-2009 | All Recent SEC Filings |
2-Mar-2009
Annual Report
Forward-looking Statements, Reimbursement Issues and Other Factors Affecting Future Results
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this document. This document contains forward-looking statements within the meaning of the federal securities laws, including statements regarding potential financings and potential future changes in reimbursement. These statements relate to our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements other than statements of historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology including, but not limited to, terms such as "may," "will," "anticipates," "expects," "believes," "intends," "should" or comparable terms or the negative thereof. These statements are based on information available on the date of this filing and only speak as to the date hereof and no obligation to update such forward-looking statements should be assumed. Our actual results may differ materially from those reflected in the forward-looking statements contained herein as a result of a variety of factors, including, among other things:
(i) those items discussed under "Risk Factors" in Item 1A herein;
(ii) uncertainties relating to the business operations of the operators of our assets, including those relating to reimbursement by third-party payors, regulatory matters and occupancy levels;
(iii) the ability of any operators in bankruptcy to reject unexpired lease obligations, modify the terms of our mortgages and impede our ability to collect unpaid rent or interest during the process of a bankruptcy proceeding and retain security deposits for the debtors' obligations;
(iv) our ability to sell closed or foreclosed assets on a timely basis and on terms that allow us to realize the carrying value of these assets;
(v) our ability to negotiate appropriate modifications to the terms of our credit facility;
(vi) our ability to manage, re-lease or sell any owned and operated facilities;
(vii) the availability and cost of capital;
(viii) our ability to maintain our credit ratings;
(ix) competition in the financing of healthcare facilities;
(x) regulatory and other changes in the healthcare sector;
(xi) the effect of economic and market conditions generally and, particularly, in the healthcare industry;
(xii) changes in the financial position of our operators;
(xiii) changes in interest rates;
(xiv) the amount and yield of any additional investments;
(xv) changes in tax laws and regulations affecting real estate investment trusts;
(xvi) our ability to maintain our status as a real estate investment trust;
(xvii) changes in our credit ratings and the ratings of our debt and preferred securities;
(xviii) the potential impact of a general economic slowdown on governmental budgets and healthcare reimbursement expenditures; and
(xix) the effect of the recent financial crisis and severe tightening in the global credit markets.
Overview
We have one reportable segment consisting of investments in healthcare related real estate properties. Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities located in the United States. 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. In July 2008, we assumed operating responsibilities for 15 of our facilities due to the bankruptcy of one of our operator/tenants. In September, we entered into an agreement to lease these facilities to a new operator/tenant. The new operator/tenant assumed operating responsibility for 13 of the 15 facilities effective September 1, 2008. We continue to be responsible for the two remaining facilities as of December 31, 2008 that are in the process of being transitioned to the new operator pending approval by state regulators.
Our portfolio of investments at December 31, 2008, consisted of 256 healthcare
facilities, located in 28 states and operated by 25 third-party operators. Our
gross investment in these facilities totaled approximately $1.5 billion at
December 31, 2008, with 99% of our real estate investments related to long-term
healthcare facilities. This portfolio is made up of (i) 227 SNFs, (ii) seven
ALFs, (iii) two rehabilitation hospitals owned and leased to third parties,
(iii) two ILFs, (iv) fixed rate mortgages on 15 SNFs, (v) two SNFs that are
owned and operated by us and (vi) one SNF that is currently held for sale. At
December 31, 2008, we also held other investments of approximately $29.9
million, consisting primarily of secured loans to third-party operators of our
facilities.
The recent downturn in the U.S. economy and other factors could result in significant cost-cutting at both the federal and state levels, resulting in a reduction of reimbursement rates and levels to our operators under both the Medicare and Medicaid programs. Current market and economic conditions may have a significant impact on state budgets and health care spending. The states with the most significant projected budget deficits in which the Company owns facilities and the percentage of our gross investments in such states as of December 31, 2008 are as follows: Alabama (3.0%), Arizona (1.3%), California (2.4%), Florida (11.7%), New Hampshire (1.5%) and Rhode Island (2.7%). These deficits, exacerbated by the potential for increased enrollment in Medicaid due to rising unemployment levels and declining family incomes, could cause states to reduce state expenditures under their respective state Medicaid programs by lowering reimbursement rates.
We currently believe that our operator coverage ratios are strong and that our operators can absorb moderate reimbursement rate reductions under Medicaid and Medicare and still meet their obligations to us. However, significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse effect on an operator's results of operations and financial condition, which could adversely affect the operator's ability to meet its obligations to us.
2008 Highlights
The following significant highlights occurred during the twelve-month period ended December 31, 2008.
Financing
Preferred Stock Repurchase/Gain
On October 16, 2008, we purchased 400,000 shares of our Series D Preferred Stock (NYSE:OHI PrD) at a price of $18.90 per share. The liquidation preference for the Series D Preferred Stock ("Series D") is $25.00 per share. The purchase of the Series D Preferred Stock shares resulted in a fourth quarter 2008 gain of approximately $2.1 million, net of a non-cash charge of $0.3 million reflecting the write-off of the pro-rata portion of the original issuance costs of the Series D Preferred Stock.
6.0 Million Share Common Stock Offering
On September 19, 2008, we closed an underwritten public offering of 6.0 million shares our common stock at $16.37 per share. The net proceeds, after deducting underwriting discounts and offering expenses, were approximately $96.9 million. The net proceeds were used to repay indebtedness under our senior credit facility and for working capital and general corporate purposes.
5.9 Million Common Stock Offering
On May 6, 2008, we have issued 5.9 million shares of our common stock at $16.93 per share, in a registered direct placement to a number of institutional investors. The net proceeds from the offering were approximately $98.8 million, after deducting the placement agent's fee and other estimated offering expense. The net proceeds were used to repay indebtedness under our senior credit facility.
We have a Dividend Reinvestment and Common Stock Purchase Plan (the "DRSPP") that allows for the reinvestment of dividends and the optional purchase of our common stock. For the twelve- month period ended December 31, 2008, we issued 2,067,809 shares of common stock for approximately $34.1 million in net proceeds.
On October 29, 2008, we announced the immediate suspension of the optional cash purchase component of our DRSPP until further notice. Dividend reinvestment and all other features of the DRSPP will continue as set forth in the DRSPP, including sales, transfers and certificate issuances of stock held in participant accounts.
Stockholders participating in the DRSPP who have elected to reinvest dividends will continue to have cash dividends reinvested in accordance with the DRSPP. Any checks or other funds received by Computershare Trust Company, N.A. from DRSPP participants on or after October 15, 2008, for optional cash investments will be returned without interest.
Dividends
Common Dividends
On January 15, 2009, the Board of Directors declared a common stock dividend of $0.30 per share that was paid on February 17, 2009 to common stockholders of record on January 30, 2009.
On October 16, 2008, the Board of Directors declared a common stock dividend of $0.30 per share. The common dividend was paid November 17, 2008 to common stockholders of record on October 31, 2008.
On July 16, 2008, the Board of Directors declared a common stock dividend of $0.30 per share. The common dividend was paid August 15, 2008 to common stockholders of record on July 31, 2008.
On April 16, 2008, the Board of Directors declared a common stock dividend of $0.30 per share, an increase of $0.01 per common share compared to the prior quarter. The common dividend was paid May 15, 2008 to common stockholders of record on April 30, 2008.
On January 17, 2008, the Board of Directors declared a common stock dividend of $0.29 per share, an increase of $0.01 per common share compared to the prior quarter. The common dividend was paid February 15, 2008 to common stockholders of record on January 31, 2008.
Series D Preferred Dividends
On January 15, 2009, the Board of Directors declared regular quarterly dividends of approximately $0.52344 per preferred share on its Series D Preferred Stock, that were paid February 17, 2009 to preferred stockholders of record on January 30, 2009. The liquidation preference for our Series D Preferred Stock is $25.00 per share. Regular quarterly preferred dividends for the Series D Preferred Stock represent dividends for the period November 1, 2008 through January 31, 2009.
On October 16, 2008, the Board of Directors declared regular quarterly dividends of approximately $0.52344 per preferred share on the Series D preferred stock that were paid November 17, 2008 to preferred stockholders of record on October 31, 2008.
On July 16, 2008, the Board of Directors declared regular quarterly dividends of approximately $0.52344 per preferred share on the Series D Preferred Stock that were paid August 15, 2008 to preferred stockholders of record on July 31, 2008.
On April 16, 2008, the Board of Directors declared regular quarterly dividends of approximately $0.52344 per preferred share on the Series D Preferred Stock that were paid May 15, 2008 to preferred stockholders of record on April 30, 2008.
On January 17, 2008, the Board of Directors declared regular quarterly dividends of approximately $0.52344 per preferred share on the Series D Preferred Stock that were paid February 15, 2008 to preferred stockholders of record on January 31, 2008.
Portfolio Developments, New Investments Assets Sales and Other Developments
The partial expiration of certain Medicare rate increases has had an adverse impact on the revenues of the operators of nursing home facilities and has negatively impacted some operators' ability to satisfy their monthly lease or debt payment to us. See Item 1 Business - Healthcare Reimbursement and Regulation above for further discussion. In several instances, we hold security deposits that can be applied in the event of lease and loan defaults, subject to applicable limitations under bankruptcy law with respect to operators seeking protection under title 11 of the United States Code, 11 U.S.C. §§ 101-1532, as amended and supplemented, (the "Bankruptcy Code").
Below is a brief description, by third-party operator, of new investments or operator related transactions that occurred during the year ended December 31, 2008.
New Investments and Re-leasing Activities
Alpha HealthCare Properties, LLC
On January 17, 2008, we purchased one SNF for $5.2 million from an unrelated third party and leased the facility to Alpha Health Care Properties, LLC ("Alpha"), an existing tenant of ours. The facility was added to Alpha's existing master lease and provides for an additional $0.5 million of cash rent annually.
Advocat Inc.
During the first quarter of 2008, we amended our master lease with Advocat Inc. ("Advocat") to allow for the construction of a new facility to replace an existing facility currently operated by Advocat. Upon completion (estimated to be in 2010), annual cash rent will increase by approximately $0.7 million. As a result of our plan to replace the existing facility, we recorded a $1.5 million impairment loss related to the existing facility during the first quarter of 2008 to record it at its estimated fair value.
CommuniCare Health Services
On April 18, 2008, we completed approximately $123 million of combined new investments with affiliates of CommuniCare, an existing operator. Effective April 18, 2008, we purchased from several unrelated third parties seven (7) SNFs, one (1) ALF and one (1) rehabilitation hospital, all located in Ohio, totaling 709 beds for a total investment of $47.4 million. The facilities were added into our master lease with CommuniCare, increasing annualized cash rent under the master lease by approximately $4.7 million, subject to annual escalators. The term of the CommuniCare master lease was extended to April 30, 2018, with two ten-year renewal options.
Also on April 18, 2008, and simultaneous with the amendment and extension of the master lease with CommuniCare, we entered into a first mortgage loan with CommuniCare in the amount of $74.9 million. This mortgage loan matures on April 30, 2018 and carries an interest rate of 11% per year. The $74.9 million mortgage included $4.9 million in funds placed in escrow for the purchase of a facility that was pending environmental and other studies prior to closure. In December 2008, CommuniCare notified us of their decision not to purchase the additional facility and the escrow agent returned the escrowed funds to us. As of December 31, 2008, the outstanding mortgage note was approximately $69.9 million. CommuniCare used the proceeds of the mortgage loan to acquire seven (7) SNFs located in Maryland, totaling 965 beds from several unrelated third parties. The mortgage loan is secured by a lien on the seven (7) facilities. The mortgage properties are cross-collateralized with the master lease agreement.
Guardian LTC Management, Inc.
On September 30, 2008, we completed a $40.0 million investment with subsidiaries of Guardian LTC Management, Inc. ("Guardian"), an existing operator. The transaction involved the sale and leaseback of four SNFs, one ALF and one ILF all located in Pennsylvania. The facilities and related $4.0 million of initial annual rent were added to an existing master lease with Guardian. The amended and restated master lease now includes 21 facilities and $15.7 million of annual rent, with annual escalators. In addition, the master lease term was extended from August 2016 through September 30, 2018.
Transition of Haven Properties to Formation/Genesis
In January 2008, we purchased from General Electric Capital Corporation ("GE
Capital") a $39.0 million mortgage loan due October 2012 on seven (7) facilities
then operated by Haven Eldercare, LLC ("Haven"). Prior to the acquisition of
this mortgage, we had a $22.8 million second mortgage on these facilities,
resulting in a combined $61.8 million mortgage on these facilities immediately
following the purchase from GE Capital. In conjunction with the above noted
mortgage and purchase option and the application of FIN 46R, we consolidated the
financial statements and real estate of the Haven entity that was the obligor
under this mortgage loan into our financial statements. See Note 1 -
Organization and Basis of Presentation for additional discussion regarding the
impact of the consolidation of this entity. On July 7, 2008, we took ownership
and/or possession of the Haven facilities and TC Healthcare assumed operations
of the facilities. As a result of our taking ownership and/or possession of the
Haven facilities, effective July 7, 2008, we were no longer required to
consolidate the Haven entity pursuant to FIN 46R. Our prior consolidation of the
Haven entity under the mortgage loan resulted in the following adjustments to
our consolidated balance sheet as of December 31, 2007: (i) an increase in total
gross investments of $39.0 million; (ii) an increase in accumulated depreciation
of $3.1 million; (iii) an increase in Accounts receivable - net of $0.4 million;
(iv) an increase in Other long-term borrowings of $39.0 million; and (v) a
reduction of $2.7 million in Cumulative net earnings primarily due to increased
depreciation expense. Our results of operation reflect the impact of the
consolidation of this Haven entity for the period from January 1, 2008 through
July 7, 2008 and the twelve- month periods ended December 31, 2007,
respectively. In 2007, the Haven facilities represented 9% of our total
investment and 8% of our operating revenue.
From November 2007 until July 7, 2008, affiliates of Haven, one of our operators/lessees/mortgagors, operated under Chapter 11 bankruptcy protection. Commencing in February 2008, the assets of Haven were marketed for sale via an auction process to be conducted through proceedings established by the bankruptcy court. The auction process failed to produce a qualified buyer. As a result, and pursuant to our rights as ordered by the bankruptcy court, Haven moved the bankruptcy court to authorize us to credit bid certain of the indebtedness that Haven owed to us in exchange for taking ownership of and transitioning certain of the assets of Haven to a new entity in which we have a substantial economic interest, all of which was approved by the bankruptcy court on July 4, 2008. Effective July 7, 2008, we took ownership and/or possession of 15 facilities previously operated by Haven, and a new entity and interim operator in which we have a substantial economic interest (TC Healthcare) began operating these facilities on our behalf through an independent contractor. For financial reporting purposes, the financial statements of TC Healthcare, the new entity and interim operator which assumed the operations of these facilities on our behalf will be consolidated into our financial statements in accordance with FIN 46R beginning on July 7, 2008. Effective September 1, 2008, TC Healthcare transferred the operations of 13 of the 15 facilities it operated to affiliates of Formation Capital ("Formation"). Therefore, beginning on September 1, 2008, TC Healthcare includes only the financial results of the two remaining facilities that are currently pending state approval prior to the transfer of these facilities.
In January 2008, Haven entered into a debtors-in-possession financing ("DIP") agreement with us and one other financial institution (collectively, the "DIP Lenders"), in which our initial participation was approximately $5.0 million of a $50.0 million total commitment. The agreement was originally scheduled to mature in June 2008 and yield an interest rate of prime plus 3%. On June 4, 2008, the DIP Lenders and Haven amended the DIP agreement (the "Amended DIP") which, among other things, extended the term to allow Haven additional time to sell its assets. As collateral for the Amended DIP, we received the right to use all facility accounts receivable generated from the Omega facilities from June 4, 2008 to satisfy any of our post-June 3, 2008 advances. As of December 31, 2008, we had collected all outstanding balances on the DIP agreement and had $1.2 million net outstanding related to the Amended DIP.
We entered into a Master Transaction Agreement ("MTA") to re-lease the Haven
facilities to affiliates of Formation. The 15 properties consist of 14 SNFs and
one ALF, and are located in Connecticut (5), Rhode Island (4), New Hampshire
(3), Vermont (2) and Massachusetts (1). As part of the transaction, Genesis
Healthcare ("Genesis") has entered into a long-term management agreement with
Formation to oversee the day-to-day operations of each of these facilities. As
of September 30, 2008, we have completed the operational transfer of 13 of the
15 Haven facilities with an annual rent of approximately $10.1 million. The
operational transfer for the two remaining facilities in Vermont is subject to
the receipt of appropriate regulatory approvals, which is expected sometime in
the near future. Annual rent for the facilities that have not closed due to
regulatory requirements is approximately $2.0 million.
The master lease with Formation has an initial term of 10 years with initial annual rent of approximately $12.0 million upon regulatory approval for all facilities. In addition, Formation has an option after the initial 12 months of the lease to convert eight of the leased facilities into mortgaged properties, with economic terms substantially similar to that of the original lease.
On December 31, 2008, we acquired two SNFs in West Virginia, totaling 291 beds, for approximately $19.5 million, from an unrelated third party and leased the facility to Formation. These facilities were added to Formation's existing master lease and provides for an additional $2.4 million of cash rent annually starting January 1, 2009.
Longwood Management Corporation
On September 17, 2008, we purchased the land that our Pico Rivera facility is located on in California, for approximately $1 million.
Sun Healthcare Group, Inc.
On February 1, 2008, we amended our master lease with Sun primarily to: (i) consolidate three existing master leases into one master lease; (ii) extend the lease terms of the agreement through September 2017 for facilities acquired in August 2006; and (iii) allow for the sale of two rehabilitation hospitals currently operated by Sun. On July 1, 2008, the two rehabilitation hospitals were sold for approximately $29.0 million. As a result of the sale, contractual rent decreased by $1.7 million annually beginning July 1, 2008.
Assets Held for Sale
At December 31, 2008, we had one facility that we are marketing for sale, classified as held for sale with a net book value of approximately $0.2 million. In 2008, we recorded an impairment reserve of $0.2 million to reduce the carrying value to our held-for-sale facility to its estimated fair market value.
Asset Sales
· On January 31, 2008, we sold one SNF in California for approximately $1.5 million resulting in a gain of approximately $0.4 million, which was included in our gain/loss from discontinued operations. For additional information, see Note 19 - Discontinued Operations.
· On February 1, 2008, we sold one SNF in California for approximately $1.5 million resulting in a gain of approximately $46 thousand.
· On July 1, 2008, we sold two rehabilitation hospitals in California for approximately $29.0 million resulting in a gain of approximately $12.3 million.
· On September 29, 2008, we sold one SNF in Texas for approximately $0.1 million resulting in a loss of approximately $0.5 million.
Results of Operations
The following is our discussion of the consolidated results of operations, financial position and liquidity and capital resources, which should be read in conjunction with our audited consolidated financial statements and accompanying notes.
Year Ended December 31, 2008 compared to Year Ended December 31, 2007
Operating Revenues
Our operating revenues for the year ended December 31, 2008, were $193.8 million, an increase of $34.2 million over the same period in 2007. Detailed changes in operating revenues for the year ended December 31, 2008 are as follows:
· Mortgage interest income totaled $9.6 million, an increase of $5.7 million over the same period in 2007. The increase was primarily the result of the mortgage financing of seven new facilities in April 2008.
· Other investment income totaled $2.0 million, a decrease of $0.8 million over the same period in 2007. The primary reason for the decrease was the payoff of . . .
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