UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) | ||
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20172018
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | ||
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to _______________
OMEGA HEALTHCARE INVESTORS, INC.
OHI HEALTHCARE PROPERTIES HOLDCO, INC.
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
(Exact name of Registrant as specified in its charter)
Maryland | 1-11316 | 38-3041398 |
(Omega Healthcare Investors, Inc.) | (Omega Healthcare Investors, Inc.) | (Omega Healthcare Investors, Inc.) |
Delaware | ||
(OHI Healthcare Properties Limited Partnership) | (OHI Healthcare Properties Limited Partnership) | (OHI Healthcare Properties Limited Partnership) |
(State of incorporation or organization) | (Commission file number) | (IRS Employer Identification No.) |
303 International Circle, Suite 200, 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.
Omega Healthcare Investors, Inc. Yesx No¨ NooOHI Healthcare Properties Holdco, Inc. YesoNo x
OHI Healthcare Properties Limited Partnership YesoNo x 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).
Omega Healthcare Investors, Inc. Yesx NoNo¨ oOHI Healthcare Properties Holdco, Inc. Yes xNo o
OHI Healthcare Properties Limited Partnership Yesx NoNo o¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one:)
Omega Healthcare Investors, Inc.
Large accelerated filer | x | Accelerated filer¨ | Non-accelerated filer | |||
Smaller reporting company¨ | Emerging growth company¨ |
OHI Healthcare Properties Limited Partnership
Large accelerated filer¨ | Accelerated filer | Non-accelerated filer | x | |||
Smaller reporting company¨ | Emerging growth company¨ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the SecuritiesExchange Act.
Omega Healthcare Investors, Inc. | OHI Healthcare Properties |
OHI Healthcare Properties Limited Partnershipo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Omega Healthcare Investors, Inc. Yes oNoxOHI Healthcare Properties Holdco, Inc. Yes oNo x
OHI Healthcare Properties Limited Partnership Yes oNo x
Omega Healthcare Investors, Inc.Yes¨ | Nox | OHI Healthcare Properties Limited PartnershipYes¨ | Nox |
Indicate the number of shares outstanding of each of the issuers’ classes of common stock as of August 2, 20171, 2018
Omega Healthcare Investors, Inc. | ||
Common Stock, $.10 par value | 200,335,705 | |
OHI Healthcare Properties Limited Partnership | ||
N/A | No common stock outstanding | |
(Class) | (Number of shares) |
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended June 30, 20172018 of Omega Healthcare Investors, Inc., OHI Healthcare Properties Holdco, Inc. (“OHI Holdco”) and OHI Healthcare Properties Limited Partnership (“Omega OP”). Unless stated otherwise or the context otherwise requires, (i) references to “Omega” or the “Company” means Omega Healthcare Investors, Inc. and its consolidated subsidiaries, (ii) references to “Parent” refer to Omega Healthcare Investors, Inc. without regard to its consolidated subsidiaries, (iii) references to “OHI Holdco” means OHI Healthcare Properties Holdco, Inc. and its consolidated subsidiaries and (iv)(iii) references to “Omega OP” means OHI Healthcare Properties Limited Partnership and its consolidated subsidiaries.
Omega is a self-administered real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”).1986. Omega is structured as an umbrella partnership REIT (“UPREIT”) under which all of Omega's assets are owned directly or indirectly by, and all of Omega's operations are conducted directly or indirectly bythrough, its subsidiaries, OHI Holdco andoperating partnership subsidiary, Omega OP.
Parent owned either directly or indirectlyowned approximately 96% of the issued and outstanding partnership units in Omega OP (the “Omega OP Units”) at June 30, 2017. Parent owned approximately 74% of2018. Each Omega OP Units directly and an additional approximately 22% through its 100% ownership in OHI Holdco. Omega OP Units, otherUnit (other than those owned by Parent) is redeemable at the election of the holder for cash equal to the then-fair market value of one share of common stock of Parent, and OHI Holdco, are exchangeablesubject to Parent’s election to exchange the Omega OP Units tendered for redemption for common stock of the Parent on a one-for-one basis for Parent’s common shares.in an unregistered transaction, subject to adjustment as set forth in the partnership agreement. The management of Parent consists of the same members as the management of OHI Holdco and Omega OP.
The financial results of OHI Holdco and Omega OP are consolidated into the financial statements of Omega. Omega has no significant assets other than its investments in OHI Holdco and Omega OP. Omega OHI Holdco and Omega OP are managed and operated as one entity. OHI Holdco has no assets other than its interests in Omega OP. Omega OP has no significant assets other than its interests in non-guarantor subsidiaries.
We believe it is important for investors to understand the few differences between Omega OHI Holdco and Omega OP in the context of how we operate as a consolidated company. Omega and OHI Holdco actacts as the general partnerspartner of Omega OP. Net proceeds from equity issuances by Parent are contributed to Omega OP in exchange for additional partnership units. Parent and Omega OP incur indebtedness. The net proceeds of the Parent’s borrowings are loaned to Omega OP. The outstanding senior notes and certain other debt of Parent is guaranteed by OHI HoldcoOmega OP.
The presentation of debt and related interest, including amounts accrued, stockholders’ equity, owners’ equity and noncontrolling interests are the main areas of difference between the consolidated financial statements of Omega and Omega OP. The differences between debt, stockholders’ equity and owners’ equity result from differences in the debt or equity issued at the Omega and Omega OP levels. With respect to owners’ equity, the units held by the partners in Omega OP other than the Parent are accounted for as owners’ equity in Omega OP’s financial statements and as noncontrolling interests in Omega’s financial statements. Although classified differently, total debt and equity of Omega and Omega OP are the same.
We believe combining the quarterly reports on Form 10-Q of Omega OHI Holdco and Omega OP into this single report results in the following benefits:
· | combined reports better reflect how management and the analyst community view the business as a single operating unit; |
· | combined reports enhance investors’ understanding of Omega |
· | combined reports are more efficient for Omega |
· | combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review. |
In order to highlight the differences between Omega OHI Holdco and Omega OP, the separate sections in this report for Omega OHI Holdco and the Omega OP specifically refer to Omega OHI Holdco and the Omega OP. In the sections that combine disclosure of Omega OHI Holdco and the Omega OP, this report refers to “we” and “us” actions or holdings as being “our” actions or holdings. Although Omega OP and its subsidiaries hold all of our assets, we believe that reference to “we,” “us” or “our” in this context is appropriate because the business is one enterprise and we operate substantially all of our business through OHI Holdco and Omega OP.
OMEGA HEALTHCARE INVESTORS, INC.
OHI HEALTHCARE PROPERTIES HOLDCO, INC.
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
FORM 10-Q
June 30, 20172018
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, | December 31, | June 30, | December 31, | |||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Real estate properties | ||||||||||||||||
Real estate investments (see Note 2) | $ | 7,730,199 | $ | 7,566,358 | ||||||||||||
Real estate investments | $ | 7,571,661 | $ | 7,655,960 | ||||||||||||
Less accumulated depreciation | (1,366,376 | ) | (1,240,336 | ) | (1,475,463 | ) | (1,376,828 | ) | ||||||||
Real estate investments – net | 6,363,823 | 6,326,022 | 6,096,198 | 6,279,132 | ||||||||||||
Investments in direct financing leases – net | 582,307 | 601,938 | 349,465 | 364,965 | ||||||||||||
Mortgage notes receivable – net | 662,709 | 639,343 | 703,309 | 671,232 | ||||||||||||
7,608,839 | 7,567,303 | 7,148,972 | 7,315,329 | |||||||||||||
Other investments – net | 278,985 | 256,846 | 377,206 | 276,342 | ||||||||||||
Investment in unconsolidated joint venture | 38,968 | 48,776 | 32,820 | 36,516 | ||||||||||||
Assets held for sale – net | 18,889 | 52,868 | 3,782 | 86,699 | ||||||||||||
Total investments | 7,945,681 | 7,925,793 | 7,562,780 | 7,714,886 | ||||||||||||
Cash and cash equivalents | 21,031 | 93,687 | 10,951 | 85,937 | ||||||||||||
Restricted cash | 12,203 | 13,589 | 2,598 | 10,871 | ||||||||||||
Accounts receivable – net | 288,686 | 240,035 | 320,140 | 279,334 | ||||||||||||
Goodwill | 644,184 | 643,474 | 644,369 | 644,690 | ||||||||||||
Other assets | 34,869 | 32,682 | 33,301 | 37,587 | ||||||||||||
Total assets | $ | 8,946,654 | $ | 8,949,260 | $ | 8,574,139 | $ | 8,773,305 | ||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Revolving line of credit | $ | 155,000 | $ | 190,000 | 220,000 | 290,000 | ||||||||||
Term loans – net | 899,292 | 1,094,343 | 902,168 | 904,670 | ||||||||||||
Secured borrowings – net | 53,737 | 54,365 | - | 53,098 | ||||||||||||
Unsecured borrowings – net | 3,321,858 | 3,028,146 | 3,325,889 | 3,324,390 | ||||||||||||
Accrued expenses and other liabilities | 323,543 | 360,514 | 257,049 | 295,142 | ||||||||||||
Deferred income taxes | 17,714 | 9,906 | 14,718 | 17,747 | ||||||||||||
Total liabilities | 4,771,144 | 4,737,274 | 4,719,824 | 4,885,047 | ||||||||||||
Equity: | ||||||||||||||||
Common stock $.10 par value authorized – 350,000 shares, issued and outstanding – 197,224 shares as of June 30, 2017 and 196,142 as of December 31, 2016 | 19,722 | 19,614 | ||||||||||||||
Common stock $.10 par value authorized – 350,000 shares, issued and outstanding – 200,332 shares as of June 30, 2018 and 198,309 as of December 31, 2017 | 20,033 | 19,831 | ||||||||||||||
Common stock – additional paid-in capital | 4,896,076 | 4,861,408 | 4,997,329 | 4,936,302 | ||||||||||||
Cumulative net earnings | 1,908,634 | 1,738,937 | 2,011,689 | 1,839,356 | ||||||||||||
Cumulative dividends paid | (2,954,230 | ) | (2,707,387 | ) | (3,473,406 | ) | (3,210,248 | ) | ||||||||
Accumulated other comprehensive loss | (41,903 | ) | (53,827 | ) | (30,157 | ) | (30,150 | ) | ||||||||
Total stockholders’ equity | 3,828,299 | 3,858,745 | 3,525,488 | 3,555,091 | ||||||||||||
Noncontrolling interest | 347,211 | 353,241 | 328,827 | 333,167 | ||||||||||||
Total equity | 4,175,510 | 4,211,986 | 3,854,315 | 3,888,258 | ||||||||||||
Total liabilities and equity | $ | 8,946,654 | $ | 8,949,260 | $ | 8,574,139 | $ | 8,773,305 |
See notes to consolidated financial statements.
2 |
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
Unaudited
(in thousands, except per share amounts)
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||
Rental income | $ | 193,997 | $ | 186,454 | $ | 386,534 | $ | 363,157 | $ | 192,850 | $ | 193,997 | $ | 386,799 | $ | 386,534 | ||||||||||||||||
Income from direct financing leases | 15,462 | 15,521 | 31,108 | 30,963 | 497 | 15,462 | 1,110 | 31,108 | ||||||||||||||||||||||||
Mortgage interest income | 16,297 | 21,371 | 32,253 | 37,977 | 16,834 | 16,297 | 33,413 | 32,253 | ||||||||||||||||||||||||
Other investment income – net | 7,278 | 4,982 | 14,192 | 8,413 | ||||||||||||||||||||||||||||
Other investment income | 9,097 | 7,278 | 17,624 | 14,192 | ||||||||||||||||||||||||||||
Miscellaneous income | 2,763 | 496 | 3,454 | 1,193 | 603 | 2,763 | 1,134 | 3,454 | ||||||||||||||||||||||||
Total operating revenues | 235,797 | 228,824 | 467,541 | 441,703 | 219,881 | 235,797 | 440,080 | 467,541 | ||||||||||||||||||||||||
Expenses | ||||||||||||||||||||||||||||||||
Depreciation and amortization | 70,350 | 65,505 | 140,343 | 127,938 | 69,609 | 70,350 | 139,970 | 140,343 | ||||||||||||||||||||||||
General and administrative | 11,541 | 11,832 | 24,065 | 22,287 | 15,237 | 11,541 | 31,712 | 24,065 | ||||||||||||||||||||||||
Acquisition costs | 19 | 3,504 | (22 | ) | 7,275 | - | 19 | - | (22 | ) | ||||||||||||||||||||||
Impairment loss on real estate properties | 10,135 | 6,893 | 17,773 | 41,451 | ||||||||||||||||||||||||||||
(Recovery) impairment on real estate properties | (1,097 | ) | 10,135 | 3,817 | 17,773 | |||||||||||||||||||||||||||
Provision for uncollectible accounts | 2,673 | (1,154 | ) | 5,077 | 3,970 | 564 | 2,673 | 8,378 | 5,077 | |||||||||||||||||||||||
Total operating expenses | 94,718 | 86,580 | 187,236 | 202,921 | 84,313 | 94,718 | 183,877 | 187,236 | ||||||||||||||||||||||||
Income before other income and expense | 141,079 | 142,244 | 280,305 | 238,782 | 135,568 | 141,079 | 256,203 | 280,305 | ||||||||||||||||||||||||
Other income (expense) | ||||||||||||||||||||||||||||||||
Interest income | 254 | 4 | 258 | 12 | ||||||||||||||||||||||||||||
Interest income and other - net | 1,125 | 254 | 1,710 | 258 | ||||||||||||||||||||||||||||
Interest expense | (48,085 | ) | (39,651 | ) | (93,126 | ) | (76,873 | ) | (48,082 | ) | (48,085 | ) | (96,093 | ) | (93,126 | ) | ||||||||||||||||
Interest – amortization of deferred financing costs | (2,543 | ) | (2,210 | ) | (5,045 | ) | (4,342 | ) | (2,242 | ) | (2,543 | ) | (4,485 | ) | (5,045 | ) | ||||||||||||||||
Interest – refinancing costs | (21,965 | ) | - | (21,965 | ) | (298 | ) | - | (21,965 | ) | - | (21,965 | ) | |||||||||||||||||||
Contractual settlement | - | - | 10,412 | - | - | - | - | 10,412 | ||||||||||||||||||||||||
Realized gain (loss) on foreign exchange | 79 | - | 140 | (22 | ) | |||||||||||||||||||||||||||
Realized (loss) gain on foreign exchange | (66 | ) | 79 | (7 | ) | 140 | ||||||||||||||||||||||||||
Total other expense | (72,260 | ) | (41,857 | ) | (109,326 | ) | (81,523 | ) | (49,265 | ) | (72,260 | ) | (98,875 | ) | (109,326 | ) | ||||||||||||||||
Income before (loss) gain on assets sold | 68,819 | 100,387 | 170,979 | 157,259 | 86,303 | 68,819 | 157,328 | 170,979 | ||||||||||||||||||||||||
(Loss) gain on assets sold – net | (622 | ) | 13,221 | 6,798 | 14,792 | (2,891 | ) | (622 | ) | 14,609 | 6,798 | |||||||||||||||||||||
Income from continuing operations | 68,197 | 113,608 | 177,777 | 172,051 | 83,412 | 68,197 | 171,937 | 177,777 | ||||||||||||||||||||||||
Income taxes | (591 | ) | (454 | ) | (1,691 | ) | (701 | ) | ||||||||||||||||||||||||
Income from unconsolidated joint venture | 551 | - | 1,183 | - | ||||||||||||||||||||||||||||
Income tax expense | (838 | ) | (591 | ) | (1,381 | ) | (1,691 | ) | ||||||||||||||||||||||||
(Loss) income from unconsolidated joint venture | (588 | ) | 551 | (637 | ) | 1,183 | ||||||||||||||||||||||||||
Net income | 68,157 | 113,154 | 177,269 | 171,350 | 81,986 | 68,157 | 169,919 | 177,269 | ||||||||||||||||||||||||
Net income attributable to noncontrolling interest | (2,900 | ) | (5,102 | ) | (7,572 | ) | (7,743 | ) | (3,450 | ) | (2,900 | ) | (7,163 | ) | (7,572 | ) | ||||||||||||||||
Net income available to common stockholders | $ | 65,257 | $ | 108,052 | $ | 169,697 | $ | 163,607 | $ | 78,536 | $ | 65,257 | $ | 162,756 | $ | 169,697 | ||||||||||||||||
Earnings per common share available to common stockholders: | ||||||||||||||||||||||||||||||||
Basic: | ||||||||||||||||||||||||||||||||
Net income available to common stockholders | $ | 0.33 | $ | 0.57 | $ | 0.86 | $ | 0.87 | $ | 0.39 | $ | 0.33 | $ | 0.82 | $ | 0.86 | ||||||||||||||||
Diluted: | ||||||||||||||||||||||||||||||||
Net income | $ | 0.33 | $ | 0.57 | $ | 0.86 | $ | 0.86 | $ | 0.39 | $ | 0.33 | $ | 0.82 | $ | 0.86 | ||||||||||||||||
Dividends declared per common share | $ | 0.63 | $ | 0.58 | $ | 1.25 | $ | 1.15 | $ | 0.66 | $ | 0.63 | $ | 1.32 | $ | 1.25 | ||||||||||||||||
Weighted-average shares outstanding, basic | 197,433 | 188,981 | 197,223 | 188,604 | 199,497 | 197,433 | 199,204 | 197,223 | ||||||||||||||||||||||||
Weighted-average shares outstanding, diluted | 206,672 | 199,157 | 206,423 | 198,754 | 208,460 | 206,672 | 208,139 | 206,423 |
See notes to consolidated financial statements.
3 |
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(in thousands)
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | June 30, | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | June 30, | June 30, | |||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||
Net income | $ | 68,157 | $ | 113,154 | $ | 177,269 | $ | 171,350 | $ | 81,986 | $ | 68,157 | $ | 169,919 | $ | 177,269 | ||||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||||||||||
Other comprehensive (loss) income: | ||||||||||||||||||||||||||||||||
Foreign currency translation | 10,274 | (21,836 | ) | 14,608 | (26,566 | ) | (16,153 | ) | 10,274 | (6,284 | ) | 14,608 | ||||||||||||||||||||
Derivative instruments | (3,407 | ) | (4,198 | ) | (2,153 | ) | (13,074 | ) | ||||||||||||||||||||||||
Total other comprehensive income (loss) | 6,867 | (26,034 | ) | 12,455 | (39,640 | ) | ||||||||||||||||||||||||||
Cash flow hedges | 1,788 | (3,407 | ) | 6,276 | (2,153 | ) | ||||||||||||||||||||||||||
Total other comprehensive (loss) income | (14,365 | ) | 6,867 | (8 | ) | 12,455 | ||||||||||||||||||||||||||
Comprehensive income | 75,024 | 87,120 | 189,724 | 131,710 | 67,621 | 75,024 | 169,911 | 189,724 | ||||||||||||||||||||||||
Comprehensive income attributable to noncontrolling interest | (3,192 | ) | (3,928 | ) | (8,103 | ) | (5,953 | ) | (2,843 | ) | (3,192 | ) | (7,162 | ) | (8,103 | ) | ||||||||||||||||
Comprehensive income attributable to common stockholders | $ | 71,832 | $ | 83,192 | $ | 181,621 | $ | 125,757 | $ | 64,778 | $ | 71,832 | $ | 162,749 | $ | 181,621 |
See notes to consolidated financial statements.
4 |
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 | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||
Balance at December 31, 2016 (196,142 common shares & 8,862 Omega OP Units) | $ | 19,614 | $ | 4,861,408 | $ | 1,738,937 | $ | (2,707,387 | ) | $ | (53,827 | ) | $ | 3,858,745 | $ | 353,241 | $ | 4,211,986 | ||||||||||||||
Grant of restricted stock to company directors (32 shares at $31.23 per share) | 3 | (3 | ) | — | — | — | — | — | — | |||||||||||||||||||||||
Stock-based compensation expense | — | 7,478 | — | — | — | 7,478 | — | 7,478 | ||||||||||||||||||||||||
Vesting/exercising of equity compensation plan, net of tax withholdings (114 shares) | 11 | (2,131 | ) | — | — | — | (2,120 | ) | — | (2,120 | ) | |||||||||||||||||||||
Dividend reinvestment and stock purchase plan (614 shares at an average of $32.11 per share) | 61 | 19,660 | — | — | — | 19,721 | — | 19,721 | ||||||||||||||||||||||||
Grant of stock as payment of directors fees (5 shares at an average of $32.18 per share) | 1 | 149 | — | — | — | 150 | — | 150 | ||||||||||||||||||||||||
Deferred compensation directors | — | (29 | ) | — | — | — | (29 | ) | — | (29 | ) | |||||||||||||||||||||
Equity Shelf Program (228 shares at $29.17 per share, net of issuance costs) | 23 | 6,611 | — | — | — | 6,634 | — | 6,634 | ||||||||||||||||||||||||
Common dividends declared ($1.25 per share) | — | — | — | (246,843 | ) | — | (246,843 | ) | — | (246,843 | ) | |||||||||||||||||||||
Conversion of Omega OP Units to common stock (89 shares at $32.91 per share) | 9 | 2,933 | — | — | — | 2,942 | — | 2,942 | ||||||||||||||||||||||||
Redemption of Omega OP Units (90 units) | — | — | — | — | — | — | (2,990 | ) | (2,990 | ) | ||||||||||||||||||||||
Omega OP Units distributions | — | — | — | — | — | — | (11,143 | ) | (11,143 | ) | ||||||||||||||||||||||
Foreign currency translation | — | — | — | — | 13,986 | 13,986 | 622 | 14,608 | ||||||||||||||||||||||||
Derivative instruments | — | — | — | — | (2,062 | ) | (2,062 | ) | (91 | ) | (2,153 | ) | ||||||||||||||||||||
Net income | — | — | 169,697 | — | — | 169,697 | 7,572 | 177,269 | ||||||||||||||||||||||||
Balance at June 30, 2017 (197,224 shares & 8,772 Omega OP Units) | $ | 19,722 | $ | 4,896,076 | $ | 1,908,634 | $ | (2,954,230 | ) | $ | (41,903 | ) | $ | 3,828,299 | $ | 347,211 | $ | 4,175,510 |
Accumulated | ||||||||||||||||||||||||||||||||
Common | Additional | Cumulative | Other | Total | ||||||||||||||||||||||||||||
Stock | Paid-in | Net | Cumulative | Comprehensive | Stockholders’ | Noncontrolling | Total | |||||||||||||||||||||||||
Par Value | Capital | Earnings | Dividends | Loss | Equity | Interest | Equity | |||||||||||||||||||||||||
Balance at December 31, 2017 (198,309 common shares & 8,772 Omega OP Units) | $ | 19,831 | $ | 4,936,302 | $ | 1,839,356 | $ | (3,210,248 | ) | $ | (30,150 | ) | $ | 3,555,091 | $ | 333,167 | $ | 3,888,258 | ||||||||||||||
Cumulative effect of accounting change (see Note 1) | - | - | 9,577 | - | - | 9,577 | 423 | 10,000 | ||||||||||||||||||||||||
Balance at January 1, 2018 (198,309 common shares & 8,772 Omega OP Units) | 19,831 | 4,936,302 | 1,848,933 | (3,210,248 | ) | (30,150 | ) | 3,564,668 | 333,590 | 3,898,258 | ||||||||||||||||||||||
Grant of restricted stock to company directors (38 shares at $30.36 per share) | 4 | (4 | ) | - | - | - | - | - | - | |||||||||||||||||||||||
Stock-based compensation expense | - | 8,145 | - | - | - | 8,145 | - | 8,145 | ||||||||||||||||||||||||
Vesting/exercising of equity compensation plan, net of tax withholdings (89 shares) | 9 | (1,663 | ) | - | - | - | (1,654 | ) | - | (1,654 | ) | |||||||||||||||||||||
Dividend reinvestment and stock purchase plan (948 shares at an average of $28.55 per share) | 95 | 26,955 | - | - | - | 27,050 | - | 27,050 | ||||||||||||||||||||||||
Deferred compensation directors (35 shares at $30.42 per share) | 3 | 134 | - | - | - | 137 | - | 137 | ||||||||||||||||||||||||
Equity Shelf Program (912 shares at $30.16 per share, net of issuance costs) | 91 | 27,418 | - | - | - | 27,509 | - | 27,509 | ||||||||||||||||||||||||
Common dividends declared ($1.32 per share) | - | - | - | (263,158 | ) | - | (263,158 | ) | - | (263,158 | ) | |||||||||||||||||||||
Conversion of Omega OP Units to common stock (1 share at $31.26 per share) | - | 42 | - | - | - | 42 | - | 42 | ||||||||||||||||||||||||
Redemption of Omega OP Units (6 units at $28.06 per share) | - | - | - | - | - | - | (160 | ) | (160 | ) | ||||||||||||||||||||||
Omega OP Units distributions | - | - | - | - | - | - | (11,765 | ) | (11,765 | ) | ||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||
Foreign currency translation | - | - | - | - | (6,019 | ) | (6,019 | ) | (265 | ) | (6,284 | ) | ||||||||||||||||||||
Cash flow hedges | - | - | - | - | 6,012 | 6,012 | 264 | 6,276 | ||||||||||||||||||||||||
Net income | - | - | 162,756 | - | - | 162,756 | 7,163 | 169,919 | ||||||||||||||||||||||||
Total comprehensive income | 169,911 | |||||||||||||||||||||||||||||||
Balance at June 30, 2018 (200,332 shares & 8,766 Omega OP Units) | $ | 20,033 | $ | 4,997,329 | $ | 2,011,689 | $ | (3,473,406 | ) | $ | (30,157 | ) | $ | 3,525,488 | $ | 328,827 | $ | 3,854,315 |
See notes to consolidated financial statements.
5 |
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (in thousands)
Six Months Ended June 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 177,269 | $ | 171,350 | ||||
Adjustment to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 140,343 | 127,938 | ||||||
Impairment loss on real estate properties | 17,773 | 41,451 | ||||||
Provision for uncollectible accounts | 5,077 | 3,970 | ||||||
Refinancing costs and amortization of deferred financing costs | 15,240 | 4,640 | ||||||
Accretion of direct financing leases | (6,164 | ) | (5,915 | ) | ||||
Stock-based compensation expense | 7,478 | 6,443 | ||||||
Gain on assets sold – net | (6,798 | ) | (14,792 | ) | ||||
Amortization of acquired in-place leases - net | (6,202 | ) | (7,910 | ) | ||||
Effective yield receivable on mortgage notes | (1,191 | ) | (619 | ) | ||||
Change in operating assets and liabilities – net: | ||||||||
Contractual receivables | (33,293 | ) | 856 | |||||
Straight-line rent receivables | (23,174 | ) | (17,756 | ) | ||||
Lease inducements | 895 | 1,294 | ||||||
Other operating assets and liabilities | (21,667 | ) | (24,055 | ) | ||||
Net cash provided by operating activities | 265,586 | 286,895 | ||||||
Cash flows from investing activities | ||||||||
Acquisition of real estate | (130,977 | ) | (622,848 | ) | ||||
Cash acquired | 2,341 | — | ||||||
Investments in construction in progress | (46,108 | ) | (26,960 | ) | ||||
Investments in direct financing leases | (4,767 | ) | (30 | ) | ||||
Proceeds from direct financing leases | 27,253 | — | ||||||
Placement of mortgage loans | (24,978 | ) | (12,528 | ) | ||||
Distributions from unconsolidated joint venture | 9,741 | — | ||||||
Proceeds from sale of real estate investments | 64,061 | 43,772 | ||||||
Capital improvements to real estate investments | (16,861 | ) | (21,812 | ) | ||||
Proceeds from other investments | 35,997 | 25,923 | ||||||
Investments in other investments | (52,228 | ) | (136,536 | ) | ||||
Collection of mortgage principal | 673 | 42,051 | ||||||
Net cash used in investing activities | (135,853 | ) | (708,968 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from credit facility borrowings | 817,000 | 879,000 | ||||||
Payments on credit facility borrowings | (852,000 | ) | (639,000 | ) | ||||
Receipts of other long-term borrowings | 1,346,749 | 350,000 | ||||||
Payments of other long-term borrowings | (1,252,139 | ) | (620 | ) | ||||
Payments of financing related costs | (28,483 | ) | (3,581 | ) | ||||
Receipts from dividend reinvestment plan | 19,721 | 93,333 | ||||||
Payments for exercised options and restricted stock | (2,120 | ) | (2,380 | ) | ||||
Net proceeds from issuance of common stock | 6,634 | 487 | ||||||
Dividends paid | (246,722 | ) | (217,068 | ) | ||||
Redemption of Omega OP Units | (48 | ) | (10 | ) | ||||
Distributions to Omega OP Unit Holders | (11,143 | ) | (10,351 | ) | ||||
Net cash (used in) provided by financing activities | (202,551 | ) | 449,810 | |||||
Effect of foreign currency translation on cash and cash equivalents | 162 | (202 | ) | |||||
(Decrease) increase in cash and cash equivalents | (72,656 | ) | 27,535 | |||||
Cash and cash equivalents at beginning of period | 93,687 | 5,424 | ||||||
Cash and cash equivalents at end of period | $ | 21,031 | $ | 32,959 |
Supplemental disclosures of cash flow information:
Six Months Ended June 30, | ||||||||
2017 | 2016 | |||||||
Interest paid during the period, net of amounts capitalized | $ | 97,610 | $ | 74,010 | ||||
Taxes paid during the period | $ | 2,032 | $ | 748 | ||||
Non cash investing activities | ||||||||
Non cash acquisition of real estate (See Note 2) | $ | (9,430 | ) | $ | — | |||
Non cash acquisition of business | — | (25,000 | ) | |||||
Non cash surrender of mortgage | — | 25,000 | ||||||
Non cash investment in other investments | (6,353 | ) | — | |||||
Total | $ | (15,783 | ) | $ | — | |||
Non cash financing activities | ||||||||
Change in fair value of cash flow hedges | $ | (108 | ) | $ | 13,074 | |||
Remeasurement of debt denominated in a foreign currency | 2,190 | — | ||||||
Total | $ | 2,082 | $ | 13,074 |
Six Months Ended | ||||||||
June 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 169,919 | $ | 177,269 | ||||
Adjustment to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 139,970 | 140,343 | ||||||
Impairment on real estate properties | 8,992 | 17,773 | ||||||
Provision for uncollectible accounts | 8,378 | 5,077 | ||||||
Interest - amortization of deferred financing costs | 4,485 | 15,240 | ||||||
Accretion of direct financing leases | 67 | (6,164 | ) | |||||
Stock-based compensation expense | 8,145 | 7,478 | ||||||
Gain on assets sold – net | (14,609 | ) | (6,798 | ) | ||||
Amortization of acquired in-place leases - net | (5,277 | ) | (6,202 | ) | ||||
Effective yield receivable on mortgage notes | (710 | ) | (1,191 | ) | ||||
Interest paid-in-kind | (3,493 | ) | - | |||||
Change in operating assets and liabilities – net: | ||||||||
Contractual receivables | 1,563 | (33,293 | ) | |||||
Straight-line rent receivables | (30,746 | ) | (23,174 | ) | ||||
Lease inducements | (31,551 | ) | 895 | |||||
Other operating assets and liabilities | (37,967 | ) | (23,053 | ) | ||||
Net cash provided by operating activities | 217,166 | 264,200 | ||||||
Cash flows from investing activities | ||||||||
Acquisition of real estate | (52,744 | ) | (130,977 | ) | ||||
Cash acquired | - | 2,341 | ||||||
Investments in construction in progress | (63,313 | ) | (46,108 | ) | ||||
Investments in direct financing leases | - | (4,767 | ) | |||||
Proceeds from sale of direct financing lease | 15,433 | 27,253 | ||||||
Placement of mortgage loans | (56,944 | ) | (24,978 | ) | ||||
Distributions from unconsolidated joint venture | 3,739 | 9,741 | ||||||
Net proceeds from sale of real estate investments | 221,952 | 64,061 | ||||||
Capital improvements to real estate investments | (19,183 | ) | (16,861 | ) | ||||
Receipts from insurance proceeds | 6,901 | - | ||||||
Proceeds from other investments | 105,695 | 35,997 | ||||||
Investments in other investments | (192,962 | ) | (52,228 | ) | ||||
Collection of mortgage principal | 25,176 | 673 | ||||||
Net cash used in investing activities | (6,250 | ) | (135,853 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from credit facility borrowings | 549,000 | 817,000 | ||||||
Payments on credit facility borrowings | (619,000 | ) | (852,000 | ) | ||||
Receipts of other long-term borrowings | - | 1,346,749 | ||||||
Payments of other long-term borrowings | (2,049 | ) | (1,252,139 | ) | ||||
Payments of financing related costs | (8 | ) | (28,483 | ) | ||||
Receipts from dividend reinvestment plan | 27,050 | 19,721 | ||||||
Payments for exercised options and restricted stock | (1,654 | ) | (2,120 | ) | ||||
Net proceeds from issuance of common stock | 27,509 | 6,634 | ||||||
Dividends paid | (263,021 | ) | (246,722 | ) | ||||
Redemption of Omega OP Units | (118 | ) | (48 | ) | ||||
Distributions to Omega OP Unit Holders | (11,765 | ) | (11,143 | ) | ||||
Net cash used in financing activities | (294,056 | ) | (202,551 | ) | ||||
Effect of foreign currency translation on cash, cash equivalents and restricted cash | (119 | ) | 162 | |||||
Decrease in cash, cash equivalents and restricted cash | (83,259 | ) | (74,042 | ) | ||||
Cash, cash equivalents and restricted cash at beginning of period | 96,808 | 107,276 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 13,549 | $ | 33,234 |
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES HOLDCO, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Real estate properties | ||||||||
Real estate investments (see Note 2) | $ | 7,730,199 | $ | 7,566,358 | ||||
Less accumulated depreciation | (1,366,376 | ) | (1,240,336 | ) | ||||
Real estate investments – net | 6,363,823 | 6,326,022 | ||||||
Investments in direct financing leases – net | 582,307 | 601,938 | ||||||
Mortgage notes receivable – net | 662,709 | 639,343 | ||||||
7,608,839 | 7,567,303 | |||||||
Other investments – net | 278,985 | 256,846 | ||||||
Investment in unconsolidated joint venture | 38,968 | 48,776 | ||||||
Assets held for sale – net | 18,889 | 52,868 | ||||||
Total investments | 7,945,681 | 7,925,793 | ||||||
Cash and cash equivalents | 21,031 | 93,687 | ||||||
Restricted cash | 12,203 | 13,589 | ||||||
Accounts receivable – net | 288,686 | 240,035 | ||||||
Goodwill | 644,184 | 643,474 | ||||||
Other assets | 34,869 | 32,682 | ||||||
Total assets | $ | 8,946,654 | $ | 8,949,260 | ||||
LIABILITIES AND EQUITY | ||||||||
Term loans – net | $ | 99,372 | $ | 100,000 | ||||
Secured borrowings – net | 53,737 | 54,365 | ||||||
Accrued expenses and other liabilities | 267,346 | 302,959 | ||||||
Deferred income taxes | 17,714 | 9,906 | ||||||
Intercompany loans payable | 4,332,975 | 4,270,044 | ||||||
Total liabilities | 4,771,144 | 4,737,274 | ||||||
Equity: | ||||||||
Common stock – additional paid-in capital | 923,218 | 923,218 | ||||||
Cumulative net earnings | 163,808 | 126,187 | ||||||
Cumulative dividends paid | (229,930 | ) | (175,289 | ) | ||||
Accumulated other comprehensive loss | (9,797 | ) | (12,439 | ) | ||||
Total stockholders’ equity | 847,299 | 861,677 | ||||||
Noncontrolling interest | 3,328,211 | 3,350,309 | ||||||
Total equity | 4,175,510 | 4,211,986 | ||||||
Total liabilities and equity | $ | 8,946,654 | $ | 8,949,260 |
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES HOLDCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(in thousands)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue | ||||||||||||||||
Rental income | $ | 193,997 | $ | 186,454 | $ | 386,534 | $ | 363,157 | ||||||||
Income from direct financing leases | 15,462 | 15,521 | 31,108 | 30,963 | ||||||||||||
Mortgage interest income | 16,297 | 21,371 | 32,253 | 37,977 | ||||||||||||
Other investment income – net | 7,278 | 4,982 | 14,192 | 8,413 | ||||||||||||
Miscellaneous income | 2,763 | 496 | 3,454 | 1,193 | ||||||||||||
Total operating revenues | 235,797 | 228,824 | 467,541 | 441,703 | ||||||||||||
Expenses | ||||||||||||||||
Depreciation and amortization | 70,350 | 65,505 | 140,343 | 127,938 | ||||||||||||
General and administrative | 11,541 | 11,832 | 24,065 | 22,287 | ||||||||||||
Acquisition costs | 19 | 3,504 | (22 | ) | 7,275 | |||||||||||
Impairment loss on real estate properties | 10,135 | 6,893 | 17,773 | 41,451 | ||||||||||||
Provision for uncollectible accounts | 2,673 | (1,154 | ) | 5,077 | 3,970 | |||||||||||
Total operating expenses | 94,718 | 86,580 | 187,236 | 202,921 | ||||||||||||
Income before other income and expense | 141,079 | 142,244 | 280,305 | 238,782 | ||||||||||||
Other income (expense) | ||||||||||||||||
Interest income | 254 | 4 | 258 | 12 | ||||||||||||
Interest expense | (48,085 | ) | (39,651 | ) | (93,126 | ) | (76,873 | ) | ||||||||
Interest – amortization of deferred financing costs | (2,543 | ) | (2,210 | ) | (5,045 | ) | (4,342 | ) | ||||||||
Interest – refinancing costs | (21,965 | ) | - | (21,965 | ) | (298 | ) | |||||||||
Contractual settlement | - | - | 10,412 | - | ||||||||||||
Realized gain (loss) on foreign exchange | 79 | - | 140 | (22 | ) | |||||||||||
Total other expense | (72,260 | ) | (41,857 | ) | (109,326 | ) | (81,523 | ) | ||||||||
Income before (loss) gain on assets sold | 68,819 | 100,387 | 170,979 | 157,259 | ||||||||||||
(Loss) gain on assets sold – net | (622 | ) | 13,221 | 6,798 | 14,792 | |||||||||||
Income from continuing operations | 68,197 | 113,608 | 177,777 | 172,051 | ||||||||||||
Income taxes | (591 | ) | (454 | ) | (1,691 | ) | (701 | ) | ||||||||
Income from unconsolidated joint venture | 551 | - | 1,183 | - | ||||||||||||
Net income | 68,157 | 113,154 | 177,269 | 171,350 | ||||||||||||
Net income attributable to noncontrolling interest | (53,709 | ) | (88,160 | ) | (139,648 | ) | (133,455 | ) | ||||||||
Net income available to common stockholders | $ | 14,448 | $ | 24,994 | $ | 37,621 | $ | 37,895 |
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES HOLDCO, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(in thousands)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 68,157 | $ | 113,154 | $ | 177,269 | $ | 171,350 | ||||||||
Other comprehensive income (loss) | ||||||||||||||||
Foreign currency translation | 10,274 | (21,836 | ) | 14,608 | (26,566 | ) | ||||||||||
Derivative instruments | (3,407 | ) | (4,198 | ) | (2,153 | ) | (13,074 | ) | ||||||||
Total other comprehensive income (loss) | 6,867 | (26,034 | ) | 12,455 | (39,640 | ) | ||||||||||
Comprehensive income | 75,024 | 87,120 | 189,724 | 131,710 | ||||||||||||
Comprehensive income attributable to noncontrolling interest | (59,120 | ) | (67,877 | ) | (149,460 | ) | (102,581 | ) | ||||||||
Comprehensive income attributable to common stockholders | $ | 15,904 | $ | 19,243 | $ | 40,264 | $ | 29,129 |
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES HOLDCO, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Unaudited
(in thousands)
Common stock – additional paid-in capital | Cumulative Net Earnings | Cumulative Dividends | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | Noncontrolling Interest | Total Equity | ||||||||||||||||||||||
Balance at December 31, 2016(1 shares) | $ | 923,218 | $ | 126,187 | $ | (175,289 | ) | $ | (12,439 | ) | $ | 861,677 | $ | 3,350,309 | $ | 4,211,986 | ||||||||||||
Contributions | — | — | — | — | — | 34,776 | 34,776 | |||||||||||||||||||||
Distributions | — | — | (54,641 | ) | — | (54,641 | ) | (206,335 | ) | (260,976 | ) | |||||||||||||||||
Foreign currency translation | — | — | — | 3,098 | 3,098 | 11,510 | 14,608 | |||||||||||||||||||||
Derivative instruments | — | — | — | (456 | ) | (456 | ) | (1,697 | ) | (2,153 | ) | |||||||||||||||||
Net income | — | 37,621 | — | — | 37,621 | 139,648 | 177,269 | |||||||||||||||||||||
Balance at June 30, 2017 (1 shares) | $ | 923,218 | $ | 163,808 | $ | (229,930 | ) | $ | (9,797 | ) | $ | 847,299 | $ | 3,328,211 | $ | 4,175,510 |
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES HOLDCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (in thousands)
Six Months Ended June 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 177,269 | $ | 171,350 | ||||
Adjustment to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 140,343 | 127,938 | ||||||
Impairment loss on real estate properties | 17,773 | 41,451 | ||||||
Provision for uncollectible accounts | 5,077 | 3,970 | ||||||
Refinancing costs and amortization of deferred financing costs | 15,240 | 4,640 | ||||||
Accretion of direct financing leases | (6,164 | ) | (5,915 | ) | ||||
Stock-based compensation expense | 7,478 | 6,443 | ||||||
Gain on assets sold – net | (6,798 | ) | (14,792 | ) | ||||
Amortization of acquired in-place leases - net | (6,202 | ) | (7,910 | ) | ||||
Effective yield receivable on mortgage notes | (1,191 | ) | (619 | ) | ||||
Change in operating assets and liabilities – net: | ||||||||
Contractual receivables | (33,293 | ) | 856 | |||||
Straight-line rent receivables | (23,174 | ) | (17,756 | ) | ||||
Lease inducements | 895 | 1,294 | ||||||
Other operating assets and liabilities | (21,667 | ) | (24,055 | ) | ||||
Net cash provided by operating activities | 265,586 | 286,895 | ||||||
Cash flows from investing activities | ||||||||
Acquisition of real estate | (130,977 | ) | (622,848 | ) | ||||
Cash acquired | 2,341 | — | ||||||
Investments in construction in progress | (46,108 | ) | (26,960 | ) | ||||
Investments in direct financing leases | (4,767 | ) | (30 | ) | ||||
Proceeds from direct financing leases | 27,253 | — | ||||||
Placement of mortgage loans | (24,978 | ) | (12,528 | ) | ||||
Distributions from unconsolidated joint venture | 9,741 | — | ||||||
Proceeds from sale of real estate investments | 64,061 | 43,772 | ||||||
Capital improvements to real estate investments | (16,861 | ) | (21,812 | ) | ||||
Proceeds from other investments | 35,997 | 25,923 | ||||||
Investments in other investments | (52,228 | ) | (136,536 | ) | ||||
Collection of mortgage principal | 673 | 42,051 | ||||||
Net cash used in investing activities | (135,853 | ) | (708,968 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from intercompany loans payable from Omega | 2,163,749 | 1,229,000 | ||||||
Repayment of intercompany loans payable to Omega | (2,104,139 | ) | (639,620 | ) | ||||
Payment of financing related costs incurred by Omega | (28,483 | ) | (3,581 | ) | ||||
Dividends paid | (54,641 | ) | (25,354 | ) | ||||
Contributions from noncontrolling interests | 24,235 | 91,440 | ||||||
Distributions to Omega | (203,272 | ) | (202,075 | ) | ||||
Net cash (used in) provided by financing activities | (202,551 | ) | 449,810 | |||||
Effect of foreign currency translation on cash and cash equivalents | 162 | (202 | ) | |||||
(Decrease) increase in cash and cash equivalents | (72,656 | ) | 27,535 | |||||
Cash and cash equivalents at beginning of period | 93,687 | 5,424 | ||||||
Cash and cash equivalents at end of period | $ | 21,031 | $ | 32,959 |
Supplemental disclosures of cash flow information:
Six Months Ended June 30, | ||||||||
2017 | 2016 | |||||||
Interest paid during the period, net of amounts capitalized | $ | 97,610 | $ | 74,010 | ||||
Taxes paid during the period | $ | 2,032 | $ | 748 | ||||
Non cash investing activities | ||||||||
Non cash acquisition of real estate (See Note 2) | $ | (9,430 | ) | $ | — | |||
Non cash acquisition of business | — | (25,000 | ) | |||||
Non cash surrender of mortgage | — | 25,000 | ||||||
Non cash investment in other investments | (6,353 | ) | — | |||||
Total | $ | (15,783 | ) | $ | — | |||
Non cash financing activities | ||||||||
Change in fair value of cash flow hedges | $ | (108 | ) | $ | 13,074 | |||
Remeasurement of debt denominated in a foreign currency | 2,190 | — | ||||||
$ | 2,082 | $ | 13,074 |
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, | December 31, | June 30, | December 31, | |||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Real estate properties | ||||||||||||||||
Real estate investments (see Note 2) | $ | 7,730,199 | $ | 7,566,358 | ||||||||||||
Real estate investments | $ | 7,571,661 | $ | 7,655,960 | ||||||||||||
Less accumulated depreciation | (1,366,376 | ) | (1,240,336 | ) | (1,475,463 | ) | (1,376,828 | ) | ||||||||
Real estate investments – net | 6,363,823 | 6,326,022 | 6,096,198 | 6,279,132 | ||||||||||||
Investments in direct financing leases – net | 582,307 | 601,938 | 349,465 | 364,965 | ||||||||||||
Mortgage notes receivable – net | 662,709 | 639,343 | 703,309 | 671,232 | ||||||||||||
7,608,839 | 7,567,303 | 7,148,972 | 7,315,329 | |||||||||||||
Other investments – net | 278,985 | 256,846 | 377,206 | 276,342 | ||||||||||||
Investment in unconsolidated joint venture | 38,968 | 48,776 | 32,820 | 36,516 | ||||||||||||
Assets held for sale – net | 18,889 | 52,868 | 3,782 | 86,699 | ||||||||||||
Total investments | 7,945,681 | 7,925,793 | 7,562,780 | 7,714,886 | ||||||||||||
Cash and cash equivalents | 21,031 | 93,687 | 10,951 | 85,937 | ||||||||||||
Restricted cash | 12,203 | 13,589 | 2,598 | 10,871 | ||||||||||||
Accounts receivable – net | 288,686 | 240,035 | 320,140 | 279,334 | ||||||||||||
Goodwill | 644,184 | 643,474 | 644,369 | 644,690 | ||||||||||||
Other assets | 34,869 | 32,682 | 33,301 | 37,587 | ||||||||||||
Total assets | $ | 8,946,654 | $ | 8,949,260 | $ | 8,574,139 | $ | 8,773,305 | ||||||||
LIABILITIES AND OWNERS’ EQUITY | ||||||||||||||||
Term loans – net | $ | 99,372 | $ | 100,000 | ||||||||||||
Term loan – net | $ | 99,488 | $ | 99,423 | ||||||||||||
Secured borrowings – net | 53,737 | 54,365 | - | 53,098 | ||||||||||||
Accrued expenses and other liabilities | 267,346 | 302,959 | 195,463 | 226,028 | ||||||||||||
Deferred income taxes | 17,714 | 9,906 | 14,718 | 17,747 | ||||||||||||
Intercompany loans payable | 4,332,975 | 4,270,044 | 4,410,155 | 4,488,751 | ||||||||||||
Total liabilities | 4,771,144 | 4,737,274 | 4,719,824 | 4,885,047 | ||||||||||||
Owners’ Equity: | ||||||||||||||||
General partners’ equity | 3,828,299 | 3,858,745 | 3,525,488 | 3,555,091 | ||||||||||||
Limited partners’ equity | 347,211 | 353,241 | 328,827 | 333,167 | ||||||||||||
Total owners’ equity | 4,175,510 | 4,211,986 | 3,854,315 | 3,888,258 | ||||||||||||
Total liabilities and owners’ equity | $ | 8,946,654 | $ | 8,949,260 | $ | 8,574,139 | $ | 8,773,305 | ||||||||
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
Unaudited
(in thousands, except per share amounts)
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||
Rental income | $ | 193,997 | $ | 186,454 | $ | 386,534 | $ | 363,157 | $ | 192,850 | $ | 193,997 | $ | 386,799 | $ | 386,534 | ||||||||||||||||
Income from direct financing leases | 15,462 | 15,521 | 31,108 | 30,963 | 497 | 15,462 | 1,110 | 31,108 | ||||||||||||||||||||||||
Mortgage interest income | 16,297 | 21,371 | 32,253 | 37,977 | 16,834 | 16,297 | 33,413 | 32,253 | ||||||||||||||||||||||||
Other investment income – net | 7,278 | 4,982 | 14,192 | 8,413 | ||||||||||||||||||||||||||||
Other investment income | 9,097 | 7,278 | 17,624 | 14,192 | ||||||||||||||||||||||||||||
Miscellaneous income | 2,763 | 496 | 3,454 | 1,193 | 603 | 2,763 | 1,134 | 3,454 | ||||||||||||||||||||||||
Total operating revenues | 235,797 | 228,824 | 467,541 | 441,703 | 219,881 | 235,797 | 440,080 | 467,541 | ||||||||||||||||||||||||
Expenses | ||||||||||||||||||||||||||||||||
Depreciation and amortization | 70,350 | 65,505 | 140,343 | 127,938 | 69,609 | 70,350 | 139,970 | 140,343 | ||||||||||||||||||||||||
General and administrative | 11,541 | 11,832 | 24,065 | 22,287 | 15,237 | 11,541 | 31,712 | 24,065 | ||||||||||||||||||||||||
Acquisition costs | 19 | 3,504 | (22 | ) | 7,275 | - | 19 | - | (22 | ) | ||||||||||||||||||||||
Impairment loss on real estate properties | 10,135 | 6,893 | 17,773 | 41,451 | ||||||||||||||||||||||||||||
(Recovery) impairment loss on real estate properties | (1,097 | ) | 10,135 | 3,817 | 17,773 | |||||||||||||||||||||||||||
Provision for uncollectible accounts | 2,673 | (1,154 | ) | 5,077 | 3,970 | 564 | 2,673 | 8,378 | 5,077 | |||||||||||||||||||||||
Total operating expenses | 94,718 | 86,580 | 187,236 | 202,921 | 84,313 | 94,718 | 183,877 | 187,236 | ||||||||||||||||||||||||
Income before other income and expense | 141,079 | 142,244 | 280,305 | 238,782 | 135,568 | 141,079 | 256,203 | 280,305 | ||||||||||||||||||||||||
Other income (expense) | ||||||||||||||||||||||||||||||||
Interest income | 254 | 4 | 258 | 12 | ||||||||||||||||||||||||||||
Interest income and other - net | 1,125 | 254 | 1,710 | 258 | ||||||||||||||||||||||||||||
Interest expense | (48,085 | ) | (39,651 | ) | (93,126 | ) | (76,873 | ) | (48,082 | ) | (48,085 | ) | (96,093 | ) | (93,126 | ) | ||||||||||||||||
Interest – amortization of deferred financing costs | (2,543 | ) | (2,210 | ) | (5,045 | ) | (4,342 | ) | (2,242 | ) | (2,543 | ) | (4,485 | ) | (5,045 | ) | ||||||||||||||||
Interest – refinancing costs | (21,965 | ) | - | (21,965 | ) | (298 | ) | - | (21,965 | ) | - | (21,965 | ) | |||||||||||||||||||
Contractual settlement | - | - | 10,412 | - | - | - | - | 10,412 | ||||||||||||||||||||||||
Realized gain (loss) on foreign exchange | 79 | - | 140 | (22 | ) | |||||||||||||||||||||||||||
Realized (loss) gain on foreign exchange | (66 | ) | 79 | (7 | ) | 140 | ||||||||||||||||||||||||||
Total other expense | (72,260 | ) | (41,857 | ) | (109,326 | ) | (81,523 | ) | (49,265 | ) | (72,260 | ) | (98,875 | ) | (109,326 | ) | ||||||||||||||||
Income before (loss) gain on assets sold | 68,819 | 100,387 | 170,979 | 157,259 | 86,303 | 68,819 | 157,328 | 170,979 | ||||||||||||||||||||||||
(Loss) gain on assets sold – net | (622 | ) | 13,221 | 6,798 | 14,792 | (2,891 | ) | (622 | ) | 14,609 | 6,798 | |||||||||||||||||||||
Income from continuing operations | 68,197 | 113,608 | 177,777 | 172,051 | 83,412 | 68,197 | 171,937 | 177,777 | ||||||||||||||||||||||||
Income taxes | (591 | ) | (454 | ) | (1,691 | ) | (701 | ) | ||||||||||||||||||||||||
Income from unconsolidated joint venture | 551 | - | 1,183 | - | ||||||||||||||||||||||||||||
Income tax expense | (838 | ) | (591 | ) | (1,381 | ) | (1,691 | ) | ||||||||||||||||||||||||
(Loss) income from unconsolidated joint venture | (588 | ) | 551 | (637 | ) | 1,183 | ||||||||||||||||||||||||||
Net income | $ | 68,157 | $ | 113,154 | $ | 177,269 | $ | 171,350 | $ | 81,986 | $ | 68,157 | $ | 169,919 | $ | 177,269 | ||||||||||||||||
Earnings per unit: | ||||||||||||||||||||||||||||||||
Basic: | ||||||||||||||||||||||||||||||||
Net income | $ | 0.33 | $ | 0.57 | $ | 0.86 | $ | 0.87 | $ | 0.39 | $ | 0.33 | $ | 0.82 | $ | 0.86 | ||||||||||||||||
Diluted: | ||||||||||||||||||||||||||||||||
Net income | $ | 0.33 | $ | 0.57 | $ | 0.86 | $ | 0.86 | $ | 0.39 | $ | 0.33 | $ | 0.82 | $ | 0.86 | ||||||||||||||||
Dividends declared per Omega OP Unit | $ | 0.63 | $ | 0.58 | $ | 1.25 | $ | 1.15 | $ | 0.66 | $ | 0.63 | $ | 1.32 | $ | 1.25 | ||||||||||||||||
Weighted-average Omega OP Units outstanding, basic | 206,205 | 197,903 | 206,016 | 197,539 | 208,263 | 206,205 | 207,972 | 206,016 | ||||||||||||||||||||||||
Weighted-average Omega OP Units outstanding, diluted | 206,672 | 199,157 | 206,423 | 198,754 | 208,460 | 206,672 | 208,139 | 206,423 |
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(in thousands)
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | June 30, | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | June 30, | June 30, | |||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||
Net income | $ | 68,157 | $ | 113,154 | $ | 177,269 | $ | 171,350 | $ | 81,986 | $ | 68,157 | $ | 169,919 | $ | 177,269 | ||||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||
Foreign currency translation | 10,274 | (21,836 | ) | 14,608 | (26,566 | ) | (16,153 | ) | 10,274 | (6,284 | ) | 14,608 | ||||||||||||||||||||
Derivative instruments | (3,407 | ) | (4,198 | ) | (2,153 | ) | (13,074 | ) | ||||||||||||||||||||||||
Total other comprehensive income (loss) | 6,867 | (26,034 | ) | 12,455 | (39,640 | ) | ||||||||||||||||||||||||||
Cash flow hedges | 1,788 | (3,407 | ) | 6,276 | (2,153 | ) | ||||||||||||||||||||||||||
Total other comprehensive (loss) income | (14,365 | ) | 6,867 | (8 | ) | 12,455 | ||||||||||||||||||||||||||
Comprehensive income | $ | 75,024 | $ | 87,120 | $ | 189,724 | $ | 131,710 | $ | 67,621 | $ | 75,024 | $ | 169,911 | $ | 189,724 |
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CHANGES IN OWNERS’ EQUITY
Unaudited
(in thousands)
General Partners’ Omega OP Units | Limited Partners’ Omega OP Units | Total Omega OP Units | General Partners’ Equity | Limited Partners’ | Total Owners’ Equity | |||||||||||||||||||
Balance at December 31, 2016 | 196,142 | 8,862 | 205,004 | $ | 3,858,745 | $ | 353,241 | $ | 4,211,986 | |||||||||||||||
Contributions from partners | 1,082 | — | 1,082 | 34,776 | — | 34,776 | ||||||||||||||||||
Distributions to partners | — | — | — | (246,843 | ) | (11,143 | ) | (257,986 | ) | |||||||||||||||
Omega OP Unit redemptions | — | (90 | ) | (90 | ) | — | (2,990 | ) | (2,990 | ) | ||||||||||||||
Foreign currency translation | — | — | — | 13,986 | 622 | 14,608 | ||||||||||||||||||
Derivative instruments | — | — | — | (2,062 | ) | (91 | ) | (2,153 | ) | |||||||||||||||
Net income | — | — | — | 169,697 | 7,572 | 177,269 | ||||||||||||||||||
Balance at June 30, 2017 | 197,224 | 8,772 | 205,996 | $ | 3,828,299 | $ | 347,211 | $ | 4,175,510 |
General | Limited | |||||||||||||||||||||||
Partners’ | Partners’ | Total | General | Limited | Total | |||||||||||||||||||
Omega | Omega | Omega | Partners’ | Partners’ | Owners’ | |||||||||||||||||||
OP Units | OP Units | OP Units | Equity | Equity | Equity | |||||||||||||||||||
Balance at December 31, 2017 | 198,309 | 8,772 | 207,081 | $ | 3,555,091 | $ | 333,167 | $ | 3,888,258 | |||||||||||||||
Cumulative effect of accounting change (see Note 1) | - | - | - | 9,577 | 423 | 10,000 | ||||||||||||||||||
Balance at January 1, 2018 | 198,309 | 8,772 | 207,081 | 3,564,668 | 333,590 | 3,898,258 | ||||||||||||||||||
Contributions from partners | 2,023 | - | 2,023 | 61,229 | - | 61,229 | ||||||||||||||||||
Distributions to partners | - | - | - | (263,158 | ) | (11,765 | ) | (274,923 | ) | |||||||||||||||
Omega OP Unit redemptions | - | (6 | ) | (6 | ) | - | (160 | ) | (160 | ) | ||||||||||||||
Comprehensive income | ||||||||||||||||||||||||
Foreign currency translation | - | - | - | (6,019 | ) | (265 | ) | (6,284 | ) | |||||||||||||||
Cash flow hedges | - | - | - | 6,012 | 264 | 6,276 | ||||||||||||||||||
Net income | - | - | - | 162,756 | 7,163 | 169,919 | ||||||||||||||||||
Total comprehensive income | 169,911 | |||||||||||||||||||||||
Balance at June 30, 2018 | 200,332 | 8,766 | 209,098 | $ | 3,525,488 | $ | 328,827 | $ | 3,854,315 |
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (in thousands)
Six Months Ended June 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 177,269 | $ | 171,350 | ||||
Adjustment to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 140,343 | 127,938 | ||||||
Impairment loss on real estate properties | 17,773 | 41,451 | ||||||
Provision for uncollectible accounts | 5,077 | 3,970 | ||||||
Refinancing costs and amortization of deferred financing costs | 15,240 | 4,640 | ||||||
Accretion of direct financing leases | (6,164 | ) | (5,915 | ) | ||||
Stock-based compensation expense | 7,478 | 6,443 | ||||||
Gain on assets sold – net | (6,798 | ) | (14,792 | ) | ||||
Amortization of acquired in-place leases - net | (6,202 | ) | (7,910 | ) | ||||
Effective yield receivable on mortgage notes | (1,191 | ) | (619 | ) | ||||
Change in operating assets and liabilities – net: | ||||||||
Contractual receivables | (33,293 | ) | 856 | |||||
Straight-line rent receivables | (23,174 | ) | (17,756 | ) | ||||
Lease inducements | 895 | 1,294 | ||||||
Other operating assets and liabilities | (21,667 | ) | (24,055 | ) | ||||
Net cash provided by operating activities | 265,586 | 286,895 | ||||||
Cash flows from investing activities | ||||||||
Acquisition of real estate | (130,977 | ) | (622,848 | ) | ||||
Cash acquired | 2,341 | — | ||||||
Investments in construction in progress | (46,108 | ) | (26,960 | ) | ||||
Investments in direct financing leases | (4,767 | ) | (30 | ) | ||||
Proceeds from direct financing leases | 27,253 | — | ||||||
Placement of mortgage loans | (24,978 | ) | (12,528 | ) | ||||
Distributions from unconsolidated joint venture | 9,741 | — | ||||||
Proceeds from sale of real estate investments | 64,061 | 43,772 | ||||||
Capital improvements to real estate investments | (16,861 | ) | (21,812 | ) | ||||
Proceeds from other investments | 35,997 | 25,923 | ||||||
Investments in other investments | (52,228 | ) | (136,536 | ) | ||||
Collection of mortgage principal | 673 | 42,051 | ||||||
Net cash used in investing activities | (135,853 | ) | (708,968 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from intercompany loans payable from Omega | 2,163,749 | 1,229,000 | ||||||
Repayment of intercompany loans payable to Omega | (2,104,139 | ) | (639,620 | ) | ||||
Payment of financing related costs incurred by Omega | (28,483 | ) | (3,581 | ) | ||||
Equity contributions from general partners | 24,235 | 91,440 | ||||||
Distributions to general partners | (246,722 | ) | (217,068 | ) | ||||
Distributions to limited partners | (11,143 | ) | (10,351 | ) | ||||
Redemption of Omega OP Units | (48 | ) | (10 | ) | ||||
Net cash (used in) provided by financing activities | (202,551 | ) | 449,810 | |||||
Effect of foreign currency translation on cash and cash equivalents | 162 | (202 | ) | |||||
(Decrease) increase in cash and cash equivalents | (72,656 | ) | 27,535 | |||||
Cash and cash equivalents at beginning of period | 93,687 | 5,424 | ||||||
Cash and cash equivalents at end of period | $ | 21,031 | $ | 32,959 |
Supplemental disclosures of cash flow information:
Six Months Ended June 30, | ||||||||
2017 | 2016 | |||||||
Interest paid during the period, net of amounts capitalized | $ | 97,610 | $ | 74,010 | ||||
Taxes paid during the period | $ | 2,032 | $ | 748 | ||||
Non-cash investing activities | ||||||||
Non cash acquisition of real estate (See Note 2) | $ | (9,430 | ) | $ | — | |||
Non cash acquisition of business | — | (25,000 | ) | |||||
Non cash surrender of mortgage | — | 25,000 | ||||||
Non cash investment in other investments | (6,353 | ) | — | |||||
Total | $ | (15,783 | ) | $ | — | |||
Non-cash financing activities | ||||||||
Change in fair value of cash flow hedges | $ | (108 | ) | $ | 13,074 | |||
Remeasurement of debt denominated in a foreign currency | 2,190 | — | ||||||
$ | 2,082 | $ | 13,074 |
Six Months Ended | ||||||||
June 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 169,919 | $ | 177,269 | ||||
Adjustment to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 139,970 | 140,343 | ||||||
Impairment on real estate properties | 8,992 | 17,773 | ||||||
Provision for uncollectible accounts | 8,378 | 5,077 | ||||||
Interest - amortization of deferred financing costs | 4,485 | 15,240 | ||||||
Accretion of direct financing leases | 67 | (6,164 | ) | |||||
Stock-based compensation expense | 8,145 | 7,478 | ||||||
Gain on assets sold – net | (14,609 | ) | (6,798 | ) | ||||
Amortization of acquired in-place leases - net | (5,277 | ) | (6,202 | ) | ||||
Effective yield receivable on mortgage notes | (710 | ) | (1,191 | ) | ||||
Interest paid-in-kind | (3,493 | ) | - | |||||
Change in operating assets and liabilities – net: | ||||||||
Contractual receivables | 1,563 | (33,293 | ) | |||||
Straight-line rent receivables | (30,746 | ) | (23,174 | ) | ||||
Lease inducements | (31,551 | ) | 895 | |||||
Other operating assets and liabilities | (37,967 | ) | (23,053 | ) | ||||
Net cash provided by operating activities | 217,166 | 264,200 | ||||||
Cash flows from investing activities | ||||||||
Acquisition of real estate | (52,744 | ) | (130,977 | ) | ||||
Cash acquired | - | 2,341 | ||||||
Investments in construction in progress | (63,313 | ) | (46,108 | ) | ||||
Investments in direct financing leases | - | (4,767 | ) | |||||
Proceeds from sale of direct financing lease | 15,433 | 27,253 | ||||||
Placement of mortgage loans | (56,944 | ) | (24,978 | ) | ||||
Distributions from unconsolidated joint venture | 3,739 | 9,741 | ||||||
Proceeds from sale of real estate investments | 221,952 | 64,061 | ||||||
Capital improvements to real estate investments | (19,183 | ) | (16,861 | ) | ||||
Receipts from insurance proceeds | 6,901 | - | ||||||
Proceeds from other investments | 105,695 | 35,997 | ||||||
Investments in other investments | (192,962 | ) | (52,228 | ) | ||||
Collection of mortgage principal | 25,176 | 673 | ||||||
Net cash used in investing activities | (6,250 | ) | (135,853 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from intercompany loans payable to Omega | 549,000 | 2,163,749 | ||||||
Repayment of intercompany loans payable to Omega | (621,049 | ) | (2,104,139 | ) | ||||
Payment of financing related costs incurred by Omega | (8 | ) | (28,483 | ) | ||||
Equity contributions from general partners | 52,905 | 24,235 | ||||||
Distributions to general partners | (263,021 | ) | (246,722 | ) | ||||
Distributions to limited partners | (11,765 | ) | (11,143 | ) | ||||
Redemption of Omega OP Units | (118 | ) | (48 | ) | ||||
Net cash used in financing activities | (294,056 | ) | (202,551 | ) | ||||
Effect of foreign currency translation on cash, cash equivalents and restricted cash | (119 | ) | 162 | |||||
Decrease in cash, cash equivalents and restricted cash | (83,259 | ) | (74,042 | ) | ||||
Cash, cash equivalents and restricted cash at beginning of period | 96,808 | 107,276 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 13,549 | $ | 33,234 |
See notes to consolidated financial statements.
OMEGA HEALTHCARE INVESTORS, INC., OHI HEALTHCARE PROPERTIES HOLDCO, INC., AND OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
June 30, 20172018
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business Overview and Organization
Omega Healthcare Investors, Inc. (“Omega”) was formed as a real estate investment trust (“REIT”) and incorporated in the State of Maryland on March 31, 1992. AllOmega is structured as an umbrella partnership REIT (“UPREIT”) under which all of Omega's assets are owned directly or indirectly by, and all of Omega's operations are conducted directly or indirectly through, its subsidiaries, OHI Healthcare Properties Holdco, Inc. (“OHI Holdco”), a direct wholly ownedoperating partnership subsidiary, of Omega, and OHI Healthcare Properties Limited Partnership (“Omega OP”). OHI Holdco was formed as a corporation and incorporated in the State of Delaware on October 22, 2014. Omega OP was formed as a limited partnership and organized in the State of Delaware on October 24, 2014. No substantive assets or activity occurred in either of these entities until the merger with Aviv REIT, Inc. on April 1, 2015. Unless stated otherwise or the context otherwise requires, the terms the “Company,” “we,” “our” and “us” means Omega OHI Holdco and Omega OP, collectively.
The Company has one reportable segment consisting of investments in healthcare-related real estate properties located in the United States (“U.S.”) and the United Kingdom (“U.K.”). Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities (“SNFs”) and, to a lesser extent, assisted living facilities (“ALFs”), independent living facilities and rehabilitation and acute care facilities. 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 April 2015, Aviv REIT, Inc., a Maryland corporation (“Aviv”), merged (the “Aviv Merger”) with Our other investment income derives from fixed and into a wholly owned subsidiary of Omega, pursuant tovariable rate loans, which are either unsecured or secured by the terms of that certain Agreement and Plan of Merger, dated as of October 30, 2014 (the “Merger Agreement”), by and among Omega, Aviv, OHI Holdco, Omega OP, and Aviv Healthcare Properties Limited Partnership, a Delaware limited partnership.
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 resultcollateral of the UPREIT Conversion and following the consummation of the Aviv Merger, all of Omega’s assets are held by Omega OP, through its equity interests in its subsidiaries.borrower.
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, Omega and OHI Holdco are the general partners of Omega OP, and havehas exclusive control over Omega OP’s day-to-day management.management pursuant to the Partnership Agreement. As of June 30, 2017,2018, Omega and OHI Holdco together owned approximately 96% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and investors owned approximately 4% of the outstanding Omega OP Units.
Basis of Presentation
The accompanying unaudited consolidated financial statements 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. 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/A10-K filed with the SEC on August 9, 2017.February 23, 2018.
OurOmega’s consolidated financial statements include the accounts of (i) Omega, (ii) OHI Holdco, (iii) Omega OP, and (iv)(iii) all direct and indirect wholly owned subsidiaries of Omega. All intercompany transactions and balances have been eliminated in consolidation,and ourOmega’s net earnings are reduced by the portion of net earnings attributable to noncontrolling interests.
12 |
Asset
Omega OP’s consolidated financial statements include the accounts of (i) Omega OP, and (ii) all direct and indirect wholly owned subsidiaries of Omega OP. All intercompany transactions and balances have been eliminated in consolidation.
Variable Interest Entities
GAAP requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIEs”). A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. We may change our original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affects the characteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary.
Our variable interests in VIEs may be in the form of equity ownership, leases, guarantees and/or loans with our operators. We analyze our agreements and investments to determine whether our operators or unconsolidated joint venture are VIEs and, if so, whether we are the primary beneficiary.
We consolidate a VIE when we determine that we are its primary beneficiary. We identify the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. Factors considered in determining whether we are the primary beneficiary of an entity include: (i) our voting rights, if any; (ii) our involvement in day-to-day capital and operating decisions; (iii) our risk and reward sharing; (iv) the financial condition of the operator or joint venture and (iv) our representation on the VIE’s board of directors. We perform this analysis on an ongoing basis.
As of June 30, 2018, we have not consolidated any VIEs, as we do not have the power to direct the activities of any VIEs that most significantly impact their economic performance and we do not have the obligation to absorb losses or receive benefits of the VIEs that could be significant to the entity.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and highly liquid investments with a maturity date of three months or less when purchased. These investments are stated at cost, which approximates fair value. The majority of our cash, cash equivalents and restricted cash are held at major commercial banks. Certain cash account balances exceed FDIC insurance limits of $250,000 per account and, as a result, there is a concentration of credit risk related to amounts in excess of the insurance limits. We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash, cash equivalents or restricted cash.
Restricted Cash
Restricted cash consists primarily of liquidity deposits escrowed for tenant obligations required by us pursuant to certain contractual terms. Prior to June 1, 2018, restricted cash also included other deposits required by the U.S. Department of Housing and Urban Development (“HUD”) in connection with our mortgage borrowings guaranteed by HUD. For additional information see Note 2 – Properties and Investments and Note 14 – Borrowing Activities and Arrangements.
13 |
Real Estate Investment Impairment
Management evaluates our real estate investments for impairment indicators at each reporting period, including the evaluation of our assets’ useful lives. The judgment regarding the existence of impairment indicators is based on factors such as, but not limited to, market conditions, operator performance including the current payment status of contractual obligations and expectations of the ability to meet future contractual obligations, legal structure, as well as our intent with respect to holding or disposing of the asset. If indicators of impairment are present, management evaluates the carrying value of the related real estate investments in relation to themanagement’s estimate of future undiscounted cash flows of the underlying facilities. The estimated future undiscounted cash flows are generally based on the related lease which relates to one or more properties and may include cash flows from the eventual disposition of the asset. In some instances, there may be various potential outcomes for a real estate investment and its potential future cash flows. In these instances, the undiscounted future cash flows used to assess the recoverability are probability-weighted based on management’s best estimates as of the date of evaluation. Provisions for impairment losses related to long-lived assets are recognized when expected future undiscounted cash flows based on our intended use of the property are determined to be less than the carrying values of the assets. An adjustment is made to the net carrying value of the real estate investments for the excess of carrying value over fair value. The fair value of the real estate investment is determined based on current market conditions and considerconsiders matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties, and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. Additionally, our evaluation of fair value may consider valuing the property as a nursing home as well as alternative uses. All impairments are taken as a period cost at that time, and depreciation is adjusted going forward to reflect the new value assigned to the asset. Management’s impairment evaluation process, and when applicable, impairment calculations involve estimation of the future cash flows from management’s intended use of the property as well as the fair value of the property. Changes in the facts and circumstances that drive management’s assumptions may result in an impairment of the Company’s assets in a future period that could be material to the Company’s results of operations.
For the three months ended June 30, 2018 and 2017, we recognized (a recovery on) impairment on real estate properties of $(1.1) million and $10.1 million, respectively. For the six months ended June 30, 20172018 and 2016,2017, we recognized impairment losseson real estate properties of $10.1 million, $17.8 million, $6.9$3.8 million and $41.5$17.8 million, respectively. For additional information see Note 2 – Properties and Investments.
Allowance for Losses on Mortgages, Other Investments and Direct Financing Leases
The allowances for losses on mortgage notes receivable, other investments and direct financing leases (collectively, our “loans”) are maintained at a level believed adequate to absorb potential losses. The determination of the allowances is based on a quarterly evaluation of these loans, including general economic conditions and estimated collectability of loan payments. We evaluate the collectability of our loans based on a combination of factors, including, but not limited to, delinquency status, financial strength of the borrower and guarantors, if applicable, and the value of the underlying collateral. If such factors indicate that there is greater risk of loan charge-offs, additional allowances or placement on non-accrual status may be required. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due as scheduled according to the contractual terms of the loan agreements. Consistent with this definition, all loans on non-accrual status may be deemed impaired. To the extent circumstances improve and the risk of collectability is diminished, we will return these loans to full accrual status. When management identifies potential loan impairment indicators, the loan is written down to the present value of the expected future cash flows. In cases where expected future cash flows are not readily determinable, the loan is written down to the fair value of the underlying collateral, if applicable. We may base our valuation on a loan’s observable market price, if any, or the fair value of collateral, net of sales costs, if the repayment of the loan is expected to be provided solely by the sale of the collateral.
We account for impaired loans using (a) the cost-recovery method, and/or (b) the cash basis method. We generally utilize the cost-recovery method for impaired loans for which impairment reserves were recorded. We utilize the cash basis method for impaired loans for which no impairment reserves were recorded because the net present value of the discounted cash flows expected under the loan and/or the underlying collateral supporting the loan were equal to or exceeded the book value of the loan. Under the cost-recovery method, we apply cash received against the outstanding loan balance prior to recording interest income. Under the cash basis method, we apply cash received to principal or interest income based on the terms of the agreement. As of June 30, 2018 and December 31, 2017, we had $177.1 million and $177.5 million, respectively, of reserves on our loans. For additional information see Note 3 – Direct Financing Leases, Note 4 – Mortgage Notes Receivable and Note 5 – Other Investments.
14 |
Goodwill Impairment
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 reporting unit. In evaluating goodwill for impairment on an interim basis, we assess qualitative factorssuch as asignificant decline in real estate valuations,current macroeconomic conditions, state of the equity and capital markets and our overall financial and operating performanceor a significant decline in the value of our market capitalization, to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the reporting unit is less than its carrying amount. On an annual basis during the fourth quarter of each fiscal year, or on an interim basis if we conclude it is more likely than not that the fair value of the reporting unit is less than its carrying value, we perform a two-step goodwill impairment test to identify potential impairment and measure the amount of impairment we will recognize, if any.
Noncontrolling Interests
Noncontrolling interests is the portion of equity not attributable to the respective reporting entity. 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, or owners’ equity on our Consolidated Balance Sheets. We include net income attributable to the noncontrolling interests in net income in our Consolidated Statements of Income.Operations.
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.
The noncontrolling interest for Omega represents the outstanding Omega OP Units held by outside investors. The noncontrolling interest for OHI Holdco represents the Omega OP Units held by the Parent and the outstanding Omega OP Units held by outside investors.
Foreign Operations
The U.S. dollar is the functional currency for our consolidated subsidiaries operating in the U.S. The functional currency for our consolidated subsidiaries operating in the U.K. is the British Pound.Pound (“GBP”). For our consolidated subsidiaries whose functional currency is not the U.S. dollar (“USD”), we translate their financial statements into the U.S. dollar.USD. We translate assets and liabilities at the exchange rate in effect as of the financial statement date. Revenue and expense accounts are translated using an average exchange rate for the period. Gains and losses resulting from translation are included in Omega OP’s owners’ equity and Omega’s accumulated other comprehensive loss (“AOCL”), as a separate component of equity and a proportionate amount of gain or loss is allocated to noncontrolling interests.
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 thenin which case the adjustments are included in AOCL.Omega OP’s owners’ equity and Omega’s AOCL and a proportionate amount of gain or loss is allocated to noncontrolling interests.
15 |
Derivative Instruments
Cash flow hedges
During our normal course of business, we may use certain types of derivative instruments for the purpose of managing interest rate and currency risk. To qualify for hedge accounting, derivative instruments used for risk management purposes must effectively reduce the risk exposure that they are designed to hedge. In addition, at the inception of a qualifying cash flow hedging relationship, the underlying transaction or transactions, must be, and are expected to remain, probable of occurring in accordance with the Company’s related assertions. The Company recognizes all derivative instruments, including embedded derivatives required to be bifurcated, as assets or liabilities in the Consolidated Balance Sheets at their fair value which areis determined using a market approach and Level 2 inputs. Changes in the fair value of derivative instruments that are not designated in hedging relationships or that do not meet the criteria of hedge accounting are recognized in earnings. For derivatives designated asin qualifying cash flow hedging relationships, the change in fair value ofgain or loss on the effective portion of the derivativesderivative is recognized in Omega OP’s owners’ equity and Omega’s AOCL as a separate component of equity and a proportionate amount of gain or loss is allocated to noncontrolling interest, whereas the change in fair value of the ineffective portion is recognized in earnings.interest. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objectives and strategy for undertaking various hedge transactions. This process includes designating all derivatives that are part of a hedging relationship to specific forecasted transactions as well as recognized obligationsliabilities or assets inon the Consolidated Balance Sheets. We also assess and document, both at inception of the hedging relationship and on a quarterly basis thereafter, whether the derivatives are highly effective in offsetting the designated risks associated with the respective hedged items. If it is determined that a derivative ceases to be highly effective as a hedge, or that it is probable the underlying forecasted transaction will not occur, we discontinue hedge accounting prospectively and record the appropriate adjustment to earnings based on the current fair value of the derivative. As a matter of policy, we do not use derivatives for trading or speculative purposes. At June 30, 20172018 and December 31, 2016, we had $1.42017, $7.7 million and $1.5 million, respectively, of qualifying cash flow hedges were recorded at fair value in accrued expenses and other liabilitiesassets on our Consolidated Balance Sheets.
Net investment hedge
We useThe Company is exposed to fluctuations in the spot methodGBP against its functional currency, the USD, relating to measureits investments in healthcare-related real estate properties located in the effectiveness of ourU.K. The Company uses a nonderivative, GBP-denominated term loan to manage its exposure to fluctuations in the GBP-USD exchange rate. The foreign currency transaction gain or loss on the nonderivative hedging instrument that is designated and qualifies as a net investment hedge. Under this method, for each reporting period, the change in the carrying value of the hedging instrument due to remeasurement of the effective portionhedge is reported in Omega OP’s owners’ equity and Omega’s AOCL in our Consolidated Balance Sheets and the remaining change in the carrying value of the ineffective portion, if any, is recognized in earnings. We evaluate the effectiveness of our net investment hedge on a quarterly basis. We did not record any ineffectiveness for fiscal 2017.Sheets.
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 rent 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, modification, or renewal of the lease, and are amortized as a reduction of rental revenue over the non-cancellable lease term.
At June 30, 2017, two of our top 10 operators were approximately 90 days past due on rent payments to the Company.
On a quarterly basis, and more frequently as appropriate, 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.agreement, if any. 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, a mortgageloan recognized on an effective yield basis or the existence of lease inducements, we generally provide an allowance for straight-line, effective interest, and/or lease inducement accounts receivable when certain conditions or indicators of adverse collectability are present. If the accounts receivable balance is subsequently deemed uncollectible, the receivable and allowance for doubtful account balance are written off.
A summary of our net receivables by type is as follows:
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Contractual receivables | $ | 37,655 | $ | 43,258 | ||||
Effective yield interest receivables | 12,384 | 11,673 | ||||||
Straight-line rent receivables | 226,633 | 216,054 | ||||||
Lease inducements | 48,456 | 16,812 | ||||||
Allowance | (4,988 | ) | (8,463 | ) | ||||
Accounts receivable – net | $ | 320,140 | $ | 279,334 |
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
(in thousands) | ||||||||
Contractual receivables | $ | 40,484 | $ | 13,376 | ||||
Effective yield interest receivables | 10,940 | 9,749 | ||||||
Straight-line rent receivables | 231,233 | 208,874 | ||||||
Lease inducements | 7,498 | 8,393 | ||||||
Allowance | (1,469 | ) | (357 | ) | ||||
Accounts receivable – net | $ | 288,686 | $ | 240,035 |
During the first quarter of 2018, we wrote-off approximately $7.8 million of straight-line rent receivables to provision for uncollectible accounts, as a result of facility transitions to other operators.
Related Party TransactionsDuring the second quarter of 2018, we placed two of our operators on a cash basis and wrote-off approximately $2.8 million of straight-line rent receivables and reserved approximately $0.6 million of contractual receivables to provision for uncollectible accounts related to these two operators. The provision for uncollectible accounts was offset by a recovery of approximately $2.8 million.
The Company has a policy which generally requires related party transactions to be approved or ratified byDuring the Audit Committee. On February 1, 2016,first quarter of 2018, we acquired 10 SNFs from Laurel Healthcare Holdings, Inc. (“Laurel”) forpaid an existing operator approximately $169.0$50 million in cash and leased themexchange for a reduction of such operator’s participation in an in-the-money purchase option. As a result, we recorded an approximate $28 million lease inducement that will be amortized as a reduction to an unrelated existing operator. A former memberrental income over the remaining term of the Board of Directors of the Company, together with certain members of his immediate family, beneficially owned approximately 34% of the equity of Laurel priorlease. The remaining $22 million was recorded as a reduction to the transaction. Immediately followinginitial contingent liability which was included in accrued expenses and other liabilities on our acquisition,Consolidated Balance Sheets.
Reclassification
Certain prior quarter amounts have been reclassified to conform to the unrelated existing operator acquired all of the outstanding equity interests of Laurel, including the interests previously held by the former director of the Company and his family.current quarter presentation.
Accounting PronouncementPronouncements Adopted in 20172018
In March 2016,2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09,Compensation-Stock Compensation (Topic 718) (“ASU 2016-09”). ASU 2016-09 amends the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016. We adopted this accounting standard on January 1, 2017, at which time the Company began prospectively accounting for excess tax benefits or tax deficiencies as an adjustment to income tax expense in our Consolidated Statements of Income as opposed to the prior requirement that these excess tax benefits be recognized in additional paid-in capital and tax deficiencies be recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement. The Company will continue to account for forfeitures as they occur and present employee taxes paid as a financing activity on our Consolidated Statements of Cash Flows. The adoption of this accounting standard did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements - Pending Adoption
In 2014, the FASB issued 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. In addition, the FASB has begun to issueissued targeted updates to clarify specific implementation issues of ASU 2014-09. These updates includeincluded ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Identifying Performance Obligations and Licensing, and ASU 2016-12, Narrow-Scope Improvements and Practical Expedients.The Company is currently evaluating the provisionsAs a result of adopting ASU 2014-09 and its related updates and will be closely monitoring developments and additional guidanceon January 1, 2018, the Company recognized $10.0 million of deferred gain resulting from the sale of facilities to determine the potential impact of the new standard.a third-party in December 2017 through opening equity on January 1, 2018. The Company intends to adoptadopted ASU 2014-09 and its subsequent updates in accordance with the modified retrospective approach. We do not expect theThe adoption of ASU 2014-09 and its related updates todid not have a significantmaterial impact on our consolidated financial statements, as a substantial portion of our revenue consists of rental income from leasing arrangements and interest income from loan arrangements, both of which are specifically excluded from ASU 2014-09.2014-09 and its updates.
In August 2017, the FASB issued ASU 2017-12,Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities(“ASU 2017-12”). The purpose of this updated guidance is to better align the financial reporting for hedging activities with the economic objectives of those activities. The transition guidance provides companies with the option of early adopting the new standard using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. This adoption method will require the Company to recognize the cumulative effect of initially applying ASU 2017-12 as an adjustment to accumulated other comprehensive income (loss) with a corresponding adjustment to the opening balance of equity as of the beginning of the fiscal year that an entity adopts the update. On January 1, 2018, the Company adopted ASU 2017-12 using the modified retrospective transition method. As a result of adopting the standard, the Company is making certain adjustments to its existing hedge designation documentation for active hedging relationships in order to take advantage of specific provisions in the new guidance and to fully align its documentation with ASU 2017-12. The adoption of ASU 2017-12 did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements - Pending Adoption
In February 2016, the FASB issued ASU 2016-02,Leases(“ASU 2016-02”), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective for the Company beginning January 1, 2019. Early adoption of ASU 2016-02 as of its issuance is permitted. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. As a result of the pending adoption ASU 2016-02 and in connection with the pending adoption of ASU 2014-09,2016-02, the Company may be required to record real estate tax revenues and an equal anand offsetting real estate tax expense, as a result of our operators paying real estate taxes on our behalf. In July 2018, the FASB issued ASU 2018-11,Leases(“ASU 2018-11”): Targeted Improvementsto simplify the implementation of ASU 2016-02. This targeted improvement permits the adoption of ASU 2016-02 at the adoption date instead of the earliest comparative period presented in the financial statements and a practical expedient permitting lessors to not separate nonlease components from the associated lease component if certain conditions are met. Upon adoption of ASU 2016-02 and its updates, we intend to transition to the new leasing accounting standard on January 1, 2019, without modifying our prior year balance sheet and recognizing the cumulative-effect adjustment to opening equity. We are continuingcontinue to evaluate the other impacts of adopting ASU 2016-02 and its updates on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses(Topic (Topic 326) (“ASU 2016-13”), which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. We are currently evaluating the impact of adopting ASU 2016-13 on our consolidated financial statements.
NOTE 2 – PROPERTIES AND INVESTMENTS
Leased Property
Our leased real estate properties, represented by 803709 SNFs, 119116 ALFs, 1614 specialty facilities and one medical office building at June 30, 2017,2018, are leased under provisions of single or master operating leases with initial terms typically ranging from five to 15 years, plus renewal options. Also see Note 3 – Direct Financing Leases for information regarding additional properties accounted for as direct financing leases. 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 between 2.0% and 3.0%; (ii) an increase based on the change in pre-determined formulas from year to year (e.g., 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.
18 |
A summary of our investment in leased real estate properties is as follows:
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
(in thousands) | ||||||||
Buildings | $ | 6,055,423 | $ | 5,954,771 | ||||
Land | 796,561 | 759,295 | ||||||
Furniture, fixtures and equipment | 458,427 | 454,760 | ||||||
Site improvements | 204,993 | 206,206 | ||||||
Construction in progress | 214,795 | 191,326 | ||||||
Total real estate investments | 7,730,199 | 7,566,358 | ||||||
Less accumulated depreciation | (1,366,376 | ) | (1,240,336 | ) | ||||
Real estate investments - net | $ | 6,363,823 | $ | 6,326,022 |
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Buildings | $ | 5,985,795 | $ | 6,098,119 | ||||
Land | 782,913 | 795,874 | ||||||
Furniture, fixtures and equipment | 436,680 | 440,737 | ||||||
Site improvements | 230,304 | 227,150 | ||||||
Construction in progress | 135,969 | 94,080 | ||||||
Total real estate investments | 7,571,661 | 7,655,960 | ||||||
Less accumulated depreciation | (1,475,463 | ) | (1,376,828 | ) | ||||
Real estate investments - net | $ | 6,096,198 | $ | 6,279,132 |
The following table summarizes the significant acquisitions that occurred during the first six months of 2017:2018:
Number of | Total | Building & Site | Furniture | Initial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Number of Facilities | Country/ | Total Investment | Land | Building & Site | Furniture & Fixtures | Initial Annual Cash Yield | Facilities | Country/ | Investment | Land | Improvements | & Fixtures | Annual | |||||||||||||||||||||||||||||||||||||||||||||||
Period | SNF | ALF | State | (in millions) | (2)(%) | SNF | ALF | State | (in millions) | Cash Yield(3) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Q1 | - | 1 | VA | $ | 7.6 | $ | 0.5 | $ | 6.8 | $ | 0.3 | 7.50 | - | 1 | UK | $ | 4.0 | (1) | $ | 0.9 | $ | 2.9 | $ | 0.2 | 8.5 | % | ||||||||||||||||||||||||||||||||||
Q2 | 1 | - | NC | 8.6 | 0.7 | 7.3 | 0.6 | 9.50 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Q1 | - | 1 | UK | 5.7 | (2) | 1.4 | 4.1 | 0.2 | 8.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Q1 | 1 | - | PA | 7.4 | 1.6 | 5.4 | 0.4 | 9.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Q1 | 1 | - | VA | 13.2 | 2.4 | 10.5 | 0.3 | 9.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Q2 | - | 18 | UK | 124.2 | (1) | 34.1 | 85.1 | 5.0 | 8.50 | 5 | - | TX | 22.8 | 0.5 | 20.4 | 1.9 | 9.5 | % | ||||||||||||||||||||||||||||||||||||||||||
Total | 1 | 19 | $ | 140.4 | $ | 35.3 | $ | 99.2 | $ | 5.9 | 7 | 2 | $ | 53.1 | $ | 6.8 | $ | 43.3 | $ | 3.0 |
(1) | Omega recorded a non-cash deferred tax liability |
(2) | Omega recorded a non-cash deferred tax liability of approximately $0.2 million in connection with this acquisition. |
(3) | The cash yield is based on the purchase price. |
DuringFor the second quarter of 2017,six months ended June 30, 2018, we acquired two parcels of land which are not(not reflected in the table aboveabove) for approximately $5.5$3.5 million with the intent of building new facilities for anour existing operator.operators.
Asset Sales, Impairments and Other
During the first quarter of 2017,2018, we sold 1514 facilities (five of which were previously held for sale at December 31, 2017) subject to operating leases for approximately $45.8$74.7 million in net cash proceeds recognizing a gain on sale of approximately $7.4$17.5 million. Eleven of the sold facilities were previously classified as held for sale. In addition, we recorded a provision for impairmentimpairments on real estate properties of approximately $7.6$4.9 million on three17 facilities one(16 of which waswere subsequently reclassified to assets held for sale as of March 31, 2017.sale).
During the second quarter of 2017,2018, we sold three45 facilities and one ancillary building (33 of which were previously held for sale at March 31, 2018) subject to operating leases for approximately $18.3$147.2 million in net cash proceeds recognizing a loss on sale of approximately $0.6$2.9 million. Two of the sold facilities were previously classified as assets held for sale. In addition, we recorded a provision for impairmentimpairments of approximately $10.1$4.1 million on six facilities.nine facilities (three of which were subsequently reclassified to assets held for sale). Our impairments were offset by $5.2 million of insurance proceeds received related to a facility destroyed in November 2017.
Of the 45 facilities sold during the second quarter of 2018, we sold 12 SNFs on June 1, 2018 (12 of which were previously held for sale at March 31, 2018) secured by HUD mortgages to subsidiaries of an existing operator. The Company sold the 12 SNF facilities with carrying values of approximately $62 million for approximately $78 million which consisted of $25 million of cash consideration and their assumption of approximately $53 million of our HUD mortgages. See Note 14 – Borrowing Activities and Arrangements for additional details. Simultaneously, subsidiaries of the operator assumed our HUD restricted cash accounts, deposits and escrows. The Company recorded a gain on sale of approximately $11 million after approximately $5 million of closing and other transaction related costs. In connection with this sale, we provided a principal of an existing operator an unsecured loan of approximately $39.7 million. See Note 5 – Other Investments for details.
19 |
Our recorded impairments were primarily the result of decisions to exit certain non-strategic facilities and/or operators. We reduced the net book value of the impaired facilities to their estimated fair values or, with respect to the facilityfacilities reclassified to assets held for sale, to itstheir estimated fair valuevalues less costs to sell. To estimate the fair value of the facilities, we utilized a market approach andwhich considered binding sale agreements (a Level 1 input) and/or Level 3 inputs (which generally consist of non-binding offers from unrelated third parties). Also see Note 78 – Assets Held For Sale for details. Our recorded impairments were primarily the result of a decision to exit certain non-strategic facilities and/or operators.Sale.
NOTE 3 – DIRECT FINANCING LEASES
The components of investments in direct financing leases consist of the following:
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
(in thousands) | ||||||||
Minimum lease payments receivable | $ | 4,085,493 | $ | 4,287,069 | ||||
Less unearned income | (3,499,877 | ) | (3,685,131 | ) | ||||
Less allowance for loss on direct financing lease | (3,309 | ) | — | |||||
Investment in direct financing leases - net | $ | 582,307 | $ | 601,938 | ||||
Properties subject to direct financing leases | 53 | 58 |
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Minimum lease payments receivable | $ | 3,649,602 | $ | 3,707,079 | ||||
Less unearned income | (3,127,950 | ) | (3,169,942 | ) | ||||
Investment in direct financing leases | 521,652 | 537,137 | ||||||
Less allowance for loss on direct financing lease | (172,187 | ) | (172,172 | ) | ||||
Investment in direct financing leases – net | $ | 349,465 | $ | 364,965 | ||||
Properties subject to direct financing leases | 40 | 41 | ||||||
Number of direct financing leases | 4 | 5 |
The following minimum rents are due under our direct financing leases for the remainder of 20172018 and the subsequent five years (in thousands):
2018(1) | 2019(1) | 2020(1) | 2021(1) | 2022(1) | 2023(1) | |||||||||||||||||
$ | 580 | $ | 1,166 | $ | 1,170 | $ | 1,084 | $ | 1,106 | $ | 1,128 |
2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
$24,407 | $50,019 | $51,246 | $52,493 | $53,681 | $55,008 |
(1) | Orianna has been excluded from the contractual minimum rent payments due under our direct financing leases as the facilities are expected to be transitioned or sold. See below for additional information. |
New Ark Investment Inc.In June 2018, we sold one SNF with a carrying value of approximately $15.4 million subject to a direct financing lease to an unrelated third-party for approximately $15.4 million.
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” which does business as “Orianna Health Systems” and is herein referred to as “Orianna”), 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 the38 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 value at the time.
The remaining 50 facilities under theseour master leases with Orianna as of June 30, 20172018 are located in 10seven states, predominantly in the southeastern U.S. The facilities are separated by region and divided amongst four cross-defaulted master leases. The four regions include the Southeast (38 facilities), the Northwest (2 facilities), Texas (9(37 facilities) and Indiana (1 facility). Our recorded investment in these direct financing leases, net of the $172.2 million allowance, amounted to $337.7 million as of June 30, 2018. We have not recognized any direct financing lease income from Orianna for the period from July 1, 2017 through June 30, 2018.
20 |
Orianna has not satisfied the contractual payments due under the terms of the remaining two direct financing leases or the separate operating lease covering four facilities with the Company and the collectability of future amounts due is uncertain.
Additionally,
In March 2018, Orianna commenced voluntary Chapter 11 proceedings in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the “Bankruptcy Court”). As described in Orianna’s filings with the Bankruptcy Court, we entered into a Restructuring Support Agreement (“RSA”) that was expected to form the basis for Orianna’s restructuring. The RSA provided for the recommencement, in April 2018, of partial rent payments at $1.0 million per month and established a specific timeline for the implementation of Orianna’s planned restructuring. The RSA provided for the transition of 23 facilities to new operators and the potential sale of the remaining 19 facilities subject to the plan of reorganization as approved by the Bankruptcy Court. On July 25, 2018, we terminated the RSA with Orianna. See Note 19 – Subsequent Events.
To provide liquidity to Orianna during their Chapter 11 proceedings, we entered into a senior secured superpriority debtor-in-possession (“DIP”) credit agreement with Orianna for a revolving credit and term loan DIP facility of up to $30 million, which DIP facility was approved by the Bankruptcy Court on an interim basis on March 9, 2018 and on a final basis on May 14, 2018. On July 23, 2018, we notified Orianna that it was in default under the DIP facility. See Note 5 – Other Investments and Note 19 – Subsequent Events.
In 2017, we recorded an allowance for loss on direct financing leases of $172.2 million with Orianna covering 38 facilities in the Southeast region of the U.S. The amount of the allowance was determined based on the fair value of the facilities subject to the direct financing lease. To estimate the fair value of the underlying collateral, we utilized an income approach and Level 3 inputs. Our estimate of fair value assumed annual rents ranging between $32.0 million and $38.0 million, rental yields between 9% and 10%, current and projected operating performance of the facilities, coverage ratios and bed values. Such assumptions are subject to change based on changes in market conditions and the ultimate resolution of this matter. Such changes could be significantly different than the currently estimated fair value and such differences could have a material impact on our financial statements.
In addition to our direct financing leases with Orianna, we own four facilities and lease them to New ArkOrianna under a master lease which expires in 2026. The four facility lease is being accounted for as an operating lease.
In March We have not recognized any income on this operating lease for the period from July 1, 2017 we executed sale agreements with two unrelated third parties to sell seven facilities leased to New Ark locatedthrough June 30, 2018, as Orianna did not pay the contractual amounts due and collectability is uncertain. Our recorded investment in the Northwest with a carrying valuefour facilities subject to this operating lease was $37.3 million as of approximately $36.4 million for approximately $34.0 million. During the first quarter of 2017, we recorded an allowance for loss of approximately $2.4 million. In the second quarter of 2017, we sold five of the Northwest facilities and received net cash proceeds of approximately $27.3 million and recorded an additional allowance for loss of approximately $0.9 million. For the three and six months ended June 30, 2017, we recognized approximately $0.5 million and $1.3 million, respectively, of direct financing lease income on a cash basis related to the Northwest facilities lease. The sale of the remaining two Northwest facilities is expected to close in the third quarter of 2017.2018.
NOTE 4 – MORTGAGE NOTES RECEIVABLE
As of June 30, 2017,2018, mortgage notes receivable relate to 29six fixed rate mortgagesmortgage notes on 5253 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 tensix states that are operated by sevenfive independent healthcare operating companies. We monitor compliance with mortgages and when necessary have initiated collection, foreclosure and other proceedings with respect to certain outstanding mortgage notes.
Mortgage interest income is recognized as earned over the terms of the related mortgage notes, typically 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 the application of security deposits.
21 |
The outstanding principal amounts outstanding of mortgage notes receivable, net of allowances, were as follows:
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
(in thousands) | ||||||||
Mortgage note due 2024; interest at 9.98% | $ | 112,500 | $ | 112,500 | ||||
Mortgage note due 2029; interest at 9.45% | 411,467 | 412,140 | ||||||
Other mortgage notes outstanding(1) | 143,489 | 118,637 | ||||||
Mortgage notes receivable, gross | 667,456 | 643,277 | ||||||
Allowance for loss on mortgage notes receivable | (4,747 | ) | (3,934 | ) | ||||
Total mortgages — net | $ | 662,709 | $ | 639,343 |
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Mortgage note due 2027; interest at 10.18% | $ | 112,500 | $ | 112,500 | ||||
Mortgage notes due 2029; interest at 9.67%(1) | 529,960 | 476,320 | ||||||
Other mortgage notes outstanding(2) | 65,754 | 87,317 | ||||||
Mortgage notes receivable, gross | 708,214 | 676,137 | ||||||
Allowance for loss on mortgage notes receivable(3) | (4,905 | ) | (4,905 | ) | ||||
Total mortgages — net | $ | 703,309 | $ | 671,232 |
(1) | Approximates the weighted average interest rate on 39 facilities. Two notes totaling approximately $15.2 million are construction mortgages maturing in 2018 and 2019. The remaining loan balance matures in 2029. |
(2) | Other mortgage notes outstanding have |
(3) | The allowance for loss on mortgage notes receivable relates to one mortgage with an operator. The carrying value and fair value of the mortgage note receivable is approximately $1.5 million at June 30, 2018 and December 31, 2017. |
$112.5 Million of Mortgage Note due 2027
On January 17, 2014, we entered into a $112.5 million first mortgage loan with an existing operator. The loan is secured by 7 SNFs and 2 ALFs located in Pennsylvania (7) and Ohio (2). The mortgage is cross-defaulted and cross-collateralized with our existing master lease with the operator. In March 2018, we extended the maturity date to January 31, 2027 and provided an option to extend the maturity for a five year period through January 31, 2032 and a second option to extend the maturity for a two year period through September 30, 2034.
$530.0 Million of Mortgage Notes due 2029
On June 30, 2014, we entered into a mortgage loan agreement with Ciena Healthcare (“Ciena”) to refinance/consolidate $117 million in existing mortgages with maturity dates ranging from 2021 to 2023 on 17 facilities into one mortgage and simultaneously provide mortgage financing for an additional 14 facilities. The $415 million mortgage (the “Master Mortgage”) matures in 2029 and is secured by 30 facilities. The Master Mortgage note bore an initial interest rate of 9.0% per annum which increases each year by 0.225% per annum. As of June 30, 2018, the outstanding principal balance of the Master Mortgage note is approximately $410.0 million and the interest rate is 9.68% per annum.
Subsequent to June 30, 2014, the Company amended its Master Mortgage with Ciena to provide for additional borrowings in the form of incremental facility mortgages, construction and/or improvement mortgages with maturity dates in 2018, 2019 and 2029 with initial annual interest rates ranging between 8.5% and 10% and fixed annual escalators of 2% or 2.5% over the prior year’s interest rate, or a fixed increase of 0.225% per annum. As of June 30, 2018 the outstanding principal balance of these mortgage notes are approximately $75.8 million.
In June 2018, we amended the Master Mortgage with the addition of a $44.7 million mortgage note related to five SNFs located in Michigan. The mortgage note matures on June 30, 2029 and bears an initial annual interest rate of 9.5% which increases each year by 0.225%. As of June 30, 2018 the outstanding principal balance of this mortgage note is approximately $44.2 million. Additionally, the Company committed to fund an additional $9.6 million to Ciena if certain performance metrics are achieved by the portfolio.
The mortgage notes with Ciena are cross-defaulted and cross-collateralized with our existing master lease and other investment notes with the operator.
Mortgage notes paid off
In January 2018, one of our operators repaid two construction loans with a total outstanding balance of approximately $21.2 million. These construction loans bore interest at 8.75%.
22 |
NOTE 5 – OTHER INVESTMENTS
A summary of our other investments is as follows:
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
(in thousands) | ||||||||
Other investment note due 2019; interest at 10.96% | $ | 49,583 | $ | 49,458 | ||||
Other investment note due 2020; interest at 14.00% | 47,899 | 47,913 | ||||||
Other investment note due 2022, interest at 9.00% | 31,987 | 31,987 | ||||||
Other investment note due 2030; interest at 6.66% | 50,000 | 44,595 | ||||||
Other investment notes outstanding(1) | 104,314 | 87,691 | ||||||
Other investments, gross | 283,783 | 261,644 | ||||||
Allowance for loss on other investments | (4,798 | ) | (4,798 | ) | ||||
Total other investments | $ | 278,985 | $ | 256,846 |
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Other investment notes due 2018-2022; interest at 8.29%(1) | $ | 39,984 | $ | 15,115 | ||||
Other investment notes due 2018-2023; interest at 10.59%(1) | 39,166 | 40,985 | ||||||
Other investment notes due 2020; interest at 13.05%(1) | 68,175 | 49,490 | ||||||
Other investment note due 2021; interest at 6.00% | 39,689 | 7,000 | ||||||
Other investment notes due 2023-2030; interest at 7.24%(1) | 62,800 | 64,050 | ||||||
Other investment note due 2023; interest at 12.00% | 59,324 | 49,708 | ||||||
Other investment notes due 2024-2025; interest at 8.52%(1) | 41,987 | 31,987 | ||||||
Other investment notes outstanding(2) | 26,081 | 18,380 | ||||||
Other investments, gross | 377,206 | 276,715 | ||||||
Allowance for loss on other investments(3) | - | (373 | ) | |||||
Total other investments | $ | 377,206 | $ | 276,342 |
(1) | Approximate weighted average interest rate as of June 30, 2018. |
(2) | Other investment notes have a weighted average interest rate of 8.55% and maturity dates through |
(3) | The allowance for loss on other investments relates to one loan with an operator that was fully reserved at December 31, 2017 and |
Other investment notes due 2018 - 2022
In March 2018, we agreed to provide senior secured superpriority DIP financing to Orianna consisting of a $14.2 million term loan and a $15.8 million revolving credit facility. The DIP financing has been approved by the Bankruptcy Court. The DIP financing is secured by a security interest in and liens on substantially all of Orianna’s existing and future real and personal property. The $14.2 million term loan bears interest at 1-month LIBOR plus 5.5% per annum and matures on September 30, 2018. Orianna has borrowed the full amount of the term loan to repay their previous secured working capital lender. As of June 30, 2018, approximately $14.2 million is outstanding on this term loan. The $15.8 million revolving credit facility bears interest at 1-month LIBOR plus 9.0% per annum and matures on September 30, 2018. The borrowings under the revolving credit facility are to be used for general business expenses and other uses permitted under the loan documents. As of June 30, 2018, approximately $10.5 million is outstanding on this revolving credit facility. On July 23, 2018, we notified Orianna that it was in default under the DIP facility. See Note 19 – Subsequent Events.
In May 2017, we provided Orianna an $18.8 million maximum borrowing secured revolving working capital loan that bears interest at 9% per annum (with one-half (1/2) of all accrued interest to be paid-in-kind and added to the loan balance) and matures on April 30, 2022. This revolving working capital loan has a default rate of 5% per annum. As of June 30, 2018, approximately $15.2 million is outstanding on this revolving working capital loan. Pursuant to the Bankruptcy Court’s interim order approving the DIP financing, Orianna is obligated to pay one-half (1/2) of all accrued post-bankruptcy interest payable on this revolving working capital loan at the default rate. As of June 30, 2018, our total other investments outstanding with Orianna was approximately $40.0 million.
Other investment notes due 2020
On July 29, 2016, we provided Genesis HealthCare, Inc. (“Genesis”) a $48.0 million secured term loan bearing interest at LIBOR with a floor of 1% plus 13% maturing on July 29, 2020. The $48.0 million term loan (and the $16.0 million term loan discussed below) is secured by a perfected first priority lien on and security interest in certain collateral of Genesis. The term loan required monthly principal payments of $0.25 million through July 2019, and $0.5 million from August 2019 through maturity. In addition, a portion of the monthly interest accrued to the outstanding principal balance of the loan. In November 2017, we provided Genesis forbearance through February 2018. The forbearance allowed for the deferral of principal payments and permitted Genesis to accrue all interest due to the outstanding principal balance of the loan.
On March 6, 2018, we amended certain terms of the $48.0 million secured term loan. As of February 22, 2018, the $48.0 million term loan bears interest at a fixed rate of 14% per annum, of which 9% per annum will be paid-in-kind. Additionally, the amended term loan does not require monthly payments of principal. All principal and accrued and unpaid interest will be due at maturity on July 29, 2020. As of June 30, 2018, approximately $52.0 million is outstanding on this term loan.
Also on March 6, 2018, we provided Genesis an additional $16.0 million secured term loan bearing interest at a fixed rate of 10% per annum, of which 5% per annum will be paid-in-kind and matures on July 29, 2020. As of June 30, 2018, approximately $16.2 million is outstanding on this term loan. As of June 30, 2018, our total other investments outstanding with Genesis was approximately $68.2 million.
Other investment note due 2021
Simultaneously, with the sale of 12 SNFs to subsidiaries of an existing operator we provided a principal of the existing operator a $39.7 million unsecured loan bearing interest at 6% per annum that matures on May 31, 2021. Commencing October 1, 2018 and the first day of each subsequent quarter, the loan requires principal payments of $0.6 million and additional quarterly principal payments of $0.3 million in the future. The borrower has one option to extend the loan to May 31, 2024 subject to an extension fee. A $7.0 million loan provided to the same principal in 2017 was repaid with proceeds from the $39.7 million loan. As of June 30, 2018, our total other investments outstanding with this principal borrower was approximately $39.7 million.
Other investment note due 2023
On February 26, 2016, we acquired and funded a $50.0 million mezzanine loan at a discount of approximately $0.75 million. In May 2018, the Company amended the mezzanine loan with the borrower which is secured by an equity interest in subsidiaries of the borrower. As part of the refinancing, the Company increased the mezzanine loan by $10.0 million, extended the maturity date to May 31, 2023 and fixed the interest rate at 12% per annum. The mezzanine loan requires semi-annual principal payments of $2.5 million commencing December 31, 2018 (payments due each December 31 and June 30). As of June 30, 2018, our total other investments outstanding with this borrower was approximately $59.3 million. In connection with the amendment, the Company recognized fees of approximately $1.1 million of which $0.5 million was paid at closing with the remainder due at maturity. The discount and loan fee are deferred and recognized on an effective basis over the term of the loan.
Other investment note due 2024-2025
On September 30, 2016, we acquired and amended a term loan with a fair value of approximately $37.0 million with Agemo Holdings LLC (“Agemo” an entity formed in May 2018 to silo the leases and loans formerly held by Signature Healthcare). A $5.0 million tranche of the term loan that bore interest at 13% per annum was repaid in August 2017. The remaining $32.0 million tranche of the term loan bears interest at 9% per annum and currently matures on December 31, 2024. The $32.0 million term loan (and the $25.0 million working capital loan discussed below) is secured by a security interest in the collateral of Agemo.
24 |
On May 7, 2018, the Company provided Agemo a $25.0 million secured working capital loan bearing interest at 7% per annum that matures on April 30, 2025. The proceeds of the working capital loan are for paying operating expenses, settlement payments, fees, taxes and other costs approved by the Company. As of June 30, 2018, approximately $10.0 million is outstanding on this working capital loan. Our total loans outstanding with Agemo at June 30, 2018 approximate $42.0 million.
On May 7, 2018, the Company also provided principals of Agemo a one year unsecured $2.8 million loan. The proceeds were used to pay down contractual receivables outstanding.
Other investments note
On December 28, 2017, we provided $10.0 million of financing to a third-party to acquire ten SNFs previously owned by us. The loan bears interest at 10% per annum and requires principal payments of $5.0 million in December 2018, $2.0 million in December 2019 and $3.0 million at maturity in December 2020. In March 2018, the third-party buyer repaid $5.0 million related to this financing.
NOTE 6 – VARIABLE INTEREST ENTITIES
As of June 30, 2018, Orianna and Agemo are VIEs. Below is a summary of our assets and liabilities associated with each operator as of June 30, 2018:
Operator | ||||||||
Orianna | Agemo | |||||||
(in thousands) | ||||||||
Assets | ||||||||
Real estate investments - net | $ | 37,286 | $ | 409,450 | ||||
Investments in direct financing leases - net | 337,705 | - | ||||||
Other investments - net | 39,984 | 41,987 | ||||||
Contractual receivables - net | 279 | 17,574 | ||||||
Straight-line rent receivables | - | 28,737 | ||||||
Above market lease | - | 4 | ||||||
Subtotal | 415,254 | 497,752 | ||||||
Liabilities | ||||||||
Letters of credit | - | (9,253 | ) | |||||
Subtotal | - | (9,253 | ) | |||||
Collateral | ||||||||
Personal guarantee | - | (15,000 | ) | |||||
Other collateral | (399,926 | ) | (409,450 | ) | ||||
Subtotal | (399,926 | ) | (424,450 | ) | ||||
Maximum exposure to loss | $ | 15,328 | $ | 64,049 |
25 |
In determining our maximum exposure to loss from these VIEs, we considered the underlying fair value of the real estate subject to leases with these operators and other collateral, if any, supporting our other investments, which may include accounts receivable, security deposits, letters of credit or personal guarantees, if any. See Note 5 – Other Investments regarding the terms of other investments with these two operators. The Company has also committed to provide Agemo with up to approximately $13.6 million of capital expenditure funding through 2021 to be used for general maintenance and capital improvements for our facilities. As of June 30, 2018, approximately $13.1 million of the $13.6 million remains unfunded by the Company.
The table below reflects our total revenues from Orianna and Agemo for the three and six months ended June 30, 2018:
Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 | |||||||||||||||
Operator | Operator | |||||||||||||||
Orianna | Agemo | Orianna | Agemo | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue | ||||||||||||||||
Rental income | $ | - | $ | 14,860 | $ | - | $ | 29,711 | ||||||||
Other investment income | 1,145 | 828 | 1,664 | 1,548 | ||||||||||||
Total | $ | 1,145 | $ | 15,688 | $ | 1,664 | $ | 31,259 |
NOTE 67 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
On November 1, 2016, we invested approximately $50.0 million for an approximate 15% ownership interest in a joint venture operating as Second Spring Healthcare Investments. The other approximate 85% interest is owned by affiliates of Lindsey Goldberg LLC. We account for our investment in the joint venture using the equity method. On November 1, 2016, the joint venture acquired 64 SNFs from Welltower Inc. for approximately $1.1 billion and leased them to Genesis. During the second quarter of 2018, the joint venture sold 12 SNF facilities subject to an operating lease for approximately $149.3 million in net cash proceeds and recognized a single operator.loss on sale of approximately $4.4 million.
We receive asset management fees from the joint venture for services provided. For the three months ended June 30, 2018 and 2017, we recognized $0.5 million of asset management fees in each period. For the six months ended June 30, 2018 and 2017, we recognized $0.5 million and $1.0 million respectively, of asset management fees.fees in each period. These fees are included in miscellaneous income in the accompanying Consolidated Statements of Income.Operations. The accounting policies for the unconsolidated joint venture are the same as those of the Company.
NOTE 78 – ASSETS HELD FOR SALE
The following is a summary of our assets held for sale:
Properties Held For Sale | Properties Held For Sale | |||||||||||||||
Number of Properties | Net Book Value (in thousands) | Number | Net Book | |||||||||||||
of | Value | |||||||||||||||
December 31, 2016 | 20 | $ | 52,868 | |||||||||||||
Properties | (in thousands) | |||||||||||||||
December 31, 2017 | 22 | $ | 86,699 | |||||||||||||
Properties sold/other(1) | (12 | ) | (30,023 | ) | (5 | ) | (9,307 | ) | ||||||||
Properties added(2) | 1 | 400 | 16 | 66,027 | ||||||||||||
March 31, 2017 | 9 | $ | 23,245 | |||||||||||||
March 31, 2018 | 33 | 143,419 | ||||||||||||||
Properties sold/other(1) | (2 | ) | (4,356 | ) | (33 | ) | (143,419 | ) | ||||||||
June 30, 2017(3) | 7 | $ | 18,889 | |||||||||||||
Properties added(2) | 3 | 3,782 | ||||||||||||||
June 30, 2018(3) | 3 | $ | 3,782 |
(1) | In the first quarter of |
(2) | In the first quarter of |
(3) | We plan to sell the facilities classified as assets held for sale at June 30, |
NOTE 89 – INTANGIBLES
The following is a summary of our intangibles as of June 30, 20172018 and December 31, 20162017:
June 30, | December 31, | June 30, | December 31, | |||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Assets: | ||||||||||||||||
Goodwill | $ | 644,184 | $ | 643,474 | $ | 644,369 | $ | 644,690 | ||||||||
Above market leases | $ | 22,426 | $ | 22,476 | $ | 22,426 | $ | 22,426 | ||||||||
In-place leases | 167 | 167 | 167 | 167 | ||||||||||||
Accumulated amortization | (16,477 | ) | (15,864 | ) | (17,541 | ) | (17,059 | ) | ||||||||
Net intangible assets | $ | 6,116 | $ | 6,779 | $ | 5,052 | $ | 5,534 | ||||||||
Liabilities: | ||||||||||||||||
Below market leases | $ | 164,735 | $ | 165,028 | $ | 161,286 | $ | 164,443 | ||||||||
Accumulated amortization | (77,534 | ) | (70,738 | ) | (89,584 | ) | (83,824 | ) | ||||||||
Net intangible liabilities | $ | 87,201 | $ | 94,290 | $ | 71,702 | $ | 80,619 |
Above market leases and in-place leases, net of accumulated amortization, are included in other assets on our Consolidated Balance Sheets. Below market leases, net of accumulated amortization, are included in accrued expenses and other liabilities on our Consolidated Balance Sheets. The net amortization related to the above and below market leases is included in our Consolidated Statements of IncomeOperations as an adjustment to rental income.
For the three months ended June 30, 20172018 and 2016,2017, our net amortization related to intangibles was $3.1$2.6 million and $3.6$3.1 million, respectively. For the six months ended June 30, 20172018 and 2016,2017, our net amortization related to intangibles was $6.2$5.3 million and $7.9$6.2 million, respectively. The estimated net amortization related to these intangibles for the remainder of 20172018 and the subsequent four years is as follows: remainder of 2017 – $5.8 million; 2018 – $10.5$4.3 million; 2019 – $9.5$8.2 million; 2020 – $9.3$8.0 million; 2021– $7.6 million and 20212022 – $8.7$7.0 million. As of June 30, 20172018, the weighted average remaining amortization period of above market leases (inclusive of in-place leases) and below market leases is approximately eightseven years and nine years, respectively.
The following is a reconciliationsummary of our goodwill as of June 30, 2017:2018:
(in thousands) | ||||
Balance as of December 31, 2016 | $ | 643,474 | ||
Add: foreign currency translation | 710 | |||
Balance as of June 30, 2017 | $ | 644,184 |
(in thousands) | ||||
Balance as of December 31, 2017 | $ | 644,690 | ||
Less: foreign currency translation | (321 | ) | ||
Balance as of June 30, 2018 | $ | 644,369 |
27 |
NOTE 910 – CONCENTRATION OF RISK
As of June 30, 2017,2018, our portfolio of real estate investments consisted of 999936 healthcare facilities, located in 4241 states and the U.K. and operated by 77 third party67 third-party operators. Our investment in these facilities, net of impairments and reserve for uncollectible loans,allowances, totaled approximately $9.0$8.6 billion at June 30, 2017,2018, with approximately 99% of our real estate investments related to long-term care facilities. Our portfolio is made up of 803748 SNFs, 119117 ALFs, 1614 specialty facilities, one medical office building, fixed rate mortgages on 4751 SNFs and fourtwo ALFs, and ninethree facilities that are closed/held-for-sale.held for sale. At June 30, 2017,2018, we also held other investments of approximately $279.0$377.2 million, consisting primarily of secured loans to third-party operators of our facilities and a $39.0$32.8 million investment in an unconsolidated joint venture.
At June 30, 2017,2018, we had investments with one operator/or manager that exceeded 10% of our total investments: Ciena. Ciena Healthcare (10%). No operatoralso generated more thanapproximately 10% of our total revenues from operations for the three and six months ended June 30, 2018 and 2017. At June 30, 2017,2018, the three states in which we had our highest concentration of investments were Ohio (9%Texas (10%), Texas (9%Florida (10%) and Florida (9%Michigan (8%).
NOTE 1011 – STOCKHOLDERS’/OWNERS'OWNERS’ EQUITY
On July 13, 2017, theThe Board of Directors has declared a common stock dividend of $0.64 per share, increasing the quarterly common dividend rate by $0.01 per share over the prior quarter, to be paid on August 15, 2017 to common stockholders of recorddividends as of the close of business on August 1, 2017.set forth below:
On April 13, 2017, the Board of Directors declared a common stock dividend of $0.63 per share, increasing the quarterly common dividend by $0.01 per share over the prior quarter. The common dividends were paid May 15, 2017 to common stockholders of record as of the close of business on May 1, 2017.
On January 12, 2017, the Board of Directors declared a common stock dividend of $0.62 per share, increasing the quarterly common dividend by $0.01 per share over the previous quarter. The common dividends were paid February 15, 2017 to common stockholders of record as of the close of business on January 31, 2017.
Record | Payment | Dividend per | ||||
Date | Date | Common Share | ||||
January 31, 2018 | February 15, 2018 | $ | 0.66 | |||
April 30, 2018 | May 15, 2018 | 0.66 | ||||
July 31, 2018 | August 15, 2018 | 0.66 |
On the same dates listed above, Omega OP Unit holders received the same distributions per unit as those paid to the common stockholders of Omega.
$500 Million Equity Shelf Program
For the three months ended June 30, 2017, no2018, we issued 0.9 million shares were issuedof our common stock at an average price of $30.19 per share, net of issuance costs, generating net proceeds of $27.5 million under our $500 million Equity Shelf Program. For the six months ended June 30, 2017,2018, we issued 0.2 million shares of common stock at an average price of $29.17 per share, net of issuance costs, generating net proceeds of $6.6 million under our $500 million Equity Shelf Program.
Dividend Reinvestment and Common Stock Purchase Plan
For the three months ended June 30, 2017, approximately 0.40.9 million shares of our common stock at an average price of $33.02$30.16 per share, net of issuance costs, generating net proceeds of $27.5 million under our $500 million Equity Shelf Program.
Dividend Reinvestment and Common Stock Purchase Plan
For the three months ended June 30, 2018, approximately 0.8 million shares of our common stock at an average price of $29.22 per share were issued through our Dividend Reinvestment and Common Stock Purchase ProgramPlan for gross proceeds of approximately $12.4$22.2 million. For the six months ended June 30, 2017,2018, approximately 0.60.9 million shares of our common stock at an average price of $32.11$28.55 per share were issued through our Dividend Reinvestment and Common Stock Purchase ProgramPlan for gross proceeds of approximately $19.7$27.1 million.
Accumulated Other Comprehensive Loss
The following is a summary of our accumulated other comprehensive loss, net of tax where applicable:
Omega | As of and For the | As of and For the | ||||||||||||||||||||||||||||||
As of and For the Three Months Ended June 30, | As of and For the Six Months Ended June 30, | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | June 30, | June 30, | |||||||||||||||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Foreign Currency Translation: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | (50,614 | ) | $ | (13,143 | ) | $ | (54,948 | ) | $ | (8,413 | ) | $ | (11,015 | ) | $ | (50,614 | ) | $ | (25,993 | ) | $ | (54,948 | ) | ||||||||
Translation gain (loss) | 10,195 | (21,836 | ) | 14,468 | (26,544 | ) | ||||||||||||||||||||||||||
Realized gain (loss) | 79 | - | 140 | (22 | ) | |||||||||||||||||||||||||||
Translation (loss) gain | (24,383 | ) | 10,195 | (9,464 | ) | 14,468 | ||||||||||||||||||||||||||
Realized (loss) gain | (66 | ) | 79 | (7 | ) | 140 | ||||||||||||||||||||||||||
Ending balance | (40,340 | ) | (34,979 | ) | (40,340 | ) | (34,979 | ) | (35,464 | ) | (40,340 | ) | (35,464 | ) | (40,340 | ) | ||||||||||||||||
Derivative Instruments: | ||||||||||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||||
Beginning balance | (166 | ) | (9,594 | ) | (1,420 | ) | (718 | ) | 5,951 | (166 | ) | 1,463 | (1,420 | ) | ||||||||||||||||||
Unrealized loss | (1,840 | ) | (4,198 | ) | (1,350 | ) | (13,074 | ) | ||||||||||||||||||||||||
Unrealized gain (loss) | 1,735 | (1,840 | ) | 5,970 | (1,350 | ) | ||||||||||||||||||||||||||
Realized gain | 626 | - | 1,390 | - | 53 | 626 | 306 | 1,390 | ||||||||||||||||||||||||
Ending balance | (1,380 | ) | (13,792 | ) | (1,380 | ) | (13,792 | ) | 7,739 | (1,380 | ) | 7,739 | (1,380 | ) | ||||||||||||||||||
Net investment hedge: | ||||||||||||||||||||||||||||||||
Beginning balance | - | - | - | - | (12,219 | ) | - | (7,110 | ) | - | ||||||||||||||||||||||
Unrealized loss | (2,193 | ) | - | (2,193 | ) | - | ||||||||||||||||||||||||||
Unrealized gain (loss) | 8,296 | (2,193 | ) | 3,187 | (2,193 | ) | ||||||||||||||||||||||||||
Ending balance | (2,193 | ) | - | (2,193 | ) | - | (3,923 | ) | (2,193 | ) | (3,923 | ) | (2,193 | ) | ||||||||||||||||||
Total accumulated other comprehensive loss | (43,913 | ) | (48,771 | ) | (43,913 | ) | (48,771 | ) | ||||||||||||||||||||||||
Total accumulated other comprehensive loss for Omega OP(2) | (31,648 | ) | (43,913 | ) | (31,648 | ) | (43,913 | ) | ||||||||||||||||||||||||
Add: portion included in noncontrolling interest | 2,010 | 2,308 | 2,010 | 2,308 | 1,491 | 2,010 | 1,491 | 2,010 | ||||||||||||||||||||||||
Total accumulated other comprehensive loss | $ | (41,903 | ) | $ | (46,463 | ) | $ | (41,903 | ) | $ | (46,463 | ) | ||||||||||||||||||||
Total accumulated other comprehensive loss for Omega | $ | (30,157 | ) | $ | (41,903 | ) | $ | (30,157 | ) | $ | (41,903 | ) |
Recorded in interest expense on the Consolidated Statements of Operations. |
OHI Holdco | ||||||||||||||||
As of and For the Three Months Ended June 30, | As of and For the Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(in thousands) | ||||||||||||||||
Foreign Currency Translation: | ||||||||||||||||
Beginning balance | $ | (50,614 | ) | $ | (13,143 | ) | $ | (54,948 | ) | $ | (8,413 | ) | ||||
Translation gain (loss) | 10,195 | (21,836 | ) | 14,468 | (26,544 | ) | ||||||||||
Realized gain (loss) | 79 | - | 140 | (22 | ) | |||||||||||
Ending balance | (40,340 | ) | (34,979 | ) | (40,340 | ) | (34,979 | ) | ||||||||
Derivative Instruments: | ||||||||||||||||
Cash flow hedges: | ||||||||||||||||
Beginning balance | (166 | ) | (9,594 | ) | (1,420 | ) | (718 | ) | ||||||||
Unrealized loss | (1,840 | ) | (4,198 | ) | (1,350 | ) | (13,074 | ) | ||||||||
Realized gain | 626 | - | 1,390 | - | ||||||||||||
Ending balance | (1,380 | ) | (13,792 | ) | (1,380 | ) | (13,792 | ) | ||||||||
Net investment hedge: | ||||||||||||||||
Beginning balance | - | - | - | - | ||||||||||||
Unrealized loss | (2,193 | ) | - | (2,193 | ) | - | ||||||||||
Ending balance | (2,193 | ) | - | (2,193 | ) | - | ||||||||||
Total accumulated other comprehensive loss | (43,913 | ) | (48,771 | ) | (43,913 | ) | (48,771 | ) | ||||||||
Add: portion included in noncontrolling interest | 34,116 | 37,965 | 34,116 | 37,965 | ||||||||||||
Total accumulated other comprehensive loss | $ | (9,797 | ) | $ | (10,806 | ) | $ | (9,797 | ) | $ | (10,806 | ) |
Omega OP | ||||||||||||||||
As of and For the Three Months Ended June 30, | As of and For the Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(in thousands) | ||||||||||||||||
Foreign Currency Translation: | ||||||||||||||||
Beginning balance | $ | (50,614 | ) | $ | (13,143 | ) | $ | (54,948 | ) | $ | (8,413 | ) | ||||
Translation gain (loss) | 10,195 | (21,836 | ) | 14,468 | (26,544 | ) | ||||||||||
Realized gain (loss) | 79 | - | 140 | (22 | ) | |||||||||||
Ending balance | (40,340 | ) | (34,979 | ) | (40,340 | ) | (34,979 | ) | ||||||||
Derivative Instruments: | ||||||||||||||||
Cash flow hedges: | ||||||||||||||||
Beginning balance | (166 | ) | (9,594 | ) | (1,420 | ) | (718 | ) | ||||||||
Unrealized loss | (1,840 | ) | (4,198 | ) | (1,350 | ) | (13,074 | ) | ||||||||
Realized gain | 626 | - | 1,390 | - | ||||||||||||
Ending balance | (1,380 | ) | (13,792 | ) | (1,380 | ) | (13,792 | ) | ||||||||
Net investment hedge: | ||||||||||||||||
Beginning balance | - | - | - | - | ||||||||||||
Unrealized loss | (2,193 | ) | - | (2,193 | ) | - | ||||||||||
Ending balance | (2,193 | ) | - | (2,193 | ) | - | ||||||||||
Total accumulated other comprehensive loss | $ | (43,913 | ) | $ | (48,771 | ) | $ | (43,913 | ) | $ | (48,771 | ) |
These amounts are included in owners’ equity. |
NOTE 1112 – TAXES
OHI HoldcoOmega is a wholly owned subsidiary of Omega and is a qualified REIT subsidiary for United States federal income tax purposes, and Omega OP is a pass through entity for United States federal income tax purposes.
Since our inception, we haveOmega has elected to be taxed as a REIT under the applicable provisions of the Internal Revenue Code (“Code”). A REIT is generally not subject to federal income tax on that portion of its REIT taxable income which is distributed to its stockholders, provided that at least 90% of such taxable income is distributed each tax year and certain other requirements are met, including asset and income tests. 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.
If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income taxes on its taxable income at regular corporate rates and dividends paid to our stockholders will not be deductible by us in computing taxable income. Further, we willwould not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which qualification is denied, unless the Internal Revenue Service grants us relief under certain statutory provisions. Failing to qualify as a REIT could materially and adversely affect the Company’s net income; however, we believe we are organized and operate in such a manner as to qualify for treatment as a REIT. We test our compliance within the REIT taxation rules to ensure that we are in compliance with the REIT rules on a quarterly and annual basis. We review our distributions and projected distributions each year to ensure we have met and will continue to meet the annual REIT distribution requirements. In 2017,2018, we expect to distributepay dividends in excess of our taxable income.
29 |
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 wholly owned subsidiary REITs and added a sixth wholly owned subsidiary REIT as of January 1, 2016, all of which are subject to all of the REIT qualification rules set forth in the Code. We merged five of the wholly owned subsidiary REITs into a single wholly owned subsidiary REIT in December 2015, and then merged the sixth wholly owned subsidiary REIT into our other wholly owned subsidiary REIT in December 2016, which wholly owned subsidiary REIT remains 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 elected for two of our active subsidiaries to be treated as TRSs. One of our TRSs is subject to federal, state and local income taxes at the applicable corporate rates and the other is subject to foreign income taxes. As of June 30, 2017,2018, our TRS that is subject to federal, state and local income taxes at the applicable corporate rates had a net operating loss carry-forward of approximately $0.8$5.8 million. The loss carry-forward is fully reserved as of June 30, 2017,2018, with a valuation allowance due to uncertainties regarding realization. Our net operating loss carryforwards will be carried forward for no more than 20 years.
DuringFor the second quarter ofthree months ended June 30, 2018 and 2017, we recorded approximately $0.2 million and $0.5 million, respectively, of state and local income tax provisionprovision. For the six months ended June 30, 2018 and 2017, we recorded approximately $0.3 million and $1.5 million, respectively, of state and local income tax provision. For the three months ended June 30, 2018 and 2017, we recorded approximately $0.6 million and $0.1 million, respectively, of tax provision for foreign income taxes. For the six months ended June 30, 2018 and 2017, we recorded approximately $1.5$1.0 million of state and local income tax provision and approximately $0.2 million, respectively, of tax provision for foreign income taxes. The expenses were included in provision for income taxestax expense on our Consolidated Statements of Income.Operations.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. The Tax Act includes numerous changes to existing U.S. tax law, including lowering the statutory U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Company has completed its preliminary assessment of these changes, and has determined that there is an immaterial impact to the consolidated financial statements.
NOTE 1213 – STOCK-BASED COMPENSATION
On June 8, 2018, at our Company’s Annual Meeting, our stockholders approved the 2018 Stock Incentive Plan (the “2018 Plan”), which amended and restated the Company’s 2013 Stock Incentive Plan (the “2013 Plan”). The 2018 Plan is a comprehensive incentive compensation plan that allows for various types of equity-based compensation, including restricted stock units (including performance-based restricted stock units), stock awards (including restricted stock), deferred restricted stock units, incentive stock options, non-qualified stock options, stock appreciation rights, dividend equivalent rights, performance unit awards, certain cash-based awards (including performance-based cash awards) and other stock-based awards. The 2018 Plan increases the number of shares of common stock available for issuance under the 2013 Plan by 4.5 million.
The following is a summary of our stock-based compensation expense for the three and six months ended June 30, 20172018 and 2016,2017, respectively:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(in thousands) | ||||||||||||||||
Stock-based compensation expense | $ | 3,734 | $ | 3,665 | $ | 7,478 | $ | 6,443 |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Stock-based compensation expense | $ | 4,089 | $ | 3,734 | $ | 8,145 | $ | 7,478 |
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 employmentservice or a change in control of the Company. Prior to vesting, ownership of the shares/units cannot be transferred. 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. We awarded 140,416169,900 RSUs to employees on January 1, 2017.2018.
30 |
Performance Restricted Stock Units and LTIP Units
Performance restricted stock units (“PRSUs”) and long term incentive plan units (“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 and the LTIP Units have varying degrees of performance requirements to be earned and vested,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 and vested is convertible into one Omega OP Unit in Omega OP, subject to certain conditions. The earningvesting requirements are based on either the (i) total shareholder return (“TSR”) of Omega or (ii) Omega’s TSR relative to other real estate investment trusts in the MSCI U.S. REIT Index orfor awards before 2016 and in the FTSE NAREIT Equity Health Care Index TSRfor awards granted in or after 2016 (both “Relative TSR”). Vesting, in general, requires that the employee remain employed by us until the date specified in the applicable PRSU or LTIP agreement, which may be later than the date that the TSR or Relative TSR requirements are satisfied. 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. Dividend equivalentsDividends on the PRSUs accumulateare accrued and with respectonly paid to PRSUs granted before 2015the extent the applicable performance requirements are paid when the PRSUs vest and with respect to PRSUs granted in 2015 or later are paid once the PRSUs are earned.met. 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 399,726677,488 LTIP Units to employees on January 1, 2017.2018.
The number of shares earned under the Relative TSR PRSUs depends generally on the level of achievement of Omega’s TSR relative to other real estate investment trusts in the MSCI U.S. REIT Index or FTSE NAREIT Equity Health Care Index TSR over the performance period indicated. We awarded 285,338334,544 Relative TSR PRSUs to employees on January 1, 2017.2018.
The following table summarizes our total unrecognized compensation cost as of June 30, 20172018 associated with restricted stock, restricted stock units,RSUs, PRSU awards, and LTIP Unit awards to employees:
Grant Date | Total | Weighted Average | Unrecognized | |||||||||||||||||||||||||||||||||||||||||||||||||||
Average | Compensation | Period of Expense | Compensation | |||||||||||||||||||||||||||||||||||||||||||||||||||
Grant | Shares | Fair Value | Cost | Recognition | Cost | Performance | Vesting | |||||||||||||||||||||||||||||||||||||||||||||||
Grant Year | Shares/ Units | Grant Date Average Fair Value Per Unit/ Share | Total Compensation Cost (in millions) (1) | Weighted Average Period of Expense Recognition (in months) | Unrecognized Compensation Cost (in millions) | Performance Period | Vesting Dates | Year | / Units | Per Unit/ Share | (in millions)(1) | (in months) | (in millions) | Period | Dates | |||||||||||||||||||||||||||||||||||||||
RSUs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
3/31/15 RSU | 2015 | 109,985 | $ | 40.57 | $ | 4.5 | 33 | $ | 0.8 | N/A | 12/31/2017 | |||||||||||||||||||||||||||||||||||||||||||
4/1/15 RSU | 2015 | 40,464 | 40.74 | 1.6 | 33 | 0.3 | N/A | 12/31/2017 | ||||||||||||||||||||||||||||||||||||||||||||||
Assumed Aviv RSU | 2015 | 7,799 | 35.08 | 0.3 | 33 | 0.1 | N/A | 11/1/2017 | ||||||||||||||||||||||||||||||||||||||||||||||
3/17/16 RSU | 2016 | 130,006 | 34.78 | 4.6 | 33 | 2.4 | N/A | 12/31/2018 | 2016 | 130,006 | $ | 34.78 | $ | 4.50 | 33 | $ | 0.80 | N/A | 12/31/2018 | |||||||||||||||||||||||||||||||||||
1/1/2017 RSU | 2017 | 140,416 | 31.26 | 4.3 | 36 | 3.6 | N/A | 12/31/2019 | 2017 | 140,416 | 31.26 | 4.40 | 36 | 2.20 | N/A | 12/31/2019 | ||||||||||||||||||||||||||||||||||||||
1/1/2018 RSU | 2018 | 169,900 | 27.54 | 4.70 | 36 | 3.90 | N/A | 12/31/2020 | ||||||||||||||||||||||||||||||||||||||||||||||
Restricted Stock Units Total | 428,670 | $ | 35.68 | $ | 15.3 | $ | 7.2 | 440,322 | $ | 30.86 | $ | 13.60 | $ | 6.90 | ||||||||||||||||||||||||||||||||||||||||
TSR PRSUs and LTIP Units | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
2016 TSR | 2014 | 135,634 | $ | 8.67 | $ | 1.2 | 48 | $ | 0.2 | 1/1/2014-12/31/2016 | Quarterly in 2017 | |||||||||||||||||||||||||||||||||||||||||||
3/31/15 2017 LTIP Units | 2015 | 137,249 | 14.66 | 2.0 | 45 | 0.8 | 1/1/2015-12/31/2017 | Quarterly in 2018 | 2015 | 137,249 | $ | 14.66 | $ | 2.00 | 45 | $ | 0.30 | 1/1/2015-12/31/2017 | Quarterly in 2018 | |||||||||||||||||||||||||||||||||||
4/1/2015 2017 LTIP Units | 2015 | 54,151 | 14.80 | 0.8 | 45 | 0.3 | 1/1/2015-12/31/2017 | Quarterly in 2018 | 2015 | 53,387 | 14.81 | 0.80 | 45 | 0.10 | 1/1/2015-12/31/2017 | Quarterly in 2018 | ||||||||||||||||||||||||||||||||||||||
3/17/2016 2018 LTIP Units | 2016 | 372,069 | 13.21 | 4.9 | 45 | 3.2 | 1/1/2016-12/31/2018 | Quarterly in 2019 | 2016 | 370,152 | 13.21 | 4.90 | 45 | 1.90 | 1/1/2016-12/31/2018 | Quarterly in 2019 | ||||||||||||||||||||||||||||||||||||||
1/1/2017 2019 LTIP Units | 2017 | 399,726 | 12.61 | 5.0 | 48 | 4.4 | 1/1/2017-12/31/2019 | Quarterly in 2020 | 2017 | 399,726 | 12.61 | 5.00 | 48 | 3.20 | 1/1/2017-12/31/2019 | Quarterly in 2020 | ||||||||||||||||||||||||||||||||||||||
1/1/2018 2020 LTIP Units | 2018 | 677,488 | 7.31 | 5.00 | 48 | 4.30 | 1/1/2018-12/31/2020 | Quarterly in 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
TSR PRSUs & LTIP Total | 1,098,829 | $ | 12.69 | $ | 13.9 | $ | 8.9 | 1,638,002 | $ | 10.80 | $ | 17.70 | $ | 9.80 | ||||||||||||||||||||||||||||||||||||||||
Relative TSR PRSUs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
2016 Relative TSR | 2014 | 135,634 | $ | 14.24 | $ | 1.9 | 48 | $ | 0.2 | 1/1/2014-12/31/2016 | Quarterly in 2017 | |||||||||||||||||||||||||||||||||||||||||||
3/31/15 2017 Relative TSR | 2015 | 137,249 | 22.50 | 3.1 | 45 | 1.2 | 1/1/2015-12/31/2017 | Quarterly in 2018 | 2015 | 137,249 | $ | 22.50 | $ | 3.10 | 45 | $ | 0.40 | 1/1/2015-12/31/2017 | Quarterly in 2018 | |||||||||||||||||||||||||||||||||||
4/1/2015 2017 Relative TSR | 2015 | 54,151 | 22.91 | 1.2 | 45 | 0.5 | 1/1/2015-12/31/2017 | Quarterly in 2018 | 2015 | 53,387 | 22.92 | 1.20 | 45 | 0.20 | 1/1/2015-12/31/2017 | Quarterly in 2018 | ||||||||||||||||||||||||||||||||||||||
3/17/2016 2018 Relative TSR | 2016 | 307,480 | 16.45 | 5.1 | 45 | 3.4 | 1/1/2016-12/31/2018 | Quarterly in 2019 | 2016 | 305,563 | 16.44 | 5.00 | 45 | 2.00 | 1/1/2016-12/31/2018 | Quarterly in 2019 | ||||||||||||||||||||||||||||||||||||||
1/1/2017 2019 Relative TSR | 2017 | 285,338 | 18.04 | 5.1 | 48 | 4.5 | 1/1/2017-12/31/2019 | Quarterly in 2020 | 2017 | 285,338 | 18.04 | 5.10 | 48 | 3.20 | 1/1/2017-12/31/2019 | Quarterly in 2020 | ||||||||||||||||||||||||||||||||||||||
1/1/2018 2020 Relative TSR | 2018 | 334,544 | 16.65 | 5.60 | 48 | 4.80 | 1/1/2018-12/31/2020 | Quarterly in 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
Relative TSR PRSUs Total | 919,852 | $ | 17.78 | $ | 16.4 | $ | 9.8 | 1,116,081 | $ | 17.97 | $ | 20.00 | $ | 10.60 | ||||||||||||||||||||||||||||||||||||||||
Grand Total | 2,447,351 | $ | 18.63 | $ | 45.6 | $ | 25.9 | 3,194,405 | $ | 16.07 | $ | 51.30 | $ | 27.30 |
(1) | Total shares/units and compensation costs are net of |
(2) | This table excludes approximately $1.5 million of unrecognized compensation costs related to outstanding director restricted stock grants. |
Director Restricted Stock Grants
As of June 30, 2017, we had 90,421 shares of restricted stock outstanding to directors. The outstanding restricted stock granted to directors prior to 2017 is scheduled to vest ratably over three years from the date of grant. Beginning with the 2017 grants, director restricted stock grants fully vest at the annual meeting following the grant date. As of June 30, 2017, the unrecognized compensation cost associated with outstanding director restricted stock grants is approximately $2.2 million.
NOTE 1314 – BORROWING ACTIVITIES AND ARRANGEMENTS
Secured and Unsecured Borrowings
The following is a summary of our borrowings:
Annual | ||||||||||||||||||||||||||||
Interest Rate | ||||||||||||||||||||||||||||
as of | ||||||||||||||||||||||||||||
Annual Interest June 30, | June 30, | December 31, | June 30, | June 30, | December 31, | |||||||||||||||||||||||
Maturity | 2017 | 2017 | 2016 | Maturity | 2018 | 2018 | 2017 | |||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||
Secured borrowings: | ||||||||||||||||||||||||||||
HUD mortgages assumed December 2011(1) | 2044 | 3.06% | $ | 54,316 | $ | 54,954 | ||||||||||||||||||||||
HUD mortgages assumed December 2011 | 2044 | - | $ | - | $ | 53,666 | ||||||||||||||||||||||
Deferred financing costs – net | (579 | ) | (589 | ) | - | (568 | ) | |||||||||||||||||||||
Total secured borrowings – net(2) | 53,737 | 54,365 | ||||||||||||||||||||||||||
Total secured borrowings – net(1) | - | 53,098 | ||||||||||||||||||||||||||
Unsecured borrowings: | ||||||||||||||||||||||||||||
Revolving line of credit | 2021 | 2.47% | 155,000 | 190,000 | 2021 | 3.29 | % | 220,000 | 290,000 | |||||||||||||||||||
Tranche A-1 term loan | - | - | — | 200,000 | ||||||||||||||||||||||||
Tranche A-2 term loan | - | - | — | 200,000 | ||||||||||||||||||||||||
Tranche A-3 term loan | - | - | — | 350,000 | ||||||||||||||||||||||||
U.S. term loan | 2022 | 2.67% | 425,000 | — | 2022 | 3.54 | % | 425,000 | 425,000 | |||||||||||||||||||
Sterling term loan | 2022 | 1.70% | 130,250 | — | ||||||||||||||||||||||||
Omega OP term loan(2) | 2022 | 2.67% | 100,000 | 100,000 | ||||||||||||||||||||||||
Sterling term loan(2) | 2022 | 1.95 | % | 132,030 | 135,130 | |||||||||||||||||||||||
Omega OP term loan(1) | 2022 | 3.54 | % | 100,000 | 100,000 | |||||||||||||||||||||||
2015 term loan | 2022 | 3.80% | 250,000 | 250,000 | 2022 | 3.80 | % | 250,000 | 250,000 | |||||||||||||||||||
Discounts and deferred financing costs – net(3) | (5,958 | ) | (5,657 | ) | (4,862 | ) | (5,460 | ) | ||||||||||||||||||||
Total term loans – net | 899,292 | 1,094,343 | 902,168 | 904,670 | ||||||||||||||||||||||||
2023 notes | 2023 | 4.375% | 700,000 | 700,000 | 2023 | 4.375 | % | 700,000 | 700,000 | |||||||||||||||||||
2024 notes | 2024 | 5.875% | — | 400,000 | ||||||||||||||||||||||||
2024 notes | 2024 | 4.95% | 400,000 | 400,000 | 2024 | 4.950 | % | 400,000 | 400,000 | |||||||||||||||||||
2025 notes | 2025 | 4.50% | 400,000 | 250,000 | 2025 | 4.500 | % | 400,000 | 400,000 | |||||||||||||||||||
2026 notes | 2026 | 5.25% | 600,000 | 600,000 | 2026 | 5.250 | % | 600,000 | 600,000 | |||||||||||||||||||
2027 notes | 2027 | 4.50% | 700,000 | 700,000 | 2027 | 4.500 | % | 700,000 | 700,000 | |||||||||||||||||||
2028 notes | 2028 | 4.75% | 550,000 | — | 2028 | 4.750 | % | 550,000 | 550,000 | |||||||||||||||||||
Other | 2018 | - | 1,500 | 3,000 | 2018 | - | - | 1,500 | ||||||||||||||||||||
Subordinated debt | 2021 | 9.00% | 20,000 | 20,000 | 2021 | 9.000 | % | 20,000 | 20,000 | |||||||||||||||||||
Discount - net | (22,345 | ) | (17,151 | ) | ||||||||||||||||||||||||
Discount – net | (19,798 | ) | (21,073 | ) | ||||||||||||||||||||||||
Deferred financing costs – net | (27,297 | ) | (27,703 | ) | (24,313 | ) | (26,037 | ) | ||||||||||||||||||||
Total unsecured borrowings – net | 3,321,858 | 3,028,146 | ||||||||||||||||||||||||||
Total senior notes and other unsecured borrowings – net | 3,325,889 | 3,324,390 | ||||||||||||||||||||||||||
Total secured and unsecured borrowings – net | $ | 4,429,887 | $ | 4,366,854 | ||||||||||||||||||||||||
Total unsecured borrowings - net | 4,448,057 | 4,519,060 | ||||||||||||||||||||||||||
Total secured and unsecured borrowings – net(4) | $ | 4,448,057 | $ | 4,572,158 |
(1) |
These amounts represent borrowings that were incurred by Omega OP or wholly owned subsidiaries of Omega OP. |
This borrowing is denominated in British Pounds Sterling. |
(3) | The amount includes |
(4) | All borrowings are direct borrowings of Omega unless otherwise noted. |
33 |
HUD Mortgage Disposition
On June 1, 2018, subsidiaries of an existing operator assumed approximately $53 million of our indebtedness guaranteed by HUD that secured 12 separate facilities located in Arkansas. In connection with our disposition of the mortgages we wrote-off approximately $0.6 million of unamortized deferred costs that are recorded in (Loss) gain on assets sold – net on our Consolidated Statement of Operations. These fixed rate mortgages had a weighted average interest rate of approximately 3.06% per annum and matured in July 2044. See Note 2 – Properties and Investments.
Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As of June 30, 20172018 and December 31, 2016,2017, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings. OHI Holdco and Omega OP, the guarantorsguarantor of Parent’s outstanding senior notes, dodoes not directly own any substantive assets other than OHI Holdco’s interest in Omega OP and Omega OP’sits interest in non-guarantor subsidiaries.
New and Amended Unsecured Credit Facility – 2017
2017 Omega Credit Facilities
On May 25, 2017, Omega entered into a credit agreement (the “2017 Omega Credit Agreement”) providing us with a new $1.8 billion senior unsecured revolving and term loan credit facility, consisting of a $1.25 billion senior unsecured multicurrency revolving credit facility (the “Revolving Credit Facility”), a $425 million senior unsecured U.S. Dollar term loan facility (the “U.S. Term Loan Facility”), and a £100 million senior unsecured British Pound Sterling term loan facility (the “Sterling Term Loan Facility” and, together with the Revolving Credit Facility and the U.S. Term Loan Facility, collectively, the “2017 Omega Credit Facilities”). The 2017 Omega Credit Agreement contains an accordion feature permitting us, subject to compliance with customary conditions, to increase the maximum aggregate commitments under the 2017 Omega Credit Facilities to $2.5 billion.
The 2017 Omega Credit Facilities replace the previous $1.25 billion senior unsecured 2014 revolving credit facility, the previous $200 million Tranche A-1 senior unsecured term loan facility, and the previous $350 million Tranche A-3 senior unsecured incremental term loan facility established under our 2014 credit agreement, which has been terminated (the “2014 Omega Credit Agreement”). We had previously repaid and terminated the $200 million Tranche A-2 senior unsecured term loan facility established under the 2014 Omega Credit Agreement, with proceeds from our $550 million and $150 million unsecured senior notes issued in April 2017.
The Revolving Credit Facility bears interest at LIBOR plus an applicable percentage (with a range of 100 to 195 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. The Revolving Credit Facility matures on May 25, 2021, subject to an option by us to extend such maturity date for two, six month periods. The 2017 Omega Credit Agreement provides for the Revolving Credit Facility to be drawn in Euros, British Pounds Sterling, Canadian Dollars (collectively, “Alternative Currencies”) or U.S. Dollars, with a $900 million tranche available in U.S. Dollars and a $350 million tranche available in U.S. Dollars or Alternative Currencies. For purposes of the 2017 Omega Credit Facilities, references to LIBOR include the Canadian dealer offered rates for amounts offered in Canadian Dollars and any other Alternative Currency rate approved in accordance with the terms of the 2017 Omega Credit Agreement for amounts offered in any other non-London interbank offered rate quoted currency, as applicable.
The U.S. Term Loan Facility and the Sterling Term Loan Facility bear interest at LIBOR plus an applicable percentage (with a range of 90 to 190 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. The U.S. Term Loan Facility and the Sterling Term Loan Facility each mature on May 25, 2022.
For the three month period ending June 30, 2017, we recorded a one-time, non-cash charge of approximately $5.5 million relating to the write-off of deferred financing costs associated with the termination of the 2014 Omega Credit Facilities.
Amended 2015 Term Loan Facility
On May 25, 2017, Omega entered into an amended and restated credit agreement (the “Amended 2015 Credit Agreement”), which amended and restated our previous $250 million senior unsecured term loan facility (the “Amended 2015 Term Loan Facility”). The Amended 2015 Term Loan Facility bears interest at LIBOR plus an applicable percentage (with a range of 140 to 235 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. The Amended 2015 Term Loan Facility continues to mature on December 16, 2022. The Amended 2015 Credit Agreement permits us, subject to compliance with customary conditions, to add one or more incremental tranches to the Amended 2015 Term Loan Facility in an aggregate principal amount not exceeding $150 million.
Omega’s obligations under the 2017 Omega Credit Facilities and the Amended 2015 Term Loan Facility are jointly and severally guaranteed by Omega OP, OHI Holdco, and any domestic subsidiary of Omega that provides a guaranty of any unsecured indebtedness of Omega for borrowed money evidenced by bonds, debentures, notes or other similar instruments in an amount of at least $50 million individually or in the aggregate.
2017 Omega OP Term Loan Facility
On May 25, 2017, Omega OPentered into a credit agreement (the “2017 Omega OPCredit Agreement”) providing it with a new $100 million senior unsecured term loan facility (the “2017 Omega OPTerm Loan Facility”). The 2017 Omega OP Credit Agreement replaces the $100 million senior unsecured term loan facility obtained in 2015 (the “2015 Omega OPTerm Loan Facility”) and the related credit agreement (the “2015 Omega OPCredit Agreement”). The 2017 Omega OPTerm Loan Facility bears interest at LIBOR plus an applicable percentage (with a range of 90 to 190 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. The 2017 Omega OPTerm Loan Facility matures on May 25, 2022.
Omega OP’s obligations in connection with the 2017 Omega OPTerm Loan Facility are not currently guaranteed, but will be jointly and severally guaranteed by any domestic subsidiary of Omega OPthat provides a guaranty of any unsecured indebtedness of Omega or Omega OPfor borrowed money evidenced by bonds, debentures, notes or other similar instruments in an amount of at least $50 million individually or in the aggregate.
$550 Million 4.75% Senior Notes and $150 Million 4.5% Senior Notes
On April 4, 2017, Omega issued (i) $550 million aggregate principal amount of our 4.75% Senior Notes due 2028 (the “2028 Notes”) and (ii) an additional $150 million aggregate principal amount of our existing 4.50% Senior Notes due 2025 (the “2025 Notes”, and together with the 2028 Notes collectively, the “Notes”). The 2028 Notes mature on January 15, 2028 and the 2025 Notes mature on January 15, 2025.
The 2028 Notes were sold at an issue price of 98.978% of their face value before the underwriters’ discount and the 2025 Notes were sold at an issue price of 99.540% of their face value before the underwriters’ discount. Our net proceeds from the Notes offering, after deducting underwriting discounts and expenses, were approximately $690.7 million. The net proceeds from the Notes offering were used to (i) redeem all of our outstanding $400 million aggregate principal amount of 5.875% Senior Notes due 2024 (the “5.875% Notes”) on April 28, 2017, (ii) prepay the $200 million Tranche A-2 Term Loan Facility on April 5, 2017 that otherwise would have become due on June 27, 2017, and (iii) repay outstanding borrowings under our revolving credit facility.
$400 Million 5.875% Senior Notes Redemption
On April 28, 2017, Omega redeemed all of our outstanding 5.875% Notes. As a result of the redemption, during the second quarter of 2017, we recorded approximately $16.5 million in redemption related costs and write-offs, including $11.8 million for the call premium and $4.7 million in net write-offs associated with unamortized deferred financing costs.
NOTE 1415 – FINANCIAL INSTRUMENTS
The net carrying amount of cash and cash equivalents, restricted cash, contractual receivables and accounts receivableaccrued expenses and other liabilities reported in the Consolidated Balance Sheets approximates fair value because of the short maturity of these instruments (i.e., less than 90 days) (Level 1).
At June 30, 20172018 and December 31, 2016,2017, the net carrying amounts and fair values of our other financial instruments were as follows:
June 30, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||||
June 30, 2017 | December 31, 2016 | Carrying | Fair | Carrying | Fair | |||||||||||||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | Amount | Value | Amount | Value | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Investments in direct financing leases – net | $ | 582,307 | $ | 578,998 | $ | 601,938 | $ | 598,665 | $ | 349,465 | $ | 349,465 | $ | 364,965 | $ | 364,965 | ||||||||||||||||
Mortgage notes receivable – net | 662,709 | 676,396 | 639,343 | 644,961 | 703,309 | 726,016 | 671,232 | 686,772 | ||||||||||||||||||||||||
Other investments – net | 278,985 | 271,306 | 256,846 | 253,385 | 377,206 | 373,842 | 276,342 | 281,031 | ||||||||||||||||||||||||
Total | $ | 1,524,001 | $ | 1,526,700 | $ | 1,498,127 | $ | 1,497,011 | $ | 1,429,980 | $ | 1,449,323 | $ | 1,312,539 | $ | 1,332,768 | ||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Revolving line of credit | $ | 155,000 | $ | 155,000 | $ | 190,000 | $ | 190,000 | $ | 220,000 | $ | 220,000 | $ | 290,000 | $ | 290,000 | ||||||||||||||||
Tranche A-1 term loan | — | — | 198,830 | 200,000 | ||||||||||||||||||||||||||||
Tranche A-2 term loan | — | — | 200,000 | 200,000 | ||||||||||||||||||||||||||||
Tranche A-3 term loan | — | — | 347,449 | 350,000 | ||||||||||||||||||||||||||||
U.S. term loan | 422,280 | 425,000 | — | — | 422,782 | 425,000 | 422,498 | 425,000 | ||||||||||||||||||||||||
Sterling term loan | 129,413 | 130,250 | — | — | 131,347 | 132,030 | 134,360 | 135,130 | ||||||||||||||||||||||||
Omega OP term loan(1) | 99,373 | 100,000 | 100,000 | 100,000 | 99,488 | 100,000 | 99,423 | 100,000 | ||||||||||||||||||||||||
2015 term loan | 248,226 | 250,000 | 248,064 | 250,000 | 248,551 | 250,000 | 248,390 | 250,000 | ||||||||||||||||||||||||
4.375% notes due 2023 – net | 692,890 | 723,805 | 692,305 | 693,505 | 694,059 | 694,736 | 693,474 | 711,190 | ||||||||||||||||||||||||
5.875% notes due 2024 – net | — | — | 395,065 | 432,938 | ||||||||||||||||||||||||||||
4.95% notes due 2024 – net | 393,175 | 421,504 | 392,669 | 406,361 | 394,186 | 406,220 | 393,680 | 420,604 | ||||||||||||||||||||||||
4.50% notes due 2025 – net | 394,368 | 361,983 | 245,949 | 249,075 | 395,021 | 390,337 | 394,640 | 399,874 | ||||||||||||||||||||||||
5.25% notes due 2026 – net | 593,969 | 641,199 | 593,616 | 611,461 | 594,674 | 605,460 | 594,321 | 625,168 | ||||||||||||||||||||||||
4.50% notes due 2027 – net | 685,784 | 703,514 | 685,052 | 681,978 | 687,248 | 666,345 | 686,516 | 681,007 | ||||||||||||||||||||||||
4.75% notes due 2028 – net | 539,741 | 557,520 | — | — | 540,379 | 529,727 | 539,882 | 550,667 | ||||||||||||||||||||||||
HUD debt – net(1) | 53,737 | 52,535 | 54,365 | 52,510 | - | - | 53,098 | 51,817 | ||||||||||||||||||||||||
Subordinated debt – net | 20,431 | 24,045 | 20,490 | 23,944 | 20,322 | 23,253 | 20,376 | 23,646 | ||||||||||||||||||||||||
Other | 1,500 | 1,500 | 3,000 | 3,000 | - | - | 1,500 | 1,500 | ||||||||||||||||||||||||
Total | $ | 4,429,887 | $ | 4,547,855 | $ | 4,366,854 | $ | 4,444,772 | $ | 4,448,057 | $ | 4,443,108 | $ | 4,572,158 | $ | 4,665,603 |
(1) | These amounts represent borrowings that were incurred by Omega OP or wholly owned subsidiaries of Omega OP. |
34 |
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, 2016, as amended)2017). 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.
· | 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). In addition, the Company may estimate the fair value of its investment based on the estimated fair value of the collateral using a market approach or an income approach which considers inputs such as, current and projected operating performance of the facilities, projected rent, prevailing capitalization rates and/or coverages and bed values (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). |
· | 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 a 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 using a present value technique based on inputs from trading activity provided by a |
· | HUD debt: The fair value of our borrowings under HUD debt agreements are estimated using an expected present value technique based on quotes obtained by HUD debt brokers (Level 2). |
NOTE 1516 – LITIGATIONCOMMITMENTS AND CONTINGENCIES
WeLitigation
On November 16, 2017, a purported securities class action complaint captioned Dror Gronich v. Omega Healthcare Investors, Inc., C. Taylor Pickett, Robert O. Stephenson, and Daniel J. Booth was filed against the Company and certain of its officers in the United States District Court for the Southern District of New York, Case No. 1:17-cv-08983-NRB (the “Gronich Securities Class Action”). On November 17, 2017, a second purported securities class action complaint captioned Steve Klein v. Omega Healthcare Investors, Inc., C. Taylor Pickett, Robert O. Stephenson, and Daniel J. Booth was filed against the Company and the same officers in the United States District Court for the Southern District of New York, Case No. 1:17-cv-09024-NRB (together with the Gronich Class Action, the “Securities Class Action”). Thereafter, the Court considered a series of applications by various shareholders to be named lead plaintiff, consolidated the two actions and designated Royce Setzer as the lead plaintiff.
Pursuant to a Scheduling Order entered by the Court, lead plaintiff Setzer and additional plaintiff Earl Holtzman filed a Consolidated Amended Class Action Complaint on May 25, 2018 (the “Amended Complaint”). The Securities Class Action purports to be a class action brought on behalf of shareholders who acquired the Company’s securities between May 3, 2017 and October 31, 2017. The Securities Class Action alleges that the defendants violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), by making materially false and/or misleading statements, and by failing to disclose material adverse facts about the Company’s business, operations, and prospects, including the financial and operating results of one of the Company’s operators, the ability of such operator to make timely rent payments, and the impairment of certain of the Company’s leases and the uncollectibility of certain receivables. The Securities Class Action, which purports to assert claims for violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the Exchange Act, seeks an unspecified amount of monetary damages, interest, fees and expenses of attorneys and experts, and other relief. The Company and the officers named in the Amended Complaint filed a Motion to Dismiss on July 17, 2018. Briefing on the Motion to Dismiss is to be completed by September 14, 2018.
35 |
Although the Company denies the material allegations of the Securities Class Action and intends to vigorously pursue its defense, we are in the very early stages of this litigation and are unable to predict the outcome of the case or to estimate the amount of potential costs.
The Company’s Board of Directors received a demand letter, dated April 9, 2018, from an attorney for a purported current shareholder of the Company relating to the subject matter covered by the Securities Class Action (the “Shareholder Demand”). The letter demanded that the Board of Directors conduct an investigation into the statements and other matters at issue in the Securities Class Action and commence legal proceedings against each party identified as being responsible for the alleged activities. The Board of Directors is reviewing the Shareholder Demand to determine the appropriate course of action.
In addition, we are subject to various other 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.
Commitments
We have committed to fund the construction of new leased and mortgaged facilities and other capital improvements. We expect the funding of these commitments to be completed over the next several years. Our remaining commitments at June 30, 2018, are outlined in the table below (in thousands):
Total commitment | $ | 730,009 | ||
Amounts funded(1) | (450,050 | ) | ||
Remaining commitment | $ | 279,959 |
(1) | Includes finance costs. |
NOTE 1617 – EARNINGS PER SHARE/UNIT
The computation of basic earnings per share/unit (“EPS” or “EPU”) is computed by dividing net income available to common stockholders/Omega OP Unit holders by the weighted-average number of shares of common stock/Omega OP Units outstanding during the relevant period. Diluted EPS/EPU is computed using the treasury stock method, which is net income divided by the total weighted-average number of common outstanding shares/Omega OP Units plus the effect of dilutive common equivalent shares/units during the respective period. Dilutive common shares/Omega OP Units 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. Dilutive Omega OP Units reflect the assumed issuance of additional Omega OP Units pursuant to certain of our share-based compensation plans, including stock options, restricted stock and performance restricted stock. No per share information was provided for OHI Holdco because the sole stockholder is Omega. OHI Holdco is a wholly owned subsidiary of Omega and has 1,000 shares of $0.01 par value per share common stock outstanding.
The following tables set forth the computation of basic and diluted earnings per share/unit:
Omega | ||||||||||||||||||||||||||||||||
Omega | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
(in thousands, except per share amounts) | (in thousands, except per share amounts) | |||||||||||||||||||||||||||||||
Numerator: | ||||||||||||||||||||||||||||||||
Net income | $ | 68,157 | $ | 113,154 | $ | 177,269 | $ | 171,350 | $ | 81,986 | $ | 68,157 | $ | 169,919 | $ | 177,269 | ||||||||||||||||
Less: net income attributable to noncontrolling interests | (2,900 | ) | (5,102 | ) | (7,572 | ) | (7,743 | ) | (3,450 | ) | (2,900 | ) | (7,163 | ) | (7,572 | ) | ||||||||||||||||
Net income available to common stockholders | $ | 65,257 | $ | 108,052 | $ | 169,697 | $ | 163,607 | $ | 78,536 | $ | 65,257 | $ | 162,756 | $ | 169,697 | ||||||||||||||||
Denominator: | ||||||||||||||||||||||||||||||||
Denominator for basic earnings per share | 197,433 | 188,981 | 197,223 | 188,604 | 199,497 | 197,433 | 199,204 | 197,223 | ||||||||||||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||||||||||||||||
Common stock equivalents | 467 | 1,254 | 407 | 1,215 | 197 | 467 | 167 | 407 | ||||||||||||||||||||||||
Noncontrolling interest – Omega OP Units | 8,772 | 8,922 | 8,793 | 8,935 | 8,766 | 8,772 | 8,768 | 8,793 | ||||||||||||||||||||||||
Denominator for diluted earnings per share | 206,672 | 199,157 | 206,423 | 198,754 | 208,460 | 206,672 | 208,139 | 206,423 | ||||||||||||||||||||||||
Earnings per share – basic: | ||||||||||||||||||||||||||||||||
Net income available to common stockholders | $ | 0.33 | $ | 0.57 | $ | 0.86 | $ | 0.87 | $ | 0.39 | $ | 0.33 | $ | 0.82 | $ | 0.86 | ||||||||||||||||
Earnings per share – diluted: | ||||||||||||||||||||||||||||||||
Net income | $ | 0.33 | $ | 0.57 | $ | 0.86 | $ | 0.86 | $ | 0.39 | $ | 0.33 | $ | 0.82 | $ | 0.86 |
Omega OP | ||||||||||||||||||||||||||||||||
Omega OP | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
(in thousands, except per share amounts) | (in thousands, except per share amounts) | |||||||||||||||||||||||||||||||
Numerator: | ||||||||||||||||||||||||||||||||
Net income | $ | 68,157 | $ | 113,154 | $ | 177,269 | $ | 171,350 | $ | 81,986 | $ | 68,157 | $ | 169,919 | $ | 177,269 | ||||||||||||||||
Denominator: | ||||||||||||||||||||||||||||||||
Denominator for basic earnings per unit | 206,205 | 197,903 | 206,016 | 197,539 | 208,263 | 206,205 | 207,972 | 206,016 | ||||||||||||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||||||||||||||||
Omega OP Unit equivalents | 467 | 1,254 | 407 | 1,215 | 197 | 467 | 167 | 407 | ||||||||||||||||||||||||
Denominator for diluted earnings per unit | 206,672 | 199,157 | 206,423 | 198,754 | 208,460 | 206,672 | 208,139 | 206,423 | ||||||||||||||||||||||||
Earnings per unit – basic: | ||||||||||||||||||||||||||||||||
Net income available to Omega OP Unit holders | $ | 0.33 | $ | 0.57 | $ | 0.86 | $ | 0.87 | $ | 0.39 | $ | 0.33 | $ | 0.82 | $ | 0.86 | ||||||||||||||||
Earnings per unit – diluted: | ||||||||||||||||||||||||||||||||
Net income | $ | 0.33 | $ | 0.57 | $ | 0.86 | $ | 0.86 | $ | 0.39 | $ | 0.33 | $ | 0.82 | $ | 0.86 |
NOTE 18 – SUPPLEMENTAL DISCLOSURE TO CONSOLIDATED STATEMENTS OF CASH FLOWS
The following are supplemental disclosures to the consolidated statements of cash flows for the six months ended June 30, 2018 and 2017:
Six Months Ended | ||||||||
June 30, | ||||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Reconciliation of cash and cash equivalents and restricted cash: | ||||||||
Cash and cash equivalents | $ | 10,951 | $ | 21,031 | ||||
Restricted cash | 2,598 | 12,203 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 13,549 | $ | 33,234 | ||||
Supplemental information: | ||||||||
Interest paid during the period, net of amounts capitalized | $ | 108,317 | $ | 97,610 | ||||
Taxes paid during the period | $ | 2,072 | $ | 2,032 | ||||
Non cash investing activities | ||||||||
Non cash acquisition of real estate (See Note 2) | $ | (880 | ) | $ | (9,430 | ) | ||
Non cash proceeds from sale of real estate investments (See Note 2) | 53,118 | - | ||||||
Non cash investment in other investments (See Note 5) | (11,026 | ) | - | |||||
Non cash proceeds from other investments (see Note 5) | 7,000 | (6,353 | ) | |||||
Total | $ | 48,212 | $ | (15,783 | ) | |||
Non cash financing activities | ||||||||
Non cash disposition of other long-term borrowings (See Note 14) | $ | (53,118 | ) | $ | - | |||
Change in fair value of cash flow hedges | 6,233 | (108 | ) | |||||
Remeasurement of debt denominated in a foreign currency | (3,100 | ) | 2,190 | |||||
Total | $ | (49,985 | ) | $ | 2,082 |
38 |
NOTE 19 – SUBSEQUENT EVENTS
On July 23, 2018, Omega notified Orianna that it was in default under the DIP facility and, as a result of such default, Omega (a) declared the amounts owing under the DIP facility to be immediately due and payable, (b) terminated the DIP facility and any further commitment of Omega to extend credit to Orianna under the DIP facility, and (c) restricted Orianna’s use of cash collateral solely to payment of those amounts contained in a budget approved by Omega. Omega also informed Orianna that while Omega did not (as of such date) intend to immediately collect amounts owing under the DIP facility, Omega may at any time in the future exercise further rights and remedies under the DIP facility.
On July 25, 2018, Omega terminated the restructuring support agreement with its tenant 4 West Holdings and the sponsor of Orianna’s restructuring plan. The Company is evaluating and/or pursuing alternative courses of action to protect its assets and shareholder value, and working with operators to protect the interests of residents of the facilities. On July 1, 2018, we transitioned the legacy Orianna portfolio in Mississippi (13 facilities) to an existing Omega operator with annual contractual rent of $12 million and on August 1, 2018, a legacy Orianna facility in Indiana was transitioned to an existing operator with annual contractual rent of $0.5 million.
39 |
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations
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, including statements regarding potential future changes in reimbursement. This document contains “forward-looking statements” within the meaning of the federal securities laws. 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 Part I, Item 1A to our annual report on Form |
(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 of Omega’s operators in bankruptcy to reject unexpired lease obligations, modify the terms of |
(iv) | our ability to re-lease, otherwise transition, or sell |
(v) | our ability to |
(vi) | the availability and cost of capital to us; |
(vii) | changes in our credit ratings and the ratings of our debt securities; |
(viii) | competition in the financing of healthcare facilities; |
(ix) | regulatory and other changes in the healthcare sector; |
(x) | changes in the financial position of our operators; |
(xi) | the effect of economic and market conditions generally and, particularly, in the healthcare industry; |
(xii) | changes in interest rates; |
(xiii) | the amount and yield of any additional investments; |
(xiv) | changes in tax laws and regulations affecting real estate investment trusts (“REITs”); |
(xv) | the potential impact of changes in the skilled nursing facility (“SNF”) and assisted living facility (“ALF”) |
(xvi) | our ability to maintain our status as a |
Overview
Omega Healthcare Investors, Inc. (“Omega”) was formed as a real estate investment trust (“REIT”) and incorporated in the State of Maryland on March 31, 1992. AllOmega is structured as an umbrella partnership REIT (“UPREIT”) under which all of Omega's assets are owned directly or indirectly by, and all of Omega's operations are conducted directly or indirectly through, its subsidiaries, OHI Healthcare Properties Holdco, Inc. (“OHI Holdco”), a direct wholly ownedoperating partnership subsidiary, of Omega, and OHI Healthcare Properties Limited Partnership (“Omega OP”). OHI Holdco was formed as a corporation and incorporated in the State of Delaware on October 22, 2014. Omega OP was formed as a limited partnership and organized in the State of Delaware on October 24, 2014. No substantive assets or activity occurred in either of these entities until the merger with Aviv REIT, Inc. on April 1, 2015. Unless stated otherwise or the context otherwise requires, the terms the “Company,” “we,” “our” and “us” means Omega OHI Holdco and Omega OP, collectively.
The Company has one reportable segment consisting of investments in healthcare-related real estate properties located in the United States (“U.S.”) and the United Kingdom (“U.K.”). Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on SNFs and, to a lesser extent, ALFs, independent living facilities and rehabilitation and acute care facilities. 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. Our other investment income derives from fixed and variable rate loans, which are either unsecured or secured by the collateral of the borrower.
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 Omega, Aviv, OHI Holdco, Omega OP, and Aviv Healthcare Properties Limited Partnership, a Delaware limited partnership.
40 |
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, all of Omega’s assets are held by Omega OP, through its equity interests in its subsidiaries.
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, Omega and OHI Holdco are the general partners of Omega OP, and havehas exclusive control over Omega OP’s day-to-day management.management pursuant to the Partnership Agreement. As of June 30, 2017,2018, Omega and OHI Holdco together owned approximately 96% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and investors owned approximately 4% of the Omega OP Units.
Our portfolio of real estate investments at June 30, 2017,2018, consisted of 999936 healthcare facilities, located in 4241 states and the United KingdomU.K. and operated by 77 third party67 third-party operators. Our investment in these facilities, net of impairments and reserves for uncollectible loans,allowances, totaled approximately $9.0$8.6 billion at June 30, 2017,2018, with approximately 99% of our real estate investments related to long-term care facilities. Our portfolio is made up of: (i) 803748 SNFs, (ii) 119117 ALFs, (iii) 1614 specialty facilities, (iv) one medical office building, (v) fixed rate mortgages on 4751 SNFs and fourtwo ALFs and (vi) ninethree facilities that are closed/held-for-sale.held for sale. At June 30, 2017,2018, we also held other investments of approximately $279.0$377.2 million, consisting primarily of secured loans to third-party operators of our facilities and a $39.0$32.8 million investment in an unconsolidated joint venture.
In 2017, we began implementation of a strategic asset repositioning program, disposing of non-core assets and reinvesting the proceeds in assets we envision holding for the long-term. This program is expected to continue for much of 2018 and is designed to position the Company for future growth.
As of June 30, 20172018 and December 31, 20162017, we do not have any material properties or operators with facilities that are not materially occupied.
OurOmega’s consolidated financial statements include the accounts of (i) Omega, (ii) OHI Holdco, (iii) Omega OP, and (iv)(iii) all direct and indirect wholly owned subsidiaries of Omega. All intercompany transactions and balances have been eliminated in consolidation, and ourOmega’s net earnings are reduced by the portion of net earnings attributable to noncontrolling interests. Omega OP’s consolidated financial statements include the accounts of (i) Omega OP, and (ii) all direct and indirect wholly owned subsidiaries of Omega OP. All intercompany transactions and balances have been eliminated in consolidation.
Taxation
OHI HoldcoOmega is a wholly owned subsidiary of Omega and is a qualified REIT subsidiary for United States federal income tax purposes, and Omega OP is a pass through entity for United States federal income tax purposes.
Since our inception, we haveOmega has elected to be taxed as a REIT under the applicable provisions of the Internal Revenue Code (“Code”). A REIT is generally not subject to federal income tax on that portion of its REIT taxable income which is distributed to its stockholders, provided that at least 90% of such taxable income is distributed each tax year and certain other requirements are met, including asset and income tests. 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.
If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income taxes on its taxable income at regular corporate rates and dividends paid to our stockholders will not be deductible by us in computing taxable income. Further, we willwould not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which qualification is denied, unless the Internal Revenue Service grants us relief under certain statutory provisions. Failing to qualify as a REIT could materially and adversely affect the Company’s net income; however, we believe we are organized and operate in such a manner as to qualify for treatment as a REIT. We test our compliance within the REIT taxation rules to ensure that we are in compliance with the REIT rules on a quarterly and annual basis. We review our distributions and projected distributions each year to ensure we have met and will continue to meet the annual REIT distribution requirements. In 2017,2018, we expect to distributepay dividends in excess of our taxable income.
41 |
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 wholly owned subsidiary REITs and added a sixth wholly owned subsidiary REIT as of January 1, 2016, all of which are subject to all of the REIT qualification rules set forth in the Code. We merged five of the wholly owned subsidiary REITs into a single wholly owned subsidiary REIT in December 2015, and then merged the sixth wholly owned subsidiary REIT into our other wholly owned subsidiary REIT in December 2016, which wholly owned subsidiary REIT remains 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 elected for two of our active subsidiaries to be treated as TRSs. One of our TRSs is subject to federal, state and local income taxes at the applicable corporate rates and the other is subject to foreign income taxes. As of June 30, 2017,2018, our TRS that is subject to federal, state and local income taxes at the applicable corporate rates had a net operating loss carry-forward of approximately $0.8$5.8 million. The loss carry-forward is fully reserved as of June 30, 2017,2018, with a valuation allowance due to uncertainties regarding realization. Our net operating loss carryforwards will be carried forward for no more than 20 years.
DuringFor the second quarter ofthree months ended June 30, 2018 and 2017, we recorded approximately $0.2 million and $0.5 million, respectively, of state and local income tax provisionprovision. For the six months ended June 30, 2018 and 2017, we recorded approximately $0.3 million and $1.5 million, respectively, of state and local income tax provision. For the three months ended June 30, 2018 and 2017, we recorded approximately $0.6 million and $0.1 million, respectively, of tax provision for foreign income taxes. For the six months ended June 30, 2018 and 2017, we recorded approximately $1.5$1.0 million of state and local income tax provision and approximately $0.2 million, respectively, of tax provision for foreign income taxes. The expenses were included in provision for income taxestax expense on our Consolidated Statements of Income.Operations.
Government Regulation and Reimbursement
The healthcare industry is heavily regulated. Our operators are subject to extensive and complex federal, state and local healthcare laws and regulations. These laws and regulations are subject to frequent and substantial changes resulting from the adoption of new legislation, rules and regulations, and administrative and judicial interpretations of existing law. The ultimate timing or effect of these changes, which may be applied retroactively, cannot be predicted. Changes in laws and regulations impacting our operators, in addition to regulatory non-compliance by our operators, can have a significant effect on the operations and financial condition of our operators, which in turn may adversely impact us. The following is a discussion of certain laws and regulations generally applicable to our operators, and in certain cases, to us.
Healthcare Reform. A substantial amount of rules and regulations have been issued under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education and Reconciliation Act of 2010 (collectively referred to as the “Healthcare Reform Law”). The new administration has brought several Congressional efforts to repeal and replace the Affordable Care Act. The House of Representatives passed the American Health Care Act (“AHCA”) on May 4, 2017, which contains provisions that would change the level of federal funding of state Medicaid programs and affect funding for long term care recipients, including the elderly and disabled. The Senate then moved to craft its own “repeal and replace” legislation called the Better Care Reconciliation Act (“BCRA”) with more onerous funding changes affecting the elderly and disabled. BCRA and two other amendments failed in the Senate and it is unclear if the Senate will debate potential amendments further. However, even if a different bill or amendment passed in the Senate, reconciliation with the House’s AHCA bill would be required. Under any new legislation, we expect additional rules, regulations and interpretations to be issued that may materially affect our operators’ financial condition and operations. Even if the Healthcare Reform Law is not ultimately amended or repealed, the new administration could propose changes impacting implementation of the Healthcare Reform Law. The ultimate composition and timing of any legislation enacted under the new administration that would impact the current implementation of the Healthcare Reform Law remains uncertain. Given the complexity of the Healthcare Reform Law and the substantial requirements for regulation thereunder, the impact of the Healthcare Reform Law on our operators or their ability to meet their obligations to us cannot be predicted, whether in its current form or as amended or repealed.
Reform Requirements for Long-Term Care Facilities. On October 4, 2016, the Centers for Medicare and Medicaid Services (“CMS”) issued a final rule modifying the conditions of participation in Medicare and Medicaid for SNFs. CMS stated that the regulations, last updated in 1991, were “necessary to reflect the substantial advances that had been made over the past several years in the theory and practice of service delivery and safety” within long-term care. The extensive modifications require SNFs to implement new processes; make changes to current practices; and create new policies and procedures within a short timeframe to remain in compliance with their conditions for participation. Changes include provisions related to staff training, discharge planning, infection prevention and control programs, and pharmacy services, among others. While many of the regulations became effective on November 28, 2016, some of the regulations becomebecame effective in Phase 2 beginning on November 28, 2017, with others becoming effective in Phase 3, beginning on November 28, 2019. AccordingCMS delayed for eighteen months the imposition of any fines for failure to implement Phase 2 of the new “Requirements of Participation” implemented in November 2017. CMS it is estimated thatalso announced a freeze on the inspection star ratings for any surveys occurring between November 28, 2017 and November 27, 2018. CMS estimates the average cost for a SNF to implement the new regulations is estimated to be $62,900 the first year and $55,000 each year thereafter. Further, CMS delayed for one year the imposition of any fines for failure to implement Phase 2 of the new “Requirements of Participation” scheduled for implementation in November 2017.
42 |
Reimbursement Generally. A significant portion of our operators’ revenue is derived from government-funded reimbursement programs, consisting primarily of Medicare and Medicaid. As federal and state governments continue to focus on healthcare reform initiatives, and as the federal government and many states face significant current and future budget deficits, efforts to reduce costs by government payors will likely continue, which may result in reductions in reimbursement at both the federal and state levels. Additionally, new and evolving payor and provider programs, including but not limited to Medicare Advantage, dual eligible, accountable care organizations, and bundled payments could adversely impact our tenants’ and operators’ liquidity, financial condition or results of operations.
We currently believe that our operator coverage ratios are adequate and that our operators can absorb moderate reimbursement rate reductions and still meet their obligations to us. However, significant Significant limits on the scope of services reimbursed and/or reductions of reimbursement rates could have a material adverse effect on our operators’ results of operations and financial condition, which could adversely affect our operators’ ability to meet their obligations to us.
Medicaid. State budgetary concerns, coupled with the implementation of rules under the Healthcare Reform Law, or prospective changes to the Healthcare Reform Law under the new administration, may result in significant changes in healthcare spending at the state level. Many states are currently focusing on the reduction of expenditures under their state Medicaid programs, which may result in a reduction in reimbursement rates for our operators. The need to control Medicaid expenditures by the states may be exacerbated by the potential for increased enrollment in Medicaid due to unemployment and declines in family incomes. Since our operators’ profit margins on Medicaid patients are generally relatively low, more than modest reductions in Medicaid reimbursement or an increase in the number of Medicaid patients could adversely affect our operators’ results of operations and financial condition, which in turn could negatively impact us.
The Healthcare Reform Law provided for Medicaid coverage to be expanded to all individuals under age 65 with incomes up to 133% of the federal poverty level, beginning January 1, 2014. While the federal government committed to paying the entire cost for Medicaid coverage for newly eligible beneficiaries from 2014 through 2016, the federal share declines to 95% in 2017, 94% in 2018, 93% in 2019, and 90% in 2020 and subsequent years. Although the Supreme Court ruled on June 28, 2012 that states could not be required to expand Medicaid or risk losing federal funding of their existing Medicaid programs, as of August 3, 2017, thirty-one (31)July 12, 2018, thirty-four (34) states and the District of Columbia have expanded Medicaid eligibility with additional states continuing to consider expansion.
As indicated above, both the House and the Senate have proposed bills that contain provisions that would change the level of federal funding of state Medicaid programs. Both bills contain provisions that would change the level of federal funding of state Medicaid programs from the current unlimited amount based on a matching formula that varies by state based on per capita income levels to a capped amount by state based on varying per capita limits for five defined categories of Medicaid beneficiaries, two categories of which cover Medicaid long-term care residents of SNFs. However, the status of Healthcare Reform is far from certain.
As noted above, the vote on BCRA has been delayed and it is unclear whether it would pass a vote. Even if passed, reconciliation with the AHCA would be required, so it remains to be seen which of the proposals will prevail or if neither proposal will come to fruition.
Medicare. On July 31, 2017, CMS issued a final rule regarding the fiscal year (“FY”) 2018 Medicare payment rates and quality payment programs for SNFs, which continues the trend of shifting Medicare payments from volume to value. Proposed aggregate payments to SNFs effective October 1, 2017 for FY 2018 are expected to increase by $370 million, or 1.0%, over FY 2017 payments. This reimbursement increase is attributable to a 1.0% market basket increase as required under the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA)(“MACRA”) after application of the productivity adjustment. Additionally, as mandated by the Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act)(“IMPACT Act”), the annual update is reduced by 2 percentage points for SNFs that fail to submit required quality data to CMS under the SNF Quality Reporting Program (QRP)(“QRP”), beginning with FY 2018. The application of this penalty to those SNFs that do not meet the requirements for the FY 2018 SNF QRP would produce a market basket index percentage change that is less than zero and would also result in FY 2018 payment rates that are less than such payment rates for the preceding fiscal year. Similarly, a value-based purchasing program under the 2014 Protecting Access to Medicare Act (“PAMA”) legislation discounts SNF Medicare Fee-for-Service (“FFS”) payments by 2% commencing on October 1, 2018 (FY 2019), with reimbursement of those discounts to SNF based on comparative rehospitalization metrics. Beginning on October 1, 2018, the “Bipartisan Budget Act of 2018” froze the market basket update at 2.4% prior to application of any penalty adjustment for failure to meet the requirements of the SNF QRP. This freeze could reduce Medicare reimbursements to SNFs which could have a material adverse effect on our operators’ financial condition and operations, adversely impacting their ability to meet their obligations to us.
Reimbursement methodology reforms, such as value-based purchasing, continue to be prevalent and attempt to hold providers accountable for the cost and quality of care provided by redistributing a portion of a provider or facility’s reimbursement based on the relative performance on designated economic, clinical quality, and patient satisfaction metrics. On April 27, 2017,2018, CMS released an Advanced Notice of Proposed Rulemaking (“ANPRM”)issued a proposed rule to replace the SNF PPS RUG-IV case-mix classification methodology which formswith a new value-based Patient Driven Payment Model (“PDPM”). Under the basisPDPM, payments would be based on a resident’s objective classification group, and payment would be calculated by multiplying the case-mix index for SNFthe resident’s classification group to create a resident’s total per diem rate. The new payment with the Resident Classification System, Version I (RCS-I),system, if adopted as early as FYproposed, is expected to go into effect on October 1, 2019. The RCS-I case-mix model, removes service-based metrics from the SNF PPS and provides for payment, almost exclusively, from objective resident characteristics. CMS extended the comment period on the ANPRM from June 26, 2017 to August 25, 2017 in response to requests from national industry organizations for additional time to analyze this potentially far-reaching proposal. Notably, CMS’ overall model is designed to be budget-neutral with the current system.
43 |
In addition to FY 20172018 Medicare payment rates, SNFs continue to be impacted by the “Bipartisan Budget Act of 2015” (“BBA”) signed on November 2, 2015 which provided $80 billion in discretionary spending sequestration relief over two years, and extended Medicare sequestration, which generally cuts Medicare provider and plan payments by 2% across the board, for an additional year, through 2025. The FY 2025 sequestration will be “front loaded,” such that a 4% reduction will apply during the first six months of the fiscal year and no reduction will be imposed during the second half of the fiscal year.
Furthermore, while the “Medicare Access and CHIP Reauthorizationexceptions review process for therapy caps stipulated by MACRA expired December 31, 2017, the Bipartisan Budget Act of 2015” continues to have2018 permanently repealed the potential to negatively impact Medicare revenues through the extension of the Medicare therapy cap exceptions process through December 31, 2017; modification of the requirement for manual medical review for services over the $3,700 therapy thresholds; and extension of the application of therapy caps and related provisions,the exceptions review process that applied to outpatient hospitals untilMedicare Part B therapy coverage as of January 1, 2018. The statutoryindustry estimates that these changes may potentially (i) result in the restoration of Medicare Part B outpatient cap for occupational therapy is $1,980 for 2017, with the combined cap for physical therapy and speech therapy also set at $1,980 for 2017. While the caps do not apply to therapy services covered under Medicare Part A for SNFs and the exception process permits medically necessary therapy services beyond the cap limits, the caps apply in most other circumstances involving patients in SNFs or long-term care facilities who receive therapy services covered under Medicare Part B. Expiration ofSNF revenues that would have declined had the therapy cap exceptions processcaps remained in the future could have a material adverse effect on our operators’ financial conditionplace and operations, which could adversely impact their ability(ii) permit continued necessary services to meet their obligations to us.
As indicated above, reimbursement methodology reforms, such as value-based purchasing, continue to be increasingly prevalent and attempt to hold providers accountable for the cost andmaintain beneficiary quality of care providedlevels. However, it reduced the reimbursement rate for Medicare Part B therapy services performed by redistributingtherapy assistants to 85% of the physician fee schedule beginning January 1, 2022 which may offset some of the additional expenses. The Bipartisan Budget Act of 2018 also restored the limited post-pay claims review process and eliminated a portion of a provider or facility’s reimbursement based onthreat to future SNF Medicare payment rates by ending the relative performance on designated economic, clinical quality, and patient satisfaction metrics. These reimbursement methodologies and similar programs are expected to expand, both in public and commercial health plans.“Independent Payment Advisory Board” which was tasked with cutting future Medicare rates.
For example,Relatedly, CMS released a final rule on December 1, 2017 to significantly scale back mandatory participation in the “Protecting Access to Medicare Act of 2014” called for the U.S. Department of Health and Human Services (“HHS”) to develop a value based purchasing program for SNFs aimed at tying a reimbursement adjustment to lower readmission rates effective October 1, 2018, and on April 26, 2015, CMS announced its goal to have 30% of Medicare payments for quality and value through alternative payment models such as accountable care organizations or bundled payments by the end of 2016 and up to 50% by the end of 2018. In March 2016, CMS announced that its 30% target for 2016 had already been reached.
Additionally, CMS’s bundled payment program for Lower Extremity Joint Replacement (“CJR”) procedures that went into effect on April 1, 2016, and iswas mandatory for all hospitals paid under the Medicare Inpatient Prospective Payment System that are located in the 67 selected metropolitan statistical areas. Through this bundled payment model,areas (“MSAs”). Effective January 1, 2018, CJR program participation under the final rule is voluntary for the eligible hospitals in the 67 selected metropolitan areas receive additional payments if quality and costs exceed defined parameters or, if not, must repay Medicare for a portion33 of the spending. On July 25, 2016, CMS proposed rulemaking to extendMSAs currently covered by the program as of February 2018. The CJR bundled payment models effective July 1, 2017 for both hip/femur fracture surgeriesprogram will remain mandatory in the same 67 metropolitan as well as additional bundled payment models/Episode Payment Models34 MSAs for heart attacksthe duration of the program, with an exception for certain low volume and bypass surgeries in 98 randomly selected metropolitan statistical areas.rural hospitals. CMS anticipates the number of mandatory participating hospitals to decrease from approximately 700 under this rule. SNFs receiving Medicare revenues related to hospital discharges subject to CJR bundled payment programs in the identified geographic areas could be either positively or negatively affected by the CJR bundled payment program. CMS delayed the applicability date of the expanded CJR bundled payment pilot from July 1, 2017 until October 1, 2017 through an interim final rule with comment period published in the Federal Register on March 21, 2017. CMS again delayed the effective date of the CJR bundled payment program until January 1, 2018 through a final rule entitled, “Medicare Program; Advancing Care Coordination Through Episode Payment Models (EPMs); Cardiac Rehabilitation Incentive Payment Model; and Changes to the Comprehensive Care for Joint Replacement Model; Delay of Effective Date,” published in the Federal Register on May 19, 2017 . This final rule also finalized May 20, 2017 as the effective date of the final rule entitled, “Advancing Care Coordination Through Episode Payment Models (EPMs); Cardiac Rehabilitation Incentive Payment Model; and Changes to the Comprehensive Care for Joint Replacement Model,” which was originally published on January 3, 2017.
Quality of Care Initiatives. In addition to quality or value based reimbursement reforms, CMS has implemented a number of initiatives focused on the quality of care provided by long term care facilities that could affect our operators. OnIn December 2008, CMS released quality ratings for all of the nursing homes that participate in Medicare or Medicaid under its “Five Star Quality Rating System.” Facility rankings, ranging from five stars (“much above average”) to one star (“much below average”) are updated on a monthly basis. SNFs are required to provide information for the CMS Nursing Home Compare website regarding staffing and quality measures. Based on this data and the results of state health inspections, SNFs are then rated based on the five-star rating system.
In August 2016, CMS announced a modification to the Five Star Quality Rating System through the introduction of new quality measures based primarily on Medicare claims data submitted by hospitals, including: (1) percentage of short-stay residents who were successfully discharged to the community; (2) percentage of short-stay residents who have had an outpatient emergency department visit; (3) percentage of short-stay residents who were re-hospitalized after a nursing home admission; (4) percentage of short-stay residents who made improvements in function; and (5) percentage of long-stay residents whose ability to move independently worsened. These ratings were incorporated into the nursing home rating system in July 2016 and were phased in through January 2017. Effective September 1, 2016, SNFs that received a Five Star Quality Indicators Survey deficiency cited at a Scope and Severity level J or higher are automatically and immediately assessed civil monetary penalties by CMS, with no opportunity to correct the deficiencies to avoid the heightened and costly monetary penalties. It is possible that this or any other ranking system could lead to future reimbursement policies that reward or penalize facilities on the basis of the reported quality of care parameters.
Office of the Inspector General Activities. TheBeginning June 15, 2017, the Office of Inspector General’s (the “OIG”General (“OIG”) began updating its Work Plan website monthly in order to enhance transparency around the OIG’s continuous work planning efforts. The OIG reported in its January 2018 update that it would review the quality of care provided to Medicare beneficiaries, including elders and disabled persons, who are being treated at inpatient and outpatient medical facilities for conditions that may be the result of abuse or neglect. The OIG referenced prior reviews which indicated problems with the quality of care and the reporting and investigation of potential abuse or neglect at group homes, nursing homes, and skilled nursing facilities.
44 |
This review supplements the OIG’s Work Plan for government fiscal year 2017 which describes projects that the OIG plans to address during the fiscal year, includesincluded seven projects related specifically to nursing homes: (1) determining to what extent State agencies investigate serious nursing home complaints within the required timeframes; (2) unreported incidents of potential abuse and neglect in SNFs; (3) review of SNF Medicare reimbursement documentation (determine if it meets requirements for each particular resource utilization group); (4) the SNF Adverse Event Screening Tool, which will disseminate practical information about the SNF Adverse Event Trigger Tool; (5) review of the National Background Check Program for long-term care employees; (6) compliance with the SNF prospective payment system requirement related to a three-day qualifying inpatient hospital stay; and (7) review of potentially avoidable hospitalizations of Medicare and Medicaid-Eligible nursing facility residents and prevention and detection services provided by nursing homes. Additionally, regional RACRecovery Audit Contractor program auditors along with the Office of Inspector GeneralOIG and Department of Justice will alsoare expected to continue their efforts to evaluate SNF Medicare claims for any excessive therapy charges. In orderaddition to enhance transparency around the OIG’s continuous work planning efforts, effective June 15,seven projects identified on the fiscal year 2017 Work Plan, subsequent updates indicate that the OIG will update its Work Plan website monthly.would review whether ambulance services paid by Medicare Part B were subject to Part A SNF consolidated billing requirements. This review is ongoing.
Department of Justice. SNFs are under intense scrutiny for the quality of care being rendered to residents and appropriate billing practices. The Department of Justice launched ten regional Elder Justice Task Forces in 2016 which are coordinating and enhancing efforts to pursue SNFs that provide grossly substandard care to their residents. They are also focusing on therapy billing issues. These Task Forces are composed of representatives from the U.S. Attorneys’ Offices, State Medicaid Fraud Control Units, state and local prosecutors’ offices, HHS,U.S. Department of Health and Human Services (“HHS”), State Adult Protective Services agencies, Long Term Care Ombudsmen programs, and law enforcement.
Fraud and Abuse. There are various federal and state civil and criminal laws and regulations governing a wide array of healthcare provider referrals, relationships and arrangements, including laws and regulations prohibiting fraud by healthcare providers. Many of these complex laws raise issues that have not been clearly interpreted by the relevant governmental authorities and courts.
These laws include: (i) federal and state false claims acts, which, among other things, prohibit providers from filing false claims or making false statements to receive payment from Medicare, Medicaid or other federal or state healthcare programs; (ii) federal and state anti-kickback and fee-splitting statutes, including the Medicare and Medicaid Anti-kickback statute, which prohibit the payment or receipt of remuneration to induce referrals or recommendations of healthcare items or services, such as services provided in a SNF; (iii) federal and state physician self-referral laws (commonly referred to as the Stark Law), which generally prohibit referrals by physicians to entities for designated health services (some of which are provided in SNFs) with which the physician or an immediate family member has a financial relationship; (iv) the federal Civil Monetary Penalties Law, which prohibits, among other things, the knowing presentation of a false or fraudulent claim for certain healthcare services and (v) federal and state privacy laws, including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996, which provide for the privacy and security of personal health information.
Violations of healthcare fraud and abuse laws carry civil, criminal and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and Medicaid reimbursement and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. Additionally, there are criminal provisions that prohibit filing false claims or making false statements to receive payment or certification under Medicare and Medicaid, as well as failing to refund overpayments or improper payments. Violation of the Anti-kickback statute or Stark Law may form the basis for a federal False Claims Act violation. These laws are enforced by a variety of federal, state and local agencies and can also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or whistleblower actions, which have become more frequent in recent years.
Several of our operators have responded to subpoenas and other requests for information regarding their operations in connection with inquiries by the U.S. Department of Justice or other regulatory agencies. One of our top 10 operators is in ongoing settlement discussions with the Department of Justice.
45 |
Privacy. Our operators are subject to various federal, state and local laws and regulations designed to protect the confidentiality and security of patient health information, including the federal Health Insurance Portability and Accountability Act of 1996, as amended, the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and the corresponding regulations promulgated thereunder (collectively referred to herein as “HIPAA”). The HITECH Act expanded the scope of these provisions by mandating individual notification in instances of breaches of protected health information, providing enhanced penalties for HIPAA violations, and granting enforcement authority to states’ Attorneys General in addition to the HHS Office for Civil Rights. HHS continued its auditing program in 2016 to assess compliance efforts by covered entities and business associates. Through a second phase of audits, which commenced for covered entities in July 2016, HHS focused on a review of policies and procedures adopted and employed by covered entities and their business associates to meet selected standards and implementation specifications of the HIPAA Privacy, Security, and Breach Notification Rules. Covered entities and business associates selected for a desk audit in 2016 have the potential to be selected for an on-site audit in 2017.audit. The HHS Office for Civil Rights reported that as of September 2017, desk audits of covered entities were completed and desk audits of business associates were ongoing.
Various states have similar laws and regulations that govern the maintenance and safeguarding of patient records, charts and other information generated in connection with the provision of professional medical services. These laws and regulations require our operators to expend the requisite resources to secure protected health information, including the funding of costs associated with technology upgrades. Operators found in violation of HIPAA or any other privacy law or regulation may face large penalties. In addition, compliance with an operator’s notification requirements in the event of a breach of unsecured protected health information could cause reputational harm to an operator’s business.
Licensing and Certification. Our operators and facilities are subject to various federal, state and local licensing and certification laws and regulations, including laws and regulations under Medicare and Medicaid requiring operators of SNFs and ALFs to comply with extensive standards governing operations. Governmental agencies administering these laws and regulations regularly inspect our operators’ facilities and investigate complaints. Our operators and their managers receive notices of observed violations and deficiencies from time to time, and sanctions have been imposed from time to time on facilities operated by them. In addition, many states require certain healthcare providers to obtain a certificate of need, which requires prior approval for the construction, expansion or closure of certain healthcare facilities, which has the potential to impact some of our operators’ abilities to expand or change their businesses.
Americans with Disabilities Act (the “ADA”). Our properties must comply with the ADA and any similar state or local laws to the extent that such properties are public accommodations as defined in those statutes. The ADA may require removal of barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. Should barriers to access by persons with disabilities be discovered at any of our properties, we may be directly or indirectly responsible for additional costs that may be required to make facilities ADA-compliant. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. Our commitment to make readily achievable accommodations pursuant to the ADA is ongoing, and we continue to assess our properties and make modifications as appropriate in this respect.
Other Laws and Regulations. Additional federal, state and local laws and regulations affect how our operators conduct their operations, including laws and regulations protecting consumers against deceptive practices and otherwise generally affecting our operators’ management of their property and equipment and the conduct of their operations (including laws and regulations involving fire, health and safety; quality of services, including care and food service; residents’ rights, including abuse and neglect laws; and the health standards set by the federal Occupational Safety and Health Administration).
General and Professional Liability.Although arbitration agreements have been effective in limiting general and professional liabilities for SNF and long term care providers, there have been numerous lawsuits challenging the validity of arbitration agreements in long term care settings. As set forth in the recent conditions of participation final rule issued on October 4, 2016, CMS prohibited pre-dispute arbitration agreements between SNFs and residents effective November 28, 2016, thereby increasing potential liabilities for SNFs and long-term care providers. Subsequently, the authority of CMS to restrict the rights of these parties to arbitrate was challenged by litigation in various jurisdictions, and enforcement by CMS was suspended on November 7, 2016 following the issuance of a preliminary injunction by the U.S. District Court for the Northern District of Mississippi. In a reversal from its previous position, CMS issued a proposed rule on June 5, 2017, that lifts CMS’ ban on pre-dispute arbitration agreements in the long-term care setting. The proposed rule continues to face challenges by certain industry groups.
46 |
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States, and a summary of our significant accounting policies is included in “Note 2 – Summary of Significant Accounting Policies” to our Annual Report on Form 10-K for the year ended December 31, 2016, as amended.2017. Our preparation of the financial statements requires us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and accompanying footnotes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the consolidated financial statements. We have described our most critical accounting policies in our 20162017 Annual Report on Form 10-K for the year ended December 31, 2016, as amended,2017, in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations”.
There have been no changes to our critical accounting policies or estimates since December 31, 2016.2017. See Note 2 – Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the year ended December 31, 2016, as amended.2017.
Accounting PronouncementPronouncements Adopted in 20172018
In March 2016,2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09,Compensation-Stock Compensation (Topic 718) (“ASU 2016-09”). ASU 2016-09 amends the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016. We adopted this accounting standard on January 1, 2017, at which time the Company began prospectively accounting for excess tax benefits or tax deficiencies as an adjustment to income tax expense in our Consolidated Statements of Income as opposed to the prior requirement that these excess tax benefits be recognized in additional paid-in capital and tax deficiencies be recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement. The Company will continue to account for forfeitures as they occur and present employee taxes paid as a financing activity on our Consolidated Statements of Cash Flows. The adoption of this accounting standard did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements - Pending Adoption
In 2014, the FASB issued 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. In addition, the FASB has begun to issueissued targeted updates to clarify specific implementation issues of ASU 2014-09. These updates includeincluded ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Identifying Performance Obligations and Licensing, and ASU 2016-12, Narrow-Scope Improvements and Practical Expedients.The Company is currently evaluating the provisionsAs a result of adopting ASU 2014-09 and its related updates and will be closely monitoring developments and additional guidanceon January 1, 2018, the Company recognized $10.0 million of deferred gain resulting from the sale of facilities to determine the potential impact of the new standard.a third-party in December 2017 through opening equity on January 1, 2018. The Company intends to adoptadopted ASU 2014-09 and its subsequent updates in accordance with the modified retrospective approach. We do not expect theThe adoption of ASU 2014-09 and its related updates todid not have a significantmaterial impact on our consolidated financial statements, as a substantial portion of our revenue consists of rental income from leasing arrangements and interest income from loan arrangements, both of which are specifically excluded from ASU 2014-09.2014-09 and its updates.
In August 2017, the FASB issued ASU 2017-12,Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities(“ASU 2017-12”). The purpose of this updated guidance is to better align the financial reporting for hedging activities with the economic objectives of those activities. The transition guidance provides companies with the option of early adopting the new standard using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. This adoption method will require the Company to recognize the cumulative effect of initially applying ASU 2017-12 as an adjustment to accumulated other comprehensive income (loss) with a corresponding adjustment to the opening balance of equity as of the beginning of the fiscal year that an entity adopts the update. On January 1, 2018, the Company adopted ASU 2017-12 using the modified retrospective transition method. As a result of adopting the standard, the Company is making certain adjustments to its existing hedge designation documentation for active hedging relationships in order to take advantage of specific provisions in the new guidance and to fully align its documentation with ASU 2017-12. The adoption of ASU 2017-12 did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements - Pending Adoption
In February 2016, the FASB issued ASU 2016-02,Leases(“ASU 2016-02”), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective for the Company beginning January 1, 2019. Early adoption of ASU 2016-02 as of its issuance is permitted. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. As a result of the pending adoption ASU 2016-02 and in connection with the pending adoption of ASU 2014-09,2016-02, the Company may be required to record real estate tax revenues and an equal anand offsetting real estate tax expense, as a result of our operators paying real estate taxes on our behalf. In July 2018, the FASB issued ASU 2018-11,Leases(“ASU 2018-11”): Targeted Improvementsto simplify the implementation of ASU 2016-02. This targeted improvement permits the adoption of ASU 2016-02 at the adoption date instead of the earliest comparative period presented in the financial statements and a practical expedient permitting lessors to not separate nonlease components from the associated lease component if certain conditions are met. Upon adoption of ASU 2016-02 and its updates, we intend to transition to the new leasing accounting standard on January 1, 2019, without modifying our prior year balance sheet and recognizing the cumulative-effect adjustment to opening equity. We are continuingcontinue to evaluate the other impacts of adopting ASU 2016-02 and its updates on our consolidated financial statements.
47 |
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses(Topic (Topic 326) (“ASU 2016-13”), which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. We are currently evaluating the impact of adopting ASU 2016-13 on our consolidated financial statements.
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 unaudited consolidated financial statements and accompanying notes.
Three Months Ended June 30, 20172018 and 20162017
Operating Revenues
Our operating revenues for the three months ended June 30, 2017,2018 totaled $235.8$219.9 million, an increasea decrease of $7.0$15.9 million over the same period in 2016.2017. The $7.0$15.9 million increasedecrease was primarily the result of:of (i) a $1.5$15.0 million increasedecrease in the direct financing lease income related to New Ark Investment Inc. (“New Ark” which does business as “Orianna Health Systems” and is herein referred to as “Orianna”), (ii) $1.1 million decrease in rental income resulting from facility sales and placing three leases on cash basis, offset by additional revenue from facility acquisitions, facility transitions and lease amendments and (iii) a $2.2 million decrease in miscellaneous income primarily related to the U.K. Gold Care acquisitionreversal of operator earn-outs in May 2017, (ii) $6.0 millionthe second quarter of additional rental income associated with other acquisitions and lease amendments made throughout 2016 and 2017 and (iii)fewer late fees in 2018. These decreases were offset by a $2.3$1.8 million increase in other investment income primarily related to new notes and additional funding to existing operators made throughout 20162017 and 2017. These increases were offset by a $5.1 million decrease in mortgage interest income primarily due to the repayment of certain mortgages in the second quarter of 2016.2018.
Operating Expenses
Operating expenses for the three months ended June 30, 2017,2018, totaled $94.7$84.3 million, an increasea decrease of approximately $8.1$10.4 million over the same period in 2016.2017. The increase$10.4 million decrease was primarily due to: (i) $4.1 million of impairments on nine facilities in the second quarter of 2018, offset by $5.2 million of insurance proceeds received related to a $4.8facility destroyed in November 2017, as compared to $10.1 million increaseof impairments on six facilities in the same period of 2017, (ii) a $2.1 million decrease in provisions for uncollectible accounts and (iii) a $0.7 million decrease in depreciation and amortization expense, relatedprimarily resulting from facilities reclassified to acquisitionsheld for sale and the placement of assets in service during 2016 and 2017, (ii)facility sales. The decreases were partially offset by a $3.8$3.7 million increase in provision for uncollectible accounts, (iii) a $3.2 million increase in provision for impairment losses, offset by a $3.5 million decrease in acquisition costs primarily due to fewer acquisitionsgeneral and the capitalization of acquisition costs in 2017.administrative expenses.
Other Income (Expense)
For the three months ended June 30, 2017,2018, total other expenses were $72.3$49.3 million, an increasea decrease of approximately $30.4$23.0 million over the same period in 2016.2017. The increasedecrease was primarily related to: (i)to a $22.0 million increasedecrease in interest refinancing- refinance costs related to early extinguishment costs incurred to redeemthe redemption of the $400 million 5.875% Senior Notes due 2024senior notes and the restructuring of the credit facility in the second quarter of 2017.
48 |
Six Months Ended June 30, 2018 and 2017
Operating Revenues
Our operating revenues for the six months ended June 30, 2018 totaled $440.1 million, a decrease of $27.5 million over the same period in 2017. The $27.5 million decrease was primarily the result of (i) a $30.0 million decrease in the direct financing lease income related to Orianna and (ii) a $2.3 million decrease in miscellaneous income primarily related to the reversal of operator earn-outs in the second quarter of 2017 and fewer late fees in 2018. The decrease was offset by: (i) a $3.4 million increase in other investment income primarily related to new notes and additional funding to existing operators made throughout 2017 and 2018, (ii) a $1.2 million increase in mortgage interest income primarily related to additional funding on mortgages to an existing operator, partially offset by mortgage loan payoffs and (iii) a $0.3 million increase in rental income related to acquisitions, transitions, and lease amendments made throughout 2017 and 2018, offset by the loss of rental income from facility sales and operators placed on a cash basis due to future collectability concerns.
Operating Expenses
Operating expenses for the six months ended June 30, 2018, totaled $183.9 million, a decrease of approximately $3.4 million over the same period in 2017. The $3.4 million decrease was primarily due to a $14.0 million decrease in impairment on real estate properties, offset by (i) a $7.6 million increase in general and administrative expenses resulting from higher professional service fees resulting from operator restructurings and a $2.0 million buyout of an in-the-money purchase option to an unrelated third-party and (ii) a $3.3 million increase in provisions for uncollectible accounts related to the reserve and/or write-off of deferredcontractual receivables and straight-line receivables.
Other Income (Expense)
For the six months ended June 30, 2018, total other expenses were $98.9 million, a decrease of approximately $10.5 million over the same period in 2017. The decrease was primarily related to a $22.0 million decrease in interest - refinance costs related to the 2014redemption of the $400 million 5.875% senior notes and the restructuring of the credit facility in the second quarter of 2017, offset by (i) a $10.4 million favorable contractual settlement with an unrelated third-party related to a contingent liability obligation that originated in 2012 and was resolved in the first quarter of 2017 and (ii) an $8.4a $3.0 million increase in interest expense related to higher debt balances outstanding to fund new investments and higher blended borrowing costs.
Six Months Ended June 30, 2017 and 2016
Operating Revenues
Our operating revenues for the six months ended June 30, 2017, totaled $467.5 million, an increase of $25.8 million over the same period in 2016. The $25.8 million increase was primarily the result of: (i) a $1.5 million increase in rental income related to the U.K. Gold Care acquisition in May 2017, (ii) $21.9 million of additional rental income associated with other acquisitions and lease amendments made throughout 2016 and 2017, and (iii) a $5.8 million increase in other investment income primarily related to new notes and additional funding to existing operators made throughout 2016 and 2017. These increases were offset by a $5.7 million decrease in mortgage interest income primarily due to the repayment of certain mortgages in the second quarter of 2016.
Operating Expenses
Operating expenses for the six months ended June 30, 2017, totaled $187.2 million, a decrease of approximately $15.7 million over the same period in 2016. The decrease was primarily due to: (i) a $23.7 million decrease in provision for impairment losses due to fewer facilities impaired during the first six months of 2017 as compared to the same period in 2016, (ii) a $7.3 million decrease in acquisition costs primarily due fewer acquisitions and the capitalization of acquisition costs in 2017, offset by a $12.4 million increase in depreciation and amortization expense related to acquisitions and the placement of assets in service during 2016 and 2017.
Other Income (Expense)
For the six months ended June 30, 2017, total other expenses were $109.3 million, an increase of approximately $27.8 million over the same period in 2016. The increase was primarily related to: (i) a $21.7 million increase in interest refinancing costs related to early extinguishment costs incurred to redeem the $400 million 5.875% Senior Notes due 2024 and the write-off of deferred costs related to the 2014 credit facility and (ii) a $16.3 million increase in interest expense related to higher debt balances outstanding to fund new investments and higher blended borrowing costs, offset by a one-time $10.4 million contractual settlement with an unrelated third party related to a contingent liability obligation that originated in 2012 and was resolved in the first quarter of 2017.
National Association of Real Estate Investment Trusts Funds From Operations
Our funds from operations (“NAREIT FFO”) for the three months ended June 30, 20172018 was $150.9$155.5 million compared to $172.3$150.9 million for the same period in 2016.2017. Our NAREIT FFO for the six months ended June 30, 20172018 was $331.9$303.5 million compared to $325.9$331.9 million for the same period in 2016.2017.
We calculate and report NAREIT FFO in accordance with the definition of Funds from Operations and interpretive guidelines issued by the National Association of Real Estate Investment Trusts (“NAREIT”), and, consequently, NAREIT FFO is defined as net income (computed in accordance with GAAP), adjusted for the effects of asset dispositions and certain non-cash items, primarily depreciation and amortization and impairment on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will beare calculated to reflect funds from operations on the same basis. We believe that NAREIT FFO is an important supplemental measure of our operating performance. Because the historical cost accounting convention used for real estate assets requires depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time, while real estate values instead have historically risen or fallen with market conditions. NAREIT FFO was designed by the real estate industry to address this issue. NAREIT FFO herein is not necessarily comparable to NAREIT FFO of other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us.
49 |
NAREIT FFO is a non-GAAP financial measure. We use NAREIT FFO as one of several criteria to measure the operating performance of our business. We further believe that by excluding the effect of depreciation, amortization, impairment on real estate assets and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, NAREIT FFO can facilitate comparisons of operating performance between periods and between other REITs. We offer this measure to assist the users of our financial statements in evaluating our financial performance under GAAP, and NAREIT FFO should not be considered a measure of liquidity, an alternative to net income or an indicator of any other performance measure determined in accordance with GAAP. Investors and potential investors in our securities should not rely on this measure as a substitute for any GAAP measure, including net income.
The following table presents our NAREIT FFO results for the three and six months ended June 30, 20172018 and 2016:2017:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Net income | $ | 68,157 | $ | 113,154 | $ | 177,269 | $ | 171,350 | $ | 81,986 | $ | 68,157 | $ | 169,919 | $ | 177,269 | ||||||||||||||||
Add back loss (deduct gain) from real estate dispositions | 622 | (13,221 | ) | (6,798 | ) | (14,792 | ) | 2,891 | 622 | (14,609 | ) | (6,798 | ) | |||||||||||||||||||
Add back loss from real estate dispositions - unconsolidated joint venture | 640 | - | 640 | - | ||||||||||||||||||||||||||||
68,779 | 99,933 | 170,471 | 156,558 | 85,517 | 68,779 | 155,950 | 170,471 | |||||||||||||||||||||||||
Elimination of non-cash items included in net income: | ||||||||||||||||||||||||||||||||
Depreciation and amortization | 70,350 | 65,505 | 140,343 | 127,938 | 69,609 | 70,350 | 139,970 | 140,343 | ||||||||||||||||||||||||
Depreciation – unconsolidated joint venture | 1,658 | — | 3,316 | — | 1,466 | 1,658 | 3,123 | 3,316 | ||||||||||||||||||||||||
Add back impairments on real estate properties | 10,135 | 6,893 | 17,773 | 41,451 | ||||||||||||||||||||||||||||
(Deduct) add back (recovery) impairments on real estate properties | (1,097 | ) | 10,135 | 3,817 | 17,773 | |||||||||||||||||||||||||||
Add back impairments on real estate properties - unconsolidated joint venture | - | - | 608 | - | ||||||||||||||||||||||||||||
NAREIT FFO(a) | $ | 150,922 | $ | 172,331 | $ | 331,903 | $ | 325,947 | $ | 155,495 | $ | 150,922 | $ | 303,468 | $ | 331,903 |
(a) Includes amounts allocated to Omega stockholders and Omega OP Unit holders.
(a) | Includes amounts allocated to Omega stockholders and Omega OP Unit holders. |
Portfolio and Recent Developments
The following table summarizes the significant acquisitions that occurred during the first six months of 2017:2018:
Number of | Total | Building & Site | Furniture | Initial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Number of Facilities | Country/ | Total Investment | Land | Building & Site Improvements | Furniture & Fixtures | Initial Annual Cash | Facilities | Country/ | Investment | Land | Improvements | & Fixtures | Annual | |||||||||||||||||||||||||||||||||||||||||||||||
Period | SNF | ALF | State | (in millions) | Yield(2) (%) | SNF | ALF | State | (in millions) | Cash Yield(3) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Q1 | - | 1 | VA | $ | 7.6 | $ | 0.5 | $ | 6.8 | $ | 0.3 | 7.50 | - | 1 | UK | $ | 4.0 | (1) | $ | 0.9 | $ | 2.9 | $ | 0.2 | 8.5 | % | ||||||||||||||||||||||||||||||||||
Q2 | 1 | - | NC | 8.6 | 0.7 | 7.3 | 0.6 | 9.50 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Q1 | - | 1 | UK | 5.7 | (2) | 1.4 | 4.1 | 0.2 | 8.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Q1 | 1 | - | PA | 7.4 | 1.6 | 5.4 | 0.4 | 9.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Q1 | 1 | - | VA | 13.2 | 2.4 | 10.5 | 0.3 | 9.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Q2 | - | 18 | UK | 124.2 | (1) | 34.1 | 85.1 | 5.0 | 8.50 | 5 | - | TX | 22.8 | 0.5 | 20.4 | 1.9 | 9.5 | % | ||||||||||||||||||||||||||||||||||||||||||
Total | 1 | 19 | $ | 140.4 | $ | 35.3 | $ | 99.2 | $ | 5.9 | 7 | 2 | $ | 53.1 | $ | 6.8 | $ | 43.3 | $ | 3.0 |
(1) | Omega recorded a non-cash deferred tax liability |
(2) | Omega recorded a non-cash deferred tax liability of approximately $0.2 million in connection with the acquisition. |
(3) | The cash yield is based on the purchase price. |
50 |
During
For the second quarter of 2017,six months ended June 30, 2018, we acquired two parcels of land which are not(not reflected in the table aboveabove) for approximately $5.5$3.5 million with the intent of building new facilities for anour existing operator.
Asset Sales, Impairments and Other
During the first quarter of 2017, we sold 15 facilities for approximately $45.8 million in net proceeds recognizing a gain on sale of approximately $7.4 million. Eleven of the sold facilities were previously classified as held for sale. In addition, we recorded a provision for impairment of approximately $7.6 million on three facilities, one of which was reclassified to held for sale as of March 31, 2017.
During the second quarter of 2017, we sold three facilities for approximately $18.3 million in net cash proceeds recognizing a loss on sale of approximately $0.6 million. Two of the sold facilities were previously classified as assets held for sale. In addition, we recorded a provision for impairment of approximately $10.1 million on six facilities. We reduced the net book value of the impaired facilities to their estimated fair values. To estimate the fair value of the facilities, we utilized a market approach and Level 3 inputs (which generally consist of non-binding offers from unrelated third parties). Our recorded impairments were primarily the result of a decision to exit certain non-strategic facilities and/or operators.
In June 2018, we amended our original $415.0 million mortgage with Ciena Healthcare (“Ciena”) with the addition of a $44.7 million mortgage note related to five SNFs located in Michigan. The mortgage note matures on June 30, 2029 and bears an initial annual interest rate of 9.5% which increases each year by 0.225%. As of June 30, 2018, the outstanding principal balance of this mortgage note is approximately $44.2 million. Additionally, the Company committed to fund an additional $9.6 million to Ciena if certain performance metrics are achieved by the portfolio.
During the second quarter of 2017,On February 26, 2016, we sold five facilities previously classified as investments in direct financing leasesacquired and received net cash proceedsfunded a $50.0 million mezzanine loan at a discount of approximately $27.3$0.75 million. In May 2018, the Company amended the mezzanine loan with the borrower which is secured by an equity interest in subsidiaries of the borrower. As part of the refinancing, the Company increased the mezzanine loan by $10.0 million, extended the maturity date to May 31, 2023 and recorded an additional allowance for lossfixed the interest rate at 12% per annum. The mezzanine loan requires semi-annual principal payments of $2.5 million commencing December 31, 2018 (payments due each December 31 and June 30). As of June 30, 2018, our total other investments outstanding with this borrower was approximately $0.9 million in addition to $2.4 million allowance for loss recorded in the first quarter of 2017.$59.3 million.
As of June 30, 2017, seven2018, we have three facilities, totaling $18.9$3.8 million are classified as assets held for sale. We expect to sell these facilities over the next few quarters.twelve months.
AtAsset Sales, Impairments, Accounts Receivable and Other
Asset Sales
During the first quarter of 2018, we sold 14 facilities (five of which were previously held for sale at December 31, 2017) subject to operating leases for approximately $74.7 million in net cash proceeds recognizing a gain on sale of approximately $17.5 million.
During the second quarter of 2018, we sold 45 facilities and one ancillary building (33 of which were previously held for sale at March 31, 2018) subject to operating leases for approximately $147.2 million in net cash proceeds recognizing a loss on sale of approximately $2.9 million.
Of the 45 facilities sold during the second quarter of 2018, we sold 12 SNFs on June 1, 2018 (12 of which were previously held for sale at March 31, 2018) secured by HUD mortgages to subsidiaries of an existing operator. The Company sold the 12 SNF facilities with carrying values of approximately $62 million for approximately $78 million which consisted of $25 million of cash consideration and their assumption of approximately $53 million of our HUD mortgages. Simultaneously, subsidiaries of the operator assumed our HUD restricted cash accounts, deposits and escrows. The Company recorded a gain on sale of approximately $11 million after approximately $5 million of closing and other transaction related costs. In connection with this sale, we provided a principal of an existing operator an unsecured loan of approximately $39.7 million bearing interest at 6% per annum and maturing on May 31, 2021. Commencing October 1, 2018 and the first day of each subsequent quarter, the unsecured loan requires principal payments of $0.6 million and additional quarterly principal payments of $0.3 million in the future. The borrower has one option to extend the loan to May 31, 2024 subject to an extension fee. A $7.0 million loan provided to the same principal in 2017 was repaid with proceeds from the $39.7 million loan.
In June 2018, we sold one SNF with a carrying value of approximately $15.4 million subject to a direct financing lease to an unrelated third-party for approximately $15.4 million.
Impairments
During the first quarter of 2018, we recorded impairments on real estate properties of approximately $4.9 million on 17 facilities (16 of which were subsequently reclassified to assets held for sale).
51 |
During the second quarter of 2018, we recorded impairments of approximately $4.1 million on nine facilities (three of which were subsequently reclassified to assets held for sale). Our impairments were offset by $5.2 million of insurance proceeds received related to a facility destroyed in November 2017.
Our recorded impairments were primarily the result of decisions to exit certain non-strategic facilities and/or operators. We reduced the net book value of the impaired facilities to their estimated fair values or, with respect to the facilities reclassified to assets held for sale, to their estimated fair values less costs to sell. To estimate the fair value of the facilities, we utilized a market approach which considered binding sale agreements (a Level 1 input) and/or Level 3 inputs (which generally consist of non-binding offers from unrelated third parties).
Accounts Receivable
As of June 30, 2017,2018, we have approximately $32.7 million of contractual receivables outstanding – net of allowances. Of the $32.7 million of contractual receivables outstanding – net of allowances, approximately $20.8 million relates to Orianna, Agemo Holdings LLC (“Agemo” an entity formed in May 2018 to silo the leases and loans formerly held by Signature Healthcare), and Daybreak Venture LLC (“Daybreak”). Orianna and Daybreak are on a cash basis of accounting for purposes of revenue recognition, see additional discussion below. In addition to the contractual receivables, we have approximately $36.1 million of straight-line rent receivables and/or lease inducements associated with these operators as of June 30, 2018. For the three and six months ended June 30, 2018, we recorded approximately $22.9 million and $42.2 million of rental income, respectively, $2.0 million and $3.2 million of other investment income and no income from direct financing leases for these operators.
Other
Orianna has not satisfied the contractual payments due under the terms of the remaining two direct financing leases or the separate operating lease covering four facilities with the Company and the collectability of our top 10 operators were approximately 90 days pastfuture amounts due onis uncertain.
In March 2018, Orianna commenced voluntary Chapter 11 proceedings in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the “Bankruptcy Court”). As described in Orianna’s filings with the Bankruptcy Court, we entered into a Restructuring Support Agreement (“RSA”) that was expected to form the basis for Orianna’s restructuring. The RSA provided for the recommencement of partial rent payments at $1.0 million per month and established a specific timeline for the implementation of Orianna’s planned restructuring. The RSA provided for the transition of 23 facilities to new operators and the Company. Onepotential sale of these operators has been facing liquidity pressures following a management transition, but has been showing signsthe remaining 19 facilities.
On July 25, 2018, Omega terminated the restructuring support agreement with its tenant 4 West Holdings and the sponsor of operational improvement and is currently making partial monthly rent payments. The current management of this operator is pursuing operational improvements, such as replacing executive management and senior level management, renegotiating vendor contracts and establishing a centralized referral network.Orianna’s restructuring plan. The Company is evaluating and/or pursuing alternative courses of action to protect its assets and shareholder value, and working with thisoperators to protect the interests of residents of the facilities. While the form of resolution with 4 West Holdings and the sponsor of Orianna’s restructuring plan is evolving, we remain confident that the final resolution will ultimately result in our previously stated range of $32 million to $38 million of annual rent or rent equivalents from the assets that previously constituted our Orianna portfolio. On July 1, 2018, we transitioned the legacy Orianna portfolio in Mississippi (13 facilities) to an existing Omega operator with annual contractual rent of $12 million and on August 1, 2018, a legacy Orianna facility in Indiana was transitioned to concentrate its geographic footprintan existing operator with annual contractual rent of $0.5 million.
To provide liquidity to Orianna during their Chapter 11 proceedings, we entered into a senior secured superpriority debtor-in-possession (“DIP”) credit agreement with Orianna for a revolving credit and term loan DIP facility of up to $30 million, which DIP facility was approved by selling certain facilities,the Bankruptcy Court on an interim basis on March 9, 2018 and on a final basis on May 14, 2018. The DIP financing consists of a $14.2 million term loan and a $15.8 million revolving credit facility which five were sold priorare secured by a security interest in and liens on substantially all of Orianna’s existing and future real and personal property. The $14.2 million term loan bears interest at 1-month LIBOR plus 5.5% per annum and matures on September 30, 2018. Orianna has borrowed the full amount of the term loan to repay their previous secured working capital lender. As of June 30, 2017.2018, approximately $14.2 million is outstanding on this term loan. The Company expects$15.8 million revolving credit facility bears interest at 1-month LIBOR plus 9.0% per annum and matures on September 30, 2018. The borrowings under the revolving credit facility are to sell twobe used for general business expenses and other uses permitted under the loan documents. As of June 30, 2018, approximately $10.5 million is outstanding on this revolving credit facility.
52 |
In May 2017, we provided Orianna an $18.8 million maximum borrowing secured revolving working capital loan that bears interest at 9% per annum (with one-half (1/2) of all accrued interest to be paid-in-kind and added to the loan balance) and matures on April 30, 2022. This revolving working capital loan has a default rate of 5% per annum. As of June 30, 2018, approximately $15.2 million is outstanding on this revolving working capital loan. Pursuant to the Bankruptcy Court’s order approving the DIP financing, Orianna is obligated to pay one-half (1/2) of all accrued post-bankruptcy interest payable on this revolving working capital loan at the default rate. As of June 30, 2018, our total other investments outstanding with Orianna approximate $40.0 million.
In 2017, we recorded an allowance for loss on direct financing leases of $172.2 million with Orianna covering 38 facilities in the Southeast region of the U.S. The amount of the allowance was determined based on the fair value of the facilities subject to the direct financing lease. To estimate the fair value of the underlying collateral, we utilized an income approach and Level 3 inputs. Our estimate of fair value assumed annual rents ranging between $32.0 million and $38.0 million, rental yields between 9% and 10%, current and projected operating performance of the facilities, coverage ratios and bed values. Such assumptions are subject to change based on changes in market conditions and the ultimate resolution of this matter. Such changes could be significantly different than the currently estimated fair value and such differences could have a material impact on our financial statements.
The 38 facilities remaining under our direct financing leases with Orianna as of June 30, 2018 are located in seven states, predominantly in the southeastern U.S. (37 facilities) and Indiana (1 facility). Our recorded investment in these direct financing leases, net of the $172.2 million allowance, amounted to $337.7 million as of June 30, 2018. We have not recognized any direct financing lease income from Orianna for the period from July 1, 2017 through June 30, 2018. In addition to our direct financing leases with Orianna, we own four facilities and transitionlease them to Orianna under a master lease which expires in 2026. The four facility lease is being accounted for as an operating lease. We have not recognized any income on this operating lease for the period from July 1, 2017 through June 30, 2018, as Orianna did not pay the contractual amounts due and collectability is uncertain.
On July 23, 2018, Omega notified Orianna that it was in default under the DIP facility and, as a result of such default, Omega (a) declared the amounts owing under the DIP facility to be immediately due and payable, (b) terminated the DIP facility and any further commitment of Omega to extend credit to Orianna under the DIP facility, and (c) restricted Orianna’s use of cash collateral solely to payment of those amounts contained in a budget approved by Omega. Omega also informed Orianna that while Omega did not (as of such date) intend to immediately collect amounts owing under the DIP facility, Omega may at any time in the future exercise further rights and remedies under the DIP facility.
On May 7, 2018, Omega and Signature Healthcare entered into a consensual, out-of-court restructuring agreement. The restructuring involves multiple third-party constituents, including other third-party landlords, a new working capital lender, medical malpractice claimants, and other third-party interests. As part of the restructuring, Signature Healthcare was reorganized to separate each of its existing Texasprimary portfolios with its major landlords into three distinct lease silos and separate virtually all other legal obligations. As part of this restructuring, Signature Healthcare formed Agemo Holdings LLC (“Agemo”) to be the holding company of the lessees and loans of the Omega portfolio, and for which Omega agreed to:
· | defer up to $6.3 million of rent per annum for 3 years commencing May 1, 2018; |
· | provide capital expenditure funds to be used for the general maintenance and capital improvements of our 59 facilities in the amount of approximately $4.5 million per year for 3 years; |
· | extend a 7-year working capital term loan at 7% for an amount up to $25 million with a maturity date of April 30, 2025 ($10.0 million is outstanding as of June 30, 2018); |
· | extend the term of the master lease by two years to December 31, 2030 and; |
· | extend the maturity date of the existing term loan by two years to December 31, 2024. |
As part of the restructuring, Signature Healthcare entered into new working capital credit facilities with its new working capital lender for each of its separate silos, including Agemo. In addition, as part of our restructure, certain third-party guarantors of the Agemo master lease were required to another operator duringcontribute approximately $7.8 million in funds to the enterprise to be used to reduce the outstanding contractual receivables owed to Omega from Agemo. On May 8, 2018, the Company received $5.0 million in cash from the guarantors and a one-year term note from the principals of Agemo for approximately $2.8 million.
53 |
During the third quarter of 2017. The Company is optimistic that the combination of these efforts will result in improving margins and performance by this operator. The Company is currently recording rental revenue from this operator on an accrual basis. The Company continues to monitor the operator’s operating plan and in the event its performance deteriorates, the Company will reassess the carrying value of the portfolio and consider recording future rental revenue2017, we placed Daybreak on a cash basis.basis for revenue recognition as a result of nonpayment. During the fourth quarter of 2017, we executed a Settlement and Forbearance Agreement with Daybreak which permitted Daybreak to defer payments up to 23% of their contractual rent for the remainder of 2017, subject to certain conditions. During 2018, rent returned to the full contractual amount and we expect that past due rent will begin to be repaid in the latter part of 2018.
The other operator with approximately 90 days rent past due has been adversely affected by an adverse general and professional liability environment in Kentucky and is in ongoing discussions to settle matters arising from a U.S. Department of Justice investigation. The Company has negotiated a proposed restructuring plan with this operator, subject to the operator’s resolution of its obligations with other landlords and lenders and the Department of Justice investigation. Receivables from this operator are backed by a security deposit and guarantees from the principals of the operator.
The Company believes the current performance of these two operators primarily reflects specific operator-related or localized issues rather than issues generally impacting the industry. The Company continues to closely monitor the performance of these twoall of its operators, specifically, as well as industry trends and developments generally.
Liquidity and Capital Resources
At June 30, 2017,2018, we had total assets of $8.9$8.6 billion, total equity of $4.2$3.9 billion and debt of $4.4 billion, representing approximately 51.5%53.6% of total capitalization.
Financing Activities and Borrowing Arrangements
HUD Mortgage Disposition
On June 1, 2018, subsidiaries of an existing operator assumed approximately $53 million of our indebtedness guaranteed by HUD that secured 12 separate facilities located in Arkansas. In connection with our disposition of the mortgages we wrote-off approximately $0.6 million of unamortized deferred costs that are recorded in (Loss) gain on assets sold – net on our Consolidated Statement of Operations. These fixed rate mortgages had a weighted average interest rate of approximately 3.06% per annum and matured in July 2044.
Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As of June 30, 20172018 and December 31, 2016,2017, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.
New and Amended Unsecured Credit Facility – 2017
2017 Omega Credit Facilities
On May 25, 2017, Omega entered into a credit agreement (the “2017 Omega Credit Agreement”) providing us with a new $1.8 billion senior unsecured revolving and term loan credit facility, consistingOP, the guarantor of a $1.25 billion senior unsecured multicurrency revolving credit facility (the “Revolving Credit Facility”), a $425 million senior unsecured U.S. Dollar term loan facility (the “U.S. Term Loan Facility”), and a £100 million senior unsecured British Pound Sterling term loan facility (the “Sterling Term Loan Facility” and, together with the Revolving Credit Facility and the U.S. Term Loan Facility, collectively, the “2017 Omega Credit Facilities”). The 2017 Omega Credit Agreement contains an accordion feature permitting us, subject to compliance with customary conditions, to increase the maximum aggregate commitments under the 2017 Omega Credit Facilities to $2.5 billion. Among other things, proceeds from borrowings under the 2017 Omega Credit Facilities were used to refinance existing indebtedness, to finance acquisitions and to fund working capital, capital expenditures and other general corporate purposes.
The 2017 Omega Credit Facilities replace the previous $1.25 billion senior unsecured 2014 revolving credit facility, the previous $200 million Tranche A-1 senior unsecured term loan facility, and the previous $350 million Tranche A-3 senior unsecured incremental term loan facility established under our 2014 credit agreement, which has been terminated (the “2014 Omega Credit Agreement”). We had previously repaid and terminated the $200 million Tranche A-2 senior unsecured term loan facility established under the 2014 Omega Credit Agreement, with proceeds from our $550 million and $150 million unsecuredParent’s outstanding senior notes, issueddoes not directly own any substantive assets other than its interest in April 2017.
The Revolving Credit Facility bears interest at LIBOR plus an applicable percentage (with a range of 100 to 195 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. The Revolving Credit Facility matures on May 25, 2021, subject to an option by us to extend such maturity date for two, six month periods. The 2017 Omega Credit Agreement provides for the Revolving Credit Facility to be drawn in Euros, British Pounds Sterling, Canadian Dollars (collectively, “Alternative Currencies”) or U.S. Dollars, with a $900 million tranche available in U.S. Dollars and a $350 million tranche available in U.S. Dollars or Alternative Currencies. For purposes of the 2017 Omega Credit Facilities, references to LIBOR include the Canadian dealer offered rates for amounts offered in Canadian Dollars and any other Alternative Currency rate approved in accordance with the terms of the 2017 Omega Credit Agreement for amounts offered in any other non-London interbank offered rate quoted currency, as applicable. As of June 30, 2017, $155.0 million remains outstanding on the Revolving Credit Facility.
The U.S. Term Loan Facility and the Sterling Term Loan Facility bear interest at LIBOR plus an applicable percentage (with a range of 90 to 190 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. The U.S. Term Loan Facility and the Sterling Term Loan Facility each mature on May 25, 2022. As of June 30, 2017, we had $425.0 million in borrowings outstanding under the U.S. Term Loan Facility, and £100.0 million (equivalent to $130.3 million in U.S. dollars) in borrowings outstanding under the Sterling Term Loan Facility.
For the three month period ending June 30, 2017, we recorded a one-time, non-cash charge of approximately $5.5 million relating to the write-off of deferred financing costs associated with the termination of the 2014 Omega Credit Agreement.
Amended 2015 Term Loan Facility
On May 25, 2017, Omega entered into an amended and restated credit agreement (the “Amended 2015 Credit Agreement”), which amended and restated our previous $250 million senior unsecured term loan facility (the “Amended 2015 Term Loan Facility”). The Amended 2015 Term Loan Facility bears interest at LIBOR plus an applicable percentage (with a range of 140 to 235 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. As of June 30, 2017, $250 million remains outstanding on the Amended 2015 Term Loan Facility. The Amended 2015 Term Loan Facility continues to mature on December 16, 2022. The Amended 2015 Credit Agreement permits us, subject to compliance with customary conditions, to add one or more incremental tranches to the Amended 2015 Term Loan Facility in an aggregate principal amount not exceeding $150 million.
Omega’s obligations under the 2017 Omega Credit Facilities and the Amended 2015 Term Loan Facility are jointly and severally guaranteed by Omega OP, OHI Holdco, and any domestic subsidiary of Omega that provides a guaranty of any unsecured indebtedness of Omega for borrowed money evidenced by bonds, debentures, notes or other similar instruments in an amount of at least $50 million individually or in the aggregate.
2017 Omega OP Term Loan Facility
On May 25, 2017, Omega OP entered into a credit agreement (the “2017 Omega OP Credit Agreement”) providing it with a new $100 million senior unsecured term loan facility (the “2017 Omega OP Term Loan Facility”). The 2017 Omega OP Credit Agreement replaces the $100 million senior unsecured term loan facility obtained in 2015 (the “2015 Omega OP Term Loan Facility”) and the related credit agreement (the “2015 Omega OP Credit Agreement”). The 2017 Omega OP Term Loan Facility bears interest at LIBOR plus an applicable percentage (with a range of 90 to 190 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. The 2017 Omega OP Term Loan Facility matures on May 25, 2022. As of June 30, 2017, $100 million in borrowings remains outstanding on the 2017 Omega OP Term Loan Facility. Among other things, proceeds from borrowings under the 2017 Omega OP Term Loan Facility were used to refinance existing indebtedness.
Omega OP’s obligations in connection with the 2017 Omega OP Term Loan Facility are not currently guaranteed, but will be jointly and severally guaranteed by any domestic subsidiary of Omega OP that provides a guaranty of any unsecured indebtedness of Omega or Omega OP for borrowed money evidenced by bonds, debentures, notes or other similar instruments in an amount of at least $50 million individually or in the aggregate.
$550 Million 4.75% Senior Notes and $150 Million 4.5% Senior Notes
On April 4, 2017, Omega issued (i) $550 million aggregate principal amount of our 4.75% Senior Notes due 2028 (the “2028 Notes”) and (ii) an additional $150 million aggregate principal amount of our existing 4.50% Senior Notes due 2025 (the “2025 Notes”, and together with the 2028 Notes collectively, the “Notes”). The 2028 Notes mature on January 15, 2028 and the 2025 Notes mature on January 15, 2025.
The 2028 Notes were sold at an issue price of 98.978% of their face value before the underwriters’ discount and the 2025 Notes were sold at an issue price of 99.540% of their face value before the underwriters’ discount. Our net proceeds from the Notes offering, after deducting underwriting discounts and expenses, were approximately $690.7 million. The net proceeds from the Notes offering were used to (i) redeem all of our outstanding $400 million aggregate principal amount of 5.875% Senior Notes due 2024 (the “5.875% Notes”) on April 28, 2017, (ii) prepay the $200 million Tranche A-2 Term Loan Facility on April 5, 2017 that otherwise would have become due on June 27, 2017, and (iii) repay outstanding borrowings under our revolving credit facility.
$400 Million 5.875% Senior Notes Redemption
On April 28, 2017, Omega redeemedall of our outstanding 5.875% Notes. As a result of the redemption, during the second quarter of 2017, we recorded approximately $16.5 million in redemption related costs and write-offs, including $11.8 million for the call premium and $4.7 million in net write-offs associated with unamortized deferred financing costs.non-guarantor subsidiaries.
$500 Million Equity Shelf Program
For the three months ended June 30, 2017, no2018, we issued 0.9 million shares were issuedof our common stock at an average price of $30.19 per share, net of issuance costs, generating net proceeds of $27.5 million under our $500 million Equity Shelf Program. For the six months ended June 30, 2017,2018, we issued 0.20.9 million shares of our common stock at an average price of $29.17$30.16 per share, net of issuance costs, generating net proceeds of $6.6$27.5 million under our $500 million Equity Shelf Program.
Dividend Reinvestment and Common Stock Purchase Plan
For the three months ended June 30, 2017,2018, approximately 0.40.8 million shares of our common stock at an average price of $33.02$29.22 per share were issued through our Dividend Reinvestment and Common Stock Purchase ProgramPlan for gross proceeds of approximately $12.4$22.2 million. For the six months ended June 30, 2017,2018, approximately 0.60.9 million shares of our common stock at an average price of $32.11$28.55 per share were issued through our Dividend Reinvestment and Common Stock Purchase ProgramPlan for gross proceeds of approximately $19.7$27.1 million.
Dividends
In order to qualify as a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders in an amount at least equal to (A) the sum of (i) 90% of our “REIT taxable income” (computed without regard to the dividends paid deduction and our net capital gain), and (ii) 90% of the net income (after tax), if any, from foreclosure property, minus (B) the sum of certain items of non-cash income. In addition, if we dispose of any built-in gain asset during a recognition period, we will be required to distribute at least 90% of the built-in gain (after tax), if any, recognized on the disposition of such asset. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for such year and paid on or before the first regular dividend payment after such declaration. In addition, such distributions are required to be made pro rata, with no preference to any share of stock as compared with other shares of the same class, and with no preference to one class of stock as compared with another class except to the extent that such class is entitled to such a preference. To the extent that we do not distribute all of our net capital gain or do distribute at least 90%, but less than 100% of our “REIT taxable income” as adjusted, we will be subject to tax thereon at regular ordinary and capital gain corporate tax rates.
54 |
For the three and six months ended June 30, 2017,2018, we paid dividends of approximately $124.5$131.6 million and $246.7$263.0 million, to our common stockholders, respectively. The Omega OP Unit holders received the same distributions per unit as those paid to the common stockholders of Omega.
Liquidity
We believe our liquidity and various sources of available capital, including cash from operations, our existing availability under our Omega Credit Facilities and expected proceeds from mortgage payoffs are adequate to finance operations, meet recurring debt service requirements and fund future investments through the next twelve months.
We regularly review our liquidity needs, the adequacy of cash flow from operations, and other expected liquidity sources to meet these needs. We believe our principal short-term liquidity needs are to fund:
· | normal recurring expenses; |
· | debt service payments; |
· | capital improvement programs; |
· | common stock dividends; and |
· | growth through acquisitions of additional properties. |
The primary source of liquidity is our cash flows from operations. Operating cash flows have historically been determined by: (i) the number of facilities we lease or have mortgages on; (ii) rental and mortgage rates; (iii) our debt service obligations; and (iv) general and administrative expenses.expenses and (v) our operators’ ability to pay amounts owed. The timing, source and amount of cash flows provided by or used in financing activities and in investing activities are sensitive to the capital markets environment, especially to changes in interest rates. Changes in the capital markets environment may impact the availability of cost-effective capital and affect our plans for acquisition and disposition activity.
Cash, and cash equivalents and restricted cash totaled $21.0$13.5 million as of June 30, 2017,2018, a decrease of $72.7$83.3 million as compared to the balance at December 31, 2016.2017. The following is a discussion of changes in cash, and cash equivalents and restricted cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows.
Operating Activities– Operating activities generated $265.6$217.2 million of net cash flow for the six months ended June 30, 2017,2018, as compared to $286.9$264.2 million for the same period in 2016,2017, a decrease of $21.3$47.0 million which is primarily due to an increase in contractual receivableslower rental income resulting from two operators.facility sales, the loss of direct financing lease income from Oriana and cash payments for lease inducements of which we paid one operator approximately $28.4 million during the first quarter of 2018.
Investing Activities – Net cash flow from investing activities was an outflow of $135.9$6.3 million for the six months ended June 30, 2017,2018, as compared to an outflow of $709.0$135.9 million for the same period in 2016.2017. The $573.1$129.6 million change in cash flow from investing activities related primarily to (i) a $491.9$157.9 million reductionincrease in proceeds from sale of real estate investments, (ii) a $78.2 million decrease in real estate acquisitions (ii)and (iii) a $94.4$6.9 million reductionincrease in receipts from insurance proceeds. Offsetting these changes were: (i) a $71.0 million increase in other investments – net primarily related to funding fewermore other investments in 2017, (iii) a $47.5 million increase in proceeds from the sale of real estate investments (including five facilities previously classified as investment in direct financing leases) in 2017, as compared to the same period in 2016 and (iv) an increase of $9.7 million in distributions from our unconsolidated joint venture in 2017. Offsetting these outflows were: (i) a $41.4 million decrease in collection of mortgages primarily related to the repayment of certain mortgages in 2016 and2018, (ii) a $19.1$17.2 million increase in investments in construction in progress in 2017,2018, as compared to the same period in 2016.2017, (iii) an $11.8 million decrease in proceeds from the sale of direct financing lease assets and (iv) a $7.5 million increase in mortgages – net primarily related to funding additional mortgages in 2018.
Financing Activities – Net cash flow from financing activities was an outflow of $202.6$294.1 million for the six months ended June 30, 2017,2018, as compared to an inflowoutflow of $449.8$202.6 million for the same period in 2016.2017. The $652.4$91.5 million increasechange in cash outflow from financing activities was primarily related to (i) a net decrease$35.0 million increase in cash providedused by our credit facility, (ii) a net $96.7 million increase in cash from our other long-term borrowings, primarily resulting from the second quarter 2017 issuance of $275.0$550.0 million 4.75% senior notes due 2028 and $150.0 million 4.5% senior notes due 2025, offset by the repayment of the $400.0 million 5.875% senior notes due 2024 and a reduction in 2016borrowings outstanding under our credit facility provided $240.0and (iii) a $16.3 million increase in net cash as compared to a use of $35.0 million in net cash in 2017, (ii) a net decrease of $254.8 million from long-term borrowings, primarily from the redemption of the $400 million 5.875% Senior Notes due 2024 and the repayment of certain 2014 credit facility borrowingsdividends paid, offset by new borrowings under the 2017 credit facility, (iii)(i) a $28.5 million decrease in net proceeds of $73.6 million from our dividend reinvestment planfinancing related costs in 2017,2018, as compared to the same period in 2016, (iv) an increase of $29.7 million in dividends paid and (v) an increase of $24.9 million in financing related costs in 2017, as compared to the same period in 2016. Offsetting these outflows was a $6.1(ii) $20.9 million increase in cash proceeds from the issuance of common stock in 2017,2018, as compared to the same period in 2016.2017 and (iii) a $7.3 million increase in net proceeds from our dividend reinvestment plan in 2018, as compared to the same period in 2017.
55 |
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
During the quarter ended June 30, 2017,2018, there were no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016, as amended.2017.
Item 4 – Controls and Procedures
Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
In connection with the preparation of this Form 10-Q, management evaluated the effectiveness of the design and operation of the disclosure controls and procedures of Omega OHI Holdco, and Omega OP (for purposes of this Item 4, the “Companies”) as of June 30, 2017.2018. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures of the Companies were effective at a reasonable assurance level as of June 30, 2017.2018.
Internal Control Over Financial Reporting
There were no changes in the Companies’ internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report identified in connection with the evaluation of our disclosure controls and procedures described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
See Note 1516 – Litigation toCommitments and Contingencies in the Consolidated Financial Statements in- Part I, Item 1 hereto, which is hereby incorporated by reference in response to this item.
There have been no material changes to our risk factors as previously disclosed in Item 1A contained in Part I of Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and filed with the Securities and Exchange Commission (“SEC”) on August 9, 2017.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
During the quarterly period ended June 30, 2017,2018, Omega issued an aggregate of 42,5391,350 shares of Omega common stock in exchange for an equivalent number of Omega OP Units tendered to Omega OP for redemption in accordance with the provisions of the Partnership Agreement. The Company issued these shares of Omega common stock in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, based upon factual representations received from the limited partners who received the Omega common stock.
Exhibit No. | ||
10.2 | Omega Healthcare Investors, Inc. | |
10.3 | Fourth Amendment to Steven Insoft Employment Agreement (Incorporated by reference to | |
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive | ||
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial | |
31.3 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of OHI Healthcare Properties | |
31.4 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of OHI Healthcare Properties | |
Section 1350 Certification of the Chief Executive | ||
32.2 | Section 1350 Certification of the Chief Financial |
32.3 | Section 1350 Certification of the Chief Executive Officer of OHI Healthcare Properties | |
32.4 | Section 1350 Certification of the Chief Financial Officer of OHI Healthcare Properties | |
101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Extension Schema Document. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
* Exhibits that are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OMEGA HEALTHCARE INVESTORS, INC.
Registrant
Date: | August | By: | /S/ C. TAYLOR PICKETT | ||
C. Taylor Pickett | |||||
Chief Executive Officer |
Date: | |||||
August | By: | /S/ ROBERT O. STEPHENSON | |||
Robert O. Stephenson | |||||
OHI HEALTHCARE PROPERTIES HOLDCO, INC.
Co-Registrant
Chief Financial Officer |
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
Co-Registrant
By: OHIOmega Healthcare Properties Holdco,Investors, Inc., its Primary General Partner
Date: | August | By: | /S/ C. TAYLOR PICKETT | ||
C. Taylor Pickett | |||||
Chief Executive Officer |
Date: | |||||
August | By: | /S/ ROBERT O. STEPHENSON | |||
Robert O. Stephenson | |||||
Chief Financial Officer |