Item 1 - Financial Statements
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands,
except per share amounts
)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Real estate properties
|
|
|
|
|
|
|
|
|
Real estate investments (see Note 2)
|
|
$
|
7,581,665
|
|
|
$
|
7,566,358
|
|
Less accumulated depreciation
|
|
|
(1,306,084
|
)
|
|
|
(1,240,336
|
)
|
Real estate investments – net
|
|
|
6,275,581
|
|
|
|
6,326,022
|
|
Investments in direct financing leases – net
|
|
|
604,777
|
|
|
|
601,938
|
|
Mortgage notes receivable – net
|
|
|
644,696
|
|
|
|
639,343
|
|
|
|
|
7,525,054
|
|
|
|
7,567,303
|
|
Other investments – net
|
|
|
255,899
|
|
|
|
256,846
|
|
Investment in unconsolidated joint venture
|
|
|
40,152
|
|
|
|
48,776
|
|
Assets held for sale – net
|
|
|
23,245
|
|
|
|
52,868
|
|
Total investments
|
|
|
7,844,350
|
|
|
|
7,925,793
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
40,349
|
|
|
|
93,687
|
|
Restricted cash
|
|
|
12,198
|
|
|
|
13,589
|
|
Accounts receivable – net
|
|
|
272,506
|
|
|
|
240,035
|
|
Goodwill
|
|
|
643,692
|
|
|
|
643,474
|
|
Other assets
|
|
|
29,023
|
|
|
|
32,682
|
|
Total assets
|
|
$
|
8,842,118
|
|
|
$
|
8,949,260
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
$
|
123,000
|
|
|
$
|
190,000
|
|
Term loans – net
|
|
|
1,094,875
|
|
|
|
1,094,343
|
|
Secured borrowings – net
|
|
|
54,052
|
|
|
|
54,365
|
|
Unsecured borrowings – net
|
|
|
3,028,938
|
|
|
|
3,028,146
|
|
Accrued expenses and other liabilities
|
|
|
316,985
|
|
|
|
360,514
|
|
Deferred income taxes
|
|
|
9,746
|
|
|
|
9,906
|
|
Total liabilities
|
|
|
4,627,596
|
|
|
|
4,737,274
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Common stock $.10 par value authorized – 350,000 shares, issued and outstanding – 196,761 shares as of March 31, 2017 and 196,142 as of December 31, 2016
|
|
|
19,676
|
|
|
|
19,614
|
|
Common stock – additional paid-in capital
|
|
|
4,878,637
|
|
|
|
4,861,408
|
|
Cumulative net earnings
|
|
|
1,843,377
|
|
|
|
1,738,937
|
|
Cumulative dividends paid
|
|
|
(2,829,718
|
)
|
|
|
(2,707,387
|
)
|
Accumulated other comprehensive loss
|
|
|
(48,478
|
)
|
|
|
(53,827
|
)
|
Total stockholders’ equity
|
|
|
3,863,494
|
|
|
|
3,858,745
|
|
Noncontrolling interest
|
|
|
351,028
|
|
|
|
353,241
|
|
Total equity
|
|
|
4,214,522
|
|
|
|
4,211,986
|
|
Total liabilities and equity
|
|
$
|
8,842,118
|
|
|
$
|
8,949,260
|
|
See notes to consolidated financial statements
.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(in thousands, except per share amounts)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
|
|
|
|
|
Rental income
|
|
$
|
192,537
|
|
|
$
|
176,703
|
|
Income from direct financing leases
|
|
|
15,646
|
|
|
|
15,442
|
|
Mortgage interest income
|
|
|
15,956
|
|
|
|
16,606
|
|
Other investment income – net
|
|
|
6,914
|
|
|
|
3,431
|
|
Miscellaneous income
|
|
|
691
|
|
|
|
697
|
|
Total operating revenues
|
|
|
231,744
|
|
|
|
212,879
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
69,993
|
|
|
|
62,433
|
|
General and administrative
|
|
|
12,524
|
|
|
|
10,455
|
|
Acquisition costs
|
|
|
(41
|
)
|
|
|
3,771
|
|
Impairment loss on real estate properties
|
|
|
7,638
|
|
|
|
34,558
|
|
Provision for uncollectible accounts
|
|
|
2,404
|
|
|
|
5,124
|
|
Total operating expenses
|
|
|
92,518
|
|
|
|
116,341
|
|
|
|
|
|
|
|
|
|
|
Income before other income and expense
|
|
|
139,226
|
|
|
|
96,538
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4
|
|
|
|
8
|
|
Interest expense
|
|
|
(45,041
|
)
|
|
|
(37,222
|
)
|
Interest – amortization of deferred financing costs
|
|
|
(2,502
|
)
|
|
|
(2,132
|
)
|
Interest – refinancing costs
|
|
|
-
|
|
|
|
(298
|
)
|
Contractual settlement
|
|
|
10,412
|
|
|
|
-
|
|
Realized gain (loss) on foreign exchange
|
|
|
61
|
|
|
|
(22
|
)
|
Total other expense
|
|
|
(37,066
|
)
|
|
|
(39,666
|
)
|
|
|
|
|
|
|
|
|
|
Income before gain on assets sold
|
|
|
102,160
|
|
|
|
56,872
|
|
Gain on assets sold – net
|
|
|
7,420
|
|
|
|
1,571
|
|
Income from continuing operations
|
|
|
109,580
|
|
|
|
58,443
|
|
Income tax expense
|
|
|
(1,100
|
)
|
|
|
(247
|
)
|
Income from unconsolidated joint venture
|
|
|
632
|
|
|
|
-
|
|
Net income
|
|
|
109,112
|
|
|
|
58,196
|
|
Net income attributable to noncontrolling interest
|
|
|
(4,672
|
)
|
|
|
(2,641
|
)
|
Net income available to common stockholders
|
|
$
|
104,440
|
|
|
$
|
55,555
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share available to common stockholders:
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
0.53
|
|
|
$
|
0.30
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.53
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.62
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding, basic
|
|
|
197,013
|
|
|
|
188,228
|
|
Weighted-average shares outstanding, diluted
|
|
|
206,174
|
|
|
|
198,350
|
|
See notes to consolidated financial statements.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
Unaudited
(in thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
109,112
|
|
|
$
|
58,196
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
4,334
|
|
|
|
(4,730
|
)
|
Cash flow hedges
|
|
|
1,254
|
|
|
|
(8,876
|
)
|
Total other comprehensive income (loss)
|
|
|
5,588
|
|
|
|
(13,606
|
)
|
Comprehensive income
|
|
|
114,700
|
|
|
|
44,590
|
|
Comprehensive income attributable to noncontrolling interest
|
|
|
(4,911
|
)
|
|
|
(2,025
|
)
|
Comprehensive income attributable to common stockholders
|
|
$
|
109,789
|
|
|
$
|
42,565
|
|
See notes to consolidated financial statements.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
EQUITY
Unaudited
(in thousands, except per share amounts)
|
|
Common
Stock Par
Value
|
|
|
Additional
Paid-in
Capital
|
|
|
Cumulative
Net
Earnings
|
|
|
Cumulative
Dividends
Paid
|
|
|
Accumulated
Other
Comprehensive
Income (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
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
3,744
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,744
|
|
|
|
—
|
|
|
|
3,744
|
|
Vesting/exercising of equity compensation plan,
net of tax withholdings (103 shares)
|
|
|
10
|
|
|
|
(2,130
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,120
|
)
|
|
|
—
|
|
|
|
(2,120
|
)
|
Dividend reinvestment and stock purchase plan
(239 shares at an average of $30.67 per share)
|
|
|
24
|
|
|
|
7,311
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,335
|
|
|
|
—
|
|
|
|
7,335
|
|
Grant of stock as payment of directors fees (2 shares at an average
of $31.19 per share)
|
|
|
—
|
|
|
|
75
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75
|
|
|
|
—
|
|
|
|
75
|
|
Deferred compensation directors
|
|
|
—
|
|
|
|
(16
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(16
|
)
|
|
|
—
|
|
|
|
(16
|
)
|
Equity Shelf Program (228 shares at $29.71 per
share, net of issuance costs)
|
|
|
23
|
|
|
|
6,736
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,759
|
|
|
|
—
|
|
|
|
6,759
|
|
Common dividends declared ($0.62 per share)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(122,331
|
)
|
|
|
—
|
|
|
|
(122,331
|
)
|
|
|
—
|
|
|
|
(122,331
|
)
|
Conversion of Omega OP Units to common stock
(47 shares at $32.30 per share)
|
|
|
5
|
|
|
|
1,509
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,514
|
|
|
|
—
|
|
|
|
1,514
|
|
Redemption of Omega OP Units (48 units)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,570
|
)
|
|
|
(1,570
|
)
|
Omega OP Unit distributions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,554
|
)
|
|
|
(5,554
|
)
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,149
|
|
|
|
4,149
|
|
|
|
185
|
|
|
|
4,334
|
|
Cash flow hedges
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,200
|
|
|
|
1,200
|
|
|
|
54
|
|
|
|
1,254
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
104,440
|
|
|
|
—
|
|
|
|
—
|
|
|
|
104,440
|
|
|
|
4,672
|
|
|
|
109,112
|
|
Balance
at March 31, 2017 (196,761 shares & 8,814 Omega OP Units)
|
|
$
|
19,676
|
|
|
$
|
4,878,637
|
|
|
$
|
1,843,377
|
|
|
$
|
(2,829,718
|
)
|
|
$
|
(48,478
|
)
|
|
$
|
3,863,494
|
|
|
$
|
351,028
|
|
|
$
|
4,214,522
|
|
See notes to consolidated financial statements.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (in thousands)
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
|
$
|
109,112
|
|
|
$
|
58,196
|
|
Adjustment to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
69,993
|
|
|
|
62,433
|
|
Impairment loss on real estate properties
|
|
|
7,638
|
|
|
|
34,558
|
|
Provision for uncollectible accounts
|
|
|
2,404
|
|
|
|
5,124
|
|
Refinancing costs and amortization of deferred financing costs
|
|
|
2,502
|
|
|
|
2,430
|
|
Accretion of direct financing leases
|
|
|
(3,016
|
)
|
|
|
(2,921
|
)
|
Stock-based compensation expense
|
|
|
3,744
|
|
|
|
2,778
|
|
Gain on assets sold – net
|
|
|
(7,420
|
)
|
|
|
(1,571
|
)
|
Amortization of acquired in-place leases - net
|
|
|
(3,096
|
)
|
|
|
(4,300
|
)
|
Effective yield receivable on mortgage notes
|
|
|
(593
|
)
|
|
|
(819
|
)
|
Change in operating assets and liabilities – net:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(21,377
|
)
|
|
|
560
|
|
Straight-line rent receivables
|
|
|
(11,747
|
)
|
|
|
(9,947
|
)
|
Lease inducements
|
|
|
447
|
|
|
|
647
|
|
Other operating assets and liabilities
|
|
|
(34,653
|
)
|
|
|
(19,989
|
)
|
Net cash provided by operating activities
|
|
|
113,938
|
|
|
|
127,179
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition of real estate
|
|
|
(7,574
|
)
|
|
|
(416,104
|
)
|
Investments in construction in progress
|
|
|
(15,703
|
)
|
|
|
(16,316
|
)
|
Investments in direct financing leases
|
|
|
(2,229
|
)
|
|
|
—
|
|
Deposit to acquire real estate
|
|
|
—
|
|
|
|
(113,816
|
)
|
Placement of mortgage loans
|
|
|
(5,749
|
)
|
|
|
(6,162
|
)
|
Distributions from unconsolidated joint venture
|
|
|
8,587
|
|
|
|
—
|
|
Proceeds from sale of real estate investments
|
|
|
45,848
|
|
|
|
2,392
|
|
Capital improvements to real estate investments
|
|
|
(8,199
|
)
|
|
|
(9,544
|
)
|
Proceeds from other investments
|
|
|
23,181
|
|
|
|
1,461
|
|
Investments in other investments
|
|
|
(22,144
|
)
|
|
|
(116,003
|
)
|
Collection of mortgage principal
|
|
|
333
|
|
|
|
312
|
|
Net cash provided by (used in) investing activities
|
|
|
16,351
|
|
|
|
(673,780
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from credit facility borrowings
|
|
|
148,000
|
|
|
|
670,000
|
|
Payments on credit facility borrowings
|
|
|
(215,000
|
)
|
|
|
(370,000
|
)
|
Receipts of other long-term borrowings
|
|
|
—
|
|
|
|
350,000
|
|
Payments of other long-term borrowings
|
|
|
(318
|
)
|
|
|
(309
|
)
|
Payments of financing related costs
|
|
|
(563
|
)
|
|
|
(3,576
|
)
|
Receipts from dividend reinvestment plan
|
|
|
7,335
|
|
|
|
19,596
|
|
Payments for exercised options and restricted stock
|
|
|
(2,120
|
)
|
|
|
(2,381
|
)
|
Net proceeds from issuance of common stock
|
|
|
6,759
|
|
|
|
—
|
|
Dividends paid
|
|
|
(122,272
|
)
|
|
|
(107,500
|
)
|
Redemption of Omega OP Units
|
|
|
(56
|
)
|
|
|
(10
|
)
|
Distributions to Omega OP Unit Holders
|
|
|
(5,554
|
)
|
|
|
(5,131
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(183,789
|
)
|
|
|
550,689
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation on cash and cash equivalents
|
|
|
162
|
|
|
|
(105
|
)
|
(Decrease) increase in cash and cash equivalents
|
|
|
(53,338
|
)
|
|
|
3,983
|
|
Cash and cash equivalents at beginning of period
|
|
|
93,687
|
|
|
|
5,424
|
|
Cash and cash equivalents at end of period
|
|
$
|
40,349
|
|
|
$
|
9,407
|
|
Supplemental disclosures of cash flow information:
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Interest paid during the period, net of amounts capitalized
|
|
$
|
61,832
|
|
|
$
|
36,597
|
|
Taxes paid during the period
|
|
$
|
1,173
|
|
|
$
|
141
|
|
|
|
|
|
|
|
|
Non-cash financing activities
|
|
|
|
|
|
|
|
|
Change in fair value of cash flow hedges
|
|
$
|
(1,291
|
)
|
|
$
|
8,876
|
|
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES HOLDCO, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands,
except per share amounts
)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Real estate properties
|
|
|
|
|
|
|
|
|
Real estate investments (see Note 2)
|
|
$
|
7,581,665
|
|
|
$
|
7,566,358
|
|
Less accumulated depreciation
|
|
|
(1,306,084
|
)
|
|
|
(1,240,336
|
)
|
Real estate investments – net
|
|
|
6,275,581
|
|
|
|
6,326,022
|
|
Investments in direct financing leases – net
|
|
|
604,777
|
|
|
|
601,938
|
|
Mortgage notes receivable – net
|
|
|
644,696
|
|
|
|
639,343
|
|
|
|
|
7,525,054
|
|
|
|
7,567,303
|
|
Other investments – net
|
|
|
255,899
|
|
|
|
256,846
|
|
Investment in unconsolidated joint venture
|
|
|
40,152
|
|
|
|
48,776
|
|
Assets held for sale – net
|
|
|
23,245
|
|
|
|
52,868
|
|
Total investments
|
|
|
7,844,350
|
|
|
|
7,925,793
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
40,349
|
|
|
|
93,687
|
|
Restricted cash
|
|
|
12,198
|
|
|
|
13,589
|
|
Accounts receivable – net
|
|
|
272,506
|
|
|
|
240,035
|
|
Goodwill
|
|
|
643,692
|
|
|
|
643,474
|
|
Other assets
|
|
|
29,023
|
|
|
|
32,682
|
|
Total assets
|
|
$
|
8,842,118
|
|
|
$
|
8,949,260
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Term loans – net
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
Secured borrowings – net
|
|
|
54,052
|
|
|
|
54,365
|
|
Accrued expenses and other liabilities
|
|
|
275,899
|
|
|
|
302,959
|
|
Deferred income taxes
|
|
|
9,746
|
|
|
|
9,906
|
|
Intercompany payable
|
|
|
4,187,899
|
|
|
|
4,270,044
|
|
Total liabilities
|
|
|
4,627,596
|
|
|
|
4,737,274
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Common stock – additional paid-in capital
|
|
|
923,218
|
|
|
|
923,218
|
|
Cumulative net earnings
|
|
|
149,360
|
|
|
|
126,187
|
|
Cumulative dividends paid
|
|
|
(202,391
|
)
|
|
|
(175,289
|
)
|
Accumulated other comprehensive loss
|
|
|
(11,253
|
)
|
|
|
(12,439
|
)
|
Total stockholders’ equity
|
|
|
858,934
|
|
|
|
861,677
|
|
Noncontrolling interest
|
|
|
3,355,588
|
|
|
|
3,350,309
|
|
Total equity
|
|
|
4,214,522
|
|
|
|
4,211,986
|
|
Total liabilities and equity
|
|
$
|
8,842,118
|
|
|
$
|
8,949,260
|
|
See notes to consolidated financial statements
.
OHI HEALTHCARE PROPERTIES HOLDCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(in thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
192,537
|
|
|
$
|
176,703
|
|
Income from direct financing leases
|
|
|
15,646
|
|
|
|
15,442
|
|
Mortgage interest income
|
|
|
15,956
|
|
|
|
16,606
|
|
Other investment income – net
|
|
|
6,914
|
|
|
|
3,431
|
|
Miscellaneous income
|
|
|
691
|
|
|
|
697
|
|
Total operating revenues
|
|
|
231,744
|
|
|
|
212,879
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
69,993
|
|
|
|
62,433
|
|
General and administrative
|
|
|
12,524
|
|
|
|
10,455
|
|
Acquisition costs
|
|
|
(41
|
)
|
|
|
3,771
|
|
Impairment loss on real estate properties
|
|
|
7,638
|
|
|
|
34,558
|
|
Provision for uncollectible accounts
|
|
|
2,404
|
|
|
|
5,124
|
|
Total operating expenses
|
|
|
92,518
|
|
|
|
116,341
|
|
|
|
|
|
|
|
|
|
|
Income before other income and expense
|
|
|
139,226
|
|
|
|
96,538
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4
|
|
|
|
8
|
|
Interest expense
|
|
|
(45,041
|
)
|
|
|
(37,222
|
)
|
Interest – amortization of deferred financing costs
|
|
|
(2,502
|
)
|
|
|
(2,132
|
)
|
Interest – refinancing costs
|
|
|
-
|
|
|
|
(298
|
)
|
Contractual settlement
|
|
|
10,412
|
|
|
|
-
|
|
Realized gain (loss) on foreign exchange
|
|
|
61
|
|
|
|
(22
|
)
|
Total other expense
|
|
|
(37,066
|
)
|
|
|
(39,666
|
)
|
|
|
|
|
|
|
|
|
|
Income before gain on assets sold
|
|
|
102,160
|
|
|
|
56,872
|
|
Gain on assets sold – net
|
|
|
7,420
|
|
|
|
1,571
|
|
Income from continuing operations
|
|
|
109,580
|
|
|
|
58,443
|
|
Income tax expense
|
|
|
(1,100
|
)
|
|
|
(247
|
)
|
Income from unconsolidated joint venture
|
|
|
632
|
|
|
|
-
|
|
Net income
|
|
|
109,112
|
|
|
|
58,196
|
|
Net income attributable to noncontrolling interest
|
|
|
(85,939
|
)
|
|
|
(45,294
|
)
|
Net income available to common stockholders
|
|
$
|
23,173
|
|
|
$
|
12,902
|
|
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES HOLDCO, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
Unaudited
(in thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
109,112
|
|
|
$
|
58,196
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
4,334
|
|
|
|
(4,730
|
)
|
Cash flow hedges
|
|
|
1,254
|
|
|
|
(8,876
|
)
|
Total other comprehensive income (loss)
|
|
|
5,588
|
|
|
|
(13,606
|
)
|
Comprehensive income
|
|
|
114,700
|
|
|
|
44,590
|
|
Comprehensive income attributable to noncontrolling interest
|
|
|
(90,340
|
)
|
|
|
(34,705
|
)
|
Comprehensive income attributable to common stockholders
|
|
$
|
24,360
|
|
|
$
|
9,885
|
|
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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,291
|
|
|
|
17,291
|
|
Distributions
|
|
|
—
|
|
|
|
—
|
|
|
|
(27,102
|
)
|
|
|
—
|
|
|
|
(27,102
|
)
|
|
|
(102,353
|
)
|
|
|
(129,455
|
)
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
920
|
|
|
|
920
|
|
|
|
3,414
|
|
|
|
4,334
|
|
Cash flow hedges
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
266
|
|
|
|
266
|
|
|
|
988
|
|
|
|
1,254
|
|
Net
income
|
|
|
—
|
|
|
|
23,173
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,173
|
|
|
|
85,939
|
|
|
|
109,112
|
|
Balance at March 31,
2017 (1 shares)
|
|
$
|
923,218
|
|
|
$
|
149,360
|
|
|
$
|
(202,391
|
)
|
|
$
|
(11,253
|
)
|
|
$
|
858,934
|
|
|
$
|
3,355,588
|
|
|
$
|
4,214,522
|
|
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES HOLDCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(in thousands)
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
|
$
|
109,112
|
|
|
$
|
58,196
|
|
Adjustment to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
69,993
|
|
|
|
62,433
|
|
Impairment loss on real estate properties
|
|
|
7,638
|
|
|
|
34,558
|
|
Provision for uncollectible accounts
|
|
|
2,404
|
|
|
|
5,124
|
|
Refinancing costs and amortization of deferred financing costs
|
|
|
2,502
|
|
|
|
2,430
|
|
Accretion of direct financing leases
|
|
|
(3,016
|
)
|
|
|
(2,921
|
)
|
Stock-based compensation expense
|
|
|
3,744
|
|
|
|
2,778
|
|
Gain on assets sold – net
|
|
|
(7,420
|
)
|
|
|
(1,571
|
)
|
Amortization of acquired in-place leases - net
|
|
|
(3,096
|
)
|
|
|
(4,300
|
)
|
Effective yield receivable on mortgage notes
|
|
|
(593
|
)
|
|
|
(819
|
)
|
Change in operating assets and liabilities – net:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(21,377
|
)
|
|
|
560
|
|
Straight-line rent receivables
|
|
|
(11,747
|
)
|
|
|
(9,947
|
)
|
Lease inducements
|
|
|
447
|
|
|
|
647
|
|
Other operating assets and liabilities
|
|
|
(34,653
|
)
|
|
|
(19,989
|
)
|
Net cash provided by operating activities
|
|
|
113,938
|
|
|
|
127,179
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition of real estate
|
|
|
(7,574
|
)
|
|
|
(416,104
|
)
|
Investments in construction in progress
|
|
|
(15,703
|
)
|
|
|
(16,316
|
)
|
Investments in direct financing leases
|
|
|
(2,229
|
)
|
|
|
—
|
|
Deposit to acquire real estate
|
|
|
—
|
|
|
|
(113,816
|
)
|
Placement of mortgage loans
|
|
|
(5,749
|
)
|
|
|
(6,162
|
)
|
Distributions from unconsolidated joint venture
|
|
|
8,587
|
|
|
|
—
|
|
Proceeds from sale of real estate investments
|
|
|
45,848
|
|
|
|
2,392
|
|
Capital improvements to real estate investments
|
|
|
(8,199
|
)
|
|
|
(9,544
|
)
|
Proceeds from other investments
|
|
|
23,181
|
|
|
|
1,461
|
|
Investments in other investments
|
|
|
(22,144
|
)
|
|
|
(116,003
|
)
|
Collection of mortgage principal
|
|
|
333
|
|
|
|
312
|
|
Net cash provided by (used in) investing activities
|
|
|
16,351
|
|
|
|
(673,780
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from intercompany loans from Omega
|
|
|
148,000
|
|
|
|
1,020,000
|
|
Repayment of interompany loans to Omega
|
|
|
(215,318
|
)
|
|
|
(370,309
|
)
|
Payment of financing related costs incurred by Omega
|
|
|
(563
|
)
|
|
|
(3,576
|
)
|
Dividends paid
|
|
|
(27,102
|
)
|
|
|
(24,916
|
)
|
Contribution from noncontrolling interest
|
|
|
11,974
|
|
|
|
17,215
|
|
Distributions to limited partners
|
|
|
(100,780
|
)
|
|
|
(87,725
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(183,789
|
)
|
|
|
550,689
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation on cash and cash equivalents
|
|
|
162
|
|
|
|
(105
|
)
|
(Decrease) increase in cash and cash equivalents
|
|
|
(53,338
|
)
|
|
|
3,983
|
|
Cash and cash equivalents at beginning of period
|
|
|
93,687
|
|
|
|
5,424
|
|
Cash and cash equivalents at end of period
|
|
$
|
40,349
|
|
|
$
|
9,407
|
|
Supplemental disclosures of cash flow information:
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Interest paid during the period, net of amounts capitalized
|
|
$
|
61,832
|
|
|
$
|
36,597
|
|
Taxes paid during the period
|
|
$
|
1,173
|
|
|
$
|
141
|
|
|
|
|
|
|
|
|
|
|
Non cash financing activities
|
|
|
|
|
|
|
|
|
Change in fair value of cash flow hedges
|
|
$
|
(1,291
|
)
|
|
$
|
8,876
|
|
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(in thousands
)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Real estate properties
|
|
|
|
|
|
|
|
|
Real estate investments (see Note 2)
|
|
$
|
7,581,665
|
|
|
$
|
7,566,358
|
|
Less accumulated depreciation
|
|
|
(1,306,084
|
)
|
|
|
(1,240,336
|
)
|
Real estate investments – net
|
|
|
6,275,581
|
|
|
|
6,326,022
|
|
Investments in direct financing leases – net
|
|
|
604,777
|
|
|
|
601,938
|
|
Mortgage notes receivable – net
|
|
|
644,696
|
|
|
|
639,343
|
|
|
|
|
7,525,054
|
|
|
|
7,567,303
|
|
Other investments – net
|
|
|
255,899
|
|
|
|
256,846
|
|
Investment in unconsolidated joint venture
|
|
|
40,152
|
|
|
|
48,776
|
|
Assets held for sale – net
|
|
|
23,245
|
|
|
|
52,868
|
|
Total investments
|
|
|
7,844,350
|
|
|
|
7,925,793
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
40,349
|
|
|
|
93,687
|
|
Restricted cash
|
|
|
12,198
|
|
|
|
13,589
|
|
Accounts receivable – net
|
|
|
272,506
|
|
|
|
240,035
|
|
Goodwill
|
|
|
643,692
|
|
|
|
643,474
|
|
Other assets
|
|
|
29,023
|
|
|
|
32,682
|
|
Total assets
|
|
$
|
8,842,118
|
|
|
$
|
8,949,260
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND OWNERS’ EQUITY
|
|
|
|
|
|
|
|
|
Term loans – net
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
Secured borrowings – net
|
|
|
54,052
|
|
|
|
54,365
|
|
Accrued expenses and other liabilities
|
|
|
275,899
|
|
|
|
302,959
|
|
Deferred income taxes
|
|
|
9,746
|
|
|
|
9,906
|
|
Intercompany payable
|
|
|
4,187,899
|
|
|
|
4,270,044
|
|
Total liabilities
|
|
|
4,627,596
|
|
|
|
4,737,274
|
|
|
|
|
|
|
|
|
|
|
Owners’ Equity:
|
|
|
|
|
|
|
|
|
General partners’ equity
|
|
|
3,863,494
|
|
|
|
3,858,745
|
|
Limited partners’ equity
|
|
|
351,028
|
|
|
|
353,241
|
|
Total owners’ equity
|
|
|
4,214,522
|
|
|
|
4,211,986
|
|
Total liabilities and owners’ equity
|
|
$
|
8,842,118
|
|
|
$
|
8,949,260
|
|
See notes to consolidated financial statements
.
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(in thousands, except per unit amounts)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
192,537
|
|
|
$
|
176,703
|
|
Income from direct financing leases
|
|
|
15,646
|
|
|
|
15,442
|
|
Mortgage interest income
|
|
|
15,956
|
|
|
|
16,606
|
|
Other investment income – net
|
|
|
6,914
|
|
|
|
3,431
|
|
Miscellaneous income
|
|
|
691
|
|
|
|
697
|
|
Total operating revenues
|
|
|
231,744
|
|
|
|
212,879
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
69,993
|
|
|
|
62,433
|
|
General and administrative
|
|
|
12,524
|
|
|
|
10,455
|
|
Acquisition costs
|
|
|
(41
|
)
|
|
|
3,771
|
|
Impairment loss on real estate properties
|
|
|
7,638
|
|
|
|
34,558
|
|
Provision for uncollectible accounts
|
|
|
2,404
|
|
|
|
5,124
|
|
Total operating expenses
|
|
|
92,518
|
|
|
|
116,341
|
|
|
|
|
|
|
|
|
|
|
Income before other income and expense
|
|
|
139,226
|
|
|
|
96,538
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4
|
|
|
|
8
|
|
Interest expense
|
|
|
(45,041
|
)
|
|
|
(37,222
|
)
|
Interest – amortization of deferred financing costs
|
|
|
(2,502
|
)
|
|
|
(2,132
|
)
|
Interest – refinancing costs
|
|
|
-
|
|
|
|
(298
|
)
|
Contractual settlement
|
|
|
10,412
|
|
|
|
-
|
|
Realized gain (loss) on foreign exchange
|
|
|
61
|
|
|
|
(22
|
)
|
Total other expense
|
|
|
(37,066
|
)
|
|
|
(39,666
|
)
|
|
|
|
|
|
|
|
|
|
Income before gain on assets sold
|
|
|
102,160
|
|
|
|
56,872
|
|
Gain on assets sold – net
|
|
|
7,420
|
|
|
|
1,571
|
|
Income from continuing operations
|
|
|
109,580
|
|
|
|
58,443
|
|
Income tax expense
|
|
|
(1,100
|
)
|
|
|
(247
|
)
|
Income from unconsolidated joint venture
|
|
|
632
|
|
|
|
-
|
|
Net income
|
|
$
|
109,112
|
|
|
$
|
58,196
|
|
|
|
|
|
|
|
|
|
|
Earnings per Omega OP Unit :
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.53
|
|
|
$
|
0.30
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.53
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per Omega OP Unit
|
|
$
|
0.62
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
Weighted-average Omega OP Units outstanding, basic
|
|
|
205,827
|
|
|
|
197,175
|
|
Weighted-average Omega OP Units outstanding, diluted
|
|
|
206,174
|
|
|
|
198,350
|
|
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
Unaudited
(in thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
109,112
|
|
|
$
|
58,196
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
4,334
|
|
|
|
(4,730
|
)
|
Cash flow hedges
|
|
|
1,254
|
|
|
|
(8,876
|
)
|
Total other comprehensive income (loss)
|
|
|
5,588
|
|
|
|
(13,606
|
)
|
Comprehensive income
|
|
$
|
114,700
|
|
|
$
|
44,590
|
|
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’
Equity
|
|
|
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
|
|
|
619
|
|
|
|
—
|
|
|
|
619
|
|
|
|
17,291
|
|
|
|
—
|
|
|
|
17,291
|
|
Distributions to partners
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(122,331
|
)
|
|
|
(5,554
|
)
|
|
|
(127,885
|
)
|
Omega OP Unit redemptions
|
|
|
—
|
|
|
|
(48
|
)
|
|
|
(48
|
)
|
|
|
—
|
|
|
|
(1,570
|
)
|
|
|
(1,570
|
)
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,149
|
|
|
|
185
|
|
|
|
4,334
|
|
Cash flow hedges
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,200
|
|
|
|
54
|
|
|
|
1,254
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
104,440
|
|
|
|
4,672
|
|
|
|
109,112
|
|
Balance at March 31, 2017
|
|
|
196,761
|
|
|
|
8,814
|
|
|
|
205,575
|
|
|
$
|
3,863,494
|
|
|
$
|
351,028
|
|
|
$
|
4,214,522
|
|
See notes to consolidated financial statements.
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(in thousands)
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
109,112
|
|
|
$
|
58,196
|
|
Adjustment to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
69,993
|
|
|
|
62,433
|
|
Impairment loss on real estate properties
|
|
|
7,638
|
|
|
|
34,558
|
|
Provision for uncollectible accounts
|
|
|
2,404
|
|
|
|
5,124
|
|
Refinancing costs and amortization of deferred financing costs
|
|
|
2,502
|
|
|
|
2,430
|
|
Accretion of direct financing leases
|
|
|
(3,016
|
)
|
|
|
(2,921
|
)
|
Stock-based compensation expense
|
|
|
3,744
|
|
|
|
2,778
|
|
Gain on assets sold – net
|
|
|
(7,420
|
)
|
|
|
(1,571
|
)
|
Amortization of acquired in-place leases - net
|
|
|
(3,096
|
)
|
|
|
(4,300
|
)
|
Effective yield receivable on mortgage notes
|
|
|
(593
|
)
|
|
|
(819
|
)
|
Change in operating assets and liabilities – net:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(21,377
|
)
|
|
|
560
|
|
Straight-line rent receivables
|
|
|
(11,747
|
)
|
|
|
(9,947
|
)
|
Lease inducements
|
|
|
447
|
|
|
|
647
|
|
Other operating assets and liabilities
|
|
|
(34,653
|
)
|
|
|
(19,989
|
)
|
Net cash provided by operating activities
|
|
|
113,938
|
|
|
|
127,179
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition of real estate
|
|
|
(7,574
|
)
|
|
|
(416,104
|
)
|
Investments in construction in progress
|
|
|
(15,703
|
)
|
|
|
(16,316
|
)
|
Investments in direct financing leases
|
|
|
(2,229
|
)
|
|
|
—
|
|
Deposit to acquire real estate
|
|
|
—
|
|
|
|
(113,816
|
)
|
Placement of mortgage loans
|
|
|
(5,749
|
)
|
|
|
(6,162
|
)
|
Distributions from unconsolidated joint venture
|
|
|
8,587
|
|
|
|
—
|
|
Proceeds from sale of real estate investments
|
|
|
45,848
|
|
|
|
2,392
|
|
Capital improvements to real estate investments
|
|
|
(8,199
|
)
|
|
|
(9,544
|
)
|
Proceeds from other investments
|
|
|
23,181
|
|
|
|
1,461
|
|
Investments in other investments
|
|
|
(22,144
|
)
|
|
|
(116,003
|
)
|
Collection of mortgage principal
|
|
|
333
|
|
|
|
312
|
|
Net cash provided by (used in) investing activities
|
|
|
16,351
|
|
|
|
(673,780
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from intercompany loans from Omega
|
|
|
148,000
|
|
|
|
1,020,000
|
|
Repayment of intercompany loans to Omega
|
|
|
(215,318
|
)
|
|
|
(370,309
|
)
|
Payment of financing related costs incurred by Omega
|
|
|
(563
|
)
|
|
|
(3,576
|
)
|
Equity contributions from general partners’
|
|
|
11,974
|
|
|
|
17,215
|
|
Distribution to general partners
|
|
|
(122,272
|
)
|
|
|
(107,500
|
)
|
Distributions to limited partners’
|
|
|
(5,554
|
)
|
|
|
(5,131
|
)
|
Redemption of Omega OP Units
|
|
|
(56
|
)
|
|
|
(10
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(183,789
|
)
|
|
|
550,689
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation on cash and cash equivalents
|
|
|
162
|
|
|
|
(105
|
)
|
(Decrease) increase in cash and cash equivalents
|
|
|
(53,338
|
)
|
|
|
3,983
|
|
Cash and cash equivalents at beginning of period
|
|
|
93,687
|
|
|
|
5,424
|
|
Cash and cash equivalents at end of period
|
|
$
|
40,349
|
|
|
$
|
9,407
|
|
Supplemental disclosures of cash flow information:
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Interest paid during the period, net of amounts capitalized
|
|
$
|
61,832
|
|
|
$
|
36,597
|
|
Taxes paid during the period
|
|
$
|
1,173
|
|
|
$
|
141
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities
|
|
|
|
|
|
|
Change in fair value of cash flow hedges
|
|
$
|
(1,291
|
)
|
|
$
|
8,876
|
|
See notes to consolidated financial statements.
OMEGA HEALTHCARE INVESTORS, INC.
OHI HEALTHCARE PROPERTIES HOLDCO, INC.
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
March 31, 2017
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. All of Omega's assets are owned directly or indirectly, and all of Omega's operations are conducted directly
or indirectly, through its subsidiaries, OHI Healthcare Properties Holdco, Inc. (“OHI Holdco”), a direct wholly owned
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 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.
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 have exclusive control over Omega OP’s day-to-day management. As of March 31, 2017, 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.
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 Form 10-K/A filed with the SEC on
August 9, 2017.
Our
consolidated financial statements include the accounts of (i) Omega, (ii) OHI Holdco (iii) Omega OP and (iv) all direct and indirect
wholly owned subsidiaries of Omega. All intercompany transactions and balances have been eliminated in consolidation
,
and
our net earnings are reduced by the portion of net earnings attributable to noncontrolling interests.
Asset 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, 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 the future
undiscounted cash flows of the underlying facilities. 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 by market research, which includes valuing the
property as a nursing home as well as other 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. 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.
If we decide to sell
real estate properties or land holdings, we evaluate the recoverability of the carrying amounts of the assets. If the evaluation
indicates that the carrying value is not recoverable from estimated net sales proceeds, the property is written down to estimated
fair value less costs to sell. Our estimates of cash flows and fair values of the properties are based on current market conditions
and consider 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.
For the three months
ended March 31, 2017 and 2016, we recognized impairment losses of $7.6 million and $34.6 million, respectively. For additional
information see Note 2 – Properties and Investments and Note 7 – Assets Held For Sale.
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 factors
such as a
significant
decline in real estate valuations,
current macroeconomic conditions, state
of the equity and capital markets and our overall financial and operating performance
or 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 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. For our consolidated subsidiaries whose functional currency is not the U.S. dollar,
we translate their financial statements into the U.S. dollar. We translate assets and liabilities at the exchange rate in effect
as of the financial statement date. Revenue and expense accounts are translated using an average exchange rate for the period.
Gains and losses resulting from translation are included in accumulated other comprehensive loss (“AOCL”), as a separate
component of equity and a proportionate amount of gain or loss is allocated to noncontrolling interest.
We and certain of our
consolidated subsidiaries may have intercompany and third-party debt that is not denominated in the entity’s functional currency.
When the debt is remeasured against the functional currency of the entity, a gain or loss can result. The resulting adjustment
is reflected in results of operations, unless it is intercompany debt that is deemed to be long-term in nature and then the adjustments
are included in AOCL.
Derivative Instruments
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 are 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 as qualifying cash flow hedging relationships, the change
in fair value of the effective portion of the derivatives is recognized in 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. 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 obligations or assets in 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 March 31,
2017 and December 31, 2016, we had $0.2 million and $1.5 million, respectively, of qualifying cash flow hedges recorded at fair
value in accrued expenses and other liabilities on our Consolidated Balance 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 receivables relate to the difference between the rental
revenue recognized on a straight-line basis and the amounts currently due to us according to the contractual agreement. Lease inducements
result from value provided by us to the lessee, at the inception or renewal of the lease, and are amortized as a reduction of rental
revenue over the non-cancellable lease term.
On a quarterly basis,
we review our accounts receivable to determine their collectability. The determination of collectability of these assets requires
significant judgment and is affected by several factors relating to the credit quality of our operators that we regularly monitor,
including (i) payment history, (ii) the age of the contractual receivables, (iii) the current economic conditions and reimbursement
environment, (iv) the ability of the tenant to perform under the terms of their lease and/or contractual loan agreements and (v)
the value of the underlying collateral of the agreement. If we determine collectability of any of our contractual receivables
is at risk, we estimate the potential uncollectible amounts and provide an allowance. In the case of a lease recognized on a straight-line
basis, a mortgage 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:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Contractual receivables
|
|
$
|
34,751
|
|
|
$
|
13,376
|
|
Effective yield interest receivables
|
|
|
10,343
|
|
|
|
9,749
|
|
Straight-line rent receivables
|
|
|
219,821
|
|
|
|
208,874
|
|
Lease inducements
|
|
|
7,946
|
|
|
|
8,393
|
|
Allowance
|
|
|
(355
|
)
|
|
|
(357
|
)
|
Accounts receivable – net
|
|
$
|
272,506
|
|
|
$
|
240,035
|
|
Related Party Transactions
The Company has a policy
which generally requires related party transactions to be approved or ratified by the Audit Committee. On February 1, 2016, we
acquired 10 SNFs from Laurel Healthcare Holdings, Inc. (“Laurel”) for approximately $169.0 million in cash and leased
them to an unrelated existing operator. A former member 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 prior to the transaction. Immediately following
our acquisition, 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.
Accounting Pronouncement Adopted in 2017
In March 2016, 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 Operations 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 issue targeted updates to clarify specific implementation
issues of ASU 2014-09. These updates include 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 provisions of ASU 2014-09 and its related updates
and will be closely monitoring developments and additional guidance to determine the potential impact of the new standard. The
Company intends to adopt ASU 2014-09 and its subsequent updates in accordance with the modified retrospective approach. We do not
expect the adoption of ASU 2014-09 and its updates to have a significant 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.
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. We are currently evaluating the impact of adopting ASU
2016-02 on our consolidated financial statements.
In June 2016, the FASB
issued ASU 2016-13,
Financial Instruments - Credit Losses (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 real estate properties,
represented by 808 SNFs, 101 ALFs, 16 specialty facilities and one medical office building at March 31, 2017, are leased under
provisions of single or master leases with initial terms typically ranging from five to 15 years, plus renewal options. Substantially
all of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed
in one of three methods depending on specific provisions of each lease as follows: (i) a specific annual percentage increase over
the prior year’s rent, generally 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.
A summary of our investment in
leased real estate properties is as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Buildings
|
|
$
|
5,980,501
|
|
|
$
|
5,954,771
|
|
Land
|
|
|
756,803
|
|
|
|
759,295
|
|
Furniture, fixtures and equipment
|
|
|
454,288
|
|
|
|
454,760
|
|
Site improvements
|
|
|
206,326
|
|
|
|
206,206
|
|
Construction in progress
|
|
|
183,747
|
|
|
|
191,326
|
|
Total real estate investments
|
|
|
7,581,665
|
|
|
|
7,566,358
|
|
Less accumulated depreciation
|
|
|
(1,306,084
|
)
|
|
|
(1,240,336
|
)
|
Real estate investments - net
|
|
$
|
6,275,581
|
|
|
$
|
6,326,022
|
|
The following table
summarizes the significant acquisitions that occurred in the first quarter of 2017:
Number of
Facilities
|
|
|
Country/
|
|
Total
Investment
|
|
|
Land
|
|
|
Building & Site
Improvements
|
|
|
Furniture
& Fixtures
|
|
|
Initial
Annual Cash
|
|
SNF
|
|
|
ALF
|
|
|
State
|
|
(in millions)
|
|
|
Yield (%)
|
|
|
-
|
|
|
|
1
|
|
|
VA
|
|
$
|
7.6
|
|
|
$
|
0.5
|
|
|
$
|
6.8
|
|
|
$
|
0.3
|
|
|
|
7.50
|
|
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 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 on March 31, 2017. We reduced
the net book value of the impaired facilities to their estimated fair values or, with respect to the facility reclassified to held
for sale, to its estimated fair value less costs to sell. 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). Also see Note 7 – 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.
NOTE 3 – DIRECT FINANCING LEASES
The components of investments
in direct financing leases consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Minimum lease payments receivable
|
|
$
|
4,291,940
|
|
|
$
|
4,287,069
|
|
Less unearned income
|
|
|
(3,684,757
|
)
|
|
|
(3,685,131
|
)
|
Less allowance for loss on direct financing lease
|
|
|
(2,406
|
)
|
|
|
—
|
|
Investment in direct financing leases - net
|
|
$
|
604,777
|
|
|
$
|
601,938
|
|
|
|
|
|
|
|
|
|
|
Properties subject to direct financing leases
|
|
|
58
|
|
|
|
58
|
|
As of March 31, 2017,
the following minimum rents are due under our direct financing leases for the next five fiscal years (in thousands):
2018
|
2019
|
2020
|
2021
|
2022
|
$51,319
|
$52,626
|
$53,917
|
$55,199
|
$56,488
|
New Ark Investment Inc.
On November 27, 2013,
we closed an aggregate $529 million purchase/leaseback transaction in connection with the acquisition of Ark Holding Company, Inc.
(“Ark Holding”) by 4 West Holdings Inc. At closing, we acquired 55 SNFs and 1 ALF operated by Ark Holding and leased
the facilities back to Ark Holding, now known as New Ark Investment Inc. (“New Ark”), pursuant to four 50-year master
leases with rental payments yielding 10.6% per annum over the term of the leases. The purchase/leaseback transaction is being accounted
for as a direct financing lease.
The lease agreements
allow the tenant the right to purchase the facilities for a bargain purchase price plus closing costs at the end of the lease term.
In addition, commencing in the 41st year of each lease, the tenant will have the right to prepay the remainder of its obligations
thereunder for an amount equal to the sum of the unamortized portion of the original aggregate $529 million investment plus the
net present value of the remaining payments under the lease and closing costs. In the event the tenant exercises either of these
options, we have the right to purchase the properties for fair value at the time.
The 56 facilities represent
5,623 licensed beds located in 12 states, predominantly in the southeastern U.S. The 56 facilities are separated by region and
divided amongst four cross-defaulted master leases. The four regions include the Southeast (39 facilities), the Northwest (7 facilities),
Texas (9 facilities) and Indiana (1 facility).
Additionally, we own
four facilities and lease them to New Ark under a master lease which expires in 2026. The four facility lease is being accounted
for as an operating lease.
In March 2017, we executed
sale agreements with two unrelated third parties to sell the 7 Northwest facilities with a carrying value of approximately $36.4
million for $34.0 million. As a result, we recorded an allowance for loss of approximately $2.4 million. For the three months ended
March 31, 2017, we recognized approximately $0.8 million of direct financing lease income on a cash basis related to the Northwest
facilities lease. The sale of these facilities is expected to close in the second quarter of 2017.
NOTE 4 – MORTGAGE NOTES RECEIVABLE
As of March 31, 2017,
mortgage notes receivable relate to 27 fixed rate mortgages on 49 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 ten states that are operated by eight independent healthcare operating companies. We monitor compliance with mortgages
and when necessary have initiated collection, foreclosure and other proceedings with respect to certain outstanding mortgage notes.
Mortgage interest income
is recognized as earned over the terms of the related mortgage notes, using the effective yield method. Allowances are provided
against earned revenues from mortgage interest when collection of amounts due becomes questionable or when negotiations for restructurings
of troubled operators lead to lower expectations regarding ultimate collection. When collection is uncertain, mortgage interest
income on impaired mortgage loans is recognized as received after taking into account the application of security deposits.
The outstanding principal
amounts of mortgage notes receivable, net of allowances, were as follows:
|
|
March 31,
|
|
|
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%
|
|
|
411,807
|
|
|
|
412,140
|
|
Other mortgage notes outstanding
(1)
|
|
|
124,323
|
|
|
|
118,637
|
|
Mortgage notes receivable, gross
|
|
|
648,630
|
|
|
|
643,277
|
|
Allowance for loss on mortgage notes receivable
|
|
|
(3,934
|
)
|
|
|
(3,934
|
)
|
Total mortgages — net
|
|
$
|
644,696
|
|
|
$
|
639,343
|
|
|
(1)
|
Other mortgage notes outstanding have stated interest rates ranging from 8.35% to 12.0% and maturity
dates through 2029.
|
NOTE 5 – OTHER INVESTMENTS
A summary of our other
investments is as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Other investment note due 2019; interest at 10.73%
|
|
$
|
49,521
|
|
|
$
|
49,458
|
|
Other investment note due 2020; interest at 14.00%
|
|
|
47,856
|
|
|
|
47,913
|
|
Other investment note due 2022, interest at 9.00%
|
|
|
31,987
|
|
|
|
31,987
|
|
Other investment note due 2030; interest at 6.66%
|
|
|
48,705
|
|
|
|
44,595
|
|
Other investment notes outstanding
(1)
|
|
|
82,628
|
|
|
|
87,691
|
|
Other investments, gross
|
|
|
260,697
|
|
|
|
261,644
|
|
Allowance for loss on other investments
|
|
|
(4,798
|
)
|
|
|
(4,798
|
)
|
Total other investments
|
|
$
|
255,899
|
|
|
$
|
256,846
|
|
|
(1)
|
Other investment notes have maturity dates through 2028 and interest rates ranging from 6.50% to
13.0%.
|
NOTE 6 – 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 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.
We receive asset management
fees from the joint venture for services provided. For the three months ended March 31, 2017, we recognized $0.5 million of asset
management fees. These fees are included in miscellaneous income in the accompanying Consolidated Statement of Operations. The
accounting policies for the unconsolidated joint venture are the same as those of the Company.
NOTE 7 – ASSETS HELD FOR SALE
The following is a summary of our assets
held for sale:
|
|
Properties Held For Sale
|
|
|
|
Number of
Properties
|
|
|
Net Book Value
(in thousands)
|
|
|
|
|
|
December 31, 2016
|
|
|
20
|
|
|
$
|
52,868
|
|
Properties sold/other
(1)
|
|
|
(12
|
)
|
|
|
(30,023
|
)
|
Properties added
(2)
|
|
|
1
|
|
|
|
400
|
|
March 31, 2017
(3)
|
|
|
9
|
|
|
$
|
23,245
|
|
|
(1)
|
In the first quarter of 2017, we sold nine SNFs and two ALFs for approximately $29.4 million in
net proceeds recognizing a gain on sale of approximately $3.6 million. One SNF classified as an asset held for sale at December
31, 2016 was no longer considered held for sale during the first quarter of 2017 and was reclassified back to leased properties
at approximately $5.1 million which represents the facility’s then carrying value adjusted for depreciation that was not
recognized while classified as held for sale.
|
|
(2)
|
In the first quarter of 2017, we recorded a $3.5 million impairment to reduce one ALF’s net
book value to its estimated fair value less costs to sell before it was reclassified to assets held for sale.
|
|
(3)
|
We plan to sell the nine facilities classified as held for sale at March 31, 2017 over the next
several quarters.
|
NOTE 8 – INTANGIBLES
The following
is a summary of our intangibles as of March 31, 2017 and December 31, 2016
:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
Goodwill
|
|
$
|
643,692
|
|
|
$
|
643,474
|
|
|
|
|
|
|
|
|
|
|
Above market leases
|
|
$
|
22,443
|
|
|
$
|
22,476
|
|
In-place leases
|
|
|
167
|
|
|
|
167
|
|
Accumulated amortization
|
|
|
(16,180
|
)
|
|
|
(15,864
|
)
|
Net intangible assets
|
|
$
|
6,430
|
|
|
$
|
6,779
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Below market leases
|
|
$
|
164,735
|
|
|
$
|
165,028
|
|
Accumulated amortization
|
|
|
(74,131
|
)
|
|
|
(70,738
|
)
|
Net intangible liabilities
|
|
$
|
90,604
|
|
|
$
|
94,290
|
|
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 Operations as an
adjustment to rental income.
For the three months
ended March 31, 2017 and 2016, our net amortization related to intangibles was $3.1 million and $4.3 million, respectively. The
estimated net amortization related to these intangibles for the remainder of 2017 and the subsequent four years is as follows:
remainder of 2017 – $8.9 million; 2018 – $10.5 million; 2019 – $9.5 million; 2020 – $9.3 million and 2021
– $8.7 million. As of March 31, 2017 the weighted average remaining amortization period of above market leases (inclusive
of in-place leases) and below market leases is approximately eight years and nine years, respectively.
The following is a reconciliation of our
goodwill as of March 31, 2017:
|
|
(in thousands)
|
|
Balance as of December 31, 2016
|
|
$
|
643,474
|
|
Add: foreign currency translation
|
|
|
218
|
|
Balance as of March 31, 2017
|
|
$
|
643,692
|
|
NOTE 9 – CONCENTRATION OF RISK
As of March 31, 2017,
our portfolio of real estate investments consisted of 985 healthcare facilities, located in 42 states and the U.K. and operated
by 77 third party operators. Our investment in these facilities, net of impairments and reserve for uncollectible loans, totaled
approximately $8.9 billion at March 31, 2017, with approximately 99% of our real estate investments related to long-term care facilities.
Our portfolio is made up of 808 SNFs, 101 ALFs, 16 specialty facilities, one medical office building, fixed rate mortgages on 44
SNFs and four ALFs, and 11 facilities that are closed/held-for-sale. At March 31, 2017, we also held other investments of approximately
$255.9 million, consisting primarily of secured loans to third-party operators of our facilities.
At March 31, 2017,
the three states in which we had our highest concentration of investments were Ohio (10%), Texas (9%) and Florida (9%). No single
operator or manager generated more than 10% of our total revenues for the three months ended March 31, 2017.
NOTE 10 – STOCKHOLDERS’/OWNERS’ EQUITY
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, to be 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.
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 March 31, 2017, we issued 0.2 million shares of common stock at an average price of $29.71 per share, net of issuance costs,
generating net proceeds of $6.8 million under our $500 million Equity Shelf Program.
Dividend Reinvestment and Common Stock Purchase Plan
For the three months
ended March 31, 2017, approximately 0.2 million shares of our common stock at an average price of $30.67 per share were issued
through our Dividend Reinvestment and Common Stock Purchase Program for gross proceeds of approximately $7.3 million.
Accumulated Other Comprehensive Loss
The following is a summary of our accumulated
other comprehensive loss, net of tax where applicable:
|
|
Omega
|
|
|
OHI Holdco
|
|
|
Omega OP
|
|
|
|
As of and For the Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(54,948
|
)
|
|
$
|
(8,413
|
)
|
|
$
|
(54,948
|
)
|
|
$
|
(8,413
|
)
|
|
$
|
(54,948
|
)
|
|
$
|
(8,413
|
)
|
Translation gain (loss)
|
|
|
4,273
|
|
|
|
(4,708
|
)
|
|
|
4,273
|
|
|
|
(4,708
|
)
|
|
|
4,273
|
|
|
|
(4,708
|
)
|
Realized gain (loss)
|
|
|
61
|
|
|
|
(22
|
)
|
|
|
61
|
|
|
|
(22
|
)
|
|
|
61
|
|
|
|
(22
|
)
|
Ending balance
|
|
|
(50,614
|
)
|
|
|
(13,143
|
)
|
|
|
(50,614
|
)
|
|
|
(13,143
|
)
|
|
|
(50,614
|
)
|
|
|
(13,143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
(1,420
|
)
|
|
|
(718
|
)
|
|
|
(1,420
|
)
|
|
|
(718
|
)
|
|
|
(1,420
|
)
|
|
|
(718
|
)
|
Unrealized gain (loss)
|
|
|
490
|
|
|
|
(8,876
|
)
|
|
|
490
|
|
|
|
(8,876
|
)
|
|
|
490
|
|
|
|
(8,876
|
)
|
Realized gain (loss)
|
|
|
764
|
|
|
|
-
|
|
|
|
764
|
|
|
|
-
|
|
|
|
764
|
|
|
|
-
|
|
Ending balance
|
|
|
(166
|
)
|
|
|
(9,594
|
)
|
|
|
(166
|
)
|
|
|
(9,594
|
)
|
|
|
(166
|
)
|
|
|
(9,594
|
)
|
Total accumulated other comprehensive
loss
|
|
|
(50,780
|
)
|
|
|
(22,737
|
)
|
|
|
(50,780
|
)
|
|
|
(22,737
|
)
|
|
|
(50,780
|
)
|
|
|
(22,737
|
)
|
Add: portion included in noncontrolling interest
|
|
|
2,302
|
|
|
|
1,035
|
|
|
|
39,527
|
|
|
|
17,681
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated
other comprehensive loss
|
|
$
|
(48,478
|
)
|
|
$
|
(21,702
|
)
|
|
$
|
(11,253
|
)
|
|
$
|
(5,056
|
)
|
|
$
|
(50,780
|
)
|
|
$
|
(22,737
|
)
|
NOTE 11 – TAXES
OHI Holdco 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 have 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 will
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, we expect to distribute
dividends in excess of our taxable income.
As a result of our
UPREIT Conversion, our Company and its subsidiaries may be subject to income or franchise taxes in certain states and municipalities.
Also, as a result of our UPREIT Conversion, we created five 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 March 31, 2017, 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 million. The loss carry-forward is fully reserved as of March 31, 2017, with a valuation allowance due to
uncertainties regarding realization.
During the first
quarter of 2017, we recorded approximately $1.0 million of state and local income tax provision and approximately $0.1 million
of tax provision for foreign income taxes included in provision for income taxes on our Consolidated Statement of Operations.
NOTE 12 – STOCK-BASED COMPENSATION
Stock-based compensation
expense was $3.7 million and $2.8 million for the three months ended March 31, 2017 and 2016, respectively:
Restricted Stock and Restricted Stock Units
Restricted stock and
restricted stock units (“RSUs”) are subject to forfeiture if the holder’s service to us terminates prior to vesting,
subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company. Prior to
vesting, ownership of the shares/units cannot be transferred. 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 140,416 RSUs to employees
on January 1, 2017.
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, 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 earning 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 or FTSE NAREIT Equity Health Care Index TSR (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 equivalents on the PRSUs accumulate and with
respect to PRSUs granted before 2015 are paid when the PRSUs vest and with respect to PRSUs granted in 2015 or later are paid once
the PRSUs are earned. 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 399,726 LTIP Units to employees on January 1, 2017.
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 285,338 Relative TSR PRSUs to employees on January 1, 2017.
The following table
summarizes our total unrecognized compensation cost as of March 31, 2017 associated with restricted stock, restricted stock units,
PRSU awards, and LTIP Unit awards to employees:
|
|
Grant
Year
|
|
|
Shares/ Units
|
|
|
Grant Date
Average
Fair Value
Per Unit/
Share
|
|
|
Total
Compensation
Cost (in millions)
(1)
|
|
|
Weighted
Average
Period of
Expense
Recognition
(in months)
|
|
|
Unrecognized
Compensation
Cost (in
millions)
|
|
|
Performance
Period
|
|
Vesting
Dates
|
RSUs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/31/15 RSU
|
|
|
2015
|
|
|
|
109,985
|
|
|
$
|
40.57
|
|
|
$
|
4.5
|
|
|
|
33
|
|
|
$
|
1.2
|
|
|
N/A
|
|
12/31/2017
|
4/1/15 RSU
|
|
|
2015
|
|
|
|
40,464
|
|
|
|
40.74
|
|
|
|
1.6
|
|
|
|
33
|
|
|
|
0.5
|
|
|
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
|
|
|
|
2.8
|
|
|
N/A
|
|
12/31/2018
|
1/1/2017 RSU
|
|
|
2017
|
|
|
|
140,416
|
|
|
|
31.26
|
|
|
|
4.3
|
|
|
|
36
|
|
|
|
4.0
|
|
|
N/A
|
|
12/31/2019
|
Restricted Stock Units Total
|
|
|
|
|
|
|
428,670
|
|
|
$
|
35.68
|
|
|
$
|
15.3
|
|
|
|
|
|
|
$
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
0.9
|
|
|
1/1/2015-12/31/2017
|
|
Quarterly in 2018
|
4/1/2015 2017 LTIP Units
|
|
|
2015
|
|
|
|
54,151
|
|
|
|
14.80
|
|
|
|
0.8
|
|
|
|
45
|
|
|
|
0.4
|
|
|
1/1/2015-12/31/2017
|
|
Quarterly in 2018
|
3/17/2016 2018 LTIP Units
|
|
|
2016
|
|
|
|
372,069
|
|
|
|
13.21
|
|
|
|
4.9
|
|
|
|
45
|
|
|
|
3.6
|
|
|
1/1/2016-12/31/2018
|
|
Quarterly in 2019
|
1/1/2017 2019 LTIP Units
|
|
|
2017
|
|
|
|
399,726
|
|
|
|
12.61
|
|
|
|
5.0
|
|
|
|
48
|
|
|
|
4.7
|
|
|
1/1/2017-12/31/2019
|
|
Quarterly in 2020
|
TSR PRSUs & LTIP Total
|
|
|
|
|
|
|
1,098,829
|
|
|
$
|
12.69
|
|
|
$
|
13.9
|
|
|
|
|
|
|
$
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relative TSR PRSUs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Relative TSR
|
|
|
2014
|
|
|
|
135,634
|
|
|
$
|
14.24
|
|
|
$
|
1.9
|
|
|
|
48
|
|
|
$
|
0.4
|
|
|
1/1/2014-12/31/2016
|
|
Quarterly in 2017
|
3/31/15 2017 Relative TSR
|
|
|
2015
|
|
|
|
137,249
|
|
|
|
22.50
|
|
|
|
3.1
|
|
|
|
45
|
|
|
|
1.4
|
|
|
1/1/2015-12/31/2017
|
|
Quarterly in 2018
|
4/1/2015 2017 Relative TSR
|
|
|
2015
|
|
|
|
54,151
|
|
|
|
22.91
|
|
|
|
1.2
|
|
|
|
45
|
|
|
|
0.6
|
|
|
1/1/2015-12/31/2017
|
|
Quarterly in 2018
|
3/17/2016 2018 Relative TSR
|
|
|
2016
|
|
|
|
307,480
|
|
|
|
16.45
|
|
|
|
5.1
|
|
|
|
45
|
|
|
|
3.7
|
|
|
1/1/2016-12/31/2018
|
|
Quarterly in 2019
|
1/1/2017 2019 Relative TSR
|
|
|
2017
|
|
|
|
285,338
|
|
|
|
18.04
|
|
|
|
5.1
|
|
|
|
48
|
|
|
|
4.8
|
|
|
1/1/2017-12/31/2019
|
|
Quarterly in 2020
|
Relative TSR PRSUs Total
|
|
|
|
|
|
|
919,852
|
|
|
$
|
17.78
|
|
|
$
|
16.4
|
|
|
|
|
|
|
$
|
10.9
|
|
|
|
|
|
Grand Total
|
|
|
|
|
|
|
2,447,351
|
|
|
$
|
18.63
|
|
|
$
|
45.6
|
|
|
|
|
|
|
$
|
29.3
|
|
|
|
|
|
|
(1)
|
Total compensation costs are net of shares cancelled.
|
Director Restricted Stock Grants
As of March 31, 2017,
we had 51,999 shares of restricted stock outstanding to directors. The directors’ restricted shares are scheduled to vest
over the next three years. As of March 31, 2017, the unrecognized compensation cost associated with outstanding director restricted
stock grants is approximately $1.1 million.
NOTE 13 – BORROWING ACTIVITIES AND ARRANGEMENTS
Secured and Unsecured Borrowings
The following is a
summary of our borrowings:
|
|
|
|
Annual Interest
Rate as of
March 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Maturity
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Secured borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HUD mortgages assumed December 2011
(1)
|
|
2044
|
|
|
3.06
|
%
|
|
$
|
54,636
|
|
|
$
|
54,954
|
|
Deferred financing costs – net
|
|
|
|
|
|
|
|
|
(584
|
)
|
|
|
(589
|
)
|
Total secured borrowings – net
(2)
|
|
|
|
|
|
|
|
|
54,052
|
|
|
|
54,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
2018
|
|
|
2.25
|
%
|
|
|
123,000
|
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche A-1 term loan
|
|
2019
|
|
|
2.48
|
%
|
|
|
200,000
|
|
|
|
200,000
|
|
Tranche A-2 term loan
|
|
2017
|
|
|
2.44
|
%
|
|
|
200,000
|
|
|
|
200,000
|
|
Tranche A-3 term loan
|
|
2021
|
|
|
2.48
|
%
|
|
|
350,000
|
|
|
|
350,000
|
|
Omega OP term loan
(2)
|
|
2017
|
|
|
2.44
|
%
|
|
|
100,000
|
|
|
|
100,000
|
|
2015 term loan
|
|
2022
|
|
|
3.80
|
%
|
|
|
250,000
|
|
|
|
250,000
|
|
Deferred financing costs – net
|
|
|
|
|
|
|
|
|
(5,125
|
)
|
|
|
(5,657
|
)
|
Total term loans – net
|
|
|
|
|
|
|
|
|
1,094,875
|
|
|
|
1,094,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 notes
|
|
2023
|
|
|
4.375
|
%
|
|
|
700,000
|
|
|
|
700,000
|
|
2024 notes
|
|
2024
|
|
|
5.875
|
%
|
|
|
400,000
|
|
|
|
400,000
|
|
2024 notes
|
|
2024
|
|
|
4.95
|
%
|
|
|
400,000
|
|
|
|
400,000
|
|
2025 notes
|
|
2025
|
|
|
4.50
|
%
|
|
|
250,000
|
|
|
|
250,000
|
|
2026 notes
|
|
2026
|
|
|
5.25
|
%
|
|
|
600,000
|
|
|
|
600,000
|
|
2027 notes
|
|
2027
|
|
|
4.50
|
%
|
|
|
700,000
|
|
|
|
700,000
|
|
Other
|
|
2018
|
|
|
-
|
|
|
|
3,000
|
|
|
|
3,000
|
|
Subordinated debt
|
|
2021
|
|
|
9.00
|
%
|
|
|
20,000
|
|
|
|
20,000
|
|
Discount - net
|
|
|
|
|
|
|
|
|
(16,669
|
)
|
|
|
(17,151
|
)
|
Deferred financing costs – net
|
|
|
|
|
|
|
|
|
(27,393
|
)
|
|
|
(27,703
|
)
|
Total unsecured borrowings – net
|
|
|
|
|
|
|
|
|
3,028,938
|
|
|
|
3,028,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total secured and unsecured borrowings – net
|
|
|
|
|
|
|
|
$
|
4,300,865
|
|
|
$
|
4,366,854
|
|
|
(1)
|
Reflects the weighted average annual contractual interest rate on the mortgages at March 31, 2017 excluding a third-party administration
fee of approximately 0.5% annually. Secured by real estate assets with a net carrying value of $64.8 million as of March 31, 2017.
|
|
(2)
|
These amounts represent borrowings that were incurred by Omega OP or wholly owned subsidiaries of Omega OP.
|
Certain of our other
secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As
of March 31, 2017 and December 31, 2016, 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 guarantors of Parent’s outstanding senior
notes as of May 25, 2017, do not directly own any substantive assets other than OHI Holdco’s interest in Omega
OP and Omega OP’s interest in non-guarantor subsidiaries.
See Note 17 –
Subsequent Events for additional details regarding new borrowings, the redemption of the $400 million 5.875% Senior Notes due 2024
and the prepayment of the $200 million senior unsecured incremental term loan facility (the “Tranche A-2 Term Loan Facility”)
due 2017.
NOTE 14 – FINANCIAL INSTRUMENTS
The carrying amount
of cash and cash equivalents, restricted cash and accounts receivable 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 March 31, 2017 and
December 31, 2016, the carrying amounts and fair values of our other financial instruments were as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in direct financing leases – net
|
|
$
|
604,777
|
|
|
$
|
601,522
|
|
|
$
|
601,938
|
|
|
$
|
598,665
|
|
Mortgage notes receivable – net
|
|
|
644,696
|
|
|
|
652,487
|
|
|
|
639,343
|
|
|
|
644,961
|
|
Other investments – net
|
|
|
255,899
|
|
|
|
248,959
|
|
|
|
256,846
|
|
|
|
253,385
|
|
Total
|
|
$
|
1,505,372
|
|
|
$
|
1,502,968
|
|
|
$
|
1,498,127
|
|
|
$
|
1,497,011
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
$
|
123,000
|
|
|
$
|
123,000
|
|
|
$
|
190,000
|
|
|
$
|
190,000
|
|
Tranche A-1 term loan
|
|
|
199,124
|
|
|
|
200,000
|
|
|
|
198,830
|
|
|
|
200,000
|
|
Tranche A-2 term loan
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
200,000
|
|
Tranche A-3 term loan
|
|
|
347,605
|
|
|
|
350,000
|
|
|
|
347,449
|
|
|
|
350,000
|
|
Omega OP term loan
(1)
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
2015 term loan
|
|
|
248,145
|
|
|
|
250,000
|
|
|
|
248,064
|
|
|
|
250,000
|
|
4.375% notes due 2023 – net
|
|
|
692,598
|
|
|
|
710,967
|
|
|
|
692,305
|
|
|
|
693,505
|
|
5.875% notes due 2024 – net
|
|
|
395,236
|
|
|
|
434,814
|
|
|
|
395,065
|
|
|
|
432,938
|
|
4.95% notes due 2024 – net
|
|
|
392,922
|
|
|
|
413,512
|
|
|
|
392,669
|
|
|
|
406,361
|
|
4.50% notes due 2025 – net
|
|
|
245,953
|
|
|
|
250,500
|
|
|
|
245,949
|
|
|
|
249,075
|
|
5.25% notes due 2026 – net
|
|
|
593,792
|
|
|
|
627,443
|
|
|
|
593,616
|
|
|
|
611,461
|
|
4.50% notes due 2027 – net
|
|
|
685,418
|
|
|
|
696,683
|
|
|
|
685,052
|
|
|
|
681,978
|
|
4.75% notes due 2028 – net
|
|
|
(440
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
HUD debt – net
(1)
|
|
|
54,052
|
|
|
|
52,771
|
|
|
|
54,365
|
|
|
|
52,510
|
|
Subordinated debt – net
|
|
|
20,460
|
|
|
|
23,909
|
|
|
|
20,490
|
|
|
|
23,944
|
|
Other
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
3,000
|
|
Total
|
|
$
|
4,300,865
|
|
|
$
|
4,436,599
|
|
|
$
|
4,366,854
|
|
|
$
|
4,444,772
|
|
|
(1)
|
The amounts represent borrowings that were incurred by Omega OP or wholly owned subsidiaries of
Omega OP.
|
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). 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).
|
|
·
|
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 third party (Level 2).
|
|
·
|
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 15 – LITIGATION
We are subject to various
legal proceedings, claims and other actions arising out of the normal course of business. While any legal proceeding or claim has
an element of uncertainty, management believes that the outcome of each lawsuit, claim or legal proceeding that is pending or threatened,
or all of them combined, will not have a material adverse effect on our consolidated financial position or results of operations.
NOTE 16 – 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 Units holders by the weighted-average number of shares of common stock/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/Omega OP Units during the respective period. Dilutive common shares reflect the assumed issuance of additional common shares/Omega
OP Units 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 OP
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
109,112
|
|
|
$
|
58,196
|
|
|
$
|
109,112
|
|
|
$
|
58,196
|
|
Less: net income attributable to noncontrolling interests
|
|
|
(4,672
|
)
|
|
|
(2,641
|
)
|
|
|
—
|
|
|
|
—
|
|
Net income available to common stockholders/Omega OP Unit holders
|
|
$
|
104,440
|
|
|
$
|
55,555
|
|
|
$
|
109,112
|
|
|
$
|
58,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share/unit
|
|
|
197,013
|
|
|
|
188,228
|
|
|
|
205,827
|
|
|
|
197,175
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents/units
|
|
|
347
|
|
|
|
1,175
|
|
|
|
347
|
|
|
|
1,175
|
|
Noncontrolling interest – Omega OP Units
|
|
|
8,814
|
|
|
|
8,947
|
|
|
|
—
|
|
|
|
—
|
|
Denominator for diluted earnings per share/unit
|
|
|
206,174
|
|
|
|
198,350
|
|
|
|
206,174
|
|
|
|
198,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders/Omega OP Unit holders
|
|
$
|
0.53
|
|
|
$
|
0.30
|
|
|
$
|
0.53
|
|
|
$
|
0.30
|
|
Earnings per share/unit – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.53
|
|
|
$
|
0.29
|
|
|
$
|
0.53
|
|
|
$
|
0.29
|
|
NOTE 17 – SUBSEQUENT EVENTS
2017 Omega Credit Facilities
On May 25, 2017, we
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 “2017 Revolving Credit Facility”), a $425 million senior unsecured U.S. Dollar term loan facility (the “2017
U.S. Term Loan Facility”), and a £100 million senior unsecured British Pound Sterling term loan facility (the “2017
Sterling Term Loan Facility” and, together with the 2017 Revolving Credit Facility and the 2017 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”).
The 2017 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 2017 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 2017 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 2017 U.S. Term
Loan Facility and the 2017 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 2017 U.S. Term
Loan Facility and the 2017 Sterling Term Loan Facility each mature on May 25, 2022.
In April 2017, we repaid
and terminated the $200 million Tranche A-2 senior unsecured term loan facility established under the 2014 Omega Credit Agreement.
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.
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.
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,
we 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,
we 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.
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 10-K for the year ended December 31, 2016, as amended and in Part II, Item 1A of this report, as amended (if any);
|
|
(ii)
|
uncertainties relating to the business operations of the operators of our assets, including those
relating to reimbursement by third-party payors, regulatory matters and occupancy levels;
|
|
(iii)
|
the ability of any operators in bankruptcy to reject unexpired lease obligations, modify the terms
of our mortgages and impede our ability to collect unpaid rent or interest during the process of a bankruptcy proceeding and retain
security deposits for the debtors’ obligations;
|
|
(iv)
|
our ability to sell closed or foreclosed assets on a timely basis and on terms that allow us to
realize the carrying value of these assets;
|
|
(v)
|
our ability to manage, re-lease or sell any owned and operated facilities;
|
|
(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”) market or local real estate conditions on our ability to dispose of assets held for sale for
the anticipated proceeds or on a timely basis, or to redeploy the proceeds therefrom on favorable terms; and
|
|
(xvi)
|
our ability to maintain our status as a real estate investment trust.
|
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. All of Omega's assets are owned directly or indirectly, and all of Omega's operations are conducted directly
or indirectly, through its subsidiaries, OHI Healthcare Properties Holdco, Inc. (“OHI Holdco”), a direct wholly owned
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 and the
United Kingdom. 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.
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
(the “Aviv OP”).
Prior to April 1, 2015
and in accordance with the Merger Agreement, Omega restructured the manner in which it holds its assets by converting to an umbrella
partnership real estate investment trust structure (the “UPREIT Conversion”). As a result of the UPREIT Conversion
and following the consummation of the Aviv Merger, 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 have exclusive control over Omega OP’s day-to-day management. As of March 31, 2017, 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 March 31, 2017, consisted of 985 healthcare facilities, located in 42 states and the United Kingdom
and operated by 77 third party operators. Our gross investment in these facilities, net of impairments and before reserve for uncollectible
loans, totaled approximately $8.9 billion at March 31, 2017, with approximately 99% of our real estate investments related to long-term
care facilities. Our portfolio is made up of: (i) 808 SNFs, (ii) 101 ALFs, (iii) 16 specialty facilities, (iv) one medical office
building, (v) fixed rate mortgages on 44 SNFs and four ALFs and (vi) 11 facilities that are closed/held-for-sale. At March 31,
2017, we also held miscellaneous investments of approximately $255.9 million, consisting primarily of secured loans to third-party
operators of our facilities.
As of March 31, 2017
and December 31, 2016 we do not have any material properties or operators with facilities that are not materially occupied.
Our consolidated financial
statements include the accounts of (i) Omega, (ii) OHI Holdco, (iii) Omega OP, and (iv) all direct and indirect wholly owned subsidiaries
of Omega. All intercompany transactions and balances have been eliminated in consolidation, and our net earnings are reduced by
the portion of net earnings attributable to noncontrolling interests.
Taxation
OHI Holdco 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 have 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 will
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, we expect to distribute
dividends in excess of our taxable income.
As a result of our
UPREIT Conversion, our Company and its subsidiaries may be subject to income or franchise taxes in certain states and municipalities.
Also, as a result of our UPREIT Conversion, we created five 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 March 31, 2017, 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 million. The loss carry-forward is fully reserved as of March 31, 2017, with a valuation allowance due to
uncertainties regarding realization.
During the first
quarter of 2017, we recorded approximately $1.0 million of state and local income tax provision and approximately $0.1 million
of tax provision for foreign income taxes included in provision for income taxes on our Consolidated Statement of 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”).
We expect additional rules, regulations and interpretations under the Healthcare Reform Law to be issued that may materially affect
our operators’ financial condition and operations. For example, the new administration and certain members of Congress have
affirmatively indicated that they will pursue repeal of, or significant amendment to, the Healthcare Reform Law. Even if the Healthcare
Reform Law is not 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 become effective on November
28, 2016, some of the regulations become effective in Phase 2, beginning on November 28, 2017, with others becoming effective in
Phase 3, beginning on November 28, 2019. According to CMS, it is estimated that 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.
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 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 March 31, 2017, thirty-one (31) states and the District
of Columbia have expanded Medicaid eligibility with additional states continuing to consider expansion.
Medicare
.
On July 29, 2016, CMS issued a final rule regarding the fiscal year (“FY”) 2017 Medicare payment rates and quality
programs for SNFs, which continues the trend of shifting Medicare payments from volume to value. Aggregate payments to SNFs effective
October 1, 2016 for FY 2017 were expected to increase by $920 million, or 2.4%, over FY 2016 payments. This reimbursement increase
is attributable to a 2.7% market basket increase, reduced by 0.3% in accordance with the multifactor productivity adjustment required
by law.
In addition to FY 2017
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, the “Medicare
Access and CHIP Reauthorization Act of 2015” continues to have 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,
to outpatient hospitals until January 1, 2018. The statutory 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 of the therapy cap exceptions process in the future could have a material
adverse effect on our operators’ financial condition and operations, which could adversely impact their ability 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 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. These reimbursement
methodologies and similar programs are expected to expand, both in public and commercial health plans.
For example, 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 went into effect on April 1, 2016,
and is 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, 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 portion of the spending. On July
25, 2016, CMS proposed rulemaking to extend the CJR bundled payment models effective July 1, 2017 for both hip/femur fracture surgeries
in the same 67 metropolitan as well as additional bundled payment models for heart attacks and bypass surgeries in 98 randomly
selected metropolitan statistical areas. 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. The interim final rule also modified
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” published on January 3, 2017 until May
20, 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. On 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
. The Office of Inspector General’s (the “OIG”) Work Plan for government
fiscal year 2017, which describes projects that the OIG plans to address during the fiscal year, includes 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.
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, 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. A few 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.
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.
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. However, the authority of CMS to restrict the rights of these parties to arbitrate is continuing
to be challenged by litigation in various jurisdictions, and enforcement by CMS has been suspended until a preliminary injunction
issued by the U.S. District Court for the Northern District of Mississippi banning such enforcement by CMS is lifted.
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. 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 2016 Annual Report on Form 10-K
for the year ended December 31, 2016, as amended, in Item 7, Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
There have been no
changes to our critical accounting policies or estimates since December 31, 2016. 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.
Accounting Pronouncement Adopted in 2017
In March 2016, 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 Operations 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 issue targeted updates to clarify specific implementation
issues of ASU 2014-09. These updates include 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 provisions of ASU 2014-09 and its related updates
and will be closely monitoring developments and additional guidance to determine the potential impact of the new standard. The
Company intends to adopt ASU 2014-09 and its subsequent updates in accordance with the modified retrospective approach. We do not
expect the adoption of ASU 2014-09 and its updates to have a significant 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.
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. We are currently evaluating the impact of adopting ASU
2016-02 on our consolidated financial statements.
In June 2016, the FASB
issued ASU 2016-13,
Financial Instruments - Credit Losses (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 March 31, 2017
and 2016
Operating Revenues
Our operating revenues
for the three months ended March 31, 2017, totaled $231.7 million, an increase of $18.9 million over the same period in 2016. The
$18.9 million increase was primarily the result of: (i) $15.8 million of rental income associated with acquisitions and lease amendments
made throughout 2016 and (ii) a $3.5 million increase in other investment income primarily related to new notes and additional
funding to existing operators made throughout 2016 and 2017.
Operating Expenses
Operating expenses
for the three months ended March 31, 2017, totaled $92.5 million, a decrease of approximately $23.8 million over the same period
in 2016. The decrease was primarily due to: (i) a $26.9 million decrease in provision for impairment losses due to fewer facilities
impaired in the first quarter of 2017 compared to the same period in 2016, (ii) a $3.8 million decrease in acquisition costs due
to a fewer acquisitions in the first quarter of 2017 compared to the same period in 2016 and (iii) a $2.7 million decrease in provision
for uncollectible accounts, offset by a $7.6 million increase in depreciation and amortization expense related to acquisitions
completed in 2016.
Other Income (Expense)
For the three months
ended March 31, 2017, total other expenses were $37.1 million, a decrease of approximately $2.6 million over the same period in
2016. The decrease was primarily related to 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. The income from the
contractual settlement was offset by a $7.8 million increase in interest expense primarily related to higher debt balances outstanding
to fund new investments.
National Association of Real Estate
Investment Trusts Funds From Operations
Our funds from operations
(“NAREIT FFO”) for the three months ended March 31, 2017 was $181.0 million compared to $153.6 million for the same
period in 2016.
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 be 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.
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 months ended March 31, 2017 and 2016:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
109,112
|
|
|
$
|
58,196
|
|
Deduct gain from real estate dispositions
|
|
|
(7,420
|
)
|
|
|
(1,571
|
)
|
|
|
|
101,692
|
|
|
|
56,625
|
|
Elimination of non-cash items included in net income:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
69,993
|
|
|
|
62,433
|
|
Depreciation – unconsolidated joint venture
|
|
|
1,658
|
|
|
|
—
|
|
Add back impairments on real estate properties
|
|
|
7,638
|
|
|
|
34,558
|
|
NAREIT FFO
(a)
|
|
$
|
180,981
|
|
|
$
|
153,616
|
|
(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 in the first quarter of 2017:
Number of
Facilities
|
|
|
Country/
|
|
Total
Investment
|
|
|
Land
|
|
|
Building & Site
Improvements
|
|
|
Furniture
& Fixtures
|
|
|
Initial
Annual Cash
|
|
SNF
|
|
|
ALF
|
|
|
State
|
|
(in millions)
|
|
|
Yield (%)
|
|
|
-
|
|
|
|
1
|
|
|
VA
|
|
$
|
7.6
|
|
|
$
|
0.5
|
|
|
$
|
6.8
|
|
|
$
|
0.3
|
|
|
|
7.50
|
|
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 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 on March 31, 2017. We reduced
the net book value of the impaired facilities to their estimated fair values or, with respect to the facility reclassified to held
for sale, to its estimated fair value less costs to sell. 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.
Liquidity and Capital Resources
At March 31, 2017,
we had total assets of $8.8 billion, total equity of $4.2 billion and debt of $4.3 billion, representing approximately 50.5% of
total capitalization.
Financing Activities and Borrowing
Arrangements
Certain of our other
secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As
of March 31, 2017 and December 31, 2016, we were in compliance with all affirmative and negative covenants, including financial
covenants, for our secured and unsecured borrowings.
$500 Million Equity Shelf Program
For the three months
ended March 31, 2017, we issued 0.2 million shares of common stock at an average price of $29.71 per share, net of issuance costs,
generating net proceeds of $6.8 million under our $500 million Equity Shelf Program.
Dividend Reinvestment and Common Stock Purchase Plan
For the three months
ended March 31, 2017, approximately 0.2 million shares of our common stock at an average price of $30.67 per share were issued
through our Dividend Reinvestment and Common Stock Purchase Program for gross proceeds of approximately $7.3 million.
Subsequent Events
2017 Omega Credit Facilities
On May 25, 2017, we
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 “2017 Revolving Credit Facility”), a $425 million senior unsecured U.S. Dollar term loan facility (the “2017
U.S. Term Loan Facility”), and a £100 million senior unsecured British Pound Sterling term loan facility (the “2017
Sterling Term Loan Facility” and, together with the 2017 Revolving Credit Facility and the 2017 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”).
The 2017 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 2017 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 2017 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 2017 U.S. Term
Loan Facility and the 2017 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 2017 U.S. Term
Loan Facility and the 2017 Sterling Term Loan Facility each mature on May 25, 2022.
In April 2017, we repaid
and terminated the $200 million Tranche A-2 senior unsecured term loan facility established under the 2014 Omega Credit Agreement.
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.
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.
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, we
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,
we 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.
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.
For the three months
ended March 31, 2017, we paid dividends of approximately $122 million to our common stockholders. 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;
|
|
·
|
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. 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
totaled $40.3 million as of March 31, 2017, a decrease of $53.3 million as compared to the balance at December 31, 2016. The following
is a discussion of changes in cash and cash equivalents due to operating, investing and financing activities, which are presented
in our Consolidated Statements of Cash Flows.
Operating Activities
–
Operating activities generated $113.9 million of net cash flow for the three months ended March 31, 2017, as compared to $127.2
million for the same period in 2016, a decrease of $13.2 million which is primarily due to the timing of collection of contractual
receivables.
Investing Activities
–
Net cash flow from investing activities was an inflow of $16.4 million for the three months ended March 31, 2017, as compared to
an outflow of $673.8 million for the same period in 2016. The $690.1 million increase in cash flow from investing activities related
primarily to (i) a $408.5 million reduction in acquisitions of real estate, (ii) a $113.8 million cash deposit to acquire 10 care
homes in the United Kingdom completed in the prior year, (iii) $115.6 million from other investments – net primarily related
to funding fewer other investments in 2017, (iv) a $43.5 million increase in proceeds from the sale of real estate investments
in 2017, as compared to the same period in 2016 and (v) an increase of $8.6 million in distributions from our unconsolidated joint
venture in 2017, as compared to the same period of 2016.
Financing Activities
–
Net cash flow from financing activities was an outflow of $183.8 million for the three months ended March 31, 2017, as compared
to an inflow of $550.7 million for the same period in 2016. The $734.5 million increase in cash outflow from financing activities
was primarily related to (i) a net decrease in cash provided by our credit facility of $367.0 million, in 2016 our credit facility
provided $300.0 million in cash as compared to a use of $67.0 million in cash in 2017, (ii) a decrease of $350 million in long-term
borrowings resulting from the $350 million senior unsecured incremental term loan facility obtained in January 2016, (iii) an increase
of $14.8 million in dividends paid, (iv) a decrease in net proceeds of $12.3 million from our dividend reinvestment plan in 2017,
as compared to the same period in 2016. Offsetting these outflows was a $6.8 million increase in cash proceeds from the issuance
of common stock in 2017, as compared to the same period in 2016.