Omega Healthcare Investors, Inc. (NYSE:OHI) (the "Company" or "Omega") today announced its results of operations for the three- and nine-month period ended September 30, 2011. The Company also reported Funds From Operations ("FFO") available to common stockholders for the three-month period ended September 30, 2011 of $44.5 million or $0.43 per common share. The $44.5 million of FFO available to common stockholders for the third quarter of 2011 includes a charge of approximately $3.1 million to write-off deferred financing costs associated with the termination of the Company's 2010 credit facility, $1.5 million of non-cash stock-based compensation expense and a $148 thousand net loss associated with the run-off of owned and operated assets. FFO is presented in accordance with the guidelines for the calculation and reporting of FFO issued by the National Association of Real Estate Investment Trusts ("NAREIT"). Adjusted FFO was $0.48 per common share for the three-month period ended September 30, 2011. FFO and Adjusted FFO are non-GAAP financial measures. Adjusted FFO is calculated as FFO available to common stockholders excluding the impact of certain non-cash items and certain items of revenue or expense, including, but not limited to: results of operations of owned and operated facilities during the period, expenses associated with acquisitions and stock-based compensation expense. For more information regarding FFO and Adjusted FFO, see the "Third Quarter 2011 Results - Funds From Operations" section below.
GAAP NET INCOME
For the three-month period ended September 30, 2011, the Company reported net income of $21.4 million and net income available to common stockholders of $21.4 million, or $0.21 per diluted common share on operating revenues of $72.8 million. This compares to net income of $17.0 million and net income available to common stockholders of $14.7 million, or $0.15 per diluted common share on operating revenues of $69.7 million, for the same period in 2010.
For the nine-month period ended September 30, 2011, the Company reported net income of $33.3 million and net income available to common stockholders of $28.2 million, or $0.28 per diluted common share on operating revenues of $215.9 million. This compares to net income of $53.5 million and net income available to common stockholders of $46.7 million, or $0.50 per diluted common share on operating revenues of $187.2 million, for the same period in 2010.
The year-to-date decrease in net income was primarily due to: (i) increased depreciation expense associated with over $660 million of new investments (including capital improvements) made throughout 2010 and 2011; (ii) impairment charges related to five real estate assets recorded in the first quarter of 2011; (iii) increased interest expense associated with debt instruments issued and assumed in 2010 primarily related to the asset acquisitions from CapitalSource Inc. ("CapitalSource"); (iv) provisions for uncollectible accounts receivable related to one of our operators; and (v) income associated with cash received from a legal settlement in the first quarter of 2010. This impact was partially offset by revenue associated with the new investments completed in 2010 and 2011. In addition to the aforementioned items, net income available to common stockholders was also reduced by a non-cash charge related to the redemption of the Company's 8.375% Series D Cumulative Redeemable Preferred Stock in the first quarter of 2011.
THIRD QUARTER 2011 HIGHLIGHTS AND OTHER RECENT DEVELOPMENTS
- In October 2011, the Company completed approximately $69 million of new investments.
- In October 2011, the Company declared its quarterly common stock dividend of $0.40 per share.
- In September 2011, the Company sold a skilled nursing facility for approximately $4.2 million resulting in a gain of approximately $1.8 million.
- In August 2011, the Company's Board of Directors authorized a $100 million Stock Repurchase Program.
- In August 2011, the Company entered into a new $475 million unsecured revolving credit facility.
THIRD QUARTER 2011 RESULTS
Operating Revenues and Expenses - Operating revenues for the three-month period ended September 30, 2011 were $72.8 million. Operating expenses for the three-month period ended September 30, 2011, excluding nursing home expenses for owned and operated assets, totaled $29.3 million and were composed of $24.9 million of depreciation and amortization expense, $2.9 million of general and administrative expense and $1.5 million of stock-based compensation expense. A reconciliation of these amounts to revenues and expenses reported in accordance with GAAP is provided at the end of this release.
Other Income and Expense - Other income and expense for the three-month period ended September 30, 2011 was a net expense of $23.8 million, which was composed of: (i) $20.1 million of interest expense; (ii) $3.1 million to write-off deferred financing costs associated with the termination of the Company's 2010 credit facility; and (iii) $0.6 million of amortized deferred financing costs.
Funds From Operations - For the three-month period ended September 30, 2011, reportable FFO available to common stockholders was $44.5 million, or $0.43 per common share on 103 million weighted-average common shares outstanding, compared to $42.5 million, or $0.44 per common share on 96 million weighted-average common shares outstanding, for the same period in 2010.
The $44.5 million of FFO for the three-month period ended September 30, 2011 includes the impact of the $3.1 million write-off of deferred financing costs, approximately $1.5 million of non-cash stock-based compensation expense, and a $148 thousand net loss associated with owned and operated assets.
The $42.5 million of FFO for the third quarter of 2010 includes the impact of $78 thousand of costs associated with the CapitalSource asset acquisitions, $0.5 million of non-cash restricted stock expense, and a $0.5 million net loss associated with owned and operated assets.
Adjusted FFO was $142.0 million, or $1.40 per common share, for the nine-month period ended September 30, 2011, compared to $111.0 million, or $1.20 per common share, for the same period in 2010. The Company had 9.1 million additional weighted-average shares for the nine months ended September 30, 2011 compared to the same period in 2010. The increase in weighted-average common shares over the twelve month period was primarily a result of: (i) approximately 3.5 million common shares issued under the equity shelf programs and (ii) approximately 3.4 million common shares issued under the Company's Dividend Reinvestment and Common Stock Purchase Plan. For further information see "Funds From Operations" below.
FINANCING ACTIVITIES
$475 Million Unsecured Revolving Credit Facility - On August 16, 2011, the Company entered into a new $475 million unsecured revolving credit facility (the "2011 Credit Facility"). The 2011 Credit Facility replaces the Company's previous $320 million revolving senior secured credit facility (the "2010 Credit Facility"). The 2011 Credit Facility matures in four years, on August 17, 2015. The 2011 Credit Facility includes an "accordion feature" that permits the Company to expand its borrowing capacity to $600 million.
The 2011 Credit Facility is priced at LIBOR plus an applicable percentage (ranging from 225 basis points to 300 basis points) based on the Company's consolidated leverage. In the event the Company achieves at least two investment grade ratings from Standard & Poor's, Moody's and/or Fitch Ratings, the 2011 Credit Facility will be priced at LIBOR plus an applicable percentage ranging from 150 basis points to 210 basis points (including a facility fee). The Company's applicable percentage above LIBOR was 400 basis points at June 30, 2011 under the 2010 Credit Facility. The Company's applicable percentage above LIBOR was 250 basis points at September 30, 2011 under the 2011 Credit Facility. The 2011 Credit Facility will be used for acquisitions and general corporate purposes.
The Company and its subsidiaries terminated the 2010 Credit Facility in connection with the effectiveness of the 2011 Credit Facility. The Company did not experience any material early termination penalties due to the termination of the 2011 Credit Facility. For the three month period ending September 30, 2011, the Company recorded a non-cash charge of approximately $3.1 million relating to the write-off of deferred financing costs associated with the termination of the 2010 Credit Facility.
$100 Million Stock Repurchase Program - On August 30, 2011, the Company's Board of Directors authorized the repurchase of up to $100 million of its outstanding common stock, from time to time, over the next 12 months.
The Company is authorized to repurchase shares of its common stock in open market and privately negotiated transactions at the times, and in the manner and amounts, as determined by the Company's management and in accordance with the pricing guidelines approved by the Board of Directors and applicable law. The timing and amount of stock repurchases will depend on a variety of factors, including market conditions and corporate and regulatory considerations. The Company has no obligation to repurchase any amount of its common stock, and such repurchases, if any, may be discontinued at any time.
On September 30, 2011, the Company entered into open market transactions to repurchase 183,310 of its common stock at an average price of $15.96 per share. The settlement of these shares occurred on October 5, 2011.
Equity Shelf Program and the Dividend Reinvestment and Direct Stock Purchase Plan - During the nine-month period ended September 30, 2011, the Company sold the following shares of its common stock:
PORTFOLIO AND RECENT DEVELOPMENTS
Persimmon Ventures, LLC - On October 31, 2011, the Company completed approximately $69 million of combined new investments with affiliates of Persimmon Ventures, LLC ("Persimmon") a new operator to the Company.
Purchase / Lease Back Transaction - Effective October 31, the Company purchased three skilled nursing facilities ("SNFs") located in Maryland (2) and West Virginia (1), totaling 511 beds for a total investment of $44 million, consisting of $ 14 million in cash and the assumption of $30 million, 4.87% (weighted-average) indebtedness guaranteed by the U.S. Department of Housing and Urban Development ("HUD") maturing between March 2036 and August 2040.
In addition to the purchase / leaseback transaction described above, Omega has held back an additional $17 million of cash in anticipation of taking title to a third Maryland facility within the next several months. The actual purchase and leaseback is subject to, amongst other things, the completion of a major renovation project.
Mortgage Transaction - Also on October 31, 2011, and simultaneous with the close of the above purchase / leaseback transaction, the Company entered into a first mortgage loan with Persimmon in the amount of $25 million (the "Persimmon Loan"), secured by a lien on three SNFs, totaling 352 beds, all located in Maryland. The Persimmon Loan will be cross defaulted with the above related leases.
The overall combined transaction, including the aforementioned third Maryland leased facility, totals $86 million, consisting of $56 million in cash and $30 million in assumed HUD indebtedness, with a combined initial annual yield of approximately 10%. The combined transaction includes 7 facilities located in 2 states with 938 beds.
Nexion Health, Inc. - On July 18, 2011, the Company entered into a $5.0 million first mortgage loan with Nexion Health Management ("Nexion") to finance Nexion's purchase of one SNF in Texas.
Connecticut Facilities - In January 2011, upon the Company's request, a complaint was filed by the State of Connecticut, Commissioner of Social Services (the "State"), against the licensees/operators of the Company's four Connecticut SNFs, seeking the appointment of a receiver. The SNFs were leased and operated by FC/SCH and were managed by Genesis. The Superior Court, Judicial District of Hartford, Connecticut appointed a receiver.
The receiver is responsible for (i) operating the facilities and funding all operational expenses incurred after the appointment of the receiver and (ii) providing the court with recommendations regarding the facilities. In March, the receiver moved to close all four SNFs and the Company objected. At the hearing held on April 21, 2011, the Company stated its position that the receiver failed to comply with the statutory requirements prior to recommending the facilities' closure. In addition, alternative operators expressed interest in operating several of the facilities. On April 27, 2011, the Court granted the receiver's motion and ordered the facilities closed.
The Company timely filed its notice of appeal, taking the position that the Court's Order (the "Order") is final and appealable, and erroneous. Following the Company's notice of appeal, the Company negotiated a stipulation with the State and the receiver which afforded it significant concessions. Those concessions included: (a) an agreed recognition of the Company as a secured lienholder with a priority claim, (b) an accelerated time frame for the (i) allocation by the receiver of collected funds between pre- and post- receivership periods, and (ii) disbursement to the Company of pre-receivership funds collected, and (c) an agreement by the State that it would forego its right to seek recoupment of pre-receivership funds as reimbursement for post-receivership advances. In exchange for these concessions (among others), the Company withdrew its appeal.
As of the date of this release, all of the residents of the four facilities have been relocated, the receiver has surrendered possession of three of the facilities to the Company, and the receiver's surrender of possession to the Company of the one remaining facility will take place no later than November 1, 2011. The Company is actively marketing the facilities for sale and/or lease (for purposes other than the operation of skilled nursing care).
As a result of the Court's Order, the Company recorded an impairment charge of $24.4 million during the three-month period ended March 31, 2011, in accordance with US Generally Accepted Accounting Principles, to reduce the carrying values of the Connecticut facilities to their fair values. While this impairment charge reduced first quarter and year-to-date net income, the closure of the facilities does not impact the Company's adjusted FFO guidance, which is discussed below.
FC/SCH Facilities - On June 15, 2011, the Company executed an Agreement To Enter Into Master Lease And Restructure Certain Obligations ("MTA") with Genesis Healthcare, LLC ("Genesis") and FC/SCH Partners, LLC and FC Properties WV, LLC (previously referred to as "Formation" and hereafter "FC/SCH") related to the eleven facilities currently leased by FC/SCH. Among other things, the MTA provides at the closing:
1. a subsidiary of Genesis will enter into a new long-term master lease providing for a twelve-year initial term;
2. Genesis will deliver a guaranty of the new master lease;
3. the restructuring of certain indebtedness of FC/SCH to Omega, including, the guaranty of Genesis to repay such indebtedness as restructured; and
4. the release of certain other obligations of FC/SCH.
The sole condition to the closing of the transactions contemplated by the MTA is the receipt of all necessary healthcare regulatory approvals in Massachusetts, New Hampshire, Rhode Island and West Virginia to the transfer of the operating licenses from FC/SCH to Genesis. If not received as of the closing, the facilities located in Vermont will be added to the new master lease when the regulatory approvals for Vermont are received.
As a result of the MTA, during the second quarter of 2011, the Company evaluated the recoverability of the straight-line rent and lease inducements associated with FC/SCH and recorded a $4.1 million provision for uncollectible accounts associated with straight-line receivables and lease inducements.
DIVIDENDS
Common Dividends - On October 13, 2011, the Company's Board of Directors announced a common stock dividend of $0.40 per share. The common dividends are to be paid November 15, 2011 to common stockholders of record on October 31, 2011. At the date of this release, the Company has approximately 103 million common shares outstanding.
2011 ADJUSTED FFO GUIDANCE
The Company modified its guidance for 2011 Adjusted FFO available to common stockholders to be between $1.86 and $1.88 per diluted share. In August 2011, the Company issued its guidance indicating 2011 Adjusted FFO available to common stockholders would be between $1.82 and $1.86 per diluted share.
The Company's Adjusted FFO guidance for 2011 excludes the impact of gains and losses from the sale of assets, additional divestitures, impairment of assets, certain revenue and expense items, capital transactions and restricted stock amortization expense. A reconciliation of the Adjusted FFO guidance to the Company's projected GAAP earnings is provided on a schedule attached to this press release. The Company may, from time to time, update its publicly announced Adjusted FFO guidance, but it is not obligated to do so.
The Company's Adjusted FFO guidance is based on a number of assumptions, which are subject to change and many of which are outside the control of the Company. If actual results vary from these assumptions, the Company's expectations may change. Without limiting the generality of the foregoing, the completion of acquisitions, divestitures, capital and financing transactions, and variations in restricted stock amortization expense may cause actual results to vary materially from our current expectations. There can be no assurance that the Company will achieve its projected results.
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