XNYS:OHI Omega Healthcare Investors Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  
  OF THE SECURITIES EXCHANGE ACT OF 1934  
     
For the quarterly period ended June 30, 2012  
     
  or  
     
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  
  SECURITIES EXCHANGE ACT OF 1934  
     
For the transition period from _______________ to _______________  
     
Commission file number 1-11316  
 
OMEGA HEALTHCARE
INVESTORS, INC.
(Exact name of Registrant as specified in its charter)
     
Maryland
 
38-3041398
 
(State of incorporation)
 
(IRS Employer
Identification No.)
 
200 International Circle, Suite 3500, Hunt Valley, MD 21030
(Address of principal executive offices)
 
(410) 427-1700
(Telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes   x                                           No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes    x                                           No   o

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

Large accelerated filer   x                Accelerated filer                   Non-accelerated filer                   Smaller reporting company   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes   o                                                      No   x

Indicate the number of shares outstanding of each of the issuers classes of common stock as of July 30, 2012.
 
  Common Stock, $.10 par value 108,675,027  
  (Class)  (Number of shares)  
                                                                                   
 
 

 

OMEGA HEALTHCARE INVESTORS, INC.
FORM 10-Q
June 30, 2012
 
TABLE OF CONTENTS

   
Page
No.
PART I
Financial Information
   
       
Item 1.
Financial Statements:
   
     
 
June 30, 2012 (unaudited) and December 31, 2011                                                                                                     
2
 
       
     
 
Three and six months ended June 30, 2012 and 2011                                                                                                  
3
 
       
     
 
Six months ended June 30, 2012 (unaudited)                                                                                                     
4
 
       
     
 
Six months ended June 30, 2012 and 2011                                                                                                     
5
 
       
     
 
June 30, 2012 (unaudited)                                                                                               
6
 
       
Item 2.
25
 
       
Item 3.
Quantitative and Qualitative Disclosures About Market Risk                                                                                                
40
 
       
Item 4.
Controls and Procedures                                                                                       
41
 
       
PART II
Other Information
   
       
Item 1.
Legal Proceedings                                                                                                          
42
 
       
Item 1A.
Risk Factors                                                                                                          
42
 
       
Item 5.
42
 
       
Item 6.
Exhibits                                                                                                          
43
 
 
 
 

 

PART I – FINANCIAL INFORMATION

Item 1 - Financial Statements

OMEGA HEALTHCARE INVESTORS, INC.
(in thousands, except per share amounts)

   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
ASSETS
           
Real estate properties
           
Land and buildings
  $ 2,560,909     $ 2,537,039  
Less accumulated depreciation
    (522,107 )     (470,420 )
Real estate properties – net
    2,038,802       2,066,619  
Mortgage notes receivable – net
    243,461       238,675  
      2,282,263       2,305,294  
Other investments – net
    46,475       52,957  
      2,328,738       2,358,251  
Assets held for sale – net
    2,120       2,461  
Total investments
    2,330,858       2,360,712  
                 
Cash and cash equivalents
    2,861       351  
Restricted cash
    36,479       34,112  
Accounts receivable – net
    112,842       100,664  
Other assets
    68,822       61,473  
Total assets
  $ 2,551,862     $ 2,557,312  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Revolving line of credit
  $ 2,000     $ 272,500  
Secured borrowings
    287,339       303,610  
Unsecured borrowings – net
    1,200,652       975,290  
Accrued expenses and other liabilities
    126,196       127,428  
Total liabilities
    1,616,187       1,678,828  
                 
Stockholders’ equity:
               
Common stock $.10 par value 200,000 shares authorized –– 107,820 shares as of June 30, 2012 and 103,410 as of December 31, 2011 issued and outstanding
        10,782           10,341  
Common stock – additional paid-in-capital
    1,558,506       1,471,381  
Cumulative net earnings
    690,086       633,430  
Cumulative dividends paid
    (1,323,699 )     (1,236,668 )
Total stockholders’ equity
    935,675       878,484  
Total liabilities and stockholders’ equity
  $ 2,551,862     $ 2,557,312  
 
See notes to consolidated financial statements.

 
2

 

OMEGA HEALTHCARE INVESTORS, INC.
Unaudited
(in thousands, except per share amounts)

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenue
                       
Rental income
  $ 75,228     $ 68,487     $ 151,203     $ 134,824  
Mortgage interest income
    7,404       3,433       14,740       6,931  
Other investment income – net
    1,165       617       2,295       1,258  
Miscellaneous
    28       69       102       69  
Total operating revenues
    83,825       72,606       168,340       143,082  
                                 
Expenses
                               
Depreciation and amortization
    27,199       24,759       54,346       49,977  
General and administrative
    4,954       4,930       10,480       10,156  
Acquisition costs
    98       -       203       45  
Impairment loss on real estate properties
    -       -       272       24,971  
Provisions for uncollectible mortgages, notes and accounts receivable
    -       4,139       -       4,139  
Nursing home expenses of owned and operated assets
    -       225       -       455  
Total operating expenses
    32,251       34,053       65,301       89,743  
                                 
Income before other income and expense
    51,574       38,553       103,039       53,339  
Other income (expense)
                               
Interest income
    9       12       16       23  
Interest expense
    (24,009 )     (20,072 )     (46,976 )     (40,072 )
Interest – amortization of deferred financing costs
    (668 )     (703 )     (1,297 )     (1,397 )
Interest – gain (loss) on extinguishment of debt
    1,698       -       (5,410 )     (16 )
Total other expense
    (22,970 )     (20,763 )     (53,667 )     (41,462 )
                                 
Income before gain on assets sold
    28,604       17,790       49,372       11,877  
Gain on assets sold – net
    1,968       -       7,284       -  
Net income
    30,572       17,790       56,656       11,877  
Preferred stock dividends
    -       -       -       (1,691 )
Preferred stock redemption
    -       16       -       (3,456 )
Net income available to common stockholders
  $ 30,572     $ 17,806     $ 56,656     $ 6,730  
                                 
Income per common share available to common shareholders:
                               
Basic:
                               
Net income
  $ 0.29     $ 0.17     $ 0.54     $ 0.07  
Diluted:
                               
Net income
  $ 0.29     $ 0.17     $ 0.54     $ 0.07  
                                 
Dividends declared and paid per common share
  $ 0.42     $ 0.38     $ 0.83     $ 0.75  
                                 
Weighted-average shares outstanding, basic
    105,717       101,912       104,736       100,993  
Weighted-average shares outstanding, diluted
    106,033       102,001       105,023       101,044  
 
See notes to consolidated financial statements.

 
3

 

OMEGA HEALTHCARE INVESTORS, INC.
Unaudited
(in thousands, except per share amounts)
   
 
Common
Stock Par
Value
   
 
 
Additional
Paid-in Capital
   
 
 
Cumulative
Net Earnings
   
 
 
Cumulative
Dividends
   
 
 
 
Total
 
                               
Balance at December 31, 2011 (103,410 common shares)
  $ 10,341     $ 1,471,381     $ 633,430     $ (1,236,668 )   $ 878,484  
Issuance of common stock:
                                       
Grant of restricted stock to company executives (428 shares)
    43       (43 )                  
Grant of restricted stock to company directors (13 shares at $20.29 per share)
    1       (1 )                  
Amortization of restricted stock
          2,940                   2,940  
Dividend reinvestment plan (3,206 shares at $21.52 per share)
    320       68,656                   68,976  
Grant of stock as payment of directors fees (4 shares at an average of $21.42 per share)
    1       75                   76  
Equity Shelf Program (759 shares at $21.27 per share, net of issuance costs)
    76       15,498                   15,574  
Net income
                56,656             56,656  
Common dividends ($0.83 per share)
                      (87,031 )     (87,031 )
Balance at June 30, 2012 (107,820 common shares)
  $ 10,782     $ 1,558,506     $ 690,086     $ (1,323,699 )   $ 935,675  
 
See notes to consolidated financial statements.

 
4

 

OMEGA HEALTHCARE INVESTORS, INC.
Unaudited (in thousands)
 
   
Six Months Ended
June 30,
 
   
2012
   
2011
 
Cash flows from operating activities
           
Net income
  $ 56,656     $ 11,877  
Adjustment to reconcile net income to cash provided by operating activities:
               
Depreciation and amortization
    54,346       49,977  
Impairment on real estate properties
    272       24,971  
Provisions for uncollectible accounts receivable
          4,139  
Amortization of deferred financing and debt extinguishment costs
    6,707       1,397  
Restricted stock amortization expense
    2,971       2,998  
Gain on assets sold – net
    (7,284 )      
Amortization of acquired in-place leases - net
    (2,852 )     (3,232 )
Other
    (75 )     (75 )
Change in operating assets and liabilities – net of amounts assumed/acquired:
               
Accounts receivable, net
    370       16  
Straight-line rent
    (13,120 )     (6,672 )
Lease inducement
    1,684       1,696  
Effective yield receivable on mortgage notes
    (1,113 )     (675 )
Other operating assets and liabilities
    (4,138 )     (9,218 )
Operating assets and liabilities for owned and operated properties
          (47 )
Net cash provided by operating activities
    94,424       77,152  
Cash flows from investing activities
               
Acquisition of real estate – net of liabilities assumed and escrows acquired
    (26,922 )     (98 )
Placement of mortgage loans
    (4,955 )     (4,607 )
Proceeds from sale of real estate investments
    22,006        
Capital improvements and funding of other investments
    (14,207 )     (8,118 )
Proceeds from other investments
    10,040       1,747  
Investments in other investments
    (3,558 )     (2,290 )
Collection of mortgage principal – net
    243       37  
Net cash used in investing activities
    (17,353 )     (13,329 )
Cash flows from financing activities
               
Proceeds from credit facility borrowings
    92,000       174,000  
Payments on credit facility borrowings
    (362,500 )     (121,000 )
Receipts of other long-term borrowings
    400,000        
Payments of other long-term borrowings
    (188,674 )     (1,216 )
Payments of financing related costs
    (12,920 )     (641 )
Receipts from dividend reinvestment plan
    68,976       40,613  
Net proceeds from issuance of common stock
    15,574       31,350  
Payments from exercised options and restricted stock – net
          (1,254 )
Dividends paid
    (87,017 )     (79,044 )
Redemption of preferred stock
          (108,556 )
Net cash used in financing activities
    (74,561 )     (65,748 )
                 
Increase (decrease) in cash and cash equivalents
    2,510       (1,925 )
Cash and cash equivalents at beginning of period
    351       6,921  
Cash and cash equivalents at end of period
  $ 2,861     $ 4,996  
Interest paid during the period, net of amounts capitalized
  $ 46,323     $ 38,387  
 
See notes to consolidated financial statements.

 
5

 
 
OMEGA HEALTHCARE INVESTORS, INC.
Unaudited
June 30, 2012
 
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Business Overview
 
Omega Healthcare Investors, Inc. (“Omega” or the “Company”) has one reportable segment consisting of investments in healthcare-related real estate properties.  Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities (“SNFs”) located in the United States.  Our core portfolio consists of long-term leases and mortgage agreements.  All of our leases are “triple-net” leases, which require the tenants to pay all property-related expenses.  Our mortgage revenue derives from fixed-rate mortgage loans, which are secured by first mortgage liens on the underlying real estate and personal property of the mortgagor.
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements for Omega have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements.  In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  We have evaluated all subsequent events through the date of the filing of this Form 10-Q. These unaudited consolidated financial statements should be read in conjunction with the financial statements and the footnotes thereto included in our latest Annual Report on Form 10-K.
 
Our consolidated financial statements include the accounts of (i) Omega, (ii) all direct and indirect wholly owned subsidiaries of Omega, and (iii) TC Healthcare (“TC Healthcare”), an entity and interim operator created in 2008 to temporarily operate the 15 facilities we assumed as a result of the bankruptcy of one of our former tenants/operators.  Thirteen of these facilities were transitioned from TC Healthcare to a new tenant/operator on September 1, 2008.  The two remaining facilities were transitioned to the new tenant/operator on June 1, 2010 upon approval by state regulators of the operating license transfer, and as of such date, TC Healthcare no longer operated these facilities (see Note 3 – Owned and Operated Assets).  All inter-company accounts and transactions have been eliminated in consolidation of the financial statements.
 
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 will be amortized as a reduction of rental revenue over the non cancellable lease term. 
 
 
6

 
 
On a quarterly basis, we review our accounts receivable to determine their collectability.  The determination of collectability of these assets requires significant judgment and is affected by several factors relating to the credit quality of our operators that we regularly monitor, including (i) payment history, (ii) the age of the contractual receivables, (iii) the current economic conditions and reimbursement environment, (iv) the ability of the tenant to perform under the terms of their lease and/or contractual loan agreements and (v) the value of the underlying collateral of the agreement.  If we determine collectability of any of our contractual receivables is at risk, we estimate the potential uncollectible amounts and provide an allowance.  In the case of a lease recognized on a straight-line basis or existence of lease inducements, we generally provide an allowance for straight-line accounts receivable and/or the lease inducements when certain conditions or indicators of adverse collectability are present.
 
A summary of our net receivables by type is as follows:
     June 30,
2012
     
December 31,
2011
 
   
(in thousands)
 
                 
Contractual receivables
  $ 5,243     $ 4,683  
Effective yield interest receivables
    2,454       1,341  
Straight-line receivables
    86,689       73,604  
Lease inducements
    20,992       22,677  
Allowance
    (2,536 )     (1,641 )
Accounts receivable – net
  $ 112,842     $ 100,664  
 
We continuously evaluate the payment history and financial strength of our operators and have historically established allowance reserves for straight-line rent adjustments for operators that do not meet our requirements.  We consider factors such as payment history and the operator’s financial condition as well as current and future anticipated operating trends when evaluating whether to establish allowance reserves.
 
NOTE 2 – PROPERTIES AND INVESTMENTS
 
In the ordinary course of our business activities, we periodically evaluate investment opportunities and extend credit to customers.  We also regularly engage in lease and/or loan extensions and modifications. Additionally, we actively monitor and manage our investment portfolio with the objectives of improving credit quality and increasing investment returns.  In connection with our portfolio management, we may engage in various collection and foreclosure activities.
 
If we acquire real estate pursuant to a foreclosure or bankruptcy proceeding, the assets will initially be included on the consolidated balance sheet at the lower of cost or estimated fair value (see Note 3 Owned and Operated Assets).
 
Leased Property
 
Our leased real estate properties, represented by 386 SNFs, 10 assisted living facilities (“ALFs”) and five specialty facilities at June 30, 2012, are leased under provisions of single or master leases with initial terms typically ranging from 5 to 15 years, plus renewal options.  Substantially all of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of three methods depending on specific provisions of each lease as follows: (i) a specific annual percentage increase over the prior year’s rent, generally 2.5%; (ii) an increase based on the change in pre-determined formulas from year to year (i.e., such as increases in the Consumer Price Index (“CPI”)); or (iii) specific dollar increases over prior years.  Under the terms of the leases, the lessee is responsible for all maintenance, repairs, taxes and insurance on the leased properties.
 
 
7

 
 
2012 Acquisitions
 
Health and Hospital Corporation
 
On June 29, 2012, we purchased four facilities encompassing 383 licensed beds in Indiana for approximately $21.7 million and leased the facilities to an existing operator.  We are awaiting information necessary to complete the process of allocating the fair value of the assets purchased.  We believe that the final allocation will consist of land, building and furniture and equipment.
 
Mark Ide Limited Liability Company
 
On June 29, 2012, we purchased one facility encompassing 80 licensed beds in Indiana for approximately $3.4 million and leased the facility to an existing operator.  We are awaiting information necessary to complete the process of allocating the fair value of the assets purchased.  We believe that the final allocation will consist of land, building and furniture and equipment.
 
2011 Acquisitions
 
Capital Funding Group, Inc.
 
On December 23, 2011, we purchased 17 SNFs from affiliates of Capital Funding Group, Inc. (“CFG”), a new operator to Omega, for an aggregate purchase price of $128 million.  The acquisition consisted of the assumption of $71 million of indebtedness guaranteed by the Department of Housing and Urban Development (“HUD”) and $57 million in cash.
 
The $71 million of assumed HUD debt was comprised of 15 HUD mortgage loans with a blended interest rate of 5.70% and maturities between October 2029 and July 2044.
 
The 17 SNFs, representing 1,820 available beds, are located in Arkansas (12), Colorado (1), Florida (1), Michigan (2) and Wisconsin (1). The transaction involved two separate master lease agreements covering all 17 SNFs.
 
We recorded approximately $129.9 million consisting of land ($9.0 million), buildings and site improvements ($111.5 million) and furniture and fixtures ($9.4 million).  We recorded approximately $1.9 million of fair value adjustment related to the above market debt assumed based on the terms of comparable debt.  On June 29, 2012, we retired four HUD mortgage notes and wrote-off the unamortized fair value adjustment associated with the mortgages.  We did not record goodwill in connection with this transaction.
 
Persimmon Ventures, LLC and White Pine Holdings, LLC
 
During the fourth quarter of 2011, we completed $86 million of combined new investments with affiliates of Persimmon Ventures, LLC and White Pine Holding, LLC (“White Pine”), both new operators to Omega.  The investments involved a purchase / lease back transaction and a mortgage transaction.  The combined transaction consists of 7 facilities and 938 beds.
 
Purchase / Lease Back Transaction
 
We purchased four SNFs located in Maryland (3) and West Virginia (1), totaling 586 beds for a total investment of $61 million, including approximately $1 million to complete renovations at one facility.  The consideration consisted of $31 million in cash and the assumption of $30 million in HUD – guaranteed indebtedness, which bears an interest rate of 4.87% (weighted-average) and matures between March 2036 and September 2040.
 
 
8

 
 
Acquisition costs related to the CFG and White Pine acquisitions were approximately $1.2 million in 2011.
 
Mortgage Transaction
 
We entered into a first mortgage loan with White Pine in the amount of $25 million secured by a lien on three SNFs, totaling 352 beds, all located in Maryland.
 
The overall combined transaction totaled $86 million, consisting of $56 million in cash and $30 million in assumed HUD indebtedness, with a combined initial annual yield of approximately 10%.
 
We recorded approximately $62.7 million consisting of land ($4.4 million), buildings and site improvements ($55.0 million) and furniture and fixtures ($3.3 million).  One of the facilities acquired in connection with this transaction on December 30, 2011 is in the process of being renovated.  We recorded approximately $3.0 million of fair value adjustment related to the above market debt assumed based on the terms of comparable debt.  We estimate amortization will be approximately $0.2 million per year over the next five years. We did not record goodwill in connection with this transaction.
 
The facilities acquired from White Pine and affiliates of CFG in the fourth quarter of 2011 and from Health & Hospital Corporation and Mark Ide in the second quarter of 2012 are included in our results of operations from the date of acquisition.  The following unaudited pro forma results of operations reflect each of the White Pine, affiliates of CFG, Health & Hospital Corporation and Mark Ide transactions as if they occurred on January 1, 2011.  In the opinion of management, all significant necessary adjustments to reflect the effect of the acquisitions have been made.  The following pro forma information is not indicative of future operations.
 
   
Pro Forma
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
     2012      2011      2012      2011  
     (in thousands, except per share amount, unaudited)  
                         
Revenues
  $ 84,523     $ 78,612     $ 169,736     $ 155,094  
Net income available to common stockholders
  $ 30,768     $ 19,293     $ 57,048     $ 9,704  
                                 
Earnings per share – diluted:
                               
Net income available to common stockholders – as reported
  $ 0.29     $ 0.17     $ 0.54     $ 0.07  
Net income available to common stockholders – pro forma
  $ 0.29     $ 0.19     $ 0.54     $ 0.10  
 
Connecticut Properties
 
In January 2011, at our request, a complaint was filed by the State of Connecticut, Commissioner of Social Services (the “State”) against the licensees/operators of four Connecticut SNFs, seeking the appointment of a receiver.  The facilities were leased and operated by affiliates of FC/SCH Capital, LLC (“FC/SCH”) and were managed by Genesis Healthcare (“Genesis”), and had approximately 472 licensed beds as of March 31, 2011.  The Superior Court, Judicial District of Hartford, Connecticut (the “Court”) appointed a receiver.
 
 
9

 
 
The receiver was responsible for (i) operating the facilities and funding all operational expenses incurred after the appointment of the receiver and (ii) for providing the Court with recommendations regarding the facilities.  In March 2011, the receiver moved to close all four SNFs and we objected.  At the hearing held on April 21, 2011, we stated our 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.
 
We timely filed our notice of appeal, taking the position that the Courts Order was final and appealable, and erroneous.  Following our notice of appeal, we negotiated a stipulation with the State and the receiver which afforded us significant concessions.  Those concessions included: (a) an agreed recognition of us as a secured lienholder with a priority claim, (b) an accelerated timeframe for the (i) allocation by the receiver of collected funds between pre- and post- receivership periods, and (ii) disbursement to us 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), we withdrew our appeal.
 
As a result of these developments, during the six months ended June 30, 2011, we recorded an impairment charge of $24.4 million to reduce the carrying values of the Connecticut SNFs to their estimated fair values.  We estimated the fair value of these facilities based on the facilities’ potential sales value assuming that the facilities would not be used as skilled nursing facilities.  As of November 1, 2011, all of the residents of the four facilities have been relocated and the receiver has surrendered possession of all of the facilities to us.  We are actively marketing the facilities for sale (for purposes other than the provision of skilled nursing care).  See “Assets Sold or Held for Sale” below for more detail.
 
FC/SCH Facilities
 
During the second quarter of 2011, we entered into a master transition agreement (“2011 MTA”) with one of our current lessee/operators and a third party lessee/operator to transition the facilities from the current operator to the new operator.  The 2011 MTA closing is subject to receipt of healthcare regulatory approvals from several states for the operating license transfer from the current operator to the new operator.  On January 1, 2012, regulatory approval was provided and the former lease was terminated and a new operator entered into a new twelve-year master lease for the facilities.  As a result of the 2011 MTA, during the second quarter of 2011, we evaluated the recoverability of the straight-line rent and lease inducements associated with the current lease and recorded a $4.1 million provision for uncollectible accounts associated with straight-line receivables and lease inducements.
 
Assets Sold or Held for Sale
 
Assets Sold
 
   On January 13, 2012, we sold a SNF in Indiana for approximately $3.1 million resulting in a gain of approximately $0.3 million.
   
 ●  On March 23, 2012, an operator in Alaska exercised its purchase option and purchased a SNF for approximately $11.0 million.  We recognized a gain of approximately $5.1 million in this transaction.
   
 ●  On April 2, 2012, we sold a held-for-sale SNF in Arkansas for approximately $1.7 million.  No gain or loss was recognized in this transaction.
   
 ●  On May 18, 2012, we sold a held-for-sale SNF in Alabama for $4.5 million resulting in a gain of approximately $0.4 million.
   
 ●  On June 15, 2012, we sold a held-for-sale SNF in Connecticut for $1.8 million resulting in a gain of approximately $1.6 million.
 
 
10

 
 
Held for Sale
 
During the first quarter of 2012, we recorded a $0.1 million impairment charge to reduce the carrying value of a SNF in Arkansas to its estimated fair value less cost to sell and simultaneously classified the facility as held-for-sale.  Also during the first quarter of 2012, we recorded a $0.1 million impairment charge to reduce the carrying value of a held-for-sale facility that was sold during the quarter.
 
At June 30, 2012, we had four SNFs and one parcel of land classified as held-for-sale with an aggregate net book value of approximately $2.1 million.
 
Mortgage Notes Receivables
 
Our mortgage notes receivables relate to 12 fixed-rate mortgages on 32 long-term care facilities and two construction mortgages on two facilities currently under construction.  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 five (5) states, which are operated by six (6) independent healthcare operating companies.  We monitor compliance with mortgages and when necessary have initiated collection, foreclosure and other proceedings with respect to certain outstanding loans.  As of June 30, 2012, none of our mortgages were in default or in foreclosure proceedings.  Where appropriate, the mortgage properties are generally cross-collateralized with the master lease agreement.
 
Mortgage interest income is recognized as earned over the terms of the related mortgage notes, using the effective yield method.  Allowances are provided against earned revenues from mortgage interest when collection of amounts due becomes questionable or when negotiations for restructurings of troubled operators lead to lower expectations regarding ultimate collection.  When collection is uncertain, mortgage interest income on impaired mortgage loans is recognized as received after taking into account application of security deposits.
 
NOTE 3 – OWNED AND OPERATED ASSETS
 
In November 2007, affiliates of Haven Healthcare (“Haven”), one of our former operators/lessees/mortgagors, operated under Chapter 11 bankruptcy protection.  Commencing in February 2008, the assets of the Haven facilities were marketed for sale via an auction process to be conducted through proceedings established by the bankruptcy court.  The auction process failed to produce a qualified buyer.  As a result, and pursuant to our rights as ordered by the bankruptcy court, Haven moved the bankruptcy court to authorize us to credit bid certain of the indebtedness that it owed to us in exchange for taking ownership of and transitioning certain of its assets to a new entity in which we have a substantial ownership interest, all of which was approved by the bankruptcy court on July 4, 2008.  Effective July 7, 2008, we took ownership and/or possession of 15 facilities previously operated by Haven.  TC Healthcare, a new entity and an interim operator, in which we have a substantial economic interest, began operating these facilities on our behalf through an independent contractor.
 
On August 6, 2008, we entered into a Master Transaction Agreement (“2008 MTA”) with affiliates of FC/SCH whereby FC/SCH agreed (subject to certain closing conditions, including the receipt of licensure) to lease 14 SNFs and one ALF facility under a master lease.  These facilities were formerly leased to Haven.
 
 
11

 
 
Effective September 1, 2008, we completed the operational transfer of 12 SNFs and one ALF to affiliates of FC/SCH, in accordance with the terms of the 2008 MTA.  These 13 facilities are located in Connecticut (5), Rhode Island (4), New Hampshire (3) and Massachusetts (1).  As part of the transaction, Genesis has entered into a long-term management agreement with FC/SCH to oversee the day-to-day operations of each of these facilities. The two remaining facilities in Vermont, which were operated by TC Healthcare until May 31, 2010, were transferred to FC/SCH upon licensure from the state of Vermont.  As a result of the transition of the operations to FC/SCH, we no longer operate any owned and operated facilities, effective June 1, 2010.  Our consolidated financial statements include the results of operations of the two Vermont facilities from July 7, 2008 to May 31, 2010.
 
Nursing home revenues and expenses, included in our consolidated financial statements that relate to such owned and operated assets are set forth in the tables below.
 
   
Three Months Ended
June 30,
     
Six Months Ended
June 30,
 
   
2012
   
2011
     
2012
   
2011
 
   
(in thousands)
 
Nursing home revenues
  $     $       $     $  
                                   
Nursing home expenses
          225               455  
Loss from nursing home operations
  $     $ (225 )     $     $ (455 )
 
NOTE 4 – CONCENTRATION OF RISK
 
As of June 30, 2012, our portfolio of real estate investments consisted of 437 healthcare facilities, located in 34 states and operated by 47 third-party operators.  Our gross investment in these facilities, net of impairments and before reserve for uncollectible loans, totaled approximately $2.8 billion at June 30, 2012, with approximately 99% of our real estate investments related to long-term care facilities.  This portfolio is made up of 386 SNFs, 10 ALFs, five specialty facilities, fixed rate mortgages on 32 SNFs, and four SNFs that are held-for-sale.  At June 30, 2012, we also held miscellaneous investments of approximately $46.5 million, consisting primarily of secured loans to third-party operators of our facilities.
 
At June 30, 2012, we had investments with one operator that exceeded 10% of our total investment: affiliates and/or subsidiaries of CommuniCare Health Services (“CommuniCare”) (12%).  The two states in which we had our highest concentration of investments were Florida (22%) and Ohio (13%) at June 30, 2012.
 
For the three-month period ended June 30, 2012, our revenues from operations totaled $83.8 million, of which approximately $11.0 million was from CommuniCare (13%) and $8.5 million was from Sun Healthcare (“Sun”) (10%).  No other operator generated more than 9% of our revenues from operations for the three-month period ended June 30, 2012.
 
For the six-month period ended June 30, 2012, our revenues from operations totaled $168.3 million, of which approximately $21.9 million was from CommuniCare (13%) and $17.0 million was from Sun Healthcare (“Sun”) (10%).  No other operator generated more than 9% of our revenues from operations for the six-month period ended June 30, 2012.
 
Sun is subject to the reporting requirements of the SEC and is required to file with the SEC annual reports containing audited financial information and quarterly reports containing unaudited interim financial information.  Sun’s filings with the SEC can be found at the SEC’s website at www.sec.gov.  We are providing this data for information purposes only, and we undertake no responsibility for Sun’s filings.
 
 
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NOTE 5 – DIVIDENDS
 
Common Dividends
 
On July 17, 2012, the Board of Directors declared a common stock dividend of $0.42 per share.  The common dividends are to be paid August 15, 2012 to common stockholders of record on July 31, 2012.
 
On April 17, 2012, the Board of Directors declared a common stock dividend of $0.42 per share, increasing the quarterly common dividend by $0.01 per share over the prior quarter, which was paid May 15, 2012 to common stockholders of record on April 30, 2012.
 
On January 13, 2012, the Board of Directors declared a common stock dividend of $0.41 per share, increasing the quarterly common dividend by $0.01 per share over the prior quarter, which was paid February 15, 2012 to common stockholders of record on January 31, 2012.
 
NOTE 6 – TAXES
 
So long as we qualify as a real estate investment trust (“REIT”) under the Internal Revenue Code (the “Code”), we generally will not be subject to federal income taxes on the REIT taxable income that we distribute to stockholders, subject to certain exceptions.  On a quarterly and annual basis, we test our compliance within the REIT taxation rules to ensure that we were in compliance with the rules.
 
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”).  Currently, we have one TRS that is taxable as a corporation and that pays federal, state and local income tax on its net income at the applicable corporate rates.  As of June 30, 2012, the TRS had a net operating loss carry-forward of $1.1 million.  The loss carry-forward is fully reserved with a valuation allowance as we concluded it was more-likely-than-not that the deferred tax asset would not be realized.
 
NOTE 7 – STOCK-BASED COMPENSATION
 
The following is a summary of our stock-based compensation expense for the three- and six- month periods ended June 30, 2012 and 2011, respectively:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(in thousands)
 
                         
Stock-based compensation expense
  $ 1,486     $ 1,519     $ 2,971     $ 2,998  
 
2011 and 2012 Stock Awards
 
Effective January 2011, we granted 428,503 shares of restricted stock and 496,977 performance restricted stock units (“PRSUs”) to six employees.  Effective January 2012, we granted 124,244 PRSUs to six employees.
 
Restricted Stock Awards
 
The restricted stock awards vest 100% on December 31, 2013, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.  As of June 30, 2012, no shares of restricted stock have vested under these restricted stock awards.
 
 
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Performance Restricted Stock Units
 
Effective January 1, 2011, we awarded three types of PRSUs to the six employees: (i) 124,244 annual total shareholder return (“TSR”) PRSUs for the year ended December 31, 2011 (“2011 Annual TSR PRSUs”); (ii) 279,550 multi-year absolute TSR PRSUs and (iii) 93,183 multi-year relative TSR PRSUs.  On January 1, 2012, we awarded to the six employees 124,244 annual TSR PRSUs for the year ended December 31, 2012 (“2012 Annual TSR PRSUs”).
 
Annual TSR PRSUs
 
The number of shares earned under the annual TSR PRSUs depends generally on the level of achievement of TSR for the year.  The annual TSR PRSUs vest on December 31 of the year, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.  The 2011 Annual TSR PRSUs were forfeited because the required TSR for 2011 was not achieved.
 
Multi-year Absolute TSR PRSUs
 
The number of shares earned under the multi-year absolute TSR PRSUs depends generally on the level of achievement of TSR for the three-years ending December 31, 2013.  The multi-year absolute TSR PRSUs vest 25% on the last day of each calendar quarter in 2014, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.
 
Multi-year Relative TSR PRSUs
 
The number of shares earned under the multi-year relative TSR PRSUs depends generally on the level of achievement of TSR relative to other real estate investment trusts in the MSCI U.S. REIT Index for the three-years ending December 31, 2013.  The multi-year relative TSR PRSUs vest 25% on the last day of each calendar quarter in 2014, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.
 
The PRSU awards have varying degrees of performance requirements to achieve vesting, and each PRSU award represents the right to a variable number of shares of common stock and related dividend equivalents based on dividends paid to stockholders during the applicable performance period.
 
As of June 30, 2012, none of these PRSUs are vested or earned.
 
The following table summarizes our total unrecognized compensation cost as of June 30, 2012 associated with outstanding restricted stock and PRSU awards to employees:
 
                               
   
Shares/
Units
   
Grant Date Average Fair Value Per
Unit/ Share
   
Total Compensation Cost
(in millions)
   
Weighted Average
Period of
Expense
Recognition
(in months)
   
Unrecognized Compensation Cost
(in millions)
 
       
Restricted stock
    428,503     $ 22.44     $ 9.6       36     $ 4.8  
2012 Annual PRSUs
    124,244     $ 9.61       1.2       12       0.6  
Multi-year absolute TSR PRSUs
    279,550     $ 11.06       3.1       44       1.8  
Multi-year relative TSR PRSUs
    93,183     $ 12.26       1.1       44       0.7  
Total
    925,480     $ 15.64     $ 15.0             $ 7.9  
 
We used a Monte Carlo model to estimate the fair value for PRSUs granted to the employees in January 2011 and January 2012.
 
 
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Director Restricted Stock Grants
 
As of June 30, 2012, we had 30,999 shares of restricted stock outstanding to directors.  The directors’ restricted shares are scheduled to vest over the next three years.  As of June 30, 2012, the unrecognized compensation cost associated with outstanding director restricted stock grants is approximately $0.4 million.
 
NOTE 8 – FINANCING ACTIVITIES AND BORROWING ARRANGEMENTS
 
Secured and Unsecured Borrowings
 
The following is a summary of our long-term borrowings:
 
         
Current
     
June 30,
   
December 31,
 
   
Maturity
   
Rate
     
2012
   
2011
 
                 
(in thousands)
 
Secured borrowings:
                         
HUD Berkadia mortgages (1) 
    2036 - 2040       6.61 %     $ 63,729     $ 64,533  
HUD Capital Funding mortgages
    2040 - 2045       4.85 %       131,982       133,061  
HUD White Pine mortgages (1) 
    2036 - 2040       4.87 %       32,406       32,813  
HUD Affiliates of CFG mortgages(1)
    2044       5.55 %       59,222       73,203  
Total secured borrowings
                      287,339       303,610  
                                   
Unsecured borrowings:
                                 
Revolving line of credit
    2015       3.00 %     $ 2,000     $ 272,500  
                                   
2016 Notes
    2016       7.0 %             175,000  
2020 Notes
    2020       7.5 %       200,000       200,000  
2022 Notes
    2022       6.75 %       575,000       575,000  
2024 Notes
    2024       5.875 %       400,000        
Subordinated debt
    2021       9.0 %       21,132       21,219  
                        1,196,132       971,219  
Premium - net
                      4,520       4,071  
Total unsecured borrowings
                      1,202,652       1,247,790  
Totals net 
                    $ 1,489,991     $ 1,551,400  
(1)  
Reflects the weighted average interest rate on the mortgages.
 
Bank Credit Agreements
 
At June 30, 2012, we had $2.0 million outstanding under our $475 million unsecured revolving credit facility (the “2011 Credit Facility”), and no letters of credit outstanding, leaving availability of $473.0 million.
 
The 2011 Credit Facility matures on August 17, 2015.  The 2011 Credit Facility includes an “accordion feature” that permits us to expand our borrowing capacity to $600 million, under certain conditions.
 
Interest under the 2011 Credit Facility was originally priced at LIBOR plus an applicable percentage (ranging from 225 basis points to 300 basis points) based on our consolidated leverage.  As of June 30, 2012, our applicable percentage above LIBOR was 275 basis points.  The 2011 Credit Facility agreement includes an alternative pricing grid for us if we achieved investment grade ratings from at least two of the following rating agencies: (i) Standard & Poor’s, (ii) Moody’s, and/or (iii) Fitch Ratings.  In July, Fitch Ratings initiated coverage of our bonds at an investment grade, thereby achieving investment grade rating from two of the three named rating agencies.  As a result, for so long as we maintain two investment grade ratings, our borrowing cost under 2011 Credit Facility will be based on this alternative pricing grid, which reduces the borrowing cost under the 2011 Credit Facility to LIBOR plus an applicable percentage ranging from 150 basis points to 210 basis points (including a facility fee). The 2011 Credit Facility is used for acquisitions and general corporate purposes.
 
 
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The 2011 Credit Facility contains customary affirmative and negative covenants, including, without limitation, limitations on indebtedness; limitations on investments; limitations on liens; limitations on mergers and consolidations; limitations on sales of assets; limitations on transactions with affiliates; limitations on negative pledges; limitations on prepayment of debt; limitations on use of proceeds; limitations on changes in lines of business; limitations on repurchases of the Company’s capital stock if a default or event of default occurs; and maintenance of REIT status.  In addition, the 2011 Credit Facility contains financial covenants including, without limitation, those relating to maximum total leverage, maximum secured leverage, maximum unsecured leverage, minimum fixed charge coverage, minimum consolidated tangible net worth, minimum unsecured debt yield, minimum unsecured interest coverage and maximum distributions. As of June 30, 2012, we were in compliance with all affirmative and negative covenants, including financial covenants.
 
Issuance of $400 Million 5.875% Senior Notes due 2024
 
On March 19, 2012, we issued $400 million aggregate principal amount of our 5.875% Senior Notes due 2024, or the 2024 Notes.  The 2024 Notes mature on March 15, 2024 and pay interest semi-annually on March 15 and September 15 of each year, commencing on September 15, 2012.
 
We may redeem the 2024 Notes, in whole at any time or in part from time to time, at redemption prices of 102.938%, 101.958% and 100.979% of the principal amount thereof if the redemption occurs during the 12-month periods beginning on March 15 of the years 2017, 2018 and 2019, respectively, and at a redemption price of 100% of the principal amount thereof on and after March 15, 2020, in each case, plus any accrued and unpaid interest to the redemption date.  In addition, until March 15, 2015 we may redeem up to 35% of the 2024 Notes with the net cash proceeds of one or more public equity offerings at a redemption price of 105.875% of the principal amount of the 2024 Notes to be so redeemed, plus any accrued and unpaid interest to the redemption date.  If we undergo a change of control, we may be required to offer to purchase the notes from holders at a purchase price equal to 101% of the principal amount plus accrued interest.
 
The 2024 Notes were sold at an issue price of 100% of the principal amount. We used the net proceeds of the offering to fund the tender offer and consent solicitation for the 2016 Notes (described below), to fund the redemption of the untendered 2016 Notes (described below) and to repay a portion of our indebtedness outstanding under our $475 million senior unsecured revolving credit facility.  As of June 30, 2012, our subsidiaries that are not guarantors of the 2024 Notes accounted for approximately $520 million of our total assets.
 
$175 Million 7% Senior Notes due 2016 Tender Offer and Redemption
 
On March 5, 2012, we commenced a tender offer to purchase for cash any and all of our outstanding $175 million aggregate principal amount of 7% Senior Notes due 2016, or the 2016 Notes.  Pursuant to the terms of the tender offer, on March 19, 2012, we purchased $168.9 million aggregate principal amount of the 2016 Notes.
 
On March 27, 2012, pursuant to the terms of the indenture governing the 2016 Notes, we redeemed the remaining $6.1 million aggregate principal amount of the 2016 Notes at a redemption price of 102.333% of their principal amount, plus accrued and unpaid interest up to the redemption date. Following redemption, the 2016 Notes, the indenture governing the 2016 Notes and the related guarantees were terminated.
 
 
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The redemption resulted in approximately $7.1 million of redemption related cost and write-offs, including $4.5 million in payments made to bondholders for early redemption, $2.2 million of write-offs associated with deferred costs and $0.4 million of expenses associated with the tender and redemption.
 
$245 Million Equity Shelf Program
 
On June 19, 2012, we entered into separate Equity Distribution Agreements (collectively, the “2012 Agreements”) to sell shares of our common stock having an aggregate gross sales price of up to $245 million (the “2012 ESP”) with each of BB&T Capital Markets, a division of Scott & Stringfellow, LLC, Credit Agricole Securities (USA) Inc., Deutsche Bank Securities Inc., Jefferies & Company, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets, LLC, RBS Securities Inc., Stifel, Nicolaus & Company, Incorporated, SunTrust Robinson Humphrey, Inc. and UBS Securities LLC, each as a sales agent and/or principal (collectively, the “Managers”).  Under the terms of the 2012 Agreements, we may sell shares of our common stock, from time to time, through or to the Managers having an aggregate gross sales price of up to $245 million.  Sales of the shares, if any, will be made by means of ordinary brokers’ transactions on the New York Stock Exchange at market prices, or as otherwise agreed with the applicable Manager.  We will pay each Manager compensation for sales of the shares equal to 2% of the gross sales price per share of shares sold through such Manager under the applicable 2012 Agreement.
 
We are not obligated to sell and the Managers are not obligated to buy or sell any shares under the 2012 Agreements. No assurance can be given that we will sell any shares under the 2012 Agreements, or, if we do, as to the price or amount of shares that we sell, or the dates when such sales will take place.  As of June 30, 2012, no shares were issued under the 2012 ESP.
 
Termination of $140 Million Equity Shelf Program
 
On June 19, 2012, we terminated our $140 million Equity Shelf Program (the “2010 ESP”).  For the three months ended June 30, 2012, we issued 510,000 shares of our common stock under the 2010 ESP generating gross proceeds of approximately $10.8 million, before $0.2 million of commissions.  For the six months ended June 30, 2012, we issued approximately 759,000 shares of our common stock under the 2010 ESP at an average price per share of $21.27, generating gross proceeds of approximately $16.1 million, before $0.3 million of commissions.  The proceeds of the sale of our common stock were used for working capital and for general corporate purposes, including funding the recent investments described above.
 
Since inception of the 2010 ESP, we have sold a total of 5.3 million shares of common stock generating total gross proceeds of $114.9 million under the program, before $2.3 million of commissions.  As a result of the termination of the 2010 ESP no additional shares will be issued under the 2010 ESP.
 
HUD Mortgage Payoffs
 
On June 29, 2012, we paid approximately $11.8 million to retire four HUD mortgages that were assumed as part of the Capital Funding Group SNF acquisition.  The retirement of the four HUD mortgages resulted in a net gain of approximately $1.7 million.  The net gain included the write-off of approximately $1.8 million related to marking the debt to market at the time of the CFG SNF acquisition as well as a prepayment fee of approximately $0.1 million.
 
Dividend Reinvestment and Common Stock Purchase Plan
 
For the six-month period ended June 30, 2012, approximately 3.2 million shares of our common stock were issued through our Dividend Reinvestment and Common Stock Purchase Program for net proceeds of approximately $69.0 million.
 
 
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NOTE 9 – FINANCIAL INSTRUMENTS
 
At June 30, 2012 and December 31, 2011, the carrying amounts and fair values of our financial instruments were as follows:
 
   
2012
     
2011
 
   
Carrying
Amount
   
Fair
Value
     
Carrying
Amount
   
Fair
Value
 
Assets:
 
(in thousands)
 
Cash and cash equivalents
  $ 2,861     $ 2,861       $ 351     $ 351  
Restricted cash
    36,479       36,479         34,112       34,112  
Mortgage notes receivable – net
    243,461       246,987         238,675       241,494  
Other investments – net
    46,475       43,820         52,957       48,903  
Totals
  $ 329,276     $ 330,147       $ 326,095     $ 324,860  
Liabilities:
                                 
Revolving line of credit
  $ 2,000     $ 2,000       $ 272,500     $ 272,500  
7.00% Notes due 2016 – net
                  174,376       186,398  
7.50% Notes due 2020 – net
    197,374       220,024         197,202       216,114  
6.75% Notes due 2022 – net
    582,146       623,985         582,493       582,684  
5.875% Notes due 2024 – net
    400,000       404,342                
HUD debt
    287,339       354,852         303,610       321,949  
Subordinated debt
    21,132       24,548         21,219       23,198  
Totals
  $ 1,489,991     $ 1,629,751       $ 1,551,400     $ 1,602,843  
 
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 2011 Annual Report on Form 10-K).  The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts.
 
The following methods and assumptions were used in estimating fair value disclosures for financial instruments.
 
 
Cash and cash equivalents and restricted cash:  The carrying amount of cash and cash equivalents and restricted cash reported in the balance sheet approximates fair value because of the short maturity of these instruments (i.e., less than 90 days).
 
 
Mortgage notes receivable:  The fair values 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.
 
 
Other investments:  Other investments are primarily comprised of: (i) notes receivable and (ii) an investment in redeemable non-convertible preferred security of an unconsolidated business accounted for using the cost method of accounting.  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.  The fair value of the investment in the unconsolidated business is estimated using quoted market value and considers the terms of the underlying arrangement.
 
 
Revolving line of credit:  The fair value of our borrowings under variable rate agreements are estimated using an expected present value technique based on expected cash flows discounted using the current market rates.
 
 
Senior notes and other long-term borrowings:  The fair value of our borrowings under fixed rate agreements are estimated based on open market trading activity provided by a third party.
 
 
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NOTE 10 – 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 11 – EARNINGS PER SHARE
 
The computation of basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the relevant period.  Diluted EPS is computed using the treasury stock method, which is net income divided by the total weighted-average number of common outstanding shares plus the effect of dilutive common equivalent shares during the respective period.  Dilutive common shares reflect the assumed issuance of additional common shares pursuant to certain of our share-based compensation plans, including stock options, restricted stock and performance restricted stock units.
 
The following tables set forth the computation of basic and diluted earnings per share:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(in thousands, except per share amounts)
 
Numerator:
                       
Net income
  $ 30,572     $ 17,790     $ 56,656     $ 11,877  
Preferred stock dividends
                      (1,691 )
Preferred stock redemption
          16             (3,456 )
Numerator for net income available to common per share - basic and diluted
  $ 30,572     $ 17,806     $ 56,656     $ 6,730  
 
Denominator:
                               
Denominator for basic earnings per share
    105,717       101,912       104,736       100,993  
Effect of dilutive securities:
                               
Restricted stock
    299       77       270       39  
Deferred stock
    17       12       17       12  
Denominator for diluted earnings per share
    106,033       102,001       105,023       101,044  
                                 
Earnings per share – basic:
                               
Net income – basic
  $ 0.29     $ 0.17     $ 0.54     $ 0.07  
Earnings per share – diluted:
                               
Net income – diluted
  $ 0.29     $ 0.17     $ 0.54     $ 0.07  
 
 
19

 
 
NOTE 12 – CONSOLIDATING FINANCIAL STATEMENTS
 
As of June 30, 2012, we had outstanding (i) $200 million 7.5% Senior Notes due 2020, (ii) $575 million 6.75% Senior Notes due 2022 and (iii) $400 million 5.875% Senior Notes due 2024, which we collectively refer to as the Senior Notes.  The Senior Notes are fully and unconditionally guaranteed, jointly and severally, by each of our subsidiaries that guarantee other indebtedness of Omega or any of the subsidiary guarantors.  Any subsidiary that we properly designate as an “unrestricted subsidiary” under the indentures governing the Senior Notes will not provide guarantees of the Senior Notes.  As of and prior to March 31, 2010, the non-subsidiary guarantors were minor and insignificant.  On June 29, 2010, we designated as “unrestricted subsidiaries” the 39 subsidiaries acquired from CapitalSource on such date.  During the fourth quarter of 2011, we designated as “unrestricted subsidiaries” three subsidiaries acquired from White Pine and 17 of the subsidiaries acquired from affiliates of CFG.  On July 17, 2012, our Board of Directors approved removing the unrestricted subsidiary designation from five of the CFG subsidiaries due to the retirement of the HUD related mortgages.  As of June 30, 2012, the total assets related to these “unrestricted subsidiaries” consisted approximately $47.9 million.
 
For the six months ended June 30, 2012 and 2011, the operating cash flow of the non-guarantor subsidiaries approximated net income of the non-guarantor subsidiaries, adjusted for depreciation and amortization expense.  For the six months ended June 30, 2012 and 2011, the non-guarantor subsidiaries have not engaged in investing or financing activities other than routine principal payments on its HUD mortgage debt and the retirement of four HUD mortgages of $13.7 million ($11.7 million related to the retirement of four HUD mortgages) and $1.2 million, respectively.  All of the subsidiary guarantors of our outstanding senior notes are 100 percent owned by Omega.
 
The following summarized condensed consolidating financial information segregates the financial information of the non-guarantor subsidiaries from the financial information of Omega Healthcare Investors, Inc. and the subsidiary guarantors under the senior notes.  The results and financial position of acquired entities are included from the dates of their respective acquisitions.
 
 
20

 
 
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATING BALANCE SHEETS
Unaudited
(in thousands, except per share amounts)

   
June 30, 2012
 
       
   
Issuer & Subsidiary
Guarantors
   
Non – Guarantor
Subsidiaries
   
Elimination
Company
   
Consolidated
 
                         
ASSETS
                       
Real estate properties
                       
Land and buildings
  $ 2,070,647     $ 490,262     $     $ 2,560,909  
Less accumulated depreciation
    (486,635 )     (35,472 )           (522,107 )
Real estate properties – net
    1,584,012       454,790             2,038,802  
Mortgage notes receivable – net
    243,461                   243,461  
      1,827,473       454,790             2,282,263  
Other investments – net
    46,475                   46,475  
      1,873,948       454,790             2,328,738  
Assets held for sale – net
    2,120                   2,120  
Total investments
    1,876,068       454,790             2,330,858  
                                 
Cash and cash equivalents
    2,861                   2,861  
Restricted cash
    6,615       29,864             36,479  
Accounts receivable – net
    107,507       5,335             112,842  
Investment in affiliates
    163,183             (163,183 )      
Other assets
    38,893       29,929             68,822  
Total assets
  $ 2,195,127     $ 519,918       (163,183 )   $ 2,551,862  
                                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                               
Revolving line of credit
  $ 2,000     $     $     $ 2,000  
Secured borrowings
          287,339             287,339  
Unsecured borrowings – net
    1,179,520       21,132             1,200,652  
Accrued expenses and other liabilities
    77,932       48,264             126,196  
Intercompany payable
          146,629       (146,629 )      
Total liabilities
    1,259,452       503,364       (146,629 )     1,616,187  
                                 
Stockholders’ equity:
                               
Common stock
    10,782                   10,782  
Common stock – additional paid-in-capital
    1,558,506                   1,558,506  
Cumulative net earnings
    690,086       16,554       (16,554 )     690,086  
Cumulative dividends paid
    (1,323,699 )                 (1,323,699 )
Total stockholders’ equity
    935,675       16,554       (16,554 )     935,675  
Total liabilities and stockholders’ equity
  $ 2,195,127     $ 519,918     $ (163,183 )   $ 2,551,862  
 
 
21

 

OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATING BALANCE SHEETS
 (in thousands, except per share amounts)

   
December 31, 2011
 
       
   
Issuer & Subsidiary
Guarantors
   
Non – Guarantor
Subsidiaries
   
Elimination
Company
   
 
Consolidated
 
                         
ASSETS
                       
Real estate properties
                       
Land and buildings
  $ 2,046,776     $ 490,263     $     $ 2,537,039  
Less accumulated depreciation
    (446,530 )     (23,890 )           (470,420 )
Real estate properties – net
    1,600,246       466,373             2,066,619  
Mortgage notes receivable – net
    238,675                   238,675  
      1,838,921       466,373             2,305,294  
Other investments – net
    52,957                   52,957  
      1,891,878       466,373             2,358,251  
Assets held for sale – net
    2,461                   2,461  
Total investments
    1,894,339       466,373             2,360,712  
                                 
Cash and cash equivalents
    351                   351  
Restricted cash
    6,381       27,731             34,112  
Accounts receivable – net
    97,407       3,257             100,664  
Investment in affiliates
    154,953             (154,953 )      
Other assets
    31,980       29,493             61,473  
Total assets
  $ 2,185,411     $ 526,854       (154,953 )   $ 2,557,312  
                                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                               
Revolving line of credit
  $ 272,500     $     $     $ 272,500  
Secured borrowings
          303,610             303,610  
Unsecured borrowings – net
    954,071       21,219             975,290  
Accrued expenses and other liabilities
    80,356       47,072             127,428  
Intercompany payable
          145,255       (145,255 )      
Total liabilities
    1,306,927       517,156       (145,255 )     1,678,828  
                                 
Stockholders’ equity:
                               
Common stock
    10,341                   10,341  
Common stock – additional paid-in-capital
    1,471,381                   1,471,381  
Cumulative net earnings
    633,430       9,698       (9,698 )     633,430  
Cumulative dividends paid
    (1,236,668 )                 (1,236,668 )
Total stockholders’ equity
    878,484       9,698       (9,698 )     878,484  
Total liabilities and stockholders’ equity
  $ 2,185,411     $ 526,854     $ (154,953 )   $ 2,557,312  
 
 
22

 

OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
Unaudited
(in thousands, except per share amounts)

             
   
Three Months Ended June 30, 2012
   
Six Months Ended June 30, 2012
 
                                                 
   
Issuer &
Subsidiary
Guarantors
   
Non –
Guarantor
Subsidiaries
   
 
 
Elimination
   
Consolidated
   
Issuer &
Subsidiary
Guarantors
   
Non –
Guarantor
Subsidiaries
   
 
 
Elimination
   
Consolidated
 
Revenue
                                               
Rental income
  $ 61,874     $ 13,354