Back to GetFilings.com
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003.
[ ] 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 or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
9690 DEERECO RD., SUITE 100
TIMONIUM, MD 21093
(Address of Principal (Zip Code)
Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 410-427-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common Stock, $.10 Par Value
and associated stockholder protection rights New York Stock Exchange
9.25% Series A Cumulative Preferred Stock, $1 Par Value New York Stock Exchange
8.625% Series B Cumulative Preferred Stock, $1 Par Value New York Stock Exchange
8.375%Series D Cumulative Redeemable Preferred Stock,
$1 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE.
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 and Exchange Act
of 1934 during the preceding twelve 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates was $195,071,909. The aggregate market value was computed using
the $5.25 closing price per share for such stock on the New York Stock Exchange
on June 30, 2003.
As of February 18, 2004 there were 43,608,956 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
- --------------------------------------------------------------------------------
OMEGA HEALTHCARE INVESTORS, INC.
2003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART 1
Page
Item 1. Business of the Company.......................................................................... 1
Overview...................................................................................... 1
Summary of Financial Information.............................................................. 1
Description of the Business................................................................... 2
Executive Officers of Our Company............................................................. 4
Risk Factors.................................................................................. 5
Item 2. Properties....................................................................................... 15
Item 3. Legal Proceedings................................................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 17
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................ 18
Item 6. Selected Financial Data.......................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 20
Overview...................................................................................... 20
Critical Accounting Policies and Estimates.................................................... 22
Results of Operations......................................................................... 24
Portfolio Developments........................................................................ 29
Liquidity and Capital Resources............................................................... 31
Series D Preferred Offering; Series C Preferred Repurchase and Conversion..................... 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................... 35
Item 8. Financial Statements and Supplementary Data...................................................... 36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 36
Item 9A. Controls and Procedures.......................................................................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant............................................... 37
Item 11. Executive Compensation........................................................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 44
Item 13. Certain Relationships and Related Transactions................................................... 46
Item 14. Principal Accountant Fees and Services........................................................... 47
PART IV
Item 15. Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K............ 48
PART I
ITEM 1 - BUSINESS OF THE COMPANY
OVERVIEW
We were incorporated in the State of Maryland on March 31, 1992. We are a
self-administered real estate investment trust, or REIT, investing in
income-producing healthcare facilities, principally long-term care facilities
located in the United States. We provide lease or mortgage financing to
qualified operators of skilled nursing facilities and, to a lesser extent,
assisted living and acute care facilities. We have historically financed
investments through borrowings under our revolving credit facilities, private
placements or public offerings of debt or equity securities, the assumption of
secured indebtedness, or a combination of these methods.
As of December 31, 2003, our portfolio of investments consisted of 211
healthcare facilities, located in 28 states and operated by 39 third-party
operators. Our gross investments in these facilities, net of impairments and
before reserve for uncollectible loans, totaled $812.3 million. This portfolio
is made up of:
o 151 long-term healthcare facilities and two rehabilitation hospitals
owned and leased to third parties;
o fixed rate mortgages on 51 long-term healthcare facilities;
o one long-term healthcare facility that was recovered from customers
and is currently operated through third-party management contracts for
our own account; and
o six long-term healthcare facilities that were recovered from customers
and are currently closed.
In addition, we hold miscellaneous investments of approximately $29.8
million at December 31, 2003, including $22.7 million of notes receivable, net
of allowance, consisting primarily of secured loans to third-party operators to
our facilities.
Our filings with the Securities and Exchange Commission, including our
annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports are accessible free of charge on our
website at www.omegahealthcare.com.
SUMMARY OF FINANCIAL INFORMATION
The following tables summarize our revenues and real estate assets by asset
category for 2003, 2002 and 2001. (See Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations, Note 3 - Properties,
Note 4 - Mortgage Notes Receivable and Note 16 - Segment Information to our
audited consolidated financial statements).
REVENUES BY ASSET CATEGORY
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
2003 2002 2001
----------------------------------
Core assets:
Lease rental income..................................................................... $ 65,121 $ 62,718 $ 60,117
Mortgage interest income................................................................ 14,747 20,922 20,478
----------------------------------
Total core asset revenues........................................................... 79,868 83,640 80,595
Other asset revenue........................................................................ 2,982 5,302 4,845
Miscellaneous income....................................................................... 3,417 1,757 2,642
----------------------------------
Total revenue before owned and operated assets...................................... 86,267 90,699 88,082
Owned and operated assets revenue.......................................................... - 42,905 162,042
----------------------------------
Total revenue....................................................................... $ 86,267 $133,604 $250,124
==================================
REAL ESTATE ASSETS BY ASSET CATEGORY
(IN THOUSANDS)
AS OF DECEMBER 31,
2003 2002
-----------------------
Core assets:
Leased assets........................................................................... $687,159 $663,617
Mortgaged assets........................................................................ 119,815 173,914
-----------------------
Total core assets................................................................... 806,974 837,531
Other assets............................................................................... 29,787 36,887
-----------------------
Total real estate assets before owned and operated assets........................... 836,761 874,418
Owned and operated and held for sale assets................................................ 5,295 7,895
-----------------------
Total real estate assets............................................................ $842,056 $882,313
=======================
DESCRIPTION OF THE BUSINESS
INVESTMENT POLICIES. We maintain a diversified portfolio of long-term
healthcare facilities and mortgages on healthcare facilities located in the
United States. In making investments, we generally have focused on established,
creditworthy, middle-market healthcare operators that meet our standards for
quality and experience of management. We have sought to diversify our
investments in terms of geographic locations, operators and facility types.
In evaluating potential investments, we consider such factors as:
o the quality and experience of management and the creditworthiness of
the operator of the facility;
o the facility's historical, current and forecasted cash flow and its
ability to meet operational needs, capital expenditures and lease or
debt service obligations, providing a competitive return on investment
to us;
o the construction quality, condition and design of the facility;
o the geographic area and type of facility;
o the tax, growth, regulatory and reimbursement environment of the
jurisdiction in which the facility is located;
o the occupancy and demand for similar healthcare facilities in the same
or nearby communities; and
o the payor mix of private, Medicare and Medicaid patients.
One of our fundamental investment strategies is to obtain contractual rent
escalations under long-term, non-cancelable, "triple-net" leases and fixed-rate
mortgage loans, and to obtain substantial liquidity deposits. Additional
security is typically provided by covenants regarding minimum working capital
and net worth, liens on accounts receivable and other operating assets, and
various provisions for cross-default, cross-collateralization and
corporate/personal guarantees, when appropriate.
We prefer to invest in equity ownership of properties. Due to regulatory,
tax or other considerations, we sometimes pursue alternative investment
structures, including convertible participating and participating mortgages,
that achieve returns comparable to equity investments. The following summarizes
the primary investment structures we typically use. Average annualized yields
reflect existing contractual arrangements. However, in view of the ongoing
financial challenges in the long-term care industry, we cannot assure you that
the operators of our facilities will meet their payment obligations in full or
when due. Therefore, the annualized yields as of January 1, 2004 set forth below
are not necessarily indicative of or a forecast of actual yields, which may be
lower.
PURCHASE/LEASEBACK. In a Purchase/Leaseback transaction, we purchase the
property from the operator and lease it back to the operator over terms
typically ranging from 5 to 15 years, plus renewal options. The leases
originated by us generally provide for minimum annual rentals which are
subject to annual formula increases based upon such factors as increases in
the Consumer Price Index ("CPI") or increases in the revenue streams
generated by the underlying properties, with certain fixed minimum and
maximum levels. The average annualized yield from leases was 10.1% at
January 1, 2004.
CONVERTIBLE PARTICIPATING MORTGAGE. Convertible participating mortgages are
secured by first mortgage liens on the underlying real estate and personal
property of the mortgagor. Interest rates are usually subject to annual
increases based upon increases in the CPI or increases in the revenues
generated by the underlying long-term care facilities, with certain maximum
limits. Convertible participating mortgages afford us the option to convert
our mortgage into direct ownership of the property, generally at a point
six to nine years from inception. If we exercise our purchase option, we
are obligated to lease the property back to the operator for the balance of
the originally agreed term and for the originally agreed participations in
revenues or CPI adjustments. This allows us to capture a portion of the
potential appreciation in value of the real estate. The operator has the
right to buy out our option at prices based on specified formulas. At
December 31, 2003, we did not have any convertible participating mortgages.
PARTICIPATING MORTGAGE. Participating mortgages are similar to convertible
participating mortgages except that we do not have a purchase option.
Interest rates are usually subject to annual increases based upon increases
in the CPI or increases in revenues of the underlying long-term care
facilities, with certain maximum limits. At December 31, 2003, we did not
have any participating mortgages.
FIXED-RATE MORTGAGE. These mortgages have a fixed interest rate for the
mortgage term and are secured by first mortgage liens on the underlying
real estate and personal property of the mortgagor. The average annualized
yield on these investments was 11.2% at January 1, 2004.
The following table identifies the years of expiration of the 2004 payment
obligations due to us under existing contractual obligations. This information
is provided solely to indicate the scheduled expiration of payment obligations
due to us, and is not a forecast of expected revenues.
MORTGAGE
RENT INTEREST TOTAL %
-------------------------------------------------
(IN THOUSANDS)
2004........................ $ 1,260 $ 1,281 $ 2,541 3.07%
2005........................ - - - -
2006........................ 3,844 1,462 5,306 6.41
2007........................ 360 44 404 0.49
2008........................ 750 - 750 0.91
Thereafter.................. 63,170 10,580 73,750 89.12
-------------------------------------------------
Total..................... $69,384 $13,367 $82,751 100.00%
=================================================
The table set forth in Item 2 - Properties, contains information regarding
our real estate properties, their geographic locations, and the types of
investment structures as of December 31, 2003.
BORROWING POLICIES. We may incur additional indebtedness and have
historically sought to maintain a long-term debt-to-total capitalization ratio
in the range of 40% to 50%. Total capitalization is total stockholders equity
plus long-term debt. We intend to periodically review our policy with respect to
our debt-to-total capitalization ratio and to modify the policy as our
management deems prudent in light of prevailing market conditions. Our strategy
generally has been to match the maturity of our indebtedness with the maturity
of our investment assets, and to employ long-term, fixed-rate debt to the extent
practicable in view of market conditions in existence from time to time.
We may use proceeds of any additional indebtedness to provide permanent
financing for investments in additional healthcare facilities. We may obtain
either secured or unsecured indebtedness, and may obtain indebtedness which may
be convertible into capital stock or be accompanied by warrants to purchase
capital stock. Where debt financing is available on terms deemed favorable, we
generally may invest in properties subject to existing loans, secured by
mortgages, deeds of trust or similar liens on properties.
If we need capital to repay indebtedness as it matures, we may be required
to liquidate investments in properties at times which may not permit realization
of the maximum recovery on these investments. This could also result in adverse
tax consequences to us. We may be required to issue additional equity interests
in our company, which could dilute your investment in our company. (See Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources).
FEDERAL INCOME TAX CONSIDERATIONS. We intend to make and manage our
investments, including the sale or disposition of property or other investments,
and to operate in such a manner as to qualify as a REIT under the Internal
Revenue Code, unless, because of changes in circumstances or changes in the
Internal Revenue Code, our Board of Directors determines that it is no longer in
our best interest to qualify as a REIT. As a REIT, we generally will not pay
federal income taxes on the portion of our taxable income which is distributed
to stockholders.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES. If our Board of Directors
determines that additional funding is required, we may raise such funds through
additional equity offerings, debt financing, retention of cash flow (subject to
provisions in the Internal Revenue Code concerning taxability of undistributed
REIT taxable income) or a combination of these methods.
Borrowings may be in the form of bank borrowings, secured or unsecured, and
publicly or privately placed debt instruments, purchase money obligations to the
sellers of assets, long-term, tax-exempt bonds or financing from banks,
institutional investors or other lenders, or securitizations, any of which
indebtedness may be unsecured or may be secured by mortgages or other interests
in our assets. Such indebtedness may be recourse to all or any part of our
assets or may be limited to the particular asset to which the indebtedness
relates.
We have authority to offer our common stock or other equity or debt
securities in exchange for property and to repurchase or otherwise reacquire our
shares or any other securities and may engage in such activities in the future.
Subject to the percentage of ownership limitations and gross income and
asset tests necessary for REIT qualification, we may invest in securities of
other REITs, other entities engaged in real estate activities or securities of
other issuers, including for the purpose of exercising control over such
entities.
We may engage in the purchase and sale of investments. We do not underwrite
the securities of other issuers.
Our officers and directors may change any of these policies without a vote
of our stockholders.
In the opinion of our management, our properties are adequately covered by
insurance.
EXECUTIVE OFFICERS OF OUR COMPANY
At the date of this report, the executive officers of our company are:
C. Taylor Pickett (42) is the Chief Executive Officer and has served in
this capacity since June, 2001. Prior to joining our company, Mr. Pickett served
as the Executive Vice President and Chief Financial Officer from January 1998 to
June 2001 of Integrated Health Services, Inc., a public company specializing in
post-acute healthcare services. He also served as Executive Vice President of
Mergers and Acquisitions from May 1997 to December 1997 of Integrated Health
Services. Prior to his roles as Chief Financial Officer and Executive Vice
President of Mergers and Acquisitions, Mr. Pickett served as the President of
Symphony Health Services, Inc. from January 1996 to May 1997.
Daniel J. Booth (40) is the Chief Operating Officer and has served in this
capacity since October, 2001. Prior to joining our company, Mr. Booth served as
a member of Integrated Health Services, Inc.'s management team since 1993, most
recently serving as Senior Vice President, Finance. Prior to joining Integrated
Health Services, Mr. Booth was Vice President in the Healthcare Lending Division
of Maryland National Bank (now Bank of America).
R. Lee Crabill, Jr. (50) is the Senior Vice President of Operations of our
company and has served in this capacity since July, 2001. Mr. Crabill served as
a Senior Vice President of Operations at Mariner Post-Acute Network from 1997
through 2000. Prior to that, he served as an Executive Vice President of
Operations at Beverly Enterprises.
Robert O. Stephenson (40) is the Chief Financial Officer and has served in
this capacity since August, 2001. Prior to joining our company, Mr. Stephenson
served from 1996 to July 2001 as the Senior Vice President and Treasurer of
Integrated Health Services, Inc., a public company specializing in post-acute
healthcare services. Prior to Integrated Health Services, Mr. Stephenson served
in management roles at CSX Intermodal, Martin Marietta Corporation and
Electronic Data Systems.
Mariner Post-Acute Network and Integrated Health Services, along with
several other long-term care operators, each filed voluntary petitions under
Chapter 11 of the United States Bankruptcy Code in January and February 2000,
respectively.
As of December 31, 2003, we had 17 full-time employees and one part-time
employee, including the four executive officers listed above.
RISK FACTORS
You should carefully consider the risks described below. These risks are
not the only ones that we may face. Additional risks and uncertainties that we
are unaware of, or that we currently deem immaterial, also may become important
factors that affect us. If any of the following risks occurs, our business,
financial condition or results of operations could be materially and adversely
affected.
RISKS RELATED TO THE OPERATORS OF OUR FACILITIES
Our financial position could be weakened and our ability to pay dividends
could be limited if any of our major operators were unable to meet their
obligations to us or failed to renew or extend their relationship with us as
their lease terms expire, or if we were unable to lease or re-lease our
facilities or make mortgage loans on economically favorable terms. These adverse
developments could arise due to a number of factors, including those listed
below.
OUR RECENT EFFORTS TO RESTRUCTURE AND STABILIZE OUR PORTFOLIO MAY NOT PROVE TO
BE SUCCESSFUL.
In large part as a result of the 1997 changes in Medicare reimbursement of
services provided by skilled nursing facilities and reimbursement cuts imposed
under state Medicaid programs, a number of operators of our properties have
encountered significant financial difficulties during the last several years. In
1999, our investment portfolio consisted of 216 properties and our largest
public operators (by investment) were Sun Healthcare Group, Inc. ("Sun"),
Integrated Health Services, Advocat, Inc. ("Advocat") and Mariner Health Care
Inc. ("Mariner"). Some of these operators, including Sun, Integrated Health
Services and Mariner, subsequently filed for bankruptcy protection. Other of our
operators were required to undertake significant restructuring efforts. We have
restructured our arrangements with many of our operators whereby we have
renegotiated lease and mortgage terms, re-leased properties to new operators and
have closed and/or disposed of properties. At December 31, 2003, our investment
portfolio consisted of 211 properties and our largest public operators (by
investment) were Sun (20.7%), Advocat (12.8%) and Mariner (7.4%). Our largest
private company operators (by investment) were Seacrest Healthcare (6.8%) and
Claremont Healthcare Holdings, Inc. ("Claremont") (5.7%). We have a non-binding
agreement in principle with Sun, our largest operator (by investment) regarding
our 51 properties that were leased to various affiliates of Sun. Finalization of
our agreement with Sun is subject to negotiation and execution of definitive
documentation. In addition, we continue to have ongoing restructuring
discussions with Claremont regarding five facilities Claremont currently leases
from us. We might not be successful in reaching definitive agreements with Sun
or Claremont. We are also aware of four properties in our portfolio located in
Illinois where facility operations are currently insufficient to meet rental
payments due to us under our leases for these facilities. These lease payments
are currently being paid by the lessee from funds other than those generated by
the facilities. It is possible that we will need to take steps to restructure
this portion of our portfolio, or other properties in our portfolio with respect
to which our operators encounter financial difficulty. We cannot assure you that
our recent efforts to restructure and stabilize our property portfolio will be
successful.
THE BANKRUPTCY, INSOLVENCY OR FINANCIAL DETERIORATION OF OUR OPERATORS COULD
DELAY OUR ABILITY TO COLLECT UNPAID RENTS OR REQUIRE US TO FIND NEW OPERATORS
FOR REJECTED FACILITIES.
We are exposed to the risk that our operators may not be able to meet their
obligations, which may result in their bankruptcy or insolvency. Although our
leases and loans provide us the right to terminate an investment, evict an
operator, demand immediate repayment and other remedies, the bankruptcy laws
afford certain protections to a party that has filed for bankruptcy that may
render these remedies unenforceable. In addition, an operator in bankruptcy may
be able to restrict our ability to collect unpaid rent or mortgage payments
during the bankruptcy case.
If one of our lessees seeks bankruptcy protection, title 11 of the United
States Code ("Bankruptcy Code"), provides that a trustee in a liquidation or
reorganization case under the Bankruptcy Code, or a debtor-in-possession in a
reorganization case under the Bankruptcy Code, has the option to assume or
reject the unexpired lease obligations of a debtor-lessee. However, our lease
arrangements with operators who operate more than one of our facilities are
generally made pursuant to a single master lease covering all of that operator's
facilities leased from us. Subject to certain restrictions, a debtor- lessee
under a master lease agreement would generally be required to assume or reject a
master lease as a whole, rather than making the decision on a facility by
facility basis, thereby preventing the debtor-lessee from assuming only the
better performing facilities and terminating the leasing arrangement with
respect to the poorer performing facilities. Whether or not a court would
require a master lease agreement to be assumed or rejected as a whole would
depend on a number of factors, including applicable state law, the parties
intent, whether the master lease agreement and related documents were executed
contemporaneously, the nature and purpose of the relevant documents, whether
there was separate and distinct consideration for each lease, and the provisions
contained in the relevant documents, including whether the relevant documents
are interrelated and contain ample cross-references. Therefore, it is not
possible to predict how a bankruptcy court would decide this issue.
o ASSUMPTION OF LEASES. In the event that an unexpired lease is assumed
by or on behalf of the debtor-lessee, any defaults, other than those
created by the financial condition of the debtor-lessee, the
commencement of its bankruptcy case or the appointment of a trustee,
would have to be cured and all the rental obligations thereunder
generally would be entitled to a priority over other unsecured claims.
Generally, unexpired leases must be assumed in their totality,
however, a bankruptcy court has the power to refuse to enforce certain
provisions of a lease, such as cross-default provisions or penalty
provisions, that would otherwise prevent or limit the ability of a
debtor-lessee from assuming or assuming and assigning to another party
the unexpired lease.
o REJECTION OF LEASES. Generally, the debtor-lessee is required to make
rent payments to us during its bankruptcy unless and until it rejects
the lease. The rejection of a lease is deemed to be a pre-petition
breach of the lease and the lessor will be allowed a pre-petition
general unsecured claim that will be limited to any unpaid rent
already due plus an amount equal to the rent reserved under the lease,
without acceleration, for the greater of (a) one year and (b) fifteen
percent (15%), not to exceed three years, of the remaining term of
such lease, following the earlier of (i) the petition date and (ii)
repossession or surrender of the leased property. Although the amount
of a lease rejection claim is subject to the statutory cap described
above, the lessor should receive the same percentage recovery on
account of its claim as other holders of allowed pre-petition
unsecured claims receive from the bankruptcy estate. If the
debtor-lessee rejects the lease, the facility would be returned to us.
In that event, if we were unable to re-lease the facility to a new
operator on favorable terms or only after a significant delay, we
could lose some or all of the associated revenue from that facility
for an extended period of time.
If an operator defaults under one of our mortgage loans, we may have to
foreclose on the mortgage or protect our interest by acquiring title to the
property and thereafter making substantial improvements or repairs in order to
maximize the facility's investment potential. Operators may contest enforcement
of foreclosure or other remedies, seek bankruptcy protection against our
exercise of enforcement or other remedies and/or bring claims for lender
liability in response to actions to enforce mortgage obligations. If an operator
seeks bankruptcy protection, the automatic stay provisions of the federal
bankruptcy law would preclude us from enforcing foreclosure or other remedies
against the operator unless relief is obtained from the court. High "loan to
value" ratios or declines in the value of the facility may prevent us from
realizing an amount equal to our mortgage loan upon foreclosure.
The receipt of liquidation proceeds or the replacement of an operator that
has defaulted on its lease or loan could be delayed by the approval and
licensure process of any federal, state or local agency necessary for the
replacement of the previous operator licensed to manage the facility. In some
instances, we may take possession of a property and such action could expose us
to successor liabilities. These events, if they were to occur, could reduce our
revenue and operating cash flow.
OPERATORS THAT FAIL TO COMPLY WITH GOVERNMENTAL REIMBURSEMENT PROGRAMS SUCH AS
MEDICARE OR MEDICAID, LICENSING AND CERTIFICATION REQUIREMENTS, FRAUD AND ABUSE
REGULATIONS OR NEW LEGISLATIVE DEVELOPMENTS MAY BE UNABLE TO MEET THEIR
OBLIGATIONS TO US.
Our operators are subject to numerous federal, state and local laws and
regulations that are subject to frequent and substantial changes (sometimes
applied retroactively) resulting from legislation, adoption of rules and
regulations, and administrative and judicial interpretations of existing law.
The ultimate timing or effect of these changes cannot be predicted. These
changes may have a dramatic effect on our operators' costs of doing business and
the amount of reimbursement by both government and other third-party payors. The
failure of any of our operators to comply with these laws, requirements and
regulations could adversely affect their ability to meet their obligations to
us. In particular:
o MEDICARE AND MEDICAID. A significant portion of our skilled nursing
facility operators' revenue is derived from governmentally-funded
reimbursement programs, primarily Medicare and Medicaid, and failure
to maintain certification and accreditation in these programs would
result in a loss of funding from such programs. Loss of certification
or accreditation could cause the revenues of our operators to decline,
potentially jeopardizing their ability to meet their obligations to
us. In that event, our revenues from those facilities could be
reduced, which could in turn cause the value of our affected
properties to decline. State licensing and Medicare and Medicaid laws
also require operators of nursing homes and assisted living facilities
to comply with extensive standards governing operations. Federal and
state agencies administering those laws regularly inspect such
facilities and investigate complaints. Our operators and their
managers receive notices of potential sanctions and remedies from time
to time, and such sanctions have been imposed from time to time on
facilities operated by them. If they are unable to cure deficiencies
which have been identified or which are identified in the future, such
sanctions may be imposed and if imposed may adversely affect our
operators' revenues, potentially jeopardizing their ability to meet
their obligations to us.
o LICENSING AND CERTIFICATION. Our operators and facilities are subject
to regulatory and licensing requirements of federal, state and local
authorities and are periodically audited by them to confirm
compliance. Failure to obtain licensure or loss or suspension of
licensure would prevent a facility from operating or result in a
suspension of reimbursement payments until all licensure issues have
been resolved and the necessary licenses obtained or reinstated. Our
skilled nursing facilities require governmental approval, in the form
of a certificate of need that generally varies by state and is subject
to change, prior to the addition or construction of new beds, the
addition of services or certain capital expenditures. Some of our
facilities may be unable to satisfy current and future certificate of
need requirements and may for this reason be unable to continue
operating in the future. In such event, our revenues from those
facilities could be reduced or eliminated for an extended period of
time.
o FRAUD AND ABUSE REGULATIONS. There are various extremely complex and
largely uninterpreted federal and state laws governing a wide array of
referrals, relationships and arrangements and prohibiting fraud by
healthcare providers, including criminal provisions that prohibit
filing false claims or making false statements to receive payment or
certification under Medicare and Medicaid, or failing to refund
overpayments or improper payments. Governments are devoting increasing
attention and resources to anti-fraud initiatives against healthcare
providers. The Health Insurance Portability and Accountability Act of
1996 and the Balanced Budget Act of 1997 expanded the penalties for
healthcare fraud, including broader provisions for the exclusion of
providers from the Medicare and Medicaid programs. Furthermore, the
Office of Inspector General of the U.S. Department of Health and Human
Services, or OIG, in cooperation with other federal and state
agencies, continues to focus on the activities of skilled nursing
facilities in certain states in which we have properties. In addition,
the federal False Claims Act allows a private individual with
knowledge of fraud to bring a claim on behalf of the federal
government and earn a percentage of the federal government's recovery.
Because of these incentives, these so-called "whistleblower" suits
have become more frequent. The violation of any of these regulations
by an operator may result in the imposition of fines or other
penalties that could jeopardize that operator's ability to make lease
or mortgage payments to us or to continue operating its facility.
o LEGISLATIVE AND REGULATORY DEVELOPMENTS. Each year, legislative
proposals are introduced or proposed in Congress and in some state
legislatures that would affect major changes in the healthcare system,
either nationally or at the state level. The Medicare Prescription
Drug, Improvement and Modernization Act of 2003, P.Law 108-173, which
is one example of such legislation, was enacted in late 2003. The
Medicare reimbursement changes for the long term care industry under
this Act are limited to a temporary increase in the per diem amount
paid to skilled nursing facilities for residents who have AIDS. The
significant expansion of other benefits for Medicare beneficiaries
under this Act, such as the expanded prescription drug benefit, could
result in financial pressures on the Medicare program that might
result in future legislative and regulatory changes with impacts for
our operators. Other proposals under consideration include efforts by
individual states to control costs by decreasing state Medicaid
reimbursements, a federal "Patient Protection Act" to protect
consumers in managed care plans, efforts to improve quality of care
and reduce medical errors throughout the health care industry and
hospital cost-containment initiatives by public and private payors. We
cannot accurately predict whether any proposals will be adopted or, if
adopted, what effect, if any, these proposals would have on operators
and, thus, our business.
Regulatory proposals and rules are released on an ongoing basis that may
have major impact on the healthcare system generally and the skilled nursing and
long-term care industries in particular.
OUR OPERATORS DEPEND ON REIMBURSEMENT FROM GOVERNMENTAL AND OTHER THIRD-PARTY
PAYORS AND REIMBURSEMENT RATES FROM SUCH PAYORS MAY BE REDUCED.
Changes in the reimbursement rate or methods of payment from third-party
payors, including the Medicare and Medicaid programs, or the implementation of
other measures to reduce reimbursements for services provided by our operators
has in the past, and could in the future, result in a substantial reduction in
our operators' revenues and operating margins. Additionally, net revenue
realizable under third-party payor agreements can change after examination and
retroactive adjustment by payors during the claims settlement processes or as a
result of post-payment audits. Payors may disallow requests for reimbursement
based on determinations that certain costs are not reimbursable or reasonable or
because additional documentation is necessary or because certain services were
not covered or were not medically necessary. There also continue to be new
legislative and regulatory proposals that could impose further limitations on
government and private payments to healthcare providers. In some cases, states
have enacted or are considering enacting measures designed to reduce their
Medicaid expenditures and to make changes to private healthcare insurance. We
cannot assure you that adequate reimbursement levels will continue to be
available for the services provided by our operators, which are currently being
reimbursed by Medicare, Medicaid or private third-party payors. Further limits
on the scope of services reimbursed and on reimbursement rates could have a
material adverse effect on our operators' liquidity, financial condition and
results of operations which could cause the revenues of our operators to decline
and potentially jeopardize their ability to meet their obligations to us.
OUR OPERATORS MAY BE SUBJECT TO SIGNIFICANT LEGAL ACTIONS THAT COULD SUBJECT
THEM TO INCREASED OPERATING COSTS AND SUBSTANTIAL UNINSURED LIABILITIES, WHICH
MAY AFFECT THEIR ABILITY TO PAY THEIR LEASE AND MORTGAGE PAYMENTS TO US.
As is typical in the healthcare industry, our operators are often subject
to claims that their services have resulted in resident injury or other adverse
effects. Many of these operators have experienced an increasing trend in the
frequency and severity of professional liability and general liability insurance
claims and litigation asserted against them. The insurance coverage maintained
by our operators may not cover all claims made against them nor continue to be
available at a reasonable cost, if at all. In some states, insurance coverage
for the risk of punitive damages arising from professional liability and general
liability claims and/or litigation may not, in certain cases, be available to
operators due to state law prohibitions or limitations of availability. As a
result, our operators operating in these states may be liable for punitive
damage awards that are either not covered or are in excess of their insurance
policy limits. We also believe that there has been, and will continue to be, an
increase in governmental investigations of long-term care providers,
particularly in the area of Medicare/Medicaid false claims, as well as an
increase in enforcement actions resulting from these investigations. Insurance
is not available to cover such losses. Any adverse determination in a legal
proceeding or governmental investigation, whether currently asserted or arising
in the future, could have a material adverse effect on an operator's financial
condition. If an operator is unable to obtain or maintain insurance coverage, if
judgments are obtained in excess of the insurance coverage, if an operator is
required to pay uninsured punitive damages, or if an operator is subject to an
uninsurable government enforcement action, the operator could be exposed to
substantial additional liabilities.
ONE OF OUR LARGEST OPERATORS WAS RECENTLY SERVED WITH SIX LAWSUITS BY THE STATE
OF ARKANSAS SEEKING SUBSTANTIAL DAMAGES RELATING TO PATIENT CARE ISSUES AND
ALLEGED MEDICAID FALSE CLAIMS.
On February 19, 2004, Advocat announced that it had been served with six
lawsuits by the State of Arkansas alleging violations by Advocat and certain of
its subsidiaries of the Arkansas Abuse of Adults Act and the Arkansas Medicaid
False Claims Act. In its announcement, Advocat stated that the complaints seek,
in the aggregate, actual damages of approximately $250,000 and fines and
penalties in excess of $45 million. Although Advocat stated its intention to
vigorously defend itself against the subject allegations, Advocat further stated
that it cannot predict the outcome of the subject lawsuits or the impact of the
ultimate outcome on Advocat's financial condition, cash flows or results of
operations. Advocat accounts for approximately 13.4% of our 2003 total revenues.
In the event that there is an adverse outcome to Advocat in these lawsuits, or
in the event that Advocat's business is otherwise adversely affected as a result
of the lawsuits (for example, as a result of penalties imposed in connection
with a settlement of the lawsuits, as a result of licensure revocation,
admission holds or similar restrictions being imposed or as a result of a
decline in business due to reputational issues), and Advocat is unable to pay
its full monthly rental obligation to us, then we will experience a reduction of
our rental income. Should such events occur, our income and cash flows from
operations would be adversely affected. We are unable currently to predict how
this matter may ultimately affect us.
INCREASED COMPETITION AS WELL AS INCREASED OPERATING COSTS HAVE RESULTED IN
LOWER REVENUES FOR SOME OF OUR OPERATORS AND MAY AFFECT THE ABILITY OF OUR
TENANTS TO MEET THEIR PAYMENT OBLIGATIONS TO US.
The healthcare industry is highly competitive and we expect that it may
become more competitive in the future. Our operators are competing with numerous
other companies providing similar healthcare services or alternatives such as
home health agencies, life care at home, community-based service programs,
retirement communities and convalescent centers. We cannot be certain the
operators of all of our facilities will be able to achieve occupancy and rate
levels that will enable them to meet all of their obligations to us. Our
operators may encounter increased competition in the future that could limit
their ability to attract residents or expand their businesses and therefore
affect their ability to pay their lease or mortgage payments.
The market for qualified nurses, healthcare professionals and other key
personnel is highly competitive and our operators may experience difficulties in
attracting and retaining qualified personnel. Increases in labor costs due to
higher wages and greater benefits required to attract and retain qualified
healthcare personnel incurred by our operators could affect their ability to pay
their lease or mortgage payments. This situation could be particularly acute in
certain states that have enacted legislation establishing minimum staffing
requirements.
RISKS RELATED TO US AND OUR OPERATIONS
In addition to the operator related risks discussed above, there are a
number of risks directly associated with us and our operations.
WE RELY ON EXTERNAL SOURCES OF CAPITAL TO FUND FUTURE CAPITAL NEEDS, AND IF WE
ENCOUNTER DIFFICULTY IN OBTAINING SUCH CAPITAL, WE MAY NOT BE ABLE TO MAKE
FUTURE INVESTMENTS NECESSARY TO GROW OUR BUSINESS OR MEET MATURING COMMITMENTS.
In order to qualify as a REIT under the Internal Revenue Code, or the Code,
we are required, among other things, to distribute each year to our stockholders
at least 90% of our REIT taxable income. Because of this distribution
requirement, we may not be able to fund, from cash retained from operations, all
future capital needs, including capital needs to make investments and to satisfy
or refinance maturing commitments. As a result, we may rely on external sources
of capital. If we are unable to obtain needed capital at all or only on
unfavorable terms from these sources, we might not be able to make the
investments needed to grow our business, or to meet our obligations and
commitments as they mature, which could negatively affect the ratings of our
debt and even, in extreme circumstances, affect our ability to continue
operations. Our access to capital depends upon a number of factors over which we
have little or no control, including general market conditions and the market's
perception of our growth potential and our current and potential future earnings
and cash distributions and the market price of the shares of our capital stock.
Generally speaking, difficult capital market conditions in our industry during
the past several years and our need to stabilize our portfolio have limited our
access to capital. Our potential capital sources include, but are not limited
to:
EQUITY FINANCING. As with other publicly-traded companies, the availability of
equity capital will depend, in part, on the market price of our common stock
which, in turn, will depend upon various market conditions and other factors
that may change from time to time including:
o the extent of investor interest;
o the general reputation of REITs and the attractiveness of their equity
securities in comparison to other equity securities, including
securities issued by other real estate-based companies;
o our financial performance and that of our operators;
o the contents of analyst reports about us and the REIT industry;
o general stock and bond market conditions, including changes in
interest rates on fixed income securities, which may lead prospective
purchasers of our common stock to demand a higher annual yield from
future distributions;
o our failure to maintain or increase our dividend, which is dependent,
to a large part, on growth of funds from operations which in turn
depends upon increased revenues from additional investments and rental
increases; and
o other factors such as governmental regulatory action and changes in
REIT tax laws.
The market value of the equity securities of a REIT is generally based upon
the market's perception of the REIT's growth potential and its current and
potential future earnings and cash distributions. Our failure to meet the
market's expectation with regard to future earnings and cash distributions would
likely adversely affect the market price of our common stock and reduce the
value of your investment.
DEBT FINANCING/LEVERAGE. Financing for future investments and our maturing
commitments may be provided by borrowings under our bank line of credit, private
or public offerings of debt, the assumption of secured indebtedness, mortgage
financing on a portion of our owned portfolio or through joint ventures. We are
subject to risks normally associated with debt financing, including the risks
that our cash flow will be insufficient to make timely payments of interest,
that we will be unable to refinance existing indebtedness and that the terms of
refinancing will not be as favorable as the terms of existing indebtedness. If
we are unable to refinance or extend principal payments due at maturity or pay
them with proceeds from other capital transactions, our cash flow may not be
sufficient in all years to pay distributions to our stockholders and to repay
all maturing debt. Furthermore, if prevailing interest rates, changes in our
debt ratings or other factors at the time of refinancing result in higher
interest rates upon refinancing, the interest expense relating to that
refinanced indebtedness would increase, which could reduce our profitability and
the amount of dividends we are able to pay. Moreover, additional debt financing
increases the amount of our leverage. Our degree of leverage could have
important consequences to stockholders, including affecting our investment grade
ratings, affecting our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, development or other
general corporate purposes and making us more vulnerable to a downturn in
business or the economy generally.
CERTAIN OF OUR OPERATORS ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR REVENUES.
Based on existing contractual rent and lease payments regarding the
restructuring of certain existing investments, Advocat and Sun each account for
over 10% of our current contractual monthly revenues, with Sun accounting for
slightly over 20% of our current contractual monthly revenues. Additionally, our
top five operators account for over 55% of our current contractual monthly
revenues. The failure or inability of any of these operators to pay their
obligations to us could materially reduce our revenues and net income, which
could in turn reduce the amount of dividends we pay and cause our stock price to
decline. For information regarding our non-binding agreement in principle with
Sun, see "Portfolio Developments; Sun Healthcare Group, Inc."
UNFORESEEN COSTS ASSOCIATED WITH THE ACQUISITION OF NEW PROPERTIES COULD REDUCE
OUR PROFITABILITY.
Our business strategy contemplates future acquisitions that may not prove
to be successful. For example, we might encounter unanticipated difficulties and
expenditures relating to any acquired properties, including contingent
liabilities, or newly acquired properties might require significant management
attention that would otherwise be devoted to our ongoing business. If we agree
to provide funding to enable healthcare operators to build, expand or renovate
facilities on our properties and the project is not completed, we could be
forced to become involved in the development to ensure completion or we could
lose the property. These costs may negatively affect our results of operations.
OUR ASSETS MAY BE SUBJECT TO IMPAIRMENT CHARGES.
We periodically but not less than annually evaluate our real estate
investments and other assets for impairment indicators. The judgment regarding
the existence of impairment indicators is based on factors such as market
conditions, operator performance and legal structure. If we determine that a
significant impairment has occurred, we would be required to make an adjustment
to the net carrying value of the asset, which could have a material adverse
affect on our results of operations and funds from operations in the period in
which the write-off occurs.
WE MAY NOT BE ABLE TO SELL CERTAIN CLOSED FACILITIES FOR THEIR BOOK VALUE.
From time to time, we close facilities and actively market such facilities
for sale. To the extent we are unable to sell these properties for our book
value, we may be required to take an impairment charge or loss on the sale,
either of which would reduce our net income.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
We have substantial indebtedness and we may increase our indebtedness in
the future. As of December 31, 2003, our debt was $280.6 million, the majority
of which currently comes due in 2007. Our level of indebtedness could have
important consequences to our stockholders. For example, it could:
o limit our ability to satisfy our obligations with respect to holders
of our capital stock;
o potentially cause us to violate a cross-default provision under our
various long-term debt obligations;
o make us more vulnerable to economic downturns;
o potentially limit our ability to withstand competitive pressures if,
as a result of a decline in our rating agency ratings, our cost of
capital increases as compared to our competitors' cost of capital thus
reducing the spread on our investments; and
o impair our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions or general
corporate purposes.
OUR REAL ESTATE INVESTMENTS ARE RELATIVELY ILLIQUID.
Real estate investments are relatively illiquid and, therefore, tend to
limit our ability to vary our portfolio promptly in response to changes in
economic or other conditions. All of our properties are "special purpose"
properties that could not be readily converted to general residential, retail or
office use. Healthcare facilities that participate in Medicare or Medicaid must
meet extensive program requirements, including physical plant and operational
requirements, which are revised from time to time. Such requirements may include
a duty to admit Medicare and Medicaid patients, limiting the ability of the
facility to increase its private pay census beyond certain limits. Medicare and
Medicaid facilities are regularly inspected to determine compliance, and may be
excluded from the programs--in some cases without a prior hearing--for failure
to meet program requirements. Transfers of operations of nursing homes and other
healthcare-related facilities are subject to regulatory approvals not required
for transfers of other types of commercial operations and other types of real
estate. Thus, if the operation of any of our properties becomes unprofitable due
to competition, age of improvements or other factors such that our lessee or
mortgagor becomes unable to meet its obligations on the lease or mortgage loan,
the liquidation value of the property may be substantially less, particularly
relative to the amount owing on any related mortgage loan, than would be the
case if the property were readily adaptable to other uses. The receipt of
liquidation proceeds or the replacement of an operator that has defaulted on its
lease or loan could be delayed by the approval process of any federal, state or
local agency necessary for the transfer of the property or the replacement of
the operator with a new operator licensed to manage the facility. In addition,
certain significant expenditures associated with real estate investment, such as
real estate taxes and maintenance costs, are generally not reduced when
circumstances cause a reduction in income from the investment. Should such
events occur, our income and cash flows from operations would be adversely
affected.
AS AN OWNER OR LENDER WITH RESPECT TO REAL PROPERTY, WE MAY BE EXPOSED TO
POSSIBLE ENVIRONMENTAL LIABILITIES.
Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real property or a secured lender, such as us, may be
liable in certain circumstances for the costs of removal or remediation of
certain hazardous or toxic substances at, under or disposed of in connection
with such property, as well as certain other potential costs relating to
hazardous or toxic substances, including government fines and damages for
injuries to persons and adjacent property. Such laws often impose liability
without regard to whether the owner knew of, or was responsible for, the
presence or disposal of such substances and liability may be imposed on the
owner in connection with the activities of an operator of the property. The cost
of any required remediation, removal, fines or personal or property damages and
the owner's liability therefore could exceed the value of the property, and/or
the assets of the owner. In addition, the presence of such substances, or the
failure to properly dispose of or remediate such substances, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral which, in turn, would reduce the owner's revenues.
Although our leases and mortgage loans require the lessee and the mortgagor
to indemnify us for certain environmental liabilities, the scope of such
obligations may be limited, and we cannot assure you that any such mortgagor or
lessee would be able to fulfill its indemnification obligations.
THE INDUSTRY IN WHICH WE OPERATE IS HIGHLY COMPETITIVE. THIS COMPETITION MAY
PREVENT US FROM RAISING PRICES AT THE SAME PACE AS OUR COSTS INCREASE.
We compete for additional healthcare facility investments with other
healthcare investors, including other REITs. The operators of the facilities
compete with other regional or local nursing care facilities for the support of
the medical community, including physicians and acute care hospitals, as well as
the general public. Some significant competitive factors for the placing of
patients in skilled and intermediate care nursing facilities include quality of
care, reputation, physical appearance of the facilities, services offered,
family preferences, physician services and price. If our cost of capital should
increase relative to the cost of capital of our competitors, the spread that we
realize on our investments may decline if competitive pressures limit or prevent
us from charging higher lease or mortgage rates.
WE ARE NAMED AS DEFENDANTS IN LITIGATION ARISING OUT OF PROFESSIONAL LIABILITY
AND GENERAL LIABILITY CLAIMS RELATING TO OUR PREVIOUSLY OWNED AND OPERATED
FACILITIES WHICH IF DECIDED AGAINST US, COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION.
We and several of our wholly-owned subsidiaries have been named as
defendants in professional liability and general liability claims related to our
owned and operated facilities. Other third-party managers responsible for the
day-to-day operations of these facilities have also been named as defendants in
these claims. In these suits, patients of certain previously owned and operated
facilities have alleged significant damages, including punitive damages, against
the defendants. The lawsuits are in various stages of discovery and we are
unable to predict the likely outcome at this time. We continue to vigorously
defend these claims and pursue all rights we may have against the managers of
the facilities, under the terms of the management agreements. We have insured
these matters, subject to self-insured retentions of various amounts. There can
be no assurance that we will be successful in our defense of these matters or in
asserting our claims against various managers of the subject facilities or that
the amount of any settlement or judgment will be substantially covered by
insurance or that any punitive damages will be covered by insurance.
WE ARE SUBJECT TO SIGNIFICANT ANTI-TAKEOVER PROVISIONS.
Our articles of incorporation and bylaws contain various procedural and
other requirements which could make it difficult for stockholders to effect
certain corporate actions. Our Board of Directors is divided into three classes
and our Board members are elected for terms that are staggered. Our Board of
Directors also has the authority to issue additional shares of preferred stock
and to fix the preferences, rights and limitations of the preferred stock
without stockholder approval. We have also adopted a stockholders rights plan
which provides for share purchase rights to become exercisable at a discount if
a person or group acquires more than 9.9% of our common stock or announces a
tender or exchange offer for more than 9.9% of our common stock. These
provisions could discourage unsolicited acquisition proposals or make it more
difficult for a third party to gain control of us, which could adversely affect
the market price of our securities.
WE MAY CHANGE OUR INVESTMENT STRATEGIES AND POLICIES AND CAPITAL STRUCTURE.
Our Board of Directors, without the approval of our stockholders, may alter
our investment strategies and policies if it determines in the future that a
change is in our and our stockholders' best interests. The methods of
implementing our investment strategies and policies may vary as new investments
and financing techniques are developed.
IF WE FAIL TO MAINTAIN OUR REIT STATUS, WE WILL BE SUBJECT TO FEDERAL INCOME TAX
ON OUR TAXABLE INCOME AT REGULAR CORPORATE RATES.
We were organized to qualify for taxation as a real estate investment
trust, or REIT, under Sections 856 through 860 of the Internal Revenue Code. We
believe we have conducted, and we intend to continue to conduct, our operations
so as to qualify as a REIT. Qualification as a REIT involves the satisfaction of
numerous requirements, some on an annual and some on a quarterly basis,
established under highly technical and complex provisions of the Internal
Revenue Code for which there are only limited judicial and administrative
interpretations and involve the determination of various factual matters and
circumstances not entirely within our control. For example, in order to qualify
as a REIT, each year we must distribute to our stockholders at least 90% of our
REIT taxable income. We cannot assure you that we will at all times satisfy
these rules and tests.
If we were to fail to qualify as a REIT in any taxable year, as a result of
a determination that we failed to meet the annual distribution requirement or
otherwise, we would be subject to federal income tax, including any applicable
alternative minimum tax, on our taxable income at regular corporate rates.
Moreover, unless entitled to relief under certain statutory provisions, we also
would be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. This treatment would
reduce our net earnings and cash flow available for investment, debt service or
distribution to stockholders because of our additional tax liability for the
years involved. In addition, distributions to stockholders would no longer be
required to be made.
WE HEDGE FLOATING RATE DEBT WITH AN INTEREST RATE CAP, AND MAY RECORD CHARGES
ASSOCIATED WITH THE TERMINATION OR CHANGE IN VALUE OF THE INTEREST RATE CAP.
We utilize one interest rate cap to reduce certain exposures to interest
rate fluctuations. We do not use derivatives for trading or speculative
purposes. We have a policy of only entering into contracts with major financial
institutions based upon their credit ratings and other factors. We will assess
the probability that our expected future floating rate debt is sufficient for
our cap and may recognize a charge to earnings to reverse amounts previously
recorded as a component of comprehensive income.
RISKS RELATED TO OUR STOCK
THE MARKET VALUE OF OUR STOCK COULD BE SUBSTANTIALLY AFFECTED BY VARIOUS
FACTORS.
The share price of our stock will depend on many factors, which may change
from time to time, including:
o the market for similar securities issued by REITs;
o changes in estimates by analysts;
o our ability to meet analysts' estimates;
o general economic and financial market conditions; and
o our financial condition, performance and prospects.
OUR ISSUANCE OF ADDITIONAL CAPITAL STOCK, WARRANTS OR DEBT SECURITIES, WHETHER
OR NOT CONVERTIBLE, MAY REDUCE THE MARKET PRICE FOR OUR SHARES.
We cannot predict the effect, if any, that future sales of our capital
stock, warrants or debt securities, or the availability of our securities for
future sale, will have on the market price of our shares, including our common
stock. Sales of substantial amounts of our common stock or preferred shares,
warrants or debt securities convertible into or exercisable or exchangeable for
common stock in the public market or the perception that such sales might occur
could reduce the market price of our stock and the terms upon which we may
obtain additional equity financing in the future.
In addition, we may issue additional capital stock in the future to raise
capital or as a result of the following:
o The issuance and exercise of options to purchase our common stock. As
of December 31, 2003, we had outstanding options to acquire
approximately 2.3 million shares of our common stock. In addition, we
may in the future issue additional options or other securities
convertible into or exercisable for our common stock under our 2000
Stock Incentive Plan, as amended, or other remuneration plans. We may
also issue options or convertible securities to our employees in lieu
of cash bonuses or to our directors in lieu of director's fees.
o The issuance of debt securities exchangeable for our common stock.
o The exercise of warrants we may issue in the future.
o Lenders sometimes ask for warrants or other rights to acquire shares
in connection with providing financing. We cannot assure you that our
lenders will not request such rights.
THERE ARE NO ASSURANCES OF OUR ABILITY TO PAY DIVIDENDS IN THE FUTURE.
In 2001, our Board of Directors suspended dividends on our common stock and
all series of preferred stock in an effort to generate cash to address then
impending debt maturities. In 2003, we paid all accrued but unpaid dividends on
all series of preferred stock and reinstated dividends on our common stock and
all series of preferred stock. However, our ability to pay dividends may be
adversely affected if any of the risks described above were to occur. Our
payment of dividends is subject to compliance with restrictions contained in our
bank credit facilities and our preferred stock. All dividends will be paid at
the discretion of our Board of Directors and will depend upon our earnings, our
financial condition, maintenance of our REIT status and such other factors as
our Board may deem relevant from time to time. There are no assurances of our
ability to pay dividends in the future. In addition, our dividends in the past
have included, and may in the future include, a return of capital.
HOLDERS OF OUR OUTSTANDING PREFERRED STOCK HAVE LIQUIDATION AND OTHER RIGHTS
THAT ARE SENIOR TO THE RIGHTS OF THE HOLDERS OF OUR COMMON STOCK.
Our Board of Directors has the authority to designate and issue preferred
stock that may have dividend, liquidation and other rights that are senior to
those of our common stock. As of February 11, 2004, 2,300,000 shares of our
9.25% Series A cumulative preferred stock, 2,000,000 shares of our 8.625% Series
B cumulative preferred stock and 4,739,500 shares of our 8.375% Series D
cumulative redeemable preferred stock were issued and outstanding. Holders of
our preferred stock are generally entitled to cumulative dividends before any
dividends may be declared or set aside on our common stock. Upon our voluntary
or involuntary liquidation, dissolution or winding up, before any payment is
made to holders of our common stock, holders of our preferred stock are entitled
to receive a liquidation preference of $25 per share with respect to the Series
A, Series B and Series D preferred stock, plus any accrued and unpaid
distributions. This will reduce the remaining amount of our assets, if any,
available to distribute to holders of our common stock. In addition, holders of
our preferred stock have the right to elect two additional directors to our
Board of Directors if six quarterly preferred dividends are in arrears.
LEGISLATIVE OR REGULATORY ACTION COULD ADVERSELY AFFECT PURCHASERS OF OUR STOCK.
In recent years, numerous legislative, judicial and administrative changes
have been made in the provisions of the federal income tax laws applicable to
investments similar to an investment in our stock. Changes are likely to
continue to occur in the future, and we cannot assure you that any of these
changes will not adversely affect our stockholder's stock. Any of these changes
could have an adverse effect on an investment in our stock or on market value or
resale potential. Stockholders are urged to consult with your own tax advisor
with respect to the impact that recent legislation may have on your investment
and the status of legislative regulatory or administrative developments and
proposals and their potential effect.
RECENT CHANGES IN TAXATION OF CORPORATE DIVIDENDS MAY ADVERSELY AFFECT THE VALUE
OF OUR STOCK.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 that was enacted
into law on May 28, 2003, among other things, generally reduces to 15% the
maximum marginal rate of tax payable by individuals on dividends received from a
regular C corporation. This reduced tax rate, however, will not apply to
dividends paid to individuals by a REIT on its shares, except for certain
limited amounts. While the earnings of a REIT that are distributed to its
stockholders still generally will be subject to less combined federal income
taxation than earnings of a non-REIT C corporation that are distributed to its
stockholders net of corporate-level tax, this legislation could cause individual
investors to view the stock of regular C corporations as more attractive
relative to the shares of a REIT than was the case prior to the enactment of the
legislation. Individual investors could hold this view because the dividends
from regular C corporations will generally be taxed at a lower rate while
dividends from REITs will generally be taxed at the same rate as the
individual's other ordinary income. We cannot predict what effect, if any, the
enactment of this legislation may have on the value of the shares of REITs in
general or on the value of our stock in particular, either in terms of price or
relative to other investments.
ITEM 2 - PROPERTIES
At December 31, 2003, our real estate investments included long-term care
facilities and rehabilitation hospital investments, either in the form of
purchased facilities which are leased to operators, mortgages on facilities
which are operated by the mortgagors or their affiliates and one facility owned
and operated for our account. The facilities are located in 28 states and are
operated by 39 unaffiliated operators. The following table summarizes our
property investments as of December 31, 2003:
GROSS
NO. OF NO. OF OCCUPANCY INVESTMENT
INVESTMENT STRUCTURE/OPERATOR BEDS FACILITIES PERCENTAGE(1) (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
PURCHASE/LEASEBACK
Sun Healthcare Group, Inc......................... 4,028 38 85 $168,482
Advocat, Inc...................................... 2,997 29 77 91,567
Seacrest Healthcare............................... 950 7 88 55,020
Claremont Health Care Holdings, Inc............... 628 5 95 45,900
Alden Management Services, Inc.................... 868 4 56 31,727
Harborside Healthcare Corporation................. 465 4 84 22,868
Haven Healthcare.................................. 442 4 95 22,387
Alterra Healthcare Corporation.................... 273 7 75 22,216
StoneGate Senior Care LP.......................... 664 6 84 21,781
CommuniCare Health Services....................... 260 2 60 20,300
Infinia Properties of Arizona, LLC................ 378 4 69 17,852
USA Healthcare, Inc............................... 550 5 75 14,879
Conifer Care Communities, Inc..................... 195 3 87 14,365
Senior Management................................. 386 3 83 13,463
Washington N&R, LLC............................... 286 2 80 12,152
Peak Medical of Idaho, Inc........................ 224 2 70 10,500
HQM of Floyd County, Inc.......................... 283 3 87 10,250
Triad Health Management of Georgia II, LLC........ 304 2 99 10,000
Mark Ide Limited Liability Company(2)............. 373 4 78 9,885
The Ensign Group, Inc............................. 271 3 93 9,656
Lakeland Investors, LLC........................... 300 1 62 8,348
Hickory Creek Healthcare Foundation, Inc.......... 138 2 89 7,250
American Senior Communities, LLC.................. 78 2 73 6,195
Liberty Assisted Living Centers, LP............... 120 1 100 5,995
Emeritus Corporation.............................. 52 1 72 5,674
Longwood Management Corporation................... 185 2 93 5,200
Eldorado Care Center, Inc. & Magnolia
Manor, Inc...................................... 167 2 46 5,100
Nexion Management................................. 131 1 96 4,603
LandCastle Diversified LLC........................ 238 2 62 3,900
Lamar Healthcare, Inc............................. 102 1 68 2,540
Generations Healthcare, Inc....................... 59 1 87 2,507
-------------------------------------------------------------------------------
16,395 153 81 682,562
OWNED AND OPERATED ASSETS--FEE
Nexion Health Management, Inc(2).................. 128 1 84 5,295
-------------------------------------------------------------------------------
128 1 84 5,295
CLOSED FACILITIES
Closed Facilities................................. - 6 - 4,597
-------------------------------------------------------------------------------
- 6 - 4,597
FIXED-RATE MORTGAGES
Mariner Health Care, Inc.......................... 1,618 12 94 59,688
Essex Healthcare Corporation...................... 633 6 76 14,484
Advocat, Inc...................................... 423 4 82 12,715
Parthenon Healthcare, Inc......................... 300 2 81 10,851
Hickory Creek Healthcare Foundation, Inc.......... 667 15 71 10,025
Tiffany Care Centers, Inc......................... 319 5 75 4,518
Texas Health Enterprises/HEA Mgmt. Group, Inc..... 450 3 67 3,226
Evergreen Healthcare.............................. 191 2 66 2,131
Covenant Care Midwest, Inc........................ 150 1 60 1,691
Paris Nursing Home, Inc........................... 144 1 70 486
-------------------------------------------------------------------------------
4,895 51 82 119,815
Reserve for uncollectible loans...................... - - - -
-------------------------------------------------------------------------------
Total......................................... 21,418 211 81 $812,269
===============================================================================
(1) Represents the most recent data provided by our operators.
(2) Effective January 1, 2004, our remaining owned and operated asset was
re-leased to Mark Ide Limited Liability Company.
The following table presents the concentration of our facilities by state
as of December 31, 2003:
TOTAL % OF
NUMBER OF TOTAL INVESTMENT TOTAL
FACILITIES BEDS (IN THOUSANDS) INVESTMENT
--------------------------------------------------------------------
Florida................................... 23 2,770 $126,128 15.5
California................................ 19 1,556 66,436 8.2
Ohio...................................... 14 1,445 58,878 7.2
Illinois.................................. 11 1,513 51,274 6.3
Michigan.................................. 9 1,171 42,009 5.2
Texas..................................... 14 1,746 41,496 5.1
North Carolina............................ 8 1,154 40,389 5.0
Arkansas.................................. 12 1,253 39,325 4.8
Indiana................................... 24 1,277 35,968 4.4
Alabama................................... 9 1,152 35,932 4.4
Massachusetts............................. 5 600 31,168 3.8
West Virginia............................. 7 688 30,579 3.8
Kentucky.................................. 9 757 26,963 3.3
Connecticut............................... 4 442 22,387 2.8
Tennessee................................. 6 642 21,553 2.7
Washington................................ 3 194 18,230 2.2
Arizona................................... 4 378 17,852 2.2
Colorado.................................. 4 232 16,948 2.1
Iowa...................................... 7 700 16,679 2.1
Missouri.................................. 7 605 16,671 2.1
Pennsylvania.............................. 2 200 15,697 1.9
Idaho..................................... 3 264 11,100 1.4
Georgia................................... 2 304 10,000 1.2
New Hampshire............................. 1 68 5,800 0.7
Louisiana................................. 1 131 4,603 0.6
Kansas.................................... 1 40 3,419 0.4
Oklahoma.................................. 1 36 3,178 0.4
Utah...................................... 1 100 1,607 0.2
--------------------------------------------------------------------
Total................................ 211 21,418 $ 812,269 100.0
====================================================================
Our core portfolio consists of long-term lease and mortgage agreements. Our
leased real estate properties are leased under provisions of Single Facility
Leases or Master Leases with initial terms typically ranging from 5 to 15 years,
plus renewal options. Substantially all of the Master Leases provide for minimum
annual rentals that are subject to annual increases based upon increases in the
CPI or increases in revenues of the underlying properties, with certain limits.
Under the terms of the leases, the lessee is responsible for all maintenance,
repairs, taxes and insurance on the leased properties.
At December 31, 2003, we had one owned and operated facility which is
subject to governmental regulation and derives a substantial portion of its net
operating revenues from third-party payors, including the Medicare and Medicaid
programs. This facility is managed by an independent third party under a
management contract. The manager is responsible for the day-to-day operations of
the facility, including, among other things, patient care, staffing, billing and
collection of patient accounts and facility-level financial reporting. For its
services, the manager is paid a management fee based on a percentage of nursing
home revenues. We leased this facility to an operator effective January 1, 2004
and, as of the date of this report, we have no owned and operated facilities in
our portfolio. (See Note 3 - Properties to our audited consolidated financial
statements).
ITEM 3 - LEGAL PROCEEDINGS
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.
On June 21, 2000, we were named as a defendant in certain litigation
brought against us in the U.S. District Court for the Eastern District of
Michigan, Detroit Division, by Madison/OHI Liquidity Investors, LLC ("Madison"),
for the breach and/or anticipatory breach of a revolving loan commitment. Ronald
M. Dickerman and Bryan Gordon are partners in Madison and limited guarantors
("Guarantors") of Madison's obligations to us. Effective as of September 30,
2002, the parties settled all claims in the suit in consideration of Madison's
payment of the sum of $5.4 million consisting of a $0.4 million cash payment for
our attorneys' fees, with the balance evidenced by the amendment of the existing
promissory note from Madison to us. The note reflects a principal balance of
$5.0 million, with interest accruing at 9% per annum, payable over three years
upon liquidation of the collateral securing the note. The note is also fully
guaranteed by the Guarantors; provided that if all accrued interest and 75% of
original principal has been repaid within 18 months, the Guarantors will be
released. Accordingly, a reserve of $1.26 million was recorded in 2002 relating
to this note. As of December 31, 2003, the principal balance on this note was
$2.2 million prior to reserves.
In 2000, we filed suit against a title company (later adding a law firm as
a defendant), seeking damages based on claims of breach of contract and
negligence, among other things, as a result of the alleged failure to file
certain Uniform Commercial Code ("UCC") financing statements in our favor. We
filed a subsequent suit seeking recovery under title insurance policies written
by the title company. The defendants denied the allegations made in the
lawsuits. In settlement of our claims against the defendants, we agreed in the
first quarter of 2003 to accept a lump sum cash payment of $3.2 million. The
cash proceeds were offset by related expenses incurred of $1.0 million resulting
in a net gain of $2.2 million.
We and several of our wholly-owned subsidiaries have been named as
defendants in professional liability claims related to our formerly owned and
operated facilities. Other third-party managers responsible for the day-to-day
operations of these facilities have also been named as defendants in these
claims. In these suits, patients of certain previously owned and operated
facilities have alleged significant damages, including punitive damages against
the defendants. The lawsuits are in various stages of discovery and we are
unable to predict the likely outcome at this time. We continue to vigorously
defend these claims and pursue all rights we may have against the managers of
the facilities, under the terms of the management agreements, which include,
among other matters, the requirement that the operators indemnify us against all
losses, cost, fines and related expenses arising out of such matters. We also
maintain insurance against such claims, subject to self-insured retentions of
various amounts. There can be no assurance that the operators will fulfill their
obligations to indemnify us or that such insurance will be available to fund any
losses or settlements arising as a result of such claims.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders during the fourth quarter of the
year covered by this report.
PART II
ITEM 5 - MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange under the symbol
OHI. The following table sets forth, for the periods shown, the high and low
prices for our common stock as reported on the New York Stock Exchange Composite
for the periods indicated and cash dividends per share:
2003 2002
-------------------------------------------- ------------------------------------------
DIVIDENDS DIVIDENDS
QUARTER HIGH LOW PER SHARE QUARTER HIGH LOW PER SHARE
-------------------------------------------- ------------------------------------------
First $ 3.9200 $ 2.2600 $ 0.00 First $ 6.2000 $ 3.8000 $ 0.00
Second 5.6000 2.2100 0.00 Second 7.6600 5.0300 0.00
Third 8.3500 5.0700 0.00 Third 7.5800 4.5500 0.00
Fourth 9.4200 7.4000 0.15 Fourth 5.9400 3.2500 0.00
------- -------
$ 0.15 $ 0.00
======= =======
The closing price for our common stock on December 31, 2003 was $9.33 per
share. As of December 31, 2003, there were 37,290,562 shares of common stock
outstanding with approximately 1,700 registered holders and approximately 14,200
beneficial owners.
In 2003, we paid all cumulative, unpaid dividends and resumed our regular
quarterly dividend payments on our Series A, B and C preferred stock and common
stock. (See Note 13 - Dividends; Note 20 - Subsequent Events).
The following table provides information about all equity awards under our
company's 2000 Stock Incentive Plan and 1993 Amended and Restated Stock Option
and Restricted Stock Plan as of December 31, 2003.
- ------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ------------------------------------------------------------------------------------------------------------
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
exercise of exercise price of equity compensation plans
Plan category outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
- ------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 2,282,630 $3.20 566,332
- ------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by
security holders -- -- --
- ------------------------------------------------------------------------------------------------------------
Total 2,282,630 $3.20 566,332
- ------------------------------------------------------------------------------------------------------------
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth our selected financial data and operating
data for our company on an historical basis. The following data should be read
in conjunction with our financial statement and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere herein. Our historical operating results may not be
comparable to our future operating results.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA
Revenues from core operations................................... $ 86,267 $ 90,699 $ 88,082 $ 98,325 $120,385
Revenues from nursing home operations(1)........................ - 42,905 162,042 167,287 1,050
------------------------------------------------------
Total revenues................................................ $ 86,267 133,604 250,124 265,612 121,435
------------------------------------------------------
Income (loss) from continuing operations........................ $ 23,341 (3,744) (15,588) (43,250) 18,966
Net income (loss) available to common........................... 2,915 (34,761) (36,651) (66,485) 10,040
Per share amounts:
Income (loss) from continuing operations:
Basic......................................................... $ 0.09 $ (0.69) $ (1.78) $ (3.00) $ 0.47
Diluted....................................................... 0.08 (0.69) (1.78) (3.00) 0.47
Net income (loss) available to common:
Basic......................................................... $ 0.08 $ (1.00) $ (1.83) $ (3.32) $ 0.51
Diluted....................................................... 0.08 (1.00) (1.83) (3.32) 0.51
Dividends, Common Stock(2)...................................... 0.15 - - 1.00 2.80
Dividends, Series A Preferred(2)................................ 6.937 - - 2.31 2.31
Dividends, Series B Preferred(2)................................ 6.469 - - 2.16 2.16
Dividends, Series C Preferred(3)................................ 29.807 - - 0.25 -
Weighted-average common shares outstanding, basic............... 37,189 34,739 20,038 20,052 19,877
Weighted-average common shares outstanding, diluted............. 38,154 34,739 20,038 20,052 19,877
DECEMBER 31,
------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------
BALANCE SHEET DATA
Gross investments............................................... $842,056 $882,313 $938,228 $974,507 $1,072,398
Total assets.................................................... 725,054 804,009 892,414 950,213 1,040,688
Revolving lines of credit....................................... 177,074 177,000 193,689 185,641 166,600
Other long-term borrowings...................................... 103,520 129,462 219,483 249,161 339,764
Subordinated convertible debentures............................. - - - 16,590 48,405
Stockholders equity............................................. 436,235 479,701 450,690 464,313 457,081
- ----------
(1) Nursing home revenues and expenses of owned and operated assets are shown
on a net basis for the year ended December 31, 2003 and are shown on a
gross basis for the years ended December 31, 2002, 2001, 2000 and 1999.
(2) Dividends per share are those declared and paid during such period.
(3) Dividends per share are those declared during such period, based on the
number of shares of common stock issuable upon conversion of the
outstanding Series C preferred stock.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains forward-looking statements, including statements
regarding potential financings and potential future changes in reimbursement.
These statements relate to our expectations, beliefs, intentions, plans,
objectives, goals, strategies, future events, performance and underlying
assumptions and other statements other than statements of historical facts. In
some cases, you can identify forward-looking statements by the use of
forward-looking terminology including "may," "will," "anticipates," "expects,"
"believes," "intends," "should" or comparable terms or the negative thereof.
These statements are based on information available on the date of this filing
and only speak as to the date hereof and no obligation to update such
forward-looking statements should be assumed. Our actual results may differ
materially from those reflected in the forward-looking statements contained
herein as a result of a variety of factors, including, among other things:
(i) those items discussed under "Risk Factors" in Item 1 above;
(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 assets on a timely basis and at terms that
allow us to realize the carrying value of these assets;
(v) our ability to negotiate appropriate modifications to the terms of our
credit facilities;
(vi) our ability to complete the proposed refinancing with respect to our
existing credit facilities;
(vii)our ability to manage, re-lease or sell any owned and operated
facilities;
(viii) the availability and cost of capital
(ix) competition in the financing of healthcare facilities;
(x) regulatory and other changes in the healthcare sector
(xi) the effect of economic and market conditions generally and,
particularly, in the healthcare industry;
(xii) changes in interest rates;
(xiii) the amount and yield of any additional investments;
(xiv)changes in tax laws and regulations affecting real estate investment
trusts; and
(xv) changes in the ratings of our debt and preferred securities.
OVERVIEW
As of December 31, 2003, our portfolio consisted of 211 healthcare
facilities, located in 28 states and operated by 39 third-party operators. Our
gross investment in these facilities, net of impairments, totaled $812.3 million
at December 31, 2003, with 97.1% of our real estate investments related to
long-term care facilities. Our portfolio is made up of 151 long-term healthcare
facilities and two rehabilitation hospitals owned and leased to third parties,
fixed rate mortgages on 51 long-term healthcare facilities, one long-term
healthcare facility that was recovered from a customer and was operated through
a third-party management contract for our own account and six long-term
healthcare facilities that were recovered from customers and are currently
closed. At December 31, 2003, we also held miscellaneous investments of
approximately $29.8 million.
Nearly all of our properties are used as healthcare facilities; therefore,
we are directly affected by the risk associated with the healthcare industry.
Our lessees and mortgagors, as well as any facilities owned and operated for our
own account, derive a substantial portion of their net operating revenues from
third-party payors, including the Medicare and Medicaid programs. These programs
are highly regulated by federal, state and local laws, rules and regulations and
subject to frequent and substantial change. The Balanced Budget Act of 1997
("Balanced Budget Act") significantly reduced spending levels for the Medicare
and Medicaid programs. Due to the implementation of the terms of the Balanced
Budget Act, effective July 1, 1998, the majority of skilled nursing facilities
shifted from payments based on reasonable cost to a prospective payment system
for services provided to Medicare beneficiaries. Under the prospective payment
system, skilled nursing facilities are paid on a per diem prospective case-mix
adjusted basis for all covered services. Implementation of the prospective
payment system has affected each long-term care facility to a different degree,
depending upon the amount of revenue it derives from Medicare patients.
Legislation adopted in 1999 and 2000 increased Medicare payments to nursing
facilities and specialty care facilities on an interim basis. Section 101 of the
Balanced Budget Relief Act of 1999 ("Balanced Budget Relief Act") included a 20%
increase for 15 patient acuity categories (known as Resource Utilization Groups
("RUGS")) and a 4% across the board increase of the adjusted federal per diem
payment rate. The 20% increase was implemented in April 2000 and will remain in
effect until the implementation of refinements in the current RUG case-mix
classification system to more accurately estimate the cost of non-therapy
ancillary services. The 4% increase was implemented in April 2000 and expired
October 1, 2002.
The Benefits Improvement and Protection Act of 2000 ("Benefits Improvement
and Protection Act") included a 16.7% increase in the nursing component of the
case-mix adjusted federal periodic payment rate and a 6.7% increase in the 14
RUG payments for rehabilitation therapy services. The 16.7% increase was
implemented in April 2000 and expired October 1, 2002. The 6.7% increase is an
adjustment to the 20% increase granted in the Balance Budget Relief Act and
spreads the funds directed at three of those 15 RUGs to an additional 11
rehabilitation RUGs. The increase was implemented in April 2001 and will remain
in effect until the implementation of refinements in the current RUG case-mix
classification system.
The expiration of the 4% and 16.7% increases under these statutes as of
October 1, 2002 has had an adverse impact on the revenues of the operators of
nursing facilities and has negatively impacted some operators' ability to
satisfy their monthly lease or debt payments to us. Medicare reimbursement could
be further reduced when the Centers for Medicare & Medicaid Services ("CMS")
completes its RUG refinement, thereby triggering the sunset of the temporary 20%
and 6.7% increases also established under these statutes.
On August 4, 2003, CMS published the payment rates for SNFs for federal
fiscal year 2004 (effective on October 1, 2003). CMS announced that the SNF
update would be a 3.0% increase in Medicare payments for federal fiscal year
2004. In addition, CMS announced that the two temporary payment increases - the
20% and 6.7% add-ons for certain payment categories - will continue to be
effective for federal fiscal year 2004.
Also in the August 4, 2003 announcement, CMS confirmed its intention to
incorporate a forecast error adjustment that takes into account previous years'
update errors. According to CMS, there was a cumulative SNF market basket, or
inflation adjustment, forecast error of 3.26% for federal fiscal years 2000
through 2002. As a result, CMS has increased the national payment rate by an
additional 3.26% above the 3.0% increase for federal fiscal year 2004.
Due to the temporary nature of the 20% and 6.7% payment increases
established under the Balanced Budget Relief Act and Benefits Improvement and
Protection Act, we cannot be assured that the federal reimbursement will remain
at levels comparable to present levels and that such reimbursement will be
sufficient for our lessees or mortgagors to cover all operating and fixed costs
necessary to care for Medicare and Medicaid patients. We also cannot be assured
that there will be any future legislation to increase payment rates for skilled
nursing facilities. If payment rates for skilled nursing facilities are not
increased in the future, some of our lessees and mortgagors may have difficulty
meeting their payment obligations to us.
In addition, each state has its own Medicaid program that is funded jointly
by the state and federal government. Federal law governs how each state manages
its Medicaid program, but there is wide latitude for states to customize
Medicaid programs to fit the needs and resources of its citizens. Rising
Medicaid costs and decreasing state revenues caused by current economic
conditions have prompted an increasing number of states to cut or consider
reductions in Medicaid funding as a means of balancing their respective state
budgets. Existing and future initiatives affecting Medicaid reimbursement may
reduce utilization of (and reimbursement for) services offered by the operators
of our properties. In early 2003, many states announced actual or potential
budget shortfalls. As a result of these budget shortfalls, many states have
announced that they are implementing or considering implementing "freezes" or
cuts in Medicaid reimbursement rates, including rates paid to SNF providers, or
reductions in Medicaid enrollee benefits, including long-term care benefits. We
cannot predict the extent to which Medicaid rate freezes or cuts or benefit
reductions will ultimately be adopted, the number of states that will adopt them
nor the impact of such adoption on our operators. However, extensive Medicaid
rate cuts or freezes or benefit reductions could have a material adverse effect
on our operators' liquidity, financial condition and results of operations,
which could affect adversely their ability to make lease or mortgage payments to
us.
On May 28, 2003, the federal Jobs and Growth Tax Relief Reconciliation Act
("Tax Relief Act") was signed into law, which included an increase in Medicaid
federal funding for five fiscal quarters (April 1, 2003 through June 30, 2004).
In addition, the Tax Relief Act provides state fiscal relief for federal fiscal
years 2003 and 2004 to assist states with funding shortfalls. It is anticipated
that these temporary federal funding provisions could mitigate state Medicaid
funding reductions through federal fiscal year 2004.
In addition, private payors, including managed care payors, are
increasingly demanding discounted fee structures and the assumption by
healthcare providers of all or a portion of the financial risk of operating a
healthcare facility. Efforts to impose greater discounts and more stringent cost
controls are expected to continue. Any changes in reimbursement policies which
reduce reimbursement levels could adversely affect the revenues of our lessees
and mortgagors and thereby adversely affect those lessees' and mortgagors'
abilities to make their monthly lease or debt payments to us.
At December 31, 2002, we owned three long-term healthcare facilities that
had been recovered from customers and were operated for our own account. During
2001 and 2002, we experienced a significant increase in nursing home revenues
attributable to the increase in owned and operated assets. During 2003, these
increases abated as we re-leased, sold or closed all but one of these
facilities. In addition, in connection with the recovery of these assets, we
often fund working capital and deferred capital expenditure needs for a
transitional period until license transfers and other regulatory matters are
completed and reimbursement from third-party payors recommences. As of January
1, 2004, we had sold or re-leased all of the owned and operated facilities in
our portfolio and had six closed facilities in our portfolio Our management
intends to sell these assets as promptly as possible, consistent with achieving
valuations that reflect our management's estimate of fair value of the assets.
We do not know, however, if, or when, the dispositions will be completed or
whether the dispositions will be completed on terms that will enable us to
realize the fair value of such assets.
The following significant highlights occurred during the twelve-month
period ended December 31, 2003.
FINANCING
o In June 2003, we obtained a $225 million Senior Secured Credit
Facility ("Credit Facility") to repay borrowings under our two
previous credit facilities, replace letters of credit and pay
cumulative unpaid preferred dividends.
o In December 2003, we secured a $50 million acquisition credit
facility, which we believe, combined with the $225 million Credit
Facility and cash on hand, will provide us the flexibility to initiate
a growth strategy in 2004.
DIVIDENDS
o In July 2003, our Board of Directors declared a full catch-up of
cumulative, unpaid dividends and regular quarterly dividends for all
classes of preferred stock and such dividends were paid on August 15,
2003 to preferred stockholders of record on August 5, 2003.
o In September 2003, our Board of Directors reinstated our common stock
dividend and a dividend of $0.15 per share of common stock was paid on
November 17, 2003 to common stockholders of record on October 31,
2003.
RE-LEASING
o In March 2003, we re-leased nine skilled nursing fa