Edgar Filing: OMEGA HEALTHCARE INVESTORS INC

a6816701.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission file number 1-11316

OMEGA HEALTHCARE

INVESTORS, INC.

(Exact name of Registrant as specified in its charter)

Maryland		38-3041398
(State of incorporation)		(IRS Employer Identification No.)

200 International Circle, Suite 3500, Hunt Valley, MD 21030

(Address of principal executive offices)

(410) 427-1700

(Telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

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

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of July 29, 2011.

Common Stock, $.10 par value	103,097,397
(Class)	(Number of shares)

OMEGA HEALTHCARE INVESTORS, INC.

FORM 10-Q

March 31, 2011

TABLE OF CONTENTS
		Page No.
PART I	Financial Information

Item 1.	Financial Statements:
	Consolidated Balance Sheets
	June 30, 2011 (unaudited) and December 31, 2010	2

	Consolidated Statements of Operations (unaudited)
	Three and six months ended June 30, 2011 and 2010	3

	Consolidated Statements of Stockholders’ Equity
	Six months ended June 30, 2011 (unaudited)	4

	Consolidated Statements of Cash Flows (unaudited)
	Six months ended June 30, 2011 and 2010	5

	Notes to Consolidated Financial Statements
	June 30, 2011 (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	34

PART II	Other Information

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 6.	Exhibits	36

PART I – FINANCIAL INFORMATION

Item 1 - Financial Statements

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

	June 30,			December 31,
	2011			2010
	(Unaudited)
ASSETS
Real estate properties
Land and buildings	$	2,339,689		$	2,366,856
Less accumulated depreciation		(420,651	)		(380,995	)
Real estate properties – net		1,919,038			1,985,861
Mortgage notes receivable – net		113,202			108,557
		2,032,240			2,094,418
Other investments – net		29,278			28,735
		2,061,518			2,123,153
Assets held for sale – net		811			670
Total investments		2,062,329			2,123,823

Cash and cash equivalents		4,996			6,921
Restricted cash		20,609			22,399
Accounts receivable – net		94,315			92,819
Other assets		58,455			57,172
Operating assets for owned and operated properties		275			873
Total assets	$	2,240,979		$	2,304,007

LIABILITIES AND STOCKHOLDERS’ EQUITY
Revolving line of credit	$	53,000		$	—
Secured borrowings		199,454			201,296
Unsecured borrowings – net		975,477			975,669
Accrued expenses and other liabilities		110,487			121,859
Operating liabilities for owned and operated properties		472			1,117
Total liabilities		1,338,890			1,299,941

Stockholders’ equity:
Preferred stock issued and outstanding – 4,340 shares
Series D with an aggregate liquidation preference
of $108,488 as of December 31, 2010		—			108,488
Common stock $.10 par value authorized – 200,000 shares
issued and outstanding – 102,624 shares as of June 30, 2011
and 99,233 as of December 31, 2010		10,262			9,923
Common stock – additional paid-in-capital		1,452,935			1,376,131
Cumulative net earnings		592,701			580,824
Cumulative dividends paid		(1,153,809	)		(1,071,300	)
Total stockholders’ equity		902,089			1,004,066
Total liabilities and stockholders’ equity	$	2,240,979		$	2,304,007

See notes to consolidated financial statements.

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

(in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Revenue
Rental income	$	68,487		$	51,520		$	134,824		$	98,729
Mortgage interest income		3,433			2,519			6,931			5,133
Other investment income – net		617			1,790			1,258			2,536
Miscellaneous		69			20			69			3,749
Nursing home revenues of owned and operated assets		-			2,956			-			7,336
Total operating revenues		72,606			58,805			143,082			117,483

Expenses
Depreciation and amortization		24,759			16,451			49,977			31,138
General and administrative		4,930			3,672			10,156			7,382
Acquisition costs		-			1,192			45			1,412
Impairment on real estate properties		-			155			24,971			155
Provisions for uncollectible mortgages, notes and accounts receivable		4,139			-			4,139			-
Nursing home expenses of owned and operated assets		225			2,797			455			7,369
Total operating expenses		34,053			24,267			89,743			47,456

Income before other income and expense		38,553			34,538			53,339			70,027
Other income (expense):
Interest income		12			62			23			77
Interest expense		(20,072	)		(14,705	)		(40,072	)		(28,280	)
Interest – amortization of deferred financing costs		(703	)		(925	)		(1,397	)		(1,903	)
Interest –refinancing costs		-			(3,461	)		(16	)		(3,461	)
Total other expense		(20,763	)		(19,029	)		(41,462	)		(33,567	)

Net income		17,790			15,509			11,877			36,460
Preferred stock dividends		-			(2,272	)		(1,691	)		(4,543	)
Preferred stock redemption		16			-			(3,456	)		-
Net income available to common	$	17,806		$	13,237		$	6,730		$	31,917

Income per common share available to common shareholders:
Basic:
Net income	$	0.17		$	0.14		$	0.07		$	0.35
Diluted:
Net income	$	0.17		$	0.14		$	0.07		$	0.35

Dividends declared and paid per common share	$	0.38		$	0.32		$	0.75		$	0.64

Weighted-average shares outstanding, basic		101,912			93,031			100,993			90,935
Weighted-average shares outstanding, diluted		102,001			93,153			101,044			91,057

Components of other comprehensive income:
Net income	$	17,790		$	15,509		$	11,877		$	36,460
Unrealized loss on other investments		-			(38	)		-			-
Total comprehensive income	$	17,790		$	15,471		$	11,877		$	36,460

See notes to consolidated financial statements.

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Unaudited

(in thousands, except per share amounts)

	Preferred Stock			Common Stock Par Value		Additional Paid-in Capital			Cumulative Net Earnings		Cumulative Dividends			Total

Balance at December 31, 2010 (99,233 common shares)	$	108,488		$	9,923	$	1,376,131		$	580,824	$	(1,071,300	)	$	1,004,066
Issuance of common stock:
Grant of restricted stock (13 shares at $22.00 per share)		—			1		(1	)		—		—			—
Amortization of restricted stock		—			—		2,972			—		—			2,972
Vesting of restricted stock (grants 68 shares)		—			7		(1,261	)		—		—			(1,254	)
Dividend reinvestment plan (1,888 shares at $21.55 per share)		—			189		40,424			—		—			40,613
Grant of stock as payment of directors fees (3 shares at an average of $21.65 per share)		—			—		74			—		—			74
Equity Shelf Program (1,419 shares at $22.61 per share, net of issuance costs)		—			142		31,208			—		—			31,350
Preferred stock redemption		(108,488	)		—		3,388			—		(3,456	)		(108,556	)
Net income		—			—		—			11,877		—			11,877
Common dividends ($0.75 per share).		—			—		—			—		(75,848	)		(75,848	)
Preferred dividends (Series D of $0.74 per share)		—			—		—			—		(3,205	)		(3,205	)

Balance at June 30, 2011 (102,624 common shares)	$	—		$	10,262	$	1,452,935		$	592,701	$	(1,153,809	)	$	902,089

See notes to consolidated financial statements.

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited (in thousands)

	Six Months Ended
	June 30,
	2011			2010
Cash flows from operating activities
Net income	$	11,877		$	36,460
Adjustment to reconcile net income to cash provided by operating activities:
Depreciation and amortization		49,977			31,138
Impairment loss on real estate properties		24,971			155
Provisions for uncollectible accounts receivable		4,139			—
Amortization of deferred financing and refinancing costs		1,397			5,364
Restricted stock amortization expense		2,998			1,306
Effective yield receivable on mortgage notes		(675	)		—
Amortization of in-place leases		(3,232	)		—
Gain on sale of securities		—			(789	)
Other		(75	)		(75	)
Change in operating assets and liabilities – net of amounts assumed/acquired:
Accounts receivable, net		16			(1,381	)
Straight-line rent		(6,672	)		(3,961	)
Lease inducement		1,696			(236	)
Other operating assets and liabilities		(9,218	)		(1,999	)
Operating assets and liabilities for owned and operated properties		(47	)		(44	)
Net cash provided by operating activities		77,152			65,938
Cash flows from investing activities
Acquisition of real estate – net of liabilities assumed and escrows acquired		(98	)		(343,180	)
Placement of mortgage loans		(4,607	)		—
Proceeds from sale of real estate investments		—			28
Capital improvements and funding of other investments		(8,118	)		(17,003	)
Proceeds from other investments		1,747			14,549
Investments in other investments		(2,290	)		(14,356	)
Collection of mortgage principal – net		37			45
Net cash used in investing activities		(13,329	)		(359,917	)
Cash flows from financing activities
Proceeds from credit facility borrowings		174,000			271,000
Payments on credit facility borrowings		(121,000	)		(144,100	)
Receipts of other long-term borrowings		—			196,556
Payments of other long-term borrowings		(1,216	)		(59,354	)
Payment of financing related costs		(641	)		(8,824	)
Receipts from dividend reinvestment plan		40,613			27,526
Net proceeds from issuance of common stock		31,350			73,525
Payments from exercised options and restricted stock – net		(1,254	)		89
Dividends paid		(79,044	)		(62,652	)
Redemption of preferred stock		(108,556	)		—
Net cash (used in) provided by financing activities		(65,748	)		293,766

Decrease in cash and cash equivalents		(1,925	)		(213	)
Cash and cash equivalents at beginning of period		6,921			2,170
Cash and cash equivalents at end of period	$	4,996		$	1,957
Interest paid during the period, net of amounts capitalized	$	38,387		$	21,509
Non-cash investing activities
Assumed debt obligations	$	—		$	202,015
Non-cash settlement of mortgage obligations		—			(12,395	)
Non-cash acquisition of real estate properties		—			12,395
Stock consideration issued for acquisition		—			19,693
Net non-cash investing activities	$	—		$	221,708

See notes to consolidated financial statements.

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

June 30, 2011

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Business Overview

Omega Healthcare Investors, Inc. (“Omega” or the “Company”) has one reportable segment consisting of investments in healthcare-related real estate properties. Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities (“SNFs”) located in the United States. Our core portfolio consists of long-term leases and mortgage agreements. All of our leases are “triple-net” leases, which require the tenants to pay all property-related expenses. Our mortgage revenue derives from fixed-rate mortgage loans, which are secured by first mortgage liens on the underlying real estate and personal property of the mortgagor.

Basis of Presentation

The accompanying unaudited consolidated financial statements for Omega have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. We have evaluated all subsequent events through the date of the filing of this Form 10-Q. These unaudited consolidated financial statements should be read in conjunction with the financial statements and the footnotes thereto included in our latest Annual Report on Form 10-K.

Our consolidated financial statements include the accounts of (i) Omega, (ii) all direct and indirect wholly owned subsidiaries of Omega, and (iii) TC Healthcare (“TC Healthcare”), an entity and interim operator created to operate the 15 facilities we assumed as a result of the bankruptcy of one of our former tenants/operators. Thirteen of these facilities were transitioned from TC Healthcare to a new tenant/operator on September 1, 2008. The two remaining facilities were transitioned to the new tenant/operator on June 1, 2010 upon approval by state regulators of the operating license transfer, and as of such date, TC Healthcare no longer operates these facilities. All inter-company accounts and transactions have been eliminated in consolidation of the financial statements.

Accounts Receivable

Accounts receivable includes: contractual receivables, straight-line rent receivables and lease inducements, net of an estimated provision for losses related to uncollectible and disputed accounts. Contractual receivables relates to the amounts currently owed to us under the terms of the lease agreement. Straight-line receivables relates to the difference between the rental revenue recognized on a straight-line basis and the amounts due to us contractually. Lease inducements result from value provided by us to the lessee at the inception or renewal of the lease and will be amortized as a reduction of rental revenue over the non cancellable lease term. On a quarterly basis, we review the collection of our contractual payments and determine the appropriateness of our allowance for uncollectible contractual rents. In the case of a lease recognized on a straight-line basis or existence of lease inducements, we generally provide an allowance for straight-line accounts receivable or the lease inducements when certain conditions or indicators of adverse collectability are present.

A summary of our net receivables by type is as follows:

	June 30,			December 31,
	2011			2010
	(in thousands)

Contractual receivables	$	8,250		$	5,354
Straight-line receivables		68,499			62,423
Lease inducements		24,361			29,026
Allowance		(6,795	)		(3,984	)
Accounts receivable – net	$	94,315		$	92,819

During the second quarter, we entered into a master transition agreement (“2011 MTA”) with one of our current lessee/operators and a third party lessee/operator to transition the facilities from the current operator to the new operator. The 2011 MTA closing is subject to receipt of healthcare regulatory approvals from several states for the operating license transfer from the current operator to the new operator. Upon closing of the 2011 MTA, the current lease will be terminated and the new operator will enter into a new twelve-year master lease for the facilities. As a result of the 2011 MTA, during the second quarter of 2011, we evaluated the recoverability of the straight-line rent and lease inducements associated with the current lease and have recorded a $4.1 million provision for uncollectible accounts associated with straight-line receivables and lease inducements.

We continuously evaluate the payment history and financial strength of our operators and have historically established allowance reserves for straight-line rent adjustments for operators that do not meet our requirements. We consider factors such as payment history and the operator’s financial condition as well as current and future anticipated operating trends when evaluating whether to establish allowance reserves.

NOTE 2 – PROPERTIES AND INVESTMENTS

In the ordinary course of our business activities, we periodically evaluate investment opportunities and extend credit to customers. We also regularly engage in lease and loan extensions and modifications. Additionally, we actively monitor and manage our investment portfolio with the objectives of improving credit quality and increasing investment returns. In connection with our portfolio management, we may engage in various collection and foreclosure activities.

If we acquire real estate pursuant to a foreclosure or bankruptcy proceeding, the assets will initially be included on the consolidated balance sheet at the lower of cost or estimated fair value (see Note 3 – Owned and Operated Assets).

Leased Property

Our leased real estate properties, represented by 370 SNFs, 10 assisted living facilities (“ALFs”) and five specialty facilities at June 30, 2011, are leased under provisions of single or master leases with initial terms typically ranging from 5 to 15 years, plus renewal options. Substantially all of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of three methods depending on specific provisions of each lease as follows: (i) a specific annual percentage increase over the prior year’s rent, generally 2.5%; (ii) an increase based on the change in pre-determined formulas from year to year (i.e., such as increases in the Consumer Price Index (“CPI”)); or (iii) specific dollar increases over prior years. Under the terms of the leases, the lessee is responsible for all maintenance, repairs, taxes and insurance on the leased properties.

Connecticut Properties

In January 2011, at our request, a complaint was filed by the State of Connecticut, Commissioner of Social Services (the “State”) against the licensees/operators of four Connecticut SNFs, seeking the appointment of a receiver. The facilities were leased and operated by affiliates of FC/SCH and were managed by Genesis Healthcare, and had approximately 472 licensed beds as of March 31, 2011. The Superior Court, Judicial District of Hartford, Connecticut (the “Court”) appointed a receiver.

The receiver is responsible for (i) operating the facilities and funding all operational expenses incurred after the appointment of the receiver and (ii) for providing the Court with recommendations regarding the facilities. In March 2011, the receiver moved to close all four SNFs and the Company objected. At the hearing held on April 21, 2011, the Company stated its position that the receiver failed to comply with the statutory requirements prior to recommending the facilities’ closure. In addition, alternative operators expressed interest in operating several of the facilities. On April 27, 2011, the Court granted the receiver’s motion and ordered the facilities closed.

The Company timely filed its notice of appeal, taking the position that the Court's Order (the “Order”) is final and appealable, and erroneous. Following the Company’s notice of appeal, the Company negotiated a stipulation with the State and the receiver which afforded it significant concessions. Those concessions included: (a) an agreed recognition of the Company as a secured lienholder with a priority claim, (b) an accelerated timeframe for the (i) allocation by the receiver of collected funds between pre- and post- receivership periods, and (ii) disbursement to the Company of pre-receivership funds collected, and (c) an agreement by the State that it would forego its right to seek recoupment of pre-receivership funds as reimbursement for post-receivership advances. In exchange for these concessions (among others), the Company withdrew its appeal.

As a result of these developments, the Company recorded an impairment charge of $24.4 million to reduce the carrying values of the Connecticut SNFs to their estimated fair values in the first quarter of 2011. We estimated the fair value of these facilities based on the facilities potential sales value assuming that the facilities would not be used as skilled nursing facilities.

143 Facility CapitalSource Acquisitions (December 2009 and June 2010)

In November 2009, we entered into a securities purchase agreement (the “CapitalSource Purchase Agreement”) with CapitalSource Inc. (“CapitalSource”) and several of its affiliates, pursuant to which we agreed to purchase CapitalSource subsidiaries owning 80 long term care facilities, plus an option to purchase CapitalSource subsidiaries owning an additional 63 facilities (the “Option”), for approximately $858 million. We accounted for these acquisitions as business combinations.

The transactions closed in three phases: (i) on December 22, 2009, we purchased CapitalSource entities owning 40 facilities for approximately $271 million and an option to purchase CapitalSource entities owning 63 additional facilities for $25 million; (ii) on June 9, 2010, we completed our purchase of the 63 CapitalSource facilities pursuant to the option for an aggregate purchase price of approximately $293 million in cash, plus the $25 million purchase option deposit, representing a total purchase price of $318 million; and (iii) on June 29, 2010, we purchased CapitalSource entities owning 40 facilities for approximately $271 million and paid approximately $15 million for escrow accounts transferred to us at closing.

As of December 31, 2010, we completed our purchase price allocation for all three of these transactions. The allocation included the fair value adjustment for above-market debt assumed in the transactions as well as above and below-market in-place leases assumed. During the first six months of 2011, we amortized approximately $0.7 million of above-market adjustments related to the assumed debt and approximately $3.2 million of net below market in-place leases assumed from these transactions.

The facilities acquired from CapitalSource on June 9, 2010 and June 29, 2010 are included in our results of operations from the date of acquisition. The following unaudited pro forma results of operations reflect each of the CapitalSource transactions as if they occurred on January 1, 2010. In the opinion of management, all significant necessary adjustments to reflect the effect of the acquisition have been made. The following pro forma information is not indicative of future operations.

	Pro Forma
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
	(in thousands, except per share amount, unaudited)

Revenues	$	72,606	$	73,600	$	143,082	$	149,240
Net income available to common stockholders	$	17,806	$	16,342	$	6,730	$	38,816

Earnings per share – diluted:
Net income available to common stockholders – as reported	$	0.17	$	0.14	$	0.07	$	0.35
Net income available to common stockholders – pro forma	$	0.17	$	0.17	$	0.07	$	0.42

Held for Sale

At June 30, 2011, we had two SNFs classified as held-for-sale with an aggregate net book value of approximately $0.8 million.

Mortgage Notes Receivable

Our mortgage notes receivable relate to 13 long-term care facilities and two construction mortgages on two facilities currently under construction. The mortgage notes are secured by first mortgage liens on the borrowers’ underlying real estate and personal property. The mortgage notes receivable relate to facilities located in four (4) states, which are operated by four (4) independent healthcare operating companies. We monitor compliance with mortgages and when necessary have initiated collection, foreclosure and other proceedings with respect to certain outstanding loans. As of June 30, 2011, none of our mortgages were in default or in foreclosure proceedings. The mortgage properties are cross-collateralized with the master lease agreement.

Mortgage interest income is recognized as earned over the terms of the related mortgage notes, using the effective yield method. Allowances are provided against earned revenues from mortgage interest when collection of amounts due becomes questionable or when negotiations for restructurings of troubled operators lead to lower expectations regarding ultimate collection. When collection is uncertain, mortgage interest income on impaired mortgage loans is recognized as received after taking into account application of security deposits.

NOTE 3 – OWNED AND OPERATED ASSETS

In November 2007, affiliates of Haven Healthcare (“Haven”), one of our former operators/lessees/mortgagors, operated under Chapter 11 bankruptcy protection. Commencing in February 2008, the assets of the Haven facilities were marketed for sale via an auction process to be conducted through proceedings established by the bankruptcy court. The auction process failed to produce a qualified buyer. As a result, and pursuant to our rights as ordered by the bankruptcy court, Haven moved the bankruptcy court to authorize us to credit bid certain of the indebtedness that it owed to us in exchange for taking ownership of and transitioning certain of its assets to a new entity in which we have a substantial ownership interest, all of which was approved by the bankruptcy court on July 4, 2008. Effective July 7, 2008, we took ownership and/or possession of 15 facilities previously operated by Haven. TC Healthcare, a new entity and an interim operator, in which we have a substantial economic interest, began operating these facilities on our behalf through an independent contractor.

On August 6, 2008, we entered into a Master Transaction Agreement (“2008 MTA”) with affiliates of FC/SCH whereby FC/SCH agreed (subject to certain closing conditions, including the receipt of licensure) to lease 14 SNFs and one ALF facility under a master lease. These facilities were formerly leased to Haven.

Effective September 1, 2008, we completed the operational transfer of 12 SNFs and one ALF to affiliates of FC/SCH, in accordance with the terms of the 2008 MTA. These 13 facilities are located in Connecticut (5), Rhode Island (4), New Hampshire (3) and Massachusetts (1). As part of the transaction, Genesis has entered into a long-term management agreement with FC/SCH to oversee the day-to-day operations of each of these facilities. The two remaining facilities in Vermont, which were operated by TC Healthcare until May 31, 2010, were transferred to FC/SCH upon licensure from the state of Vermont. As a result of the transition of the operations to FC/SCH, we no longer operate any owned and operated facilities, effective June 1, 2010. Our consolidated financial statements include the results of operations of Vermont facilities from July 7, 2008 to May 31, 2010.

Nursing home revenues and expenses, included in our consolidated financial statements that relate to such owned and operated assets are set forth in the tables below.

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2011			2010		2011			2010
	(in thousands)
Nursing home revenues	$	—		$	2,956	$	—		$	7,336

Nursing home expenses		225			2,797		455			7,369
(Loss) gain from nursing home operations	$	(225	)	$	159	$	(455	)	$	(33	)

NOTE 4 – CONCENTRATION OF RISK

As of June 30, 2011, our portfolio of real estate investments consisted of 400 healthcare facilities, located in 35 states and operated by 50 third-party operators. Our gross investment in these facilities, net of impairments and before reserve for uncollectible loans, totaled approximately $2.5 billion at June 30, 2011, with approximately 99% of our real estate investments related to long-term care facilities. This portfolio is made up of 370 SNFs, 10 ALFs, five specialty facilities, fixed rate mortgages on 13 SNFs, and two SNFs that are held-for-sale. At June 30, 2011, we also held miscellaneous investments of approximately $29.3 million, consisting primarily of secured loans to third-party operators of our facilities. Included in the $29.3 million miscellaneous investments is a working capital note with an operator that is secured by the operator’s accounts receivables. We have classified the note as impaired but believe that the collateral supporting the working capital note is in excess of the balance and therefore, no reserve is recorded. As part of the 2011 MTA, the new third party lessee/operator will assume approximately $15 million of the working capital note as well as the accounts receivables supporting the note related to the 12 facilities that are expected to be transitioned to the new operator. We are in the process of working with the Connecticut receiver to collect the Connecticut receivables that support the remaining portion of the note.

At June 30, 2011, we had two investments with operators and/or managers that exceeded 10% of our total investment: (i) CommuniCare Health Services (“CommuniCare”) (13%) and (ii) Airamid Health Management, LLC through its subsidiaries and management relationships, (“Airamid”) (11%). No other operator and/or manager represented more than 10% of our investments for the six month period ended June 30, 2011. The two states in which we had our highest concentration of investments were Florida (24%) and Ohio (15%) at June 30, 2011.

For the three-month period ended June 30, 2011, our revenues from operations totaled $72.6 million, of which approximately $9.6 million was from CommuniCare (13%) and $8.4 million was from Sun Healthcare (“Sun”) (12%). No other operator generated more than 10% of our revenues from operations for the three-month period ended June 30, 2011.

For the six-month period ended June 30, 2011, our revenues from operations totaled $143.1 million, of which approximately $19.2 million was from CommuniCare (13%) and $16.7 million was from Sun Healthcare (12%). No other operator generated more than 10% of our revenues from operations for the six-month period ended June 30, 2011.

Sun is subject to the reporting requirements of the SEC and is required to file with the SEC annual reports containing audited financial information and quarterly reports containing unaudited interim financial information. Sun’s filings with the SEC can be found at the SEC’s website at www.sec.gov. We are providing this data for information purposes only, and we undertake no responsibility for Sun’s filings.

NOTE 5 – DIVIDENDS

Common Dividends

On July 14, 2011, the Board of Directors declared a common stock dividend of $0.40 per share, increasing the quarterly common dividend by $0.02, or 5.3%, per share over the prior quarter. The common dividends are to be paid August 15, 2011 to common stockholders of record on August 1, 2011.

On April 14, 2011, the Board of Directors declared a common stock dividend of $0.38 per share, increasing the quarterly common dividend by $0.01 per share over the prior quarter, that was paid May 16, 2011 to common stockholders of record on April 29, 2011.

On January 14, 2011, the Board of Directors declared a common stock dividend of $0.37 per share that was paid February 15, 2011 to common stockholders of record on January 31, 2011.

Series D Preferred Dividends

On January 14, 2011, the Board of Directors declared regular quarterly dividends of approximately $0.52344 per preferred share on the Series D Preferred Stock that were paid February 15, 2011 to preferred stockholders of record on January 31, 2011.

Redemption of Series D Preferred Stock

On March 7, 2011, pursuant to authorization from our Board of Directors, we redeemed all of the outstanding shares of our 8.375% Series D Cumulative Redeemable Preferred Stock at a redemption price of $25 per share plus $0.21519 per share in accrued and unpaid dividends up to and including the redemption date, for an aggregate redemption price of $25.21519 per share. Dividends on the shares of Series D Preferred Stock ceased to accrue on and after the redemption date, after which the Series D Preferred Stock ceased to be outstanding.

We borrowed approximately $103 million under our $320 million revolving senior secured credit facility to fund the redemption price. In connection with the redemption of the Series D Preferred Stock, we wrote-off $3.4 million of preferred stock issuance costs that reduced first quarter 2011 net income attributable to common stockholders by approximately $0.03 per common share.

NOTE 6 – TAXES

So long as we qualify as a real estate investment trust (“REIT”) under the Internal Revenue Code (the “Code”), we generally will not be subject to federal income taxes on the REIT taxable income that we distribute to stockholders, subject to certain exceptions. On a quarterly and annual basis, we test our compliance within the REIT taxation rules to ensure that we were in compliance with the rules.

Subject to the limitation under the REIT asset test rules, we are permitted to own up to 100% of the stock of one or more taxable REIT subsidiaries (“TRSs”). Currently, we have one TRS that is taxable as a corporation and that pays federal, state and local income tax on its net income at the applicable corporate rates. The TRS had a net operating loss carry-forward as of June 30, 2011 of $1.1 million. The loss carry-forward is fully reserved with a valuation allowance as we concluded it was more-likely-than-not that the deferred tax asset would not be realized.

NOTE 7 – STOCK-BASED COMPENSATION

The following is a summary of our stock-based compensation expense for the three- and six- month periods ended June 30, 2011 and 2010, respectively:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
	(in thousands)

Stock-based compensation expense	$	1,519	$	467	$	2,998	$	1,306

2011 Stock Awards

Effective January 2011, we granted 428,503 shares of restricted stock and 496,977 performance restricted stock units (“PRSUs”) to six employees.

Restricted Stock Awards

The restricted stock awards vest 100% on December 31, 2013, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company. As of June 30, 2011, no shares of restricted stock have vested under these restricted stock awards.

Performance Restricted Stock Units

We awarded three types of PRSUs to the six employees: (i) 124,244 annual total shareholder return (“TSR”) PRSUs, (ii) 279,550 multi-year TSR PRSUs and (iii) 93,183 multi-year relative TSR PRSUs.

Annual TSR PRSUs

The number of shares earned under the annual PRSUs depends generally on the level of achievement of TSR for the year-ended December 31, 2011. The annual PRSUs vest on December 31, 2011, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

Multi-year TSR PRSUs

The number of shares earned under the multi-year TSR PRSUs depends generally on the level of achievement of TSR for the three-years ended December 31, 2013. The multi-year TSR PRSUs vest 25% on the last day of each calendar quarter in 2014, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

Multi-year Relative TSR PRSUs

The number of shares earned under the multi-year relative TSR PRSUs depends generally on the level of achievement of TSR relative to other real estate investment trust in the MSCI U.S. REIT Index for the three-years ended December 31, 2013. The multi-year relative TSR PRSUs vest 25% on the last day of each calendar quarter in 2014, subject to continued employment on the vesting date and subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company.

The PRSU awards have varying degrees of performance requirements to achieve vesting, and each PRSU award represents the right to a variable number of shares of common stock and related dividend equivalents based on dividends paid to stockholders during the applicable performance period.

As of June 30, 2011, none of these PRSUs are vested or earned.

The following table summarizes our total unrecognized compensation cost as of June 30, 2011 associated with outstanding restricted stock and PRSU awards to employees:

	Shares/ Units		Grant Date Average Fair Value Per Unit/ Share		Total Compensation Cost (in millions)		Weighted Average Period of Expense Recognition (in months)		Unrecognized Compensation Cost (in millions)

Restricted stock		428,503	$	22.44	$	9.6		36	$	8.0
2011 Annual PRSUs		124,244	$	11.04		1.4		12		0.7
Multi-year TSR PRSUs		279,550	$	11.06		3.1		48		2.7
Multi-year relative TSR PRSUs		93,183	$	12.26		1.1		48		1.0
Total		925,480	$	16.45	$	15.2			$	12.4

We used a Monte Carlo model to estimate the fair value and for PRSUs granted to the employees in January 2011.

Director Grants

As of June 30, 2011, we had 29,799 shares of restricted stock outstanding to directors. The directors’ restricted shares are scheduled to vest over the next three years. As of June 30, 2011, the unrecognized compensation cost associated with the directors is approximately $0.4 million.

NOTE 8 – FINANCING ACTIVITIES AND BORROWING ARRANGEMENTS

Secured and Unsecured Borrowings

The following is a summary of our long-term borrowings:

		Current	June 30,		December 31,
	Maturity	Rate	2011		2010
			(in thousands)
Secured borrowings:
Revolving lines of credit	2014	4.19%	$	53,000	$	—

HUD Berkadia mortgages (1)	2036 - 2040	6.61%		65,332		66,128
HUD Capital Funding mortgages	2040 - 2045	4.85%		134,122		135,168
Total secured borrowings				199,454		201,296

Unsecured borrowings:
2016 Notes	2016	7.0%	$	175,000	$	175,000
2020 Notes	2020	7.5%		200,000		200,000
2022 Notes	2022	6.75%		575,000		575,000
Subordinated debt	2021	9.0%		21,309		21,403
				971,309		971,403
Premium				4,168		4,266
Total unsecured borrowings				975,477		975,669
Totals – net			$	1,227,931	$	1,176,965

(1)	Reflects the weighted average interest rate on the mortgages.

Bank Credit Agreements

At June 30, 2011, we had $53.0 million outstanding under our $320 million revolving senior secured credit facility (the “2010 Credit Facility”), and no letters of credit outstanding, leaving availability of $267.0 million.

The 2010 Credit Facility is priced at LIBOR plus an applicable percentage (ranging from 325 basis points to 425 basis points) based on the consolidated leverage and is not subject to a LIBOR floor. Our applicable percentage above LIBOR was 375 basis points as of June 30, 2011.

$140 Million Equity Shelf Program

During the six months ended June 30, 2011, 1.4 million shares of our common stock were issued through our $140 million Equity Shelf Program (the “2010 ESP”) for net proceeds of approximately $31.4 million, net of $0.6 million of commissions.

$575 Million 6.75% Senior Notes Exchange Offer

On June 2, 2011, we commenced an offer to exchange $575 million of our 6.75% Senior Notes due 2022 that have been registered under the Securities Act of 1933 for $575 million of our outstanding 6.75% Senior Notes due 2022, which were issued in October and November 2010 in two separate private placements.

All $575 million outstanding aggregate principal amount of the initial notes were validly tendered and not withdrawn prior to the expiration of the exchange offer, and were exchanged for exchange notes as of July 14, 2011, pursuant to the terms of the exchange offer. The exchange notes are identical in all material respects to the initial notes, except that the issuance of the exchange notes was registered under the Securities Act of 1933 and the provisions of the initial notes relating to transfer restrictions, registration rights and additional interest relating to registrations delays do not apply to the exchange notes.

NOTE 9 – FINANCIAL INSTRUMENTS

At June 30, 2011 and December 31, 2010, the carrying amounts and fair values of our financial instruments were as follows:

	2011				2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:	(in thousands)
Cash and cash equivalents	$	4,996	$	4,996	$	6,921	$	6,921
Restricted cash		20,609		20,609		22,399		22,399
Mortgage notes receivable – net		113,202		114,616		108,557		109,610
Other investments – net		29,278		28,961		28,735		25,317
Totals	$	168,085	$	169,182	$	166,612	$	164,247
Liabilities:
Revolving lines of credit	$	53,000	$	53,000	$	—	$	—
7.00% Notes due 2016 – net		174,298		191,880		174,221		187,079
7.50% Notes due 2020 – net		197,029		214,691		196,857		212,837
6.75% Notes due 2022 – net		582,841		594,981		583,188		576,019
HUD debt		199,454		212,732		201,296		214,643
Subordinated debt		21,309		23,939		21,403		23,248
Totals	$	1,227,931	$	1,291,223	$	1,176,965	$	1,213,826

Fair value estimates are subjective in nature and are dependent on a number of important assumptions, including estimates of future cash flows, risks, discount rates and relevant comparable market information associated with each financial instrument (see Note 2 – Summary of Significant Accounting Policies in our 2010 Annual Report on Form 10-K). The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts.

The following methods and assumptions were used in estimating fair value disclosures for financial instruments.

●	Cash and cash equivalents and restricted cash: The carrying amount of cash and cash equivalents and restricted cash reported in the balance sheet approximates fair value because of the short maturity of these instruments (i.e., less than 90 days).

●	Mortgage notes receivable: The fair values of the mortgage notes receivables are estimated using a discounted cash flow analysis, using interest rates being offered for similar loans to borrowers with similar credit ratings.

●

Other investments: Other investments are primarily comprised of: (i) notes receivable and (ii) an investment in redeemable non-convertible preferred security of an unconsolidated business accounted for using the cost method of accounting. The fair values of notes receivable are estimated using a discounted cash flow analysis, using interest rates being offered for similar loans to borrowers with similar credit ratings. The fair value of the investment in the unconsolidated business is estimated using quoted market value and considers the terms of the underlying arrangement.

●	Revolving lines of credit: The fair value of our borrowings under variable rate agreements are estimated using an expected present value technique based on expected cash flows discounted using the current market rates.

●	Senior notes and other long-term borrowings: The fair value of our borrowings under fixed rate agreements are estimated based on open market trading activity provided by a third party.

NOTE 10 – LITIGATION

We are subject to various legal proceedings, claims and other actions arising out of the normal course of business. While any legal proceeding or claim has an element of uncertainty, management believes that the outcome of each lawsuit, claim or legal proceeding that is pending or threatened, or all of them combined, will not have a material adverse effect on our consolidated financial position or results of operations.

On January 7, 2010, LCT SE Texas Holdings, L.L.C., an affiliate of Mariner Health Care and the lessee of four facilities located in the Houston area, filed a petition in the District Court of Harris County, Texas (No. 2010-01120) against four landlord entities, the member interests of which we purchased as part of the December 2009 acquisition from CapitalSource. On April 19, 2011, the Court dismissed with prejudice Plaintiff's claims against the Defendants, all pursuant to a joint motion to dismiss filed by the parties.

NOTE 11 – EARNINGS PER SHARE

The computation of basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the relevant period. Diluted EPS is computed using the treasury stock method, which is net income divided by the total weighted-average number of common outstanding shares plus the effect of dilutive common equivalent shares during the respective period. Dilutive common shares reflect the assumed issuance of additional common shares pursuant to certain of our share-based compensation plans, including stock options, restricted stock and performance restricted stock units.

The following tables set forth the computation of basic and diluted earnings per share:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2011		2010			2011			2010
	(in thousands, except per share amounts)
Numerator:
Net income	$	17,790	$	15,509		$	11,877		$	36,460
Preferred stock dividends		—		(2,272	)		(1,691	)		(4,543	)
Preferred stock redemption		16		—			(3,456	)		—
Numerator for net income available to common
per share - basic and diluted	$	17,806	$	13,237		$	6,730		$	31,917

Denominator:
Denominator for basic earnings per share		101,912		93,031			100,993			90,935
Effect of dilutive securities:
Restricted stock		77		114			39			112
Stock option incremental shares		—		—			—			5
Deferred stock		12		8			12			5
Denominator for diluted earnings per share		102,001		93,153			101,044			91,057

Earnings per share – basic:
Net income – basic	$	0.17	$	0.14		$	0.07		$	0.35

Earnings per share – diluted:
Net income – diluted	$	0.17	$	0.14		$	0.07		$	0.35

NOTE 12 – CONSOLIDATING FINANCIAL STATEMENTS

As of June 30, 2011, we had outstanding (i) $175 million 7% Senior Notes due 2016, (ii) $200 million 7.5% Senior Notes due 2020 and (iii) $575 million 6.75% Senior Notes due 2022, which we collectively refer to as the Senior Notes. The Senior Notes are fully and unconditionally guaranteed, jointly and severally, by each of our subsidiaries that guarantee other indebtedness of Omega or any of the subsidiary guarantors. Any subsidiary that we properly designate as an “unrestricted subsidiary” under the indentures governing the Senior Notes will not provide guarantees of the Senior Notes. As of and prior to March 31, 2010, the non-subsidiary guarantors were minor and insignificant. On June 29, 2010, we designated as “unrestricted subsidiaries” the 39 subsidiaries acquired from CapitalSource on such date (see Note 2). For the six months ended June 30, 2011, the operating cash flow of the non-guarantor subsidiaries approximated net income of the non-guarantor subsidiaries, adjusted for depreciation and amortization expense. For the six-month period ended June 30, 2011, the non-guarantor subsidiaries have not engaged in investing or financing activities other than the principal payment of $1.2 million for the HUD mortgages on the facilities owned by the non-guarantor subsidiaries. All of the subsidiary guarantors of our outstanding senior notes are 100 percent owned by Omega.

The following summarized condensed consolidating financial information segregates the financial information of the non-guarantor subsidiaries from the financial information of Omega Healthcare Investors, Inc. and the subsidiary guarantors under the senior notes. The results and financial position of acquired entities are included from the dates of their respective acquisitions.

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATING BALANCE SHEETS

Unaudited

(in thousands, except per share amounts)

	June 30, 2011
	Issuer & Subsidiary Guarantors			Non – Guarantor Subsidiaries			Elimination Company			Consolidated

Land and buildings	$	2,026,343		$	313,346		$	—		$	2,339,689
Less accumulated depreciation		(405,025	)		(15,626	)		—			(420,651	)
Real estate properties – net		1,621,318			297,720			—			1,919,038
Mortgage notes receivable – net		113,202			—			—			113,202
		1,734,520			297,720			—			2,032,240
Other investments – net		29,278			—			—			29,278
		1,763,798			297,720			—			2,061,518
Assets held for sale – net		811			—			—			811
Total investments		1,764,609			297,720			—			2,062,329

Cash and cash equivalents		4,996			—			—			4,996
Restricted cash		6,702			13,907			—			20,609
Accounts receivable – net		92,114			2,201			—			94,315
Investment in affiliates		79,054			—			(79,054	)		—
Other assets		36,091			22,364			—			58,455
Operating assets for owned and operated properties		275			—			—			275
Total assets	$	1,983,841		$	336,192			(79,054	)	$	2,240,979

LIABILITIES AND STOCKHOLDERS’ EQUITY
Revolving line of credit	$	53,000		$	—		$	—		$	53,000
Secured borrowings		—			199,454			—			199,454
Unsecured borrowings – net		954,168			21,309			—			975,477
Accrued expenses and other liabilities		74,112			36,375			—			110,487
Intercompany payable		—			72,885			(72,885	)		—
Operating liabilities for owned and operated properties		472			—			—			472
Total liabilities		1,081,752			330,023			(72,885	)		1,338,890

Stockholders’ equity:
Common stock		10,262			—			—			10,262
Common stock – additional paid-in-capital		1,452,935			—			—			1,452,935
Cumulative net earnings		592,701			6,169			(6,169	)		592,701
Cumulative dividends paid		(1,153,809	)		—			—			(1,153,809	)
Total stockholders’ equity		902,089			6,169			(6,169	)		902,089
Total liabilities and stockholders’ equity	$	1,983,841		$	336,192		$	(79,054	)	$	2,240,979

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATING BALANCE SHEETS

(in thousands, except per share amounts)

	December 31, 2010
	Issuer & Subsidiary Guarantors			Non – Guarantor Subsidiaries			Elimination Company			Consolidated

Land and buildings	$	2,053,510		$	313,346		$	—		$	2,366,856
Less accumulated depreciation		(372,925	)		(8,070	)		—			(380,995	)
Real estate properties – net		1,680,585			305,276			—			1,985,861
Mortgage notes receivable – net		108,557			—			—			108,557
		1,789,142			305,276			—			2,094,418
Other investments – net		28,735			—			—			28,735
		1,817,877			305,276			—			2,123,153
Assets held for sale – net		670			—			—			670
Total investments		1,818,547			305,276			—			2,123,823

Cash and cash equivalents		6,921			—			—			6,921
Restricted cash		9,279			13,120			—			22,399
Accounts receivable – net		91,729			1,090			—			92,819
Investment in affiliates		81,334			—			(81,334	)		—
Other assets		36,653			20,519			—			57,172
Operating assets for owned and operated properties		873			—			—			873
Total assets	$	2,045,336		$	340,005			(81,334	)	$	2,304,007

LIABILITIES AND STOCKHOLDERS’ EQUITY
Revolving line of credit	$	—		$	—		$	—		$	—
Secured borrowings		—			201,296			—			201,296
Unsecured borrowings – net		954,266			21,403			—			975,669
Accrued expenses and other liabilities		85,887			35,972			—			121,859
Intercompany payable		—			78,806			(78,806	)		—
Operating liabilities for owned and operated properties		1,117			—			—			1,117
Total liabilities		1,041,270			337,477			(78,806	)		1,299,941

Stockholders’ equity:
Preferred stock		108,488			—			—			108,488
Common stock		9,923			—			—			9,923
Common stock – additional paid-in-capital		1,376,131			—			—			1,376,131
Cumulative net earnings		580,824			2,528			(2,528	)		580,824
Cumulative dividends paid		(1,071,300	)		—			—			(1,071,300	)
Total stockholders’ equity		1,004,066			2,528			(2,528	)		1,004,066
Total liabilities and stockholders’ equity	$	2,045,336		$	340,005		$	(81,334	)	$	2,304,007

OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATING STATEMENTS OF OPERATIONS

Unaudited

(in thousands, except per share amounts)


	Three Months Ended June 30, 2011								Six Months Ended June 30, 2011
	Issuer & Subsidiary Guarantors		Non – Guarantor Subsidiaries		Elimination		Consolidated		Issuer & Subsidiary Guarantors		Non – Guarantor Subsidiaries		Elimination		Consolidated
Revenue
Rental income	$	60,113	$	8,374	$	-	$	68,487	$	117,956	$	16,868	$	-	$	134,824
Mortgage interest income		3,433		-		-		3,433		6,931		-		-		6,931
Other investment income – net		617		-		-		617		1,258		-		-		1,258
Miscellaneous		69		-		-		69		69		-		-		69
Total operating revenues		64,232		8,374		-		72,606		126,214		16,868		-		143,082

Expenses
Depreciation and amortization		20,888		3,871		-		24,759		42,421		7,556		-		49,977
General and administrative		4,852		78		-		4,930		9,995		161		-		10,156
Acquisition costs		-		-		-		-		45		-		-		45
Impairment loss on real estate properties		-		-		-		-		24,971		-		-		24,971
Provisions for uncollectible