10-K: Annual report pursuant to Section 13 and 15(d)
Published on February 14, 2023
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the fiscal year ended
For the transition period from to
OMEGA HEALTHCARE INVESTORS, INC.
(Exact Name of Registrant as Specified in its Charter)
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(Omega Healthcare Investors, Inc.) |
(Omega Healthcare Investors, Inc.) |
(Omega Healthcare Investors, Inc.) |
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(State or other jurisdiction of incorporation or organization) |
(Commission file number) |
(IRS Employer Identification No.) |
(Address of principal executive offices)
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(Telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
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Registrant |
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Title of Each Class |
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Name of Exchange on |
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Omega Healthcare Investors, Inc. |
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Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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Yes ◻
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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 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.
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Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files).
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one:)
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Accelerated filer ◻ |
Non-accelerated filer ◻ |
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Smaller reporting company
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Emerging growth company ◻ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
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Yes
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Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Yes
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ◻
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
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Yes
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The aggregate market value of the common stock Omega Healthcare Investors, Inc. held by
non-affiliates was $
As of February 8, 2023, there were
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the registrant’s 2023 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2022, is incorporated by reference in Part III herein.
TABLE OF CONTENTS
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Forward-Looking Statements
Unless otherwise indicated or except where the context otherwise requires, the terms “we,” “us” and “our” and other similar terms in this Annual Report on Form 10-K refer to Omega Healthcare Investors, Inc. and its consolidated subsidiaries.
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this document. This document contains “forward-looking statements” within the meaning of the federal securities laws. These statements relate to our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements other than statements of historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology including, but not limited to, terms such as “may,” “will,” “anticipates,” “expects,” “believes,” “intends,” “should” or comparable terms or the negative thereof. These statements are based on information available on the date of this filing and only speak as to the date hereof and no obligation to update such forward-looking statements should be assumed.
Our actual results may differ materially from those reflected in the forward-looking statements contained herein as a result of a variety of factors, including, among other things:
| (1) | those items discussed under “Risk Factors” in Part I, Item 1A to this Annual Report on Form 10-K; |
| (2) | 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; |
| (3) | the impact of the COVID-19 pandemic on our business and the business of our operators, including without limitation, the announced termination of the federally declared public health emergency and related government and regulatory support scheduled for May 11, 2023, the levels of staffing shortages, increased costs and decreased occupancy experienced by operators of skilled nursing facilities (“SNFs”) and assisted living facilities (“ALFs”) in connection with the pandemic, the ability of our operators to comply with infection control and vaccine protocols and to manage facility infection rates, and the sufficiency of government support and reimbursement rates to offset such costs and the conditions related thereto; |
| (4) | the ability of our 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 pendency of a bankruptcy proceeding and retain security deposits for the debtor’s obligations, and other costs and uncertainties associated with operator bankruptcies; |
| (5) | our ability to re-lease, otherwise transition, or sell underperforming assets or assets held for sale on a timely basis and on terms that allow us to realize the carrying value of these assets; |
| (6) | the availability and cost of capital to us; |
| (7) | changes in our credit ratings and the ratings of our debt securities; |
| (8) | competition in the financing of healthcare facilities; |
| (9) | competition in the long-term healthcare industry and shifts in the perception of various types of long-term care facilities, including SNFs and ALFs; |
| (10) | additional regulatory and other changes in the healthcare sector; |
| (11) | changes in the financial position of our operators; |
| (12) | the effect of economic and market conditions generally and, particularly, in the healthcare industry; |
| (13) | changes in interest rates and the impact of inflation; |
| (14) | the timing, amount and yield of any additional investments; |
| (15) | changes in tax laws and regulations affecting real estate investment trusts (“REITs”); |
| (16) | the potential impact of changes in the SNF and ALF markets or local real estate conditions on our ability to dispose of assets held for sale for the anticipated proceeds or on a timely basis, or to redeploy the proceeds therefrom on favorable terms; |
| (17) | our ability to maintain our status as a REIT; and |
| (18) | the effect of other factors affecting our business or the businesses of our operators that are beyond our or their control, including natural disasters, other health crises or pandemics and governmental action; particularly in the healthcare industry. |
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PART I
Item 1 – Business
Overview
Omega Healthcare Investors, Inc. (“Parent”) is a Maryland corporation that, together with its consolidated subsidiaries (collectively, “Omega” or “Company”) has elected to be taxed as a REIT for federal income tax purposes. Omega is structured as an umbrella partnership REIT (“UPREIT”) under which all of Omega's assets are owned directly or indirectly by, and all of Omega's operations are conducted directly or indirectly through, its operating partnership subsidiary, OHI Healthcare Properties Limited Partnership (collectively with subsidiaries, “Omega OP”). As of December 31, 2022, Parent owned approximately 97% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and other investors owned approximately 3% of the outstanding Omega OP Units. Omega became a publicly traded company listed on the New York Stock Exchange in 1992.
Omega has one reportable segment consisting of investments in healthcare-related real estate properties located in the United States (“U.S.”) and the United Kingdom (“U.K.”). Our goal is to provide strong returns to our investors, while serving as the preferred capital partner to our healthcare operating companies and affiliates (collectively, our “operators”) so they can concentrate on providing a high level of care for their resident-patients.
Property Types
Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), and to a lesser extent, independent living facilities (“ILFs”), rehabilitation and acute care facilities (“specialty facilities”) and medical office buildings (“MOBs”). The following is a summary of our various property types.
| ● | Skilled nursing facilities - SNFs provide services that include daily nursing, therapeutic rehabilitation, social services, activities, housekeeping, nutrition, medication management and administrative services for individuals requiring certain assistance for activities in daily living. |
| ● | Assisted living facilities - ALFs provide services that include assistance for activities in daily living and permit residents to maintain some of their privacy and independence as they do not require constant supervision and assistance. Services usually include daily housekeeping, laundry, medical reminders and assistance with the activities of daily living, such as eating, dressing and bathing. |
| ● | Independent living facilities - ILFs are age-restricted multi-family properties with central dining facilities that provide services that include security, housekeeping, activities, nutrition and limited laundry services. |
| ● | Specialty facilities – Specialty facilities consist of specialty hospitals, long-term acute care hospitals, inpatient rehabilitation facilities, behavioral health substance facilities, behavioral health psychiatric facility and traumatic brain injury facilities. |
| ● | Medical office buildings – MOBs are facilities designed specifically for healthcare providers such as physicians, dentists and other clinicians. |
Investment Strategy & Types
We maintain a portfolio of long-term healthcare facilities, mortgages and other real estate loans on healthcare facilities located in the U.S. and the U.K. Our investments are generally geographically diverse and operated by a diverse group of established, middle-market healthcare operators that we believe meet our standards for quality and experience of management and creditworthiness. Our criteria for evaluating potential investments includes but is not limited to:
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the quality and experience of management and the creditworthiness of the operator of the facility; |
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the facility’s historical and forecasted cash flow and its ability to meet operational needs, capital expenditure requirements and lease or debt service obligations; |
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the construction quality, condition and design of the facility and its environmental impact; |
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the location of the facility; |
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the tax, growth, regulatory and reimbursement environment of the applicable jurisdiction; |
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the occupancy rate for the facility and demand for similar healthcare facilities in the same or nearby communities; and |
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the payor mix of private, Medicare and Medicaid patients at the facility. |
As healthcare delivery continues to evolve, we continuously evaluate potential investments, as well as our assets, operators and markets to position our portfolio for long-term success. Our strategy includes applying data analytics to our investment underwriting and asset management, as well as selling or transitioning assets that do not meet our portfolio criteria.
We prefer to invest in fee simple ownership of properties. Due to regulatory, tax or other considerations, we may pursue alternative investment structures, such as mortgages and investments in joint ventures. While the market for long-term care real estate acquisitions in the U.S. remained competitive in 2022, we continued to seek and identify selective investments that are accretive to our portfolio. In addition to our U.S.-based investments, we expect to continue to pursue investments in alternative jurisdictions such as the U.K. As part of our continuous evaluation of our portfolio and in connection with certain operator workout transactions, we expect to continue to opportunistically sell assets, or portfolios of assets, from time to time. In addition, as the long-term care industry evolves and adapts to new protocols, we have made and may continue to make select ancillary investments in companies that enhance the technology and infrastructure of long-term care providers and our operators.
We typically seek substantial liquidity deposits, 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 and/or personal guarantees for our investments when appropriate.
The following summarizes our primary investment structures. The average annualized yields described below reflect obligations under existing contractual arrangements. However, due to the nature of the long-term care industry, we cannot assure that the operators of our facilities will meet their payment obligations in full or when due. Therefore, the annualized yields as of December 31, 2022, set forth below, are not necessarily indicative of future yields, which may be lower.
Real Estate Assets & Leases
Our real estate assets are primarily comprised of land, buildings and improvements and any furniture and equipment contained within our facilities. Substantially all of our leases are triple-net operating leases and require the operator to pay rent and all additional charges incurred in the operation of the leased facility. At December 31, 2022, we had one direct financing lease. Our triple-net operating leases typically range from 5 to 15 years, plus renewal options. Our leases generally provide for minimum annual rents that are subject to annual escalators. Leases with fixed annual rental escalators are generally recognized on a straight-line basis over the initial lease period, subject to a collectibility assessment. At December 31, 2022, our average annualized yield from operating leases was approximately 9.0%. At December 31, 2022, approximately 78% of our operating leases have initial lease terms expiring after 2027. The majority of our leased real estate properties are leased under provisions of master lease agreements that govern more than one facility, and to a lesser extent, we lease facilities under single facility leases. Under our master leases, our operators are required to make one monthly payment that represents rent on all the properties that are subject to the master lease. Certain of our leases also contain operator purchase options or landlord put options.
Some of our leases provide our operators with advances for the construction of facilities or capital expenditures for strategic facility enhancements. Typically, these advances require the operator to pay a fixed percentage of the advances funded as capital expenditure rent under the lease. Construction and upgrades made under these lease clauses are capitalized within our real estate assets. We direct a significant amount of our capital back into existing assets, which we believe sets the stage for our long-term strategic success.
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Real Estate Loans
Real estate loans consist of mortgage loans and other real estate loans which are primarily collateralized by a first, second or third mortgage lien or a leasehold mortgage on, or an assignment of the partnership interest in, the related properties. Our real estate loans typically have a fixed interest rate for the loan term. We enter into real estate loans for existing facilities and for the construction of facilities. At December 31, 2022, our average annualized yield on these investments was approximately 10.1%. At December 31, 2022, approximately 76% of our real estate loans have primary terms that expire after 2027.
Investments in Unconsolidated Joint Ventures
From time to time, we also acquire equity interests in joint ventures or entities that support the long-term healthcare industry and our operators. These are investments in entities that we do not consolidate but for which we can exercise significant influence over operating and financial policies and are reported under the equity method of accounting. Our investments in unconsolidated entities generally represent interests ranging from 9% to 51%. Under the equity method of accounting, our share of the investee’s earnings or losses is included in our consolidated results of operations. The initial carrying value of investments in unconsolidated entities is based on the amount paid to purchase the entity interest inclusive of transaction costs.
Non-Real Estate Loans
Non-real estate loans are loans to our operators and/or their principals that may be either unsecured or secured by the collateral of the borrower and are typically short-term in nature. Collateral under secured non-real estate loans typically consists of the working capital of operator entities. At December 31, 2022, our average annualized yield on these investments was approximately 8.7%. At December 31, 2022, approximately 12% of our non-real estate loans have primary terms that expire after 2027.
Portfolio and Investment Summary
As of December 31, 2022, our portfolio of real estate investments included 926 healthcare facilities located in 42 states and the U.K. operated by 67 third-party operators and was made up of the following:
| ● | Real estate assets, subject to operating leases, that include 664 SNFs, 169 ALFs, 20 ILFs, 16 specialty facilities and two MOBs; |
| ● | investment in a direct financing lease on one SNF; |
| ● | real estate loans, including first lien mortgages, on 48 SNFs, two ALFs and two specialty facilities; |
| ● | investments in unconsolidated joint ventures that hold 63 ALFs and two specialty facilities; and |
| ● | 2 facilities held for sale. |
Included below is a summary of our total investment assets, excluding accumulated depreciation, as of December 31, 2022 and 2021 (dollars in thousands):
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As of December 31, |
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2022 |
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2021 |
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Real estate assets: |
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Real estate assets |
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$ |
8,860,264 |
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$ |
9,028,745 |
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Investments in direct financing leases – net |
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8,503 |
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10,873 |
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Real estate loans receivable – net |
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1,042,731 |
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1,180,786 |
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Investments in unconsolidated joint ventures |
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178,920 |
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194,687 |
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Assets held for sale |
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9,456 |
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203,025 |
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Total real estate investments |
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10,099,874 |
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10,618,116 |
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Non-real estate loans receivable – net |
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225,281 |
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124,184 |
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Total investments |
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$ |
10,325,155 |
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$ |
10,742,300 |
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Revenues
The following table summarizes our revenues by investment category for 2022, 2021 and 2020 (dollars in thousands):
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Year Ended December 31, |
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2022 |
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2021 |
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2020 |
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Real estate related income: |
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Rental income |
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$ |
750,208 |
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$ |
923,677 |
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753,427 |
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Income from direct financing leases |
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1,023 |
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1,029 |
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1,033 |
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Real estate loans interest income |
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110,322 |
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123,649 |
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117,289 |
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Total real estate related revenues |
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861,553 |
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1,048,355 |
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871,749 |
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Non-real estate loans interest income |
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13,597 |
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12,733 |
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16,997 |
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Miscellaneous income |
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3,094 |
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1,721 |
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3,635 |
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Total revenues |
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$ |
878,244 |
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$ |
1,062,809 |
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$ |
892,381 |
The table set forth in Item 2 – Properties contains additional information regarding the geographic concentration of our facilities and investments as of December 31, 2022.
Borrowing Policies
We generally attempt to match the maturity of our indebtedness with the maturity of our investment assets and employ long-term, fixed-rate debt to the extent practicable in view of market conditions in existence from time to time.
We may use the proceeds of new indebtedness to finance our investments in additional healthcare facilities. In addition, we may invest in properties subject to existing loans, secured by mortgages, deeds of trust or similar liens on properties.
Policies With Respect To Certain Activities
With respect to our capital requirements, we typically rely on equity offerings, debt financing and retention of cash flow (subject to provisions in the Internal Revenue Code of 1986, as amended (the “Code”) concerning taxability of undistributed REIT taxable income), or a combination of these methods. Our financing alternatives include bank borrowings, publicly or privately placed debt instruments, purchase money obligations to the sellers of assets or securitizations, any of which may be issued as secured or unsecured indebtedness. We have the authority to issue our common stock or other equity or debt securities in exchange for property and to repurchase or otherwise reacquire our securities. 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.
Competition
The healthcare industry is highly competitive and will likely become more competitive in the future. We face competition in making and pricing new investments from other public and private REITs, investment companies, private equity and hedge fund investors, healthcare operators, lenders, developers and other institutional investors, some of whom may have greater resources and lower costs of capital than us. In addition, a significant amount of our rental and loan interest income is generally derived from facilities in states that require state approval for development and expansion of healthcare facilities. We believe that such state approvals may reduce competition for our operators and enhance the value of our properties. Our operators compete on a local and regional basis with operators of facilities that provide comparable services and, in certain cases, home and community health solutions. The basis of competition for our operators includes, amongst other factors, the quality of care provided, reputation, the physical appearance of a facility, price, the range of services offered, family preference, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral sources, location and the size and demographics of the population and surrounding areas.
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Increased competition makes it more challenging for us to identify and successfully capitalize on opportunities that meet our objectives. Our ability to compete is also impacted by national and local economic trends, availability of investment alternatives, availability and cost of capital, our financial condition, construction and renovation costs, existing laws and regulations, new legislation and population trends.
Taxation of Omega
Omega elected to be taxed as a REIT, under Sections 856 through 860 of the Code, beginning with our taxable year ended December 31, 1992. To continue to qualify as a REIT, we must continue to meet certain tests that, among other things, generally require that our assets consist primarily of real estate assets, our income be derived primarily from real estate assets, and that we distribute at least 90% of our REIT taxable income (other than net capital gains) to our stockholders annually. Provided we maintain our qualification as a REIT, we generally will not be subject to U.S. federal income taxes at the corporate level on our net income to the extent such net income is distributed to our stockholders annually. Even if we continue to qualify as a REIT, we will continue to be subject to certain federal, state and local taxes on our income and property. We believe that we were organized and have operated in such a manner as to qualify for taxation as a REIT. We intend to continue to operate in a manner that will allow us to maintain our qualification as a REIT, but no assurance can be given that we have operated or will be able to continue to operate in a manner so as to qualify or remain qualified as a REIT.
We have utilized, and may continue to utilize, one or more taxable REIT subsidiaries (“TRS”) to engage in activities that REITs may be prohibited from performing, including the provision of management and other services to third parties and the conduct of certain nonqualifying real estate transactions. Our TRSs generally are taxable as regular corporations, and therefore, subject to federal, foreign, state and local income taxes.
To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100% of our “REIT taxable income,” as adjusted, we will be subject to tax thereon at regular corporate rates. 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 and state income tax, and any applicable alternative minimum tax on our taxable income at regular corporate rates with respect to each such taxable year for which the statute of limitations remains open. In addition, even if we continue to qualify as a REIT, we could become subject to certain excise taxes. 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 significantly reduce our net earnings and cash flow because of our additional tax liability for the years involved, which could significantly impact our financial condition.
All of our investments are held directly or through entities owned by Omega OP. Omega OP is a pass through entity for U.S. federal income tax purposes, and therefore we are required to take into account our allocable share of each item of Omega OP’s income, gain, loss, deduction, and credit for any taxable year of Omega OP ending within or with our taxable year, without regard to whether we have received or will receive any distribution from Omega OP. Although a partnership agreement for pass through entities generally will determine the allocation of income and losses among partners, such allocations will be disregarded for tax purposes if they do not comply with the provisions of the Code and Treasury Regulations governing partnership allocations. If an allocation is not recognized for federal income tax purposes, the item subject to the allocation will be reallocated in accordance with the partners’ interests in the partnership, which will be determined by considering all the facts and circumstances relating to the economic arrangement of the partners with respect to such item. While Omega OP should generally not be a taxable entity for federal income tax purposes, any state or local revenue, excise or franchise taxes that result from the operating activities of the Omega OP may be incurred at the entity level.
Investors are strongly urged to consult their own tax advisors regarding the potential tax consequences of an investment in us based on such investor’s particular circumstances.
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Government Regulation and Reimbursement
The healthcare industry is heavily regulated. Our operators, which are primarily based in the U.S., are subject to extensive and complex federal, state and local healthcare laws and regulations; we also have several U.K.-based operators which are subject to a variety of laws and regulations in their jurisdiction. These laws and regulations are subject to frequent and substantial changes resulting from the adoption of new legislation, rules and regulations, and administrative and judicial interpretations of existing law. The ultimate timing or effect of these changes, which may be applied retroactively, cannot be predicted. Changes in laws and regulations impacting our operators, in addition to regulatory non-compliance by our operators, can have a significant effect on the operations and financial condition of our operators, which in turn may adversely impact us. There is the potential that we may be subject directly to healthcare laws and regulations because of the broad nature of some of these regulations, such as the Anti-kickback Statute and False Claims Act, among others.
The U.S. Department of Health and Human Services (“HHS”) declared a public health emergency on January 31, 2020 following the World Health Organization's decision to declare COVID-19 a public health emergency of international concern. This declaration, which has been extended through its scheduled expiration date of May 11, 2023, allows HHS to provide temporary regulatory waivers and new reimbursement rules, such as a temporary increase in the Medicaid Federal Medical Assistance Percentage and other rules designed to equip providers with flexibility to respond to the COVID-19 pandemic by suspending various Medicare patient coverage criteria and documentation and care requirements, including, for example, suspension of the three-day prior hospital stay coverage requirement and expanding the list of approved services which may be provided via telehealth. The three-day prior hospital stay waiver was a significant benefit to the skilled nursing industry during the height of the pandemic, as the reimbursement associated with the ability to skill in place helped to offset some of the increased costs connected with managing the pandemic. These regulatory actions have contributed, and may continue to contribute, to a change in census volumes and skilled nursing mix that may not otherwise have occurred. The public health emergency declaration is scheduled to terminate on May 11, 2023; however, it remains uncertain whether and/or when federal and state regulators will resume enforcement of those regulations which have waived or otherwise not been enforced during the public health emergency due to the exercise of enforcement discretion.
These temporary changes to regulations and reimbursement, as well as emergency legislation, including the CARES Act enacted on March 27, 2020 and discussed below, have had a significant impact on the operations and financial condition of our operators. The extent of the COVID-19 pandemic’s continued effect, including through prolonged labor shortages, slow occupancy recovery, and expense increases, on the Company’s and our operators’ operational and financial performance will depend on future developments, including the recovery in occupancy and availability of labor, the ability of our operators to manage the impact of the termination of public health emergency and temporary relief thereunder, the sufficiency and timeliness of additional governmental relief and reimbursement rate setting in offsetting cost increases, and the continued efficacy of vaccination, treatment and infection control programs relating to COVID-19, all of which developments and impacts are uncertain and difficult to predict and may continue to adversely impact our business, results of operations, financial condition and cash flows.
A significant portion of our operators’ revenue is derived from government-funded reimbursement programs, consisting primarily of Medicare and Medicaid.As federal and state governments continue to focus on healthcare reform initiatives, efforts to reduce costs by government payors will likely continue. Significant limits on the scope of services reimbursed and/or reductions of reimbursement rates could therefore have a material adverse effect on our operators’ results of operations and financial condition. Additionally, new and evolving payor and provider programs that are tied to quality and efficiency could adversely impact our tenants’ and operators’ liquidity, financial condition or results of operations, and there can be no assurance that payments under any of these government healthcare programs are currently, or will be in the future, sufficient to fully reimburse the property operators for their operating and capital expenses. In addition to quality and value-based reimbursement reforms, the U.S. Centers for Medicare and Medicaid Services (“CMS”) has implemented a number of initiatives focused on the reporting of certain facility specific quality of care indicators that could affect our operators, including publicly released quality ratings for all of the nursing homes that participate in Medicare or Medicaid under the CMS “Five Star Quality Rating System.” Facility rankings, ranging from five stars (“much above average”) to one star (“much below average”) are updated on a monthly basis. SNFs are required to provide information for the CMS Nursing Home Compare website regarding staffing and quality measures. These rating changes have impacted referrals to SNFs, and it is possible that changes to this system or other ranking systems could lead to future reimbursement policies that reward or penalize facilities on the basis of the reported quality of care parameters.
The following is a discussion of certain U.S. laws and regulations generally applicable to our operators, and in certain cases, to us.
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Reimbursement Changes Related to COVID-19:
U.S. Federal Stimulus Funds and Financial Assistance for Healthcare Providers. In response to the pandemic, Congress has enacted a series of economic stimulus and relief measures. On March 18, 2020, the Families First Coronavirus Response Act (“FFCRA”) was enacted in the U.S., providing a temporary 6.2% increase to each qualifying state and territory’s Medicaid Federal Medical Assistance Percentage (“FMAP”) effective January 1, 2020. The temporary FMAP increase was set to extend through the last day of the calendar quarter in which the public health emergency terminates. In exchange for receiving the enhanced federal funding, the FFCRA included a requirement that Medicaid programs keep beneficiaries enrolled through the end of the month in which the public health emergency terminates. However, as part of the Consolidated Appropriations Act of 2023 signed into law on December 29, 2022, Congress decoupled the Medicaid continuous enrollment from the public health emergency and terminates this provision effective March 31, 2023. Additionally, starting April 1, 2023, states that comply with federal rules regarding conducting renewals may begin the phase-down of the enhanced federal funding according to the following schedule: 6.2 percentage points through March 2023; 5 percentage points through June 2023; 2.5 percentage points through September 2023 and 1.5 percentage points through December 2023. States cannot restrict eligibility standards, methodologies, and procedures and states cannot increase premiums as required in FFCRA. Primarily due to the continuous enrollment provision, Medicaid enrollment has grown substantially compared to before the pandemic and the uninsured rate has dropped. The extent to which this increase in Medicaid enrollment is sustained following the discontinuation of the continuous enrollment provision is uncertain.
In further response to the pandemic, the CARES Act authorized approximately $178 billion to be distributed through the Provider Relief Fund to reimburse eligible healthcare providers for healthcare related expenses or lost revenues that were attributable to coronavirus. Funds have been allocated since 2020 in targeted and general distributions, the latter over four phases. In September 2021, HHS announced the release of $25.5 billion in phase four provider funding, including $17 billion of the $178 billion previously authorized through the CARES Act and $8.5 billion for rural providers, including those with Medicaid and Medicare patients, through the American Rescue Plan Act, with payments that began in December 2021. The Provider Relief Fund is administered under the broad authority and discretion of HHS and recipients are not required to repay distributions received to the extent they are used in compliance with applicable requirements. HHS continues to evaluate and provide allocations of, and issue regulation and guidance regarding, grants made under the CARES Act. We do not expect our operators will receive additional funding from HHS.
The CARES Act and related legislation also made other forms of financial assistance available to healthcare providers, which have the potential to impact our operators to varying degrees. This assistance includes Medicare and Medicaid payment adjustments and an expansion of the Medicare Accelerated and Advance Payment Program, which made available accelerated payments of Medicare funds in order to increase cash flow to providers. These payments are loans that providers were scheduled to repay beginning one year from the issuance date of each provider’s or supplier’s accelerated or advance payment, with repayment made through automatic recoupment of 25% of Medicare payments otherwise owed to the provider or supplier for eleven months, followed by an increase to 50% for another six months, after which any outstanding balance would be repaid subject to an interest rate of 4%. We believe these repayments commenced for many of our operators in April 2021 and have adversely impacted operating cash flows of these operators. While not limited to healthcare providers, the CARES Act additionally provided payroll tax relief for employers, allowing them to defer payment of employer Social Security taxes that are otherwise owed for wage payments made after March 27, 2020 through December 31, 2020 to December 31, 2021 with respect to 50% of the payroll taxes owed, with the remaining 50% deferred until December 31, 2022.
The Budget Control Act of 2011 established a Medicare Sequestration of 2%, which is an automatic reduction of certain federal spending as a budget enforcement tool. Originally, the sequester was supposed to be in effect from FY 2013 to FY 2021. However, most recently, the Infrastructure Investment and Jobs Act extended the sequester through FY 2031. Additional legislation, including the CARES Act and the Protecting Medicare and American Farmers Act, suspended the application of the sequester to Medicare from May 1, 2020 through March 30, 2022. It also limited Medicare reductions to 1% from April 1, 2022 through June 30, 2022. The full 2% Medicare sequestration went into effect as of July 1, 2022. The sequestration is currently extended through fiscal year 2031, and gradually increases to 4% from 2030 through 2031.
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Quality of Care Initiatives and Additional Requirements Related to COVID-19. In addition to COVID-19 reimbursement changes, several regulatory initiatives announced from 2020 to 2022 focused on addressing quality of care in long-term care facilities, including those related to COVID-19 testing and infection control protocols, vaccine protocols, staffing levels, reporting requirements, and visitation policies, as well as increased inspection of nursing homes. In August 2021, CMS announced it was developing an emergency regulation requiring staff vaccinations within the nation’s more than 15,000 Medicare and Medicaid-participating nursing homes, and in September 2021, CMS further announced that the scope of the regulation would be expanded to include workers in hospitals, dialysis facilities, ambulatory surgical settings, and home health agencies. In addition, recent updates to the Nursing Home Care website and the Five Star Quality Rating System include revisions to the inspection process, adjustment of staffing rating thresholds, the implementation of new quality measures and the inclusion of a staff turnover percentage (over a 12-month period). Although the American Rescue Plan Act did not allocate specific funds directly to SNF or ALF providers, certain funds were allocated to states who then distributed a portion of these funds to SNF and ALF providers. In addition, the American Rescue Plan Act allocated funds to quality improvement organizations to provide infection control and vaccination uptake support to SNFs and to the CDC for staffing, training and deployment of state-based nursing home and long-term care “strike teams” to assist facilities with known or suspected COVID-19 outbreaks. Additionally, the Biden Administration announced a focus on implementing minimum staffing requirements and increased inspections as part of the nursing home reforms announced in the 2022 State of the Union Address, and in July 2022, CMS announced it was evaluating a proposed federal staffing mandate for SNFs. It is uncertain whether such a mandate will be implemented and, if it is, whether it will be accompanied by additional funding to offset any increased staffing requirements for our operators; an unfunded mandate to increase staff in SNFs may have a material and adverse impact on the financial condition of our operators.
On June 16, 2020, the U.S. House of Representatives Select Subcommittee on the Coronavirus Crisis announced the launch of an investigation into the COVID-19 response of nursing homes and the use of federal funds by nursing homes during the pandemic. The Select Subcommittee continued to be active throughout the remainder of 2020, 2021 and 2022. In March 2021, the Oversight Subcommittee of the House Ways and Means Committee held a hearing on examining the impact of private equity in the U.S. healthcare system, including the impact on quality of care provided within the skilled nursing industry. The Biden Administration additionally announced in March 2022 a focus on reviewing private equity investment specifically in the skilled nursing sector. These initiatives, as well as additional calls for government review of the role of private equity in the U.S. healthcare industry, could result in additional requirements on our operators.
Reimbursement Generally:
Medicaid. Most of our SNF operators derive a substantial portion of their revenue from state Medicaid programs. Whether and to what extent the level of Medicaid reimbursement covers the actual cost to care for a Medicaid eligible resident varies by state. While periodic rate setting occurs and, in most cases, has an inflationary component, the state rate setting process not always keep pace with inflation or, even if it does, there is a risk that is may still not be sufficient to cover all or a substantial portion of the cost to care for Medicaid eligible residents. Additionally, rate setting is also subject to changes based on state budgetary constraints and political factors, both of which could result in decreased or insufficient reimbursement to the industry even in an environment where costs are rising. Since our operators’ profit margins on Medicaid patients are generally relatively low, more than modest reductions in Medicaid reimbursement or an increase in the percentage of Medicaid patients has in the past, and may in the future, adversely affect our operators’ results of operations and financial condition, which in turn could adversely impact us.
The CARES Act and American Rescue Plan Act contained several provisions designed to increase coverage, expand benefits, and adjust federal financing for state Medicaid programs. While the CARES Act provided for a 6.2% FMAP add-on to the Medicaid program during the PHE, only certain states passed any of that specifically on to SNF operators either via an enhanced rate or lump sum payments. Additionally, the American Rescue Plan Act provided for a 10% FMAP add-on for state home and community-based service expenditures from April 1, 2021 through March 30, 2022 in an effort to assist seniors and people with disabilities to receive services safely in the community rather than in nursing homes and other congregate care settings. Both of these programs came with conditions that states had to meet to eligible for the FMAP add-on. There may be future initiatives proposed to allocate funding available for reimbursement away from SNFs in favor of home health agencies and community-based care.
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The risks of insufficient Medicaid reimbursement rates along with possible initiatives to push residents historically cared for in SNFs to alternative settings may impact us more acutely in states where we have a larger presence, including Florida and Texas, our states with the largest concentration of investments. In Texas several of our operators have historically experienced lower operating margins on their SNFs, as compared to other states, as a result of lower Medicaid reimbursement rates and higher labor costs. The state did provide for a sizeable increase in rate during the PHE based on the FMAP add-on; however, there is a risk that this increase won’t be captured in normal rate setting when the FMAP add-on expires. In Florida, added support to our operators during the pandemic has generally been limited, with approximately $100 million in additional FMAP funds announced in November 2021, payable over a three-month period through increased Medicaid rates. In March 2022, a revised state budget for 2022-23, which took effect October 1, 2022, increased Medicaid reimbursement rates by 7.8% to fund, in part, increased wages for certain nursing home staff. In addition, on April 6, 2022, the State of Florida enacted staffing reforms for SNFs that may provide additional flexibility to our operators in meeting minimum staffing requirements by using supplemental staff. We continue to monitor rate adjustment activity in other states in which we have a meaningful presence, and it is too early to assess whether rates will generally keep pace with increased operator costs.
Medicare. On July 29, 2022, CMS issued a final rule regarding the government fiscal year 2023 Medicare payment rates and quality payment programs for SNFs, with aggregate Medicare Part A payments projected to increase by $904 million, or 2.7%, for fiscal year 2023 compared to fiscal year 2022. This estimated reimbursement increase is attributable to a 3.9% market basket increase factor plus a 1.5 percentage point market basket forecast error adjustment and less a 0.3 percentage point productivity adjustment, as well as a $780 million decrease in the SNF prospective payment system rates as a result of the recalibrated parity adjustment described below, which is being phased in over two years. The annual update is reduced by two percentage points for SNFs that fail to submit required quality data to CMS under the SNF Quality Reporting Program. CMS has indicated that these impact figures did not incorporate the SNF Value-Based Program reductions that are estimated to be $186 million in fiscal year 2023. While Medicare reimbursement rate setting, which takes effect annually each October, has historically included forecasted inflationary adjustments, the degree to which those forecasts accurately reflect current inflation rates remains uncertain. Additionally, it remains uncertain whether these adjustments will ultimately be offset by non-inflationary factors, including any adjustments related to the impact of various payment models, such as those described below.
Payments to providers continue to be increasingly tied to quality and efficiency. The Patient Driven Payment Model (“PDPM”), which was designed by CMS to improve the incentives to treat the needs of the whole patient, became effective October 1, 2019. CMS has stated that it intended PDPM to be revenue-neutral to operators, with future Medicare reimbursement reductions possible if that was not the case. In April 2022, CMS issued a proposal for comment, which included an adjustment to obtain that revenue neutrality as early as the 2023 rate setting period. After considering the feedback received in the rulemaking cycle, CMS finalized recalibration of the PDPM parity adjustment factor of 4.6% with a two-year phase-in period that would reduce SNF spending by 2.3%, or approximately $780 million, in each of fiscal years 2023 and 2024. Prior to COVID-19, we believed that certain of our operators could realize efficiencies and cost savings from increased concurrent and group therapy under PDPM and some had reported early positive results. Given the ongoing impacts of COVID-19, many operators are and may continue to be restricted from pursuing concurrent and group therapy and unable to realize these benefits. Additionally, our operators continue to adapt to the reimbursement changes and other payment reforms resulting from the value-based purchasing programs applicable to SNFs under the 2014 Protecting Access to Medicare Act. These reimbursement changes have had and may, together with any further reimbursement changes to PDPM or value-based purchasing models, in the future have an adverse effect on the operations and financial condition of some operators and could adversely impact the ability of operators to meet their obligations to us.
On May 27, 2020, CMS added physical therapy, occupational therapy and speech-language pathology to the list of approved telehealth Providers for the Medicare Part B programs provided by a SNF as a part of the COVID-19 1135 waiver provisions. The COVID-19 1135 waiver provisions also allow for the facility to bill an originating site fee to CMS for telehealth services provided to Medicare Part B beneficiary residents of the facility when the services are provided by a physician from an alternate location, effective March 6, 2020 through May 11, 2023, the scheduled end of the public health emergency.
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Other Regulation:
Office of the Inspector General Activities. The Office of Inspector General (“OIG”) of HHS has provided long-standing guidance for SNFs regarding compliance with federal fraud and abuse laws. More recently, the OIG has conducted increased oversight activities and issued additional guidance regarding its findings related to identified problems with the quality of care and the reporting and investigation of potential abuse or neglect at group homes, nursing homes and SNFs. The OIG has additionally reviewed the staffing levels reported by SNFs as part of its August 2018 and February 2019 Work Plan updates, and included a review of involuntary transfers and discharges from nursing homes in the June 2019 Work Plan updates. In August 2020, the OIG released its findings regarding its review of staffing levels in SNFs from 2018. The OIG recommended that CMS enhance efforts to ensure nursing homes meet daily staffing requirements and explore ways to provide consumers with additional information on nursing homes’ daily staffing levels and variability. The OIG indicated that while the review was initiated before the COVID-19 pandemic emerged, the pandemic reinforces the importance of sufficient staffing for nursing homes, as inadequate staffing can make it more difficult for nursing homes to respond to infectious disease outbreaks like COVID-19. It is unknown what impact, if any, enhanced scrutiny of staffing levels by OIG and CMS will have on our operators.
Department of Justice and Other Enforcement Actions. SNFs are under intense scrutiny for ensuring the quality of care being rendered to residents and appropriate billing practices conducted by the facility. The Department of Justice (“DOJ”) has historically used the False Claims Act to civilly pursue nursing homes that bill the federal government for services not rendered or care that is grossly substandard. For example, California prosecutors announced in March 2021 an investigation into a skilled nursing provider that is affiliated with one of our operators, alleging the chain manipulated the submission of staffing level data in order to improve its Five Star rating. In 2020, the DOJ launched a National Nursing Home Initiative to coordinate and enhance civil and criminal enforcement actions against nursing homes with grossly substandard deficiencies. Such enforcement activities are unpredictable and may develop over lengthy periods of time. An adverse resolution of any of these enforcement activities or investigations incurred by our operators may involve injunctive relief and/or substantial monetary penalties, either or both of which could have a material adverse effect on their reputation, business, results of operations and cash flows.
Medicare and Medicaid Program Audits. Governmental agencies and their agents, such as the Medicare Administrative Contractors, fiscal intermediaries and carriers, as well as the OIG, CMS and state Medicaid programs, conduct audits of our operators’ billing practices from time to time. CMS contracts with Recovery Audit Contractors on a contingency basis to conduct post-payment reviews to detect and correct improper payments in the fee-for-service Medicare program, to managed Medicare plans and in the Medicaid program. Regional Recovery Audit Contractor program auditors along with the OIG and DOJ are expected to continue their efforts to evaluate SNF Medicare claims for any excessive therapy charges. CMS also employs Medicaid Integrity Contractors to perform post-payment audits of Medicaid claims and identify overpayments. In addition, the state Medicaid agencies and other contractors have increased their review activities. To the extent any of our operators are found out of compliance with any of these laws, regulations or programs, their financial position and results of operations can be adversely impacted, which in turn could adversely impact us.
Fraud and Abuse. There are various federal and state civil and criminal laws and regulations governing a wide array of healthcare provider referrals, relationships and arrangements, including laws and regulations prohibiting fraud by healthcare providers. Many of these complex laws raise issues that have not been clearly interpreted by the relevant governmental authorities and courts.
These laws include: (i) federal and state false claims acts, which, among other things, prohibit providers from filing false claims or making false statements to receive payment from Medicare, Medicaid or other federal or state healthcare programs; (ii) federal and state anti-kickback and fee-splitting statutes, including the Medicare and Medicaid Anti-kickback statute, which prohibit the payment or receipt of remuneration to induce referrals or recommendations of healthcare items or services, such as services provided in a SNF; (iii) federal and state physician self-referral laws (commonly referred to as the Stark Law), which generally prohibit referrals by physicians to entities for designated health services (some of which are provided in SNFs) with which the physician or an immediate family member has a financial relationship; (iv) the federal Civil Monetary Penalties Law, which prohibits, among other things, the knowing presentation of a false or fraudulent claim for certain healthcare services and (v) federal and state privacy laws, including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996, which provide for the privacy and security of personal health information.
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Violations of healthcare fraud and abuse laws carry civil, criminal and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and Medicaid reimbursement and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. Additionally, there are criminal provisions that prohibit filing false claims or making false statements to receive payment or certification under Medicare and Medicaid, as well as failing to refund overpayments or improper payments. Violation of the Anti-kickback statute or Stark Law may form the basis for a federal False Claims Act violation. These laws are enforced by a variety of federal, state and local agencies and can also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or whistleblower actions, which have become more frequent in recent years.
Several of our operators have responded to subpoenas and other requests for information regarding their operations in connection with inquiries by the DOJ or other regulatory agencies. In addition, MedEquities Realty Trust, Inc., which we acquired in May 2019, received a Civil Investigative Demand from the DOJ in connection with Lakeway Regional Medical Center, and in November 2022, the Company and several of its affiliates entered into a settlement agreement relating to such demand.
Privacy. Our operators are subject to various federal, state and local laws and regulations designed to protect the confidentiality and security of patient health information, including the federal Health Insurance Portability and Accountability Act of 1996, as amended, the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and the corresponding regulations promulgated thereunder (collectively referred to herein as “HIPAA”). The HITECH Act expanded the scope of these provisions by mandating individual notification in instances of breaches of protected health information, providing enhanced penalties for HIPAA violations, and granting enforcement authority to states’ Attorneys General in addition to the HHS Office for Civil Rights (“OCR”). Additionally, in a final rule issued in January 2013, HHS modified the standard for determining whether a breach has occurred by creating a presumption that any non-permitted acquisition, access, use or disclosure of protected health information is a breach unless the covered entity or business associate can demonstrate through a risk assessment that there is a low probability that the information has been compromised.
Various states have similar laws and regulations that govern the maintenance and safeguarding of patient records, charts and other information generated in connection with the provision of professional medical services. These laws and regulations require our operators to expend the requisite resources to secure protected health information, including the funding of costs associated with technology upgrades. Operators found in violation of HIPAA or any other privacy law or regulation may face significant monetary penalties. In addition, compliance with an operator’s notification requirements in the event of a breach of unsecured protected health information could cause reputational harm to an operator’s business.
Licensing and Certification. Our operators and facilities are subject to various federal, state and local licensing and certification laws and regulations, including laws and regulations under Medicare and Medicaid requiring operators of SNFs and ALFs to comply with extensive standards governing operations. Governmental agencies administering these laws and regulations regularly inspect our operators’ facilities and investigate complaints. Our operators and their managers receive notices of observed violations and deficiencies from time to time, and sanctions have been imposed from time to time on facilities operated by them. In addition, many states require certain healthcare providers to obtain a certificate of need, which requires prior approval for the construction, expansion or closure of certain healthcare facilities, which has the potential to impact some of our operators’ abilities to expand or change their businesses.
Other Laws and Regulations. Additional federal, state and local laws and regulations affect how our operators conduct their operations, including laws and regulations protecting consumers against deceptive practices and otherwise generally affecting our operators’ management of their property and equipment and the conduct of their operations (including laws and regulations involving fire, health and safety; the Americans with Disabilities Act (the “ADA”), which imposes certain requirements to make facilities accessible to persons with disabilities, the costs for which we may be directly or indirectly responsible; the U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively referred to as the “Healthcare Reform Law”), which amended requirements for staff training, discharge planning, infection prevention and control programs, and pharmacy services, among others; staffing; quality of services, including care and food service; residents’ rights, including abuse and neglect laws; and health standards, including those set by the federal Occupational Safety and Health Administration (in the U.S.). It is anticipated that our operators will continue to face additional federal and state regulatory requirements related to the operation of their facilities in response to the COVID-19 pandemic. These requirements may continue to evolve and develop over lengthy periods of time.
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General and Professional Liability. Although arbitration agreements have been effective in limiting general and professional liabilities for SNF and long-term care providers, there have been numerous lawsuits in recent years challenging the validity of arbitration agreements in long-term care settings. On July 16, 2019, CMS issued a final rule lifting the prohibition on pre-dispute arbitration agreements offered to residents at the time of admission provided that certain requirements are met. The rule prohibits providers from requiring residents to sign binding arbitration agreements as a condition for receiving care and requires that the agreements specifically grant residents the explicit right to rescind the agreement within thirty calendar days of signing. A number of professional liability and employment related claims have been filed or are threatened to be filed against long-term care providers related to COVID-19. While such claims may be subject to liability protection provisions within various state executive orders or legislation and/or federal legislation, an adverse resolution of any of legal proceeding or investigations against our operators may involve injunctive relief and/or substantial monetary penalties, either or both of which could have a material adverse effect on our operators’ reputation, business, results of operations and cash flows.
U.K. Regulations. The U.K. also imposes very high levels of regulation on our U.K.-based operators. In England, where all of our operators are based, the Care Quality Commission has regulatory oversight authority over the health and social care sectors and is responsible for approving, registering and inspecting our operators and the properties where they provide services. There is also a detailed legislative and regulatory framework in the U.K. designed to protect the vulnerable (whether by virtue of age or physical and/or mental impairment) and to prevent abuse. Each of these regulatory regimes carries significant enforcement powers, including the ability to criminally prosecute offending operators and facilities, impose fines or revoke registrations. Additionally, under the purview of the Competition and Markets Authority, local authorities are tasked with providing and funding the care needs of eligible residents within the applicable local authority area. There is ongoing debate and uncertainty within the U.K. as to how growing care needs will be met and funded in the future, and it is not clear at this stage what, if any, or the extent of such, impact will be on our U.K-based operators.
Additionally, there has been significant legislation passed and guidance issued in the U.K. in respect of the COVID-19 pandemic. Much of the legislation or guidance set out the additional precautions, measures or restrictions which were required in the care sector, including infection control measures and vaccination requirements for care sector workers. As the U.K. transitions to a post-COVID-19 pandemic position with lessened regulation across the U.K as a whole, the care sector remains subject to specific COVID-19 guidance and requirements issued by the Care Quality Commission and the U.K. government’s Department for Health and Social Care, including in relation to infection control measures, the use of personal protective equipment and testing. As a result, our U.K. operators still face significantly increased regulatory burdens under which they must deliver services and continue to experience significant impacts on their operations and financial condition, which has been somewhat offset by the level of stimulus provided.
Environmental, Social and Governance (“ESG”)
We prioritize environmental, social and governance initiatives that matter most to our business and shareholders. Our Nominating and Corporate Governance Committee of our Board of Directors has been charged with primary oversight of our sustainability efforts. The Company has established an ESG Steering Committee, with senior representation from all divisions of the company, that is responsible for advancing the Company’s governance, sustainability, and social programs, including diversity and inclusion. The Nominating and Corporate Governance Committee exercises oversight of the ESG Steering Committee.
As a triple-net landlord, our third-party operators maintain operational control and responsibility for our real estate on a day-to-day basis. While our ability to mandate environmental changes to their operations is limited, our tenants are contractually bound to preserve and maintain our properties in good working order and condition. In connection with this, they are required to meet or exceed annual expenditure thresholds on capital improvements and enhancements of our properties, which in some cases may facilitate improvements in the environmental performance of our properties and reduces energy usage, water usage, and direct and indirect greenhouse gas emissions. Beginning in 2021, we have also implemented a capital expenditure sustainability initiative to encourage operators to invest in financially beneficial and environmentally enhancing investment projects. The goal is to incentivize operators to invest in sustainable capital projects that provide a favorable return on investment while reducing the environmental footprint of these operations. Our due diligence on real estate acquisitions generally includes environmental assessments as part of our analysis to understand the environmental condition of the property, and to determine whether the property meets certain environmental standards. Similarly, during the due diligence process, we seek to evaluate the risk of physical, natural disaster or extreme weather patterns on the properties we are looking to acquire and to assess their compliance with building codes, which often results in remediations that incorporate sustainable improvements into our properties.
We are committed to providing a positive and engaging work environment for our employees and taking an active role in the betterment of the communities in which our employees live and work. See also “Human Capital Management” immediately below.
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Additional information regarding our ESG programs and initiatives is available in the ESG section of our website at www.omegahealthcare.com. Information on our website, including our Corporate ESG Report or sections thereof, is not incorporated by reference into this Annual Report.
Human Capital Management
Our success is based on the focused passion and dedication of our people. We believe our employees’ commitment to Omega provides better service to our tenants and stakeholders, supports an inclusive and collegial working environment and generates long-term value for our shareholders and the communities which we serve. As of February 1, 2023, we had 52 employees including the executive officers listed below, none of whom is subject to a collective bargaining agreement. Due to the size and nature of our business, our future performance depends to a significant degree upon the continued contributions of our executive management team and other key employees. As such, the ability to attract, develop and retain qualified personnel will continue to be important to the Company’s long-term success.
We have a long-standing commitment to being an equal opportunity employer. Additionally, in 2021, we reinforced our diversity and inclusion commitment by signing the CEO Action for Diversity and Inclusion Pledge, one of the largest CEO-driven business commitments to act on and advance diversity, equity and inclusion in the workplace. The Company has expanded its recruitment practices to reach more diverse candidates for employment and Board positions and has developed an internship program with a focus on increasing diversity in the pipeline of eligible employees. The Company requires employees and Board members to certify its Code of Business Conduct & Ethics periodically, and from time to time, conducts compliance training for all employees and Directors, including diversity and inclusion training. As of February 1, 2023, at the executive level, one of the Company’s four executive officers is a woman and brings ethnic diversity to the team, and on the senior management team, 25% are women and 25% bring ethnic diversity to the team. We regularly conduct pay equity reviews as we seek for women and men, on average, at various roles and levels of the Company, to be paid equitably for their roles and contributions to our success.
We are committed to providing a positive and engaging work environment for our employees and taking an active role in the betterment of the communities in which our employees live and work. Our full-time employees are provided a competitive benefits program, including comprehensive healthcare benefits and a 401(k) plan with a matching contribution from the Company, the opportunity to participate in our employee stock purchase program, bonus and incentive pay opportunities, competitive paid time-off benefits and paid parental leave, wellness programs, continuing education and development opportunities, and periodic engagement surveys. In addition, we believe that giving back to our community is an extension of our mission to improve the lives of our stockholders, our employees, and their families. The Company has implemented a matching program for charitable contributions of employees, provides annual charitable donations to our local Baltimore community and has implemented a scholarship, mentorship and internship program with a local, historically Black university.
Information about our Executive Officers
Biographical information regarding our executive officers and their ages as of February 1, 2023 are set forth below:
C. Taylor Pickett (61) is our Chief Executive Officer and has served in this capacity since June 2001. Mr. Pickett has also served as Director of the Company since May 30, 2002. Mr. Pickett has also been a member of the board of trustees of Corporate Office Properties Trust, an office REIT focusing on U.S. government agencies and defense contractors, since November 2013. From January 1993 to June 2001, Mr. Pickett served as a member of the senior management team of Integrated Health Services, Inc., most recently as Executive Vice President and Chief Financial Officer. Prior to joining Integrated Health Services, Inc. Mr. Pickett held various positions at PHH Corporation and KPMG Peat Marwick.
Daniel J. Booth (59) is our Chief Operating Officer and has served in this capacity since October 2001. From 1993 to October 2001, Mr. Booth served as a member of the management team of Integrated Health Services, Inc., most recently serving as Senior Vice President, Finance. Prior to joining Integrated Health Services, Inc., Mr. Booth served as a Vice President in the Healthcare Lending Division of Maryland National Bank (now Bank of America).
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Robert O. Stephenson (59) is our Chief Financial Officer and has served in this capacity since August 2001. From 1996 to July 2001, Mr. Stephenson served as the Senior Vice President and Treasurer of Integrated Health Services, Inc. Prior to joining Integrated Health Services, Inc., Mr. Stephenson held various positions at CSX Intermodal, Inc., Martin Marietta Corporation and Electronic Data Systems.
Gail D. Makode (47) is our Chief Legal Officer, General Counsel and has served in this capacity since September 2019. Previously, she served as Senior Vice President, General Counsel and Corporate Secretary of IES Holdings, Inc., from October 2012 to September 2019. Prior to IES, she served in various legal capacities at MBIA Inc., including as General Counsel and Member of the Board at MBIA Insurance Corporation and Chief Compliance Officer of MBIA Inc., from 2006 to 2012. Earlier in her career, she served as Vice President and Counsel for Deutsche Bank AG, and as an associate at Cleary, Gottlieb, Steen, & Hamilton, where she specialized in public and private securities offerings and mergers and acquisitions.
Available Information
Our website address is www.omegahealthcare.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) are available on our website, free of charge, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the U.S. Securities and Exchange Commission (“SEC”). Additionally, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us, at www.sec.gov.
Item 1A – Risk Factors
This section discusses material risk factors that may affect our business, operations and financial condition. It does not describe all risks and uncertainties applicable to us, our industry or ownership of our securities. If any of the following risks, or any other risks and uncertainties that are not addressed below or that we have not yet identified, actually occur, we could be materially adversely affected and the value of our securities could decline.
Risks Related to the Operators of Our Facilities
Our financial position could be weakened and our ability to make distributions and fulfill our obligations with respect to our indebtedness could be limited if our operators, or a portion thereof, become unable to meet their obligations to us or fail to renew or extend their relationship with us as their lease terms expire or their mortgages mature, or if we become unable to lease or re-lease our facilities or make mortgage loans on economically favorable terms. We have no operational control over our operators.
The bankruptcy or insolvency of our operators could limit or delay our ability to recover on our investments.
We are exposed to the risk that a distressed or insolvent operator may not be able to meet its lease, loan, mortgage or other obligations to us or other third parties. This risk is heightened during a period of economic or political instability. Although each of our lease and loan agreements typically provides us with the right to terminate, evict an operator, foreclose on our collateral, demand immediate payment and exercise other remedies upon the bankruptcy or insolvency of an operator, title 11 of the U.S. Code (the “Bankruptcy Code”) would limit or, at a minimum, delay our ability to collect unpaid pre-bankruptcy rents and mortgage payments and to pursue other remedies against a bankrupt operator. While we sometimes have third-party guarantees of an operator’s lease or loan obligations, such guarantees can be expensive to enforce, and have their own risks of collection as against the guarantors.
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Leases. A bankruptcy filing by one of our lessee operators would typically prevent us from collecting unpaid pre-bankruptcy rents or evicting the operator, absent approval of the bankruptcy court. The Bankruptcy Code provides a lessee with the option to assume or reject an unexpired lease within certain specified periods of time. Generally, a lessee is required to pay all rent that becomes payable between the date of its bankruptcy filing and the date of the assumption or rejection of the lease (although such payments will likely be delayed as a result of the bankruptcy filing). If one of our lessee operators chooses to assume its lease with us, the operator must promptly cure all monetary defaults existing under the lease (including payment of unpaid pre-bankruptcy rents) and provide adequate assurance of its ability to perform its future lease obligations. Even where a lessee operator assumes its lease with us, it will first often threaten to reject that lease to obtain better lease terms from us, and we sometimes have to consider making, or we do make, such economic concessions to avoid rejection of the lease and our taking a closed facility back. If one of our lessee operators opts to reject its lease with us, we would have a claim against such operator for unpaid and future rents payable under the lease, but such claim would be subject to a statutory “cap” under the Bankruptcy Code, and would likely result in a recovery substantially less than the face value of such claim. Although the operator’s rejection of the lease would permit us to recover possession of the leased facility, we would likely face losses, costs and delays associated with repairs and/or maintenance of the facility and then re-leasing the facility to a new operator, or costs associated with selling the facility. In any event, re-leasing a facility or selling it could take a material amount of time, and the pool of interested and qualified tenants or buyers will be limited due to the unique nature of our properties, which may depress values and our eventual recovery. Finally, whether a lease operator in bankruptcy ends up assuming or rejecting our lease, we will incur legal and collection costs, which can be difficult or impossible to recover.
Several other factors could impact our rights under leases with bankrupt operators. First, the operator could seek to assign its lease with us to a third party. The Bankruptcy Code disregards anti-assignment provisions in leases to permit the assignment of unexpired leases to third parties (provided all monetary defaults under the lease are promptly cured and the assignee can demonstrate its ability to perform its obligations under the lease). Second, in instances in which we have entered into a master lease agreement with an operator that operates more than one facility, the bankruptcy court could determine that the master lease was comprised of separate, divisible leases (each of which could be separately assumed or rejected), rather than a single, integrated lease (which would have to be assumed or rejected in its entirety). Finally, the bankruptcy court could re-characterize our lease agreement as a disguised financing arrangement, which could require us to receive bankruptcy court approval to foreclose or pursue other remedies with respect to the facility.
Mortgages. A bankruptcy filing by an operator to which we have made a loan secured by a mortgage would typically prevent us from collecting unpaid pre-bankruptcy mortgage payments and foreclosing on our collateral, absent approval of the bankruptcy court. As an initial matter, we could ask the bankruptcy court to order the operator to make periodic payments or provide other financial assurances to us during the bankruptcy case (known as “adequate protection”), but the ultimate decision regarding “adequate protection” (including the timing and amount of any “adequate protection” payments) rests with the bankruptcy court. In addition, we would need bankruptcy court approval before commencing or continuing any foreclosure action against the operator’s collateral (including a facility). The bankruptcy court could withhold such approval, especially if the operator can demonstrate that the facility or other collateral is necessary for an effective reorganization and that we have a sufficient “equity cushion” in the facility or that we are otherwise protected from any diminution in value of the collateral. If the bankruptcy court does not either grant us “adequate protection” or permit us to foreclose on our collateral, we may not receive any loan payments until after the bankruptcy court confirms a plan of reorganization for the operator. In addition, in any bankruptcy case of an operator to which we have made a loan, the operator may seek bankruptcy court approval to pay us (i) over a longer period of time than the terms of our loan, (ii) at a different interest rate, and/or (iii) for only the value of the collateral, instead of the full amount of the loan. Finally, even if the bankruptcy court permits us to foreclose on the facility, we would still be subject to the losses, costs and other risks associated with a foreclosure sale, including possible successor liability under government programs, indemnification obligations and suspension or delay of third-party payments. Should such events occur, our income and cash flow from operations would be adversely affected.
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Failure by our operators to comply with government regulations may adversely impact their ability to make debt or lease payments to us.
Our operators are subject to numerous federal, state and local laws and regulations in the U.S. and, for certain operators, in the U.K., including those described in Item 1. Business – Government Regulation and Reimbursement. Laws and regulations impacting our operators include, without limitation, those relating to reimbursement (including Medicare and Medicaid reimbursement programs in the U.S.), quality of care initiatives, licensing and certification of our operators, fraud and abuse laws and regulations, privacy and security laws. Other federal, state and local laws and regulations also affect how our operators conduct their operations. We cannot predict the effect that the costs of complying with these laws may have on the revenues of our operators, and thus their ability to meet their obligations to us. In addition, requirements applicable to our operators are subject to frequent and substantial changes (sometimes applied retroactively) resulting from new legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing law, and any changes in the regulatory framework could have a material adverse effect on our tenants, operators, guarantors and managers. Any of these changes may be more pronounced following federal and state leadership changes and particularly following a change in presidential administrations. 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 on 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. If we fail to effectively implement or appropriately adjust our operational and strategic initiatives with respect to the implementation of new laws and regulations, or do not do so as effectively as our competitors, our results of operations may be materially adversely affected.
Our U.S. operators depend on reimbursement from governmental and other third-party payors, and reimbursement rates from such payors may be reduced or modified, including through reductions to the Medicare and Medicaid programs.
Changes in the reimbursement rate or methods of payment from governmental and other 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. Reimbursement from governmental and other third-party payors could be reduced as part of spending cuts and tax reform initiatives that impact Medicare, Medicaid or Medicare Advantage Plans, or as part of retroactive adjustments during claims settlement processes or as a result of post-payment audits. Further, alternative payment models, as well as other regulatory initiatives, have the potential to affect Medicare payments to SNFs, including, but not limited to, provisions changing the payment methodology, setting reimbursement caps, implementing value-based purchasing and payment bundling, and studying the appropriateness of restrictions on payments for healthcare acquired conditions. In some cases, states have enacted or are considering enacting measures designed to reduce Medicaid expenditures or freeze Medicaid rates, to allocate funding available for reimbursement away from SNFs in favor of home health agencies and community-based care, and to make changes to private healthcare insurance. Several commercial payors have expressed an intent to pursue certain value-based purchasing models and initiatives. Since our operators’ profit margins on Medicaid patients are generally relatively low, more than modest reductions in Medicaid reimbursement to our SNF operators and an increase in the number of Medicaid patients could place some operators in financial distress, which in turn could adversely affect us. If funding for Medicare and/or Medicaid is reduced, it could have a material adverse effect on our operators’ results of operations and financial condition, which could adversely affect our operators’ ability to meet their obligations to us. Significant limits on the scope of services reimbursed and on reimbursement rates, as well as changes in reimbursement policies or other measures altering payment methodologies for services provided by our operators, could have a material adverse effect on our operators’ results of operations and financial condition, which could cause the revenues of our operators to decline and negatively impact their ability to meet their obligations to us.
We may be unable to find a replacement operator for one or more of our leased properties.
From time to time, we need to find a replacement operator for one or more of our leased properties for a variety of reasons, including upon the expiration of the lease term or the occurrence of an operator default. While we are attempting to locate one or more replacement operators, we sometimes experience and may in the future experience a decrease or cessation of rental payments on the applicable property or properties. We cannot assure you that any of our current or future operators will elect to renew their respective leases with us upon expiration of the terms thereof. Similarly, we cannot assure you that we will be able to locate a suitable replacement operator or, if we are successful in locating a replacement operator, that the rental payments from the new operator would not be significantly less than the existing rental payments. Our ability to locate a suitable replacement operator may be significantly delayed or limited by various state licensing, receivership, certificate of need or other laws, as well as by Medicare and Medicaid change-of-ownership rules. We also may incur substantial additional expenses in connection with any such licensing, receivership or change-of-ownership proceedings. Any such delays, limitations and expenses could materially delay or impact our ability to collect rent, obtain possession of leased properties or otherwise exercise remedies for default.
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Our operators may be subject to significant legal actions that could result in their increased operating costs and substantial uninsured liabilities, which may affect their ability to meet their obligations to us; and we may become party to such legal actions.
Our operators may be subject to claims for damages relating to the services that they provide. While we are unable to predict the scope of future federal, state and local regulations and legislation, including the Medicare and Medicaid statutes and regulations, we believe that long-term care providers will continue to be the focus of governmental investigations, particularly in the area of Medicare/Medicaid false claims and in the use of COVID-19 related funds and compliance with infection control and quality standards. We can give no assurance that the insurance coverage maintained by our operators will cover all claims made against them or 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 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.
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 and its ability to meet its obligations to us, which, in turn, could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to our stockholders.
In addition, we may in some circumstances be named as a defendant in litigation involving the services provided by our operators. In the past, 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, and we could be named as defendants in similar suits in the future. In these suits, patients of our operators have alleged significant damages, including punitive damages, against the defendants. Although we generally have no involvement in the services provided by our operators, and our standard lease and loan agreements generally require our operators to indemnify us and carry insurance to cover us in certain cases, a significant judgment against us in such litigation could exceed our and our operators’ insurance coverage, which would require us to make payments to cover the judgment.
Increased competition as well as increased operating costs result in lower revenues for some of our operators and may affect the ability of our operators to meet their obligations to us.
The long-term 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. Our operators compete on a number of different levels including the quality of care provided, reputation, the physical appearance of a facility, price, the range of services offered, family preference, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral sources, location and the size and demographics of the population in the surrounding areas. 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 and meet their obligations to us.
In addition, the market for qualified personnel is highly competitive and our operators may experience difficulties in attracting and retaining such personnel, in particular due to labor constraints and, in some cases, wage increases, which have been elevated since the beginning of the COVID-19 pandemic and may continue to remain elevated. Increases in labor costs could affect our operators’ ability to meet their obligations to us, which could be particularly acute in certain states that have established minimum staffing requirements.
We may be unable to successfully foreclose on the collateral securing our mortgage loans, and even if we are successful in our foreclosure efforts, we may be unable to successfully find a replacement operator, or operate or occupy the underlying real estate, which may adversely affect our ability to recover our investments.
If an operator defaults under one of our mortgage loans, we may foreclose on the loan or otherwise protect our interest by acquiring title to the property. In such a scenario, we may be required to make substantial improvements or repairs 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. Even if we are able to successfully foreclose on the collateral securing our mortgage loans, we may be unable to expeditiously find a replacement operator, if at all, or otherwise successfully operate or occupy the property, which could adversely affect our ability to recover our investment.
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Inflation could adversely impact our operators and our results of operations.
Inflation, both real or anticipated, as well as any resulting governmental policies, could adversely affect the economy and the costs of labor, goods and services to our operators or borrowers. Our long-term leases and loans typically contain provisions such as rent and interest escalators that are designed to mitigate the adverse impact of inflation on Omega’s results of operations. However, these provisions may have limited effectiveness at mitigating the risk of high levels of inflation due to contractual limits on escalation that exist in substantially all of our escalation provisions. Our leases are triple-net and typically require the operator to pay all property operating expenses, and therefore, increases in property-level expenses at our leased properties generally do not directly affect us. However, increased operating costs resulting from inflation have had, and may continue to have, an adverse impact on our operators and borrowers if increases in their operating expenses exceed increases in their reimbursements, which has affected, and may continue to adversely affect, our operators’ or borrowers’ ability to pay rent or other obligations owed to us.
An increase in our operators’ expenses and a failure of their reimbursements to increase at least with inflation could adversely impact our operators’ and our financial condition and our results of operations.
Uninsured losses or losses in excess of our operators’ insurance coverage could adversely affect our financial position and our cash flow.
Under the terms of our leases, our operators are generally required to maintain comprehensive general liability, fire, flood, earthquake, boiler and machinery, nursing home or long-term care professional liability and extended coverage insurance with respect to our properties with policy specifications set forth in the leases or other written agreements between us and the operator. However, our properties may be adversely affected by casualty or other losses which exceed insurance coverages and reserves. In addition, we cannot provide any assurances that our tenants will maintain the required coverages, that we will continue to require the same levels of insurance under our leases, or that such insurance will be available at a reasonable cost in the future or that the policies maintained will fully cover all losses on our properties upon the occurrence of a catastrophic event. We also cannot make any guaranty as to the future financial viability of the insurers that underwrite the policies maintained by our tenants, or, alternatively if our tenants utilize captive or self-insurance programs, that such programs will be adequately funded.
Should an uninsured loss or a loss in excess of insured limits occur, we could lose both our investment in, and anticipated profits and cash flows from, the property and disputes over insurance claims could arise. Even if it were practicable to restore the property to its condition prior to the damage caused by a major casualty, the operations of the affected property would likely be suspended for a considerable period of time.
Our development and redevelopment projects may not yield anticipated returns.
We consider and, when appropriate, invest in various development and redevelopment projects. In deciding whether to make an investment in a particular project, we make certain assumptions regarding the expected future performance of the property. Our assumptions are subject to risks generally associated with development and redevelopment projects, including, among others, that:
| ● | Our operators may not be able to complete the project on schedule or within budgeted amounts; |
| ● | Our operators may encounter delays in obtaining or fail to obtain all necessary zoning, land use, building, occupancy, environmental and other governmental permits and authorizations, or underestimate the costs necessary to develop or redevelop the property to market standards; |
| ● | Volatility in the price of construction materials or labor may increase project costs; |
| ● | The builders may fail to perform or satisfy the expectations of our operators; |
| ● | We may incorrectly forecast risks associated with development in new geographic regions; |
| ● | Demand for our project may decrease prior to completion, due to competition from other developments; and |
| ● | New facilities may take longer than expected to reach stabilized operating levels, if at all. |
If any of the risks described above occur, our development and redevelopment projects may not yield anticipated returns, which could have a material adverse effect on us.
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Risks Related to Us and Our Operations
The COVID-19 pandemic and measures intended to prevent its spread, as well as a future variant of COVID-19 or unrelated pandemic, could have a material adverse effect on our business, results of operations, cash flows and financial condition.
The COVID-19 pandemic has significantly and adversely impacted SNFs and long-term care providers due to the higher rates of virus transmission and fatality among the elderly and frail populations that these facilities serve, as well as reduced revenue due to lower occupancy and increased expenses and uncertainties regarding the continuing availability of sufficient government support and sufficiency of Medicare and Medicaid reimbursement rates to address longer-term cost increases faced by operators. As a result, many of our operators have been, and may continue to be, significantly impacted by the pandemic. See Part II Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview.
Our facilities, on average, experienced declines, in some cases that are material, in occupancy levels as a result of the pandemic. Occupancy in our facilities has generally improved on average since early 2021; however, average occupancy has not returned to pre-pandemic levels. It remains unclear when and the extent to which demand and occupancy levels will return to pre-COVID-19 levels. We believe these challenges to occupancy recovery may be in part due to staffing shortages, which in some cases have required operators to limit admissions, as well as COVID-19 related fatalities at the facilities, the delay of SNF placement and/or utilization of alternative care settings for those with lower level of care needs, the suspension and/or postponement of elective hospital procedures, fewer discharges from hospitals to SNFs and higher hospital readmittances from SNFs.
While certain states have provided pandemic-related relief measures and/or reimbursement increases, there remains uncertainty as to how widespread these measures will continue to be and to what extent they may be distributed to and benefit our operators, especially when the federally declared public health emergency expires as scheduled on May 11, 2023, or previously released federal funds to states have been fully utilized. Likewise, while certain states may in the course of routine rate-setting of Medicaid rates address inflationary factors and other expense-related items, there can be no assurance that these changes will be sufficient to offset existing increased inflation and expenses or that all states will address these items. See the “Government Regulation and Reimbursement” section for additional information. Further, to the extent the cost and occupancy impacts on our operators continue or accelerate and are not offset by continued government relief that is sufficient and timely, we anticipate that the operating results of additional operators may be materially and adversely affected, some may be unwilling or unable to pay their contractual obligations to us in full or on a timely basis and we may be unable to restructure such obligations on terms as favorable to us as those currently in place.
There are a number of uncertainties we face as we consider the continuing impact of COVID-19 on our business, including how long census disruption and related cost increases will last, as well as the rate and impact of future virus transmission in our facilities, continued efficacy of vaccination programs in reducing the spread and severity of COVID-19 in our facilities, the impact of genetic mutations of the virus into new variants on our facilities, and the extent to which funding support from the federal government and the states will offset these incremental costs as well as lost revenues. Notwithstanding vaccination programs, we expect that heightened clinical protocols for infection control within facilities will continue; however, we do not know if future reimbursement rates or equipment provided by governmental agencies will be sufficient to cover the increased costs of enhanced infection control and monitoring.
Continued uncertainty exists relating to our other operators’ ability to meet their payments obligations generally or meet their payment obligations to us due to these factors. To the extent our operators are unable to meet their payment obligations, we may record additional impairment charges with respect to straight-line rent receivables associated with any such operator or with respect to outstanding loans and our financial condition could be adversely impacted. See “Our assets, including our real estate and loans, are subject to impairment charges, and our valuation and reserve estimates are based on assumptions and may be subject to adjustment” in Item 1A contained in Part I of this Annual Report on Form 10-K.
The COVID-19 pandemic has from time to time also caused, and may continue to cause, severe economic, market and other disruptions worldwide. We cannot assure you that conditions in the bank lending, capital and other financial markets will not deteriorate or fluctuate as a result of the COVID-19 pandemic or due to a future variant of COVID-19 or a future unrelated pandemic, or that our access to capital and other sources of funding will not become constrained, which could adversely affect the availability and terms of future borrowings, renewals or refinancing. In addition, our employees may be impacted directly or indirectly by the pandemic, and we may be required to make changes to our internal controls as a result of changes in our business processes or personnel; any such changes may increase our operational and financial reporting risks.
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The extent of the COVID-19 pandemic’s effect on our and our operators’ operational and financial performance will depend on future developments, including the ability to control the spread of the outbreak generally and in our facilities, and the delivery and efficacy of and participation in vaccination programs and other treatments for COVID-19, government funds and other support for the senior care sector and the efficacy of other policies and measures that may mitigate the impact of the pandemic, as well as the future demand for needs-based skilled nursing care and senior living facilities, all of which are uncertain and difficult to predict. Due to these uncertainties, we are not able at this time to estimate the effect of these factors on our business, but the adverse impact on our business, results of operations, financial condition and cash flows could be material.
There are no assurances of our ability to pay dividends in the future.
Our ability to pay dividends may be adversely affected upon the occurrence of any of the risks described herein. Our payment of dividends is subject to compliance with restrictions contained in our credit agreements, the indentures governing our senior notes and any preferred stock that our Board may from time to time designate and authorize for issuance. All dividends will be paid at the discretion of our Board 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.
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.
As a REIT under the Code, we are required to, among other things, distribute at least 90% of our REIT taxable income each year to our stockholders. Because of this distribution requirement, we may not be able to fund, from cash retained from operations, all future capital needs, including capital needed to make investments and to satisfy or refinance maturing commitments. As a result, we rely on external sources of capital, including debt and equity financing. 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. We may not be in a position to take advantage of future investment opportunities in the event that we are unable to access the capital markets on a timely basis or we are only able to obtain financing on unfavorable terms.
Our ability to raise capital through equity sales is dependent, in part, on the market price of our common stock, and our failure to meet market expectations with respect to our business, or other factors we do not control, could negatively impact such market price and availability of equity capital.
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, some of which we cannot control, that may change from time to time including:
| ● | the extent of investor interest; |
| ● | 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; |
| ● | the financial performance of us and our operators; |
| ● | concentrations in our investment portfolio by tenant and facility type; |
| ● | concerns about our tenants’ financial condition due to uncertainty regarding reimbursement from governmental and other third-party payor programs; |
| ● | our credit ratings and analyst reports on us and the REIT industry in general, including recommendations, and our ability to meet our guidance estimates or analysts’ estimates; |
| ● | general economic, global and 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, or the impacts of a future pandemic or global conflicts on our operators; |
| ● | our failure to maintain or increase our dividend, which is dependent, to a large part, on the increase in funds from operations, which in turn depends upon increased revenues from additional investments and rental increases; and |
| ● | other factors such as governmental regulatory action and changes in REIT tax laws, as well as changes in litigation and regulatory proceedings. |
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, as a result, the availability of equity capital to us.
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We are subject to risks associated with debt financing, including changes in our credit ratings, which could negatively impact our business and limit our ability to make distributions to our stockholders and to repay maturing debt.
The financing required to make future investments and satisfy maturing commitments may be provided by borrowings under our credit facilities, private or public offerings of debt or equity, the assumption of secured indebtedness, mortgage financing on a portion of our owned portfolio or through joint ventures. To the extent we must obtain debt financing from external sources to fund our capital requirements, we cannot guarantee such financing will be available on favorable terms, if at all. In addition, 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 to make distributions to our stockholders and repay our maturing debt. Furthermore, if prevailing interest rates, changes in our debt credit 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. Factors that may affect our credit ratings include, among other things, our financial performance, our success in raising sufficient equity capital, adverse changes in our debt and fixed charge coverage ratios, our capital structure and level of indebtedness and pending or future changes in the regulatory framework applicable to our operators and our industry. Further, additional debt financing increases the amount of our leverage. The degree of leverage could have important consequences to stockholders, including affecting our investment grade ratings and our ability to obtain additional financing in the future, and making us more vulnerable to a downturn in our results of operations or the economy generally.
The interest rate of our credit facilities, term loan facilities and derivatives contracts are priced using LIBOR and are subject to risks associated with the transition from LIBOR to an alternative reference rate.
London Inter-bank Offered Rate (“LIBOR”) is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in credit facilities, term loan facilities and derivative contracts. In July 2017, the U.K.’s Financial Conduct Authority (“FCA”) that regulates LIBOR announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021, and while the transition period for many LIBOR tenors has been extended to June 2023, the U.S. Federal Reserve advised banks to stop new LIBOR issuances by the end of 2021. At this time, no consensus exists as to which reference rate or rates or benchmarks may become acceptable alternatives to LIBOR. The Alternative Reference Rates Committee, a steering committee composed of U.S. financial market participants, has identified the secured overnight financing rate, or SOFR, as the recommended alternative rate for all LIBOR. At this time, it is impossible to predict whether the SOFR or another reference rate will become an accepted alternative to LIBOR. Any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR’s phaseout could cause LIBOR to perform differently than in the past or cease to exist. Further, the consequences of these developments, or any alternative reference rate that is adopted, cannot be entirely predicted but could include an increase in the cost of our variable rate borrowings, of which we had $91.1 million of borrowings outstanding as of December 31, 2022 and $400 million notional value derivative instruments that are indexed to LIBOR. For some instruments, the method of transitioning to an alternative rate may be challenging, as this may require negotiation with the respective counterparty.
We may be subject to additional risks in connection with our acquisitions of long-term care facilities.
We may be subject to additional risks in connection with our acquisitions of long-term care facilities, including but not limited to the following:
| ● | our limited prior business experience with certain of the operators of the facilities we have recently acquired or may acquire in the future; |
| ● | the facilities may underperform due to various factors, including unfavorable terms and conditions of the lease agreements that we assume, disruptions caused by the management of the operators of the facilities or changes in economic conditions impacting the facilities and/or the operators; |
| ● | large acquisitions or investments could place significant additional demands on, and require us to expand, our management, resources and personnel, as well as to adapt our administrative, accounting and operational systems to integrate and manage the long-term care facilities we have acquired or may acquire in a timely manner; |
| ● | diversion of our management’s attention away from other business concerns; |
| ● | exposure to any undisclosed or unknown potential liabilities relating to the facilities; and |
| ● | potential underinsured losses on the facilities. |
We cannot assure you that we will be able to manage our recently acquired facilities, or the future growth in our business, without encountering difficulties or that any such difficulties will not have a material adverse effect on us. Our growth could also increase our capital requirements, which may require us to issue potentially dilutive equity securities and incur additional debt.
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Our assets, including our real estate and loans, are subject to impairment charges, and our valuation and reserve estimates are based on assumptions and may be subject to adjustment.
Our asset portfolio primarily consists of real estate and mortgage loans, which are subject to write-downs in 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 a non-cash impairment charge or loss on the sale, either of which would reduce our net income. In addition, we periodically, but not less than annually, evaluate our real estate investments and other assets for impairment indicators, and we establish general and specific reserves for our issued loans at least quarterly. The quarterly evaluation of our investments for impairment may result in significant fluctuations in our provision for credit losses or real estate impairments from quarter to quarter, impacting our results of operations. Judgments regarding the existence of impairment indicators or loan reserves are based on a number of factors, including market conditions, operator performance and legal structure, and these factors may involve estimates. If we determine that a significant impairment has occurred, we are required to make an adjustment to the net carrying value of the asset, which could have a material adverse effect on our results of operations. Our estimates of loan reserves, and other accounting estimates, are inherently uncertain and may be subject to future adjustment, leading potentially to an increase in reserves.
Our indebtedness could adversely affect our financial condition.
We have a material amount of indebtedness and we may increase our indebtedness in the future. Our level and type of indebtedness could have important consequences for our stockholders. For example, it could:
| ● | increase our vulnerability to adverse changes in general economic, industry and competitive conditions; |
| ● | limit our ability to borrow additional funds, on satisfactory terms or at all, for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business plan or other general corporate purposes; |
| ● | increase our cost of borrowing; |
| ● | require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes; |
| ● | limit our ability to make material acquisitions or take advantage of business opportunities that may arise; |
| ● | limit our ability to make distributions to our stockholders, which may cause us to lose our qualification as a REIT under the Code or to become subject to federal corporate income tax on any REIT taxable income that we do not distribute; |
| ● | expose us to fluctuations in interest rates, to the extent our borrowings bear variable rates of interest; |
| ● | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and |
| ● | place us at a competitive disadvantage compared to our competitors that have less debt. |
Further, we have the ability to incur substantial additional debt, including secured debt, which could intensify the risks above. In addition, if we are unable to refinance any of our floating rate debt, we would continue to be subject to interest rate risk. The short-term nature of some of our debt also subjects us to the risk that market conditions may be unfavorable or may prevent us from refinancing our debt at or prior to their existing maturities. In addition, our cash flow from operations may not be sufficient to repay all of our outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, if at all, to refinance our debt.
Covenants in our debt documents limit our operational flexibility, and a covenant breach could materially adversely affect our operations.
The terms of our credit agreements and note indentures require us to comply with a number of customary financial and other covenants that may limit our management’s discretion by restricting our ability to, among other things, incur additional debt, redeem our capital stock, enter into certain transactions with affiliates, pay dividends and make other distributions, make investments and other restricted payments, engage in mergers and consolidations, create liens, sell assets or engage in new lines of business. In addition, our credit facilities require us to maintain compliance with specified financial covenants, including those relating to maximum total leverage, maximum secured leverage, maximum unsecured leverage, minimum fixed charge coverage, minimum consolidated tangible net worth and minimum unsecured interest coverage. Any additional financing we may obtain could contain similar or more restrictive covenants. Our continued ability to incur indebtedness, conduct our operations, and take advantage of business opportunities as they arise is subject to compliance with these financial and other covenants. Breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness, in addition to any other indebtedness cross-defaulted against such instruments. Any such breach could materially adversely affect our business, results of operations and financial condition.
25
We are subject to particular risks associated with real estate ownership, which could result in unanticipated losses or expenses.
Our business is subject to many risks that are associated with the ownership of real estate. For example, if our operators do not renew their leases, we may be unable to re-lease the facilities at favorable rental rates, if at all. Other risks that are associated with real estate acquisition and ownership include, without limitation, the following:
| ● | general liability, property and casualty losses, some of which may be uninsured; |
| ● | the inability to purchase or sell our assets rapidly to respond to changing economic conditions, due to the illiquid nature of real estate and the real estate market; |
| ● | leases that are not renewed or are renewed at lower rental amounts at expiration; |
| ● | contingent rent escalators tied to changes in the Consumer Price Index or other parameters; |
| ● | the exercise of purchase options by operators resulting in a reduction of our rental revenue; |
| ● | costs relating to maintenance and repair of our facilities and the need to make expenditures due to changes in governmental regulations, including the Americans with Disabilities Act; |
| ● | environmental hazards created by prior owners or occupants, existing tenants, mortgagors or other persons for which we may be liable; and |
| ● | acts of God or terrorism affecting our properties. |
Our real estate investments are relatively illiquid.
Real estate investments are relatively illiquid and generally cannot be sold quickly. The real estate market is affected by many factors which are beyond our control, including general economic conditions, availability of financing, interest rates and supply and demand. Additional factors that are specific to our industry also tend to limit our ability to vary our portfolio promptly in response to changes in economic or other conditions. For example, all of our properties are ‘‘special purpose’’ properties that cannot be readily converted into general residential, retail or office use. In addition, transfers of operations of nursing homes and other healthcare-related facilities are subject to extensive regulatory approvals. We cannot predict whether we will be able to sell any property for the price or on the terms set by us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property, or that we will have funds available to make necessary repairs and improvements to a property held for sale. To the extent we are unable to sell any properties for our book value, we may be required to take a non-cash impairment charge or loss on the sale, either of which would reduce our net income.
We face possible risks and costs associated with severe weather conditions, natural disasters or the physical effects of climate change.
A large number of our properties are located in areas particularly susceptible to revenue loss, cost increase or damage caused by severe weather conditions or natural disasters such as hurricanes, earthquakes, tornadoes, fires and floods, as well as the effects of climate change. To the extent that climate change impacts changes in weather patterns, our markets could experience more frequent and severe natural disasters. Operationally, such events could cause a major power outage, leading to a disruption of our operators’ operations or require them to incur additional cost associated with evacuation plans. Over time, any of these conditions could result in increased operator costs, delays in construction, resulting in increased construction costs, or in the inability of our operators to operate our facilities at all. Climate change and severe weather may also have indirect effects on our business by increasing the cost to our operators of, or decreasing the availability to our operators of, property insurance on terms they find acceptable, and by increasing the cost of energy, maintenance, repair of water and/or wind damage, and snow removal at our properties. In the event of a loss in excess of insured limits, we could lose our incremental capital invested in the affected property.
Although Congress has not yet enacted comprehensive federal legislation to address climate change, numerous states and municipalities have adopted laws and policies on climate change and emission reduction targets. Changes in federal, state and local legislation and regulation based on concerns about climate change could result in increased capital expenditures on our existing properties and our new development properties (for example, to improve their energy efficiency and/or resistance to severe weather) without a corresponding increase in revenue, resulting in adverse impacts to our net income. There can be no assurance that climate change and severe weather will not have a material adverse effect on our properties, operations, or business.
26
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, a current or previous owner of real property or a secured lender may be liable in certain circumstances for the costs of investigation, removal or remediation of certain hazardous or toxic substances at such property, as well as certain other potential related costs, 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. As a result, liability may be imposed on the owner in connection with the activities of an operator of the property, and the owner’s liability 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 an operators’ ability to attract additional residents and our ability to sell or rent such property or to borrow using such property as collateral which, in turn, could negatively impact our revenues.
Although our leases and mortgage loans generally require the lessee and the mortgagor to indemnify us for certain environmental liabilities, they may be unable to fulfill their indemnification obligations to us, and the scope of such obligations may be limited. For instance, most of our leases do not require the lessee to indemnify us for environmental liabilities arising before the lessee took possession of the premises.
The industry in which we operate is highly competitive. Increasing investor interest in our sector and consolidation at the operator level or REIT level could increase competition and reduce our profitability.
Our business is highly competitive and we expect that it may become more competitive in the future. We compete for healthcare facility investments with other healthcare investors, including other REITs, some of which have greater resources and lower costs of capital than we do. Increased competition makes it more challenging for us to identify and successfully capitalize on opportunities that meet our business goals. If we cannot capitalize on our development pipeline, identify and purchase a sufficient quantity of healthcare facilities at favorable prices, or are unable to finance such acquisitions on commercially favorable terms, our business, results of operations and financial condition may be materially adversely affected. In addition, 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.
Our charter and bylaws contain significant anti-takeover provisions which could delay, defer or prevent a change in control or other transactions that could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of our common stock.
Our charter and bylaws contain various procedural and other requirements which could make it difficult for stockholders to effect certain corporate actions. Our Board of Directors (“Board”) 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. In addition, our charter contains limitations on the ownership of our capital stock intended to ensure we continue to meet the requirements for qualification as a REIT. For example, our charter, among other restrictions, prohibits the beneficial or constructive ownership (as defined for federal income tax purposes) by any person of more than 9.8% in value or in number of shares of the outstanding shares of any class or series of our capital stock, unless our Board grants an exemption or modifies the ownership limit for such person and certain conditions are satisfied. 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 and/or result in the delay, deferral or prevention of a change in control or other transactions that could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of our common stock.
27
Ownership of property outside the U.S. may subject us to different or greater risks than those associated with our U.S. investments, including currency fluctuations.
We have investments in the U.K. and may from time to time may seek to acquire other properties in the U.K. or otherwise outside the U.S. International development, investment, ownership and operating activities involve risks that are different from those we face with respect to our U.S. properties and operations. These risks include, but are not limited to, any international currency gain recognized with respect to changes in exchange rates may not qualify under the income tests that we must satisfy annually in order to qualify and maintain our status as a REIT; fluctuations in the exchange rates between USD and the British Pound Sterling (“GBP”), or other foreign currencies in which we may transact in the future, which we may be unable to protect against through hedging; changes in foreign political, regulatory, and economic conditions, including increases in energy prices, such as those experienced in the U.K. resulting in part from the conflict in Ukraine and sanctions imposed on Russia; challenges in managing international operations and enforcing obligations in other countries; challenges of complying with a variety of foreign laws and regulations, including those relating to real estate, healthcare operations, taxes, employment and legal proceedings; differences in lending practices and the willingness of domestic or foreign lenders to provide financing; regional or country-specific business cycles and economic instability; and changes in applicable laws and regulations in the U.S. that affect foreign operations. If we are unable to successfully manage the risks associated with international expansion and operations, our results of operations and financial condition may be adversely affected.
On January 31, 2020, the U.K. withdrew from the European Union (“E.U.”), commonly referred to as “Brexit.” Changes in economic conditions in the U.K. relating to Brexit may subject the operators of our facilities in the U.K. to increased risk, including potential disruptions in supply, increases in costs or difficulty staffing. In addition, the uncertainty related to Brexit has caused foreign exchange rate fluctuations in the past, including the strengthening of the USD relative to the Euro and GBP immediately following the announcement of Brexit, and may continue to do so in the future, which could materially adversely affect our business, financial condition and results of operations. Furthermore, Brexit could lead to legal uncertainty or the imposition of additional legal or regulatory requirements on the Company, which could have adverse consequences on our business, financial condition and results of operations. To date, one of the key effects of Brexit on the U.K. market is increased difficulty recruiting suitably qualified staff members within properties, as historically the E.U. and freedom of movement provided a reliable personnel resource for the U.K. market. The employment pool within the U.K. is further impacted by vaccination requirements for those working in the sector, meaning that those in certain roles who refuse to be vaccinated may not be employed (unless exempt from the requirement).
Our assets are concentrated in the long-term care industry and face geographic and operator concentration risk.
Our assets are generally not diversified by industry and face risks associated with the long-term care industry. In addition, at December 31, 2022, one operator represented greater than 10% of our investments, and the three states in which we had our highest concentration of investments were Florida (11.5%), Texas (10.3%) and Indiana (6.6%). As a result, we are subject to increased exposure to adverse conditions affecting these operators and regions, with regional risks including unfavorable Medicaid reimbursements rates for SNFs, downturns in the local economies, local real estate conditions, staffing challenges, increased competition or decreased demand for our facilities, regional climate events, and unfavorable legislative or regulatory developments, which could adversely affect our business and results of operations.
Our primary assets are the units of partnership interest in Omega OP and, as a result, we will depend on distributions from Omega OP to pay dividends and expenses.
The Company is a holding company and has no material assets other than units of partnership interest in Omega OP. We intend to cause the partnership to make distributions to its partners, including the Company, in an amount sufficient to allow us to qualify as a REIT for U.S. federal income tax purposes and to pay all of our expenses. To the extent we need funds and the partnership is restricted from making distributions under applicable law or otherwise, or if the partnership is otherwise unable to provide such funds, the failure to make such distributions could materially adversely affect our liquidity and financial condition.
Members of our management and Board hold partnership interests in Omega OP, and their interests may differ from those of our public stockholders.
Some members of our management and Board hold partnership interests in Omega OP. Those unitholders may have conflicting interests with holders of the Company’s common stock. For example, such unitholders of Omega OP Units may have different tax positions from the Company or holders of our common stock, which could influence their decisions in their capacities as members of management regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness and how to structure future transactions.
28
Our investments in joint ventures could be adversely affected by shared decision-making authority, our joint venture partners’ financial condition, and our exposure to potential losses from the actions of our joint venture partners.
As of December 31, 2022, we have ownership interests in two consolidated joint ventures and several unconsolidated joint ventures. These joint ventures involve additional risks, including the following:
| ● | We may be unable to take actions that are opposed by our joint venture partners under arrangements that require us to share decision-making authority over major decisions affecting the ownership or operation of the joint venture and any property owned by the joint venture, such as the sale or financing of the property, our ability to sell or transfer our interest in a joint venture or the making of additional capital contributions for the benefit of the property; |
| ● | For joint ventures in which we have a noncontrolling interest, our joint venture partners may take actions that we oppose; |
| ● | Our joint venture partners may become bankrupt or fail to fund their share of required capital contributions, which could delay construction or development of a property or increase our financial commitment to the joint venture; |
| ● | Our joint venture partners may have business interests or goals with respect to a property that conflict with our business interests and goals, including with respect to the timing, terms and strategies for investment, which could increase the likelihood of disputes regarding the ownership, management or disposition of the property; |
| ● | Disagreements with our joint venture partners could result in litigation or arbitration that increases our expenses, distracts our officers and directors, and disrupts the day-to-day operations of the property, including by delaying important decisions until the dispute is resolved; and |
| ● | We may suffer losses resulting from actions taken by our joint venture partners with respect to our joint venture investments. |
Risks Related to Taxation
Qualifying as a REIT involves highly technical and complex provisions of the Code; failure to qualify as a REIT would subject us to increased taxes and impair our ability to expand our business and make distributions; and complying with REIT requirements may affect our profitability.
We were organized to qualify for taxation as a REIT under Sections 856 through 860 of the Code. See Item 1 – Business – Taxation of Omega. Qualification as a REIT involves the application of technical and intricate Code provisions for which there are only limited judicial and administrative interpretations, and which involve the determination of various factual matters and circumstances not entirely within our control. We cannot assure that we will at all times satisfy these rules and tests. Even a technical or inadvertent violation could jeopardize our REIT qualification.
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 corporate income tax, and any applicable alternative minimum tax with respect to each such taxable year for which the statute of limitations remains open, as well certain excise taxes on nonqualified REIT income, or disqualification from treatment as a REIT for the four taxable years following the year during which qualification is lost. This treatment would significantly reduce our net earnings and cash flow because of our additional tax liability for the years involved, which could significantly impact our financial condition. We generally must distribute annually at least 90% of our taxable income to our stockholders to maintain our REIT status. To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100% of our “REIT taxable income,” as adjusted, we will be subject to tax thereon at regular corporate rates. As a result of all these factors, our failure to maintain our qualification as a REIT could impair our ability to expand our business and raise capital, and would substantially reduce our ability to make distributions to you.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income and the amounts we distribute to our stockholders. Thus, we may be required to liquidate otherwise attractive investments from our portfolio or be unable to pursue investments that would be otherwise advantageous to us, to satisfy the asset and income tests or to qualify under certain statutory relief provisions. We may also be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution (e.g., if we have assets which generate mismatches between taxable income and available cash). Having to comply with the distribution requirement could cause us to: (i) sell assets in adverse market conditions; (ii) borrow on unfavorable terms; or (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt. As a result, satisfying the REIT requirements could have an adverse effect on our business results and profitability.
29
There is a risk of changes in the tax law applicable to REITs.
The Internal Revenue Service, the U.S. Treasury Department and Congress frequently review U.S. federal income tax legislation, regulations and other guidance. We cannot predict whether, when or to what extent new U.S. federal tax laws, regulations, interpretations or rulings will be adopted. Any legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us, our properties, or our shareholders.
Risks Related to Our Stock and Capital Structure
Our issuance of additional capital stock, warrants or debt securities, whether or not convertible, may reduce the market price for our outstanding securities, including our common stock, and dilute the ownership interests of existing stockholders, and we may issue securities with greater dividend, liquidation and other rights than our common stock.
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 securities, 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 negatively impact the market price of our stock and the terms upon which we may obtain additional equity financing in the future. Our Board 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.
Any debt securities, preferred shares, warrants or other rights to acquire shares or convertible or exchangeable securities that we issue in the future may have some rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Our preferred shares, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability pay dividends or other distributions to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk that our future offerings could reduce the per share trading price of our common stock and dilute their interest in us.
General Risk Factors
Our success depends in part on our ability to retain key personnel and our ability to attract or retain other qualified personnel.
Our future performance depends to a significant degree upon the continued contributions of our executive management team and other key employees, the loss of whom could have an adverse impact on our operations. Although we have entered into employment agreements with the members of our executive management team, these agreements may not assure their continued service. In addition, our failure to successfully attract, hire, retain and train the people we need may impede our ability to implement our business strategy.
We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.
We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, tenant and lease data. In addition, we may from time to time offer technology services to tenants, which may involve storage of customer or resident data. We purchase some of our information technology from vendors, on whom our systems depend. We generally rely on third-party systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential tenant and other customer information, such as individually identifiable information, including information relating to financial accounts. It is possible that our safety and security measures will not be able to prevent the systems’ improper functioning or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of our information systems, and the privacy of the data we store, or failure to comply with related regulations, could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition and results of operations. The regulatory environment related to cyber and information security, data collection and privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business or to which we may become subject, including E.U. data protection legislation, such as they General Data Protection Regulation, or the GDPR, and the U.K.’s Data Protection Act, which impose significant data protection requirements and penalties for noncompliance. Compliance with any of these requirements may result in additional costs and could impact how we conduct in business in new jurisdictions.
30
Failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, results of operations, financial condition and stock price.
We are required to provide a report by management on internal control over financial reporting, including management’s assessment of the effectiveness of such control. Changes to our business will necessitate ongoing changes to our internal control systems and processes, and internal control over financial reporting may not prevent or detect misstatements due to inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls or to implement required new or improved controls, our business, results of operations and financial condition could be materially adversely harmed, we could fail to meet our reporting obligations and there could be a material adverse effect on our stock price. In addition, we may be adversely impacted by new accounting pronouncements which change our lease recognition or other accounting practices or otherwise alter how we report our financial results, or which require that we change our internal control and operating procedures, which we may be unable to do in a timely manner.
Item 1B – Unresolved Staff Comments
None.
Item 2 – Properties
At December 31, 2022, our real estate investments include SNFs and ALFs and to a lesser extent ILFs, specialty facilities and MOBs, in the form of (i) owned facilities that are leased to operators or their affiliates, (ii) investments in direct financing leases to operators or their affiliates and (iii) real estate loans, including mortgages on facilities that are operated by the mortgagors or their affiliates. Our facilities related to these investments are located in 42 states and the U.K.
The following table presents the concentration of our gross real estate assets, assets held for sale, gross investment in direct financing leases and gross mortgage notes receivables (included within our real estate loans receivable) by state and the U.K. as of December 31, 2022:
|
|
|
|
|
|
|
|||||
|
|
|
Gross |
% of |
|
||||||
|
Number of |
Number of |
Investment |
Gross |
|
||||||
|
Location |
|
Operating Beds |
|
Facilities |
|
(in thousands) |
|
Investment |
|
|
|
Florida |
|
12,022 |
|
98 |
$ |
1,104,417 |
|
11.5 |
% |
|
|
Texas |
|
10,957 |
|
111 |
|
987,456 |
|
10.3 |
% |
|
|
Indiana |
|
6,937 |
|
70 |
|
638,275 |
|
6.6 |
% |
|
|
California |
|
4,322 |
|
52 |
|
568,726 |
|
5.9 |
% |
|
|
Ohio |
|
4,894 |
|
43 |
|
541,412 |
|
5.6 |
% |
|
|
United Kingdom |
|
4,791 |
|
92 |
|
522,457 |
|
5.4 |
% |
|
|
Michigan |
|
3,598 |
|
38 |
|
501,496 |
|
5.2 |
% |
|
|
Pennsylvania |
|
4,399 |
|
46 |
|
498,297 |
|
5.2 |
% |
|
|
Virginia |
|
3,668 |
|
28 |
|
424,099 |
|
4.4 |
% |
|
|
North Carolina |
|
4,676 |
|
45 |
|
406,736 |
|
4.2 |
% |
|
|
Remaining States |
|
29,701 |
|
303 |
|
3,419,191 |
|
35.7 |
% |
|
|
89,965 |
926 |
$ |
9,612,562 |
100.0 |
% |
|||||
Item 3 – Legal Proceedings
See Note 20— Commitments and Contingencies to the Consolidated Financial Statements - Part IV, Item 15, which is hereby incorporated by reference in response to this item.
Item 4 – Mine Safety Disclosures
None.
31
PART II
Item 5 – Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Shares of Omega Healthcare Investors, Inc. (together with its consolidated subsidiaries, collectively, “Omega” or the “Company”) common stock are traded on the New York Stock Exchange under the symbol “OHI.” As of February 8, 2023, there were 2,744 registered holders and 234,267,646 shares of Omega common stock outstanding.
Performance Graph
The graph and table below compare the cumulative total return of Omega, the FTSE NAREIT Equity Health Care Index (Ticker: FN11-FTX), the FTSE NAREIT All REITs Index (Ticker: FNAR), the S&P 500 Index, and the Russell 2000 from January 1, 2018 to December 31, 2022. We have included the FTSE NAREIT Equity Health Care Index and the FTSE NAREIT All REITs Index because we believe that they are representative of the industry in which we compete and are relevant to an assessment of our performance. Total cumulative return is based on a $100 investment in Omega common stock and in each of the indices at the close of trading on December 31, 2017 and assumes quarterly reinvestment of dividends. Stockholder returns over the indicated periods should not be considered indicative of future stock prices or stockholder returns.
|
|
|
12/31/2017 |
|
12/31/2018 |
|
12/31/2019 |
|
12/31/2020 |
|
12/31/2021 |
|
12/31/2022 |
||||||
|
Omega Healthcare Investors, Inc. |
|
$ |
100.00 |
|
$ |
139.43 |
|
$ |
180.05 |
|
$ |
167.47 |
|
$ |
147.73 |
|
$ |
152.44 |
|
FTSE NAREIT Health Care Index |
|
$ |
100.00 |
|
$ |
107.58 |
|
$ |
130.39 |
|
$ |
117.53 |
|
$ |
136.71 |
|
$ |
106.39 |
|
FTSE NAREIT All REITs Index |
|
$ |
100.00 |
|
$ |
95.90 |
|
$ |
122.82 |
|
$ |
115.62 |
|
$ |
161.73 |
|
$ |
121.13 |
|
S&P 500 Index |
|
$ |
100.00 |
|
$ |
95.62 |
|
$ |
125.72 |
|
$ |
148.85 |
|
$ |
191.58 |
|
$ |
156.88 |
|
Russell 2000 Index |
|
$ |
100.00 |
|
$ |
88.99 |
|
$ |
111.70 |
|
$ |
134.00 |
|
$ |
153.85 |
|
$ |
122.41 |
32
Issuer Purchases of Equity Securities
On January 27, 2022, the Company authorized the repurchase of up to $500 million of our outstanding common stock from time to time through March 2025. The Company is authorized to repurchase shares of its common stock in open market and privately negotiated transactions or in any other manner as determined by the Company’s management and in accordance with applicable law. The timing and amount of stock repurchases will be determined, in management’s discretion, based on a variety of factors, including but not limited to market conditions, other capital management needs and opportunities, and corporate and regulatory considerations. The Company has no obligation to repurchase any amount of its common stock, and such repurchases, if any, may be discontinued at any time. During 2022, we repurchased 5.2 million shares of our common stock at an average price per share of $27.32 and an aggregate repurchase cost of $142.3 million (including the cost of commissions). We did not repurchase any shares during the fourth quarter of 2022.
Unregistered Sales of Equity Securities
From time to time, Omega issues shares of common stock in reliance on the private placement exemption under Section 4(a)(2) of the Securities Act of 1933, as amended, in exchange for units of partnership interest in OHI Healthcare Properties Limited Partnership (collectively with subsidiaries, “Omega OP”). During the quarter ended December 31, 2022, Omega did not issue any shares of Omega common stock.
Item 6 – [Reserved]
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is based primarily on the consolidated financial statements of Omega Healthcare Investors, Inc. presented in conformity with U.S. generally accepted accounting principles (“GAAP”) for the periods presented and should be read together with the notes thereto contained in this Annual Report on Form 10-K. Other important factors are identified in “Forward-Looking Statements” and “Item 1A – Risk Factors” above.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:
| ● | Business Overview |
| ● | Outlook, Trends and Other Conditions |
| ● | 2022 and Recent Highlights |
| ● | Results from Operations |
| ● | Funds from Operations |
| ● | Liquidity and Capital Resources |
| ● | Supplemental Guarantor Information |
| ● | Critical Accounting Policies and Estimates |
Business Overview
Omega Healthcare Investors, Inc. (“Parent”) is a Maryland corporation that, together with its consolidated subsidiaries has elected to be taxed as a REIT for federal income tax purposes. Omega is structured as an umbrella partnership REIT (“UPREIT”) under which all of Omega’s assets are owned directly or indirectly by, and all of Omega’s operations are conducted directly or indirectly through, its operating partnership subsidiary, Omega OP. As of December 31, 2022, Parent owned approximately 97% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and other investors owned approximately 3% of the outstanding Omega OP Units.
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Omega has one reportable segment consisting of investments in healthcare-related real estate properties located in the United States (“U.S.”) and the United Kingdom (“U.K.”). Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), and to a lesser extent, independent living facilities (“ILFs”), rehabilitation and acute care facilities (“specialty facilities”) and medical office buildings (“MOBs”). Our core portfolio consists of our long-term leases and real estate loans with healthcare operating companies and affiliates (collectively, our “operators”). Real estate loans consist of mortgage loans and other real estate loans which are primarily collateralized by a first, second or third mortgage lien or a leasehold mortgage on, or an assignment of the partnership interest in the related properties. In addition to our core investments, we make loans to operators and/or their principals. These loans, which may be either unsecured or secured by the collateral of the borrower, are classified as non-real estate loans. From time to time, we also acquire equity interests in joint ventures or entities that support the long-term healthcare industry and our operators.
Our portfolio of real estate investments (including properties associated with mortgages, direct financing leases, assets held for sale and consolidated joint ventures) at December 31, 2022, included 926 healthcare facilities, located in 42 states and the U.K. that are operated by 67 third-party operators. Our real estate investment in these facilities totaled approximately $9.5 billion at December 31, 2022, with approximately 97% of our real estate investments related to long-term healthcare facilities. The portfolio is made up of (i) 665 SNFs, (ii) 169 ALFs, (iii) 20 ILFs, (iv) 16 specialty facilities, (v) two MOBs, (vi) real estate loans, including mortgages on 48 SNFs, two ALFs and two specialty facilities and (vii) two facilities that are held for sale. At December 31, 2022, we also held other real estate loans (excluding mortgages) receivable of $394.6 million and non-real estate loans receivable of $225.3 million, consisting primarily of secured loans to third-party operators of our facilities, and $178.9 million of investments in six unconsolidated joint ventures.
As healthcare delivery continues to evolve, we continuously evaluate potential investments, our assets, operators and markets to position our portfolio for long-term success. Our strategy includes applying data analytics to our investment underwriting and asset management, as well as selling or transitioning assets that do not meet our portfolio criteria.
Outlook, Trends and Other Conditions
The COVID-19 pandemic has significantly and adversely impacted SNFs and long-term care providers due to the higher rates of virus transmission and fatality among the elderly and frail populations that these facilities serve; in addition, the pandemic contributed to occupancy declines, labor shortages and cost increases which continue to significantly impact our operators. As discussed further in “Collectibility Issues” below, during the year we have had several operators that have failed to make contractual payments under their lease and loan agreements, and we have agreed to short-term deferrals, lease and portfolio restructurings and/or allowed the application of security deposits or letters of credit to pay rent for several operators.
We believe these operators were impacted by, among other things, reduced revenue as a result of lower occupancy and increased expenses resulting from the COVID-19 pandemic and uncertainties regarding the continuing availability of sufficient government support and adequate reimbursement levels. These increases have been offset to some extent by increases in reimbursements due to increased skilling in place, which has been necessitated by pandemic-related protocols and may decrease when such protocols subside or when the federally declared public health emergency expires as scheduled on May 11, 2023. We believe these increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay and reliance on agency staffing due to staffing shortages, as well as a significant increase in both the cost and usage of personal protective equipment (“PPE”), testing equipment and processes and supplies, as well as implementation of new infection control protocols and vaccination programs. In addition, operators who do not achieve full compliance with applicable vaccination and infection control requirements may face potential survey issues and penalties. At this time, there is significant uncertainty regarding the impact of such developments.
We remain cautious as the COVID-19 pandemic continues to have a significant impact on our operators and their financial conditions, particularly given the trend of reduced pandemic-related federal support to our operators beginning in 2021, the persistence of staffing shortages that continue to impact our operators’ occupancy levels and profitability, uncertainty as to whether Medicare and Medicaid reimbursement rates will be sufficient to address longer-term cost increases faced by operators, factors that may impact future virus transmission in our facilities, including vaccination rates and efficacy of the vaccine for staff members and residents at our facilities and genetic mutations of the virus into new variants, and the commencement in December 2021 of repayment of deferred FICA obligations.
We believe that the incidence and severity of COVID-19 among our operators’ residents and employees, based on reporting by our operators, tend to correlate with levels of incidence and severity experienced by the applicable community in which such operators’ are located, and it remains uncertain whether certain of our facilities will be impacted by future community spread of the virus.
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Our facilities, on average, experienced declines, in some cases that are material, in occupancy levels as a result of the pandemic. Occupancy in our facilities has generally improved on average since early 2021; however, average occupancy has not returned to pre-pandemic levels. It remains unclear when and the extent to which demand and occupancy levels will return to pre-COVID-19 levels. We believe these challenges to occupancy recovery may be in part due to staffing shortages, which in some cases have required operators to limit admissions, as well as COVID-19 related fatalities at the facilities, the delay of SNF placement and/or utilization of alternative care settings for those with lower level of care needs, the suspension and/or postponement of elective hospital procedures, fewer discharges from hospitals to SNFs and higher hospital readmittances from SNFs.
While substantial government support was allocated to SNFs and to a lesser extent to ALFs in 2020, federal relief efforts have been limited since 2021 as have been relief efforts in certain states. The additional 6.2% FMAP reimbursement in connection with the pandemic is being phased out in 2023 pursuant to the Consolidated Appropriations Act of 2023 as further discussed under “Government Regulation – Reimbursement Changes Related to COVID-19” under “Item 1 – Business.” The additional 6.2% FMAP provided some of our operators with significant support, based on which states they are located in, and the phase out of such support may adversely affect their operations to the extent that expenses are not reduced or other support is not provided. We believe further government support will be needed to continue to offset these impacts on operators, which could be in the form of direct support or reimbursement rate adjustments to reflect sustained cost changes experienced by operators. It is unclear whether and to what extent such government support will continue to be sufficient and timely to offset these impacts. In particular, while $25.5 billion in federal funding for healthcare providers impacted by COVID-19 was announced in September 2021 with distributions beginning in late 2021 pursuant to the Public Health and Social Services Emergency Fund (“Provider Relief Fund”), we do not expect additional Provider Relief Funds to be allocated to healthcare operators or our operators, and it remains uncertain whether additional Medicaid funds under the American Rescue Plan Act of 2021 (the “American Rescue Plan Act”) or other changes in Medicare or Medicaid reimbursement rates in the U.S., or U.K. reimbursement and relief programs for our U.K. operators, will ultimately support reimbursement to our operators. While certain states have provided pandemic-related relief measures and/or reimbursement increases, there remains uncertainty as to how widespread these measures will continue to be and to what extent they may be distributed to and benefit our operators, especially when the federally declared public health emergency expires as scheduled on May 11, 2023 or previously released federal funds to states have been fully utilized. Likewise, while certain states may in the course of routine rate-setting of Medicaid rates address inflationary factors and other expense-related items, there can be no assurance that these changes will be sufficient to offset existing increased inflation and expenses or that all states will address these items. See the “Government Regulation and Reimbursement” section for additional information. Further, to the extent the cost and occupancy impacts on our operators continue or accelerate and are not offset by continued government relief or reimbursement rates that are sufficient and timely, we anticipate that the operating results of additional operators may be materially and adversely affected, some may be unwilling or unable to pay their contractual obligations to us in full or on a timely basis and we may be unable to restructure such obligations on terms as favorable to us as those currently in place.
There are a number of uncertainties we face as we consider the continuing impact of COVID-19 on our business, including how long census disruption and elevated COVID-19 costs will last, the ability of our operators to manage the impact of the termination of public health emergency and temporary relief thereunder, the continued efficacy of vaccination programs in reducing the spread and severity of COVID-19 in our facilities, the impact of genetic mutations of the virus into new variants on our facilities, and the extent to which funding support from the federal government, the states and the U.K. will continue to offset these incremental costs as well as lost revenues. Notwithstanding vaccination programs, we expect that heightened clinical protocols for infection control within facilities will continue for some period; however, we do not know if future reimbursement rates or equipment provided by governmental agencies will be sufficient to cover the increased costs of enhanced infection control and monitoring.
While we continue to believe that longer term demographics will drive increasing demand for needs-based skilled nursing care, we expect the uncertainties to our business described above to persist at least for the near term until we can gain more information as to the level of costs our operators will continue to experience and for how long, and the level of additional governmental support that will be available to them, the potential support our operators may request from us and the future demand for needs-based skilled nursing care and senior living facilities. We continue to monitor the rate of occupancy recovery at many of our operators, and it remains uncertain whether and when demand, staffing availability and occupancy levels will return to pre-COVID-19 levels.
In addition to the impacts of COVID-19 discussed above, our operators have been and are likely to continue to be adversely affected by labor shortages and increased labor costs as well as other inflation-related cost increases. In addition, our operations have also been and are likely to continue to be impacted by increased competition for the acquisition of facilities in the U.S., which has decreased the number of investment opportunities that would be accretive to our portfolio. As part of our continuous evaluation of our portfolio and in connection with certain operator restructuring transactions, we expect to continue to opportunistically sell assets, or portfolios of assets, from time to time.
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We continue to monitor the impacts of other regulatory changes, as discussed below, including any significant limits on the scope of services reimbursed and on reimbursement rates and fees, which could have a material adverse effect on an operator’s results of operations and financial condition, which could adversely affect the operator’s ability to meet its obligations to us.
2022 and Recent Highlights
Investments
| ● | We acquired 41 facilities for an aggregate consideration of $225.2 million in 2022. The initial cash yield (the initial annual contractual cash rent divided by the purchase price) on these asset acquisitions was between 8% and 9.5%. |
| ● | We invested $64.4 million under our construction-in-progress and capital improvement programs in 2022. |
| ● | We financed $56.2 million of new real estate loans with a weighted average interest rate of 12% in 2022. Our 2022 new real estate loans primarily relate to two new loans that we entered into during the year. We also advanced $60.0 million under existing real estate loans in 2022. |
| ● | During 2022, Ciena Healthcare (“Ciena”) made $158.5 million of early principal payments under its mortgage loans. In connection with the partial repayments, the maturity date of all the Ciena mortgage notes was extended to June 30, 2030 (with exception of two loans with an aggregate principal balance of $40.4 million with maturity dates in 2023). |
Dispositions and Impairments
| ● | In 2022, we sold 66 facilities for approximately $759.0 million in net cash proceeds, recognizing a net gain of approximately $360.0 million. Our sales during 2022 were primarily driven by restructuring transactions associated with facilities formerly leased to the following operators: Gulf Coast Health Care LLC (together with certain affiliates “Gulf Coast”) – 22 facilities, Guardian Healthcare (“Guardian”) – nine facilities, and Agemo Holdings, LLC (“Agemo”) – 22 facilities. |
| ● | In December 2022, in connection with restructuring negotiations with LaVie Care Centers, LLC (“LaVie,” f/k/a Consulate Health Care), we sold 11 facilities previously leased to LaVie for a sales price of $129.8 million. Omega provided $104.8 million in senior seller financing, collateralized by first lien mortgages on the 11 facilities, to fund a portion of the purchase price. The senior note has a December 29, 2027 maturity date and bears interest at 8% with required monthly interest payments (due in arrears beginning February 1, 2023), with no principal payments are due until the maturity date. The remaining consideration received under the purchase agreement is the assumption of a $25.0 million liability, incurred by Omega as part of the transaction, by the buyer from Omega. The 11-facility sale does not meet the contract criteria to be recognized as a sale for accounting purposes and we will continue to account for these facilities on our Consolidated Balance Sheets and depreciate the facilities until the sale recognition requirements are met. A contract liability will be recognized on our Consolidated Balance Sheets within accrued expenses and other liabilities for the $25.0 million liability assumed, which will be relieved when the sale is recognized. The loan receivable associated with the seller financing will not be recorded on our Consolidated Balance Sheets until the sale is recognized, and any cash interest received will be deferred and recorded as a contract liability within accrued expenses and other liabilities on our Consolidated Balance Sheets. No interest income or gain or loss will be recognized until the sale recognition requirements are met. |
| ● | In 2022, we recorded impairments on real estate properties of approximately $38.5 million on 22 facilities. Of the $38.5 million, $3.5 million related to two facilities that were classified as held for sale and $35.0 million related to 20 held-for-use facilities of which $17.2 million relates to 12 facilities leased to and operated by LaVie that are expected to be impacted by the on-going restructuring negotiations. |
Financing Activities
| ● | In January 2022, our Board of Directors authorized the repurchase of up to $500 million of our outstanding common stock from time to time through March 2025. For the year ended December 31, 2022, we repurchased 5.2 million shares of our outstanding common stock at an average price of $27.32 per share. |
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| ● | We sold 0.3 million shares of common stock under our Dividend Reinvestment and Common Stock Purchase Plan (“DRSPP”) during the year ended December 31, 2022. Aggregate net proceeds from these sales generated $9.2 million during 2022. |
Other Highlights
| ● | During 2022, we made $126.1 million of new non-real estate loans with a weighted average interest rate of 10.2%. We also advanced $124.8 million under existing non-real estate loans. Of the $124.8 million, an aggregate $105.9 million related to two revolving working capital loans that also had aggregate repayments of $80.0 million during 2022. |
| ● | In 2022, Omega was included in the Bloomberg Gender-Equality Index (GEI) – one of only 418 companies worldwide, and fewer than 15 U.S. REITs, to be included in the 2022 index. |
Collectibility Issues
| ● | During the year ended December 31, 2022, we placed nine operators on a cash basis of revenue recognition. These include LaVie, Maplewood Senior Living (along with affiliates, “Maplewood”), and operators representing 0.4% (“0.4% Operator”), 1.2% (“1.2% Operator”) and 2.0% (“2.0% Operator”) of total revenue (excluding the impact of write-offs), respectively, for the year ended December 31, 2022. In connection with placing these operators on a cash basis, we recognized $119.8 million in total straight-line accounts receivable write-offs through rental income. As of December 31, 2022, 20 operators are on a cash basis. These operators represent an aggregate 36.5% of our total revenues (excluding the impact of write-offs) for the year ended December 31, 2022. |
| ● | During the year ended December 31, 2022, we allowed ten operators to defer $27.0 million of contractual rent and interest. The deferrals primarily related to the following operators: Agemo, Guardian, the 3.7% Operator (defined below) and the 1.2% Operator. Additionally, we allowed seven operators to apply collateral, such as security deposits or letters of credit, to contractual rent and interest during the year ended December 31, 2022. The total collateral applied to contractual rent and interest was $11.0 million for the year ended December 31, 2022. These applications of collateral to contractual rent and interest primarily relate to the 2.0% Operator and the 1.2% Operator. |
| ● | Agemo, a cash basis operator, continued to not pay contractual rent and interest due under its lease and loan agreements during the year ended December 31, 2022. We have not recorded any rental income or interest income related to Agemo during the year ended December 31, 2022. Subsequent to year end, we entered into a restructuring agreement with Agemo. See Note 5 – Contractual Receivables and Other Receivables and Lease Inducements to the Consolidated Financial Statements - Part I, Item 15 hereto for additional details. |
| ● | Guardian did not make rent and interest payments under its lease and loan agreements during the first quarter of 2022, but it resumed making contractual rent and interest payments during the second quarter of 2022, and it continued making such payments in the third and fourth quarters of 2022, in accordance with the restructuring terms discussed further below. Guardian is on a cash basis of revenue recognition for lease purposes, and we recorded rental income of $11.3 million for the year ended December 31, 2022 for contractual rent payments that were received. Additionally, Guardian’s mortgage loan is on non-accrual status and is being accounted for under the cost recovery method and therefore the $6.0 million of interest payments that we received during the year ended December 31, 2022 were applied directly against the principal balance outstanding. In the second quarter of 2022, we agreed to a formal restructuring agreement, master lease amendments and mortgage loan amendments with Guardian. As part of the restructuring agreement and related agreements, Omega agreed to, among other things, allow for the retrospective deferral of $18.0 million of aggregate contractual rent and interest, with repayment required after September 30, 2024, and reduce the combined rent and mortgage interest to an aggregate of $24.0 million per year effective as of July 1, 2022. |
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| ● | In the fourth quarter of 2022, Omega began the process of restructuring our portfolio with LaVie, which primarily consists of two master lease agreements and two term loan agreements. On December 30, 2022, we sold 11 facilities previously subject to one of two lease agreements with LaVie. See further discussion on the sale and the accounting treatment in Dispositions and Impairments above. Concurrent with the sale, we also amended the lease agreement impacted by the sale and our loan agreements with LaVie. As part of the lease amendments, Omega agreed to, among other terms, remove the 11 sold facilities from the lease agreement and reduce monthly contractual rent from $8.3 million to $7.3 million. We amended the loans to, among other terms, extend the loan maturities to November 30, 2036 to align with the lease term, and starting in January 2023, reduce the interest rates to 2%, remove the requirement to make any principal payments until the maturity dates and to convert from monthly cash interest payments to interest paid-in-kind. The restructuring discussions are still ongoing and subject to change, but we anticipate additional restructuring activity related to this operator in 2023. As a result of the restructuring activities during 2022 and future expected restructuring activities, during the fourth quarter of 2022, we placed LaVie on a cash basis of revenue recognition as collection of substantially all contractual lease payments due from them was deemed no longer probable. As a result, we wrote-off approximately $58.0 million of straight-line rent receivables and lease inducements to rental income during the fourth quarter of 2022. In the first quarter of 2023, as part of the restructuring, we have agreed to a partial rent deferral in the first four months of 2023. In doing so, we agreed to allow LaVie to defer up to $10.0 million of contractual rent from January 2023 through April 2023 under one of our lease agreements for 32 facilities. Omega is in discussions to allow LaVie to defer up to $9.1 million of contractual rent from January 2023 through April 2023 under another lease agreement for 41 facilities. In January 2023, as a result, LaVie deferred the full contractual payment of $2.5 million under the 32-facility lease and paid $2.5 million of the $4.7 million of contractual rent due under the 41-facility lease. |
| ● | During the fourth quarter of 2022, we placed Maplewood on a cash basis of revenue recognition as collection of substantially all contractual lease payments due from them was deemed no longer probable based on the proposed restructuring of our lease and loan agreements with Maplewood. As a result, we wrote-off approximately $29.3 million of straight-line rent receivables and lease inducements to rental income during the fourth quarter of 2022. Subsequent to year end, we entered into a restructuring agreement with Maplewood. See Note 5 - Contractual Receivables and Other Receivables and Lease Inducements to the Consolidated Financial Statements - Part I, Item 15 hereto for additional details surrounding the restructuring. |
| ● | In December 2022, we agreed to allow Healthcare Homes Limited (“Healthcare Homes”), a U.K. based operator, the ability to defer up to £6.7 million of contractual rent from January 2023 through April 2023 with regular payments scheduled to resume in May 2023. The deferred rent balance accrues interest monthly at a rate of 8% per annum and must be fully repaid by December 31, 2024. Healthcare Homes has had near-term liquidity issues in connection with increased staffing and utility costs. Healthcare Homes remains current as of December 31, 2022 and is on a straight-line basis of revenue recognition. |
| ● | From January through March 2022, an operator (the “3.7% Operator”) representing 3.7% of total revenue (excluding the impact of write-offs) for the year ended December 31, 2022, did not pay its contractual amounts due under its lease agreement. In March 2022, the lease with the 3.7% Operator was amended to allow for a short-term rent deferral for January through March 2022. The 3.7% Operator paid the contractual amount due under its lease agreement from April through December 2022. Omega holds a $1.0 million letter of credit and a $150 thousand security deposit from the 3.7% Operator. The 3.7% Operator remains current on its $25.0 million revolving credit facility, which is fully drawn as of December 31, 2022 and is secured by a first lien on the 3.7% Operator’s accounts receivable. The 3.7% Operator remains on a straight-line basis of revenue recognition. |
Dividends
| ● | Quarterly cash dividends paid during 2022 aggregated to $2.68 per share. On January 26, 2023, the Board of Directors declared a cash dividend of $0.67 per share. The dividend will be paid on February 15, 2023 to stockholders of record as of the close of business on February 6, 2023. |
Results of Operations
The following is our discussion of the consolidated results of operations for the year ended December 31, 2022 as compared to the year ended December 31, 2021. For a discussion of our results of operation for the year ended December 31, 2021 as compared to the year ended December 31, 2020, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”).
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Comparison of results of operations for the years ended December 31, 2022 and 2021 (dollars in thousands):
|
|
|
Year Ended December 31, |
|
|
|
||||
|
|
|
2022 |
|
2021 |
|
Increase/(Decrease) |
|||
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
750,208 |
|
$ |
923,677 |
|
$ |
(173,469) |
|
Income from direct financing leases |
|
|
1,023 |
|
|
1,029 |
|
|
(6) |
|
Interest income |
|
|
123,919 |
|
|
136,382 |
|
|
(12,463) |
|
Miscellaneous income |
|
|
3,094 |
|
|
1,721 |
|
|
1,373 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
332,407 |
|
|
342,014 |
|
|
(9,607) |
|
General and administrative |
|
|
69,397 |
|
|
64,628 |
|
|
4,769 |
|
Real estate taxes |
|
|
15,500 |
|
|
12,260 |
|
|
3,240 |
|
Acquisition, merger and transition related costs |
|
|
42,006 |
|
|
1,814 |
|
|
40,192 |
|
Impairment on real estate properties |
|
|
38,451 |
|
|
44,658 |
|
|
(6,207) |
|
Recovery on direct financing leases |
|
|
— |
|
|
(717) |
|
|
717 |
|
Provision for credit losses |
|
|
68,663 |
|
|
77,733 |
|
|
(9,070) |
|
Interest expense |
|
|
233,244 |
|
|
234,604 |
|
|
(1,360) |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
Other expense – net |
|
|
(1,997) |
|
|
(581) |
|
|
(1,416) |
|
Loss on debt extinguishment |
|
|
(389) |
|
|
(30,763) |
|
|
30,374 |
|
Gain on assets sold – net |
|
|
359,951 |
|
|
161,609 |
|
|
198,342 |
|
Income tax expense |
|
|
(4,561) |
|
|
(3,840) |
|
|
(721) |
|
Income from unconsolidated joint ventures |
|
|
7,261 |
|
|
16,062 |
|
|
(8,801) |
Revenues
Following is a description of certain of the changes in revenues for the year ended December 31, 2022 compared to 2021:
| ● | The decrease in rental income was primarily the result of (i) a $85.7 million decrease as a result of a net increase in straight-line rent receivable and lease inducement write-offs in 2022 primarily due to placing operators LaVie, Maplewood and seven other operators on a cash basis for revenue recognition due to collectibility concerns, (ii) a $67.2 million net decrease in rental income from 13 cash basis operators, including Agemo, as a result of not recording straight-line lease revenue and/or receiving less cash rent payments period over period from these operators, (iii) a $36.8 million decrease due to recognizing no rental income related to Gulf Coast, a cash basis operator, in 2022, as we received no contractual payments in the first quarter related to the lease with this operator, and we sold or transitioned 23 of the facilities subject to the Gulf Coast lease in March and April 2022 and (iv) a $7.1 million decrease related to facility sales, transitions and lease terminations, partially offset by (i) a $18.3 million increase related to facility acquisitions made in 2022 and (ii) a $3.1 million increase related to a lease extension with one operator. |
| ● | The decrease in interest income was primarily due to (i) a $17.0 million decrease related to principal payments received during 2021 and 2022, including those on the Ciena mortgage loans discussed above, and (ii) a $12.4 million decrease related to loans placed on non-accrual status, primarily the Guardian mortgage loan, during 2021 and 2022, partially offset by a $16.9 million increase related to new and refinanced loans and additional funding to existing operators made throughout 2021 and 2022. As noted above, in 2022, we funded $116.2 million for new or existing real estate loans and $250.9 million for new or existing non-real estate loans. |
Expenses
Following is a description of certain of the changes in our expenses for the year ended December 31, 2022 compared to 2021:
| ● | The decrease in depreciation and amortization expense primarily relates to facility sales and facilities reclassified to assets held for sale, such as the 22 Gulf Coast facilities and 22 Agemo facilities that were sold during 2022, partially offset by facility acquisitions and capital additions. |
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| ● | The increase in general and administrative (“G&A”) expense primarily relates to a $5.9 million increase in stock-based compensation expense (see Note 19 – Stock-Based Compensation to the Consolidated Financial Statements for a full summary of stock-compensation movements over the last three years) partially offset by a $2.6 million decrease in payroll and benefits and severance expenses. |
| ● | The increase in acquisition, merger and transition related costs primarily relates to costs incurred related to the transition of facilities with LaVie (as discussed further in “Collectibility Issues” above) and other troubled operators. |
| ● | The 2022 impairments were recognized in connection with two facilities that were classified as held-for-sale for which the carrying values exceeded the estimated fair values less costs to sell and 20 held-for-use facilities for which the carrying value exceeded the fair value. The 2021 impairments were recognized in connection with 13 facilities that were classified as held-for-sale for which the carrying values exceeded the estimated fair values less costs to sell and one held-for-use facility because of the closure of the facility in the first quarter. The 2022 and 2021 impairments were primarily the result of decisions to exit certain non-strategic facilities and/or operators. |
Other Income (Expenses)
The increase in total other income (expense) was primarily due to (i) a $198.3 million increase in gain on assets sold resulting from the sale of 66 facilities in 2022 compared to the sale of 48 facilities in 2021 as we continue to exit certain facilities, operator relationships and/or states to improve the strength of our overall portfolio and (ii) a $30.4 million decrease in loss on debt extinguishment primarily related to fees, premiums, and expenses related to the early redemption of $350 million of principal of the 4.375% Senior Notes due 2023 during the first quarter of 2021.
Income Tax Expense
As a REIT, we generally are not subject to federal income taxes on the REIT taxable income that we distribute to stockholders, subject to certain exceptions. For tax year 2022, we made common dividend payments of $632.9 million to satisfy REIT requirements relating to qualifying income. We have elected to treat certain of our active subsidiaries as TRSs. Our domestic TRSs are subject to federal, state and local income taxes at the applicable corporate rates. Our foreign TRSs are subject to foreign income taxes. As of December 31, 2022, one of our TRSs that is subject to income taxes at the applicable corporate rates had a net operating loss (“NOL”) carry-forward of approximately $10.2 million. Also, in connection with the acquisition of one U.K. entity in the first quarter of 2022, we acquired foreign net operating losses of $55.0 million resulting in an NOL deferred tax asset of $13.4 million (see Note 3 – Real Estate Asset Acquisitions and Development and Note 17 – Taxes). The $10.2 million NOL carry-forward was fully reserved as of December 31, 2022, with a valuation allowance due to uncertainties regarding realization.
Under U.S. current law, NOL carry-forwards generated up through December 31, 2017 may be carried forward for no more than 20 years, and our NOL carry-forwards generated in our taxable years ended after December 31, 2017 may be carried forward indefinitely.
For the year ended December 31, 2022, we recorded approximately $1.2 million of federal, state and local income tax provision and approximately $3.4 million of tax provision for foreign income taxes. These amounts do not include any gross receipts or franchise taxes payable to certain states and municipalities.
Income from Unconsolidated Joint Ventures
The decrease in income from unconsolidated joint ventures was primarily due to one of the joint ventures realizing a $14.9 million gain on sale of real estate investments during 2021.
40
Funds From Operations
We use funds from operations (“Nareit FFO”), a non-GAAP financial measure, as one of several criteria to measure the operating performance of our business. We calculate and report Nareit FFO in accordance with the definition of Funds from Operations and interpretive guidelines issued by the National Association of Real Estate Investment Trusts (“Nareit”). Nareit FFO is defined as net income (computed in accordance with GAAP), adjusted for the effects of asset dispositions and certain non-cash items, primarily depreciation and amortization and impairment on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures and changes in the fair value of warrants. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis. Revenue recognized based on the application of security deposits and letters of credit or based on the ability to offset against other financial instruments is included within Nareit FFO. We believe that Nareit FFO is an important supplemental measure of our operating performance. As real estate assets (except land) are depreciated under GAAP, such accounting presentation implies that the value of real estate assets diminishes predictably over time, while real estate values instead have historically risen or fallen with market conditions. Nareit FFO was designed by the real estate industry to address this issue. Nareit FFO herein is not necessarily comparable to Nareit FFO of other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us.
We further believe that by excluding the effect of depreciation, amortization, impairment on real estate assets and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, Nareit FFO can facilitate comparisons of operating performance between periods and between other REITs. We offer this measure to assist the users of our financial statements in evaluating our financial performance under GAAP, and Nareit FFO should not be considered a measure of liquidity, an alternative to net income or an indicator of any other performance measure determined in accordance with GAAP. Investors and potential investors in our securities should not rely on this measure as a substitute for any GAAP measure, including net income.
The following table presents our Nareit FFO reconciliation for the years ended December 31, 2022, 2021 and 2020:
|
|
||||||||||
|
Year Ended December 31, |
||||||||||
|
|
|
2022 |
|
2021 |
|
2020 |
||||
|
(in thousands) |
||||||||||
|
Net income (1)(2) |
$ |
438,841 |
$ |
428,302 |
$ |
163,545 |
||||
|
Deduct gain from real estate dispositions |
(359,951) |
(161,609) |
(19,113) |
|||||||
|
Deduct gain from real estate dispositions - unconsolidated joint ventures |
|
(93) |
|
(14,880) |
|
(5,894) |
||||
|
|
78,797 |
|
251,813 |
|
138,538 |
|||||
|
Elimination of non-cash items included in net income: |
|
|
|
|
|
|
||||
|
Depreciation and amortization |
|
332,407 |
|
342,014 |
|
329,924 |
||||
|
Depreciation – unconsolidated joint ventures |
|
10,881 |
|
12,285 |
|
14,000 |
||||
|
Add back impairments on real estate properties |
38,451 |
44,658 |
72,494 |
|||||||
|
Add back impairments on real estate properties - unconsolidated joint ventures |
— |
4,430 |
— |
|||||||
|
Add back unrealized loss on warrants |
|
— |
|
43 |
|
988 |
||||
|
Nareit FFO |
$ |
460,536 |
$ |
655,243 |
$ |
555,944 |
||||
| (1) | The years ended December 31, 2022 and 2021 include the application of $11.0 million and $11.8 million, respectively, of security deposits (letter of credit and cash deposits) in revenue. |
| (2) | The year ended December 31, 2021 includes $21.3 million of revenue related to Gulf Coast recognized based on our ability to offset uncollected rent against the interest and principal of certain debt obligations of Omega. |
The $194.7 million decrease in Nareit FFO for the year ended December 31, 2022 compared to 2021 is primarily driven by the overall decrease in total revenue, which is discussed in more detail in the Results of Operations above.
41
Liquidity and Capital Resources
Sources and Uses
Our primary sources of cash include rental income and interest payment receipts on our loans, existing availability under our Revolving Credit Facility, proceeds from our DRSPP and the 2021 ATM Program, facility sales, and proceeds from mortgage and other investment payoffs. We anticipate that these sources will be adequate to meet our principal cash flow needs through the next twelve months, which include: funding dividends and distributions to our stockholders and non-controlling interest members, making debt service payments (including principal and interest), funding real estate investments (including facility acquisitions, capital improvement programs and other capital expenditures), funding new and committed loan investments and paying normal recurring G&A expenses (primarily consisting of employee payroll and benefits and expenses relating to third parties for legal, consulting and audit services).
Capital Structure
At December 31, 2022, we had total assets of $9.4 billion, total equity of $3.8 billion and total debt of $5.3 billion, with such debt representing approximately 58.4% of total capitalization.
Debt
At December 31, 2022, the weighted-average annual interest rate of our debt was 4.1%. Additionally, as of December 31, 2022, 98% of our debt with outstanding principal balances has fixed interest payments. Our high percentage of fixed interest debt has kept our interest expense relatively flat year over year despite rising interest rates. As of December 31, 2022, Omega’s debt obligations consisted of the following:
| ● | A $1.45 billion Revolving Credit Facility that bears interest at LIBOR (or in the case of loans denominated in GBP, the Sterling overnight index average reference rate plus an adjustment of 0.1193% per annum) plus an applicable percentage (with a range of 95 to 185 basis points) based on our credit ratings. The Revolving Credit Facility matures on April 30, 2025, subject to Omega’s option to extend such maturity date for two six-month periods. As of December 31, 2022, Omega had $19.2 million outstanding on the Revolving Credit Facility. |
| ● | A $50.0 million OP Term Loan that bears interest at LIBOR plus an applicable percentage (with a range of 85 to 185 basis points) based on our credit ratings. The OP Term Loan matures on April 30, 2025, subject to Omega OP’s option to extend such maturity date for two six-month periods. |
| ● | $4.9 billion of senior unsecured notes with staggered maturity dates in 2023, 2024, 2025, 2026, 2027, 2028, 2029, 2031 and 2033. These notes bear fixed interest rates between 3.25% and 5.25% per annum. |
| ● | $366.6 million of secured borrowings consisting of HUD Mortgages and two term loans. We had $344.7 million of outstanding HUD Mortgages as of December 31, 2022, with weighted average interest rates of 3.01% per annum that mature from 2046 to 2052. |
As of December 31, 2022, we had long-term credit ratings of Baa3 from Moody’s and BBB- from S&P Global and Fitch. Credit ratings impact our ability to access capital and directly impact our cost of capital as well. For example, our Revolving Credit Facility accrues interest and fees at a rate per annum equal to LIBOR plus a margin that depends upon our credit rating. A downgrade in credit ratings by Moody’s and S&P Global may have a negative impact on the interest rates and fees for our Revolving Credit Facility.
Our credit facilities that reference LIBOR contain customary LIBOR replacement language, including, but not limited to, the use of rates based on the secured overnight financing rate.
Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As of December 31, 2022 and 2021, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.
42
As of December 31, 2022 we have five forward starting swaps totaling $400 million that are indexed to 3-month LIBOR. We designated the forward starting swaps as cash flow hedges of interest rate risk associated with interest payments on a forecasted issuance of fixed rate long-term debt. The swaps are effective on August 1, 2023 and expire on August 1, 2033 and were issued at a weighted average fixed rate of approximately 0.8675%. The fair value associated with these swaps was $93.0 million as of December 31, 2022.
Equity
At December 31, 2022, we had 234.3 million shares of common stock outstanding and our shares had a market value of $6.5 billion. As of December 31, 2022, we had the following equity programs in place that we can utilize to raise capital:
| ● | The 2021 ATM Program under which shares of common stock having an aggregate gross sales price of up to $1.0 billion may be sold from time to time. The 2021 ATM Program has a forward sale provision that generally allows Omega to lock in a price on the sale of shares of common stock when sold by the forward sellers but defer receiving the net proceeds from such sales until the shares of our common stock are issued at settlement on a later date. We did not utilize the forward provisions under the 2021 ATM Program during 2022. We have $929.9 million of sales remaining under the 2021 ATM Program as of December 31, 2022. |
| ● | We have a DRSPP that allows for the reinvestment of dividends and the optional purchase of our common stock. |
Dividends
As a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders in an amount at least equal to (A) the sum of (i) 90% of our “REIT taxable income” (computed without regard to the dividends paid deduction and our net capital gain), and (ii) 90% of the net income (after tax), if any, from foreclosure property, minus (B) the sum of certain items of non-cash income. In addition, if we dispose of any built-in gain asset during a recognition period, we will be required to distribute at least 90% of the built-in gain (after tax), if any, recognized on the disposition of such asset. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for such year and paid on or before the first regular dividend payment after such declaration. In addition, such distributions are required to be made pro rata, with no preference to any share of stock as compared with other shares of the same class, and with no preference to one class of stock as compared with another class except to the extent that such class is entitled to such a preference. To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100% of our “REIT taxable income” as adjusted, we will be subject to tax thereon at regular corporate rates.
Material Cash Requirements
The following table shows our material cash requirements, described below, as of December 31, 2022:
|
|
|
Payments due by period |
|||||||||||||
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
More than |
||
|
|
|
Total |
|
1 year |
|
Years 2-3 |
|
Years 4-5 |
|
5 years |
|||||
|
|
|
(in thousands) |
|||||||||||||
|
Debt(1) |
|
$ |
5,335,865 |
|
$ |
359,898 |
|
$ |
905,185 |
|
$ |
1,317,191 |
|
$ |
2,753,591 |
|
Interest payments on long-term debt |
|
|
1,234,702 |
|
|
222,918 |
|
|
369,614 |
|
|
263,075 |
|
|
379,095 |
|
Operating lease and other obligations(2) |
|
|
43,889 |
|
|
1,992 |
|
|
4,090 |
|
|
3,389 |
|
|
34,418 |
|
Total |
|
$ |
6,614,456 |
|
$ |
584,808 |
|
$ |
1,278,889 |
|
$ |
1,583,655 |
|
$ |
3,167,104 |
| (1) | The $5.3 billion of debt outstanding includes: (i) $50 million under the OP Term Loan due April 2025, (ii) $350 million of 4.375% Senior Notes due August 2023, (iii) $400 million of 4.95% Senior Notes due April 2024, (iv) $400 million of 4.50% Senior Notes due January 2025, (v) $600 million of 5.25% Senior Notes due January 2026, (vi) $700 million of 4.5% Senior Notes due April 2027, (vii) $550 million of 4.75% Senior Notes due January 2028, (viii) $500 million of 3.625% Senior Notes due October 2029, (ix) $700 million of 3.375% Senior Notes due February 2031, (x) $700 million of 3.25% Senior Notes due April 2033, (xi) $2.2 million of 8.0% per annum debt held at a consolidated joint venture due February 2023, (xii) $19.8 million of 9.63% per annum debt held at a consolidated joint venture due February 2024 and (xiii) $344.7 million of HUD debt at a 3.01% weighted average interest rate due between 2046 and 2052. Other than the $50 million outstanding under the OP Term Loan, the $344.7 million of HUD debt and the $22.0 million of debt held at consolidated joint ventures, Parent is the obligor of all outstanding debt. |
| (2) | In connection with the adoption of Topic 842, we recognized lease liabilities in connection with ground and/or facility leases. Certain operators pay these obligations directly to the landlord. We recognize rental income for ground and/or facility leases where the operator reimburses us, or pays the obligation directly to the landlord on our behalf. |
43
Capital Expenditures and Funding Commitments
In addition to the obligations in the table above, as of December 31, 2022, we also had $210.9 million of commitments to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments. Additionally, we have commitments to fund $71.4 million of advancements under existing non-real estate loans. These commitments are expected to be funded over the next several years and are dependent upon the operators’ election to use the commitments.
Other Arrangements
We own interests in certain unconsolidated joint ventures as described in Note 11 to the Consolidated Financial Statements – Investments in Joint Ventures. Our risk of loss is generally limited to our investment in the joint venture and any outstanding loans receivable.
We also hold variable interests in certain unconsolidated entities through our loan and other investments. See disclosures regarding our risk of loss associated with these entities with Note 10 to the Consolidated Financial Statements – Variable Interest Entities.
We use derivative instruments to hedge interest rate and foreign currency exchange rate exposure as
discussed in Note 15 to the Consolidated Financial Statements – Derivatives and Hedging. We have seen
significant increases in fair value of our hedging instruments in 2022, primarily due to macroeconomic
factors impacting interest rates and foreign currency rates.
Cash Flow Summary
The following is a summary of our sources and uses of cash flows for the year ended December 31, 2022 as compared to the year ended December 31, 2021 (dollars in thousands):
|
Year Ended December 31, |
|||||||||
|
|
2022 |
|
2021 |
Increase/(Decrease) |
|||||
|
Net cash provided by (used in): |
|||||||||
|
Operating activities |
$ |
625,727 |
$ |
722,136 |
$ |
(96,409) |
|||
|
Investing activities |
|
442,853 |
|
(524,173) |
967,026 |
||||
|
Financing activities |
|
(789,447) |
|
(341,117) |
(448,330) |
||||
For a discussion of our consolidated cash flows for the year ended December 31, 2021 as compared to the year ended December 31, 2020, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2021 Form 10-K.
Cash, cash equivalents and restricted cash totaled $300.6 million as of December 31, 2022, an increase of $276.2 million as compared to the balance at December 31, 2021. The following is a discussion of changes in cash, cash equivalents and restricted cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows.
Operating
Activities –The decrease in
net cash provided by operating activities is primarily driven by a decrease of $144.9 million of net
income, net of $155.4 million of non-cash items, primarily due to a year over year reduction in rental
income and interest income, as discussed in our material changes analysis under Results of Operations
above. The decrease was partially offset by a $48.4 million change in the net movements of the operating
assets and liabilities.
44
Investing Activities –The change in cash used in investing activities related primarily to (i) a $440.5 million increase in proceeds from the sales of real estate investments driven by an attractive real estate market in which Omega elected to sell non-strategic assets, (ii) a $391.6 million decrease in real estate acquisitions, primarily related to the acquisition of 24 senior living facilities from Healthpeak in the first quarter of 2021, (iii) a $75.7 million decrease in capital improvements to real estate investments and construction in progress (including $68.0 million related to the purchase of a real estate property located in Washington, D.C. in the third quarter of 2021 that Omega, in conjunction with Maplewood, plans to redevelop), (iv) a $68.9 million increase in loan repayments, net of placements which is primarily driven by higher repayments in 2022 and (v) a $10.4 million decrease in investments in unconsolidated joint ventures primarily related to Second Spring II LLC, a new joint venture investment in 2021. Offsetting these changes were: (i) a $14.5 million decrease in distributions from unconsolidated joint ventures in excess of earnings primarily related to the Second Spring Healthcare Investments joint venture due to significant facility sales in the first quarter of 2021 and (ii) a $4.7 million decrease in receipts from insurance proceeds.
Financing Activities –The change in cash used in financing activities was primarily related to (i) a $265.9 million decrease in cash proceeds from the issuance of common stock in 2022 due to decreased issuances under our DRSPP and our 2021 ATM program, as compared to the same period in 2021, (ii) $142.3 million of repurchases of shares of common stock in 2022 as a result of implementing a $500 million repurchase program in January 2022, (iii) a $88.7 million decrease in proceeds from other long-term borrowings, net of repayments and (iv) a $9.6 million increase in redemptions of OP units, partially offset by (i) a $48.6 million decrease in payment of financing related costs due to fees and premiums paid in the first quarter of 2021 related to the early redemption of $350 million of principal of the 4.375% senior notes due 2023, (ii) a $4.8 million decrease in dividends paid primarily resulting from share repurchases throughout 2022 and (iii) a $4.7 million decrease in distributions to Omega OP Unit holders.
Supplemental Guarantor Information
Parent has issued approximately $4.9 billion aggregate principal of senior notes outstanding at December 31, 2022 that were registered under the Securities Act of 1933, as amended. The senior notes are guaranteed by Omega OP.
The SEC adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities, such as our senior notes. As a result of these amendments, registrants are permitted to provide certain alternative financial and non-financial disclosures, to the extent material, in lieu of separate financial statements for subsidiary issuers and guarantors of registered debt securities. Accordingly, separate consolidated financial statements of Omega OP have not been presented. Parent and Omega OP, on a combined basis, have no material assets, liabilities or operations other than financing activities (including borrowings under the senior unsecured revolving and term loan credit facility, Omega OP term loan and the outstanding senior notes) and their investments in non-guarantor subsidiaries.
Omega OP is currently the sole guarantor of our senior notes. The guarantees by Omega OP of our senior notes are full and unconditional and joint and several with respect to the payment of the principal and premium and interest on our senior notes. The guarantees of Omega OP are senior unsecured obligations of Omega OP that rank equal with all existing and future senior debt of Omega OP and are senior to all subordinated debt. However, the guarantees are effectively subordinated to any secured debt of Omega OP. As of December 31, 2022, there were no significant restrictions on the ability of Omega OP to make distributions to Omega.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. Our significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies to the Consolidated Financial Statements. These policies were followed in preparing the Consolidated Financial Statements for all periods presented. Actual results could differ from those estimates.
45
We have identified the following accounting policies that we believe are critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant assumptions, judgments and estimates. With respect to these critical accounting policies, we believe the application of assumptions, judgments and estimates is consistently applied and produces financial information that fairly presents the results of operations for all periods presented. The following table presents information about our critical accounting policies, as well as the material assumptions used to develop each estimate:
|
Nature of Critical Accounting Estimate |
Assumptions/Approach Used |
|
Revenue Recognition |
|
|
Rental income from our operating leases is generally recognized on a straight-line basis over the lease term when we have determined that the collectibility of substantially all of the lease payments are probable. If we determine that it is not probable that substantially all of the lease payments will be collected, we account for the revenue under the lease on a cash basis. |
We assess the probability of collecting substantially
all payments under our leases based on several factors, including, among other
things, payment history of the lessee, the financial strength of the lessee and any
guarantors, historical operations and operating trends, current and future economic
conditions and expectations of performance (which includes known substantial doubt
about an operator’s ability to continue as a going concern). If our evaluation of
these factors indicates it is probable that we will be unable to collect
substantially all rents, we place that operator on a cash basis and limit our rental
income to the lesser of lease income on a straight-line basis plus variable rents
when they become accruable or cash collected. As a result of placing an operator on
a cash basis, we may recognize a charge to rental income for any contractual rent
receivable, straight-line rent receivable and lease inducements. |
|
Real Estate Investment Impairment |
|
|
Assessing impairment of real property involves subjectivity in determining if indicators of impairment are present and in estimating the future undiscounted cash flows. The estimated future undiscounted cash flows are generally based on the related lease which relates to one or more properties and may include cash flows from the eventual disposition of the asset. In some instances, there may be various potential outcomes for a real estate investment and its potential future cash flows. In these instances, the undiscounted future cash flows used to assess the recoverability are probability-weighted based on management’s best estimates as of the date of evaluation. These estimates can have a significant impact on the undiscounted cash flows. |
We
evaluate our real estate investments for impairment indicators at each reporting period,
including the evaluation of our assets’ useful lives. The judgment regarding the
existence of impairment indicators is based on factors such as, but not limited to,
market conditions, operator performance including the current payment status of
contractual obligations and expectations of the ability to meet future contractual
obligations, legal structure, as well as our intent with respect to holding or disposing
of the asset. If indicators of impairment are present, we evaluate the carrying value of
the related real estate investments in relation to our estimate of future undiscounted
cash flows of the underlying facilities to determine if an impairment charge is
necessary. This analysis requires us to use judgment in determining whether indicators
of impairment exist, probabilities of potential outcomes and to estimate the expected
future undiscounted cash flows or estimated fair values of the facility which impact our
assessment of impairment, if any. |
46
|
Nature of Critical Accounting Estimate |
Assumptions/Approach Used |
|
Asset Acquisitions |
|
|
We believe that our real estate acquisitions are typically considered asset acquisitions. The assets acquired and liabilities assumed are recognized by allocating the cost of the acquisition, including transaction costs, to the individual assets acquired and liabilities assumed on a relative fair value basis. Tangible assets consist primarily of land, building and site improvements and furniture and equipment. Identifiable intangible assets and liabilities primarily consist of the above or below market component of in-place leases. |
The
allocation of the purchase price to the related real estate acquired (tangible assets
and intangible assets and liabilities) involves subjectivity as such allocations are
based on a relative fair value analysis. In determining the fair values that drive such
analysis, we estimate the fair value of each component of the real estate acquired which
generally includes land, buildings and site improvements, furniture and equipment, and
the above or below market component of in-place leases. Significant assumptions used to
determine such fair values include comparable land sales, capitalization rates, discount
rates, market rental rates and property operating data, all of which can be impacted by
expectations about future market or economic conditions. Our estimates of the values of
these components affect the amount of depreciation and amortization we record over the
estimated useful life of the property or the term of the lease. |
|
Allowance for Credit Losses on Real Estate Loans, Non-real Estate Loans and Direct Financing Leases |
|
|
For
purposes of determining our allowance for credit loss, we pool financial assets that
have similar risk characteristics. We aggregate our financial assets by financial
instrument type and by internal risk rating. Our internal ratings range between 1 and 7.
An internal rating of 1 reflects the lowest likelihood of loss and a 7 reflects the
highest likelihood of loss. |
We assess
our internal credit ratings on a quarterly basis. Our internal credit ratings consider
several factors including the collateral and/or security, the performance of borrowers
underlying facilities, if applicable, available credit support (e.g., guarantees),
borrowings with third parties, and other ancillary business ventures and real estate
operations of the borrower. |
Item 7A – Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We also use financial derivative instruments to hedge our interest rate exposure as well as our foreign currency exchange rate exposure. We do not enter into our market risk sensitive financial instruments and related derivative positions (if any) for trading or speculative purposes. The following disclosures discuss potential fluctuations in interest rates and foreign currency exchange rates and 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. Readers are cautioned that many of the statements contained in these paragraphs are forward-looking and should be read in conjunction with our disclosures under the heading “Forward-Looking Statements” set forth above. The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the estimates presented below are not necessarily indicative of the amounts we would realize in a current market exchange.
47
Interest Rate Risk
We borrow debt at a combination of variable and fixed rates. Movements in interest rates on our variable rate borrowings would change our future earnings and cash flows but not significantly affect the fair value of those instruments. During the year ended December 31, 2022, we incurred interest expense of $4.1 million related to variable rate borrowings outstanding under our Revolving Credit Facility, OP Term Loan and two other term loans. Assuming no changes in outstanding balances, a 1% increase in interest rates would not have significantly impacted the annual interest expense on our Revolving Credit Facility, OP Term Loan and two other term loans.
A change in interest rates will not affect the interest expense associated with our long-term fixed rate borrowings but will affect the fair value of our long-term fixed rate borrowings. The estimated fair value of our total long-term fixed-rate borrowings at December 31, 2022 was approximately $4.7 billion. A one percent increase in interest rates would result in a decrease in the fair value of long-term fixed-rate borrowings by approximately $212.0 million at December 31, 2022.
At December 31, 2022, we have $400 million of forward interest rate swaps outstanding that are recorded at fair value in other assets on our Consolidated Balance Sheets. The forward-starting swaps hedge the interest rate risk associated with interest payments on a forecasted issuance of fixed rate long-term debt.
Foreign Currency Risk
We are exposed to foreign currency risk through our investments in the U.K. Increases or decreases in the value of the British Pound Sterling relative to the U.S. Dollar impact the amount of net income we earn from our investments in the U.K. Based solely on our results for the year ended December 31, 2022, if the applicable exchange rate was to increase or decrease by 10%, our net income from our consolidated U.K.-based investments would increase or decrease, as applicable by $1.4 million.
To hedge a portion of our net investments in the U.K., at December 31, 2022, we have six foreign currency forward contracts with notional amounts totaling £250.0 million, four of which mature on March 8, 2024 and two of which mature on May 21, 2029.
Item 8 – Financial Statements and Supplementary Data
The consolidated financial statements listed under Item 15 – Exhibits and Financial Statement Schedules and the report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on such financial statements are filed as part of this report beginning on page F-1. There have been no retrospective changes to our Consolidated Statements of Operations for any of the quarters within the two most recent fiscal years that are individually or in the aggregate material.
Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of our Form 10-K as of and for the year ended December 31, 2022, management evaluated the effectiveness of the design and operation of disclosure controls and procedures of the Company as of December 31, 2022. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer of the Company concluded that the disclosure controls and procedures of the Company were effective at the reasonable assurance level as of December 31, 2022.
48
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
In connection with the preparation of this Form 10-K, our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making that assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (“2013 framework”). Based on management’s assessment, management believes that, as of December 31, 2022, the Company’s internal control over financial reporting was effective based on those criteria.
The independent registered public accounting firm’s attestation reports regarding the Company’s internal control over financial reporting is included in the 2022 financial statements under the caption entitled Report of Independent Registered Public Accounting Firm and is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2022 identified in connection with the evaluation of their disclosure controls and procedures described above that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Item 9B – Other Information
None.
Item 9C – Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable.
49
PART III
Item 10 – Directors, Executive Officers of the Registrant and Corporate Governance
The information required by this item is incorporated herein by reference to our Company’s definitive proxy statement for the 2023 Annual Meeting of Stockholders, to be filed with the SEC pursuant to Regulation 14A.
For information regarding executive officers of our Company, see Item 1 – Business – Information about our Executive Officers.
Code of Business Conduct and Ethics
We have adopted a written Code of Business Conduct and Ethics (“Code of Ethics”) that applies to all of our directors and employees, including our chief executive officer, chief financial officer, chief accounting officer and controller. A copy of our Code of Ethics is available on our website at www.omegahealthcare.com. Any amendment to our Code of Ethics or any waiver of our Code of Ethics that is required to be disclosed will be provided on our website at www.omegahealthcare.com promptly following the date of such amendment or waiver.
Item 11 – Executive Compensation
The information required by this item is incorporated herein by reference to our Company’s definitive proxy statement for the 2023 Annual Meeting of Stockholders, to be filed with the SEC pursuant to Regulation 14A.
Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to our Company’s definitive proxy statement for the 2023 Annual Meeting of Stockholders, to be filed with the SEC pursuant to Regulation 14A, except as set forth below.
The following table provides information about shares available for future issuance under our equity compensation plans as of December 31, 2022:
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
(a) |
|
(b) |
|
remaining available for |
|
|
|
|
Number of securities to |
|
Weighted-average |
|
future issuance under |
|
|
|
|
be issued upon exercise |
|
exercise price of |
|
equity compensation plans |
|
|
|
|
of outstanding options, |
|
outstanding options, |
|
excluding securities |
|
|
Plan category |
|
warrants and rights (1) |
|
warrants and rights (2) |
|
reflected in column (a) (3) |
|
|
Equity compensation plans approved by security holders |
|
4,145,974 |
|
$ |
— |
|
2,093,354 |
|
Equity compensation plans not approved by security holders |
|
— |
|
|
— |
|
— |
|
Total |
|
4,145,974 |
|
$ |
— |
|
2,093,354 |
| (1) | Reflects (i) 353,185 time-based restricted stock units (“RSUs”) and profit interest units (“PIUs”), (ii) 3,145,918 shares related to performance-based RSUs (“PRSUs”) and performance-based PIUs that could be issued if certain performance conditions are achieved and (iii) 646,871 shares in respect of outstanding deferred stock units. |
| (2) | No exercise price is payable with respect to the RSUs and PRSUs. |
| (3) | Reflects (i) 1,621,463 shares of common stock under our 2018 Stock Incentive Plan and (ii) 471,891 shares of common stock under the Omega Healthcare Investors, Inc. Employee Stock Purchase Plan. |
Item 13 – Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to our Company’s definitive proxy statement for the 2023 Annual Meeting of Stockholders, to be filed with the SEC pursuant to Regulation 14A.
Item 14 – Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to our Company’s definitive proxy statement for the 2023 Annual Meeting of Stockholders, to be filed with the SEC pursuant to Regulation 14A.
50
PART IV
Item 15 – Exhibits and Financial Statement Schedules
(a)(1) Listing of Consolidated Financial Statements
(a)(2) Financial Statement Schedules. The following consolidated financial statement schedules are included herein:
|
F-69 |
||
|
|
||
|
F-71 |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable or have been omitted because sufficient information has been included in the notes to the Consolidated Financial Statements.
(a)(3) Exhibits — See “Index to Exhibits” beginning on Page I-1 of this report.
Item 16 – Form 10-K Summary
None.
51
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Omega Healthcare Investors, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Omega Healthcare Investors, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 14, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-1
|
Collectibility of future lease payments |
|
|
Description of the Matter |
During 2022, the Company recognized rental income of $750.2 million and recorded straight-line rent and lease inducement receivables of $172.1 million at December 31, 2022. As described in Note 2 to the consolidated financial statements, the timing and pattern of rental income recognition for operating leases is affected by the Company’s determination as to whether the collectibility of substantially all lease payments is probable. Auditing the Company's accounting for rental income is complex due to the judgment involved in the Company’s determination of the collectibility of future lease payments. The determination involves consideration of the lessee’s payment history, an assessment of the financial strength of the lessee and any guarantors, where applicable, historical operations and operating trends, current and future economic conditions, and expectations of performance (which includes known substantial doubt about an operator’s ability to continue as a going concern). |
|
How We Addressed the Matter in Our Audit |
We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's controls over the recognition of rental income, including controls over management’s assessment of the collectibility of future lease payments. For example, we tested controls over management’s consideration of the factors used in assessing collectibility and controls over the completeness and accuracy of the data used in management’s analyses. To test the rental income recognized, we performed audit procedures that included, among others, evaluating the collectibility of future lease payments. For example, we assessed the lessee’s payment history, historical operating results of the properties, and factors contributing to the financial strength of the lessee, including current and future economic conditions, as well as management’s assessment of the expectation of performance of a sample of operators. We also considered whether other information obtained throughout the course of our audit procedures corroborated or contradicted management’s analysis. In addition, we tested the completeness and accuracy of the data that was used in management’s analyses. |
/s/
We have served as the Company’s auditor since 1992.
February 14, 2023
F-2
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Omega Healthcare Investors, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Omega Healthcare Investors, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Omega Healthcare Investors, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Omega Healthcare Investors, Inc. as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) and our report dated February 14, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Baltimore, Maryland
February 14, 2023
F-3
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
December 31, |
||||
|
|
2022 |
|
2021 |
||
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
Real estate assets |
|
|
|
|
|
|
Buildings and improvements |
$ |
|
|
$ |
|
|
Land |
|
|
|
|
|
|
Furniture and equipment |
|
|
|
|
|
|
Construction in progress |
|
|
|
|
|
|
Total real estate assets |
|
|
|
|
|
|
Less accumulated depreciation |
|
( |
|
|
( |
|
Real estate assets – net |
|
|
|
|
|
|
Investments in direct financing leases – net |
|
|
|
|
|
|
Real estate loans receivable – net |
|
|
|
|
|
|
Investments in unconsolidated joint ventures |
|
|
|
|
|
|
Assets held for sale |
|
|
|
|
|
|
Total real estate investments |
|
|
|
|
|
|
Non-real estate loans receivable – net |
|
|
|
|
|
|
Total investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
Restricted cash |
|
|
|
|
|
|
Contractual receivables – net |
|
|
|
|
|
|
Other receivables and lease inducements |
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
Total assets |
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
Revolving credit facility |
$ |
|
|
$ |
— |
|
Secured borrowings |
|
|
|
|
|
|
Senior notes and other unsecured borrowings – net |
|
|
|
|
|
|
Accrued expenses and other liabilities |
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
Preferred stock $ |
|
|
|
|
|
|
Common stock $ |
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
Cumulative net earnings |
|
|
|
|
|
|
Cumulative dividends paid |
|
( |
|
|
( |
|
Accumulated other comprehensive income (loss) |
|
|
|
|
( |
|
Total stockholders’ equity |
|
|
|
|
|
|
Noncontrolling interest |
|
|
|
|
|
|
Total equity |
|
|
|
|
|
|
Total liabilities and equity |
$ |
|
|
$ |
|
See accompanying notes.
F-4
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
|
Year Ended December 31, |
||||||||
|
|
|
2022 |
|
2021 |
|
2020 |
|||
|
Revenues |
|||||||||
|
Rental income |
$ |
|
$ |
|
$ |
|
|||
|
Income from direct financing leases |
|
|
|
|
|
|
|||
|
Interest income |
|
|
|
|
|
|
|||
|
Miscellaneous income |
|
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|
|||
|
Total revenues |
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|
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||
|
|
|
|
|||||||
|
Expenses |
|
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|
|
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|
||
|
Depreciation and amortization |
|
|
|
|
|
|
|||
|
General and administrative |
|
|
|
|
|
|
|||
|
Real estate taxes |
|
|
|
||||||
|
Acquisition, merger and transition related costs |
|
|
|
|
|
|
|||
|
Impairment on real estate properties |
|
|
|
|
|
|
|||
|
Recovery on direct financing leases |
|
— |
|
( |
|
( |
|||
|
Provision for credit losses |
|
|
|
|
|
|
|||
|
Interest expense |
|
|
|
|
|
|
|||
|
Total expenses |
|
|
|
|
|
|
|
||
|
|
|
|
|||||||
|
Other income (expense) |
|
|
|
|
|
|
|
||
|
Other expense – net |
|
( |
|
( |
|
( |
|||
|
Loss on debt extinguishment |
|
( |
|
( |
|
( |
|||
|
Gain on assets sold – net |
|
|
|
||||||
|
Total other income |
|
|
|
|
|
|
|
||
|
|
|
|
|||||||
|
Income before income tax expense and income from unconsolidated joint ventures |
|
|
|
|
|
|
|
||
|
Income tax expense |
|
( |
|
( |
|
( |
|||
|
Income from unconsolidated joint ventures |
|
|
|
|
|
|
|||
|
Net income |
|
|
|
|
|
|
|
||
|
Net income attributable to noncontrolling interest |
|
( |
|
( |
|
( |
|||
|
Net income available to common stockholders |
$ |
|
$ |
|
|
$ |
|
||
|
|
|
|
|||||||
|
Earnings per common share available to common stockholders: |
|
|
|
|
|
|
|
||
|
Basic: |
|
|
|
|
|
|
|
||
|
Net income available to common stockholders |
$ |
|
$ |
|
$ |
|
|||
|
Diluted: |
|
|
|
|
|
|
|||
|
Net income |
$ |
|
$ |
|
$ |
|
|||
See accompanying notes.
F-5
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|||||||
|
|
|
2022 |
|
2021 |
|
2020 |
|||
|
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
( |
|
|
( |
|
|
|
|
Cash flow hedges |
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interest |
|
|
( |
|
|
( |
|
|
( |
|
Comprehensive income attributable to common stockholders |
|
$ |
|
|
$ |
|
|
$ |
|
See accompanying notes.
F-6
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
Additional |
|
Cumulative |
|
|
|
|
Other |
|
Total |
|
|
|
|
|
|
|||||
|
|
|
Stock |
|
Paid‑in |
|
Net |
|
Cumulative |
|
Comprehensive |
|
Stockholders’ |
|
Noncontrolling |
|
Total |
||||||||
|
|
|
Par Value |
|
Capital |
|
Earnings |
|
Dividends |
|
Income (Loss) |
|
Equity |
|
Interest |
|
Equity |
||||||||
|
Balance at December 31, 2019 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
|
$ |
( |
|
$ |
|
|
$ |
|
|
$ |
|
|
Cumulative effect of accounting change (see Note 2) |
|
|
— |
|
|
— |
|
|
( |
|
|
— |
|
|
— |
|
|
( |
|
|
( |
|
|
( |
|
Balance at January 1, 2020 |
|
|
|
|
|
|
|
|
|
|
|
( |
|
|
( |
|
|
|
|
|
|
|
|
|
|
Stock related compensation |
|
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Common dividends declared ($ |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
— |
|
|
( |
|
|
— |
|
|
( |
|
Vesting/exercising of OP units |
|
|
— |
|
|
( |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
|
|
|
— |
|
Conversion and redemption of Omega OP Units to common stock |
|
|
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
( |
|
|
— |
|
Omega OP Units distributions |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
( |
|
Other comprehensive income |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
( |
|
|
( |
|
|
|
|
|
|
|
|
|
|
Stock related compensation |
|
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Common dividends declared ($ |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
— |
|
|
( |
|
|
— |
|
|
( |
|
Vesting/exercising of OP units |
|
|
— |
|
|
( |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
|
|
|
— |
|
Conversion and redemption of Omega OP Units to common stock |
|
|
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
( |
|
|
( |
|
Omega OP Units distributions |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
( |
|
Other comprehensive income |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
( |
|
|
( |
|
|
|
|
|
|
|
|
|
|
Stock related compensation |
|
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Repurchase of common stock |
|
|
( |
|
|
( |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
— |
|
|
( |
|
Common dividends declared ($ |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
— |
|
|
( |
|
|
— |
|
|
( |
|
Vesting/exercising of OP units |
|
|
— |
|
|
( |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
|
|
|
— |
|
Conversion and redemption of Omega OP Units to common stock |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
( |
|
Omega OP Units distributions |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
( |
|
Capital contributions from noncontrolling holder in consolidated JV |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
Other comprehensive income |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
See accompanying notes.
F-7
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
Year Ended December 31, |
|||||||
|
|
|
2022 |
|
2021 |
|
2020 |
|||
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
Adjustment to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
Impairment on real estate properties |
|
|
|
|
|
|
|
|
|
|
Recovery on direct financing leases |
|
|
— |
|
|
( |
|
|
( |
|
Provision for rental income |
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
Amortization of deferred financing costs and loss on debt extinguishment |
|
|
|
|
|
|
|
|
|
|
Accretion of direct financing leases |
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
Gain on assets sold – net |
|
|
( |
|
|
( |
|
|
( |
|
Amortization of acquired in-place leases – net |
|
|
( |
|
|
( |
|
|
( |
|
Effective yield payable (receivable) on mortgage notes |
|
|
|
|
|
|
|
|
( |
|
Interest paid-in-kind |
|
|
( |
|
|
( |
|
|
( |
|
Income from unconsolidated joint ventures |
|
|
|
|
|
( |
|
|
( |
|
Change in operating assets and liabilities – net: |
|
|
|
|
|
|
|
|
|
|
Contractual receivables |
|
|
|
|
|
( |
|
|
|
|
Straight-line rent receivables |
|
|
( |
|
|
( |
|
|
( |
|
Lease inducements |
|
|
|
|
|
( |
|
|
( |
|
Other operating assets and liabilities |
|
|
|
|
|
( |
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
Acquisition of a business, net of cash acquired |
|
|
— |
|
|
— |
|
|
( |
|
Acquisition of real estate |
|
|
( |
|
|
( |
|
|
( |
|
Acquisition deposit - net |
|
|
— |
|
|
( |
|
|
( |
|
Net proceeds from sale of real estate investments |
|
|
|
|
|
|
|
|
|
|
Investments in construction in progress |
|
|
( |
|
|
( |
|
|
( |
|
Proceeds from sale of direct financing lease and related trust |
|
|
— |
|
|
|
|
|
|
|
Placement of loan principal |
|
|
( |
|
|
( |
|
|
( |
|
Collection of loan principal |
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated joint ventures |
|
|
( |
|
|
( |
|
|
( |
|
Distributions from unconsolidated joint ventures in excess of earnings |
|
|
|
|
|
|
|
|
|
|
Capital improvements to real estate investments |
|
|
( |
|
|
( |
|
|
( |
|
Receipts from insurance proceeds |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
|
|
|
( |
|
|
( |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term borrowings |
|
|
|
|
|
|
|
|
|
|
Payments of long-term borrowings |
|
|
( |
|
|
( |
|
|
( |
|
Payments of financing related costs |
|
|
( |
|
|
( |
|
|
( |
|
Net proceeds from issuance of common stock |
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock |
|
|
( |
|
|
— |
|
|
— |
|
Dividends paid |
|
|
( |
|
|
( |
|
|
( |
|
Noncontrolling members’ contributions to consolidated joint venture |
|
|
|
|
|
— |
|
|
— |
|
Redemption of Omega OP Units |
|
|
( |
|
|
( |
|
|
— |
|
Distributions to Omega OP Unit Holders |
|
|
( |
|
|
( |
|
|
( |
|
Net cash used in financing activities |
|
|
( |
|
|
( |
|
|
( |
|
Effect of foreign currency translation on cash, cash equivalents and restricted cash |
|
|
( |
|
|
|
|
|
|
|
Increase (decrease) in cash, cash equivalents and restricted cash |
|
|
|
|
|
( |
|
|
|
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
|
|
$ |
|
|
$ |
|
See accompanying notes.
F-8
NOTE 1 - ORGANIZATION
Omega Healthcare Investors, Inc. (“Parent”), is a Maryland corporation that, together with its consolidated subsidiaries (collectively, “Omega”, the “Company”, “we”, “our”, “us”) invests in healthcare-related real estate properties located in the United States (“U.S.”) and the United Kingdom (“U.K.”). Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), and to a lesser extent, independent living facilities (“ILFs”), rehabilitation and acute care facilities (“specialty facilities”) and medical office buildings (“MOBs”). Our core portfolio consists of our long-term “triple-net” leases and real estate loans with healthcare operating companies and affiliates (collectively, our “operators”). In addition to our core investments, we make loans to operators and/or their principals. From time to time, we also acquire equity interests in joint ventures or entities that support the long-term healthcare industry and our operators.
Omega has elected to be taxed as a real estate investment trust (“REIT”) for federal income
tax purposes and is structured as an umbrella partnership REIT (“UPREIT”) under which all of Omega's
assets are owned directly or indirectly by, and all of Omega's operations are conducted directly or
indirectly through, its operating partnership subsidiary, OHI Healthcare Properties Limited
Partnership (collectively with subsidiaries, “Omega OP”). Omega has exclusive control over Omega
OP’s day-to-day management pursuant to the partnership agreement governing Omega OP. As of December
31, 2022, Parent owned approximately
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Consolidation
Omega’s consolidated financial statements include the accounts of (i) Parent, (ii) all direct and indirect wholly-owned subsidiaries of Omega, including Omega OP, (iii) other entities in which Omega or Omega OP has a majority voting interest and control and (iv) variable interest entities (“VIEs”) of which Omega is the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation, and Omega’s net earnings are reduced by the portion of net earnings attributable to noncontrolling interests.
GAAP requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise, if any, is the primary beneficiary of VIEs. A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. We may change our original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affects the characteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary.
Our variable interests in VIEs may be in the form of equity ownership, leases, guarantees and/or loans with our operators. We analyze our agreements and investments to determine whether our operators or unconsolidated joint ventures are VIEs and, if so, whether we are the primary beneficiary.
F-9
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
We consolidate a VIE when we determine that we are its primary beneficiary. We identify
the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the
activities of the VIE that most significantly impact the entity’s economic performance; and (ii)
the obligation to absorb losses or the right to receive benefits of the VIE that could be
significant to the entity. Factors considered in determining whether we are the primary
beneficiary of an entity include: (i) our voting rights, if any; (ii) our involvement in
day-to-day capital and operating decisions; (iii) our risk and reward sharing; (iv) the
financial condition of the operator or joint venture and (iv) our representation on the VIE’s
board of directors. We perform this analysis on an ongoing basis. As of December 31, 2022, we
have
Revenue Recognition
Rental Income
Rental income from operating leases is recognized on a straight-line basis, inclusive
of fixed annual escalators and lease inducements, over the lease term when we have determined
that the collectibility of substantially all of the lease payments is probable. Certain of our
operating leases contain provisions for an increase based on the change in pre-determined
formulas from year to year (e.g., increases in the Consumer Price Index). We do not include in
our measurement of our lease receivables these variable increases until the specific events that
trigger the variable payments have occurred. Our leased real estate properties are leased under
provisions of single or master leases with initial terms typically ranging from
We assess the probability of collecting substantially all payments due under our leases on several factors, including, among other things, payment history, the financial strength of the lessee and any guarantors, as applicable, historical operations and operating trends, current and future economic conditions, and expectations of performance (which includes known substantial doubt about an operator’s ability to continue as a going concern). If our evaluation of these factors indicates it is probable that we will be unable to collect substantially all rents, we recognize a charge to rental income to write off straight-line rent receivables and limit our rental income to the lesser of lease income on a straight-line basis plus variable rents when they become accruable or cash collected. Provisions for uncollectible lease payments are recognized as a direct reduction to rental income. If we change our conclusion regarding the probability of collecting rent payments required by a lessee, we may recognize an adjustment to rental income in the period we make a change to our prior conclusion, potentially resulting in increased volatility of rental income.
Under the terms of our leases, the lessee is responsible for all maintenance, repairs, taxes and insurance on the leased properties. Certain of our operating leases require the operators to reimburse us for property taxes and other expenditures that are not considered components of the lease and therefore no consideration is allocated to them as they do not result in the transfer of a good or service to the operators. We have determined that all of our leases qualify for the practical expedient, under Accounting Standards Codification (“ASC”) 842, Leases (“Topic 842”), to not separate the lease and non-lease components because (i) the lease components are operating leases and (ii) the timing and pattern of recognition of the non-lease components are the same as the lease components.
Certain operators are obligated to pay directly their obligations under their leases for real estate taxes, insurance and certain other expenses. These obligations, which have been assumed by the tenants under the terms of their respective leases, are not reflected in our consolidated financial statements. To the extent any tenant responsible for these obligations under their respective lease defaults on its lease or if it is deemed probable that the tenant will fail to pay for such costs, we would record a liability for such obligation.
We have elected to exclude sales and other similar taxes from the measurement of lease revenue and expense.
F-10
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
Loan Interest Income
Interest income is recognized as earned over the term of the related real estate and non-real estate loans receivable. Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected using the effective interest method. In applying the effective interest method, the effective yield on a loan is determined based on its contractual payment terms, adjusted for prepayment terms.
Direct Financing Lease Income
As of December 31, 2022, we have
Real Estate Sales
We recognize gains on the disposition of real estate when the recognition criteria have been met, generally at the time the risks and rewards and title have transferred, and we no longer have substantial continuing involvement with the real estate sold. Gains on the sale of real estate are recognized pursuant to provisions under Accounting Standards Codification (“ASC”) 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets. Under ASC 610-20, we determine whether the transaction is a sale to a customer or non-customer. As a REIT, we do not sell real estate within the ordinary course of our business and therefore, expect that our sale transactions will not be contracts with customers. ASC 610-20 refers to the revenue recognition principles under ASC 606, Revenue from Contracts with Customers. Under ASC 610-20, if we determine we do not have a controlling financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, we will dispose of the asset and recognize a gain or loss on the sale of the real estate when control of the underlying asset transfers to the buyer. If we determine a sale has not occurred under ASC 610-20, we continue to record the asset on the Consolidated Balance Sheets and related depreciation expense on the Consolidated Statements of Operations.
Fair Value Measurement
The Company measures and discloses the fair value of nonfinancial and financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy:
| ● | Level 1 - quoted prices for identical instruments in active markets; |
| ● | Level 2 - quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and |
| ● | Level 3 - fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
The Company measures fair value using a set of standardized procedures that are outlined herein for all assets and liabilities which are required to be measured at fair value. When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and classifies such items in Level 1. In some instances where a market price is available, but the instrument is in an inactive or over-the-counter market, the Company consistently applies the dealer (market maker) pricing estimate and classifies such items in Level 2.
F-11
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
If quoted market prices or inputs are not available, fair value measurements are based upon valuation models that utilize current market or independently sourced market inputs, such as interest rates, option volatilities, credit spreads and/or market capitalization rates. Items valued using such internally-generated valuation techniques are classified according to the lowest level input that is significant to the fair value measurement. As a result, these items could be classified in either Level 2 or Level 3 even though there may be some significant inputs that are readily observable. Internal fair value models and techniques used by the Company include discounted cash flow and Monte Carlo valuation models.
Risks and Uncertainties including COVID-19
The Company is subject to certain risks and uncertainties affecting the healthcare industry, including those stemming from the novel coronavirus (“COVID-19”) global pandemic, which has disproportionately impacted the senior care sector, as well as those stemming from healthcare legislation and changing regulation by federal, state and local governments. Additionally, we are subject to risks and uncertainties as a result of changes affecting operators of nursing home facilities due to the actions of governmental agencies and insurers to limit the rising cost of healthcare services.
Real Estate Acquisitions
Upon acquisition of real estate properties, we evaluate the acquisition to determine if it is a business combination or an asset acquisition. Our real estate acquisitions are generally accounted for as asset acquisitions as substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets.
If the acquisition is determined to be an asset acquisition, the Company records the purchase price and other related costs incurred to the acquired tangible assets and identified intangible assets and liabilities on a relative fair value basis. In addition, costs incurred for asset acquisitions including transaction costs, are capitalized.
If the acquisition is determined to be a business combination, we record the purchase of properties to net tangible and identified intangible assets acquired and liabilities assumed at fair value. Goodwill is measured as the excess of the fair value of the consideration transferred over the fair value of the identifiable net assets. Transaction costs are expensed as incurred as part of a business combination.
In making estimates of fair value for purposes of recording asset acquisitions and business combinations, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company determines the fair value of acquired assets and liabilities as follows:
| ● | Land is determined based on third-party appraisals which typically include market comparables. |
| ● | Buildings and site improvements acquired are valued using a combination of discounted cash flow projections that assume certain future revenues and costs and consider capitalization and discount rates using current market conditions as well as the residual approach. |
| ● | Furniture and fixtures are determined based on third-party appraisals which typically utilize a replacement cost approach. |
| ● | Mortgages and other investments are valued using a discounted cash flow analysis, using interest rates being offered for similar loans to borrowers with similar credit ratings. |
| ● | Investments in joint ventures are valued based on the fair value of the joint ventures’ assets and liabilities. Differences, if any, between the Company’s basis and the joint venture’s basis are generally amortized over the lives of the related assets and liabilities, and such amortization is included in the Company’s share of earnings (losses) of the joint venture. |
| ● | Intangible assets and liabilities acquired are valued using a combination of discounted cash flow projections as well as other valuation techniques based on current market conditions for the intangible asset or liability being acquired. When evaluating below market leases we consider extension options controlled by the lessee in our evaluation. |
F-12
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
| ● | Other assets acquired and liabilities assumed are typically valued at stated amounts, which approximate fair value on the date of the acquisition. |
| ● | Assumed debt balances are valued by discounting the remaining contractual cash flows using a current market rate of interest. |
| ● | Noncontrolling interests are valued using a stock price on the acquisition date. |
Real Estate Properties
Real estate properties are carried at initial recorded value less accumulated
depreciation. The costs of significant improvements, renovations and replacements, including
interest are capitalized. Our interest expense reflected in the Consolidated Statements of
Operations has been reduced by the amounts capitalized. For the years ended
December 31, 2022, 2021 and 2020, we capitalized $
Depreciation is computed on a
Management evaluates our real estate properties for impairment indicators at each reporting period, including the evaluation of our assets’ useful lives. The judgment regarding the existence of impairment indicators is based on factors such as, but not limited to, market conditions, operator performance including the current payment status of contractual obligations and expectations of the ability to meet future contractual obligations, legal structure, as well as our intent with respect to holding or disposing of the asset. If indicators of impairment are present, management evaluates the carrying value of the related real estate investments in relation to management’s estimate of future undiscounted cash flows of the underlying facilities. The estimated future undiscounted cash flows are generally based on the related lease which relates to one or more properties and may include cash flows from the eventual disposition of the asset. In some instances, there may be various potential outcomes for a real estate investment and its potential future cash flows. In these instances, the undiscounted future cash flows used to assess the recoverability of the assets are probability-weighted based on management’s best estimates as of the date of evaluation. Impairment losses related to long-lived assets are recognized when expected future undiscounted cash flows based on our intended use of the property are determined to be less than the carrying values of the assets. An adjustment is made to the net carrying value of the real estate investments for the excess of carrying value over fair value. The fair value of the real estate investment is determined based on current market conditions and considers matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties, and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. Additionally, our evaluation of fair value may consider valuing the property as a nursing home or other healthcare facility as well as alternative uses. All impairments are taken as a period cost at that time, and depreciation is adjusted going forward to reflect the new value assigned to the asset. Management’s impairment evaluation process, and when applicable, impairment calculations involve estimation of the future cash flows from management’s intended use of the property as well as the fair value of the property. Changes in the facts and circumstances that drive management’s assumptions may result in an impairment to our assets in a future period that could be material to our results of operations.
Assets Held for Sale
We consider properties to be assets held for sale when (1) management commits to a plan to sell the property; (2) it is unlikely that the disposal plan will be significantly modified or discontinued; (3) the property is available for immediate sale in its present condition; (4) actions required to complete the sale of the property have been initiated; (5) sale of the property is probable and we expect the completed sale will occur within one year; and (6) the property is actively being marketed for sale at a price that is reasonable given our estimate of current market value. Upon designation of a property as an asset held for sale, we record the property’s value at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and we cease depreciation.
F-13
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
Lessee Accounting
Omega leases real estate (corporate headquarters and certain other facilities), office equipment and is party to certain ground leases on our owned facilities. We determine if an arrangement is or contains a lease at inception. Leases are classified as either finance or operating at inception of the lease. Short-term leases, defined as leases with an initial term of 12 months or less that do not contain a purchase option, are not recorded on the balance sheet. Lease expense for short-term leases is recognized on a straight-line basis over the lease term. As of December 31, 2022 and 2021, all of the leases where we are the lessee were classified as operating leases.
We have leases that contain both lease and non-lease components and have elected, as an accounting policy, to not separate lease components and non-lease components. Operating and finance lease right-of-use ("ROU") assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Our ROU assets and lease liabilities are included in other assets and accrued expenses and other liabilities, respectively, on our Consolidated Balance Sheets. The lease liability is calculated as the present value of the remaining minimum rental payments for existing leases using either the rate implicit in the lease or, if none exists, the Company's incremental borrowing rate, as the discount rate. Certain leases have options to extend, terminate or purchase the asset and have been considered in our analysis of the lease term and the measurement of the ROU assets and lease liabilities.
On a quarterly basis, we record our lease liabilities at the present value of the future lease payments using the discount rate determined at lease commencement. Rental expense from operating leases is generally recognized on a straight-line basis over the lease term. Lease expense derived from our operating leases is recorded in general and administrative in our Consolidated Statements of Operations. We do not include in our measurement of our lease liability certain variable payments, including changes in an index until the specific events that trigger the variable payments have occurred.
We record on a straight-line basis rental income and ground lease expense for those assets we lease and are reimbursed by our operators and/or are paid for directly by our operators.
In-Place Leases
In-place lease assets and liabilities result when we assume a lease as part of an asset acquisition or business combination. The fair value of in-place leases consists of the following components, as applicable (1) the estimated cost to replace the leases and (2) the above or below market cash flow of the leases, determined by comparing the projected cash flows of the leases in place at the time of acquisition to projected cash flows of comparable market-rate leases.
Above market leases, net of accumulated amortization, are included in other assets on our Consolidated Balance Sheets. Below market leases, net of accumulated amortization, are included in accrued expenses and other liabilities on our Consolidated Balance Sheets. The net amortization related to the above and below market leases is included in our Consolidated Statements of Operations as an adjustment to rental income over the estimated remaining term of the underlying leases. Should a tenant terminate the lease, the unamortized portion of the lease intangible is recognized immediately as an adjustment to rental income.
Allowance for Credit Losses
The allowance for credit losses reflects our current estimate of the potential credit losses on our real estate loans, non-real estate loans, and our investment in direct financing leases and is recorded as a valuation account as a direct offset against these financial instruments on our Consolidated Balance Sheets. Expected credit losses inherent in non-cancelable unfunded loan commitments are accounted for as separate liabilities included in accrued expenses and other liabilities on the Consolidated Balance Sheets. The Company has elected to not measure an allowance for credit losses on accrued interest receivables related to all of its real estate loans and non-real estate loans because we write off uncollectible accrued interest receivable in a timely manner pursuant to our non-accrual policy, described below. Changes to the allowance for credit losses on loans resulting from quarterly evaluations are recorded through provision for credit losses on the Consolidated Statements of Operations.
F-14
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
We assess the creditworthiness of our borrowers on a quarterly basis. For purposes of determining our allowance for credit loss, we pool financial assets that have similar risk characteristics. We aggregate our financial assets by financial instrument type (i.e. real estate loan, non-real estate loan, etc.) and by our internal risk rating. Our internal credit ratings consider several factors including the collateral and/or security, the performance of borrowers underlying facilities, if applicable, available credit support (e.g., guarantees), borrowings with third parties, and other ancillary business ventures and real estate operations of the borrower. Our internal ratings range between 1 and 7. An internal rating of 1 reflects the lowest likelihood of loss and a 7 reflects the highest likelihood of loss. The characteristics associated with each risk rating is as follows:
| ● | Risk Rating 1 through 3 – Instruments with minimal to marginally acceptable risk. |
| ● | Risk Rating 4 - Instruments with potential weaknesses identified (Special mention). |
| ● | Risk Rating 5 - Instruments with well-defined weaknesses that may result in possible losses (Substandard). |
| ● | Risk Rating 6 – Instruments that are unlikely to be repaid in full and will probably result in losses (Doubtful). |
| ● | Risk Rating 7 – Instrument that will not be repaid in full and losses will occur (Loss). |
We have a limited history of incurred losses and consequently have elected to employ external data to perform our expected credit loss calculation. We utilize a probability of default (“PD”) and loss given default (“LGD”) methodology. Our model’s historic inputs consider PD and LGD data for residential care facilities published by the Federal Housing Administration along with Standards & Poor’s one-year global corporate default rates. Our historical loss rates revert to historical averages after 36 months. Our model’s current conditions and supportable forecasts consider internal credit ratings, current and projected U.S. unemployment rates published by the U.S. Bureau of Labor Statistics and the Federal Reserve Bank of St. Louis and the weighted average life to maturity of the underlying financial asset.
Periodically, the Company may identify an individual loan for impairment. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due as scheduled according to the contractual terms of the loan agreements. Our assessment of collectibility considers several factors, including, among other things, payment history, the financial strength of the borrower and any guarantors, historical operations and operating trends, current and future economic conditions, expectations of performance (which includes known substantial doubt about an operator’s ability to continue as a going concern) and the fair value of the underlying collateral of the agreement, a Level 3 measurement, if any. Consistent with this definition, all loans on non-accrual status may be deemed impaired. To the extent circumstances improve and the risk of collectibility is diminished, we will return these loans to full accrual status. When we identify a loan impairment, the loan is written down to the present value of the expected future cash flows or to the fair value of the underlying collateral. Financial instruments are charged off against the allowance for credit losses when collectibility is determined to be permanently impaired.
We account for impaired loans using (a) the cost-recovery method, and/or (b) the cash basis method. We generally utilize the cost-recovery method for impaired loans for which impairment reserves were recorded. Under the cost-recovery method, we apply cash received against the outstanding loan balance prior to recording interest income. Under the cash basis method, we apply cash received to principal or interest income based on the terms of the agreement.
Investments in Unconsolidated Joint Ventures
We account for our investments in unconsolidated joint ventures using the equity method of accounting as we exercise significant influence, but do not control the entities.
Under the equity method of accounting, the net equity investments of the Company are reflected in the accompanying Consolidated Balance Sheets and the Company’s share of net income and comprehensive income from the joint ventures are included in the accompanying Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income, respectively.
F-15
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
On a periodic basis, management assesses whether there are any indicators that the value of the Company’s investments in the unconsolidated joint ventures may be other-than-temporarily-impaired. An investment is impaired only if management’s estimate of the value of the investment is less than the carrying value of the investment, and such a decline in value is deemed to be other than-temporary. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the investment over the estimated fair value of the investment. The estimated fair value of the investment is determined using a discounted cash flow model which is a Level 3 valuation. We consider a number of assumptions that are subject to economic and market uncertainties including, among others, rental rates, operating costs, capitalization rates, holding periods and discount rates.
Cash and Cash Equivalents
Cash and cash equivalents consist
of cash on hand and highly liquid investments with a maturity date of three months or less
when purchased. These investments are stated at cost, which approximates fair value. The
majority of our cash, cash equivalents and restricted cash are held at major commercial
banks. Certain cash account balances exceed FDIC insurance limits of $
Restricted Cash
Restricted cash consists primarily of liquidity deposits escrowed for tenant obligations required by us pursuant to certain contractual terms and other deposits required by the U.S. Department of Housing and Urban Development (“HUD”) in connection with our mortgage borrowings guaranteed by HUD.
Deposits
We obtain liquidity deposits and other deposits, security deposits and letters of
credit from certain operators pursuant to our lease and mortgage agreements. These generally
represent the rental and/or mortgage interest for periods ranging from
to
The liquidity deposits and other deposits, security deposits and the letters of credit may be used in the event of lease and/or loan defaults, subject to applicable limitations under bankruptcy law with respect to operators filing under Chapter 11 of the U.S. Bankruptcy Code. Liquidity deposits and other deposits are recorded as restricted cash on our Consolidated Balance Sheets with the offset recorded as a liability in accrued expenses and other liabilities on our Consolidated Balance Sheets. Security deposits related to cash received from the operators are primarily recorded in cash and cash equivalents on our Consolidated Balance Sheets with a corresponding offset in accrued expenses and other liabilities on our Consolidated Balance Sheets. Additional security for rental and loan interest revenue from operators is provided by covenants regarding minimum working capital and net worth, liens on accounts receivable and other operating assets of the operators, provisions for cross-default, provisions for cross-collateralization and by corporate or personal guarantees.
F-16
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
Goodwill Impairment
We test goodwill for potential impairment at least annually in the fourth quarter, or more frequently if an event or other circumstance indicates that we may not be able to recover the carrying amount of the net assets of the reporting unit. In evaluating goodwill for impairment, we may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we bypass the qualitative assessment, or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we perform a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount.
In evaluating goodwill for impairment, we assess qualitative factors such as a
significant decline in real estate valuations, current macroeconomic conditions, state of the
equity and capital markets and our overall financial and operating performance or a significant
decline in the value of our market capitalization, to determine whether it is more likely than
not that the fair value of our reporting unit is less than its carrying amount. Goodwill is not
deductible for tax purposes. We have had
Income Taxes
Omega and its wholly-owned subsidiaries were organized to qualify for taxation as a REIT under Section 856 through 860 of the Internal Revenue Code (“Code”). As long as we qualify as a REIT, we will not be subject to federal income taxes on the REIT taxable income that we distributed to stockholders, subject to certain exceptions. However, with respect to certain of our subsidiaries that have elected to be treated as taxable REIT subsidiaries (“TRSs”), we record income tax expense or benefit, as those entities are subject to federal income tax similar to regular corporations. Omega OP is a pass-through entity for U.S. federal income tax purposes.
We account for deferred income taxes using the asset and liability method and recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our financial statements or tax returns. Under this method, we determine deferred tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Any increase or decrease in the deferred tax liability that results from a change in circumstances, and that causes us to change our judgment about expected future tax consequences of events, is included in the tax provision when such changes occur. Deferred income taxes also reflect the impact of operating loss and tax credit carry-forwards. A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. Any increase or decrease in the valuation allowance that results from a change in circumstances, and that causes us to change our judgment about the realizability of the related deferred tax asset, is included in the tax provision when such changes occur.
We are subject to certain state and local income tax, franchise taxes and foreign taxes. The expense associated with these taxes are included in income tax expense on the Consolidated Statements of Operations.
Stock-Based Compensation
We recognize stock-based compensation expense adjusted for estimated forfeitures to employees and directors, in general and administrative in our Consolidated Statements of Operations on a straight-line basis over the requisite service period of the awards.
F-17
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
Deferred Financing Costs and Original Issuance Premium and/or Discounts for Debt Issuance
External costs incurred from the placement of our debt are capitalized and amortized on
a straight-line basis over the terms of the related borrowings which approximates the effective
interest method. Deferred financing costs related to our revolving line of credit are included
in other assets on our Consolidated Balance Sheets and deferred financing costs related to our
other borrowings are included as a direct deduction from the carrying amount of the related
liability on our Consolidated Balance Sheets. Original issuance premium or discounts reflect the
difference between the face amount of the debt issued and the cash proceeds received and are
amortized on a straight-line basis over the term of the related borrowings. All premiums and
discounts are recorded as an addition to or reduction from debt on our Consolidated Balance
Sheets. Amortization of deferred financing costs and original issuance premiums or discounts
totaled $
Earnings Per Share
The computation of basic earnings per share/unit (“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 restricted stock and profit interest units, performance restricted stock and profit interest units, the assumed issuance of additional shares related to Omega OP Units held by outside investors.
Noncontrolling Interests and Redeemable Limited Partnership Unitholder Interests
Noncontrolling interests is the portion of equity not attributable to the respective reporting entity. We present the portion of any equity that we do not own in consolidated entities as noncontrolling interests and classify those interests as a component of total equity, separate from total stockholders’ equity on our Consolidated Balance Sheets. We include net income attributable to the noncontrolling interests in net income in our Consolidated Statements of Operations.
As our ownership of a controlled subsidiary increases or decreases, any difference between the aggregate consideration paid to acquire the noncontrolling interests and our noncontrolling interest balance is recorded as a component of equity in additional paid-in capital, so long as we maintain a controlling ownership interest.
The noncontrolling interest for Omega represents the outstanding Omega OP Units held by
outside investors and interests in a consolidated real estate joint venture not fully owned by
Omega. Each of the Omega OP Units (other than the Omega OP Units owned by Omega) is redeemable
at the election of the Omega OP Unit holder for cash equal to the then-fair market value of one
share of Omega common stock, par value $
Foreign Operations
The U.S. dollar (“USD”) is the functional currency for our consolidated subsidiaries
operating in the U.S. The functional currency for our consolidated subsidiaries operating in the
U.K. is the British Pound (“GBP”). Total revenues from our consolidated U.K. operating
subsidiaries were $
F-18
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
For our consolidated subsidiaries whose functional currency is not the USD, we translate their financial statements into the USD. We translate the balance sheet accounts at the exchange rate in effect as of the financial statement date. The income statement accounts are translated using an average exchange rate for the period. Gains and losses resulting from translation are included in accumulated other comprehensive income (loss) (“AOCI”), as a separate component of equity and a proportionate amount of gain or loss is allocated to noncontrolling interests, if applicable.
We and certain of our consolidated subsidiaries may have intercompany and third-party debt that is not denominated in the entity’s functional currency. When the debt is remeasured against the functional currency of the entity, a gain or loss can result. The resulting adjustment is reflected in results of operations within other expense - net, unless it is intercompany debt that is deemed to be long-term in nature in which case the adjustments are included in AOCI and a proportionate amount of gain or loss is allocated to noncontrolling interests, if applicable.
Derivative Instruments
We are exposed to, among other risks, the impact of changes in foreign currency exchange rates as a result of our investments in the U.K. and interest rate risk related to our capital structure. As a matter of policy, we do not use derivatives for trading or speculative purposes. Our risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes foreign currency forward contracts, interest rate swaps and debt issued in foreign currencies to offset a portion of these risks.
To qualify for hedge accounting, derivative instruments used for risk management purposes must effectively reduce the risk exposure that they are designed to hedge. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objectives and strategy for undertaking various hedge transactions. This process includes designating all derivatives that are part of a hedging relationship to specific forecasted transactions as well as recognized liabilities or assets on the Consolidated Balance Sheets. In addition, at the inception of a qualifying cash flow hedging relationship, the underlying transaction or transactions, must be, and are expected to remain, probable of occurring in accordance with the Company’s related assertions. The Company recognizes all derivative instruments, including embedded derivatives required to be bifurcated, as assets or liabilities on the Consolidated Balance Sheets at fair value which is determined using a market approach and Level 2 inputs. Changes in the fair value of derivative instruments that are not designated in hedging relationships or that do not meet the criteria of hedge accounting are recognized in the Consolidated Statements of Operations. For derivatives designated in qualifying cash flow hedging relationships, the gain or loss on the derivative is recognized in AOCI as a separate component of equity and a proportionate amount of gain or loss is allocated to noncontrolling interest, if applicable.
If it is determined that a derivative instrument ceases to be highly effective as a hedge, or that it is probable the underlying forecasted transaction will not occur, the Company discontinues its cash flow hedge accounting prospectively and records the appropriate adjustment to earnings based on the current fair value of the derivative instrument. For net investment hedge accounting, upon sale or liquidation of our U.K. investment, the cumulative balance of the remeasurement value is reclassified to the Consolidated Statements of Operations.
Segments
We conduct our operations and report financial results as
Reclassifications
Certain line items on our Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows have been reclassified to conform to the current period presentation.
F-19
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
Effective for the fourth quarter of 2022, Mortgage notes receivable - net has been renamed Real estate loans receivable - net, Other investments - net has been renamed Non-real estate loans receivable - net, and certain loans have been reclassified out of Other Investments - net into Real estate loans receivable - net. Specifically, other real estate loans collateralized by second or third mortgage liens, a leasehold mortgage on, or an assignment of partnership interest in the related properties that were previously presented in Other Investments - net are now presented in Real estate loans receivable - net. See the table below for the prior presentation compared to the current presentation.
|
|
|
|
|
|
|
|
|
|
Prior Presentation |
|
|
Current Presentation |
||
|
|
December 31, 2021 |
|
|
December 31, 2021 |
||
|
|
(in thousands) |
|
|
(in thousands) |
||
|
Mortgage notes receivable, gross |
$ |
|
|
Mortgage notes receivable, gross |
$ |
|
|
Allowance for credit losses on mortgage notes receivable |
|
( |
|
Allowance for credit losses on mortgage notes receivable |
|
( |
|
Mortgage notes receivable – net |
$ |
|
|
Mortgage notes receivable, net |
|
|
|
|
|
|
|
Leasehold mortgages and other real estate loans, gross |
|
|
|
|
|
|
|
Allowance for credit losses on leasehold mortgages and other real estate loans |
|
( |
|
Other investments, gross |
$ |
|
|
Leasehold mortgages and other real estate loans – net |
|
|
|
Allowance for credit losses on other investments |
|
( |
|
Real estate loans receivable – net |
$ |
|
|
Other investments – net |
$ |
|
|
|
|
|
|
|
|
|
|
Non-real estate loans receivable, gross |
$ |
|
|
Total |
$ |
|
|
Allowance for credit losses on non-real estate loans receivable |
|
( |
|
|
|
|
|
Non-real estate loans receivable – net |
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
We previously reported assets held for sale of $
Recently Adopted Accounting Pronouncements
ASU – 2021-05, Leases (Topic 842): Lessors – Certain Leases with Variable Lease Payments
On July 19, 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-05. This guidance requires lessors to classify leases with variable lease payments, that do not depend on an index or rate, as an operating lease on the commencement date of the lease if specified criteria are met. The guidance is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. We early adopted this guidance prospectively effective July 1, 2021. The adoption of the guidance did not have an impact on our consolidated financial statements.
ASU – 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures
On March 31, 2022, the FASB issued ASU 2022-02, which eliminates the recognition and measurement guidance for troubled debt restructurings (“TDRs”) and requires additional disclosures for certain loan modifications. ASU 2022-02 also requires entities to disclose gross write-offs of financing receivables and net investments in leases by year of origination. Omega elected to early adopt ASU 2022-02 on a prospective basis effective January 1, 2022. During 2022, we had three loan modifications with two borrowers experiencing financial difficulty pursuant to ASU 2022-02, Guardian Healthcare (“Guardian”) and LaVie Care Centers, LLC (“LaVie,” f/k/a Consulate Health Care), that require additional disclosures. The required disclosures for these loans are included in Note 5 – Contractual Receivables and Other Receivables and Lease Inducements, Note 7 – Real Estate Loans Receivable and Note 8 – Non-real Estate Loans Receivable. We have disclosed our gross write-offs of financing receivables and direct financing leases by year of origination in Note 9 – Allowance for Credit Losses.
F-20
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
ASU – 2020-04, Financial Instruments – Reference Rate Reform (Topic 848)
On March 12, 2020, the FASB issued ASU 2020-04, which contains optional practical
expedients for a limited period of time to ease the potential burden in accounting for (or
recognizing the effects of) reference rate reform on financial reporting for contracts, hedging
relationships, and other transactions that reference the London Interbank Offered Rate
(“LIBOR”). The guidance may be elected over time until December 31, 2022, as reference rate
reform activities occur. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform
(Topic 848): Deferral of the Sunset Date of Topic 848, which extended the practical expedients
under ASU 2020-04 to December 31, 2024. The Company has several derivative instruments (See Note
15 – Derivatives and Hedging), a $
ASU – 2016-13, Financial Instruments - Credit Losses (Topic 326)
In June 2016, the FASB issued ASU 2016-13, which changed the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for credit losses. The new approach requires the calculation of expected lifetime credit losses and is applied to financial assets measured at amortized cost, including loans, as well as certain off-balance sheet credit exposures such as unfunded loan commitments. The allowance for credit loss on the loans is a valuation amount that is deducted from the amortized cost basis of the loans not held at fair value to present the net amount expected to be collected over the contractual term of the loans.
ASU 2016-13 specifically excludes from its scope receivables arising from operating
leases accounted for under Topic 842. We adopted ASU 2016-13 on January 1, 2020 using the
modified retrospective approach and we recorded an initial $
F-21
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
NOTE 3 – REAL ESTATE ASSET ACQUISITIONS AND DEVELOPMENT
2022 Acquisitions
The following table summarizes the significant asset acquisitions that occurred in 2022:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
Total Real Estate |
|
Initial |
|
||
|
|
|
Facilities |
|
|
|
Assets Acquired |
|
Annual |
|
||
|
Period |
|
SNF |
ALF |
|
Country/State |
|
(in millions) |
|
Cash Yield(1) |
|
|
|
Q1 |
|
— |
|
|
U.K. |
|
$ |
|
(2) |
|
% |
|
Q1 |
|
— |
|
|
U.K. |
|
|
|
|
|
% |
|
Q1 |
|
— |
|
|
U.K. |
|
|
|
(2) |
|
% |
|
Q1 |
|
|
— |
|
MD |
|
|
|
(3) |
|
% |
|
Q3 |
|
— |
|
|
U.K. |
|
|
|
|
|
% |
|
Q4 |
|
|
|
|
PA, NC |
|
|
|
(4) |
|
% |
|
Total |
|
|
|
|
|
|
$ |
|
|
|
|
| (1) | Initial annual cash yield reflects the initial annual contractual cash rent divided by the purchase price. |
| (2) |
The
total consideration paid for the
|
| (3) |
Total
consideration for the
|
| (4) |
During
the fourth quarter of 2022, we acquired
|
2021 Acquisitions and Other
The following table summarizes the significant asset acquisitions that occurred in 2021:
|
|
|
Number of |
|
|
|
Total Real Estate |
|
Initial |
|
|||
|
|
|
Facilities |
|
|
|
Assets Acquired(1) |
|
Annual |
|
|||
|
Period |
|
SNF |
ALF |
Specialty |
|
Country/State |
|
(in millions) |
|
Cash Yield(2) |
|
|
|
Q1 |
|
— |
|
7 |
|
AZ, CA, FL, IL, NJ, OR, PA, TN, TX, VA, WA |
|
$ |
|
|
|
% |
|
Q1 |
|
|
— |
— |
|
FL |
|
|
|
|
|
% |
|
Q3 |
|
— |
|
— |
|
U.K. |
|
|
|
|
|
% |
|
Total |
|
|
|
7 |
|
|
|
$ |
|
|
|
|
| (1) |
Excludes
$
|
| (2) | Initial annual cash yield reflects the initial annual contractual cash rent divided by the purchase price. |
On
January 20, 2021, we acquired
F-22
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
2020 Acquisitions
The following table summarizes the significant transactions that occurred in 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
Total Real Estate |
|
|
Initial |
|
||
|
|
|
Facilities |
|
|
|
Assets Acquired |
|
|
Annual |
|
||
|
Period |
|
SNF |
ALF |
|
Country/State |
|
(in millions) |
|
|
Cash Yield(1) |
|
|
|
Q1 |
|
— |
|
|
U.K |
|
$ |
|
|
|
|
% |
|
Q1 |
|
|
— |
|
IN |
|
|
|
|
|
|
% |
|
Q2 |
|
|
— |
|
OH |
|
|
|
|
|
|
% |
|
Q4 |
|
|
|
|
VA |
|
|
|
|
|
|
% |
|
Total |
|
|
|
|
|
|
$ |
|
|
|
|
|
| (1) | Initial annual cash yield reflects the initial annual contractual cash rent divided by the purchase price. |
Construction in progress and capital expenditure investments
We invested $
In the second quarter of 2021, we placed a $
During the third quarter of 2021, we
purchased a real estate property located in Washington, D.C. (not reflected in the table above)
for approximately $
NOTE 4 – ASSETS HELD FOR SALE, DISPOSITIONS AND IMPAIRMENTS
We periodically sell facilities to reduce our concentration in certain operators, geographies and non-strategic assets or due to the exercise of a tenant purchase option.
The following is a summary of our assets held for sale:
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
||
|
|
2022 |
|
2021 |
||
|
Number of facilities held for sale |
|
|
|
|
|
|
Amount of assets held for sale (in thousands) |
$ |
|
|
$ |
|
In the fourth quarter of 2022, we reclassified
F-23
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
Asset Sales
2022 Activity
During the year ended December 31, 2022, we sold
In the first quarter of 2022, we sold
During the first and second quarter of 2022, we sold
In the third and fourth quarter of 2022, we sold
In December 2022, in connection with restructuring negotiations with LaVie, we sold
2021 Activity
During the year ended December 31, 2021, we sold
2020 Activity
During the year ended December 31, 2020, we sold
F-24
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
Real Estate Impairments
2022 Activity
During the year ended December 31, 2022, we recorded impairments of approximately $
2021 Activity
During the year ended December 31, 2021, we recorded impairments of approximately $
2020 Activity
During the year ended December 31, 2020, we recorded impairments of approximately $
To estimate the fair value of the facilities, for the impairments noted above, we utilized a market approach which considered binding sale agreements (a Level 1 input) or non-binding offers from unrelated third parties and/or broker quotes (a Level 3 input).
NOTE 5 – CONTRACTUAL RECEIVABLES AND OTHER RECEIVABLES AND LEASE INDUCEMENTS
Contractual receivables relate to the amounts currently owed to us under the terms of our lease and loan agreements. Effective yield interest receivables relate to the difference between the interest income recognized on an effective yield basis over the term of the loan agreement and the interest currently due to us according to the contractual agreement. Straight-line rent receivables relate to the difference between the rental revenue recognized on a straight-line basis and the amounts currently due to us according to the contractual agreement. Lease inducements result from value provided by us to the lessee, at the inception, modification or renewal of the lease, and are amortized as a reduction of rental income over the non-cancellable lease term.
A summary of our net receivables by type is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
||
|
|
|
2022 |
|
2021 |
|
||
|
|
|
(in thousands) |
|
||||
|
Contractual receivables – net |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Effective yield interest receivables |
|
$ |
|
|
$ |
|
|
|
Straight-line rent receivables |
|
|
|
|
|
|
|
|
Lease inducements |
|
|
|
|
|
|
|
|
Other receivables and lease inducements |
|
$ |
|
|
$ |
|
|
F-25
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
Cash basis operators and straight-line receivable write-offs
We review our collectibility assumptions related to our operator leases on an ongoing basis. During
the years ended December 31, 2022, 2021 and 2020, we placed
During the years ended December 31, 2022, 2021 and 2020, we also wrote-off $
Operator updates
Agemo
Agemo was formed in May 2018 by Signature Healthcare, LLC, as part of an out-of-court restructuring
agreement, to be the holding company of their leases and loans with Omega. As part of that
restructuring agreement, we agreed to, among other things, allow for the deferral of $
We placed Agemo on a cash basis of revenue recognition during the third quarter of 2020 as we
received information regarding substantial doubt of their ability to continue as a going concern. As
a result, we wrote-off approximately $
Agemo continued to make their rental and interest payments to us until July 2021. After July 2021,
Agemo made one month of contractual rent and interest payments for the remainder of fiscal year
2021. During the third and fourth quarters of 2021, we recorded $
Agemo continued to not pay contractual rent and interest due under its lease and loan agreements
during the year ended December 31, 2022.
The Agemo Forbearance Agreement has been amended multiple times throughout 2022 and the
most recent 2022 amendment on December 30, 2022 extended the forbearance period through January 31, 2023. In 2022, the Agemo Rent Deferral period was
also extended multiple times, and the most recent amendment extended the deferral through April
2022, after which time the deferral period terminated, with the Company remaining subject to the
Agemo Forbearance Agreement through January 31, 2023. As of December 31, 2022, the aggregate rent
deferred under the Agemo lease agreement was $
F-26
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
In the first quarter of 2023, Omega and Agemo entered into a restructuring agreement, an amended and restated master lease and a replacement loan agreement for two replacement loans. As part of the restructuring agreement and related agreements, Omega agreed to, among other things:
| ● | Forgive and release Agemo from previously written off past due rent and interest obligations related to certain periods prior to the 2018 Restructuring and from August 2021 through January 2023, with contractual rent under the lease agreement and contractual interest under the loan agreements scheduled to resume on April 1, 2023; |
| ● |
reduce
monthly contractual base rent from
$
|
| ● |
extend
the initial Agemo lease term from
|
| ● |
refinance
and restructure the $
|
Guardian
Guardian did not make rent and interest payments under its lease and mortgage loan agreements during
the fourth quarter of 2021. As a result of Guardian’s non-payment of contractual rent and the
anticipated restructuring of its agreements, in the fourth quarter of 2021, we placed Guardian on a
cash basis of revenue recognition and wrote-off approximately $
Guardian continued to not pay contractual rent and
interest due under its lease and mortgage loan agreements during the first quarter of 2022. During
the first and second quarters of 2022, we completed significant restructuring activities related to
the Guardian lease and loan portfolio. In the first quarter of 2022, we transitioned
| ● |
Extend
the lease and loan maturity dates from
|
| ● |
reduce
the combined rent and mortgage interest to an aggregate $
|
| ● |
allow
Guardian to retrospectively defer $
|
F-27
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
Following the execution of the restructuring agreement, Guardian resumed paying contractual
rent and interest during the second quarter of 2022 and continued such payments in the third and
fourth quarters of 2022, in accordance with the restructuring terms. For the year ended December 31,
2022, we recorded rental income of $
As of December 31, 2022, we have $
LaVie
In the fourth quarter of 2022, Omega began the process of restructuring our portfolio with LaVie,
which primarily consists of two master lease agreements and two term loan agreements. On December
30, 2022, we sold
| ● |
Remove
the
|
| ● | provide Omega the ability to enact a one-time rent reset on one of the lease agreements, if LaVie’s coverage exceeds a threshold, after February 1, 2027; and |
| ● |
require
Omega to pay LaVie a $
|
The restructuring discussions are still ongoing and subject to change, but we anticipate additional
restructuring activity related to this operator in 2023. As a result of the restructuring activities
during 2022 and future expected restructuring activities, during the fourth quarter of 2022, we
placed LaVie on a cash basis of revenue recognition and wrote-off approximately $
In the first quarter of 2023, as part of the restructuring, we have agreed to a partial rent
deferral in the first four months of 2023. In doing so, we agreed to allow LaVie to defer up to $
Maplewood
During the year ended December 31, 2020, we received a one-time rent payment of approximately $
F-28
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
During the fourth quarter of 2022, Omega began discussions with Maplewood to restructure
their portfolio, which includes a lease agreement and $
In the first quarter of 2023, we agreed to a formal restructuring agreement, master lease amendments and loan amendments with Maplewood. As part of the restructuring agreement and related agreements, Omega agreed to, among other things:
| ● |
Extend
the maturity date of the master lease from
|
| ● |
fix
contractual rent at $
|
| ● |
fund
$
|
| ● | extend the maturity date of the secured revolving credit facility from June 2030 to June 2035 with one borrower 2-year extension option; |
| ● |
increase
the capacity of the secured
revolving credit facility from $
|
| ● |
convert
the
|
| ● |
reduce
Maplewood’s share of any future potential sales proceeds (in excess of our gross
investment) by the unpaid deferred rent balance and the $
|
Gulf Coast
During the second quarter of 2021, Gulf Coast stopped paying contractual rent under its master lease
agreement because of on-going liquidity issues. Gulf Coast operated
F-29
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
As a result of Gulf Coast’s default under its master lease agreement, in August 2021, we
exercised our right to accelerate the full amount of rent due under Gulf Coast’s master lease
agreement. On October 14, 2021, Gulf Coast commenced voluntary cases under Chapter 11 of the U.S.
Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”).
As described in Gulf Coast’s filings with the Bankruptcy Court, we entered into a Restructuring
Support Agreement (the “Support Agreement”) that forms the basis for Gulf Coast’s restructuring and
liquidation. The Support Agreement established a timeline for the implementation of Gulf Coast’s
restructuring and liquidation, including the transition of management of the operations of the
facilities to a third-party operator. As part of the Support Agreement, we committed to provide up
to $
As a result of Gulf Coast’s non-payment of contractual rent, in the second quarter of 2021, we
placed Gulf Coast on a cash basis of revenue recognition and wrote-off straight-line rent receivable
balances of $
As discussed in Note 4 – Assets Held For Sale, Dispositions and Impairments, we sold
Daybreak
Daybreak previously leased and operated
F-30
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
Genesis Healthcare, Inc.
During the year ended December 31, 2020, we wrote-off approximately $
From January through March 2022, an operator (the “3.7% Operator”) representing
We have a revolving credit facility with the
In March 2022, an operator (the “1.2% Operator”), representing
In June 2022, an operator (the “2.0% Operator”), representing
F-31
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
In June 2022, we placed an operator (the “0.4% Operator”), representing
In November and December 2022, an operator that was already on a cash basis of revenue
recognition (the “0.9% Operator”), representing
Healthcare Homes Limited
In December 2022, we agreed to allow Healthcare Homes Limited (“Healthcare Homes”), a U.K.
based operator representing
Other Operators
During the year ended December 31, 2022, in addition to the operators specifically discussed above,
we allowed
Lease Inducements
For the years ended December 31, 2021 and 2020, we provided fundings of $
F-32
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
NOTE 6 –LEASES
Lease Income
The following table summarizes the Company’s rental income from operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|||||||
|
|
|
2022 |
|
2021 |
|
2020 |
|||
|
|
|
(in thousands) |
|||||||
|
Rental income – operating leases |
|
$ |
|
|
$ |
|
|
$ |
|
|
Variable lease income – operating leases |
|
|
|
|
|
|
|
|
|
|
Total rental income |
|
$ |
|
|
$ |
|
|
$ |
|
Our variable lease income primarily represents the reimbursement of real estate taxes and ground lease expenses by operators that Omega pays directly.
The following amounts reflect the future minimum lease payments due to us for the remainder of the initial terms of our operating leases as of December 31, 2022:
|
|
|
(in thousands) |
|
|
2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
Lease Costs
As of December 31, 2022, the Company is a lessee under ground leases and/or facility leases related
to
The following table summarizes the balance sheet information related to leases where the Company is a lessee:
|
|
|
December 31, |
|
December 31, |
||
|
|
|
2022 |
|
2021 |
||
|
|
|
(in thousands) |
||||
|
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
F-33
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
Direct Financing Leases
The components of investments in direct financing leases consist of the following:
|
|
|
December 31, |
|
December 31, |
|
||
|
|
|
2022 |
|
2021 |
|
||
|
|
|
(in thousands) |
|
||||
|
Minimum lease payments receivable |
|
$ |
|
|
$ |
|
|
|
Less unearned income |
|
|
( |
|
|
( |
|
|
Investment in direct financing leases |
|
|
|
|
|
|
|
|
Less allowance for credit losses on direct financing leases |
|
|
( |
|
|
( |
|
|
Investment in direct financing leases – net |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Properties subject to direct financing leases |
|
|
|
|
|
|
|
|
Number of direct financing leases |
|
|
|
|
|
|
|
During the year ended December 31, 2021, we received $
NOTE 7 – REAL ESTATE LOANS RECEIVABLE
Real estate loans consist of mortgage loans and other real estate loans which are primarily
collateralized by a first, second or third mortgage lien or a leasehold mortgage on, or an
assignment of the partnership interest in the related properties. As of December 31, 2022, our
real estate loans receivable consists of
The principal amounts outstanding of real estate loans receivable, net of allowances, were as follows:
|
|
|
December 31, |
|
December 31, |
|
||
|
|
|
2022 |
|
2021 |
|
||
|
|
|
(in thousands) |
|
||||
|
Mortgage notes due |
|
$ |
|
|
$ |
|
|
|
Mortgage note due |
|
|
|
|
|
|
|
|
Other mortgage notes outstanding(2) |
|
|
|
|
|
|
|
|
Mortgage notes receivable – gross |
|
|
|
|
|
|
|
|
Allowance for credit losses on mortgage notes receivable |
|
|
( |
|
|
( |
|
|
Mortgage notes receivable – net |
|
|
|
|
|
|
|
|
Other real estate loan due |
|
|
|
|
|
|
|
|
Other real estate loans due |
|
|
|
|
|
|
|
|
Other real estate loans due |
|
|
|
|
|
|
|
|
Other real estate loan due |
|
|
— |
|
|
|
|
|
Other real estate loans outstanding(3) |
|
|
|
|
|
|
|
|
Leasehold mortgages and other real estate loans – gross |
|
|
|
|
|
|
|
|
Allowance for credit losses on leasehold mortgages and other real estate loans |
|
|
( |
|
|
( |
|
|
Leasehold mortgages and other real estate loans – net |
|
|
|
|
|
|
|
|
Total real estate loans receivable – net |
|
$ |
|
|
$ |
|
|
| (1) | Approximates the weighted average interest rate on facilities as of December 31, 2022. |
| (2) |
Other
mortgage notes outstanding have a weighted average interest rate of
|
| (3) |
As
of December 31, 2022, includes
|
F-34
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
Interest income on real estate loans is included within interest income on the Consolidated Statements of Operations and is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|||||||
|
|
2022 |
|
2021 |
|
2020 |
|||
|
|
(in thousands) |
|||||||
|
Mortgage notes – interest income |
$ |
|
|
$ |
|
|
$ |
|
|
Leasehold mortgages and other real estate loans – interest income |
|
|
|
|
|
|
|
|
|
Total real estate loans interest income |
$ |
|
|
$ |
|
|
$ |
|
Mortgage Notes due
On June 30, 2022, Ciena Healthcare (“Ciena”) repaid $
On September 9, 2022, Ciena repaid $
At December 31, 2022, the $
| ● |
$
|
| ● |
Additional
borrowings in the form of incremental facility mortgages, construction and/or
improvement mortgages with maturities through
|
| ● |
$
|
F-35
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
| ● |
$
|
| ● |
$
|
The mortgage notes with Ciena are cross-defaulted and cross-collateralized with our existing master lease and other non-real estate loans with Ciena.
Mortgage
Note due
On January 17, 2014, we entered into a $
In the third quarter of 2021, we reduced the risk rating on the mortgage loan from a 4 to a
5, primarily due to the increased likelihood of a restructuring that would result in the
modification of the mortgage loan terms. As discussed in Note 5 – Contractual Receivables and Other
Receivables and Lease Inducements, Guardian failed to pay contractual rent and interest to us during
the fourth quarter of 2021. The mortgage loan was placed on non-accrual status for interest
recognition in October 2021 and is being accounted for under the cost recovery method. On December
30, 2021, we acquired
Guardian continued to not pay contractual rent and interest due under its lease and
mortgage loan agreements during the first quarter of 2022. On February 15, 2022, Guardian completed
the sale of
F-36
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
As of December 31, 2022, the amortized cost basis of the Guardian mortgage loan is $
Other mortgage notes outstanding
As of December 31, 2022, our other mortgage notes outstanding represents
Mortgage Note due
On July 1, 2021, we financed
Mortgage Note due
In connection with the MedEquities Merger on May 17, 2019, the Company acquired a first mortgage
lien issued to Lakeway Realty, L.L.C, an unconsolidated joint venture discussed in Note 11 –
Investments in Joint Ventures, in the original principal amount of approximately $
Other real estate loan due
On July 31, 2020, we entered into a $
F-37
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
As discussed in Note 5 – Contractual Receivables and Other Receivables and Lease
Inducements, in the first quarter of 2023, Omega entered into a restructuring agreement and a loan
amendment that modified the senior revolving credit facility. As part of the restructuring agreement
and loan amendment, Omega agreed to extend the maturity date to June 2035, increase the capacity of
the senior revolving credit facility from $
Other real estate loans due
Our other investment notes due in 2024 consists of two secured term loans with Genesis with
initial borrowings of $
Other real estate loans due
On June 28, 2022, we entered into a $
Other real estate loan due
Our other investment note due in
Other real estate loans outstanding
Preferred Equity Investment in Joint Venture - $
On June 2, 2022, we made a $
F-38
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
NOTE 8 – NON-REAL ESTATE LOANS RECEIVABLE
Our non-real estate loans consist of fixed and variable rate loans to operators and/or
principals. These loans may be either unsecured or secured by the collateral of the borrower,
which may include the working capital of the borrower. As of December 31, 2022, we had
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
||
|
|
|
2022 |
|
2021 |
|
||
|
|
|
(in thousands) |
|
||||
|
Notes due |
|
$ |
|
|
$ |
|
|
|
Notes due |
|
|
|
|
|
|
|
|
Notes due |
|
|
|
|
|
|
|
|
Note due |
|
|
|
|
|
— |
|
|
Note due |
|
|
|
|
|
|
|
|
Other notes outstanding (3) |
|
|
|
|
|
|
|
|
Non-real estate loans receivable – gross |
|
|
|
|
|
|
|
|
Allowance for credit losses on other investments |
|
|
( |
|
|
( |
|
|
Total non-real estate loans receivable – net |
|
$ |
|
|
$ |
|
|
| (1) | Approximate weighted average interest rate as of December 31, 2022. |
| (2) |
Includes
one loan with a principal balance of $
|
| (3) |
Other
notes outstanding have a weighted average interest rate of
|
For the years ended December 31, 2022, 2021 and 2020, non-real estate loans generated
interest income of $
Notes due
Notes due in
During the third quarter of 2020, we evaluated both loans for impairment upon receiving information
from Agemo regarding substantial doubt of its ability to continue as a going concern. Based on our
evaluation, we recorded a provision for credit loss of $
F-39
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
As discussed in Note 5 – Contractual Receivables and Other Receivables and Lease
Inducements, Agemo failed to pay contractual rent and interest to us from August 2021 through
October 2021 and in December 2021. In the third quarter of 2021, we recorded an additional provision
for credit loss of $
Agemo continued to not pay contractual rent and interest due under its lease and loan
agreements throughout 2022. During the year ended December 31, 2022, we recorded additional
provisions for credit losses of $
As discussed in Note 5 – Contractual Receivables and Other Receivables and Lease
Inducements, in the first quarter of 2023, Omega entered into a restructuring agreement and a
replacement loan agreement that modified the existing Agemo loans. Under the restructuring
agreement, previously written off contractual unpaid interest related to the Agemo WC Loan and the
Agemo Term Loan was forgiven. The outstanding principal of the Agemo Term Loan was rolled into a $
Notes due
Notes due
Notes due
On September 1, 2021, we entered into an $
On March 25, 2022, we entered into a $
F-40
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
During the fourth quarter of 2022, we amended these loans with LaVie to, among other terms,
extend the loan maturities to
Note due
On September 1, 2022, we entered into a $
Note due
On July 8, 2019, the Company entered into a $
Other notes outstanding
As of December 31, 2022, our other notes outstanding represents
Working Capital Loan – $
In November 2021, we entered into a $
F-41
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
During the year ended December 31, 2022, we recognized provisions for credit losses of $
Gulf Coast – DIP Facility
As discussed in Note 5 – Contractual Receivables
and Other Receivables and Lease Inducements, in October 2021, we provided an up to $
Given the uncertainty and complexity surrounding
the bankruptcy process and the deteriorated credit of Gulf Coast, we evaluated the DIP facility on
an individual basis and elected to measure the risk of loss on the DIP Facility based on the fair
value of the collateral. Based on the cash forecasts provided by Gulf Coast as part of the Support
Agreement and on-going monthly reporting, we estimated that the collateral will have insufficient
value to support the loan at maturity and that we will be unable to collect on substantially all
principal amounts advanced to Gulf Coast under the DIP Facility. Upon funding, we fully reserved all
principal amounts advanced under the DIP Facility. In the fourth quarter of 2021, we recorded
reserves of $
During the year ended December 31, 2022, we recorded an additional net provision for credit losses
of $
Revolving Credit Facility – $
On October 1, 2021, the Company amended the
terms of a $
F-42
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
As discussed in Note 5 – Contractual Receivables and Other Receivables and Lease
Inducements, from January through March 2022, the
Promissory Notes – $
In the fourth quarter of 2022, the Company entered into three unsecured loans with a
principal of an operator with principal amounts of $
Second Spring Healthcare Investments
On April 17, 2020, we provided a $
F-43
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
NOTE 9 – ALLOWANCE FOR CREDIT LOSSES
In the fourth quarter of 2022, we revised the presentation of certain loans subject to our allowance for credit losses as discussed in Note 2 – Summary of Significant Accounting Policies. The disclosures below have been reclassified to conform to the revised presentation. A rollforward of our allowance for credit losses, summarized by financial instrument type and internal credit risk rating, for the years ended December 31, 2022, 2021 and 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating |
|
Financial Statement Line Item |
Allowance for Credit Loss as of December 31, 2021 |
Provision (recovery) for Credit Loss for the year ended December 31, 2022 |
|
Write-offs charged against allowance for the year ended December 30, 2022 |
Allowance for Credit Loss as of December 31, 2022 |
||||
|
|
|
|
(in thousands) |
||||||||
|
1 |
|
Real estate loans receivable |
$ |
— |
$ |
|
|
$ |
— |
$ |
|
|
2 |
|
Real estate loans receivable |
|
|
|
|
|
|
— |
|
|
|
3 |
|
Real estate loans receivable |
|
|
|
|
|
|
— |
|
|
|
4 |
|
Real estate loans receivable |
|
|
|
|
|
|
— |
|
|
|
5 |
|
Real estate loans receivable |
|
|
|
( |
|
|
— |
|
— |
|
6 |
|
Real estate loans receivable |
|
|
|
|
|
|
( |
(1) |
|
|
|
|
Sub-total |
|
|
|
|
|
|
( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Investment in direct financing leases |
|
|
|
( |
|
|
— |
|
— |
|
5 |
|
Investment in direct financing leases |
|
— |
|
|
|
|
— |
|
|
|
|
|
Sub-total |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Non-real estate loans receivable |
|
|
|
|
|
|
— |
|
|
|
3 |
|
Non-real estate loans receivable |
|
|
|
|
|
|
— |
|
|
|
4 |
|
Non-real estate loans receivable |
|
|
|
|
|
|
— |
|
|
|
5 |
|
Non-real estate loans receivable |
|
|
|
|
(2) |
|
— |
|
|
|
6 |
|
Non-real estate loans receivable |
|
|
|
|
(3)(4) |
|
( |
(5) |
|
|
|
|
Sub-total |
|
|
|
|
|
|
( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Off-balance sheet non-real estate loan commitments |
|
|
|
|
|
|
— |
|
|
|
3 |
|
Off-balance sheet non-real estate loan commitments |
|
|
|
( |
|
|
— |
|
|
|
3 |
|
Off-balance sheet real estate loan commitments |
|
|
|
( |
|
|
— |
|
— |
|
4 |
|
Off-balance sheet non-real estate loan commitments |
|
|
|
( |
|
|
— |
|
— |
|
4 |
|
Off-balance sheet real estate loan commitments |
|
|
|
( |
|
|
— |
|
|
|
6 |
|
Off-balance sheet non-real estate loan commitments |
|
|
|
|
(5) |
|
( |
(5) |
— |
|
|
|
Sub-total |
|
|
|
|
|
|
( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
$ |
|
|
$ |
( |
$ |
|
| (1) | During the third quarter of 2022, we wrote-off the loan balance and reserve for one real estate loan with a rating of 6 that expired during the third quarter which had previously been fully reserved. |
| (2) |
Reflects
additional provisions of $
|
| (3) |
Reflects
aggregate provisions of $
|
| (4) |
Reflects
an additional provision of $
|
| (5) |
In
the second quarter of 2022, we recorded an additional reserve of $
|
F-44
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
|
Rating |
|
Financial Statement Line Item |
Allowance for Credit Loss at December 31, 2020 |
|
Provision (recovery) for Credit Loss for the year ended December 31, 2021 |
Write-offs charged against allowance for the year ended December 30, 2021 |
|
Allowance for Credit Loss as of December 31, 2021 |
|
|||
|
|
|
|
(in thousands) |
|
||||||||
|
2 |
|
Real estate loans receivable |
$ |
|
$ |
( |
|
$ |
— |
$ |
|
|
|
3 |
|
Real estate loans receivable |
|
|
|
|
|
|
— |
|
|
|
|
4 |
|
Real estate loans receivable |
|
|
|
( |
(1) |
|
— |
|
|
|
|
5 |
|
Real estate loans receivable |
|
|
|
( |
|
|
— |
|
|
|
|
6 |
|
Real estate loans receivable |
|
|
|
|
(1) |
|
— |
|
|
|
|
|
|
Sub-total |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Investment in direct financing leases |
|
|
|
( |
|
|
— |
|
|
|
|
|
|
Sub-total |
|
|
|
( |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Non-real estate loans receivable |
|
|
|
( |
|
|
— |
|
|
|
|
3 |
|
Non-real estate loans receivable |
|
|
|
( |
|
|
— |
|
|
|
|
4 |
|
Non-real estate loans receivable |
|
|
|
( |
(2) |
|
— |
|
|
|
|
5 |
|
Non-real estate loans receivable |
|
|
|
|
(3) |
|
( |
|
|
|
|
6 |
|
Non-real estate loans receivable |
|
— |
|
|
(2)(4) |
|
— |
|
|
|
|
|
|
Sub-total |
|
|
|
|
|
|
( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Off-balance sheet non-real estate loan commitments |
|
|
|
( |
|
|
— |
|
|
|
|
3 |
|
Off-balance sheet non-real estate loan commitments |
|
|
|
( |
|
|
— |
|
|
|
|
3 |
|
Off-balance sheet real estate loan commitments |
|
|
|
( |
|
|
— |
|
|
|
|
4 |
|
Off-balance sheet non-real estate loan commitments |
|
— |
|
|
|
|
— |
|
|
|
|
4 |
|
Off-balance sheet real estate loan commitments |
|
|
|
|
|
|
— |
|
|
|
|
6 |
|
Off-balance sheet non-real estate loan commitments |
|
— |
|
|
|
|
— |
|
|
|
|
|
|
Sub-total |
|
|
|
( |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
$ |
|
|
$ |
( |
$ |
|
|
| (1) |
Amount
reflects the movement of reserves associated with our mortgage loan with
Guardian due to a reduction of our internal risk rating on the loan from a 4 to
a 6 during 2021. As discussed in Note 7 – Real Estate Loans Receivable, we
elected to evaluate the risk of loss on the loan on an individual basis, which
resulted in recording an additional $
|
| (2) |
Amount
reflects the movement of $
|
| (3) |
The
provision includes an additional $
|
| (4) |
Amount
reflects $
|
F-45
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
|
Rating |
|
Financial Statement Line Item |
Allowance for Credit Loss at December 31, 2019 |
Allowance for Credit Loss at January 1, 2020 |
Provision (recovery) for Credit Loss for the year ended December 31, 2020 |
Write-offs charged against allowance for the year ended December 30, 2020 |
Allowance for Credit Loss as of December 31, 2020 |
|||||
|
|
|
|
(in thousands) |
|||||||||
|
2 |
|
Real estate loans receivable |
$ |
— |
$ |
— |
$ |
|
$ |
— |
$ |
|
|
3 |
|
Real estate loans receivable |
|
— |
|
|
|
|
|
— |
|
|
|
4 |
|
Real estate loans receivable |
|
— |
|
|
|
|
|
— |
|
|
|
5 |
|
Real estate loans receivable |
|
— |
|
|
|
( |
|
— |
|
|
|
6 |
|
Real estate loans receivable |
|
|
|
|
|
( |
|
— |
|
|
|
|
|
Sub-total |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Investment in direct financing leases |
|
|
|
|
|
|
|
( |
|
|
|
|
|
Sub-total |
|
|
|
|
|
|
|
( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Non-real estate loans receivable |
|
— |
|
|
|
( |
|
— |
|
|
|
3 |
|
Non-real estate loans receivable |
|
— |
|
|
|
|
|
— |
|
|
|
4 |
|
Non-real estate loans receivable |
|
— |
|
|
|
|
|
— |
|
|
|
5 |
|
Non-real estate loans receivable |
|
— |
|
|
|
|
|
— |
|
|
|
|
|
Sub-total |
|
— |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Off-balance sheet non-real estate loan commitments |
|
— |
|
— |
|
|
|
— |
|
|
|
3 |
|
Off-balance sheet non-real estate loan commitments |
|
— |
|
— |
|
|
|
— |
|
|
|
3 |
|
Off-balance sheet real estate loan commitments |
|
— |
|
— |
|
|
|
— |
|
|
|
4 |
|
Off-balance sheet real estate loan commitments |
|
— |
|
|
|
( |
|
— |
|
|
|
|
|
Sub-total |
|
— |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
$ |
|
$ |
|
$ |
( |
$ |
|
Included below is a summary of the amortized cost basis of our financial instruments by year of origination and internal risk rating and a summary of our gross write-offs by year of origination:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating |
Financial Statement Line Item |
2022 |
2021 |
2020 |
2019 |
2018 |
2017 |
2016 & older |
Revolving Loans |
Balance as of December 31, 2022 |
|||||||||
|
|
|
(in thousands) |
|||||||||||||||||
|
1 |
Real estate loans receivable |
$ |
|
$ |
— |
$ |
— |
$ |
— |
$ |
— |
$ |
— |
$ |
|
$ |
— |
$ |
|
|
2 |
Real estate loans receivable |
|
— |
|
— |
|
|
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
|
3 |
Real estate loans receivable |
|
|
|
|
|
— |
|
|
|
— |
|
— |
|
|
|
|
|
|
|
4 |
Real estate loans receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
5 |
Real estate loans receivable |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
6 |
Real estate loans receivable |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
|
— |
|
|
|
|
Sub-total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
Investment in direct financing leases |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
|
— |
|
|
|
|
Sub-total |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||