OMEGA HEALTHCARE INVESTORS INC 10-Q

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements and Factors Affecting Future Results The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this document, including statements regarding potential future changes in reimbursement. 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: (i) those items discussed under “Risk Factors” in Part I, Item 1A to our annual report on Form 10-K ; (ii) uncertainties relating to the business operations of the operators of our assets, including those relating to reimbursement by third-party payors, regulatory matters and occupancy levels; (iii) the impact of the novel coronavirus (“COVID-19”) on our business and the business of our operators, including without limitation, the extent and duration of the COVID-19 pandemic, increased costs and decreased occupancy levels experienced by operators of skilled nursing facilities (“SNFs”) and assisted living facilities (“ALFs”) in connection therewith, and the extent to which continued government support may be available to operators to offset such costs and the conditions related thereto; (iv) the ability of any 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; (v) 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; (vi) the availability and cost of capital to us; (vii) changes in our credit ratings and the ratings of our debt securities; (viii) competition in the financing of healthcare facilities; (ix) competition in long-term healthcare industry and shifts in the perception of various types of long-term care facilities, including SNFs and ALFs; (x) additional regulatory and other changes in the healthcare sector; (xi) changes in the financial position of our operators; (xii) the effect of economic and market conditions generally and, particularly, in the healthcare industry; (xiii) changes in interest rates; (xiv) the timing, amount and yield of any additional investments; (xv) changes in tax laws and regulations affecting real estate investment trusts (“REITs”); (xvi) 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; (xvii) our ability to maintain our status as a REIT; and (xviii) 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. 47 Table of Contents Overview Omega Healthcare Investors, Inc. (“Omega”) was incorporated in the State of Maryland on March 31, 1992, and has elected to be taxed as a real estate investment trust (“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 (“Omega OP”). Omega OP was formed as a limited partnership and organized in the State of Delaware on October 24, 2014. Unless stated otherwise or the context otherwise requires, the terms the “Company,” “we,” “our” and “us” means Omega and Omega OP, collectively. 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”) and 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 long-term leases and mortgage agreements. All of our leases are “triple-net” leases, which require the operators (we use the term “operator” to refer to our tenants, mortgagors and their affiliates who manage and/or operate our properties) to pay all property-related expenses. Our mortgage revenue derives from fixed rate mortgage loans, which are secured by first mortgage liens on the underlying real estate and personal property of the mortgagor. Our other investment income derives from fixed and variable rate loans to our operators and/or their principals to fund working capital and capital expenditures. These loans, which may be either unsecured or secured by the collateral of the borrower, are classified as other investments. Omega OP is governed by the Second Amended and Restated Agreement of Limited Partnership of OHI Healthcare Properties Limited Partnership, dated as of April 1, 2015 (the “Partnership Agreement”). Omega has exclusive control over Omega OP’s day-to-day management pursuant to the Partnership Agreement. As of September 30, 2020, Omega owned approximately 97% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and investors owned approximately 3% of the Omega OP Units. Omega’s consolidated financial statements include the accounts of (i) Omega, (ii) Omega OP, (iii) all direct and indirect wholly owned subsidiaries of Omega and (iv) other entities in which Omega or Omega OP has a majority voting interest and control. 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. Omega OP’s consolidated financial statements include the accounts of (i) Omega OP, (ii) all direct and indirect wholly owned subsidiaries of Omega OP and (iii) other entities in which Omega OP has a majority voting interest and control. All intercompany transactions and balances have been eliminated in consolidation. Omega OP’s net earnings are reduced by the portion of net earnings attributable to the noncontrolling interest. As of September 30, 2020, our portfolio of real estate investments consisted of 976 healthcare facilities, located in 40 states and the U.K. and operated by 69 third-party operators. Our investment in these facilities, net of impairments and allowances, totaled approximately $9.7 billion at September 30, 2020, with approximately 97% of our real estate investments related to healthcare facilities. Our portfolio is made up of (i) 755 SNFs, 114 ALFs, 28 specialty facilities, two medical office buildings, (ii) fixed rate mortgages on 57 SNFs, three ALFs and four specialty facilities, and (iii) 13 facilities that are held for sale. At September 30, 2020, we also held other investments of approximately $464.5 million, consisting primarily of secured loans to third-party operators of our facilities and $196.2 million of investments in five unconsolidated joint ventures. As of September 30, 2020 and December 31, 2019, we do not have any material properties or operators with facilities that are not materially occupied. 48 Table of Contents For the first three quarters of 2020, we have collected substantially all of our contractual rents due. However, the COVID-19 pandemic continues to have a significant impact on our operators. As of October 22, 2020, our operators have reported (subject to the qualifications noted below) 7,735 total confirmed cases of COVID-19 in our facilities which includes cases involving employees and residents, including patients known to be positive at the time of admission from a hospital or healthcare center. The total cases are located within 464 facilities, or 48.5%, of our 957 operating facilities as of September 30, 2020. The total confirmed cases reported by our operators may in certain cases not be adjusted downward for recoveries, discharges or deaths, may for certain operators reflect cumulative cases rather than active cases, and may be significantly lower than or different from actual cases based on the availability of testing and the lag time involved in testing and reporting, as well as the accuracy of reporting. We have not independently validated such facility virus incidence information and can provide no assurance regarding its accuracy or that there have not been any changes since the time the information was obtained from our operators; we also undertake no duty to update this information. Many of our operators have reported incurring significant cost increases as a result of the COVID-19 pandemic, with dramatic increases for facilities with positive cases. We believe these increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of personal protective equipment, testing equipment and processes and supplies. In terms of occupancy levels, many of our operators have reported experiencing declines, in part due to the elimination or suspension of elective hospital procedures, fewer discharges from hospitals to SNFs and higher hospital readmittances from SNFs. While government relief measures at the federal and state levels, including expanded Medicaid reimbursements, have offered meaningful support to offset a portion of these cost increases and impacts to our SNF operators, and to a lesser extent our ALF operators, we cannot at this time estimate the net impact going forward to these operators, and we cannot estimate the extent to which operators will receive additional governmental relief. To the extent government support is not sufficient or timely to offset these impacts, or to the extent these trends continue or accelerate and are not offset by additional government relief that is sufficient or timely, the operating results of our operators are likely to be 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. Citing in part the impact of the COVID-19 pandemic and uncertainties regarding the continuing availability of sufficient government support, three of our operators, have noted in their financial statements substantial doubt regarding their ability to continue as going concerns. There are a number of uncertainties we face as we consider the potential impact of COVID-19 on our business, including how long census disruption and elevated COVID-19 costs will last and the extent to which funding support from the federal government and the states will continue to offset these incremental costs. We also do not know the number of Omega facilities that will ultimately experience widespread, high-cost outbreaks of COVID-19, and while we have requested reporting from operators of their numbers of cases, and the federal government has required additional reporting by operators, we may not receive accurate information on the number of cases, it may be inconsistent across operators, and we may experience a lag in reporting. We expect that heightened clinical protocols for infection control within facilities, additional testing of employees and residents and the monitoring of employees, guests and others entering 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. In addition, we do not know how and when the implementation of new treatments or vaccines will impact our operators and their populations. ​ 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 visibility into the costs our operators will experience and for how long, and the level of additional governmental support that will be available to them, as well as the potential support our operators may request from us. ​ We believe the availability under our credit facility supports our liquidity and provides flexibility to manage the potential impact to our business. Accordingly, we have maintained our dividend level of $0.67 per share for the first three quarters of 2020. We will continue to evaluate any additional steps that may be needed to maintain adequate liquidity. ​ 49 Table of Contents Taxation Since our inception, Omega has elected to be taxed as a REIT under the applicable provisions of the Internal Revenue Code (“Code”). A REIT is generally not subject to federal income tax on that portion of its REIT taxable income which is distributed to its stockholders, provided that at least 90% of such taxable income is distributed each taxable year and certain other requirements are met, including asset and income tests. So long as we qualify as a REIT under the Code, we generally will not be subject to federal income taxes on the REIT taxable income that we distribute to stockholders, subject to certain exceptions. Subject to the limitation under the REIT asset test rules, we are permitted to own up to 100% of the stock of one or more taxable REIT subsidiaries (“TRSs”). 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 TSRs are subject to foreign income taxes. As of September 30, 2020, one of our TRSs that is subject to federal, state and local income taxes at the applicable corporate rates had a net operating loss (“NOL”) carry-forward of approximately $5.7 million. Up to 100% of the NOL carry-forwards arising in taxable years ending prior to January 1, 2018, may be used to reduce taxable income for any taxable year during the eligible carry-forward period. Changes made by the Tax Cuts and Jobs Act of 2017 (the “2017 Act”) limited the amount of taxable income that may be offset by a NOL carryforward to 80% of taxable income to the extent the NOL originated in tax years beginning after December 31, 2017 (the “80% Limitation”). Our NOL carry-forward was fully reserved as of September 30, 2020, with a valuation allowance due to uncertainties regarding realization. Under current law, our 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 December 31, 2019 and December 31, 2018 may be carried forward indefinitely. However, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) modified the NOL carryback rules and deferred the application for the NOL carry-forward rules. ​ The CARES Act, which was signed into law on March 27, 2020, modified the NOL carry-forward rules applicable to certain of the NOL carry-forwards possessed by our TRSs. First, the CARES Act defers the application of the 80% Limitation to our TRSs until their taxable years ended December 31, 2021, in addition to modifying the computation of the 80% Limitation. Additionally, the CARES Act permits the carryback of NOLs generated by our TRSs in 2018, 2019, and 2020 for up to five years to offset taxable income reported in any of those prior taxable years and recover income taxes paid in such prior taxable years. Other provisions of the CARES Act may also impact the computation of taxable income by any of our TRSs or Omega and Omega OP. The modifications to the NOL carryback rules do not permit the carryback of an NOL by a REIT and, thus, will not impact Omega. We do not anticipate that such changes will materially impact the computation of Omega’s taxable income, or the taxable income of any Omega entity, including our TRSs. We also do not expect that Omega or any Omega entity, including our TRSs, will realize a material tax benefit as a result of the changes to the provisions of the Code made by the CARES Act. ​ For the three months ended September 30, 2020 and 2019, we recorded approximately $0.2 million and $0.3 million, respectively, of state and local income tax provisions. For the nine months ended September 30, 2020 and 2019, we recorded approximately $0.8 million and $0.7 million, respectively, of state and local income tax provisions. For the three months ended September 30, 2020 and 2019, we recorded approximately $0.5 million and $0.2 million, respectively, of tax provisions for foreign income taxes. For the nine months ended September 30, 2020 and 2019, we recorded approximately $1.8 million and $1.3 million, respectively, of tax provisions for foreign income taxes. The expenses were included in income tax expense on our Consolidated Statements of Operations. ​ 50 Table of Contents Government Regulation and Reimbursement The healthcare industry is heavily regulated. Our operators are subject to extensive and complex federal, state and local healthcare laws and regulations. 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. Additionally, emergency legislation, including the CARES Act enacted on March 27, 2020 and discussed below, and temporary changes to regulations and reimbursement issued by the current administration in response to the COVID-19 pandemic, continue to have a significant impact on the operations and financial condition of our operators. 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 sufficiency and timeliness of additional governmental relief, the duration, spread and intensity of the outbreak, as well as the difference in how the pandemic may impact SNFs in contrast to ALFs, all of which developments and impacts 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. 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, which may result in reductions in reimbursement at both the federal and state levels. Additionally, new and evolving payor and provider programs, including but not limited to Medicare Advantage, dual eligible, value-based purchasing, payments to providers that are tied to quality and efficiency such as the Patient Driven Payment Model, and bundled payments, could adversely impact our tenants’ and operators’ liquidity, financial condition or results of operations. Significant limits on the scope of services reimbursed and/or reductions of reimbursement rates 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. The following is a discussion of certain laws and regulations generally applicable to our operators, and in certain cases, to us. Reimbursement Changes Related to COVID-19: Temporary Medicaid FMAP Increase. On March 18, 2020, the Families First Coronavirus Response Act was enacted, which provides a temporary 6.2% increase to each qualifying state and territory’s Medicaid Federal Medical Assistance Percentage (“FMAP”) effective January 1, 2020. As part of the requirements for receiving the temporary FMAP increase, states must cover testing services and treatments for COVID-19 and may not impose deductibles, copayments, coinsurance or other cost sharing charges for any quarter in which the temporary increased FMAP is claimed. The temporary FMAP increase will extend through the last day of the calendar quarter in which the COVID-19 public health emergency declared by the U.S. Department of Health and Human Services (“HHS”), including any extensions, terminates . HHS announced on October 2, 2020 that, effective October 23, 2020 the public health emergency, which had been set to expire on October 31, 2020, would be extended until December 31, 2020. In addition to maintaining the increased FMAP, this extension also allows the temporary Section 1135 waivers, including suspension of the three-day prior hospital stay coverage requirement and the relaxation of telehealth restrictions, to continue. States will make individual determinations about how this additional Medicaid reimbursement will be applied to SNFs, if at all. ​ 51 Table of Contents CARES Act and Provider Funds Appropriating $175 Billion. In further response to the pandemic, on March 27, 2020, the President signed into law the CARES Act. The CARES Act allocates $100 billion to a Public Health and Social Services Emergency Fund to “reimburse, through grants or other mechanisms, eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus.” Nursing facility operators participating in Medicare and Medicaid may be eligible to receive compensation for costs incurred in the course of providing medical services, such as those related to obtaining personal protective equipment, COVID-19 related testing supplies, and increased staffing or training, provided that such costs are not compensated by another source. The Secretary of HHS has broad authority and discretion to determine payment eligibility and the amount of such payments. Congress additionally appropriated $ 75 billion for healthcare providers through the Paycheck Protection Program and Health Care Enhancement Act , which was signed into law on April 24, 2020 . HHS is distributing this money through the Provider Relief Fund, and these payments do not need to be repaid to the extent they are used in compliance with the applicable requirements. Certain provisions of the CARES Act related to SNFs are summarized below. Distribution of Relief Funds: ● Phases 1, 2, 3 General Distributions of $88 Billion to Healthcare Providers : From April to June 2020, HHS announced distributions of congressional relief funds to healthcare providers, including a Phase 1 General Distribution of approximately $50 billion to participants in the Medicare program equivalent to 2% of their annual revenue, as well as a Phase 2 General Distribution including $18 billion in funding to providers that participate in Medicaid and the Children’s Health Insurance Program (up to 2% of their annual revenues) but who had not received funding in the initial rounds. The ultimate allocation of these distributions to healthcare providers may differ from the methodology initially announced by HHS, in which distributions would be based on prior Medicare reimbursements or historical net patient revenue. In October 2020, HHS announced a Phase 3 General Distribution of $20 billion funding for frontline healthcare providers dealing with the COVID-19 pandemic; these funds are intended to take into account financial losses and changes in operating expenses caused by COVID-19. Providers that have already received relief fund payments may also apply for these funds. In addition, in October 2020, HHS announced that certain behavioral health specialists as well as previously ineligible health care providers will be eligible to receive funds from the Provider Relief Fund. The allocation of any of these funds will not be determined until all applications are received and reviewed. In addition, distributions may be conditioned on and subject to operators meeting certain compliance obligations. ● Additional Targeted SNF Distributions of Approximately $9.5 Billion : In May 2020, HHS announced targeted distributions to skilled nursing facilities of approximately $4.9 billion from the Provider Relief Fund to offset revenue losses and assist nursing homes with additional costs related to responding to the COVID-19 public health emergency. From August through September 2020, HHS announced additional targeted distributions of $4.5 billion from the Provider Relief Fund in total to skilled nursing facilities to address critical needs in nursing homes related to infection control, such as the hiring of additional staff, implementing infection control “mentorship” programs with subject matter experts, increased testing, and providing additional technology services to residents who are unable to receive visitors. The $4.5 billion of distributions included an initial $2.5 billion to be paid out to all Medicare certified skilled nursing facilities, as well as a second distribution of approximately $2 billion to be paid out over four months as performance-based incentive payments, based on each nursing home’s relative infection and mortality rates, with the infection control component accounting for 80% of the incentive payment dollars and the mortality component accounting for 20% of the incentive payment. In addition, in August 2020, CMS released a Medicaid Informational Bulletin that provided guidance to states on flexibilities that are available to increase Medicaid reimbursement for nursing facilities that implement specific infection control practices, such as designating a quarantine or isolation wing for COVID-19 patients. ● Availability of ALF Funding : In September 2020, HHS announced that assisted living facilities may apply for funding under the Provider Relief Fund Phase 2 General Distribution allocation. 52 Table of Contents HHS continues to evaluate and provide allocations of, and issue regulation and guidance regarding, grants made under the CARES Act. There are substantial uncertainties regarding the extent to which our operators will receive such funds, the financial impact of receiving such funds on their operations or financial condition, and whether operators will be able to meet the compliance requirements associated with the funds. Temporary Suspension of Medicare Sequestration: SNFs have continued to be impacted by the Bipartisan Budget Act of 2019, which extended Medicare sequestration and Medicare reimbursement cuts to providers and plans by 2% across the board through 2029. However, the CARES Act temporarily suspends Medicare sequestration for the period of May 1 through December 31, 2020, resulting in an increase in fee-for-service Medicare payments by approximately 2% as compared to what providers would have otherwise received during this period. In exchange for this temporary suspension, the CARES Act also extends the mandatory sequestration policy by an additional one year, i.e., through 2030. Temporary suspension of certain patient coverage criteria and documentation and care requirements : The CARES Act and a series of temporary waivers and guidance issued by the CMS suspend various Medicare patient coverage criteria as well as documentation and care requirements to provide regulatory relief to ensure patients continue to have adequate access to care notwithstanding the burdens placed on healthcare providers due to the COVID-19 pandemic. These regulatory actions could contribute to a change in census volumes and skilled nursing mix that may not otherwise have occurred. It remains uncertain when federal and state regulators will resume enforcement of those regulations which are waived or otherwise not being enforced during the public health emergency due to the exercise of enforcement discretion. Medicare Accelerated and Advanced Payment Program: In an effort to increase cash flow to providers impacted by COVID-19, CMS had temporarily expanded the Accelerated and Advance Payment Programs from March 28, 2020 until April 26, 2020 in order to provide accelerated or advance payments during the period of the public health emergency to any Medicare provider or supplier who submitted a request to the appropriate Medicare Administrative Contractor and met the required qualifications. Traditionally repayment of these advance/accelerated payments is set to begin at 90 days, however CMS initially extended the repayment of these accelerated/advance payments to begin 120 days after the date of issuance of the payment and in October 2020, further extended the repayment to begin one year after payment was issued and occur over an extended period of time. Payroll Tax Deferral: 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 the end of the calendar year. Instead of depositing these taxes on a next-day or semi-weekly basis, the deposit due date for 50% of the taxes is deferred to December 31, 2021, with the remaining 50% deferred until December 31, 2022. Quality of Care Initiatives Related to COVID-19: In addition to COVID-19 reimbursement changes, the current administration and CMS have announced several regulatory initiatives focused on addressing quality of care in long-term care facilities, including those related to COVD-19 testing and infection control protocols, staffing levels, reporting requirements and visitation policies. ​ ● April 30, 2020: CMS announced that approximately $81 million in CARES Act funding would be provided to State Agencies through September 20, 2023 to increase their inspections of nursing homes. 53 Table of Contents ● April 2020: The current administration announced the formation of the Coronavirus Commission for Safety and Quality in Nursing Homes, a special task force created for the purpose of addressing the rising death toll of residents in nursing homes that is composed of leading industry experts, doctors and scientists, resident and patient advocates, family members, infection and prevention control specialists, and state and local authorities. Recommendations from the task force were released on September 16, 2020 and provided a list of steps that both providers and regulators should take to address future pandemic conditions or public health emergencies. ● April 2020: The current administration released Interim final regulation regarding the requirement for nursing home operators to report COVID-19-related data directly to the Centers for Disease Control and Prevention in addition to CMS. Nursing home providers are required to report infections and death data at least weekly to federal authorities, and by 5 p.m. the next day to residents and family members. In July 2020, CMS announced that it would begin requiring, rather than recommending, that all nursing homes in states with a specified positivity rate or greater test all nursing home staff on a regular basis, and in August 2020, CMS issued the testing requirement. ● August 26, 2020: CMS released guidance for nursing homes and clinical laboratories to assist in enhancing their abilities to prevent the spread of COVID-19 to nursing home residents and their front line staff. The nursing home guidance memo outlines steps that facilities must take under the new testing requirements, including instruction on terms of frequency, reporting, documentation and other requirements and a revised facility survey tool for program compliance. On September 23, 2020, CMS updated this guidance to adjust the frequency of testing in order to reduce the burden on skilled nursing facilities. ● September 17, 2020: CMS issued new guidance regarding visitation policies and procedures in nursing homes during the COVID-19 public health emergency. While CMS indicated that SNFs may still restrict visitation under certain circumstances, a facility’s failure to facilitate visitation, without adequate reason related to clinical necessity or resident safety, would constitute a potential violation of 42 CFR 483.10(f)(4), and the facility would be subject to citation and enforcement actions. ● Beginning in July 2020, CMS has announced various measures to supply PPE, via the Federal Emergency Management Agency, and testing equipment to nursing home providers, and in October 2020, announced measures to facilitate and prioritize distribution of vaccines, once available, to nursing homes. CMS announced that the distribution of testing equipment was designed to reduce the costs required with the mandatory testing. 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. The Select Subcommittee is seeking information from CMS on the enforcement of health and safety regulations during the crisis, data collection, and provision of life-saving supplies. Additionally, the Select Subcommittee is seeking documents and information from the five largest U.S. for-profit nursing home operators related to COVID-19 cases and deaths, testing, PPE, staffing levels and pay, legal violations, and efforts to prevent further infections, as well as additional transparency regarding the use of federal funds by nursing homes during the pandemic. Medicaid . State budgetary concerns, coupled with the implementation of rules under the Healthcare Reform Law (described further below), or prospective changes to the Healthcare Reform Law under the current administration or Congress, may result in additional significant changes in healthcare spending at the state level. Additionally, the need to control Medicaid expenditures may be exacerbated by the potential for increased enrollment in Medicaid due to unemployment and declines in family incomes resulting from the COVID-19 pandemic. 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 can adversely impact us. 54 Table of Contents In the state of Florida, the average Medicaid reimbursement rate for SNFs decreased 4.5% effective July 1, 2019, resulting from the loss of one-time discretionary funding applied to October 1, 2018 Florida Medicaid reimbursement rates to cover the impact of hold-harmless provisions in the new, price-based Prospective Payment System (“PPS”) enacted by Florida at that time. However, the net impact of this rate decrease was to revert the average rate approximately to the pre-PPS, cost-based level as of September 30, 2018, which we believe operators can generally address with operational adjustments to maintain coverage levels. A smaller discretionary increase effective October 1, 2019 increased the average rate by 0.7%. When the transition hold-harmless provisions expire on September 30, 2021, the PPS rates will no longer be dependent on discretionary funding levels. On June 29, 2020, Florida Governor Ron DeSantis signed a $92.2 billion state budget for FY 2020-2021 into law, which includes a total Medicaid rate increase of $105 million for nursing centers. At September 30, 2020, 14% of our investments were in Florida. Texas, which represents 9% of our investments as of September 30, 2020, presents a difficult operating environment for SNF operators as a result of lower statewide occupancy levels, as compared to other states, and a Medicaid rate reimbursement that we believe is among the lowest in the United States. Several of our operators have experienced lower operating margins on their SNFs in Texas, as compared to other states, as a result of the foregoing and labor costs. In mid-November 2019, CMS proposed the Medicaid Fiscal Accountability Rule (“MFAR”), which would have modified and refined the current federal portion of Medicaid funding for two programs commonly referred to as the upper payment limit (“UPL”) and provider taxes. However, the CMS withdrew the proposed rule from the regulatory agenda on September 14, 2020 in response to concerns that had been raised by states and providers about potential unintended consequences of the proposed rule, including significant funding cuts to the Medicaid program annually. ​ Medicare . On July 31, 2020, CMS issued a final rule regarding the government fiscal year (“FY”) 2021 Medicare payment rates and quality payment programs for SNFs, with aggregate payments projected to increase by $750 million, or 2.2%, for FY 2021 compared to FY 2020. This estimated reimbursement increase is attributable to a 2.2% market basket increase factor with a 0.0% reduction for the multifactor productivity adjustment mandated by the Improving Medicare Post-Acute Care Transformation Act of 2014 (“IMPACT Act”). 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 (“QRP”). The final rule also adopted revised geographic delineations provided by the Office of Management and Budget to identify a provider’s status as an urban or rural facility and to calculate the wage index. The CMS applied a five percent cap on any decreases in a provider’s wage index from FY 2020 to FY 2021. 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, rather than the volume of services the patient receives, became effective October 1, 2019 (FY 2020). The PDPM replaces the previous SNF prospective payment system that utilized the Resource Utilization Group IV case-mix methodology to classify SNF patients based on the volume of services received with a methodology that instead utilizes the International Statistical Classification of Diseases and Related Health Problems (“ ICD-10”) to classify SNF patients into certain payment groups based on their clinical disease state. In response to industry stakeholder comments, the CMS finalized changes to the ICD-10 code mappings as part of the FY 2021 SNF prospective payment system final rule, effective October 1, 2020. Effective October 1, 2019, CMS revised the definition of group therapy provided in SNFs so that it aligns with the group therapy definition used in the inpatient rehabilitation facility setting. The new definition defines group therapy as a qualified rehabilitation therapist or therapy assistant treating two to six patients at the same time who are performing the same or similar activities. CMS additionally established under the PDPM a 25% cap for concurrent and group therapy Additional changes to reimbursement for Medicare Part B therapy were included in the Bipartisan Budget Act of 2018, which permanently repealed the therapy caps that applied to Medicare Part B therapy services provided as of January 1, 2018 and reduced the reimbursement rate for Medicare Part B therapy services performed by therapy assistants to 85% of the physician fee schedule beginning January 1, 2022. The former cap amounts were retained as a threshold above which claims must include confirmation that services are medically necessary as justified by appropriate documentation in the medical record. Included within the proposed Physician Fee Schedule Rule for FY 2021, was a nine percent (9%) cut to reimbursement 9% from Medicare payments for Medicare Part B services. 55 Table of Contents 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 skilled nursing facility 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 the end of the public health emergency. 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, which became effective on October 1, 2018. These reimbursement changes have had and may 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. Healthcare Reform . A substantial number of rules and regulations have been issued under the 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”). The current administration has brought several Congressional efforts to repeal and replace the Affordable Care Act. We expect additional rules, regulations and judicial interpretations in response to legal and other constitutional challenges to be issued that may materially affect our operators’ financial condition and operations. Even if the Healthcare Reform Law is not ultimately amended or repealed, the current administration or Congress could propose changes impacting implementation of the Healthcare Reform Law. The ultimate composition and timing of any legislation enacted under the current administration that would impact the current implementation of the Healthcare Reform Law remains uncertain. Given the complexity and uncertainty regarding the future of the Healthcare Reform Law, the future impact on our operators or their ability to meet their obligations to us cannot be predicted, whether in its current form or as amended, repealed or interpreted. As part of the Healthcare Reform Law, CMS issued a final rule on October 4, 2016 modifying the conditions of participation in Medicare and Medicaid for SNFs. The extensive changes included provisions related to staff training, discharge planning, infection prevention and control programs, and pharmacy services, among others. While many of the regulations have become effective, the implementation and enforcement of some provisions, particularly with respect to the Quality Assurance Program Improvement and compliance and ethics related requirements of the Phase 3 regulations did not become effective until November 28, 2019. Quality of Care Initiatives . In addition to quality or value based reimbursement reforms, CMS has implemented a number of initiatives focused on the reporting of certain facility specific quality of care indicators that could affect our operators. Since December 2008, CMS has publicly released quality ratings for all of the nursing homes that participate in Medicare or Medicaid under its “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. 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 and the implementation of new quality measures. However, as a result of the COVID-19 pandemic, CMS made changes to, or temporarily suspended the collection and reporting of, certain survey inspection, staffing levels and quality measures, which impacted the information posted on the Nursing Home Compare website and used in the Five Star Quality Rating System calculation. In responding to the COVID-19 pandemic, CMS announced a new, targeted inspection plan to focus inspections on urgent patient safety threats and infection control, therefore causing a shift in the number of nursing homes inspected and how the inspections are conducted. It is possible that these rating changes or any other ranking system could lead to future reimbursement policies that reward or penalize facilities on the basis of the reported quality of care parameters. ​ 56 Table of Contents Office of the Inspector General Activities . The Office of Inspector General (“OIG”) 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 skilled nursing facilities. 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 2020 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 . 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”) launched ten regional Elder Justice Task Forces in 2016 which are coordinating and enhancing efforts to pursue SNFs that provide grossly substandard care to their residents. These Task Forces are composed of representatives from the U.S. Attorneys’ Offices, State Medicaid Fraud Control Units, state and local prosecutors’ offices, HHS, State Adult Protective Services agencies, Long Term Care Ombudsmen programs, and law enforcement. The DOJ has indicated that it is seeking to enhance the work of the Elder Justice Initiative to identify potential criminal charges when they uncover false claims for government reimbursements of care. The DOJ’s civil division has historically used the False Claims Act to pursue nursing homes that bill the federal government for services not rendered or care that is grossly substandard. In March 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 as poor hygiene, lax infection controls, and inadequate nurse staffing levels. On June 1, 2020, the CMS announced the imposition of civil monetary penalties for nursing homes with persistent infection control violations and increased enforcement actions for nursing homes with lower level infection control deficiencies. The CMS announced on August 14, 2020 that the agency has imposed more than $15 million in civil money penalties (CMPs) to more than 3,400 nursing homes during the public health emergency for noncompliance with infection control requirements and the failure to report coronavirus disease 2019 (COVID-19) data. On March 4, 2020, CMS prioritized its inspection protocols to allow inspectors to focus on the most serious health and safety threats like infectious diseases and abuse. Since March 4, 2020, CMS and the state survey agencies have completed infection control surveys in over 99.2% of nursing homes. These surveys have resulted in more than 180 immediate jeopardy level findings for infection control, which is triple the rate of such deficiencies found in 2019. CMS imposed civil monetary penalties (“CMPs”) for these violations totaling nearly $10 million to nursing homes across 22 states, with the average CMP imposed in the amount of $55,000. 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 Department of Justice 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. 57 Table of Contents 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. 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 Department of Justice or other regulatory agencies. In addition, MedEquities Realty Trust, Inc., which we acquired in May 2019, has responded to a Civil Investigative Demand from the Department of Justice in connection with Lakeway Regional Medical Center. See Note 16 – Commitments and Contingencies . 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. 58 Table of Contents 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. Americans with Disabilities Act (the “ADA”) . Our properties must comply with the ADA and any similar state or local laws to the extent that such properties are public accommodations as defined in those statutes. The ADA may require removal of barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. Should barriers to access by persons with disabilities be discovered at any of our properties, we may be directly or indirectly responsible for additional costs that may be required to make facilities ADA-compliant. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. Our commitment to make readily achievable accommodations pursuant to the ADA is ongoing, and we continue to assess our properties and make modifications as appropriate in this respect. 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; staffing; quality of services, including care and food service; residents’ rights, including abuse and neglect laws; and the health standards set by the federal Occupational Safety and Health Administration). 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. Such proceedings are unpredictable and may develop over lengthy periods of time. 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 growing 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. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States, and a summary of our significant accounting policies is included in Note 2 – Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the year ended December 31, 2019. Our preparation of the financial statements requires us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and accompanying footnotes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the consolidated financial statements. We have described our most critical accounting policies in our 2019 Annual Report on Form 10-K for the year ended December 31, 2019, in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. 59 Table of Contents There have been no changes to our critical accounting policies or estimates since December 31, 2019, except for the changes that resulted from the adoption of the new credit loss accounting standard on January 1, 2020, as discussed in detail in Note 1 – Basis of Presentation and Significant Accounting Policies, section “Accounting Pronouncements Adopted in 2020” of these unaudited consolidated financial statements under Part 1, Item 1 of this report and the accompanying discussion of the credit loss accounting guidance below. See also Note 2 – Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the year ended December 31, 2019. Accounting Pronouncements Adopted in 2020 In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”), which changes 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 measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. 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 $28.8 million allowance for expected credit losses with a corresponding adjustment to equity. Transition Impact of Adopting Topic 326 ​ ​ ​ ​ ​ ​ ​ ​ ​ Pre-adoption balance as of ​ Impact of adopting ​ Post-adoption balance as of Financial Statement Line Item ​ December 31, 2019 ​ Topic 326 ​ January 1, 2020 ​ ​ (in thousands) Mortgage Notes Receivable $ 773,563 $ (21,386) $ 752,177 Investment in Direct Financing Leases ​ 11,488 ​ (611) ​ 10,877 Other Investments ​ 419,228 ​ (6,688) ​ 412,540 Off-Balance Sheet Commitments ​ 20,777 ​ (100) ​ 20,677 Total $ 1,225,056 $ (28,785) $ 1,196,271 ​ Results of Operations The following is our discussion of the consolidated results of operations, financial position and liquidity and capital resources, which should be read in conjunction with our unaudited consolidated financial statements and accompanying notes. Three Months Ended September 30, 2020 and 2019 Operating Revenues Our operating revenues for the three months ended September 30, 2020 totaled $119.2 million, a decrease of approximately $114.0 million over the same period in 2019. Our third quarter 2020 operating revenue of $119 million includes primarily non-cash charges, on a net basis of $135 million, which reflects the write-off of contractual rent receivables, straight-line rent receivables and lease inducements, partially offset by the repayment of lease inducements and the acceleration of certain in-place lease liabilities. Specifically, the decrease in operating revenue was primarily the result of a $142.3 million non-cash decrease in the accounting for rental income resulting from placing three operators on a cash basis during the third quarter of 2020 and reserving the contractual receivables, straight-line rent receivables and lease inducements related to those operators. Also impacting the quarter’s operating income were a $6.7 million decrease resulting from facility sales and transitions, offset by increases in rental income of $17.3 million from the $735 million acquisition of 60 SNFs on October 31, 2019 (the “Encore Portfolio Acquisition”), a $7.8 million of additional rental income from facilities placed in service and other lease amendments in 2019 and 2020, as well as, a $5.5 million increase in mortgage and other investment income related to new mortgages and other investments to existing operators made throughout 2019 and 2020. 60 Table of Contents Operating Expenses Operating expenses for the three months ended September 30, 2020 totaled $157.9 million, an increase of approximately $58.8 million over the same period in 2019. The $58.8 million increase was primarily due to: (i) a $24.3 million increase in impairment on real estate properties related to seven facilities to reduce their books values to their estimated fair value less costs to sell or fair value, (ii) a $32.1 million increase in provision for credit losses which primarily relates to a $28.2 million reserve related to our term loans with Agemo Holdings, LLC (“Agemo”) and our adoption of ASU 2016-13 on January 1, 2020, and (iii) a $4.4 million increase in depreciation expense primarily resulting from facilities acquired in the Encore Portfolio Acquisition, other facility acquisitions, capital additions and assets placed in service. These increases were partially offset by (i) a $0.9 million decrease in acquisition and merger related costs from the MedEquities Merger and (ii) a $1.8 million decrease in real estate taxes related to facility sales and transitions and lease amendments. Other Income (Expense) For the three months ended September 30, 2020, total other expenses were $55.2 million, an increase of approximately $3.1 million over the same period in 2019. The increase was mainly due to (i) a $1.9 million increase in interest expense primarily related to increased debt balances resulting from our investments made during 2019, which includes the $500 million senior unsecured bonds issued in the third quarter of 2019 and the U.S. Department of Housing and Urban Development (“HUD”) debt assumed in the fourth quarter of 2019 from the Encore Portfolio Acquisition, and (ii) a $0.9 million increase in interest refinancing costs primarily related to the early extinguishment of two HUD loans in the third quarter of 2020. Nine Months Ended September 30, 2020 and 2019 Operating Revenues Our operating revenues for the nine months ended September 30, 2020 totaled $628.6 million, a decrease of approximately $53.6 million over the same period in 2019. The $53.6 million decrease was primarily the result of (i) an approximate $139.0 million decrease in rental income resulting from placing three operators on a cash basis during the third quarter of 2020 and reserving the contractual receivables, straight-line rent receivables and lease inducements related to those operators, and (ii) a $17.2 million decrease in rental income from facility sales and a cash basis operator offset by (i) a $58.6 million increase in rental income from the Encore Portfolio Acquisition on October 31, 2019, (ii) a $17.8 million increase in rental income from the MedEquities Merger on May 17, 2019, (iii) a $12.8 million increase from facility transitions and other lease amendments in 2019 and 2020, (iv) a $8.6 million increase in mortgage income primarily related to mortgages acquired in the MedEquities Merger and new mortgages and additional funding to existing operators made throughout 2019 and 2020, and (v) a $1.2 million increase in miscellaneous income which is primarily related to an operator’s late fees. Operating Expenses Operating expenses for the nine months ended September 30, 2020 totaled $377.7 million, an increase of approximately $78.6 million over the same period in 2019. The $78.6 million increase was primarily due to: (i) a $26.1 million increase in depreciation expense primarily resulting from the Encore Portfolio Acquisition and other facility acquisitions, (ii) a $34.2 million increase in impairment on real estate properties related to 18 facilities to reduce their book values to their estimated fair value less costs to sell or fair value and (iii) a $33.6 million increase related to our provision for credit losses which primarily relates a $28.2 million reserve related to our term loans with Agemo and our adoption of ASU 2016-13 on January 1, 2020. These increases were partially offset by (i) a $8.8 million recovery on our direct financing leases related to the final settlement of the Oriana bankruptcy and (ii) a $5.0 million decrease in acquisition and merger related costs from the MedEquities Merger. 61 Table of Contents Other Income (Expense) For the nine months ended September 30, 2020, total other expenses were $166.3 million, an increase of approximately $13.2 million over the same period in 2019. The increase was due to a (i) $11.0 million increase in interest expense primarily related to increased debt balances resulting from our investments made during 2019, which includes the $500 million senior unsecured bonds issued in the third quarter of 2019 and the HUD debt assumed in the fourth quarter of 2019 from the Encore Portfolio Acquisition, (ii) a $0.9 million increase in interest refinancing costs related to the early extinguishment of two HUD loans in the third quarter of 2020, and (iii) a $0.6 million increase in amortization of deferred financing costs primarily related to fees on the $500 million senior unsecured bonds issued in the third quarter of 2019. National Association of Real Estate Investment Trusts Funds From Operations Our funds from operations (“Nareit FFO”) for the three months ended September 30, 2020 was $15.1 million compared to $163.1 million for the same period in 2019. Our Nareit FFO for the nine months ended September 30, 2020 was $382.6 million compared to $464.4 million for the same period in 2019. 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”), and, consequently, Nareit FFO is defined as net (loss) 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. We believe that Nareit FFO is an important supplemental measure of our operating performance. Because the historical cost accounting convention used for real estate assets requires depreciation (except on land), 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. 62 Table of Contents Nareit FFO is a non-GAAP financial measure. We use Nareit FFO as one of several criteria to measure the operating performance of our business. 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 (loss) income. The following table presents our Nareit FFO results for the three and nine months ended September 30, 2020 and 2019: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2020 2019 ​ 2020 2019 ​ ​ (in thousands) ​ ​ ​ ​ ​ ​ Net (loss) income ​ $ (93,768) ​ $ 142,948 ​ $ 100,471 ​ $ 290,801 Add back loss (deduct gain) from real estate dispositions ​ ​ 749 ​ ​ (53,067) ​ ​ (13,932) ​ ​ (52,803) Deduct gain from real estate dispositions - unconsolidated joint ventures ​ (4,483) ​ (9,345) ​ (6,438) ​ (9,345) ​ ​ (97,502) ​ 80,536 ​ 80,101 ​ 228,653 Elimination of non-cash items included in net income: ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ 81,072 ​ 76,696 ​ 247,301 ​ 221,185 Depreciation – unconsolidated joint ventures ​ 3,379 ​ 1,841 ​ 10,561 ​ 4,888 Add back impairments on real estate properties ​ ​ 28,105 ​ ​ 3,836 ​ ​ 43,732 ​ ​ 9,545 Add back unrealized loss on warrants ​ 87 ​ ​ 184 ​ ​ 927 ​ ​ 170 Nareit FFO (a) ​ $ 15,141 ​ $ 163,093 ​ $ 382,622 ​ $ 464,441 (a) Includes amounts allocated to Omega stockholders and Omega OP Unit holders. ​ 63 Table of Contents Portfolio and Recent Developments The following table summarizes the significant asset acquisitions that occurred during the first nine months of 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Number of ​ ​ ​ Total ​ ​ ​ ​ Building & Site ​ Furniture Initial ​ ​ Facilities ​ Country/ ​ Investment ​ Land ​ Improvements ​ & Fixtures ​ Annual ​ Period SNF ALF Specialty MOB State ​ (in millions) Cash Yield (1) ​ Q1 — 2 — — ​ UK ​ $ 12.1 ​ $ 3.6 ​ $ 8.0 ​ $ 0.5 ​ 8.00 % Q1 1 — — — ​ IN ​ ​ 7.0 ​ ​ 0.7 ​ ​ 5.8 ​ ​ 0.5 9.50 % Q2 1 — — — ​ OH ​ ​ 6.9 ​ ​ 0.8 ​ ​ 5.5 ​ ​ 0.6 9.50 % Total 2 2 — — ​ $ 26.0 $ 5.1 ​ $ 19.3 ​ $ 1.6 ​ (1) The initial annual cash yield reflects the initial cash rent divided by the purchase price. ​ During the third quarter of 2020, we acquired one parcel of land (not reflected in the table above) for approximately $1.3 million. On May 1, 2020, we amended our initial $415 million amortizing master mortgage (the “Master Mortgage”) with Ciena Healthcare (“Ciena”) to (i) increase the interest rate on the Master Mortgage to 10.67% per annum and (ii) add an additional $83.5 million mortgage note related to eight SNFs and one ALF located in Michigan. These nine facilities were formerly leased to Ciena and were sold to Ciena in a noncash transaction that closed on May 1, 2020 and we retained the first mortgage. In connection with this sale, we recorded a loss of $3.6 million related to the write-off of the nine facilities’ straight-line rent receivable. The mortgage note matures on June 30, 2029 and bears an initial annual interest rate of 10.31% which increases each year by 2%. As of September 30, 2020, the outstanding principal balance of this mortgage note is approximately $83.4 million. In June 2020, we entered into a loan agreement with subsidiaries of Ciena to provide $43.2 million of mortgage notes related to two SNFs located in Ohio. The mortgage notes mature on June 30, 2021 and bear an initial annual interest rate of 9.5%. As of September 30, 2020, the outstanding principal balance of these mortgage notes is approximately $43.2 million. As of September 30, 2020, our total outstanding mortgage notes receivable with Ciena total $672.4 million. On April 17, 2020, we provided a $17.6 million unsecured loan to a subsidiary of Second Spring Healthcare Investments (an entity in which we have an approximate 15% ownership interest). The loan bears interest at the greater of the prime interest rate or 3-month LIBOR plus 2.75% per annum and is due on demand. As of September 30, 2020, the loan bears interest at 3.25% per annum and has a total outstanding balance of $17.6 million. In 2015 and 2017, we entered into two separate $50.0 million and $15.0 million secured revolving credit facilities with Maplewood Real Estate Holdings, LLC (“Maplewood”) and its subsidiaries. These revolving credit facilities bore interest at approximately 6.66% per annum and 9.5% per annum, respectively, and were initially scheduled to mature in 2023. As a part of an overall restructuring with this operator, the Company entered into a $220.5 million secured revolving credit facility with Maplewood on July 31, 2020, of which $132.1 million was drawn at closing. The funds drawn at closing were used to repay the prior credit facilities with Maplewood, as well as other lease obligations owed to the Company, of which approximately $55.4 million was scheduled to be repaid at termination of the master lease. Loan proceeds under the new credit facility may also be used to fund Maplewood’s working capital needs. Loans made under this facility bear interest at a fixed rate of 7% per annum and mature on June 30, 2030. As of September 30, 2020, $132.1 million remains outstanding on this credit facility to Maplewood. ​ ​ ​ ​ 64 Table of Contents Other Recent Developments On November 1, 2020, we acquired seven facilities from an unrelated third-party for $78 million. The seven facilities consist of six SNFs and one ALF representing 876 operating beds located in Virginia, were simultaneously added to an existing operator’s triple net master lease with initial annual contractual cash rent of $7.4 million. ​ On October 9, 2020, we issued $700 million aggregate principal amount of our 3.375% Senior Notes due 2031 (the “2031 Senior Notes”). The 2031 Senior Notes mature on February 1, 2031. The 2031 Senior Notes were sold at an issue price of 98.249% of their face value before the underwriters’ discount. Our net proceeds from the 2031 Senior Notes offering, after deducting underwriting discounts and expenses, were approximately $680.5 million. We used the net proceeds from the 2031 Senior Notes offering to repay the outstanding balance on our U.S. term loan and 2015 term loan and partially paydown the Omega OP term loan and revolving line of credit . ​ As a result of the repayment of the 2015 term loan and the partial paydown of the Omega OP term loan, on October 14, 2020, we settled certain interest rate swaps (interest rate swaps originated in 2015 and/or assumed in 2019) with an aggregate notional value of $275 million related to the 2015 term loan and the Omega OP term loan and paid our swap counterparties approximately $11 million. ​ Asset Held for Sale As of September 30, 2020, we have 13 facilities, totaling $35.9 million classified as assets held for sale. We expect to sell these facilities over the next twelve months. Asset Sales, Impairments, Contractual Receivables and Other Receivables and Lease Inducements Asset Sales During the first quarter of 2020, we sold six facilities subject to operating leases for approximately $18.1 million in net cash proceeds, recognizing a net gain of approximately $1.8 million. During the second quarter of 2020, we sold 15 facilities (see Portfolio and Recent Developments above) subject to operating leases and one facility subject to a direct financing lease for approximately $38.0 million in net cash proceeds, recognizing a net gain of approximately $12.8 million. During the third quarter of 2020, we sold six facilities and a parcel of land subject to operating leases for approximately $61.0 million in net cash proceeds, recognizing a net loss of approximately $0.7 million. Impairments During the first quarter of 2020, we recorded impairments on real estate properties of approximately $3.6 million on three facilities. During the second quarter of 2020, we recorded impairments on real estate properties of approximately $12.0 million on 10 facilities. During the third quarter of 2020, we recorded impairments of approximately $28.1 million on seven facilities. Our impairments for the third quarter of 2020 were offset by approximately $3.5 million of insurance proceeds related to a facility that was previously destroyed and impaired. Our recorded impairments were primarily the result of decisions to exit certain non-strategic facilities and/or operators. We reduced the net book value of the impaired facilities to their estimated fair values or, with respect to the facilities reclassified to held for sale, to their estimated fair values less costs to sell. To estimate the fair value of the facilities, we utilized a market approach which considered binding sale agreements (a Level 1 input) and/or non-binding offers from unrelated third parties and/or broker quotes (a Level 3 input). 65 Table of Contents On May 26, 2020, we executed an agreement to sell an acute care hospital located in Nevada to an unrelated third-party for $56.5 million. The agreement provided that the sale was subject to a 60-day due diligence period which expired in July 2020. During the second quarter of 2020, we recorded an impairment of approximately $2.2 million related to this facility to reduce its net book value to its fair value less costs to sell of approximately $55.3 million and reclassified the facility to assets held for sale. In July 2020, we agreed with the third-party buyer to lower the purchase price to approximately $49.0 million. The reduction in the purchase price resulted in an additional impairment of approximately $7.4 million in July 2020, and the facility was subsequently sold in September 2020. Contractual Receivables, Other Receivables and Lease Inducements A summary of our net receivables by type is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ ​ 2020 2019 ​ ​ (in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ Contractual receivables – net ​ $ 10,757 ​ $ 27,122 ​ ​ ​ ​ ​ ​ ​ ​ ​ Effective yield interest receivables ​ $ 12,481 ​ $ 12,914 ​ Straight-line rent receivables ​ 129,559 ​ 275,549 ​ Lease inducements ​ 84,373 ​ 92,628 ​ Other receivables and lease inducements ​ $ 226,413 ​ $ 381,091 ​ ​ During the first quarter of 2020, we provided approximately $16.0 million of funding to four operators, which was accounted for as lease inducements. Of the $16.0 million, $12.9 million was funded to an operator for development and start-up related costs. ​ During the second quarter of 2020, we provided approximately $12.9 million of funding to three operators, which was accounted for as lease inducements. Of the $12.9 million, $11.0 million was funded to an operator for development and start-up related costs. During the third quarter of 2020, we wrote-off approximately $142.3 million of contractual receivables, straight-line rent receivables, and lease inducements to rental income as a result of placing three operators on a cash basis resulting from a change in our evaluation of the collectability of future rent payments due under the respective lease agreements as we considered information the Company received from these three operators regarding substantial doubt as to their ability to continue as a going concern. Of the $142.3 million, $64.9 million related to Genesis Healthcare, Inc. (“Genesis”), $75.3 million related to Agemo and $2.1 million related to another operator which leases two facilities from the Company. During the third quarter of 2020, we also wrote-off approximately $1.0 million of straight-line rent receivable to rental income as a result of transitioning facilities to another existing operator. In addition, during the third quarter of 2020, we received a one-time rent payment of approximately $55.4 million from Maplewood, in conjunction with the restructuring of its master lease and loans with Omega (see Portfolio and Recent Developments above). This payment was accounted for as an adjustment to straight-line rent receivables and is being amortized over the remaining term of the master lease. ​ For the three months ended September 30, 2020 and 2019, we recorded rental income of approximately $(63.1) million and $15.1 million, respectively, and other investment income of $1.1 million and $1.2 million, respectively, from Agemo. For the nine months ended September 30, 2020 and 2019, we recorded rental income of approximately $(33.0) million and $45.5 million, respectively, and other investment income of $3.6 million and $3.3 million, respectively, from Agemo. For the three months ended September 30, 2020 and 2019, we recorded rental income of approximately $(43.6) million and $15.7 million, respectively, and other investment income of $2.7 million and $2.5 million, respectively, from Genesis. For the nine months ended September 30, 2020 and 2019, we recorded rental income of approximately $(12.5) million and $48.1 million, respectively, and other investment income of $7.8 million and $7.2 million, respectively, from Genesis. 66 Table of Contents In addition, we have accounted for Daybreak Venture LLC (“Daybreak”) on a cash basis of accounting since 2017. See “Daybreak” below. We have previously written-off our contractual rents receivable, straight-line rents receivable and lease inducements, and therefore, we have no net receivables or inducements related to Daybreak as of September 30, 2020. For the three and nine months ended September 30, 2020, we did not record any rental income from Daybreak. For the three and nine months ended September 30, 2019, we recorded rental income of approximately $0.8 million and $11.1 million, respectively, from Daybreak. Other Investments ​ On September 30, 2016, we acquired and amended a term loan of approximately $37.0 million with Agemo. A $5.0 million tranche of the term loan that bore interest at 13% per annum was repaid in August 2017. The remaining $32.0 million tranche of the term loan (the “$32.0 million term loan”) bears interest at 9% per annum and matures on December 31, 2024. The $32.0 million term loan and the $1.7 million term loan (discussed below) are secured by a security interest in certain collateral of Agemo. ​ On November 5, 2019, we provided Agemo a $1.7 million term loan (which was added to the $32.0 million term loan) that bears interest at a fixed rate of 9% per annum and was initially scheduled to mature on March 31, 2020. On February 10, 2020, we extended the maturity of this loan to January 1, 2021. During the third quarter of 2020, the Company concluded that both the $32.0 million term loan and $1.7 million term loan were impaired, based in part on our consideration of information the Company received from the operator regarding substantial doubt as to its ability to continue as a going concern. We recorded a provision for credit loss of $24.4 million to reduce the carrying value of these loans to the fair value of the underlying collateral, which was limited to our $9.3 million letter of credit (a Level 1 input). We also fully reserved approximately $3.8 million of contractual interest receivable related to the $32.0 million term loan (see Note 1 – Basis of Presentation and Significant Accounting Policies). As of September 30, 2020, approximately $9.3 million is outstanding on these term loans. On September 1, 2020, we placed both the $32.0 million and the $1.7 million term loans on a cash basis for purposes of revenue recognition. ​ On May 7, 2018, the Company provided Agemo a $25.0 million secured working capital loan bearing interest at 7% per annum and matures on April 30, 2025. The working capital loan is primarily secured by a collateral package that includes a second lien on the accounts receivable of the borrowers. The proceeds of the working capital loan were used to pay operating expenses, settlement payments, fees, taxes and other costs approved by the Company. As of September 30, 2020, approximately $25.0 million is outstanding on this working capital loan. During the third quarter of 2020, no incremental provision for credit loss was recorded for this loan given the underlying collateral value. ​ On February 28, 2020, we provided an affiliate of Agemo a $3.5 million term loan bearing interest at a fixed rate of 10% per annum (with the interest paid-in-kind) and matures on February 28, 2021. As of September 30, 2020, $3.5 million is outstanding on this term loan. During the third quarter of 2020, no incremental provision for credit loss was recorded for this loan given the underlying collateral value. At September 30, 2020, the total carrying value of our loans with Agemo and its affiliates, net of allowances for credit losses, is approximately $37.8 million. ​ On July 29, 2016, we provided Genesis a $48.0 million secured term loan bearing interest at a rate equal to the Eurodollar base rate (determined using reference rates, subject to a floor of 1.0%) or an alternative base rate (determined using reference rates, subject to a floor of 2.0%), plus in each case a specified applicable margin. The initial applicable margin for the Eurodollar base rate loans is 13.0% per annum and the initial applicable margin for the alternative base rate loans is 12.0% per annum. This loan was initially scheduled to mature on July 29, 2020. On May 9, 2019, we extended the maturity of this loan to November 30, 2021. This term loan (and the 2018 term loan discussed below) is secured by a first priority lien on and security interest in certain collateral of Genesis. ​ 67 Table of Contents On March 6, 2018, we amended certain terms of the 2016 term loan to Genesis. Commencing February 22, 2018, the 2016 term loan bears interest at a fixed rate of 14% per annum, of which 9% per annum shall be paid-in-kind. Additionally, the amended term loan does not require monthly payments of principal. All principal and accrued and unpaid interest will be due at maturity on November 30, 2021. Prior to the amendment, the term loan had required monthly principal payments of $0.25 million through July 2019, and $0.5 million from August 2019 through maturity, with a portion of the monthly interest accrued to the outstanding principal balance of the loan. In addition, in November 2017, we had provided Genesis forbearance through February 2018, which had allowed for the deferral of principal payments and permitted Genesis to accrue all interest due to the outstanding principal balance of the loan. As of September 30, 2020, approximately $63.8 million is outstanding on this term loan. ​ Also on March 6, 2018, we provided Genesis an additional $16.0 million secured term loan bearing interest at a fixed rate of 10% per annum, of which 5% per annum is paid-in-kind, that was initially scheduled to mature on July 29, 2020. On May 9, 2019, we extended the maturity of this loan to November 30, 2021. As of September 30, 2020, approximately $18.2 million is outstanding on this term loan. As of September 30, 2020, our total other investments outstanding with Genesis approximate $81.9 million. We evaluated our loans with Genesis for impairment during the third quarter of 2020, with no incremental provision for credit loss recognized given the underlying collateral value. ​ Daybreak In July 2020, we executed a Forbearance and Transition Agreement with Daybreak which, among other things, sets forth the parties’ plan to sell or re-lease the Daybreak portfolio (which plan contemplates the potential sale of 28 facilities currently leased to Daybreak to a non-Omega party for $100 million), and the Company’s agreement to forbear from exercising certain default remedies during the transition period. Consistent with the terms of the Forbearance and Transition Agreement with Daybreak, we have transitioned 14 Daybreak facilities to existing operators during the first nine months of 2020. During the fourth quarter of 2019, we transitioned two Daybreak facilities to an existing operator. The total annual contractual rent from the 16 transitioned facilities is approximately $6.1 million. In addition, we expect to transition an additional facility to an existing operator during the fourth quarter of 2020 and expect annual contractual rent on this facility of approximately $0.3 million. ​ Additionally, during the first nine months of 2020, Daybreak did not pay rent to us and we recorded impairments of approximately $11.0 million on nine Daybreak facilities that we have sold or plan to sell. ​ During the third quarter of 2020, discussions terminated on the contemplated sale transaction for $100 million, and in October 2020 the Forbearance and Transition Agreement was amended and restated to continue the forbearance. The Company is in negotiations with other third-party operators to re-lease these 28 facilities, along with three additional facilities. Further, the Company expects to re-lease or sell one additional Daybreak facility with a net book value of $0.1 million either in connection with or separate from these transactions. As of September 30, 2020, the 31 facilities subject to current re-lease negotiations have a net book value of approximately $147 million. We evaluated the facilities for impairment as of September 30, 2020 and concluded that the facilities were not impaired, as we believe that our expected annual nominal cash flows from re-leasing these facilities exceed our current net book value of the 31 facilities. To the extent certain of these 31 facilities are not re-leased to a third-party operator and are instead identified for sale, we may be required to record an impairment to the extent the sales price for a facility is less than its net book value. Accordingly, we remain in ongoing discussions with several other operators about re-leasing the remaining facilities. Any such transitions, will of course, be subject to third-party operator due diligence, regulatory approvals, legal documentation and the cooperation of Daybreak. While the ultimate outcome and timing of this process is difficult to ascertain, we continue to believe we will receive Daybreak portfolio rent or rent equivalents of between $15 million to $17 million annually after the restructuring of the portfolio is completed. However, our ability to complete the restructuring and secure the approvals necessary to do so and the ultimate rental income following any potential transition of select Daybreak facilities to other operators, may be less favorable than expected, and there can be no assurance whether or when such benefits or transition will occur. If we are unable to complete the restructuring of the Daybreak portfolio on the terms we expect, we could be required to impair our remaining assets currently leased to Daybreak. 68 Table of Contents ​ We continue to closely monitor the performance of all of our operators, as well as industry trends and developments generally. Liquidity and Capital Resources At September 30, 2020, we had total assets of $9.4 billion, total equity of $3.9 billion and debt of $5.2 billion, representing approximately 57.0% of total capitalization. Financing Activities and Borrowing Arrangements HUD Mortgage Loan Payoffs On August 26, 2020, we paid approximately $13.7 million to retire two mortgage loans guaranteed by HUD. The loans were assumed as part of an acquisition in 2019, and had an average interest rate of 3.08% per annum with maturities in 2051 and 2052. The payoff included a $0.9 million prepayment fee which is included in interest – refinancing costs on our Consolidated Statements of Operations. Subordinated Debt In connection with a 2010 acquisition, we assumed five separate $4.0 million subordinated notes bearing interest at 9% per annum that mature on December 21, 2021. Interest on these notes is due quarterly with the principal balance due at maturity. These subordinated notes may be prepaid at any time without penalty. To the extent that the operator of the facilities fails to pay rent when due to us under our existing master lease, we have the right to offset the amounts owed to us against the amounts we owe to the lender under the notes. In the fourth quarter of 2019, we had recorded a reserve of $6.5 million in connection with the operator’s failure to pay rent, and we began offsetting certain interest and principal amounts payable by us against this reserve. During the second quarter of 2020, expressly subject to our reservation of rights under the terms of the notes and related agreement, we reversed this reserve, and ceased offsetting amounts against our note payments, as a result of the operator’s payment of all current and past due rent. ​ $400 Million Forward Starting Swaps On March 27, 2020, we entered into five forward starting swaps totaling $400 million. We designated the forward starting swaps as cash flow hedges of interest rate risk associated with interest payments on a forecasted issuance of long-term debt, initially expected to occur within the next five years. The swaps are effective on August 1, 2023 and expire on August 1, 2033 and were issued at a fixed rate of approximately 0.8675%. In October 2020, we issued the 2031 Senior Notes and discontinued hedge accounting. Amounts reported in accumulated other comprehensive loss related to these discontinued cash flow hedging relationships will be reclassified to interest expense as interest payments are made on the Company’s debt. Simultaneously, we re-designated these swaps in new cash flow hedging relationships of interest rate risk associated with interest payments on another forecasted issuance of long-term debt. We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of 46 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments). ​ Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As of September 30, 2020 and December 31, 2019, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings. Omega OP, the guarantor of Parent’s outstanding senior notes, does not directly own any substantive assets other than its interest in non-guarantor subsidiaries. ​ 69 Table of Contents $200 Million Stock Repurchase Program On March 20, 2020, Omega’s Board of Directors authorized the repurchase of up to $200 million of its outstanding common stock from time to time over the twelve months ending March 20, 2021. We are authorized to repurchase shares of our common stock in open market and privately negotiated transactions or in any other manner as determined by Omega’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. Omega has no obligation to repurchase any amount of its common stock, and such repurchases, if any, may be discontinued at any time. Omega did not repurchase any of its outstanding common stock during the nine months ended September 30, 2020. ​ $500 Million Equity Shelf Program For the three months ended September 30, 2020, no shares were issued under our $500 Million Equity Shelf Program. For the three months ended September 30, 2019, we issued approximately 0.1 million shares of our common stock at an average price of $33.91 per share, net of issuance costs, generating net proceeds of $4.2 million under our $500 Million Equity Shelf Program. For the nine months ended September 30, 2020 and 2019, we issued approximately 49 thousand and 3.1 million, respectively, shares of our common stock at an average price of $34.64 per share and $34.78 per share, respectively, net of issuance costs, generating net proceeds of $1.7 million and $107.0 million, respectively, under our $500 Million Equity Shelf Program. Dividend Reinvestment and Common Stock Purchase Plan On March 23, 2020, we announced that we suspended our Dividend Reinvestment and Common Stock Purchase Plan. For the three months ended September 30, 2020, no shares were issued under our Dividend Reinvestment and Common Stock Purchase Plan. For the three months ended September 30, 2019, we issued approximately 1.0 million shares of our common stock at an average price of $37.87 per share through our Dividend Reinvestment and Common Stock Purchase Plan for gross proceeds of approximately $37.7 million. For the nine months ended September 30, 2020 and 2019, we issued approximately 90 thousand and 2.5 million, respectively, shares of our common stock at an average price of $41.80 per share and $37.06 per share, respectively, through our Dividend Reinvestment and Common Stock Purchase Plan for gross proceeds of approximately $3.7 million and $91.8 million, respectively. Commitments We have committed to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments. We expect the funding of these commitments to be completed over the next several years. Our remaining commitments at September 30, 2020, are outlined in the table below (in thousands): - ​ ​ ​ ​ ​ ​ ​ ​ ​ Total commitments $ 562,262 ​ ​ Amounts funded to date (1) ​ (467,141) ​ ​ Remaining commitments (2) ​ $ 95,121 ​ ​ (1) Includes finance costs. (2) This amount excludes our remaining commitments to fund under our other investments of approximately $109.3 million. ​ 70 Table of Contents Dividends In order to qualify 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 do distribute at least 90%, but less than 100% of our “REIT taxable income” as adjusted, we will be subject to tax thereon at regular ordinary and capital gain corporate tax rates. For the nine months ended September 30, 2020, we paid dividends of approximately $459.7 million to our common stockholders. On February 14, 2020, May 15, 2020, and August 14, 2020 we paid dividends of $0.67 per outstanding common share, respectively, to the common stockholders of record as of the last business day of the preceding month. For the nine months ended September 30, 2020, Omega OP paid distributions of approximately $16.4 million to holders of Omega OP Units other than Omega. The Omega OP Unit holders received the same distributions per unit as those paid to the common stockholders of Omega. Liquidity We believe our liquidity and various sources of available capital, including cash from operations, our existing availability under our credit facilities, existing equity sales programs, facility sales and expected proceeds from mortgage and other investment payoffs are adequate to finance operations, meet recurring debt service requirements and fund future investments through the next twelve months. We regularly review our liquidity needs, the adequacy of cash flow from operations, and other expected liquidity sources to meet these needs. We believe our principal short-term liquidity needs are to fund: ● normal recurring expenses; ● debt service payments; ● capital improvement programs; ● common stock dividends; and ● growth through acquisitions of additional properties. The primary source of liquidity is our cash flows from operations. Operating cash flows have historically been determined by: (i) the number of facilities we lease or have mortgages on; (ii) rental and mortgage rates; (iii) our debt service obligations; (iv) general and administrative expenses and (v) our operators’ ability to pay amounts owed. The timing, source and amount of cash flows provided by or used in financing activities and in investing activities are sensitive to the capital markets environment, especially to changes in interest rates. Changes in the capital markets environment may impact the availability of cost-effective capital and affect our plans for acquisition and disposition activity. Cash, cash equivalents and restricted cash totaled $40.1 million as of September 30, 2020, an increase of $6.7 million as compared to the balance at December 31, 2019. 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 – Operating activities generated $510.9 million of net cash flow for the nine months ended September 30, 2020, as compared to $405.8 million for the same period in 2019, an increase of $105.1 million, which is primarily due to facility acquisitions and transitions, acquired mortgages and other investments. 71 Table of Contents ​ Investing Activities – Net cash flow from investing activities was an outflow of $56.0 million for the nine months ended September 30, 2020, as compared to an inflow of $71.5 million for the same period in 2019. The $127.5 million change in cash flow from investing activities related primarily to (i) a $84.6 million change in mortgages – net, (ii) a $73.5 million decrease in proceeds from sale of direct financing lease and related trust, (iii) a $21.1 million change in other investments – net and (iv) a $68.8 million decrease in proceeds from the sales of real estate investments. Offsetting these changes were: (i) a $59.6 million outflow of cash to complete the MedEquities Merger in the second quarter of 2019, (ii) a $48.7 million decrease in investment in construction in progress and capital expenditures and (iii) a $22.1 million acquisition related deposit in the second quarter of 2019. ​ Financing Activities – Net cash flow from financing activities was an outflow of $447.5 million for the nine months ended September 30, 2020, as compared to an outflow of $446.2 million for the same period in 2019. The $1.3 million change in cash used in financing activities was primarily related to a $644.6 million change in our credit facility borrowings – net offset by (i) a $105.3 million decrease in cash proceeds from the issuance of common stock in 2020, as compared to the same period in 2019, (ii) a $88.1 million decrease in net proceeds from our dividend reinvestment plan in 2020, as compared to the same period in 2019, and (iii) a $413.3 million change in other long-term borrowings – net. ​ Item 3 – Quantitative and Qualitative Disclosures about Market Risk During the quarter ended September 30, 2020, there were no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019.