What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-03 compared with 2021-05-04 · 159 added, 95 removed, 239 unchanged (52% of the section changed)

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

Unless stated otherwise or the context otherwise requires, the terms “Omega”, the “Company,” “we,” “our” and “us” refer to Omega Healthcare Investors, Inc.

and its consolidated subsidiaries, including Omega OP, references to “Parent” refer to Omega Healthcare Properties, Inc.

without regard to its consolidated subsidiaries, and references to “Omega OP” mean OHI Healthcare Properties Limited Partnership and its consolidated subsidiaries.

Forward-Looking Statements and Factors Affecting Future Results

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(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, the ability of operators to comply with new infection control and vaccine protocols, the long-term impact of vaccination on facility infection rates, and the extent to which continued government support may be available to operators to offset such costs and the conditions related thereto;

(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, staffing shortages and decreased occupancy levels experienced by operators of skilled nursing facilities (“SNFs”) and assisted living facilities (“ALFs”) in connection therewith, the ability of operators to comply with new infection control and vaccine protocols, the long-term impact of vaccination on facility infection rates, 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 Omega’s operators in bankruptcy to reject unexpired lease obligations, modify the terms of Omega’s mortgages and impede the ability of Omega 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;

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particularly in the healthcare industry.

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”).

Unless stated otherwise or the context otherwise requires, the terms “Omega”, the “Company,” “we,” “our” and “us” refer to Omega Healthcare Investors, Inc.

and its consolidated subsidiaries, including Omega OP, references to “Parent” refer to Omega Healthcare Properties, Inc.

without regard to its consolidated subsidiaries, and references to “Omega OP” mean OHI Healthcare Properties Limited Partnership and its consolidated subsidiaries.

As of March 31, 2021, 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 was incorporated in the State of Maryland on March 31, 1992 and has elected to be taxed as a REIT for federal income tax purposes.

As of June 30, 2021, 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 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.”).

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COVID-19 Pandemic Update

For the year ended December 31, 2020 and for the first quarter of 2021, we have collected substantially all of the contractual rents owed to us from our operators (other than operators under a forbearance agreement prior to the pandemic).

However, the COVID-19 pandemic continues to have a significant impact on our operators.

As of April 27, 2021, our operators reported cases of COVID-19 within 212, or 22%, of our 949 operating facilities as of December 31, 2020, which includes cases involving employees and residents.

This represents a meaningful decline in cases from the 614 facilities with cases, or 64% of our 959 operating facilities, that our operators reported as of December 22, 2020.

We caution that we have not independently validated such facility virus incidence information, it may be reported on an inconsistent basis by our operators, and we 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;

For the year ended December 31, 2020 and for the first quarter of 2021, we collected substantially all of the contractual rents and mortgage interest payments owed to us from our operators (other than operators under a forbearance agreement prior to the pandemic).

However, in June 2021, we were informed by an operator, which represents approximately 3% of our revenue for the six months ended June 30, 2021 and 2020 (excluding the impact of the straight-line write-offs in 2021), that it would be unable to pay rent to us in the foreseeable future.

As of June 30, 2021, we have been unable to collect approximately $2.5 million of contractual rents due from this operator, which represents one month of contractual rent under the lease agreement, and have applied $2.5 million of the operator’s security deposit funds against their uncollected receivables.

As such, we placed the operator on a cash basis for revenue recognition based on our evaluation of the collectibility of future rent payments due under its lease agreement, and in connection with this, we wrote off approximately $17.4 million of straight-line receivables to rental income during the quarter.

We believe this operator was impacted by, among other things, reduced revenue as a result of lower occupancy and increased expenses, both as a result of the COVID-19 pandemic.

As discussed in Note 2 – Contractual Receivables and Other Receivables, we also placed a smaller operator on a cash basis in the first quarter due to collectability concerns as a result of the impacts of the COVID-19 pandemic.

With respect to our other operators, we collected substantially all contractual rents and mortgage interest payments due to us from our operators during the second quarter of 2021;

however, we remain cautious as the COVID-19 pandemic continues to have a significant impact on our operators and their financial conditions, particularly given continued uncertainty regarding the availability of sufficient government support, the persistence of staffing shortages that continue to impact our operators’ occupancy levels and profitability, and the commencement in April 2021 for many of our operators of the repayment of accelerated payments of Medicare funds that were previously received as Advanced Medicare payments in 2020.

As of July 27, 2021, our operators reported cases of COVID-19 within 153, or 16%, of our 949 operating facilities as of December 31, 2020, which includes cases involving employees and residents.

This represents a meaningful decline in cases from the 614 facilities with cases, or 64% of our 959 operating facilities, that our operators reported as of December 22, 2020, and from the 212 facilities with cases, or 22%, of our 949 operating facilities, that our operators reported as of April 27, 2021.

We caution that we have not independently validated any such facility virus incidence information, it may be reported on an inconsistent basis by our operators, and we 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.

While we believe the decline in reported cases noted above is due in large part to vaccination programs for COVID-19 which have been implemented in many of our facilities, it remains uncertain when and to what extent these vaccination programs will continue to mitigate the effects of COVID-19 in our facilities, or how effective existing vaccines will be against variants of the COVID-19 virus.

While we believe the declines in reported cases noted above is due in large part to vaccination programs for COVID-19 which have been implemented in most of our facilities, it remains uncertain when and to what extent these vaccination programs will continue to mitigate the effects of COVID-19 in our facilities, or how effective existing vaccines will be against variants of the COVID-19 virus.

The impact of these programs will depend in part on the continued speed, distribution, efficacy and delivery of the vaccine in our facilities, as well as participation levels in vaccination programs among the residents and employees of our operators.

Our operators have reported considerable variation in participation levels among both employees and residents, which may change over time as additional vaccination clinics are held.

In addition to experiencing outbreaks of positive cases and deaths of residents and employees during the pandemic, our operators have been required to, and continue to, adapt their operations rapidly throughout the pandemic to manage the spread of the COVID-19 virus as well as the implementation of new treatments and vaccines, and to implement new requirements relating to infection control, personal protective equipment (“PPE”), quality of care, visitation protocols, staffing levels, and reporting, among other regulations, throughout the pandemic.

Our operators have continued to report considerable variation in participation levels among both employees and residents, which we believe may change over time with additional vaccination education efforts.

In addition to experiencing outbreaks of positive cases and deaths of residents and employees during the pandemic, our operators have been required to, and continue to, adapt their operations rapidly throughout the pandemic to manage the spread of the COVID-19 virus as well as the implementation of new treatments and vaccines, and to implement new requirements relating to infection control, staffing levels, personal protective equipment (“PPE”), quality of care, visitation protocols, and reporting, among other regulations, throughout the pandemic while facing staffing shortages that have accelerated during the pandemic and that may impede the delivery of care.

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 PPE, testing equipment and processes and supplies, as well as implementation of new infection control protocols and vaccination programs.

In addition, many of our operators have reported experiencing declines, in some cases that are material, in occupancy levels as a result of the pandemic, which declines on average appear to be stabilizing.

We believe these declines may be in part due to COVID-19 related fatalities at the facilities, the delay of SNF placement and/or utilization of alternative care settings for those with lower level of care needs, the suspension and/or postponement of elective hospital procedures, fewer discharges from hospitals to SNFs and higher hospital readmittances from SNFs.

We believe these increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay and reliance on agency staffing due to staffing shortages, as well as a significant increase in both the cost and usage of PPE, testing equipment and processes and supplies, as well as implementation of new infection control protocols and vaccination programs.

In addition, many of our operators have reported experiencing declines, in some cases that are material, in occupancy levels as a result of the pandemic.

While these declines on average appear to be stabilizing and even marginally improving in recent months, it remains unclear when and the extent to which demand and occupancy levels will return to pre-COVID-19 levels.

We believe these occupancy declines may be in part due to staffing shortages, which in some cases have required operators to limit admissions, as well as COVID-19 related fatalities at the facilities, the delay of SNF placement and/or utilization of alternative care settings for those with lower level of care needs, the suspension and/or postponement of elective hospital procedures, fewer discharges from hospitals to SNFs and higher hospital readmittances from SNFs.

While substantial government support, primarily through the federal CARES Act in the U.S.

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It is unclear whether and to what extent such government support will continue to be sufficient and timely to offset these impacts.

In particular, it remains unclear as to whether unallocated funds under the Provider Relief Fund will be distributed to our operators in any meaningful way, whether additional funds will be added to the Provider Relief Fund or otherwise allocated to health care operators or our operators, or whether additional Medicaid funds under the recently enacted American Rescue Plan Act of 2021 (the “American Rescue Plan Act”) in the U.S.

In particular, it remains unclear as to whether unallocated funds under the Public Health and Social Services Emergency Fund (“Provider Relief Fund”) will be distributed to our operators in any meaningful way, whether additional funds will be added to the Provider Relief Fund or otherwise allocated to health care operators or our operators, or whether additional Medicaid funds under the recently enacted American Rescue Plan Act of 2021 (the “American Rescue Plan Act”) in the U.S.

will ultimately support reimbursement to our operators.

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While we continue to believe that longer term demographics will drive increasing demand for needs-based skilled nursing care, we expect the uncertainties to our business described above to persist at least for the near term until we can gain more information as to the level of costs our operators will continue to experience and for how long, and the level of additional governmental support that will be available to them, the potential support our operators may request from us and the future demand for needs-based skilled nursing care and senior living facilities.

We continue to monitor the impact of occupancy declines at many of our operators, and it remains uncertain whether and when demand and occupancy levels will return to pre-COVID-19 levels.

We continue to monitor the impacts of other regulatory changes, as discussed in Item 1.

Business – Government Regulation and Reimbursement , including any significant limits on the scope of services reimbursed and on reimbursement rates and fees, which could have a material adverse effect on an operator’s results of operations and financial condition, which could adversely affect the operator’s ability to meet its obligations to us.

We continue to monitor the impact of occupancy declines at many of our operators, and it remains uncertain whether and when demand, staffing availability and occupancy levels will return to pre-COVID-19 levels.

We continue to monitor the impacts of other regulatory changes, as discussed below, including any significant limits on the scope of services reimbursed and on reimbursement rates and fees, which could have a material adverse effect on an operator’s results of operations and financial condition, which could adversely affect the operator’s ability to meet its obligations to us.

Government Regulation and Reimbursement

The following information supplements and updates, and should be read in conjunction with, the information contained under the caption Item 1.

Business – Government Regulation and Reimbursement in our Annual Report on Form 10-K for the year ended December 31, 2020.

The healthcare industry is heavily regulated.

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There is the potential that we may be subject directly to healthcare laws and regulations because of the broad nature of some of these regulations, such as the Anti-kickback Statute and False Claims Act, among others.

The following information supplements and updates, and should be read in conjunction with, the information contained under the caption “ Item 1.

Business – Government Regulation and Reimbursement ” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Except as discussed below, there have been no changes to the matters discussed therein that we believe materially impact us.

Department of Health and Human Services (“HHS”) declared a public health emergency on January 31, 2020 following the World Health Organization's decision to declare COVID-19 a public health emergency of international concern.

This declaration, which has been extended through July 20, 2021, allows HHS to provide temporary regulatory waivers and new reimbursement rules designed to equip providers with flexibility to respond to the COVID-19 pandemic by suspending various Medicare patient coverage criteria and documentation and care requirements, including, for example, suspension of the three-day prior hospital stay coverage requirement and expanding the list of approved services which may be provided via telehealth.

This declaration, which has been extended through October 17, 2021, allows HHS to provide temporary regulatory waivers and new reimbursement rules designed to equip providers with flexibility to respond to the COVID-19 pandemic by suspending various Medicare patient coverage criteria and documentation and care requirements, including, for example, suspension of the three-day prior hospital stay coverage requirement and expanding the list of approved services which may be provided via telehealth.

These regulatory actions could contribute to a change in census volumes and skilled nursing mix that may not otherwise have occurred.

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Additionally, new and evolving payor and provider programs that are tied to quality and efficiency could adversely impact our tenants’ and operators’ liquidity, financial condition or results of operations, and there can be no assurance that payments under any of these government health care programs are currently, or will be in the future, sufficient to fully reimburse the property operators for their operating and capital expenses.

The following is a discussion of recent developments regarding certain U.S.

laws and regulations generally applicable to our operators, and in certain cases, to us, and their impact.

This discussion supplements and should be read in conjunction with the information under the heading “Item 1.

Business – Government Regulation and Reimbursement ” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Reimbursement Changes Related to COVID-19:

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States will make individual determinations about how this additional Medicaid reimbursement will be applied to SNFs, if at all.

In a further response to the pandemic, the CARES Act authorized approximately $178 Billion to be distributed through the Public Health and Social Services Emergency Fund (“Provider Relief Fund”) to reimburse eligible healthcare providers for health care related expenses or lost revenues that are attributable to coronavirus.

In a further response to the pandemic, the CARES Act authorized approximately $178 billion to be distributed through the Provider Relief Fund to reimburse eligible healthcare providers for health care related expenses or lost revenues that are attributable to coronavirus.

The Provider Relief Fund is administered under the broad authority and discretion of HHS and recipients are not required to repay distributions received to the extent they are used in compliance with applicable requirements.

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This assistance includes Medicare and Medicaid payment adjustments and an expansion of the Medicare Accelerated and Advance Payment Program, which made available accelerated payments of Medicare funds in order to increase cash flow to providers.

These payments are loans that providers must repay.

Additionally, CMS suspended Medicare sequestration payment adjustments, which would have otherwise reduced payments to Medicare providers by 2%, from May 1, 2020 through December 31, 2021, but also extended sequestration through 2030.

These payments are loans that providers are scheduled to repay beginning one year from the issuance date of each provider’s or supplier’s accelerated or advance payment, with repayment made through automatic recoupment of 25% of Medicare payments otherwise owed to the provider or supplier for eleven months, followed by an increase to 50% for another six months, after which any outstanding balance would be repaid subject to an interest rate of 4%.

We believe these repayments commenced for many of our operators in April 2021 and have adversely impacted, and will continue to adversely impact, operating cash flows of these operators.

Additionally, the Centers for Medicare and Medicaid Services (“CMS”) suspended Medicare sequestration payment adjustments, which would have otherwise reduced payments to Medicare providers by 2%, from May 1, 2020 through December 31, 2021, but also extended sequestration through 2030.

While not limited to healthcare providers, the CARES Act additionally provided payroll tax relief for employers, allowing them to defer payment of employer Social Security taxes that are otherwise owed for wage payments made after March 27, 2020 through December 31, 2020 to December 31, 2021 with respect to 50% of the payroll taxes owed, with the remaining 50% deferred until December 31, 2022.

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health care system, including the impact on quality of care provided within the skilled nursing industry.

These hearings could result in legislation imposing additional requirements on our operators.

These hearings, as well as additional calls for government review of the role of private equity in the U.S.

healthcare industry, could result in legislation imposing additional requirements on our operators.

Reimbursement Generally:

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In Texas in particular, several of our operators have historically experienced lower operating margins on their SNFs, as compared to other states, as a result of lower Medicaid reimbursement rates and higher labor costs.

Our operators in Texas may also be adversely impacted by the expected expiration, upon expiration of the federally declared public health emergency, of an add-on by the state to the daily reimbursement rate for Medicaid patients during the pandemic.

In Florida, added support to our operators during the pandemic has generally been limited, and our operators in the state may be additionally adversely impacted by the scheduled expiration in December 2021 of a three-year temporary Medicaid reimbursement rate increase by the state.

Since our operators’ profit margins on Medicaid patients are generally relatively low, more than modest reductions in Medicaid reimbursement or an increase in the percentage of Medicaid patients has in the past and may in the future adversely affect our operators’ results of operations and financial condition, which in turn could adversely impact us.

On July 29, 2021, CMS issued a final rule regarding the government fiscal year 2022 Medicare payment rates and quality payment programs for SNFs, with aggregate Medicare Part A payments projected to increase by $410 million, or 1.2%, for fiscal year 2022 compared to fiscal year 2021.

This estimated reimbursement increase is attributable to a 2.7% market basket increase factor less a 0.8 percentage point forecast error adjustment and a 0.7 percentage point productivity adjustment, and a $1.2 million decrease due to the proposed reduction to the SNF prospective payment system rates to account for the recent blood-clotting factors exclusion.

The annual update is reduced by two percentage points for SNFs that fail to submit required quality data to CMS under the SNF Quality Reporting Program.

CMS has indicated that these impact figures did not incorporate the SNF Value-Based Program reductions that are estimated to be $184.25 million in fiscal year 2022.

Payments to providers continue to be increasingly tied to quality and efficiency.

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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, together with any further reimbursement changes to PDPM, 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.

These reimbursement changes have had and may, together with any further reimbursement changes to PDPM or value-based purchasing models, in the future have an adverse effect on the operations and financial condition of some operators and could adversely impact the ability of operators to meet their obligations to us.

Department of Justice and Other Enforcement Actions:

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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, 2020.

Our financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S.

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.

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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 2020 Annual Report on Form 10-K for the year ended December 31, 2020, in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We have described our accounting policies in Note 2 – Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the year ended December 31, 2020.

There have been no material changes to our critical accounting policies or estimates since December 31, 2020.

See also Note 2 – Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the year ended December 31, 2020.

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 March 31, 2021 and 2020

Our revenues for the three months ended March 31, 2021 totaled $273.8 million, an increase of approximately $20.7 million over the same period in 2020.

The $20.7 million increase was primarily the result of (i) a $26.8 million increase in rental income resulting from facility acquisitions, facilities placed in service, and facility transitions, (ii) a $4.9 million increase in rental income resulting from the acceleration of certain in-place lease liabilities, and (iii) a $1.0 million increase in other investment income primarily related to new mortgages or notes and additional funding to existing operators.

These increases were partially offset by (i) a $8.6 million decrease in rental income resulting from placing operators on cash basis of revenue recognition and (ii) a $3.6 million decrease in rental income resulting from facility sales and facility transitions.

Expenses for the three months ended March 31, 2021 totaled $191.2 million, an increase of approximately $28.8 million over the same period in 2020.

Three Months Ended June 30, 2021 and 2020

Our revenues for the three months ended June 30, 2021 totaled $257.4 million, an increase of approximately $1.0 million over the same period in 2020.

The $1.0 million increase was primarily the result of (i) a $30.4 million increase in rental income resulting from facility acquisitions, facilities placed in service, and facility transitions and (ii) a $3.2 million increase in mortgage interest income and other investment income primarily related to new and refinanced mortgages or notes and additional funding to existing operators offset by principal payments.

These increases were partially offset by (i) a $21.5 million decrease in rental income primarily resulting from placing certain operators on a cash basis for revenue recognition, (ii) a $2.4 million decrease in rental income resulting from the acceleration of certain in-place lease liabilities, (iii) a $6.8 million decrease in rental income resulting from facility sales and facility transitions and (iv) a $1.6 million decrease in miscellaneous income which is primarily related to an operator’s late fees and reduced management fees.

Expenses for the three months ended June 30, 2021 totaled $175.1 million, an increase of approximately $7.1 million over the same period in 2020.

The $7.1 million increase was primarily due to:

(i) a $25.1 million increase in impairment on real estate properties related to four facilities in the first quarter of 2021 (compared to three facilities during the same period in 2020) to reduce their book values to their estimated fair value less costs to sell or fair value, (ii) a $3.1 million increase in interest expense primarily resulting from the issuance during the fourth quarter of 2020 of the $700 million of Senior Notes due 2031 and the issuance during the first quarter of 2021 of the $700 million of Senior Notes due 2033, partially offset by the retirement of term loans in the fourth quarter of 2020, (iii) a $2.2 million increase in depreciation expense primarily resulting from facility acquisitions and capital additions, offset by facility sales and facilities reclassified to assets held for sale, and (iv) a $2.0 million increase in acquisition, merger and transition related costs primarily resulting from the Daybreak transition.

These increases were partially offset by (i) a $1.0 million recovery for credit losses primarily resulting from decreases in average time to maturity, decreases in loss rates, and decreases in loan balances compared to a $1.5 million provision for credit losses during the same period in 2020 and (ii) a $0.9 million decrease in real estate taxes primarily related to facility sales and transitions.

(i) a $3.5 million increase in provision for credit losses primarily resulting from a $4.5 million reserve related to a term loan, (ii) a $3.6 million increase in interest expense primarily resulting from the issuance during the fourth quarter of 2020 of the $700 million of Senior Notes due 2031 and the issuance during the first quarter of 2021 of the $700 million of Senior Notes due 2033, partially offset by the retirement of term loans in the fourth quarter of 2020 and (iii) a $2.2 million increase in depreciation expense primarily resulting from facility acquisitions and capital additions, offset by facility sales and facilities reclassified to assets held for sale.

These increases were partially offset by a $3.2 million decrease in impairment on real estate properties related to three facilities in the second quarter of 2021 compared to 10 facilities during the same period in 2020.

Other Income (Expense)

For the three months ended March 31, 2021, total other income was $70.9 million, an increase of approximately $69.9 million over the same period in 2020.

The increase was mainly due to a $98.5 million increase in gain on assets sold related to the sale of 24 facilities in the first quarter of 2021 compared to the sale of six facilities during the same period in 2020 offset by a $29.7 million increase in loss on debt extinguishment primarily related to fees, premiums, and expenses related to the purchase of $350 million of the 4.375% Senior Notes due 2023 during the first quarter of 2021.

For the three months ended June 30, 2021, total other income was $4.3 million, a decrease of approximately $8.7 million over the same period in 2020.

The decrease was mainly due to an $8.7 million decrease in gain on assets sold related to the sale of six facilities in the second quarter of 2021 compared to the sale of 15 facilities during the same period in 2020.

Six Months Ended June 30, 2021 and 2020

Our revenues for the six months ended June 30, 2021 totaled $531.2 million, an increase of approximately $21.8 million over the same period in 2020.

The $21.8 million increase was primarily the result of (i) a $54.7 million increase in rental income resulting from facility acquisitions, facilities placed in service, and facility transitions and (ii) an $8.2 million increase in mortgage interest income and other investment income primarily related to new and refinanced mortgages or notes and additional funding to existing operators.

These increases were partially offset by (i) a $29.4 million decrease in rental income resulting from operators placed on a cash basis for revenue recognition, (ii) a $5.3 million decrease in rental income resulting from facility sales and facility transitions, and (iii) a $2.1 million decrease in miscellaneous income which is primarily related to an operator’s late fees and reduced management fees.

Expenses for the six months ended June 30, 2021 totaled $366.3 million, an increase of approximately $36.0 million over the same period in 2020.

The $36.0 million increase was primarily due to:

(i) a $21.9 million increase in impairment on real estate properties related to seven facilities compared to 13 facilities during the same period in 2020, (ii) a $6.9 million increase in interest expense primarily resulting from the issuance during the fourth quarter of 2020 of the $700 million of Senior Notes due 2031 and the issuance during the first quarter of 2021 of the $700 million of Senior Notes due 2033, partially offset by the retirement of term loans in the fourth quarter of 2020, (iii) a $4.4 million increase in depreciation expense primarily resulting from facility acquisitions and capital additions, offset by facility sales and facilities reclassified to assets held for sale (discussed in further detail below), (iv) a $1.8 million increase in acquisition, merger and transition related costs primarily resulting from the Daybreak transition, and (v) a $1.0 million increase in provision for credit losses primarily resulting from a $4.5 million reserve related to a term loan, increases in loan balances and increases in average time to maturity offset by decreases in loss rates compared to the same period in 2020.

Other Income (Expense)

For the six months ended June 30, 2021, total other income was $75.2 million, an increase of approximately $61.2 million over the same period in 2020.

The increase was mainly due to a $89.8 million increase in gain on assets sold related to the sale of 30 facilities compared to the sale of 21 facilities during the same period in 2020 offset by a $30.1 million increase in loss on debt extinguishment primarily related to fees, premiums, and expenses related to the purchase of $350 million of the 4.375% Senior Notes due 2023 during the first quarter of 2021.

National Association of Real Estate Investment Trusts Funds From Operations

Our funds from operations (“Nareit FFO”) for the three months ended March 31, 2021 was $170.2 million compared to $181.0 million for the same period in 2020.

Our funds from operations (“Nareit FFO”) for the three months ended June 30, 2021 was $180.8 million compared to $186.5 million for the same period in 2020.

Our Nareit FFO for the six months ended June 30, 2021 was $351.1 million compared to $367.5 million for the same period in 2020.

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 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.

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Investors and potential investors in our securities should not rely on this measure as a substitute for any GAAP measure, including net income.

The following table presents our Nareit FFO results for the three months ended March 31, 2021 and 2020:

The following table presents our Nareit FFO results for the three and six months ended June 30, 2021 and 2020:

Three Months Ended

Six Months Ended

(in thousands)

Deduct gain from real estate dispositions

Deduct gain from real estate dispositions - unconsolidated joint ventures

Add back loss (deduct gain) from real estate dispositions - unconsolidated joint ventures

Elimination of non-cash items included in net income:

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Add back impairments on real estate properties - unconsolidated joint ventures

Add back unrealized loss on warrants

(Deduct) add back unrealized (gain) loss on warrants

Portfolio and Recent Developments

The following table summarizes the significant asset acquisitions that occurred during the first three months of 2021:

The following table summarizes the significant asset acquisitions that occurred during the first six months of 2021:

(in millions)

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The acquisition involved the assumption of an in-place master lease with Brookdale Senior Living Inc.

During the second quarter of 2021, we acquired one parcel of land (not reflected in the table above) for approximately $10.4 million.

Other Recent Developments

On April 30, 2021, the Company closed a new four-year $1.45 billion senior unsecured credit facility (“Credit Facility”).

The Credit Facility replaced a $1.25 billion senior unsecured credit facility that was scheduled to mature on May 25, 2021.

On April 30, 2021, the Company closed a new four-year $50 million senior unsecured term loan facility (“OP Term Loan Facility”) to its operating partnership subsidiary.

The OP Term Loan Facility replaced a $50 million senior unsecured term loan facility that was scheduled to mature on May 25, 2022.

Asset Held for Sale

As of March 31, 2021, we have 6 facilities, totaling $7.9 million classified as assets held for sale.

We expect to sell these facilities over the next twelve months.

On July 1, 2021, the Company financed six SNFs in Ohio and amended an existing $6.4 million mortgage to include the six facilities in a consolidated $72.4 million mortgage for eight Ohio facilities bearing interest at an initial rate of 10.5% per annum.

In conjunction with this transaction, the Company also acquired three Maryland facilities that were previously subject to a mortgage issued by the Company bearing interest at 13.75% per annum with a principal balance of $36.0 million.

The purchase price for these three facilities was equal to the remaining mortgage principal amount, and the three acquired Maryland facilities were subsequently leased back to the seller for a term expiring on December 31, 2032, assuming Omega exercises the options under the agreement.

The base rent in the initial year is approximately $5.0 million and includes annual escalators of 2.5%.

On July 1, 2021, the Company also entered into a $12.0 million revolving credit facility agreement with this operator for working capital expenses for the eight Ohio facilities discussed above with a maturity date of June 30, 2022.

The credit facility bears interest at 10% per annum.

On July 14, 2021, the Company acquired two U.K.

facilities for $9.5 million and entered into a lease with an existing operator with an initial term expiring on April 23, 2027.

The base rent in the initial year is approximately $0.8 million and includes annual escalators of 2.5%.

Asset Sales, Impairments, Contractual Receivables and Other Receivables and Lease Inducements

During the first quarter of 2021, we sold 24 facilities subject to operating leases for approximately $188.3 million in net cash proceeds, recognizing a net gain of approximately $100.3 million.

During the first quarter of 2021, we recorded impairments on real estate properties of approximately $28.7 million on four facilities (three were subsequently reclassified to assets held for sale).

During the second quarter of 2021, we sold six facilities subject to operating leases for approximately $12.9 million in net cash proceeds, recognizing a net gain of approximately $4.1 million.

As of June 30, 2021, we have nine facilities and one parcel of land, totaling $35.3 million, classified as assets held for sale.

We expect to sell these facilities over the next twelve months.

During the first quarter of 2021, we recorded impairments on real estate properties of approximately $28.7 million on four facilities (three were subsequently reclassified to assets held for sale in the first quarter of 2021).

During the second quarter of 2021, we recorded impairments on real estate properties of approximately $8.8 million on three facilities (all three were subsequently reclassified to assets held for sale in the second quarter of 2021).

Our recorded impairments were primarily the result of decisions to exit certain non-strategic facilities and/or operators.

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Other receivables and lease inducements

During the first quarter of 2021, we wrote-off approximately $2.7 million of straight-line rent receivables to rental income as a result of transitioning one facility and placing one operator on a cash basis due to changes in our evaluation of the collectibility of future rent payments due under the lease agreement.

During the first and second quarters of 2021, we wrote-off approximately $2.7 million and $17.4 million, respectively, of straight-line rent receivables to rental income as a result of transitioning one facility and placing two operators on a cash basis due to changes in our evaluation of the collectibility of future rent payments due under the lease agreements.

Based on our evaluation of the collectibility of future rent payments due under the lease agreements for the two operators discussed above, we do not believe it is probable that we will be able to collect substantially all rents due.

These two operators generated approximately 3% of our total revenues (excluding the impact of straight-line rent receivable write-offs in 2021) for the six months ended June 30, 2021 and 2020.

For the six months ended June 30, 2021, we have been unable to collect approximately $3.5 million of contractual rents due from these operators.

We have applied $2.5 million of one of the operator’s security deposit funds against their uncollected receivables, which represents one month of contractual rent under the lease agreement.

We have subordinated debt to a third party with an outstanding principal balance of $20 million that matures in December 2021 (see Note 13 – Borrowing Arrangements in our Annual Report on Form 10-K for the year ended December 31, 2020).

However, that indebtedness (interest and, under some circumstances, principal) is subject to offset if contractual rent is not paid when due by one of the subject operators.

Other Investments

On March 6, 2018, we amended certain terms of our $48.0 million secured term loan with Genesis.

On March 6, 2018, we amended certain terms of our $48.0 million secured term loan with Genesis Healthcare, Inc.

The $48.0 million term loan bears interest at a fixed rate of 14% per annum, of which 9% per annum is paid-in-kind and was initially scheduled to mature on July 29, 2020.

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This term loan (and the $16.0 million term loan discussed below) is secured by a first priority lien on and security interest in certain collateral of Genesis.

As of March 31, 2021, approximately $66.7 million is outstanding on this term loan.

As of June 30, 2021, approximately $68.2 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, and was initially scheduled to mature on July 29, 2020.

The maturity date of this loan was extended during the first quarter of 2021 to January 1, 2024.

As of March 31, 2021, approximately $18.6 million is outstanding on this term loan.

During the first quarter of 2021, we transitioned 14 Daybreak facilities to existing operators and sold two Daybreak facilities.

As of March 31, 2021, we had two remaining Daybreak facilities with a net book value of approximately $0.7 million, which we expect to sell during the second quarter of 2021.

As of June 30, 2021, approximately $18.9 million is outstanding on this term loan.

During the first quarter of 2021, we transitioned 14 Daybreak Ventures, LLC (“Daybreak”) facilities to existing operators and sold two Daybreak facilities.

During the second quarter of 2021, we sold the two remaining Daybreak facilities.

The total annual rent or rent equivalents achieved through transitioning the Daybreak portfolio equal $16.6 million.

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Liquidity and Capital Resources

At March 31, 2021, we had total assets of $9.8 billion, total equity of $4.1 billion and debt of $5.5 billion, representing approximately 56.9% of total capitalization.

At June 30, 2021, we had total assets of $9.8 billion, total equity of $4.2 billion and debt of $5.3 billion, representing approximately 55.9% of total capitalization.

Financing Activities and Borrowing Arrangements

Revolving Credit Facility

On April 30, 2021, Omega entered into a credit agreement (the “2021 Omega Credit Agreement”) providing us with a new $1.45 billion senior unsecured multicurrency revolving credit facility (the “Revolving Credit Facility”), replacing our previous $1.25 billion senior unsecured 2017 multicurrency revolving credit facility (the “2017 Revolving Credit Facility”).

The 2021 Omega Credit Agreement contains an accordion feature permitting us, subject to compliance with customary conditions, to increase the maximum aggregate commitments thereunder to $2.5 billion, by requesting an increase in the aggregate commitments under the Revolving Credit Facility or by adding term loan tranches.

The Revolving Credit Facility bears interest at LIBOR (or in the case of loans denominated in GBP, the Sterling overnight index average reference rate plus an adjustment of 0.1193% per annum) plus an applicable percentage (with a range of 95 to 185 basis points) based on our credit ratings.

The Revolving Credit Facility matures on April 30, 2025, subject to Omega’s option to extend such maturity date for two six-month periods.

The Revolving Credit Facility may be drawn in Euros, GBP, Canadian Dollars (collectively, “Alternative Currencies”) or U.S.

Dollars (“USD”), with a $1.15 billion tranche available in USD and a $300 million tranche available in Alternative Currencies.

For purposes of the Revolving Credit Facility, references to LIBOR include the Canadian dealer offered rates for amounts offered in Canadian Dollars and any other Alternative Currency rate approved in accordance with the terms of the 2021 Omega Credit Agreement for amounts offered in any other non-London interbank offered rate quoted currency, as applicable.

We incurred $12.9 million of deferred costs in connection with the 2021 Omega Credit Agreement.

On April 30, 2021, Omega OP entered into a credit agreement (the “2021 Omega OP Credit Agreement”) providing it with a new $50 million senior unsecured term loan facility (the “OP Term Loan”).

The OP Term Loan replaces the $50 million senior unsecured term loan obtained in 2017 (the “2017 OP Term Loan”) and the related credit agreement.

The OP Term Loan bears interest at LIBOR plus an applicable percentage (with a range of 85 to 185 basis points) based on our credit ratings.

The OP Term Loan matures on April 30, 2025, subject to Omega OP’s option to extend such maturity date for two, six-month periods.

We incurred $0.4 million of deferred costs in connection with the 2021 Omega OP Credit Agreement.

$700 Million 3.250% Senior Notes due 2033

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In March 2021, in conjunction with the issuance of $700 million aggregate principal amount of our 3.25% Senior Notes due 2033, we discontinued hedge accounting for these five forward starting swaps.

Amounts reported in Accumulated Other Comprehensive Income related to these discontinued cash flow hedging relationships will be reclassified to interest expense over a ten year term.

Amounts reported in Accumulated Other Comprehensive Income (“AOCI”) related to these discontinued cash flow hedging relationships will be reclassified to interest expense over a ten year term.

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.

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During March 2021 and concurrent with the settlement of our GBP-denominated term loan and repayment of our GBP-denominated borrowings under our line of credit, we entered into four foreign currency forwards that mature on March 8, 2024 to hedge a portion of our net investments in foreign operations, effectively replacing the terminated net investment hedge.

For these derivatives that are designated and qualify as net investment hedges, the gain or loss on the derivative is reported in Accumulated Other Comprehensive Income as part of the cumulative translation adjustment.

Amounts are reclassified out of Accumulated Other Comprehensive Income into earnings when the hedged net investment is either sold or substantially liquidated.

Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants.

As of March 31, 2021 and December 31, 2020, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.

For these derivatives that are designated and qualify as net investment hedges, the gain or loss on the derivative is reported in AOCI as part of the cumulative translation adjustment.

Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated.

Supplemental Guarantor Information

Parent has issued approximately $4.9 billion aggregate principal of senior notes outstanding at March 31, 2021 that were registered under the Securities Act of 1933, as amended.

Parent has issued approximately $4.9 billion aggregate principal of senior notes outstanding at June 30, 2021 that were registered under the Securities Act of 1933, as amended.

The senior notes are guaranteed by Omega OP.

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Accordingly, separate consolidated financial statements of Omega OP have not been presented.

Parent and Omega OP, on a combined basis, have no material assets, liabilities or operations other than financing activities (including borrowings under the senior unsecured revolving and term loan credit facility, Omega OP term loan and the outstanding senior notes) and their investments in non-guarantor subsidiaries.

Parent and Omega OP, on a combined basis, have no material assets, liabilities or operations other than financing activities (including borrowings under the outstanding senior notes, the Revolving Credit Facility and the OP Term Loan) and their investments in non-guarantor subsidiaries.

Omega OP is currently the sole guarantor of our senior notes.

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However, the guarantees are effectively subordinated to any secured debt of Omega OP.

As of March 31, 2021, there were no significant restrictions on the ability of Omega OP to make distributions to Omega.

$500 Million Equity Shelf Program

The table below presents information regarding the shares issued under the Equity Shelf Program for the three months ended March 31, 2020 and 2021:

As of June 30, 2021, there were no significant restrictions on the ability of Omega OP to make distributions to Omega.

At-The-Market Offering Programs

During the third quarter of 2015, Omega entered into Equity Distribution Agreements with several financial institutions to sell $500.0 million of shares of common stock from time to time through an “at-the-market” (“ATM”) offering program (the “2015 ATM Program”).

During the second quarter of 2021, the we terminated the 2015 ATM Program and entered into a new ATM Equity Offering Sales Agreement pursuant to which shares of common stock having an aggregate gross sales price of up to $1.0 billion (the “2021 ATM Program”) may be sold from time to time (i) by Omega through several financial institutions acting as a sales agent or directly to the financial institutions as principals, or (ii) by several financial institutions acting as forward sellers on behalf of any forward purchasers pursuant to a forward sale agreement.

Under the 2021 ATM Program, compensation for sales of the shares will not exceed 2% of the gross sales price per share for shares sold through each financial institution.

The use of forward sales under the 2021 ATM Program generally allows Omega to lock in a price on the sale of shares of common stock when sold by the forward sellers but defer receiving the net proceeds from such sales until the shares of our common stock are issued at settlement on a later date.

We did not utilize the forward provisions under the 2021 ATM Program during the three months ended June 30, 2021.

The table below presents information regarding the shares issued under the 2021 and 2015 ATM Programs for the three and six months ended June 30, 2020 and 2021:

Shares issued

Average Price

Three Months Ended

Average Net Price

Gross Proceeds

(in millions)

Per Share (1)

(in millions)

March 31, 2020

March 31, 2021

Three Months Ended

June 30, 2020

Three Months Ended

June 30, 2021

Six Months Ended

June 30, 2020

Six Months Ended

June 30, 2021

(1) Represents the average price per share after commissions.

Dividend Reinvestment and Common Stock Purchase Plan

The table below presents information regarding the shares issued under the Dividend Reinvestment and Common Stock Purchase Plan for the three months ended March 31, 2020 and 2021:

The table below presents information regarding the shares issued under the Dividend Reinvestment and Common Stock Purchase Plan for the three and six months ended June 30, 2020 and 2021:

Shares issued

Gross Proceeds

Three Months Ended

(in millions)

March 31, 2020

March 31, 2021

Three Months Ended

June 30, 2020

Three Months Ended

June 30, 2021

Six Months Ended

June 30, 2020

Six Months Ended

June 30, 2021

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 March 31, 2021, are outlined in the table below (in thousands):

Our remaining commitments at June 30, 2021, are outlined in the table below (in thousands):

Total commitments

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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 three months ended March 31, 2021, we paid dividends of approximately $158.3 million to our common stockholders.

For the six months ended June 30, 2021, we paid dividends of approximately $316.5 million to our common stockholders.

On February 16, 2021, we paid dividends of $0.67 per outstanding common share to the common stockholders of record as of the close of business on February 8, 2021.

On May 17, 2021, we paid dividends of $0.67 per outstanding common share to the common stockholders of record as of the close of business on May 3, 2021.

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.

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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 $55.9 million as of March 31, 2021, a decrease of $111.7 million as compared to the balance at December 31, 2020.

Cash, cash equivalents and restricted cash totaled $104.6 million as of June 30, 2021, a decrease of $63.0 million as compared to the balance at December 31, 2020.

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 $176.0 million of net cash flow for the three months ended March 31, 2021, as compared to $139.1 million for the same period in 2020, an increase of $36.9 million, which is primarily due to facility acquisitions and transitions, investments in mortgages and other investments, and a reduction in lease inducements provided to our operators.

Investing Activities – Net cash flow from investing activities was an outflow of $396.3 million for the three months ended March 31, 2021, as compared to an outflow of $55.2 million for the same period in 2020.

The $341.1 million change in cash flow from investing activities related primarily to a $575.4 million increase in real estate acquisitions, offset by (i) a $170.2 million increase in proceeds from the sales of real estate investments, (ii) a $35.0 million change in other investments – net, (iii) a $26.7 million decrease in investment in construction in progress and capital expenditures and (iv) a $2.5 million refund of an acquisition related deposit in the first quarter of 2021.

Financing Activities – Net cash flow from financing activities was an inflow of $108.6 million for the three months ended March 31, 2021, as compared to an inflow of $235.2 million for the same period in 2020.

The $126.6 million change in cash provided by financing activities was primarily related to (i) a $364.0 million change in our credit facility borrowings – net, (ii) a $33.8 million increase in payment of financing related costs and (iii) a $3.7 million increase in dividends paid, offset by (i) a $206.8 million change in other long-term borrowings – net, (ii) a $58.3 million increase in cash proceeds from the issuance of common stock in 2021, as compared to the same period in 2020 and (iii) a $11.7 million increase in net proceeds from our dividend reinvestment plan in 2021, as compared to the same period in 2020.

Operating Activities – Operating activities generated $378.3 million of net cash flow for the six months ended June 30, 2021, as compared to $329.4 million for the same period in 2020, an increase of $48.9 million, which is primarily driven by an increase of $45.9 million of net income, adjusted for non-cash items, due to revenue growth as a result of facility acquisitions and transitions, investments in mortgages and other investments.

A $3.0 million change in the net movements of the operating assets and liabilities, primarily driven by a reduction in lease inducements provided to our operators, also contributed to the overall increase in cash provided by operating activities.

Investing Activities – Net cash flow from investing activities was an outflow of $387.1 million for the six months ended June 30, 2021, as compared to an outflow of $96.7 million for the same period in 2020.

The $290.4 million change in cash flow from investing activities related primarily to (i) a $579.0 million increase in real estate acquisitions and (ii) a $8.5 million increase in investments in unconsolidated joint ventures, offset by (i) a $145.1 million increase in proceeds from the sales of real estate investments, (ii) a $79.6 million increase in mortgages collections, net of placements, (iii) a $38.5 million decrease in investment in construction in progress and capital expenditures, (iv) a $27.4 million increase in other investment proceeds, net of new investments, (v) a $3.1 million increase in receipts from insurance proceeds and (vi) a $2.5 million refund of an acquisition related deposit in the first quarter of 2021.

Financing Activities – Net cash flow from financing activities was an outflow of $54.3 million for the six months ended June 30, 2021, as compared to an outflow of $224.1 million for the same period in 2020.

The $169.8 million change in cash provided by financing activities was primarily related to (i) a $148.9 million increase in cash proceeds from the issuance of common stock in 2021, as compared to the same period in 2020, (ii) a $73.5 million increase in net proceeds from our dividend reinvestment plan in 2021, as compared to the same period in 2020 and (iii) $7.8 million increase in proceeds from other long-term borrowings, net of repayments offset by (i) a $48.1 million increase in payment of financing related costs and (ii) a $9.4 million increase in dividends paid.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

During the quarter ended March 31, 2021, 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, 2020.

During the quarter ended June 30, 2021, 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, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis