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Item 7. Management’s Discussion and Analysis

2022-02-17 compared with 2021-02-22 · 274 added, 348 removed, 116 unchanged (84% of the section changed)

Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

For information with respect to our 2018 activity, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 10-K for the year ended December 31, 2019 filed with the SEC on February 28, 2020 (the “2019 Form 10-K”), which is available free of charge on the SEC’s website at www.sec.gov and the Company’s website at www.omegahealthcare.com.

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.

This document contains “forward-looking statements” within the meaning of the federal securities laws.

These statements relate to our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements other than statements of historical facts.

In some cases, you can identify forward-looking statements by the use of forward-looking terminology including, but not limited to, terms such as “may,” “will,” “anticipates,” “expects,” “believes,” “intends,” “should” or comparable terms or the negative thereof.

These statements are based on information available on the date of this filing and only speak as to the date hereof and no obligation to update such forward-looking statements should be assumed.

Our actual results may differ materially from those reflected in the forward-looking statements contained herein as a result of a variety of factors, including, among other things:

(1) those items discussed under “Risk Factors” in Part I, Item 1A to our annual report on Form 10-K;

(2) uncertainties relating to the business operations of the operators of our assets, including those relating to reimbursement by third-party payors, regulatory matters and occupancy levels;

(3) the impact of the 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, and the extent to which continued government support may be available to operators to offset such costs and the conditions related thereto;

(4) 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;

(5) our ability to re-lease, otherwise transition, or sell underperforming assets or assets held for sale on a timely basis and on terms that allow us to realize the carrying value of these assets;

(6) the availability and cost of capital to us;

(7) changes in our credit ratings and the ratings of our debt securities;

(8) competition in the financing of healthcare facilities;

(9) competition in long-term healthcare industry and shifts in the perception of various types of long-term care facilities, including SNFs and ALFs;

(10) additional regulatory and other changes in the healthcare sector;

(11) changes in the financial position of our operators;

(12) the effect of economic and market conditions generally and, particularly, in the healthcare industry;

(13) changes in interest rates;

(14) the timing, amount and yield of any additional investments;

(15) changes in tax laws and regulations affecting real estate investment trusts (“REITs”);

(16) the potential impact of changes in the skilled nursing facility (“SNF”) and assisted living facility (“ALF”) markets or local real estate conditions on our ability to dispose of assets held for sale for the anticipated proceeds or on a timely basis, or to redeploy the proceeds therefrom on favorable terms;

(17) our ability to maintain our status as a REIT;

(18) the effect of other factors affecting our business or the businesses of our operators that are beyond our or their control, including natural disasters, other health crises or pandemics and governmental action;

particularly in the healthcare industry.

The following discussion and analysis is based primarily on the consolidated financial statements of Omega Healthcare Investors, Inc.

presented in conformity with U.S.

generally accepted accounting principles (“GAAP”) for the periods presented and should be read together with the notes thereto contained in this Annual Report on Form 10-K.

Other important factors are identified in “Forward-Looking Statements” and “Item 1A - Risk Factors” above.

Overview and Outlook

The Company 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.”).

Omega Healthcare Investors, Inc.

(“Parent”) is a Maryland corporation that, together with its consolidated subsidiaries has elected to be taxed as a REIT for federal income tax purposes.

Omega is structured as an umbrella partnership REIT (“UPREIT”) under which all of Omega's assets are owned directly or indirectly by, and all of Omega's operations are conducted directly or indirectly through, its operating partnership subsidiary, Omega OP.

As of December 31, 2021, Parent owned approximately 97% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and other investors owned approximately 3% of the outstanding Omega OP Units.

Omega has one reportable segment consisting of investments in healthcare-related real estate properties located in the United States (“U.S.”) and the United Kingdom (“U.K.”).

Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), and to a lesser extent, independent living facilities (“ILFs”), rehabilitation and acute care facilities (“specialty facilities”) and medical office buildings (“MOBs”).

Our core portfolio consists of long-term leases and mortgage agreements.

All of our leases to our healthcare operators are “triple-net” leases, which require the operators (we use the term “operator” to refer to our tenants and 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 is derived from fixed and variable rate loans to our operators and/or their principals to fund working capital and capital expenditures.

Our core portfolio consists of our long-term leases and mortgage loans with healthcare operating companies and affiliates (collectively, our “operators”).

All of our leases to our operators are “triple-net” leases, which require the operators to pay all property-related expenses.

All of our mortgages are secured by first liens on the underlying real estate and personal property of the operators.

In addition to our core investments, we selectively make loans to operators for 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.

From time to time, we also acquire equity interests in joint ventures or entities that support the long-term healthcare industry and our operators.

Our portfolio of investments at December 31, 2021, included 960 healthcare facilities, located in 42 states and the U.K.

1 unchanged sentence

Our real estate investment in these facilities totaled approximately $10.1 billion at December 31, 2021, with approximately 98% of our real estate investments related to long-term healthcare facilities.

The portfolio is made up of (i) 738 SNFs, (ii) 115 ALFs, (iii) 28 specialty facilities, (iv) two medical office buildings, (v) fixed rate mortgages on 56 SNFs, three ALFs and three specialty facilities and (vi) 22 facilities that are held for sale.

At December 31, 2020, we held other investments of approximately $467.4 million, consisting primarily of secured loans to third-party operators of our facilities and $200.6 million of investment in five unconsolidated joint ventures.

Omega’s consolidated financial statements include the accounts of (i) Parent, (ii) Omega OP, and (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 accounts and transactions have been eliminated in consolidation, and Omega’s net earnings are reduced by the portion of net earnings attributable to noncontrolling interests.

The portfolio is made up of (i) 685 SNFs, (ii) 133 ALFs, (iii) 20 ILFs, (iv) 16 specialty facilities, (v) two MOBs, (vi) fixed rate mortgages on 59 SNFs, two ALFs and two specialty facilities and (vii) 41 facilities that are held for sale.

At December 31, 2021, we held other investments of approximately $469.9 million, consisting primarily of secured loans to third-party operators of our facilities and $194.7 million of investments in six unconsolidated joint ventures.

As healthcare delivery continues to evolve, we continuously evaluate potential investments, our assets, operators and markets to position our portfolio for long-term success.

1 unchanged sentence

COVID-19 Pandemic Update

For the year ended December 31, 2020, we have collected substantially all of the contractual rents owed to us from our operators.

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

As of February 9, 2021, our operators have reported cases of COVID-19 within 535, or 56.4%, of our 949 operating facilities as of December 31, 2020, which includes cases involving employees and residents.

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;

The COVID-19 pandemic has significantly and adversely impacted SNFs and long-term care providers due to the higher rates of virus transmission and fatality among the elderly and frail populations that these facilities serve.

As a result, many of our operators have been and may continue to be significantly impacted by the pandemic.

During the third and fourth quarters of 2020, four of our operators, including Agemo Holdings, LLC (“Agemo”) and Genesis Healthcare, Inc.

(“Genesis”), indicated in their financial statements substantial doubt regarding their ability to continue as going concerns, citing in part the impact of the COVID-19 pandemic and uncertainties regarding the continuing availability of sufficient government support.

This resulted in placing these operators on a cash basis of revenue recognition and a corresponding write-off of approximately $143.0 million in aggregate of contractual receivables, straight-line receivables and lease inducements to rental income during fiscal year 2020.

During the year ended December 31, 2021, Agemo, Gulf Coast Health Care LLC (together with certain affiliates “Gulf Coast”), Guardian Healthcare (”Guardian”) and one other operator either failed to make contractual rent or interest payments for a period or have informed us that they would be unable to pay us rent for the foreseeable future.

See “Portfolio and Recent Developments – Guardian” below.

In addition, on October 14, 2021, Gulf Coast commenced voluntary cases under chapter 11 of the U.S.

Bankruptcy Code.

See “Receivables, Other Investments and Operator Collectibility – Gulf Coast” below.

As of December 31, 2021, we have placed six operators, inclusive of Gulf Coast, Guardian and the one other non-paying operator noted above, on a cash basis of revenue recognition during 2021 as collection of substantially all contractual lease payments with these six operators was no longer probable.

We believe these operators were impacted by, among other things, reduced revenue as a result of lower occupancy and increased expenses resulting from the COVID-19 pandemic and uncertainties regarding the continuing availability of sufficient government support.

In connection with these developments, we wrote off approximately $36.0 million in aggregate of straight-line receivables and lease inducements to rental income for the year ended December 31, 2021 (in connection with the six operators placed on a cash basis during the year).

We have also have taken impairments of $83.4 million for the year ended December 31, 2021 in connection with loans outstanding with Agemo, Gulf Coast and Guardian, all of whom are non-paying operators.

The six operators that were placed on a cash basis during 2021 collectively represent 6.6% and 7.3%, respectively, of our total revenues (excluding the impact of the write-offs in 2021 and 2020) for the years ended December 31, 2021 and 2020.

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, the impact of governmental vaccine mandates for staff on these ongoing staffing shortages, other factors that may impact virus transmission in our facilities, including genetic mutations of the virus into new variants, 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 and the commencement in December 2021 of repayment of deferred FICA obligations.

As of January 26, 2022, our operators reported cases of COVID-19 within 713, or 75.5%, of our 944 operating facilities as of September 30, 2021, which includes cases involving employees and residents.

This represents a significant increase from the 263 facilities with cases, or 27.7%, of our 949 operating facilities, that our operators reported as of October 27, 2021.

Consistent with national trends, we experienced a slight downturn in the number of COVID-19 cases in our facilities from September to November of 2021, followed by a slight increase in December and a meaningful increase in January driven by new variants.

The January 2022 case counts are consistent with case rates that were experienced in January 2021, which represented an increase over the December 22, 2020 cases in 614 facilities, or 64% of our 959 operating facilities.

We caution that we have not independently validated any such facility virus incidence information, which may be reported on an inconsistent basis by our operators, and we can provide no assurance regarding the information’s accuracy or that there have not been any changes since the time it was obtained from our operators;

we also undertake no duty to update this information.

It remains uncertain when and to what extent vaccination programs for COVID-19, which have been implemented in many of our facilities, will mitigate the effects of COVID-19 in our facilities;

the impact of these programs will depend in part on the speed, distribution, 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.

It remains uncertain when and to what extent vaccination programs for COVID-19 and any booster doses will mitigate the effects of COVID-19 in our facilities, particularly with regard to new variants of the virus, the impact of governmental vaccine mandates for staff on ongoing staffing shortages in our facilities and other factors that impact virus transmission in our facilities.

The impact of these programs will depend in part on the continued efficacy and delivery of the vaccine and booster doses in our facilities, compliance with staff vaccination requirements and participation levels in vaccination programs among the residents and employees of our operators and in the communities in which they operate.

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 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”), testing mandates, 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.

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.

These increases have been offset to some extent by increases in reimbursements due to increased skilling in place, which has been necessitated by pandemic-related protocols and may decrease when such protocols subside.

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.

The federal government announced in August and September 2021 that it would be requiring SNF and healthcare workers to be vaccinated against COVID-19 and issued an emergency implementing regulation effective November 5, 2021 requiring covered healthcare facilities to ensure eligible staff have received a first vaccine dose as of December 5, 2021 and a second dose of a two-dose vaccine as of January 4, 2022, with certain permitted exemptions in alignment with federal law, which were subsequently extended by the U.S.

Centers for Medicare and Medicaid Services by between one to two months depending on the applicable state.

Notwithstanding these extensions, vaccination rates have increased in anticipation of the full implementation of the requirements and we expect them to further increase once such requirements are fully implemented.

However, we expect that such mandates may exacerbate ongoing staffing shortages in skilled nursing and senior housing facilities.

In addition, operators who do not achieve full compliance with the requirements may face potential survey issues and penalties.

At this time, there is significant uncertainty regarding the impact of such developments.

In addition, our facilities, on average, have experienced declines, in some cases that are material, in occupancy levels as a result of the pandemic.

While these declines have generally improved on average during 2021, new variants have caused improvement in occupancy to stall towards the end of 2021 and average occupancy has not returned to pre-pandemic levels.

It remains unclear when and the extent to which demand and occupancy levels will return to pre-COVID-19 levels.

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

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

and distribution of PPE, vaccines and testing equipment by the federal government, has been allocated to SNFs and to a lesser extent to ALFs, further government support will likely be needed to continue to offset these impacts and it is unclear whether and to what extent such government support has been and will continue to be sufficient and timely to offset these impacts.

Further, to the extent these impacts continue or accelerate and are not offset by additional government relief that is sufficient and 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, during the third and fourth quarters of 2020, four of our operators indicated 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, the impact of vaccination programs and participation levels in those programs in reducing the spread of COVID-19 in our facilities, and the extent to which funding support from the federal government and the states will continue to offset these incremental costs as well as lost revenues.

and distribution of PPE, vaccines and testing equipment by federal and state governments, was allocated to SNFs and to a lesser extent to ALFs in 2020, federal relief efforts were limited in 2021 as have been relief efforts in certain states.

We believe further government support will be needed to continue to offset these impacts.

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

In particular, while $25.5 billion in federal funding for healthcare providers impacted by COVID-19 was announced in September 2021 with distributions beginning in late 2021, it remains unclear the extent to which these funds or remaining 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 healthcare operators or our operators, or whether additional Medicaid funds under the American Rescue Plan Act of 2021 (the “American Rescue Plan Act”) in the U.S.

will ultimately support reimbursement to our operators.

Further, to the extent the cost and occupancy impacts on our operators continue or accelerate and are not offset by continued government relief that is sufficient and timely, we anticipate that the operating results of additional operators may be materially and adversely affected, some may be unwilling or unable to pay their contractual obligations to us in full or on a timely basis and we may be unable to restructure such obligations on terms as favorable to us as those currently in place.

There are a number of uncertainties we face as we consider the potential impact of COVID-19 on our business, including how long census disruption and elevated COVID-19 costs will last, the impact of vaccination programs, including booster doses, and participation levels in those programs in reducing the spread of COVID-19 in our facilities, the impact of genetic mutations of the virus into new variants on our facilities, the impact of vaccine mandates on ongoing staffing shortages in our facilities, and the extent to which funding support from the federal government and the states will continue to offset these incremental costs as well as lost revenues.

Notwithstanding vaccination programs, we expect that heightened clinical protocols for infection control within facilities will continue for some period;

however, we do not know if future reimbursement rates or equipment provided by governmental agencies will be sufficient to cover the increased costs of enhanced infection control and monitoring.

While we continue to believe that longer term demographics will drive increasing demand for needs-based skilled nursing care, we expect the uncertainties to our business described above to persist at least for the near term until we can gain more 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, 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.

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

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

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.

Other Trends and Conditions

In addition to the impacts of COVID-19 discussed above, our operations have also been and may continue to be impacted by increased competition for the acquisition of facilities in the U.S., which has decreased the number of investment opportunities that would be accretive to our portfolio.

As part of our continuous evaluation of our portfolio and in connection with certain operator workout transactions, we expect to continue to opportunistically sell assets, or portfolios of assets, from time to time.

2021 and Recent Highlights

Acquisition and Other Investments

On January 20, 2021, we acquired 24 senior living facilities from Healthpeak Properties, Inc.

for $510 million.

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

The master lease provides for 2021 contractual rent of approximately $43.5 million, and includes 24 facilities representing 2,552 operating units located in located in Arizona (1), California (1), Florida (1), Illinois (1), New Jersey (1), Oregon (6), Pennsylvania (1), Tennessee (1), Texas (6), Virginia (1), and Washington (4).

In February 2021, we sold 16 facilities for approximately $149.6 million in cash proceeds and recorded a gain on sale of approximately $94.4 million.

These 16 facilities were held for sale as of December 31, 2020 with a carrying value of approximately $49.3 million.

See “ Portfolio and Other Developments” below for a description of 2020 acquisitions and other developments.

Financing Highlights

$700 Million 3.375% Senior Notes due 2031

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, our 2015 term loan and pay down 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.

Portfolio and Other Developments

2020 Acquisitions and Other

The following table summarizes the significant asset acquisitions that occurred in 2020:

(in millions)

Cash Yield (1)

(1) Initial annual cash yield reflects the initial annual contractual cash rent divided by the purchase price.

In 2020, the Company also invested $43 million in two SNF mortgages and $111 million in capital expenditure and construction projects.

2019 Acquisitions and Other

The following table summarizes the significant transactions that occurred in 2019:

(in millions)

Cash Yield (1)

CA, CT, IN, NV, SC, TN, TX

FL, ID, KY, LA, MS, MO, MT, NC

(1) Initial annual cash yield reflects the initial annual contractual cash rent divided by the purchase price.

(2) The acquisition was accounted for as a business combination.

The other acquisitions were accounted for as asset acquisitions.

(3) Acquired via a deed-in-lieu of foreclosure.

Encore Portfolio Acquisition

On October 31, 2019, we completed the approximate $757 million portfolio acquisition of 60 facilities (the “Encore Portfolio”).

Consideration consisted of approximately $369 million of cash and the assumption of approximately $389 million in mortgage loans guaranteed by the HUD.

MedEquities Merger

On May 17, 2019, we completed our merger (the “MedEquities Merger”) with MedEquities Realty Trust, Inc.

(“MedEquities”) and its subsidiary operating partnership and the general partner of its subsidiary operating partnership.

In connection with the MedEquities Merger, we issued approximately 7.5 million shares of Omega common stock and paid approximately $63.7 million of cash consideration to former MedEquities stockholders.

We borrowed approximately $350 million under our existing senior unsecured revolving credit facility to fund the cash consideration and the repayment of MedEquities’ previously outstanding debt.

As a result of the MedEquities Merger, we acquired 33 facilities subject to operating leases, four mortgages, three other investments and an investment in an unconsolidated joint venture.

We also acquired other assets and assumed debt and other liabilities.

Based on the closing price of our common stock on May 16, 2019, the fair value of the consideration exchanged approximated $346 million.

The MedEquities facilities acquired in 2019 are included in our results of operations from the date of acquisition.

For the period from May 17, 2019 through December 31, 2019, we recognized approximately $35.2 million of total revenue from the assets acquired in connection with the MedEquities Merger.

For the year ended December 31, 2019, we incurred approximately $5.1 million of acquisition and merger related costs associated with the MedEquities Merger.

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

During the fourth quarter of 2020, we sold 16 facilities (12 were previously held for sale at September 30, 2020) for approximately $63.7 million in net cash proceeds recognizing a gain on sale of approximately $5.2 million.

In 2020, we sold 43 facilities (six were previously held for sale at December 31, 2019) for approximately $180.9 million in net cash proceeds recognizing a net gain of approximately $19.1 million.

In 2019, we sold 34 facilities (one was previously held for sale at December 31, 2018) for approximately $219.3 million in net cash proceeds recognizing a net gain of approximately $55.7 million.

As of December 31, 2020, 22 facilities, totaling approximately $81.5 million are classified as assets held for sale.

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

During the fourth quarter of 2020, we recorded impairments on real estate properties of approximately $30.2 million on seven facilities (none of which were subsequently reclassified to held for sale).

For the year ended December 31, 2020, we recorded impairments on real estate properties of approximately $76.0 million on 25 facilities.

After considering the impairments recorded and facilities sold during the year, the total net recorded investment in these properties was approximately $12.3 million as of December 31, 2020, with approximately $0.2 million related to properties classified as assets held for sale.

Our impairments were offset by approximately $3.5 million of insurance proceeds received related to a facility that was previously destroyed and impaired.

For the year ended December 31, 2019, we recorded net impairments on real estate properties of approximately $45.3 million on 23 facilities.

After considering the impairments recorded and facilities sold during the year, the total net recorded investment in these properties was approximately $23.4 million as of December 31, 2019, with approximately $4.6 million related to properties classified as assets held for sale.

Our impairments were offset by approximately $3.7 million of insurance proceeds received related to two facilities that were 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 assets 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).

Contractual Receivables and Other Receivables and Lease Inducements

(in thousands)

Contractual receivables – net

Effective yield interest receivables

Straight-line rent receivables

Lease inducements

Other receivables and lease inducements

In 2020, we wrote-off approximately $143.0 million of contractual receivables, straight-line rent receivables, and lease inducements to rental income as a result of placing four operators on a cash basis resulting from a change in our evaluation of the collectibility of future rent payments due under the respective lease agreements as further discussed in Note 2 – Summary of Significant Accounting Policies .

In part, our conclusions were based on information the Company received from these four operators during the third and fourth quarters of 2020 regarding substantial doubt as to their ability to continue as a going concern.

Of the $143.0 million, $64.9 million related to Genesis Healthcare, Inc.

(“Genesis”), $75.3 million related to Agemo Holdings, LLC (“Agemo”) and $2.8 million related to two other operators which lease five facilities from the Company.

During 2020, we also wrote-off approximately $3.6 million of straight-line rent receivables to rental income as a result of transitioning facilities to other existing operators.

In addition, during 2020, we received a one-time rent payment of approximately $55.4 million from Maplewood Real Estate Holdings, LLC (“Maplewood”), in conjunction with the restructuring of its master lease and loans with Omega.

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.

During 2020, we also provided approximately $34.1 million of funding to four operators, which was accounted for as lease inducements.

Of the $34.1 million, $23.9 million was funded to Maplewood for development and start-up related costs.

For the years ended December 31, 2020 and 2019, we recorded rental (loss) income of approximately $(22.4) million and $60.6 million, respectively, and other investment income of $4.9 million and $4.5 million, respectively, from Agemo.

For the years ended December 31, 2020 and 2019, we recorded rental income of approximately $2.3 million and $64.0 million, respectively, and other investment income of $10.6 million and $9.7 million, respectively, from Genesis.

Other investments

On September 30, 2016, we acquired and amended a term loan with a fair value 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 bears interest at 9% per annum and currently matures on December 31, 2024.

The $32.0 million term loan is secured by a security interest in certain collateral of Agemo.

During the third quarter of 2020, we concluded that the $32.0 million term loan was impaired, based in part on our consideration of information we received in the quarter from the operator regarding substantial doubt as to its ability to continue as a going concern.

We recorded a provision for credit loss of $22.7 million to reduce the carrying value of this loan to the fair value of the underlying collateral, which was limited to our $9.3 million letter of credit and placed the loan on a cash basis.

We also fully reserved approximately $3.8 million of contractual interest receivable related to the $32.0 million term loan (see Note 2 – Summary of Significant Accounting Policies).

As of December 31, 2020, the carrying amount of the loan, net of allowances is approximately $9.3 million.

On May 7, 2018, we provided Agemo a $25.0 million secured working capital loan bearing interest at 7% per annum that 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 Omega.

As of December 31, 2020, approximately $25.0 million is outstanding on this working capital loan.

During 2020, no incremental provision for credit loss was recorded for this loan given the underlying collateral value.

On November 5, 2019, we provided Agemo a $1.7 million term loan (which was added to the $32.0 million term loan) bearing interest at a fixed rate of 9% per annum with a scheduled maturity in January 2021.

This loan was repaid in 2020.

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) with a scheduled maturity in February 2021.

This loan was repaid in 2020.

At December 31, 2020, the total carrying value of our loans outstanding with Agemo and its affiliates, net of allowances for credit losses, is approximately $34.3 million.

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

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.

The maturity date of this loan was extended to January 1, 2022.

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

As of December 31, 2020, approximately $65.2 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 to January 1, 2022.

As of December 31, 2020, approximately $18.4 million is outstanding on this term loan.

As of December 31, 2020, our total other investments outstanding with Genesis was approximately $83.6 million.

We evaluated our loans with Genesis for impairment during 2020, with no incremental provision for credit loss recognized given the underlying collateral value.

On January 11, 2019, pursuant to a bankruptcy court order, affiliates of Orianna Health Systems (“Orianna”) purchased the remaining 15 SNFs (during 2018 we recorded $27.2 million of additional impairment to reduce the remaining investment in direct financing lease covering 15 facilities located in the Southeast region of the U.S.

to their estimated fair values) subject to the direct financing lease with Orianna for $176 million of consideration, comprised of $146 million in cash received by Orianna and a $30.0 million seller note held by the Company.

The $30.0 million note bears interest at 6% per annum and matures on January 11, 2026.

Interest on the unpaid principal balance is due quarterly in arrears.

Commencing on January 11, 2022, quarterly principal payments are due based on a 15-year amortization schedule on the then outstanding principal balance of the loan.

On the same date, Orianna repaid $25.0 million of our then outstanding debtor in possession financing, including all related interest.

On January 16, 2019, the bankruptcy court confirmed Orianna’s plan of reorganization, creating a Distribution Trust (the “Trust”) to distribute the proceeds from Orianna’s sale of the remaining 15 SNFs, as well as the Trust’s collections of Orianna’s accounts receivable portfolio.

In January 2019, we reclassified our net investment in direct financing lease of $115.8 million from the Trust to other assets on our Consolidated Balance Sheets.

For the period from January 16, 2019 through December 31, 2019, we received approximately $94 million from the Trust as a partial liquidation.

In March 2019, we received updated information from the Trust indicating diminished collectibility of the accounts receivable owed to us.

As a result, we recorded an additional $7.7 million allowance.

As of December 31, 2019, our remaining receivable from the Trust was approximately $14.1 million which was recorded in other assets on our Consolidated Balance Sheets.

During 2020, we received approximately $17.2 million from the Trust of which approximately $3.1 million is recorded in (recovery) impairment of direct financing leases on our Consolidated Statements of Operations.

During the third quarter of 2017, we placed Daybreak on a cash basis for revenue recognition as a result of nonpayment of funds owed to us.

During the fourth quarter of 2017, we executed a Settlement and Forbearance Agreement with Daybreak which permitted Daybreak to defer payments up to 23% of their contractual rent until January 2018, subject to certain conditions.

During the fourth quarter of 2018, Daybreak was no longer in compliance with the 2017 Settlement and Forbearance Agreement.

On January 30, 2019, we entered into a Second Amendment to the Settlement and Forbearance Agreement under which we agreed to defer approximately $4.2 million of rent in the fourth quarter of 2018 and approximately $2.5 million (or approximately one month’s rent) in each of the first two quarters of 2019.

Except for $1.1 million in required real estate tax escrows, Daybreak met their contractual payment obligations through the second quarter of 2019;

however, during the second half of 2019, Daybreak did not meet their full contractual payment obligations to us as we received approximately $1.3 million of cash rent.

During 2020, as part of our plan to transition and sell our Daybreak facilities, we transitioned 31 Daybreak facilities to existing operators.

The total annual contractual rent from the 31 transitioned facilities is approximately $12.4 million.

In 2021, we expect to transition 14 additional facilities to existing operators with annual contractual rent of approximately $4.0 million.

We currently plan to sell the remaining four Daybreak facilities (with a net book value as of December 31, 2020 of approximately $1.6 million) in 2021.

The transition or sale of these facilities will complete our exit from our relationship with Daybreak.

During 2020 and 2019, we recorded impairments of approximately $41.2 million and $28.3 million on 16 facilities and 11 facilities with Daybreak, respectively.

During 2020 and 2019, we sold seven Daybreak facilities and a parcel of land and two Daybreak facilities, respectively for gains on sale of $1.3 million and $0.5 million, respectively.

Daybreak did not pay any rent to us in 2020.

Upon conclusion of the restructuring of the Daybreak portfolio, we expect to receive rent or rent equivalents of between $15 million to $17 million annually related to that portfolio.

● We acquired 32 facilities for an aggregate consideration of $604.0 million during the year ended December 31, 2021.

The initial cash yield (the initial annual contractual cash rent divided by the purchase price) on these asset acquisitions was between 7.89% and 9.25%.

This includes the acquisition of 24 facilities from Healthpeak Properties, Inc.

(“Healthpeak”) for $511.3 million in the first quarter.

We also had $58.6 million of non-cash acquisitions of facilities previously subject to mortgage loans with Omega in which principal amounts under the loan agreements were reduced or settled in exchange for title to the facilities.

● We invested $140.0 million under our construction-in-progress and capital improvement programs during the year ended December 31, 2021.

This includes the purchase of a real estate property located in Washington, D.C.

in the third quarter for approximately $68.0 million that Omega, in conjunction with Maplewood Senior Living (along with affiliates, “Maplewood”), plans to redevelop into a 174-bed ALF and lease back to Maplewood.

● We financed $82.5 million of new mortgage loans for eight facilities with a weighted average interest rate of 10.3%.

In 2021, we also advanced $4.2 million under existing mortgage loans.

Dispositions and Impairments

● In 2021, we sold 48 facilities for approximately $318.5 million in net cash proceeds, recognizing a net gain of approximately $161.6 million.

● In 2021, we recorded impairments on real estate properties of approximately $44.7 million on 14 facilities primarily as a result of reclassifying facilities to held for sale.

● In 2021, we terminated the Daybreak Ventures, LLC (“Daybreak”) master lease and fully exited our relationship after transitioning 14 Daybreak facilities to existing operators and selling the four remaining Daybreak facilities.

● In December 2021, we entered into an agreement to sell 22 facilities that were previously leased and operated by Gulf Coast Health Care LLC (together with certain affiliates “Gulf Coast”) for estimated gross proceeds of $317.5 million.

The agreement includes an earnout clause pursuant to which the buyer is obligated to pay an additional $18.7 million to Omega if certain financial metrics are achieved at the facilities in the five years following the sale.

The sale is targeted to close on or around April 1, 2022.

See “Collectibility Issues” below for further developments related to Gulf Coast.

Financing Activities

● On March 10, 2021, the Company issued $700 million aggregate principal amount of its 3.250% Senior Notes due 2033.

The notes were sold at a public offering price of 99.304% of their face value before the underwriters’ discount.

The Company’s net proceeds from the offering were used to repay $350 million of aggregate principal of our 4.375% Senior Notes due 2023 on March 18, 2021 and partially repay borrowings under the Company’s then outstanding revolving credit facility and term loans.

As a result of the notes retirement, the Company recorded approximately $30.8 million in early extinguishment of debt charges.

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

The Revolving 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’s operating partnership subsidiary entered into a new four-year $50 million senior unsecured term loan facility (the “OP Term Loan”).

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

● On May 13, 2021, we established a $1.0 billion at-the-market program (the “2021 ATM Program”) to sell shares of our common stock from time to time in an at-the-market offering.

The 2021 ATM Program replaced our $500 million Equity Shelf Program that was entered into in 2015 (the “2015 ATM Program”).

● We sold 7.6 million shares of common stock under our 2015 ATM Program, 2021 ATM Program and Dividend Reinvestment and Common Stock Purchase Plan (“DRSPP”) during the year ended December 31, 2021.

Aggregate net proceeds from these sales generated $278.4 million during 2021.

Other Highlights

● In January 2022, our Board authorized the repurchase of up to $500 million of our outstanding common stock, from time to time, through March 2025.

● During 2021, we made $62.1 million of new other investment loans with a weighted average interest rate of 9.3%.

In 2021, we also advanced $88.4 million under existing other investment loans.

● In the third quarter of 2021, we made an investment of $20.0 million in SafelyYou, Inc.

(“SafelyYou”), a technology company that has developed artificial intelligence-enabled video that detects and helps prevent resident falls in ALFs and SNFs.

Through our investment, we obtained preferred shares representing 5% of the outstanding equity of SafelyYou and warrants to purchase SafelyYou common stock representing an additional 5% of outstanding equity as of the date of our investment, which are subject to vesting conditions based on SafelyYou’s deployment of our invested capital to support Omega facilities and operators.

As part of our investment strategy, we will continue to evaluate investments in companies that provide complementary products and services that improve the quality of our facilities and allow our operators to improve care.

● In 2021, Omega was included in the Bloomberg Gender-Equality Index (GEI) – one of only 380 companies worldwide, and fewer than 15 U.S.

REITs, to be included in the 2021 index.

Collectibility Issues

● During the second quarter of 2021, Gulf Coast stopped paying contractual rent under its master lease agreement for 24 facilities because of on-going liquidity issues.

On October 14, 2021, Gulf Coast commenced voluntary cases under chapter 11 of the U.S.

Bankruptcy Code.

As a result of Gulf Coast’s non-payment of contractual rent, in the second quarter of 2021, we placed Gulf Coast on a cash basis of revenue recognition and wrote-off straight-line rent receivable balances of $17.4 million through rental income.

Subsequent to placing Gulf Coast on a cash basis of revenue recognition in June 2021, we recognized $24.6 million of contractual rent during the remaining period of 2021, based on our ability to offset any uncollected rent receivables against Gulf Coast’s security deposit and against certain debt obligations of Omega.

In connection with the bankruptcy, we agreed to provide up to $25.0 million in senior secured debtor-in-possession (“DIP”) financing to Gulf Coast, subject to certain conditions, to provide liquidity and assist with the transition of operations in our 23 open facilities.

Operations of the 23 open facilities were transitioned to a new manager on December 1, 2021 for an interim period until the license for the facilities could be obtained by a new operator.

In the fourth quarter of 2021, we funded $20.5 million under the DIP facility and fully reserved for the loan principal through the provision for credit losses.

During the Interim Period, no rent is being paid by Gulf Coast, and we have provided a $20.0 million working capital loan to the new manager, discussed in further detail in Note 8 – Other Investments to our Consolidated Financial Statements.

● From August 2021 through October 2021 and December 2021, Agemo Holdings, LLC (“Agemo”) failed to pay contractual rent and interest due under their lease and loan agreements, but paid rent and interest in November 2021.

As of December 31, 2021, we have two loans outstanding to Agemo, a term loan with remaining principal of $32.0 million that bears interest at 9% per annum and matures on December 31, 2024 (the “Agemo Term Loan”) and a $25.0 million secured working capital loan bearing interest at 7% per annum that matures on April 30, 2025 (the “Agemo WC Loan”).

In the third quarter of 2021, we recorded a provision for credit losses of $16.7 million related to these loans as a result of a reduction in the fair value of the underlying collateral assets supporting the current carrying values.

During the third and fourth quarters of 2021, we recorded $8.7 million of revenue by collecting rental and interest payments and we recorded $8.5 million of revenue by drawing on the letter of credit and through application of the security deposit balance.

● From October 2021 through December 2021, Guardian Healthcare (“Guardian”) failed to make contractual rent and interest payments under its lease agreement for 26 operating facilities and on its $112.5 million mortgage loan agreement, bearing interest at 10.81%, for nine facilities, due to ongoing liquidity issues.

As a result of Guardian’s non-payment of contractual rent, in the fourth quarter of 2021, we placed Guardian on a cash basis of revenue recognition and wrote off approximately $14.0 million of straight-line rent receivables and lease inducements through rental income.

As of December 31, 2021, we have $7.4 million of letters of credit from Guardian as collateral which could be applied against our uncollected rent and interest receivables.

On December 30, 2021, we acquired two facilities, previously subject to the Guardian mortgage loan, in consideration for a reduction of $8.7 million in the mortgage principal and added the facilities to the master lease agreement.

During the fourth quarter of 2021, we concluded that the $112.5 million first mortgage loan was impaired.

We recorded a provision for credit loss of $38.2 million during the fourth quarter of 2021 to reduce the carrying value of this loan to the fair value of the underlying collateral.

See Note 9 – Allowance for Credit Losses to our Consolidated Financial Statements.

● In addition to the Gulf Coast and Guardian straight-line receivable write-offs in 2021 discussed above, during the year ended December 31, 2021, we wrote off straight-line rent receivable balances of $5.9 million through rental income primarily due to placing four other operators (one operator in the first quarter, two operators in the third quarter and one operator in the fourth quarter) on a cash basis of revenue recognition.

We determined that collection of substantially all contractual lease payments with these operators was no longer probable.

● In January and February 2022, an operator, representing 3.4% of total revenue (excluded the impact of write-offs) for the year ended December 31, 2021, did not pay its contractual amounts due under its lease agreement.

The operator asked for a short-term rent deferral and negotiations with the operator are on-going.

Omega holds a $1.0 million letter of credit from this operator.

The operator remains current on its loan obligations, which are secured by a first lien on the accounts receivable of the operator, as discussed further in Note 8 – Other Investments to our Consolidated Financial Statements.

● On January 27, 2022, the Board of Directors declared a cash dividend for the quarter ended December 31, 2021 of $0.67 per share.

Results of Operations

The following is our discussion of the consolidated results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020.

For a discussion of our results of operation for the year ended December 31, 2019 as compared to the year ended December 31, 2018, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2019 Form 10-K .

Our revenues for the year ended December 31, 2020 totaled $892.4 million, a decrease of $36.4 million over the same period in 2019.

For a discussion of our results of operation for the year ended December 31, 2020 as compared to the year ended December 31, 2019, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”).

Our revenues for the year ended December 31, 2021 totaled $1.1 billion, an increase of $170.4 million over the same period in 2020.

Following is a description of certain of the changes in revenues for the year ended December 31, 2021 compared to 2020:

● Rental income was $753.4 million, a decrease of $50.6 million over the same period in 2019.

The decrease was primarily the result of (i) $144.7 million related to placing four operators on a cash basis of revenue recognition due to information we received from them regarding substantial doubt as to their ability to continue as a going concern and reserving for our contractual receivables, straight-line rent receivables and lease inducements related to these operators, (ii) $4.7 million related to certain other operators on cash basis, (iii) $13.1 million from facility transitions and sales in 2019 and 2020, offset by (i) $12.3 million from facilities placed in service during 2019 and 2020, (ii) $83.9 million related to facility acquisitions and (iii) $8.3 million related to the acceleration of in-place leases resulting from facility transitions, lease terminations and acquired leases.

● Rental income was $923.7 million, an increase of $170.3 million over the same period in 2020.

The increase was primarily the result of (i) $109.3 million increase due to a net reduction in straight-line rent receivable and lease inducement write-offs in 2021 following significant write-offs associated with Agemo and Genesis in the third quarter of 2020 as a result of placing these operators on a cash basis for revenue recognition, (ii) a $101.4 million increase related to facility acquisitions made in 2021 (primarily the 24 facilities acquired from Healthpeak in the first quarter), the completion of the construction of certain facilities that were placed in service in 2021 (primarily related to developmental projects with Maplewood), and incremental revenue as a result of transitioning facilities previously associated with Daybreak to other operators, (iii) a $7.7 million increase related to Gulf Coast as a result of accelerating rent due to a default under its master lease agreement and (iv) a $5.5 million one-time rent payment from a cash basis operator for past due contractual amounts owed under its lease agreement partially offset by a (a) $49.5 million decrease in rental income resulting from not recording straight-line rent for operators placed on a cash basis for revenue recognition in 2020 and 2021 and resulting from facility sales and (b) $4.7 million decrease related to the acceleration of the amortization of in-place lease intangibles resulting from facility transitions and lease terminations.

● Mortgage interest income totaled $91.7 million, an increase of $2.2 million over the same period in 2020.

The increase was primarily due to the new mortgages and additional funding to existing operators made throughout 2019 and 2020 and mortgages acquired in the MedEquities Merger.

The increase was primarily due to new and refinanced mortgages and additional funding to existing operators made throughout 2020 and 2021, offset by principal payments.

As noted above, in 2021, we funded $86.7 million for new or existing mortgages loans.

Our expenses for the year ended December 31, 2021, totaled $777.0 million, an increase of approximately $42.0 million over the same period in 2020.

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● Our depreciation and amortization expense was $342.0 million for the year ended December 31, 2021, compared to $329.9 million for the same period in 2020.

The increase was primarily resulting from the MedEquities Merger and Encore Portfolio acquisition, other facility acquisitions, capital additions and assets placed in-service offset by a reduction in depreciation expense related to facility sales and facilities reclassified to assets held for sale.

● Our general and administrative expense was $59.9 million, compared to $57.9 million for the same period in 2019.

The increase primarily related to the increase in stock based compensation expense offset by a reduction in professional service and other costs.

● Our real estate taxes decreased $2.6 million compared to the same period in 2019.

The decrease primarily re sulted from lease amendments, facility sales and transitions.

● Our $3.1 million decrease in acquisition, merger and transition related costs primarily resulted from the MedEquities Merger.

The increase primarily relates to the timing of facility acquisitions and capital expenditures, partially offset by a reduction in depreciation expense related to facility sales and facilities reclassified to assets held for sale.

● Our general and administrative (“G&A”) expense was $64.6 million, compared to $59.9 million for the same period in 2020.

The increase primarily related to (i) a $2.6 million increase in stock-based compensation expense (see Note 19 – Stock-Based Compensation to the Consolidated Financial Statements for a full summary of stock-compensation movements over the last three years) and (ii) a $1.6 million increase in professional service costs related to the Gulf Coast bankruptcy and related matters.

● Our impairment on real estate properties was $44.7 million, compared to $72.5 million for the same period in 2020.

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The 2021 and 2020 impairments were primarily the result of decisions to exit certain non-strategic facilities and/or operators.

● Our (recovery) impairment on direct financing leases was approximately $(3.1) million, compared to $7.9 million for the same period in 2019.

Our (recovery) impairment on direct financing leases primarily relates to the Orianna bankruptcy and proceeds received from the Trust.

● Our $38.0 million increase in provision for credit losses was the result of adopting Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326) on January 1, 2020 and includes reserves related to our other investments with Agemo.

● Our recovery on direct financing leases was approximately $0.7 million, compared to $3.1 million for the same period in 2020.

Our recovery on direct financing leases primarily relates to the Orianna Health Systems bankruptcy and proceeds received from the Trust (See Note 6 – Leases to the Consolidated Financial Statements for further information regarding Orianna Health Systems).

● Our $39.7 million increase in provision for credit losses primarily relates to increase in the amount of specific reserves recorded against loans in 2021 compared to 2020.

In 2021, we recorded provisions of $16.7 million (in the third quarter) related to Agemo’s loans, $20.0 million (in the fourth quarter) related to the Gulf Coast DIP facility, and $38.2 million (in the fourth quarter) related to Guardian’s mortgage loan.

In 2020, we recorded provisions of $22.7 million against Agemo’s loans.

● Our interest expense was $234.6 million, compared to $223.4 million for the same period in 2020.

The increase primarily related to (i) interest on the $700 million senior notes issued in October 2020, (ii) interest on the $500 million senior notes issued in September 2019 and (iii) interest on the HUD debt that we assumed in the Encore Portfolio acquisition, partially offset by paydowns of certain term loans and the credit facility.

The increase primarily related to (i) interest on the $700 million senior notes issued in the fourth quarter of 2020 and (ii) interest on the $700 million senior notes issued in the first quarter of 2021, partially offset by the retirement of our previous $425 million senior unsecured U.S.

Dollar term loan facility and our previous $250 million senior unsecured term loan facility in the fourth quarter of 2020, the partial paydown of our previous $50 million senior unsecured term loan obtained in 2017 in the fourth quarter of 2020, the redemption of $350 million of the 4.375% Senior Notes due 2023 and the repayment of outstanding borrowings on the 2017 Revolving Credit Facility and the Sterling term loan in the first quarter of 2021 and lower average borrowings under the Revolving Credit Facility.

Other Income (Expenses)

For the year ended December 31, 2020, total other income was $4.9 million, a decrease of approximately $51.6 million over the same period in 2019.

The decrease was primarily due to (i) a $13.3 million loss on debt extinguishment primarily resulting from the termination of certain interest rate swaps, the write-off of unamortized deferred costs related to the repayment of certain term loans and the prepayment of two mortgage loans guaranteed by HUD and (ii) a $36.6 million decrease in gain on assets sold – net resulting from the sale of 43 facilities and 34 facilities during 2020 and 2019, respectively, as we continue to exit certain facilities, operator relationships and/or states to improve the strength of our overall portfolio.

For the year ended December 31, 2021, total other income was $130.3 million, an increase of approximately $125.4 million over the same period in 2020.

The increase was primarily due to a $142.5 million increase in gain on assets sold – net resulting from the sale of 48 facilities and 43 facilities during 2021 and 2020, respectively, as we continue to exit certain facilities, operator relationships and/or states to improve the strength of our overall portfolio, offset by a $30.8 million loss on debt extinguishment primarily resulting from fees, premiums, and expenses related to the redemption of $350 million of the 4.375% Senior Notes due 2023 during the first quarter of 2021.

Income Tax Expense

As a REIT, we generally are not subject to federal income taxes on the REIT taxable income that we distribute to stockholders, subject to certain exceptions.

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The loss carry-forward is fully reserved as of December 31, 2021 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, 2020, December 31, 2019 and December 31, 2018 may be carried forward indefinitely.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) modified the NOL carryback rules to limit recovery of taxes paid in prior tax periods.

Under current law, NOL carry-forwards generated up through December 31, 2017 may be carried forward for no more than 20 years, and our NOL carry-forwards generated in our taxable years ended after December 31, 2017 may be carried forward indefinitely.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) modified the NOL carryback rules to permit the use of NOLs arising after December 31, 2017 and before January 1, 2021 to be carried back to recover taxes paid in prior tax periods.

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.

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For the year ended December 31, 2021, we recorded approximately $1.4 million of federal, state and local income tax provision and approximately $2.4 million of tax provision for foreign income taxes.

These amounts do not include any income or franchise taxes payable to certain states and municipalities.

These amounts do not include any gross receipts or franchise taxes payable to certain states and municipalities.

Income from Unconsolidated Joint Ventures

For the year ended December 31, 2021, income from unconsolidated joint ventures was $16.1 million, an increase of approximately $9.9 million over the same period in 2020.

The increase was primarily due to one of the joint ventures realizing a $14.9 million gain on sale of real estate investments during 2021.

National Association of Real Estate Investment Trusts Funds From Operations

Our funds from operations (“Nareit FFO”), a non-GAAP financial measure as further described below, for the year ended December 31, 2020 was $555.9 million compared to $640.0 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 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.

We use funds from operations (“Nareit FFO”), a non-GAAP financial measure, as one of several criteria to measure the operating performance of our business.

Nareit FFO is defined as net income (computed in accordance with GAAP), adjusted for the effects of asset dispositions and certain non-cash items, primarily depreciation and amortization and impairment on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures and changes in the fair value of warrants.

Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis.

Revenue recognized based on the application of security deposits and letters of credit or based on the ability to offset against other financial instruments is included within Nareit FFO.

We believe that Nareit FFO is an important supplemental measure of our operating performance.

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.

As real estate assets (except land) are depreciated under GAAP, such accounting presentation implies that the value of real estate assets diminishes predictably over time, while real estate values instead have historically risen or fallen with market conditions.

Nareit FFO was designed by the real estate industry to address this issue.

Nareit FFO herein is not necessarily comparable to Nareit FFO of other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us.

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.

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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 year ended December 31, 2020 and 2019:

The following table presents our Nareit FFO results for the years ended December 31, 2021 and 2020:

Year Ended December 31,

(in thousands)

Net income (1)(2)

Deduct gain from real estate dispositions

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Add back impairments on real estate properties

Add back (deduct) unrealized loss (gain) on warrants

Add back impairments on real estate properties - unconsolidated joint ventures

Add back unrealized loss on warrants

(1) The year ended December 31, 2021 includes the application of $11.8 million of Agemo and Gulf Coast security deposits (letter of credit and cash deposits) in revenue.

(2) The year ended December 31, 2021 includes $21.3 million of revenue related to Gulf Coast recognized based on our ability to offset uncollected rent against the interest and principal of certain debt obligations of Omega.

Liquidity and Capital Resources

Sources and Uses

Our primary sources of cash include rental income and interest receipts, existing availability under our Revolving Credit Facility, proceeds from our DRSPP and the 2021 ATM Program, facility sales, and proceeds from mortgage and other investment payoffs.

We anticipate that these sources will be adequate to fund our cash flow needs through the next twelve months, which include common stock dividends, debt service payments (including principal and interest), real estate investments (including facility acquisitions, capital improvement programs and other capital expenditures), mortgage and other investment loan advances and normal recurring G&A expenses (primarily consisting of employee payroll and benefits and expenses relating to third parties for legal, consulting and audit services).

Capital Structure

At December 31, 2021, we had total assets of $9.6 billion, total equity of $4.1 billion and total net debt of $5.3 billion, with such debt representing approximately 56.4% of total capitalization.

The following table shows the amounts due in connection with the contractual obligations described below as of December 31, 2020:

At December 31, 2021, the weighted-average annual interest rate of our debt was 4.13%.

Additionally, as of December 31, 2021, 100% of our debt with outstanding principal balances has fixed interest payments (when considering the impact of cash flow hedges).

As of December 31, 2021, Omega’s debt obligations consisted of the following:

● A $1.45 billion Revolving Credit Facility that bears interest at LIBOR ( or in the case of loans denominated in GBP, the Sterling overnight index average reference rate plus an adjustment of 0.1193% per annum) plus an applicable percentage (with a range of 95 to 185 basis points) based on our credit ratings.

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

As of December 31, 2021, Omega had no borrowings on the Revolving Credit Facility.

● A $50.0 million OP Term Loan that bears interest at LIBOR plus an applicable percentage (with a range of 85 to 185 basis points) based on our credit ratings.

The interest on the OP Term Loan is effectively fixed at 3.29%, as we have interest rate swaps that effectively hedge the interest payments on this loan.

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

● $4.9 billion of senior unsecured notes with staggered maturity dates in 2023, 2024, 2025, 2026, 2027, 2028, 2029, 2031 and 2033.

These notes bear fixed interest rates between 3.25% and 5.25% per annum.

● $362.1 million of secured borrowings consisting of HUD Mortgages and a term loan.

We had $359.8 million of outstanding HUD Mortgages as of December 31, 2021, with weighted average interest rates of 3.01% per annum that mature from 2046 to 2052.

As of December 31, 2021, we had long-term credit ratings of Baa3 from Moody’s and BBB- from S&P Global and Fitch.

Credit ratings impact our ability to access capital and directly impact our cost of capital as well.

For example, our Revolving Credit Facility accrues interest and fees at a rate per annum equal to LIBOR plus a margin that depends upon our credit rating.

A downgrade in credit ratings by Moody’s and S&P Global may have a negative impact on the interest rates and fees for our Revolving Credit Facility.

Our credit facilities that reference LIBOR contain customary LIBOR replacement language, including, but not limited to, the use of rates based on the secured overnight financing rate.

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

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

At December 31, 2021, we had 239.1 million shares of common stock outstanding and our shares had a market value of $7.1 billion.

As of December 31, 2021, we had the following equity programs in place that we can utilize to raise capital:

● The 2021 ATM Program under which shares of common stock having an aggregate gross sales price of up to $1.0 billion may be sold from time to time.

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

We did not utilize the forward provisions under the 2021 ATM Program during 2021.

We have $929.9 million of sales remaining under the 2021 ATM Program as of December 31, 2021.

● We have a DRSPP that allows for the reinvestment of dividends and the optional purchase of our common stock.

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.

In 2021, we paid dividends of $637.6 million to our common stockholders.

The Board has declared common stock dividends as set forth below:

February 8, 2021

February 16, 2021

August 2, 2021

August 13, 2021

November 5, 2021

November 15, 2021

February 7, 2022

February 15, 2022

Material Cash Requirements

The following table shows our material cash requirements, described below, as of December 31, 2021:

Payments due by period

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(1) The $5.3 billion of debt outstanding includes:

(i) $101 million in borrowings under the Revolving Credit Facility due in May 2021, (ii) $137 million under the British Pound Sterling term loan facility due May 2022, (iii) $50 million under the Omega OP Term Loan Facility due May 2022, (iv) $700 million of 4.375% Senior Notes due August 2023, (v) $400 million of 4.95% Senior Notes due April 2024, (vi) $400 million of 4.50% Senior Notes due January 2025, (vii) $600 million of 5.25% Senior Notes due January 2026, (viii) $700 million of 4.5% Senior Notes due April 2027, (ix) $550 million of 4.75% Senior Notes due January 2028, (x) $500 million of 3.625% Senior Notes due October 2029, (xi) $700 million of 3.375% Senior Notes due February 2031, (xii) $20 million of 9.0% per annum subordinated debt maturing in December 2021, (xiii) $2.3 million of 3.25% per annum debt held at a consolidated joint venture due February 2021 and (xiv) $367 million of HUD debt at a 3.01% weighted average interest rate due between 2046 and 2052.

Other than the $50 million outstanding under the Omega OP Term Loan Facility, the $367 million of HUD debt and the $2.3 million of debt held at a consolidated joint venture, the Parent is the obligor of all outstanding debt.

(i) $50 million under the OP Term Loan due April 2025, (ii) $350 million of 4.375% Senior Notes due August 2023, (iii) $400 million of 4.95% Senior Notes due April 2024, (iv) $400 million of 4.50% Senior Notes due January 2025, (v) $600 million of 5.25% Senior Notes due January 2026, (vi) $700 million of 4.5% Senior Notes due April 2027, (vii) $550 million of 4.75% Senior Notes due January 2028, (viii) $500 million of 3.625% Senior Notes due October 2029, (ix) $700 million of 3.375% Senior Notes due February 2031, (x) $700 million of 3.25% Senior Notes due April 2033, (xi) $2.3 million of 3.75% per annum debt held at a consolidated joint venture due February 2022 and (xii) $360 million of HUD debt at a 3.01% weighted average interest rate due between 2046 and 2052.

Other than the $50 million outstanding under the OP Term Loan, the $360 million of HUD debt and the $2.3 million of debt held at a consolidated joint venture, Parent is the obligor of all outstanding debt.

(2) In connection with the adoption of Topic 842, we recognized lease liabilities in connection with ground and/or facility leases.

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We recognize rental income for ground and/or facility leases where the operator reimburses us, or pays the obligation directly to the landlord on our behalf.

Financing Activities and Borrowing Arrangements

$700 Million 3.375% Senior Notes due 2031

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, our 2015 term loan and pay down the Omega OP term loan and revolving line of credit .

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 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 loss on debt extinguishment 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 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 $700 million aggregate principal amount of our 3.375% Senior Notes due 2031 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).

Revolving Credit Facility

We have a $1.25 billion senior unsecured revolving credit facility that matures on May 25, 2021, subject to Omega’s option to extend such maturity date for two, six-month periods (subject to compliance with a notice requirement and other customary conditions).

As of December 31, 2020, $101.2 million of borrowings were outstanding under our revolving credit facility.

We currently plan to refinance our credit facility or exercise our option to extend the maturity of the existing facility by May 25, 2021.

Our ability to refinance our credit facilities on favorable terms or at all is subject to prevailing market conditions.

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

As of December 31, 2020 and 2019, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.

In addition to the obligations in the table above, as of December 31, 2021, we also had $244.7 million of commitments to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments.

Additionally, we have commitments to fund $50.1 million of advancements under existing other investment loans.

These commitments are expected to be funded over the next several years and are dependent upon the operators’ election to use the commitments.

Other Arrangements

We own interests in certain unconsolidated joint ventures as described in Note 11 to the Consolidated Financial Statements.

Our risk of loss is generally limited to our investment in the joint venture and any outstanding loans receivable.

We use derivative instruments to hedge interest rate and foreign currency exchange rate exposure as discussed in Note 15 to the Consolidated Financial Statements.

Cash Flow Summary

The following is our discussion of our consolidated cash flows for the year ended December 31, 2021 as compared to the year ended December 31, 2020.

For a discussion of our consolidated cash flows for the year ended December 31, 2020 as compared to the year ended December 31, 2019, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 Form 10-K .

Cash, cash equivalents and restricted cash totaled $24.4 million as of December 31, 2021, a decrease of $143.1 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 $722.1 million of net cash flow for the year ended December 31, 2021, as compared to $708.3 million for the same period in 2020, an increase of $13.9 million, which is primarily driven by an increase of $77.8 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.

This increase was partially offset by a $63.9 million change in the net movements of the operating assets and liabilities, primarily driven by the change in receivables driven by operator collectibility issues with Agemo, Guardian and Gulf Coast.

Investing Activities – Net cash flow from investing activities was an outflow of $524.2 million for the year ended December 31, 2021, as compared to an outflow of $89.1 million for the same period in 2020.

The $435.1 million change in cash used by investing activities related primarily to (i) a $510.2 million increase in real estate acquisitions, primarily related to the acquisition of 24 senior living facilities from Healthpeak in the first quarter of 2021, (ii) $8.0 million increase in investments in unconsolidated joint ventures primarily related to Second Spring II LLC, a new joint venture investment in 2021, (iii) a $33.8 million increase in capital improvements to real estate investments and construction in progress (including $68.0 million related to the purchase of a real estate property located in Washington, D.C.

that Omega, in conjunction with Maplewood, plans to redevelop), (iv) a $35.6 million increase in other investments, net of repayments driven by lower repayments in 2021 and (v) a $14.7 million decrease in proceeds from sale of direct financing lease assets and related trust related to Orianna.

Offsetting these changes were:

(i) a $11.1 million decrease in mortgage placements, net of repayments which is primarily driven by higher repayments in 2021, (ii) $137.7 million increase in proceeds from the sales of real estate investments driven by an attractive real estate market in which Omega elected to sell non-strategic assets, (iii) a $5.1 million decrease in business acquisitions and (iv) a $5.1 million increase in receipts from insurance proceeds.

Financing Activities – Net cash flow from financing activities was an outflow of $341.1 million for the year ended December 31, 2021, as compared to an outflow of $485.5 million for the same period in 2020.

The $144.4 million change in cash used in financing activities was primarily related to (i) a $82.8 million change in other long-term borrowings – net which is the result of greater additional long-term borrowings in 2021 (including the issuance of $700 million 3.25% Senior Notes due in 2033) as compared to 2020, partially offset by other long-term debt repayments in 2021 (including pay downs of $350 million on the 4.375% Senior Notes due in 2023, $138.4 million related to the Sterling term loan and $102.5 million on the 2017 Revolving Credit Facility), and (ii) a $122.2 million increase in cash proceeds from the issuance of common stock in 2021, as compared to the same period in 2020 primarily driven by $126.7 million of proceeds from the DRSPP in 2021, offset by (a) a $25.3 million increase in dividends paid primarily resulting from additional share issuances throughout 2020 and 2021 and (b) a $30.8 million increase in payment of financing related costs related to the redemption of $350 million of the 4.375% Senior Notes due 2023 and entering new debt facilities in 2021 such as the Revolving Credit Facility, the OP Term Loan and the 3.25% Senior Notes due 2033.

Supplemental Guarantor Information

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

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 December 31, 2020, are outlined in the table below (in thousands):

Total commitments

Amounts funded to date (1)

Remaining commitments (2)

(1) Includes finance costs.

(2) This amount excludes our remaining commitments to fund under our other investments of approximately $95.7 million.

$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 2020.

$500 Million Equity Shelf Program

On September 3, 2015, we entered into separate Equity Distribution Agreements (collectively, the “Equity Shelf Agreements”) to sell shares of our common stock having an aggregate gross sales price of up to $500 million (the “2015 Equity Shelf Program”) with several financial institutions, each as a sales agent and/or principal (collectively, the “Managers”).

Under the terms of the Equity Shelf Agreements, we may sell shares of our common stock, from time to time, through or to the Managers having an aggregate gross sales price of up to $500 million.

Sales of the shares, if any, are made by means of ordinary brokers’ transactions on the New York Stock Exchange at market prices, or as otherwise agreed with the applicable Manager.

We pay each Manager compensation for sales of the shares up to 2% of the gross sales price per share for shares sold through such Manager under the applicable Equity Shelf Agreements.

The table below presents information regarding the shares issued under the Equity Shelf Program for each of the years ended December 31, 2018, 2019, and 2020:

Shares issued

Average Price

(in millions)

December 31, 2018

December 31, 2019

December 31, 2020

Dividend Reinvestment and Common Stock Purchase Plan

We have a Dividend Reinvestment and Common Stock Purchase Plan (the “DRSPP”) that allows for the reinvestment of dividends and the optional purchase of our common stock.

On March 23, 2020, we temporarily suspended the DRSPP and on December 17, 2020, we reinstated the DRSPP.

The table below presents information regarding the shares issued under the DRSPP for each of the years ended December 31, 2018, 2019, and 2020:

Shares issued

Gross Proceeds

(in millions)

December 31, 2018

December 31, 2019

December 31, 2020

In 2020, we paid dividends of $612.3 million to our common stockholders.

The Board has declared common stock dividends as set forth below:

January 31, 2020

February 14, 2020

April 30, 2020

July 31, 2020

August 14, 2020

November 2, 2020

November 16, 2020

February 8, 2021

February 16, 2021

We believe our liquidity and various sources of available capital, including cash from operations, existing availability under our credit facilities, proceeds from our DRSPP and the 2015 Equity Shelf Program, 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;

● 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 $167.6 million as of December 31, 2020, an increase of $134.2 million as compared to the balance at December 31, 2019.

Operating Activities – Operating activities generated $708.3 million of net cash flow for the year ended December 31, 2020, as compared to $553.7 million for the same period in 2019, an increase of $154.5 million which is primarily due to the MedEquities Merger, the Encore portfolio acquisition, facility transitions and investments in mortgages and other investments.

Investing Activities – Net cash flow from investing activities was an outflow of $89.1 million for the year ended December 31, 2020, as compared to an outflow of $379.0 million for the same period in 2019.

The $289.9 million change in cash used by investing activities related primarily to (i) a $272.2 million decrease in real estate acquisitions, primarily related to the Encore portfolio acquisition in the fourth quarter of 2019, (ii) $101.5 million decrease in investments in unconsolidated joint ventures primarily related to new joint venture investments in 2019, (iii) a $86.4 million decrease in capital improvements to real estate investments and construction in progress and (iv) a $54.6 million decrease in business acquisitions, primarily related to the MedEquities Merger in the second quarter of 2019.

Offsetting these changes were:

(i) a $9.0 million change in other investments – net, (ii) a $86.4 million change in mortgages – net which is primarily the result of new mortgages in 2020 and fewer mortgage payoffs in 2020 as compared to 2019, (iii) a $78.3 million decrease in proceeds from sale of direct financing lease assets and related trust and (iv) a $38.4 million decrease in proceeds from the sales of real estate investments.

Financing Activities – Net cash flow from financing activities was an outflow of $485.5 million for the year ended December 31, 2020, as compared to an outflow of $154.0 million for the same period in 2019.

The $331.6 million change in cash used in financing activities was primarily related to (i) a $351.2 million change in other long-term borrowings – net which is the result of greater other long-term debt repayments in 2020 offset by additional long-term borrowings in 2020 as compared to 2019, (ii) a $252.1 million decrease in cash proceeds from the issuance of common stock in 2020, as compared to the same period in 2019, (iii) a $111.3 million decrease in net proceeds from our dividend reinvestment plan in 2020, as compared to the same period in 2019, and (iv) a $48.2 million increase in dividends paid primarily resulting from additional share issuances throughout 2019 and 2020, offset by (i) a $444.6 million change in our credit facility borrowings – net.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses.

Our significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies .

The preparation of financial statements in conformity with GAAP in the U.S.

requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses.

Our significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies to the Consolidated Financial Statements.

These policies were followed in preparing the Consolidated Financial Statements for all periods presented.

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Revenue Recognition

Rental income from our operating leases is generally recognized on a straight-line basis over the lease term when we have determined that the collectability of substantially all of the lease payments are probable.

Rental income from our operating leases is generally recognized on a straight-line basis over the lease term when we have determined that the collectibility of substantially all of the lease payments are probable.

If we determine that it is not probable that substantially all of the lease payments will be collected, we account for the revenue under the lease on a cash basis.

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As a result of placing an operator on a cash basis, we may recognize a charge to rental income for any contractual rent receivable, straight-line rent receivable and lease inducements.

As of December 31, 2021 and 2020, we had outstanding straight-line rent receivables of $148.5 million and $139.0 million, respectively, and lease inducements of $93.8 million and $83.4 million, respectively.

During 2021, we wrote-off approximately $37.3 million of contractual receivables, straight-line rent receivables and lease inducements to rental income primarily as a result of placing six operators on a cash-basis.

During 2020, we wrote-off approximately $143.0 million of contractual receivables, straight-line rent receivables and lease inducements to rental income as a result of placing four operators on a cash-basis.

If we change our conclusion regarding the probability of collecting rent payments required by a lessee, we may recognize an adjustment to rental income in the period we make a change to our prior conclusion.

Changes in the assessment of probability are accounted for on a cumulative basis as if the lease had always been accounted for based on the current determination of the likelihood of collection, potentially resulting in increased volatility of rental income.

Nature of Critical Accounting Estimate

Assumptions/Approach Used

Real Estate Investment Impairment

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This analysis requires us to use judgment in determining whether indicators of impairment exist, probabilities of potential outcomes and to estimate the expected future undiscounted cash flows or estimated fair values of the facility which impact our assessment of impairment, if any.

During 2021, we recorded impairments on real estate properties of approximately $44.7 million on 14 facilities.

During 2020, we recorded impairments on real estate properties of approximately $76.0 million on 25 facilities.

Nature of Critical Accounting Estimate

Assumptions/Approach Used

Asset Acquisitions

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Our estimates of the values of these components affect the amount of depreciation and amortization we record over the estimated useful life of the property or the term of the lease.

Allowance for Losses on Mortgages, Other Investments and Direct Financing Leases

The allowances for losses on mortgage notes receivable, other investments and direct financing leases (collectively, our “loans”) are maintained at a level that we believe are adequate to absorb potential losses.

The determination of the allowance is based on a quarterly evaluation of all outstanding loans.

If facts and circumstances indicate that there is greater risk of loan charge-offs, additional allowances, impairments or placement on non-accrual status may be required.

A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due as scheduled according to the contractual terms of the loan agreements.

We assess the probability of collecting substantially all payments due under our loans based on several factors, including, among other things, payment history, the financial strength of the lessee and/or borrower and any guarantors, historical operations and operating trends, current and future economic conditions, expectations of performance (which includes known substantial doubt about an operator’s ability to continue as a going concern) and the value of the underlying collateral of the agreement, if any.

When we identify a loan impairment, the loan is written down to the present value of the expected future cash flows which requires the judgement of management.

During 2021 and 2020, we acquired real estate assets of approximately $604.0 million and $104.4 million, respectively.

Allowance for Credit Losses on Mortgages, Other Investments and Direct Financing Leases

For purposes of determining our allowance for credit loss, we pool financial assets that have similar risk characteristics.

We aggregate our financial assets by financial instrument type and by internal risk rating.

Our internal ratings range between 1 and 7.

An internal rating of 1 reflects the lowest likelihood of loss and a 7 reflects the highest likelihood of loss.

We have a limited history of incurred losses and consequently have elected to employ external data to perform our expected credit loss calculation.

We utilize a probability of default (“PD”) and loss given default (“LGD”) methodology.

Periodically, the Company may identify an individual loan for impairment.

When we identify a loan impairment, the loan is written down to the present value of the expected future cash flows.

In cases where expected future cash flows are not readily determinable, the loan is written down to the fair value of the underlying collateral.

We may base our valuation on a loan’s observable market price, if any, or the fair value of collateral, net of sales costs, if the repayment of the loan is expected to be provided solely by the sale of the collateral.

We assess our internal credit ratings on a quarterly basis.

Our internal credit ratings consider several factors including the collateral and/or security, the performance of borrowers underlying facilities, if applicable, available credit support (e.g., guarantees), borrowings with third parties, and other ancillary business ventures and real estate operations of the borrower.

Our model’s historic inputs consider PD and LGD data for residential care facilities published by the Federal Housing Administration (“FHA”) along with Standards & Poor’s one-year global corporate default rates.

Our historical loss rates revert to historical averages after 36 periods.

Our model’s current conditions and supportable forecasts consider internal credit ratings, current and projected U.S.

unemployment rates published by the U.S.

Bureau of Labor Statistics and the Federal Reserve Bank of St.

Louis and the weighted average life to maturity of the underlying financial asset.

During 2021 and 2020, we recorded a provision for credit losses of approximately $77.7 million and $38.0 million.

As of December 31, 2021 and 2020, we had a total allowance for credit loss of $144.5 million and $67.8 million, respectively.

A 10% increase or decrease in the quarterly FHA default rates as of December 31, 2021 would result in a $1.0 million increase or decrease in the provision for credit losses.

If the weighted average yield to maturity on our portfolio increases or decreases by 1% or 10%, this will result in an additional provision or recover for credit losses of $0.8 million or $3.4 million, respectively.

If the weighted average yield to maturity on our portfolio decreases by 1% or 10%, this will result in a recovery of credit losses of $0.8 million or $3.3 million, respectively.

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-K

Item 7. Management’s Discussion and Analysis