What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2022-02-17 compared with 2021-02-22 · 1032 added, 894 removed, 1350 unchanged (59% of the section changed)

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Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In connection with the preparation of our Form 10-K as of and for the year ended December 31, 2021, management evaluated the effectiveness of the design and operation of disclosure controls and procedures of the Company as of December 31, 2021.

Based on this evaluation, the Chief Executive Officer and Chief Financial Officer of the Companies concluded that the disclosure controls and procedures of the Company were effective at the reasonable assurance level as of December 31, 2020.

Based on this evaluation, the Chief Executive Officer and Chief Financial Officer of the Company concluded that the disclosure controls and procedures of the Company were effective at the reasonable assurance level as of December 31, 2021.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.

Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

● Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

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Item 9B – Other Information

On February 2, 2022, we issued an earnings release reporting our financial and operating results for the fourth quarter and full year ended December 31, 2021.

A copy of the earnings release was furnished to the SEC as Exhibit 99.1 to our Current Report on Form 8-K on February 2, 2022.

The earnings release inadvertently included an error in the table presenting the tax treatment of 2021 dividends paid to shareholders.

Specifically, for all dividends paid in 2021 (on February 16th, May 17th, August 13th and November 15th) the correct percentage of dividends taxable as a return on capital was 4.3802% (rather than 21.4776% stated in the earnings release) and the correct percentage of dividends taxable as a capital gain was 21.4776% (rather than 4.3802% stated in the earnings release).

This inadvertent error had no impact on our financial statements or operating results reported in the earnings release.

Additionally, this information was correctly included in the 1099 forms provided to shareholders and on our website at www.omegahealthcare.com under the “Investor Relations” tab under “Dividend Taxation.” A corrected earnings release is posted on our website under the “Investors Relations” tab under “Press Releases”.

Item 10 – Directors, Executive Officers of the Registrant and Corporate Governance

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Equity compensation plans not approved by security holders

(1) Reflects (i) 150,812 shares that could be issued if certain performance conditions are achieved related to the January 1, 2017 award of performance restricted stock units or PIUs, (ii) 138,847 restricted stock units that were granted on January 1, 2018, (iii) 973,142 shares that could be issued if certain performance conditions are achieved related to the January 1, 2018 award of performance restricted stock units or PIUs, (iv) 114,112 restricted stock units and PIUs that were granted on January 1, 2019, (v) 755,198 shares that could be issued if certain performance conditions are achieved related to the January 1, 2019 award of performance restricted stock units or PIUs, (vi) 120,774 restricted stock units and PIUs that were granted on January 1, 2020, (vii) 1,169,156 shares that could be issued if certain performance conditions are achieved related to the January 1, 2020 award of performance restricted stock units or PIUs and (viii) 537,236 shares in respect of outstanding deferred stock units.

(2) No exercise price is payable with respect to the restricted stock units and performance restricted stock units.

(3) Reflects (i) 3,208,097 shares of common stock under our 2018 Stock Incentive Plan and (ii) 492,996 shares of common stock under the Omega Healthcare Investors, Inc.

(1) Reflects (i) 272,752 time-based restricted stock units (“RSUs”) and profit interest units (“PIUs”), (ii) 2,222,048 shares related to performance-based RSUs ( “PRSUs”) and performance-based PIUs that could be issued if certain performance conditions are achieved and (iii) 630,623 shares in respect of outstanding deferred stock units.

(2) No exercise price is payable with respect to the RSUs and PRSUs.

(3) Reflects (i) 2,838,290 shares of common stock under our 2018 Stock Incentive Plan and (ii) 483,645 shares of common stock under the Omega Healthcare In vestors, Inc.

Employee Stock Purchase Plan.

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Title of Document

Reports of Independent Registered Public Accounting Firm

Reports of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Financial Statements of Omega Healthcare Investors, Inc.

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Schedule IV — Mortgage Loans on Real Estate

Item 16 – Summary

Registrants may voluntarily include a summary of information required by Form 10-K under this Item 16.

We have elected not to include such summary information.

Item 16 – Form 10-K Summary

Report of Independent Registered Public Accounting Firm

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Collectability of future lease payments

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Collectibility of future lease payments

Description of the Matter

The Company recognized rental income of $924 million during 2021.

As described in Note 2 to the consolidated financial statements, the timing and pattern of rental income recognition for operating leases is affected by the Company’s determination as to whether the collectability of lease payments is probable.

Auditing the Company's accounting for rental income is complex due to the judgment involved in the Company’s determination of the collectability of future lease payments from its operators.

Auditing the Company's accounting for rental income is complex due to the judgment involved in the Company’s determination of the collectibility of future lease payments from its operators.

The determination involves consideration of the lessee’s payment history and recent payment trends, an assessment of the financial strength of the lessees and guarantors, where applicable, future contractual rents, historical and projected operating results of the lessees in such properties, and the timing of expected payments.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's controls over the recognition of rental income, including controls over management’s assessment of the collectability of future lease payments.

For example, we tested controls over management’s consideration of the factors used in assessing collectability and controls over the completeness and accuracy of the data used in management’s analyses.

To test the rental income recognized, we performed audit procedures that included, among others, evaluating the collectability of lease payments.

For example, we tested controls over management’s consideration of the factors used in assessing collectibility and controls over the completeness and accuracy of the data used in management’s analyses.

To test the rental income recognized, we performed audit procedures that included, among others, evaluating the collectibility of lease payments.

For example, we assessed the operators’ historical operating results in the properties, the financial condition of the operators and payment trends for a sample of operators.

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In addition, we tested the completeness and accuracy of the data that was used in management’s analyses.

Accounting for acquisitions

Description of the Matter

As described in Note 2 to the financial statements, the Company invested $662.6 million in asset acquisitions, including the acquisition of the Healthpeak Properties, Inc.

portfolio for $511.3 million.

Auditing the Company's accounting for its acquisitions was complex due to the significant estimation uncertainty in the Company’s determination of the fair value of the acquired assets and liabilities, including the acquired properties and assumed lease.

The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to the underlying significant assumptions utilized in the measurement of the fair value of the acquired properties and lease.

The Company used discounted cash flow analyses, market comparable data, and replacement cost data, to estimate the fair value of the acquired properties and assumed lease.

The significant assumptions used to estimate the fair value of the acquired properties and assumed lease included lease coverage ratios, lease yields, market rents, land values per acre, discount rates, and replacement costs of furniture, fixtures, and equipment.

Certain of these significant assumptions include consideration of future economic and market conditions.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls over the Company’s accounting for acquisitions.

For example, we tested controls over the measurement of the acquired properties and assumed leases, including management’s review of the appropriateness of the valuation methodology and assumptions used in the valuation models.

To test the estimated fair value of the acquired properties and assumed lease, we involved our valuation specialists and performed procedures including, among others, evaluating the Company’s valuation methodology and testing the significant assumptions.

For example, we compared the significant assumptions used to independent third-party data and the Company’s recent lease and acquisition transactions.

Additionally, we tested the completeness and accuracy of the underlying data supporting the significant assumptions and estimates including through comparison to the related lease agreements.

/s/ Ernst & Young LLP

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(in thousands, except per share amounts)

Real estate properties

Real estate investments

Real estate assets

Buildings and improvements

Furniture and equipment

Construction in progress

Total real estate assets

Less accumulated depreciation

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( 1,996,914 )

Real estate investments – net

Real estate assets – net

Investments in direct financing leases – net

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Investments in unconsolidated joint ventures

Assets held for sale – net

Assets held for sale

Total investments

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LIABILITIES AND EQUITY

Revolving line of credit

Term loans – net

Revolving credit facility

Secured borrowings

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Preferred stock $ 1.00 par value authorized – 20,000 shares, issued and outstanding - none

Common stock $ .10 par value authorized – 350,000 shares, issued and outstanding – 231,199 shares as of December 31, 2020 and 226,631 as of December 31, 2019

Common stock – additional paid-in capital

Common stock $ .10 par value authorized – 350,000 shares, issued and outstanding – 239,061 shares as of December 31, 2021 and 231,199 shares as of December 31, 2020

Additional paid-in capital

Cumulative net earnings

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Net income available to common stockholders

Earnings per common share/unit available to common stockholders:

Earnings per common share available to common stockholders:

Net income available to common stockholders

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Cash flow hedges

Total other comprehensive income (loss)

Total other comprehensive income

Comprehensive income

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Noncontrolling

Loss (Income)

Balance at December 31, 2018

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Cumulative effect of accounting change (see Note 2)

Balance at January 1, 2018

( 3,210,248 )

Stock related compensation

Vesting/exercising of equity compensation, net of tax withholdings

Dividend reinvestment plan

Equity Shelf Program

Issuance of common stock

Common dividends declared ($ 2.65 per share)

Conversion of Omega OP Units to common stock

Redemption of Omega OP Units

Vesting/exercising of OP units

Conversion and redemption of Omega OP Units to common stock

Omega OP Units distributions

Comprehensive income:

Foreign currency translation

Cash flow hedges

Total comprehensive income

Noncontrolling interest - consolidated joint venture

Other comprehensive income (loss)

Balance at December 31, 2019

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Cumulative effect of accounting change (see Note 2)

Balance at January 1, 2020

( 4,303,546 )

Stock related compensation

Vesting/exercising of equity compensation plan, net of tax withholdings

Dividend reinvestment plan

Equity Shelf Program

Issuance of common stock

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Omega OP Units distributions

Noncontrolling interest - consolidated joint venture

Comprehensive income:

Foreign currency translation

Cash flow hedges

Total comprehensive income

Other comprehensive income

Balance at December 31, 2020

( 4,916,097 )

Cumulative effect of accounting change (see Note 2)

Balance at January 1, 2020

( 4,303,546 )

Stock related compensation

Vesting/exercising of equity compensation plan, net of tax withholdings

Dividend reinvestment plan

Equity Shelf Program

Issuance of common stock

Common dividends declared ($ 2.68 per share)

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Omega OP Units distributions

Comprehensive income:

Foreign currency translation

Cash flow hedges

Total comprehensive income

Other comprehensive income

Balance at December 31, 2021

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Amortization of acquired in-place leases – net

Effective yield receivable on mortgage notes

Effective yield payable (receivable) on mortgage notes

Interest paid-in-kind

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Acquisition of real estate

Acquisition deposit

Acquisition deposit - net

Net proceeds from sale of real estate investments

Investments in construction in progress

Proceeds from direct financing lease and related trust

Proceeds from sale of direct financing lease and related trust

Placement of mortgage loans

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Cash flows from financing activities

Proceeds from credit facility borrowings

Payments on credit facility borrowings

Proceeds from long-term borrowings

Payments of long-term borrowings

( 2,178,311 )

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( 2,081,322 )

Receipts of other long-term borrowings

Payments of other long-term borrowings

Payments of financing related costs

Receipts from dividend reinvestment plan

Payments for exercised options and restricted stock

Net proceeds from issuance of common stock

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Effect of foreign currency translation on cash, cash equivalents and restricted cash

Increase (decrease) in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of year

Cash, cash equivalents and restricted cash at end of year

(Decrease) increase in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of period

Cash, cash equivalents and restricted cash at end of period

See accompanying notes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

NOTE 1 - ORGANIZATION

Omega Healthcare Investors, Inc.

(“Omega”) was incorporated in the State of Maryland on March 31, 1992 and has elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes.

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

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

and its consolidated subsidiaries, including Omega OP, references to Parent refer to Omega Healthcare Investors, Inc.

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

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.”).

(“Parent”), is a Maryland corporation that, together with its consolidated subsidiaries (collectively, “Omega”, the “Company”, “we”, “our”, “us”) invests in healthcare-related real estate properties located in the United States (“U.S.”) and the United Kingdom (“U.K.”).

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

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

All of our leases to our 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 derives from fixed and variable rate loans to our operators and/or their principals to fund working capital and capital expenditures.

These loans, which may be either unsecured or secured by the collateral of the borrower, are classified as other investments.

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

In addition to our core investments, we selectively make loans to operators for working capital and capital expenditures.

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

Omega has elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes and is structured as an umbrella partnership REIT (“UPREIT”) under which all of Omega's assets are owned directly or indirectly by, and all of Omega's operations are conducted directly or indirectly through, its operating partnership subsidiary, OHI Healthcare Properties Limited Partnership (collectively with subsidiaries, “Omega OP”).

Omega has exclusive control over Omega OP’s day-to-day management pursuant to the partnership agreement governing Omega OP.

As of December 31, 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.

Consolidation

Omega’s consolidated financial statements include the accounts of (i) Parent, (ii) Omega OP, (iii) all direct and indirect wholly owned subsidiaries of Omega and (iv) other entities in which Omega or Omega OP has a majority voting interest and control.

All intercompany transactions and balances have been eliminated in consolidation, and Omega’s net earnings are reduced by the portion of net earnings attributable to noncontrolling interests.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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Actual results could differ from those estimates.

Consolidation

Omega’s consolidated financial statements include the accounts of (i) Parent, (ii) Omega OP, (iii) all direct and indirect wholly-owned subsidiaries of Omega and (iv) other entities in which Omega or Omega OP has a majority voting interest and control.

All intercompany transactions and balances have been eliminated in consolidation, and Omega’s net earnings are reduced by the portion of net earnings attributable to noncontrolling interests.

GAAP requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise, if any, is the primary beneficiary of variable interest entities (“VIEs”).

A VIE is broadly defined as an entity with one or more of the following characteristics:

(a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support;

(b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity;

or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.

We may change our original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affects the characteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary.

Our variable interests in VIEs may be in the form of equity ownership, leases, guarantees and/or loans with our operators.

We analyze our agreements and investments to determine whether our operators or unconsolidated joint ventures are VIEs and, if so, whether we are the primary beneficiary.

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

We consolidate a VIE when we determine that we are its primary beneficiary.

We identify the primary beneficiary of a VIE as the enterprise that has both:

(i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance;

and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity.

Factors considered in determining whether we are the primary beneficiary of an entity include:

(i) our voting rights, if any;

(ii) our involvement in day-to-day capital and operating decisions;

(iii) our risk and reward sharing;

(iv) the financial condition of the operator or joint venture and (iv) our representation on the VIE’s board of directors.

We perform this analysis on an ongoing basis.

As of December 31, 2021 and 2020 we did not have any VIEs that we consolidated.

Revenue Recognition

Rental Income

Substantially all of our operating leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of three methods depending on the specific provisions of each lease as follows:

(i) a specific annual increase over the prior year’s rent, generally between 2.0 % and 3.0 % (which is the most prevalent in our lease portfolio);

(ii) an increase based on the change in pre-determined formulas from year to year (e.g., increases in the Consumer Price Index);

or (iii) specific dollar increases over prior years.

Rental income from 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 is probable.

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

If our evaluation of these factors indicates it is probable that we will be unable to collect substantially all rents, we recognize a charge to rental income and limit our rental income to the lesser of lease income on a straight-line basis plus variable rents when they become accruable or cash collected.

Provisions for uncollectible lease payments are recognized as a direct reduction to rental income.

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

Our leased real estate properties are leased under provisions of single or master leases with initial terms typically ranging from 5 to 15 years .

Some of our leases have options to extend, terminate or purchase the facilities, which are considered when determining the lease term.

We do not include in our measurement of our lease receivables certain variable payments, including changes in an index until the specific events that trigger the variable payments have occurred.

Under the terms of the leases, the lessee is responsible for all maintenance, repairs, taxes and insurance on the leased properties.

Certain of our operating leases require the operators to reimburse us for property taxes and other expenditures that are not considered components of the lease and therefore no consideration is allocated to them as they do not result in the transfer of a good or service to the operators.

We have determined that all of our leases qualify for the practical expedient to not separate the lease and non-lease components because (i) the lease components are operating leases and (ii) the timing and pattern of recognition of the non-lease components are the same as the lease components.

We apply Accounting Standards Codification (“ASC”) 842, Leases (“Topic 842”) to the combined component.

Certain operators are obligated to pay directly their obligations under their leases for real estate taxes, insurance and certain other expenses.

These obligations, which have been assumed by the tenants under the terms of their respective leases, are not reflected in our consolidated financial statements.

To the extent any tenant responsible for these obligations under their respective lease defaults on its lease or if it is deemed probable that the tenant will fail to pay for such costs, we would record a liability for such obligation.

We have elected to exclude sales and other similar taxes from the measurement of lease revenue and expense.

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Mortgage Interest Income and Other Investment Income

Mortgage interest income and other investment income is recognized as earned over the terms of the related mortgage notes or other investment.

Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected using the effective interest method.

In applying the effective interest method, the effective yield on a loan is determined based on its contractual payment terms, adjusted for prepayment terms.

Direct Financing Lease Income

As of December 31, 2021, we have one lease for a facility that is classified as a direct financing lease.

For leases accounted for as direct financing leases, we record the present value of the future minimum lease payments (utilizing a constant interest rate over the term of the lease agreement) as a receivable and record interest income based on the contractual terms of the lease agreement.

Costs related to originating direct financing leases are deferred and amortized on a straight-line basis as a reduction to income from direct financing leases over the term of the direct financing leases.

Fair Value Measurement

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Internal fair value models and techniques used by the Company include discounted cash flow and Monte Carlo valuation models.

Risks and Uncertainties

The Company is subject to certain risks and uncertainties affecting the healthcare industry, including those stemming from the novel coronavirus (“COVID-19”) global pandemic described below, which has disproportionately impacted the senior care sector, as well as, those stemming from healthcare legislation and changing regulation by federal, state and local governments, including those driven by the COVID-19 pandemic.

Additionally, we are subject to risks and uncertainties as a result of changes affecting operators of nursing home facilities due to the actions of governmental agencies and insurers to limit the rising cost of healthcare services.

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

In addition to experiencing outbreaks of positive cases and deaths of residents and employees during the pandemic, our operators have been required 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.

While we expect the approval of multiple vaccines for COVID-19 to reduce the spread and impact of the virus, particularly with respect to residents in our facilities given the prioritization of these populations in receiving the vaccines, there remain risks associated with 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.

In addition to the risks associated with managing the spread of the virus, delivery of the vaccines and care of their patients and residents, many of our operators 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 our 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.

Even if operators are able to avail themselves of government relief to offset some of these costs, they may face challenges in complying with the terms and conditions of government support and may face longer-term adverse impacts to their personnel and business operations from the COVID-19 pandemic, including potential patient litigation and decreased demand for their services, loss of business due to an interruption in their operations, or other liabilities related to gathering restrictions, quarantines, reopening plans, vaccine distribution or delivery, spread of infection or other related factors.

The extent of the COVID-19 pandemic’s effect on our and our operators’ operational and financial performance will depend on future developments, including the ability to control the spread of the outbreak generally and in our facilities and the delivery of and participation in vaccination programs and other treatments for COVID-19, government funds and other support for the senior care sector and the efficacy of other policies and measures that may mitigate the impact of the pandemic, all of which are uncertain and difficult to predict.

Due to these uncertainties, we are not able at this time to estimate the effect of these factors on our business, but the adverse impact on our business, results of operations, financial condition and cash flows could be material.

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Business Combinations

We record the purchase of properties to net tangible and identified intangible assets acquired and liabilities assumed at fair value.

Risks and Uncertainties including COVID-19

The Company is subject to certain risks and uncertainties affecting the healthcare industry, including those stemming from the novel coronavirus (“COVID-19”) global pandemic, which has disproportionately impacted the senior care sector, as well as, those stemming from healthcare legislation and changing regulation by federal, state and local governments.

Real Estate Acquisitions

Upon acquisition of real estate properties, we evaluate the acquisition to determine if it is a business combination or an asset acquisition.

Our real estate acquisitions are generally accounted for as asset acquisitions as substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets.

If the acquisition is determined to be an asset acquisition, the Company records the purchase price and other related costs incurred to the acquired tangible assets and identified intangible assets and liabilities on a relative fair value basis.

In addition, costs incurred for asset acquisitions including transaction costs, are capitalized.

If the acquisition is determined to be a business combination, we record the purchase of properties to net tangible and identified intangible assets acquired and liabilities assumed at fair value.

Goodwill is measured as the excess of the fair value of the consideration transferred over the fair value of the identifiable net assets.

Transaction costs are expensed as incurred as part of a business combination.

In making estimates of fair value for purposes of recording the purchase, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data.

We also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities as well as other critical valuation metrics such as current capitalization rates and discount rates used to estimate the fair value of the tangible and intangible assets acquired (Level 3).

When liabilities are assumed as part of a transaction, we consider information obtained about the liabilities and use similar valuation metrics (Level 3).

In some instances when debt is assumed and an identifiable active market for similar debt is present, we use market interest rates for similar debt to estimate the fair value of the debt assumed (Level 2).

The Company determines fair value as follows:

In making estimates of fair value for purposes of recording asset acquisitions and business combinations, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data.

The Company determines the fair value of acquired assets and liabilities as follows:

● Land is determined based on third-party appraisals which typically include market comparables.

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● Investments in joint ventures are valued based on the fair value of the joint ventures’ assets and liabilities.

Differences, if any, between the Company’s basis and the joint venture’s basis are generally amortized over the lives of the related assets and liabilities, and such amortization is included in the Company’s share of earnings of the joint venture.

● Intangible assets and liabilities acquired are valued using a combination of discounted cash flow projections as well as other valuation techniques based on current market conditions for the intangible asset or liability being acquired.

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● Assumed debt balances are valued by discounting the remaining contractual cash flows using a current market rate of interest.

● Noncontrolling interests are valued using a stock price on the acquisition date.

● Goodwill represents the purchase price in excess of the fair value of assets acquired and liabilities assumed.

Goodwill is not amortized.

Asset Acquisitions

For asset acquisitions, assets acquired and liabilities assumed are recognized by allocating the cost of the acquisition, including transaction costs, to the individual assets acquired and liabilities assumed on a relative fair value basis.

The fair value of the assets acquired and liabilities assumed in an asset acquisition are determined in a consistent manner with the immediately preceding “Business Combinations” section.

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Variable Interest Entities