What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-03 compared with 2022-08-02 · 150 added, 139 removed, 261 unchanged (53% of the section changed)

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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 ;

(1) those items discussed under “Risk Factors” in Part I, Item 1A to our Annual Report on Form 10-K and Part II, Item 1A herein;

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

(3) the impact of the COVID-19 pandemic on our business and the business of our operators, including without limitation, the extent and duration of the COVID-19 pandemic, increased costs, staffing shortages and decreased occupancy levels experienced by operators of skilled nursing facilities (“SNFs”) and assisted living facilities (“ALFs”) in connection therewith, the ability of operators to comply with infection control and vaccine protocols, the long-term impact of vaccination on facility infection rates, the extent to which continued government support may be available to operators to offset such costs and the conditions related thereto, and the extent to which support may terminate upon termination of the federally declared public health emergency;

(3) the impact of the COVID-19 pandemic on our business and the business of our operators, including without limitation, the duration of the federally declared public health emergency and related government and regulatory support, the levels of staffing shortages, increased costs and decreased occupancy experienced by operators of skilled nursing facilities (“SNFs”) and assisted living facilities (“ALFs”) in connection with the pandemic, the ability of our operators to comply with infection control and vaccine protocols and to manage facility infection rates, and the sufficiency of government support and reimbursement rates to offset such costs and the conditions related thereto;

(4) the ability of our operators in bankruptcy to reject unexpired lease obligations, modify the terms of our mortgages and impede our ability to collect unpaid rent or interest during the pendency of a bankruptcy proceeding and retain security deposits for the debtor’s obligations, and other costs and uncertainties associated with operator bankruptcies;

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Omega Healthcare Investors, Inc.

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

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

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

As of June 30, 2022, Parent owned approximately 97% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and other investors owned approximately 3% of the outstanding Omega OP Units.

As of September 30, 2022, Parent owned approximately 97% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and other investors owned approximately 3% of the outstanding Omega OP Units.

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

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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.

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 and trend of reduced federal support to our operators beginning in 2021, 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.

We believe that the incidence and severity of COVID-19 at our operators among their residents and employees, based on reporting by our operators, tend to correlate with levels of incidence experienced by the community.

It remains uncertain to what extent vaccination programs for COVID-19 and any booster doses will continue to mitigate the effects of COVID-19 in our facilities, particularly with regard to any 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 remain cautious as the COVID-19 pandemic continues to have a significant impact on our operators and their financial conditions, particularly given the trend of reduced pandemic-related federal support to our operators beginning in 2021, the persistence of staffing shortages that continue to impact our operators’ occupancy levels and profitability, uncertainty as to whether Medicare and Medicaid reimbursement rates will be sufficient to address longer-term cost increases faced by operators, factors that may impact future virus transmission in our facilities, including vaccination rates and efficacy of the vaccine for staff members and residents at our facilities, genetic mutations of the virus into new variants, and the commencement in April 2021 for many of our operators of the repayment of accelerated payments of Medicare funds that were previously received as Advanced Medicare payments in 2020 and the commencement in December 2021 of repayment of deferred FICA obligations.

We believe that the incidence and severity of COVID-19 among our operators’ residents and employees, based on reporting by our operators, tend to correlate with levels of incidence and severity experienced by the applicable community in which such operators’ are located, and it remains uncertain whether certain of our facilities will be impacted by future community spread of the virus.

These increases have been offset to some extent by increases in reimbursements due to increased skilling in place, which has been necessitated by pandemic-related protocols and may decrease when such protocols subside or when the federally declared public health emergency expires.

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.

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

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

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

There are a number of uncertainties we face as we consider the continuing impact of COVID-19 on our business, including how long census disruption and 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.

There are a number of uncertainties we face as we consider the continuing impact of COVID-19 on our business, including how long census disruption and elevated COVID-19 costs will last, the continued impact of vaccination programs, including booster doses, and participation levels in those programs in reducing the spread and severity of COVID-19 in our facilities, the impact of genetic mutations of the virus into new variants on our facilities, and the extent to which funding support from the federal government and the states will 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;

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

This declaration, which has been extended through October 13, 2022, allows HHS to provide temporary regulatory waivers and new reimbursement rules designed to equip providers with flexibility to respond to the COVID-19 pandemic by suspending various Medicare patient coverage criteria and documentation and care requirements, including, for example, suspension of the three-day prior hospital stay coverage requirement and expanding the list of approved services which may be provided via telehealth.

This declaration, which has been extended through January 11, 2023, allows HHS to provide temporary regulatory waivers and new reimbursement rules designed to equip providers with flexibility to respond to the COVID-19 pandemic by suspending various Medicare patient coverage criteria and documentation and care requirements, including, for example, suspension of the three-day prior hospital stay coverage requirement and expanding the list of approved services which may be provided via telehealth.

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

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

As part of the $178 billion, in May 2020, HHS announced that approximately $9.5 billion in targeted distributions would be made available to eligible SNFs, approximately $2.5 billion of which were composed of performance-based incentive payments tied to a facility’s infection rate.

Further, in September 2021, HHS announced the release of $25.5 billion in provider funding, including $17 billion of the $178 billion previously authorized through the CARES Act and $8.5 billion for rural providers, including those with Medicaid and Medicare patients, through the American Rescue Plan Act.

Funds have been allocated since 2020 in targeted and general distributions, the latter over four phases.

In September 2021, HHS announced the release of $25.5 billion in phase four provider funding, including $17 billion of the $178 billion previously authorized through the CARES Act and $8.5 billion for rural providers, including those with Medicaid and Medicare patients, through the American Rescue Plan Act, with payments beginning in December 2021.

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

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It also limited Medicare reductions to 1% from April 1, 2022 through June 30, 2022.

The full 2% Medicare sequestration is scheduled to be back in effect as of July 1, 2022.

The full 2% Medicare sequestration went into effect as of July 1, 2022.

The sequestration is currently extended through fiscal year 2031.

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In addition to COVID-19 reimbursement changes, several regulatory initiatives announced in 2020 and 2021 focused on addressing quality of care in long-term care facilities, including those related to COVID-19 testing and infection control protocols, vaccine protocols, staffing levels, reporting requirements, and visitation policies, as well as increased inspection of nursing homes.

In August 2021, CMS announced it was developing an emergency regulation requiring staff vaccinations within the nation’s more than 15,000 Medicare and Medicaid-participating nursing homes, and in September 2021, CMS further announced that the scope of the regulation will be expanded to include workers in hospitals, dialysis facilities, ambulatory surgical settings, and home health agencies.

In August 2021, CMS announced it was developing an emergency regulation requiring staff vaccinations within the nation’s more than 15,000 Medicare and Medicaid-participating nursing homes, and in September 2021, CMS further announced that the scope of the regulation would be expanded to include workers in hospitals, dialysis facilities, ambulatory surgical settings, and home health agencies.

In addition, recent updates to the Nursing Home Care website and the Five Star Quality Rating System include revisions to the inspection process, adjustment of staffing rating thresholds, the implementation of new quality measures and the inclusion of a staff turnover percentage (over a 12-month period).

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House of Representatives Select Subcommittee on the Coronavirus Crisis announced the launch of an investigation into the COVID-19 response of nursing homes and the use of federal funds by nursing homes during the pandemic.

The Select Subcommittee continued to be active throughout the remainder of 2020 and 2021 and the first half of 2022.

The Select Subcommittee continued to be active throughout the remainder of 2020, 2021 and the first three quarters of 2022.

In March 2021, the Oversight Subcommittee of the House Ways and Means Committee held a hearing on examining the impact of private equity in the U.S.

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

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

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

Reimbursement Generally:

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

In Florida, while added support to our operators during the pandemic has generally been limited, approximately $100 million in additional FMAP funds for nursing homes was approved by the State in November 2021, with the funds to be distributed through increased Medicaid payment rates over a three-month period and in March 2022, a revised state budget for 2022-23, which takes effect October 1, 2022, increased Medicaid reimbursement rates by 7.8% to fund, in part, increased wages for certain nursing home staff.

In Florida, while added support to our operators during the pandemic has generally been limited, approximately $100 million in additional FMAP funds for nursing homes was approved by the State in November 2021, with the funds to be distributed through increased Medicaid payment rates over a three-month period and in March 2022, a revised state budget for 2022-23, which took effect October 1, 2022, increased Medicaid reimbursement rates by 7.8% to fund, in part, increased wages for certain nursing home staff.

In addition, on April 6, 2022, the State of Florida enacted staffing reforms for SNFs that may provide additional flexibility to our operators in meeting minimum staffing requirements by using supplemental staff.

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In April 2022, CMS issued a proposal for comment, which included an adjustment to obtain that revenue neutrality as early as the 2023 rate setting period.

After considering the feedback received in the rulemaking cycle, CMS is finalizing recalibration of the PDPM parity adjustment factor of 4.6% with a two-year phase-in period that would reduce SNF spending by 2.3%, or approximately $780 million, in each of fiscal years 2023 and 2024.

After considering the feedback received in the rulemaking cycle, CMS finalized recalibration of the PDPM parity adjustment factor of 4.6% with a two-year phase-in period that would reduce SNF spending by 2.3%, or approximately $780 million, in each of fiscal years 2023 and 2024.

Prior to COVID-19, we believed that certain of our operators could realize efficiencies and cost savings from increased concurrent and group therapy under PDPM and some had reported early positive results.

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2022 and Recent Highlights

● We acquired $108.5 million of real estate assets which included 30 facilities during the six months ended June 30, 2022.

● During the three and nine months ended September 30, 2022, we acquired $28.2 million and $136.7 million of real estate assets, which included four facilities and 34 facilities, respectively.

The initial cash yield (the initial annual contractual cash rent divided by the purchase price) on these asset acquisitions was between 8.0% and 9.5%.

● We invested $16.0 million and $34.2 million under our construction-in-progress and capital improvement programs during the three and six months ended June 30, 2022, respectively.

● We advanced $2.2 million and $4.9 million under existing mortgage loans during the three and six months ended June 30, 2022, respectively.

● During the three months ended June 30, 2022, Ciena Healthcare (“Ciena”) repaid $113.7 million under six mortgages.

Concurrent with these repayments, we released the mortgage liens on six facilities in exchange for the partial repayment and extended the maturity date of all of the Ciena mortgage notes to June 30, 2030 (with exception of two loans with an aggregate principal balance of $34.3 million with maturity dates in 2022 and 2023).

● We invested $16.3 million and $50.5 million under our construction in progress and capital improvement programs during the three and nine months ended September 30, 2022, respectively.

● We advanced $3.6 million and $8.5 million under existing mortgage loans during the three and nine months ended September 30, 2022, respectively.

● During the three and nine months ended September 30, 2022, Ciena Healthcare (“Ciena”) repaid $44.8 million and $158.5 million under its mortgage loans.

In connection with the partial repayments, the maturity date of all the Ciena mortgage notes was extended to June 30, 2030 (with exception of two loans with an aggregate principal balance of $37.7 million with maturity dates in 2022 and 2023).

Dispositions and Impairments

● During the three and six months ended June 30, 2022, we sold 13 and 40 facilities for approximately $54.3 million and $386.9 million in net cash proceeds, recognizing net gains of approximately $25.2 million and $138.8 million, respectively.

The proceeds and gain for the six months ended June 30, 2022 primarily relate to the sale of 22 facilities in the first quarter of 2022 that were previously leased and operated by Gulf Coast Health Care LLC (together with certain affiliates “Gulf Coast”) and the sale of nine facilities (two facilities in the first quarter and seven in the second quarter) that were previously leased to Guardian Healthcare (“Guardian”) in connection with the restructuring of Guardian’s portfolio.

● During the three and six months ended June 30, 2022, we recorded impairments on four and six facilities of approximately $7.7 million and $11.2 million, respectively.

Of the $11.2 million, $3.5 million related to two facilities that were classified as held for sale for which the carrying values exceeded the estimated fair values less costs to sell, and $7.7 million related to four held-for-use facilities for which it was determined that the carrying value exceeded the fair value.

● During the three and nine months ended September 30, 2022, we sold four and 44 facilities for approximately $51.4 million and $438.3 million in net cash proceeds, respectively.

As a result of these sales, we recognized net gains of approximately $40.9 million and $179.7 million during the three and nine months ended September 30, 2022, respectively.

Our sales during the nine months ended September 30, 2022 were primarily driven by restructuring transactions associated with facilities formerly leased to the following operators:

Gulf Coast Health Care LLC (together with certain affiliates “Gulf Coast”) – 22 facilities, Guardian Healthcare (“Guardian”) – nine facilities and Agemo Holdings, LLC (“Agemo”) – two facilities.

In the fourth quarter of 2022, we completed the sale of an additional 19 facilities related to the ongoing Agemo restructuring activities for aggregate gross cash proceeds of $315.8 million.

● During the three and nine months ended September 30, 2022, we recorded impairments on four and 10 facilities of approximately $10.0 million and $21.2 million, respectively.

Of the $21.2 million, $3.5 million related to two facilities that were classified as held for sale and $17.7 million related to eight held-for-use facilities.

Financing Activities

● 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 the three and six months ended June 30, 2022, the Company repurchased 4.2 million shares, at an average price of $27.19 per share, and 5.2 million shares, at an average price of $27.32 per share, of our outstanding common stock, respectively.

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

During the nine months ended September 30, 2022, we repurchased 5.2 million shares, at an average price of $27.32 per share, of our outstanding common stock, respectively.

No shares were repurchased during the third quarter of 2022.

Other Highlights

● During the three and six months ended June 30, 2022, we made $55.6 million and $81.4 million of new other investment loans with a weighted average interest rate of 12% and 10.9%, respectively.

Our 2022 new other investment loans include $35.6 million related to a mezzanine loan entered into in the second quarter of 2022 with an existing operator that bears interest at a fixed rate of 12% per annum and matures on June 30, 2025, and $25 million related to a term loan entered into in the first quarter of 2022 with LaVie Care Centers, LLC (“LaVie,” f/k/a Consulate Health Care) that bears interest at a fixed rate of 8.5% per annum and matures on March 31, 2032.

During the three and six months ended June 30, 2022, we also advanced $42.7 million and $114.9 million, respectively, under existing other investment loans.

Of the $42.7 million and $114.9 million, $7.1 million and $54.5 million, respectively, related to a revolving working capital loan which also had repayments of $12.4 million and $60.6 million during the three and six months ended June 30, 2022, respectively.

● During the three and nine months ended September 30, 2022, we made $70.0 million and $151.4 million of new other investment loans with a weighted average interest rate of 11.1% and 11.0%, respectively.

Our 2022 new other investment loans primarily relate to five new loans that we entered into during the nine months ended September 30, 2022.

During the three and nine months ended September 30, 2022, we also advanced $34.3 million and $149.2 million, respectively, under existing other investment loans.

Of the $34.3 million and $149.2 million, an aggregate $20.3 million and $100.8 million, respectively, related to two revolving working capital loans that also had aggregate repayments of $2.8 million and $78.9 million during the three and nine months ended September 30, 2022, respectively.

● In 2022, Omega was again included in the Bloomberg Gender-Equality Index (GEI) – one of only 418 companies worldwide, and fewer than 15 U.S.

REITs, to be included in the 2022 index.

REITs, to be included in the 2022 GEI index.

Collectibility Issues

● Agemo Holdings, LLC (“Agemo”) continued to not pay contractual rent and interest due under its lease and loan agreements during the first and second quarters of 2022.

We have not recorded any rental income or interest income related to Agemo during the three and six months ended June 30, 2022.

We continue to have discussions with Agemo regarding restructuring the lease and loan agreements.

In the first and second quarters of 2022, we recorded an additional provision for credit losses of $4.7 million and $1.3 million, respectively, related to the $25.0 million secured working capital loan (the “Agemo WC Loan”) as a result of a reduction in the fair value of the underlying collateral assets supporting the current carrying values.

● Guardian did not make rent and interest payments under its lease and loan agreements during the first quarter of 2022 but resumed making contractual rent and interest payments during the second quarter of 2022, in accordance with the restructuring terms discussed further below.

Guardian is on a cash basis of revenue recognition for lease purposes and we recorded rental income of $3.8 million for the three months ended June 30, 2022 for contractual rent payments that were made.

Additionally, the mortgage loan is on non-accrual status, and is being accounted for under the cost recovery method, so the $1.4 million of interest payments that we received during the three months ended June 30, 2022 were applied directly against the principal balance outstanding.

We have recorded recoveries for credit losses of $1.4 million and $6.5 million related to Guardian during the three and six months ended June 30, 2022, primarily due to a large paydown of the Guardian mortgage loan in the first quarter of 2022.

In the first quarter of 2022, we transitioned eight facilities previously leased to Guardian to two other operators.

Additionally, during the six months ended of June 30, 2022, we sold nine facilities previously leased to Guardian and three facilities previously subject to the Guardian mortgage loan.

● During the three and nine months ended September 30, 2022, we placed three and five additional operators, respectively, on a cash basis of revenue recognition as collection of substantially all contractual lease payments due from them was no longer deemed probable.

These include operators representing 0.5% (“0.5% Operator”), 1.4% (“1.4% Operator”) and 2.2% (“2.2% Operator”) of total revenue (excluding the impact of write-offs), respectively, for the nine months ended September 30, 2022.

In connection with moving operators to a cash basis, we recognized $13.2 million and $23.6 million in total straight-line accounts receivable write-offs through rental income during the three and nine months ended September 30, 2022, respectively.

As of September 30, 2022, we had 17 total operators for which we are recording revenue on a cash basis.

These 17 cash basis operators represent an aggregate 15.3% of our total revenues (excluding the impact of write-offs) for the nine months ended September 30, 2022.

● During the three and nine months ended September 30, 2022, we allowed four and eight operators to defer $1.4 million and $25.4 million of contractual rent and interest, respectively.

The deferrals primarily related to the following operators:

Agemo, Guardian, the 3.7% Operator (defined below) and the 1.4% Operator.

Additionally, we allowed five and seven operators to apply collateral, such as security deposits or letters of credit, to contractual rent and interest during the three and nine months ended September 30, 2022, respectively.

The total collateral applied to contractual rent and interest was $5.3 million and $9.4 million for the three and nine months ended September 30, 2022, respectively.

These applications of collateral to contractual rent and interest primarily relate to the 2.2% Operator and the 1.4% Operator.

● Agemo, a cash basis operator, continued to not pay contractual rent and interest due under its lease and loan agreements during the nine months ended September 30, 2022.

We have not recorded any rental income or interest income related to Agemo during the three and nine months ended September 30, 2022.

The Company is currently in ongoing negotiations to restructure and amend Agemo’s lease and loan agreements.

See Note 4 - Contractual Receivables and Other Receivables and Lease Inducements to the Consolidated Financial Statements - Part I, Item 1 hereto.

● Guardian did not make rent and interest payments under its lease and loan agreements during the first quarter of 2022, but it resumed making contractual rent and interest payments during the second quarter of 2022, and it continued making such payments in the third quarter of 2022, in accordance with the restructuring terms discussed further below.

Guardian is on a cash basis of revenue recognition for lease purposes, and we recorded rental income of $3.7 million and $7.5 million for the three and nine months ended September 30, 2022, respectively, for contractual rent payments that were received.

Additionally, Guardian’s mortgage loan is on non-accrual status and is being accounted for under the cost recovery method, so the $2.3 million and $3.7 million of interest payments that we received during the three and nine months ended September 30, 2022, respectively, were applied directly against the principal balance outstanding.

In the second quarter of 2022, we agreed to a formal restructuring agreement, master lease amendments and mortgage loan amendments with Guardian.

As part of the restructuring agreement and related agreements, Omega agreed to, among other terms, allow for the retrospective deferral of $18.0 million of aggregate contractual rent and interest, with repayment required after September 30, 2024 and to reduce the combined rent and mortgage interest to an aggregate of $24.0 million per year as of July 1, 2022.

● From January through March 2022, an operator representing 3.8% and 3.4% of total revenue (excluding the impact of write-offs) for both the three months and six months ended June 30, 2022 and 2021, respectively, did not pay its contractual amounts due under its lease agreement.

In March 2022, the lease with this operator was amended to allow for a short-term rent deferral for January through March 2022.

This operator paid the contractual amount due under its lease agreement from April through June 2022.

Omega holds a $1.0 million letter of credit and a $150 thousand security deposit from this operator.

The operator remains current on its $20.0 million revolving credit facility, which is fully drawn as of June 30, 2022, and is secured by a first lien on the operator’s accounts receivable.

● In March 2022, another operator, representing 1.0% and 2.1% of total revenue (excluding the impact of write-offs) for the three months ended June 30, 2022 and 2021, respectively, and 1.6% and 2.1% of total revenue (excluding the impact of write-offs) for the six months ended June 30, 2022 and 2021, respectively, did not pay its contractual amounts due under its lease agreement.

In April 2022, the lease with this operator was amended to allow the operator to apply its $2.0 million security deposit in order to pay March 2022 rent and to allow for a short-term rent deferral for April 2022, with regular rent payments required to resume in May 2022.

This operator paid contractual rent in May 2022, but failed to make the full contractual rent payment for June 2022.

We placed this operator on a cash basis of revenue recognition during the second quarter of 2022 as collection of substantially all contractual lease payments due from them was no longer deemed probable.

As a result, we wrote-off approximately $8.3 million of straight-line rent receivables through rental income during the three months ended June 30, 2022.

● In June 2022, another operator, representing 2.2% and 1.0% of total revenue (excluding the impact of write-offs) for the three months ended June 30, 2022 and 2021, respectively, and 2.2% and 2.1% of total revenue (excluding the impact of write-offs) for the six months ended June 30, 2022 and 2021, respectively, short-paid the contractual rent amount due under its lease agreement by $0.6 million.

At June 30, 2022, we held a $5.4 million of letter of credit as collateral from this operator.

In July 2022, we drew the full amount of the letter of credit and applied $0.6 million of the proceeds to pay the unpaid portion of June rent.

We are in discussions with this operator to allow the application of a portion of the remaining proceeds from the letter of credit towards future contractual rent for a short-term period.

● In June 2022, we placed another operator, representing approximately 0.4% and 0.3% of our total revenues (excluding the impact of write-offs) for the three months ended June 30, 2022 and 2021, respectively, and 0.5% and 0.5% of total revenue (excluding the impact of write-offs) for the six months ended June 30, 2022 and 2021, respectively, on a cash basis of revenue recognition.

The change in our evaluation of the collectability of future rent payments due from this operator was as a result of information received from the operator during the second quarter of 2022 regarding substantial doubt as to its ability to continue as a going concern.

As a result of placing this operator on a cash basis, we wrote-off approximately $2.1 million of straight-line rent receivables through rental income during the three months ended June 30, 2022.

All facilities included in this operator’s master lease are included in assets held for sale as of June 30, 2022.

● During the six months ended June 30, 2022, we allowed three other operators, representing an aggregate 2.3% and 2.7% of total revenue (excluding the impact of write-offs) for the three months ended June 30, 2022 and 2021, respectively, and 2.4% and 2.7% of total revenue (excluding the impact of write-offs) for the six months ended June 30, 2022 and 2021, respectively, to apply an aggregate of $2.2 million of their security deposits to pay rent to accommodate short term liquidity issues, with regular rent payments required to resume shortly thereafter.

Additionally, we granted one of these operators a short-term deferral for a portion of its rent due during the six months ended June 30, 2022.

As of June 30, 2022, all of these operators are current on their respective lease obligations due to the application of security deposits.

These operators also are required to begin replenishing their security deposits in 2023.

● On July 21, 2022, the Board of Directors declared a cash dividend for the quarter ended June 30, 2022 of $0.67 per share.

As part of the restructuring agreement and related agreements, Omega agreed to, among other things, allow for the retrospective deferral of $18.0 million of aggregate contractual rent and interest, with repayment required after September 30, 2024, and reduce the combined rent and mortgage interest to an aggregate of $24.0 million per year effective as of July 1, 2022.

● From January through March 2022, an operator (the “3.7% Operator”) representing 3.7% and 3.3% of total revenue (excluding the impact of write-offs) for the nine months ended September 30, 2022 and 2021, respectively, did not pay its contractual amounts due under its lease agreement.

In March 2022, the lease with the 3.7% Operator was amended to allow for a short-term rent deferral for January through March 2022.

The 3.7% Operator paid the contractual amount due under its lease agreement from April through September 2022.

Omega holds a $1.0 million letter of credit and a $150 thousand security deposit from the 3.7% Operator.

The 3.7% Operator remains current on its $20.0 million revolving credit facility, which is fully drawn as of September 30, 2022, and is secured by a first lien on the 3.7% Operator’s accounts receivable.

The 3.7% Operator remains on a straight-line basis of revenue recognition.

● On October 21, 2022, the Board of Directors declared a cash dividend for the quarter ended September 30, 2022 of $0.67 per share.

Results of Operations

The following is our discussion of the consolidated results of operations, financial position and liquidity and capital resources, which should be read in conjunction with our unaudited consolidated financial statements and accompanying notes.

Three Months Ended June 30, 2022 and 2021

Our revenues for the three months ended June 30, 2022 totaled $244.6 million, a decrease of approximately $12.8 million over the same period in 2021.

Included below is a description of the material changes in revenues for the three months ended June 30, 2022 compared to the same period in 2021:

Three Months Ended September 30, 2022 and 2021

Our revenues for the three months ended September 30, 2022 totaled $239.4 million, a decrease of approximately $42.2 million over the same period in 2021.

Included below is a description of the material changes in revenues for the three months ended September 30, 2022 compared to the same period in 2021:

● Rental income was $207.6 million, a decrease of $39.6 million over the same period in 2021.

The decrease was primarily the result of (i) a $12.3 million decrease relating to Agemo, a cash basis operator from which we received no rental payments and recorded no rental income for in the second quarter of 2022;

(ii) a $7.3 million decrease relating to the sale of 22 facilities formerly leased and operated by Gulf Coast, which was completed in the first quarter of 2022;

(iii) a $3.3 million decrease related to one of the operators placed on a cash basis of revenue recognition during the second quarter of 2022 that only paid a portion of the contractual rent amount due during the second quarter of 2022;

and (iv) a $2.1 million decrease related to the restructuring of the Guardian lease agreement, which included the sale or transition of 17 facilities in 2022 with corresponding reductions in base rent.

The overall decrease in rental income was partially offset by (i) a $7.0 million increase due to a net reduction in straight-line rent receivable and lease inducement write-offs in the second quarter of 2022 compared to 2021, as we had a $17.4 million straight-line rent receivable write-off associated with Gulf Coast in the second quarter of 2021 as a result of placing it on a cash basis for revenue recognition;

(ii) a $4.2 million increase due to additional rental income in the second quarter of 2022 from acquisitions and construction in progress facilities being placed in service;

and (iii) a net increase of $3.8 million due to lease extensions, facility transitions and capital expenditures.

The decrease was primarily the result of (i) a $15.9 million aggregate net reduction in contractual rent payments received from two cash basis operators, Agemo and the 1.4% Operator;

(ii) a $12.6 million decrease due to a net increase in straight-line rent receivable and lease inducement write-offs in the third quarter of 2022 compared to 2021 as a result of placing the 2.2% Operator and 2 other operators on a cash basis;

(iii) a $7.4 million decrease relating to the sale of 22 facilities formerly leased and operated by Gulf Coast, which was completed in the first quarter of 2022;

(iv) a net decrease of $3.8 million due to facility transitions, facility sales and lease extensions related to several operators;

and (v) a $2.2 million decrease related to the restructuring of the Guardian lease agreement, which included the sale or transition of 17 facilities in 2022 with corresponding reductions in base rent.

The overall decrease in rental income was partially offset by a $2.8 million increase due to additional rental income in the third quarter of 2022 from acquisitions.

● Mortgage interest income was $17.2 million, a decrease of $5.8 million over the same period in 2021.

The decrease was primarily the result of (i) a $3.1 million decrease related to Guardian as a result of recognizing no interest income in the second quarter of 2022 on the $80.6 million mortgage loan, as we are accounting for the loan using the cost recovery method with interest payments applied to principal amounts outstanding and (ii) a $1.2 million write-off of effective interest in connection with the $113.7 million partial principal paydown on the Ciena mortgages during the second quarter of 2022.

Our expenses for the three months ended June 30, 2022 totaled $174.2 million, a decrease of approximately $0.9 million over the same period in 2021.

Included below is a description of the material changes in expenses for the three months ended June 30, 2022 compared to the same period in 2021:

The decrease was primarily the result of (i) a $3.1 million decrease related to Guardian as a result of recognizing no interest income in the third quarter of 2022 on the Guardian mortgage loan, as we are accounting for the loan using the cost recovery method with interest payments applied to principal amounts outstanding and (ii) a $3.7 million decrease related to the aggregate $158.5 million of principal paydowns made on the Ciena mortgages during the second and third quarter of 2022.

These decreases were partially offset by a $1.1 million write-off of effective interest in the third quarter of 2021 related to the payoff of a mortgage with an operator.

● Other investment income was $14.1 million, an increase of $3.3 million over the same period in 2021.

The increase is largely due to an overall increase in the balance of our other investment loans from $434.0 million as of September 30, 2021 to $608.2 million as of September 30, 2022.

Our expenses for the three months ended September 30, 2022 totaled $177.7 million, a decrease of approximately $16.5 million over the same period in 2021.

Included below is a description of the material changes in expenses for the three months ended September 30, 2022 compared to the same period in 2021:

● Our depreciation and amortization expense was $82.7 million, a $3.4 million decrease over the same period in 2021.

The decrease primarily relates to facility sales and facilities reclassified to assets held for sale, such as the 22 Gulf Coast facilities and the nine Guardian facilities that were sold in 2022, partially offset by facility acquisitions and capital additions.

The decrease primarily relates to facility sales and facilities reclassified to assets held for sale, such as the 20 Agemo facilities reclassified to held for sale and the two Agemo facilities that were sold in the third quarter of 2022, partially offset by facility acquisitions and capital additions.

● Our general and administrative expense was $18.2 million, a $2.9 million increase over the same period in 2021.

The increase primarily relates to (i) a $1.3 million increase in outside services primarily related to consulting, (ii) a $1.0 million increase in stock-based compensation expense and (iii) a $0.6 million increase in payroll and benefits.

● Our acquisition, merger and transition related costs were $4.0 million, an increase of $4.0 million over the same period in 2021.

This increase primarily relates to costs incurred related to the transition of facilities with troubled operators.

● Our recovery for credit losses was $1.6 million, a $5.1 million change over the same period in 2021.

The change was primarily as a result of (i) changes in loan balances and decreases in loss rates, utilized in the estimate of expected losses for loans, in the second quarter of 2022 compared to the same period in 2021 and (ii) recoveries for cash collections received on loans reserved down to the fair value of the collateral, partially offset by (i) provisions recorded on the Agemo WC Loan, the $20.0 million working capital loan that was entered into in November 2021 and the $25.0 million Gulf Coast debtor-in-possession (“DIP”) facility.

The increase primarily relates to (i) a $1.1 million increase in stock-based compensation expense, (ii) a $0.6 million increase in outside services primarily related to legal and (iii) a $0.6 million increase in payroll and benefits.

● Our impairment on real estate properties was $10.0 million, an increase of $5.1 million over the same period in 2021.

The 2022 impairments were recognized in connection with four held-for-use facilities for which it was determined that the carrying value exceeded the fair value.

The 2021 impairments were recognized in connection with six facilities that were classified as held-for-sale for which the carrying values exceeded the estimated fair values less costs to sell.

● Our provision for credit losses was $4.1 million, a $21.4 million decrease over the same period in 2021.

The decrease was primarily as a result of (i) a net decrease in aggregate specific provisions recorded during the third quarter of 2022 compared to specific provisions recorded during the same period in 2021 largely due to reserves on the loans with Agemo and (ii) changes in loan balances and decreases in loss rates and weighted average years to maturity (utilized in the estimate of expected losses for loans) in the third quarter of 2022 compared to the same period in 2021.

Other Income (Expense)

For the three months ended June 30, 2022, total other income was $20.8 million, an increase of approximately $16.5 million over the same period in 2021.

The increase was mainly due to a $21.1 million increase in gain on assets sold related to the sale of 13 facilities in the second quarter of 2022 compared to the sale of six facilities during the same period in 2021 partially offset by a $3.0 million legal reserve recorded in other (expense) income – net discussed in Note 18 – Commitments and Contingencies.

Six Months Ended June 30, 2022 and 2021

Our revenues for the six months ended June 30, 2022 totaled $494.0 million, a decrease of approximately $37.2 million over the same period in 2021.

Included below is a description of the material changes in revenues for the six months ended June 30, 2022 compared to the same period in 2021:

For the three months ended September 30, 2022, total other income was $40.4 million, a decrease of approximately $14.4 million over the same period in 2021.

The decrease was mainly due to a $15.2 million decrease in gain on assets sold related to the sale of four facilities in the third quarter of 2022 compared to the sale of 15 facilities during the same period in 2021.

Nine Months Ended September 30, 2022 and 2021

Our revenues for the nine months ended September 30, 2022 totaled $733.4 million, a decrease of approximately $79.5 million over the same period in 2021.

Included below is a description of the material changes in revenues for the nine months ended September 30, 2022 compared to the same period in 2021:

● Rental income was $635.9 million, a decrease of $70.0 million over the same period in 2021.

The decrease was primarily the result of (i) a $23.8 million decrease relating to Agemo, a cash basis operator, from which we received no rental payments and recorded no rental income during the first and second quarters of 2022;

The decrease was primarily the result of (i) a $43.0 million aggregate net reduction in contractual rent payments received from two cash basis operators, Agemo and the 1.4% Operator;

(ii) a $22.0 million decrease due to recognizing no rental income related to Gulf Coast, a cash basis operator, in 2022, as we received no contractual payments in the first quarter related to the lease with this operator, and we sold or transitioned 23 of the facilities subject to the Gulf Coast lease in March 2022;

(iii) an $8.1 million decrease relates to Guardian, due to the restructuring of the lease agreement (discussed under “ Three Months Ended June 30, 2022 and 2021 – Revenues ” above) and as a result of only receiving three months of payments from Guardian during 2022.

The overall decrease in rental income was partially offset by (i) a $10.7 million increase due to additional rental income in the second quarter of 2022 from acquisitions and construction in progress facilities being placed in service and (ii) a $6.6 million increase due to a net reduction in straight-line rent receivable and lease inducement write-offs in the six months ended June 30, 2022, as we had a $17.4 million straight-line rent receivable write-off associated with Gulf Coast in the second quarter of 2021 as a result of placing it on a cash basis for revenue recognition.

(iii) a $10.3 million decrease relates to Guardian, due to the restructuring of the lease agreement (discussed under “ Three Months Ended September 30, 2022 and 2021 – Revenues ” above) and as a result of only receiving six months of payments from Guardian during 2022;

(iv) a $6.0 million decrease due to a net increase in straight-line rent receivable and lease inducement write-offs in the nine months ended September 30, 2022;

and (v) a $4.9 million decrease resulting from the acceleration of certain in-place lease liabilities due to facility transitions.

The overall decrease in rental income was partially offset by (i) a $13.9 million increase due to additional rental income in the third quarter of 2022 from acquisitions and construction in progress facilities being placed in service and (ii) a $2.3 million increase related to an increase in real estate tax income related to construction in progress facilities being placed in service.

● Mortgage interest income was $57.4 million, a $13.3 million decrease over the same period in 2021.

The decrease was primarily the result of (i) a $6.1 million decrease related to Guardian as a result of recognizing no interest income in 2022 on the $80.6 million mortgage loan, as we are accounting for the loan using the cost recovery method with interest payments applied to principal amounts outstanding and (ii) a $1.2 million write-off of effective interest receivables, that is recorded as a reduction to mortgage interest income, in connection with the $113.7 million partial principal paydown on the Ciena mortgages during the second quarter of 2022.

Our expenses for the six months ended June 30, 2022 totaled $341.9 million, an increase of approximately $24.4 million over the same period in 2021.

Included below is a description of the material changes in expenses for the six months ended June 30, 2022 compared to the same period in 2021:

● Our depreciation and amortization expense was $166.0 million, a $4.7 million decrease over the same period in 2021.

The decrease primarily relates to facility sales and facilities reclassified to assets held for sale, such as the 22 Gulf Coast facilities that were sold in the first quarter of 2022 and the nine Guardian facilities that were sold in the first and second quarters of 2022, partially offset by facility acquisitions and capital additions.

The decrease was primarily the result of (i) a $9.2 million decrease related to Guardian as a result of recognizing no interest income in 2022 on the Guardian mortgage loan, as we are accounting for the loan using the cost recovery method with interest payments applied to principal amounts outstanding and (ii) a $5.7 million decrease related to the $158.5 million of aggregate principal paydowns on the Ciena mortgages during the second and third quarters of 2022.

These decreases were partially offset by a $1.1 million write-off of effective interest in the third quarter of 2021 related to the payoff of a mortgage with an operator.

● Other investment income was $36.5 million, an increase of $2.2 million over the same period in 2021.

The increase is largely due to an overall increase in the balance of our other investment loans from $434.0 million as of September 30, 2021, to $608.2 million as of September 30, 2022.

Our expenses for the nine months ended September 30, 2022 totaled $519.6 million, a decrease of approximately $40.9 million over the same period in 2021.

Included below is a description of the material changes in expenses for the nine months ended September 30, 2022 compared to the same period in 2021:

● Our depreciation and amortization expense was $248.7 million, an $8.1 million decrease over the same period in 2021.

The decrease primarily relates to facility sales and facilities reclassified to assets held for sale, such as the 22 Gulf Coast facilities that were sold in the first quarter of 2022 and the 20 Agemo facilities that were reclassified to held for sale in the third quarter of 2022, partially offset by facility acquisitions and capital additions.

● Our general and administrative expense was $53.4 million, a $6.7 million increase over the same period in 2021.

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● Our impairment on real estate properties was $21.2 million, a decrease of $21.2 million over the same period in 2021.

The 2022 impairments were recognized in connection with two facilities that were classified as held-for-sale for which the carrying values exceeded the estimated fair values less costs to sell and four held-for-use facilities for which it was determined that the carrying value exceeded the fair value.

The 2021 impairments were recognized in connection with six facilities that were classified as held-for-sale for which the carrying values exceeded the estimated fair values less costs to sell and one held-for-use facility for which it was determined that the carrying value exceeded the fair value.

The 2022 impairments were recognized in connection with two facilities that were classified as held-for-sale for which the carrying values exceeded the estimated fair values less costs to sell and eight held-for-use facilities for which it was determined that the carrying value exceeded the fair value.

The 2021 impairments were recognized in connection with 12 facilities that were classified as held-for-sale for which the carrying values exceeded the estimated fair values less costs to sell and one held-for-use facility because of the closure of the facility in the first quarter.

● Our provision for credit losses was $4.4 million, a $23.7 million decrease over the same period in 2021.

The decrease was primarily as a result of recoveries for cash collections and paydowns received on the Guardian mortgage, partially offset by (i) net provisions recorded on the Agemo WC Loan, the $20.0 million working capital loan that was entered into in November 2021 and the Gulf Coast DIP facility and (ii) an increase in balances, loss rates and weighted average years to maturity.

(ii) changes in loan balances and decreases in loss rates and weighted average years to maturity (utilized in the estimate of expected losses for loans) in 2022 compared to the same period in 2021;

and (iii) recoveries for cash collections received on loan reserved down to the fair value of the collateral.

See further discussion on specific loan reserves in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Collectibility Issues.

Other Income (Expense)

For the six months ended June 30, 2022, total other income was $133.9 million, an increase of approximately $58.8 million over the same period in 2021.

The increase was mainly due to (i) a $34.4 million increase in gain on assets sold related to the sale of 40 facilities compared to the sale of 30 facilities during the same period in 2021 and (ii) a $30.1 million decrease in loss on debt extinguishment primarily related to fees, premiums, and expenses related to the early redemption of $350 million of principal of the 4.375% Senior Notes due 2023 during the first quarter of 2021, partially offset by a $3.0 million legal reserve recorded in other (expense) income – net discussed in Note 18 – Commitments and Contingencies.

For the nine months ended September 30, 2022, total other income was $174.3 million, an increase of approximately $44.4 million over the same period in 2021.

The increase was mainly due to (i) a $30.3 million decrease in loss on debt extinguishment primarily related to fees, premiums, and expenses related to the early redemption of $350 million of principal of the 4.375% Senior Notes due 2023 during the first quarter of 2021 and (ii) a $19.1 million increase in gain on assets sold related to the sale of 44 facilities in 2022 compared to the sale of 45 facilities during the same period in 2021, partially offset by a $3.0 million legal reserve recorded in other (expense) income – net discussed in Note 18 – Commitments and Contingencies.

Income from Unconsolidated Joint Ventures

For the six months ended June 30, 2022, income from unconsolidated joint ventures was $3.4 million, a decrease of approximately $9.6 million over the same period in 2021.

For the nine months ended September 30, 2022, income from unconsolidated joint ventures was $7.5 million, a decrease of approximately $7.0 million over the same period in 2021.

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

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

The following table presents our Nareit FFO results for the three and six months ended June 30, 2022 and 2021:

The following table presents our Nareit FFO results for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

Net income (1)(2)

Deduct gain from real estate dispositions

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

(Deduct gain) add back loss from real estate dispositions – unconsolidated joint ventures

Elimination of non-cash items included in net income:

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Add back impairments on real estate properties – unconsolidated joint ventures

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

Add back unrealized loss on warrants

(1) The three and nine months ended September 30, 2022 includes the application of $5.3 million and $9.4 million, respectively, of security deposits (letter of credit and cash deposits) in revenue.

The three and nine months ended September 30, 2021 includes the application of $9.3 million and $11.7 million, respectively, of security deposits (letter of credit and cash deposits) in revenue.

(2) The three and nine months ended September 30, 2021 includes $6.5 million of revenue related to Gulf Coast recognized based on our ability to offset uncollected rent against the interest and principal (in the fourth quarter of 2021) of certain debt obligations of Omega.

Liquidity and Capital Resources

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Capital Structure

At June 30, 2022, we had total assets of $9.5 billion, total equity of $3.9 billion and total debt of $5.4 billion in our consolidated financial statements, with such debt representing approximately 57.7% of total capitalization.

At June 30, 2022, the weighted-average annual interest rate of our debt was 4.1%.

Additionally, as of June 30, 2022, 98% of our debt with outstanding principal balances has fixed interest payments.

As of June 30, 2022, we had long-term credit ratings of Baa3 from Moody’s and BBB- from S&P Global and Fitch.

At September 30, 2022, we had total assets of $9.4 billion, total equity of $3.9 billion and total debt of $5.3 billion in our consolidated financial statements, with such debt representing approximately 57.8% of total capitalization.

At September 30, 2022 and December 31, 2021, the weighted-average annual interest rate of our debt was 4.1%.

Additionally, as of September 30, 2022, 98% of our debt with outstanding principal balances has fixed interest payments.

Our high percentage of fixed interest debt has kept our interest expense relatively flat year over year despite rising interest rates.

As of September 30, 2022, we had long-term credit ratings of Baa3 from Moody’s and BBB- from S&P Global and Fitch.

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

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

As of June 30, 2022 and December 31, 2021, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.

As of September 30, 2022 and December 31, 2021, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.

Supplemental Guarantor Information

Parent has issued approximately $4.9 billion aggregate principal of senior notes outstanding at June 30, 2022 that were registered under the Securities Act of 1933, as amended.

Parent has issued approximately $4.9 billion aggregate principal of senior notes outstanding at September 30, 2022 that were registered under the Securities Act of 1933, as amended.

The senior notes are guaranteed by Omega OP.

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

As of June 30, 2022, there were no significant restrictions on the ability of Omega OP to make distributions to Omega.

At June 30, 2022, we had approximately 234.1 million shares of common stock outstanding, and our shares had a market value of $6.6 billion.

The following is a summary of activity under our equity programs, excluding share repurchases, which are discussed in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financing Activities above, during the three and six months ended June 30, 2022:

● We did not issue any shares of common stock under our 2021 ATM Program during the three and six months ended June 30, 2022.

We did not utilize the forward provisions under the 2021 ATM Program during the three and six months ended June 30, 2022.

We have $929.9 million of potential sales remaining under the 2021 ATM Program as of June 30, 2022.

● We issued 84.6 thousand and 164.5 thousand shares of common stock under the DRSPP during the three and six months ended June 30, 2022.

Aggregate gross proceeds from these sales were $2.3 million and $4.6 million during the three and six months ended June 30, 2022, respectively.

As of September 30, 2022, there were no significant restrictions on the ability of Omega OP to make distributions to Omega.

At September 30, 2022, we had approximately 234.2 million shares of common stock outstanding, and our shares had a market value of $6.9 billion.

● We did not issue any shares of common stock under our 2021 ATM Program during the three and nine months ended September 30, 2022.

We did not utilize the forward provisions under the 2021 ATM Program during the three and nine months ended September 30, 2022.

We have $929.9 million of potential sales remaining under the 2021 ATM Program as of September 30, 2022.

● We issued 71.2 thousand and 235.7 thousand shares of common stock under the DRSPP during the three and nine months ended September 30, 2022.

Aggregate gross proceeds from these sales were $2.4 million and $7.0 million during the three and nine months ended September 30, 2022, respectively.

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.

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To the extent that we do not distribute all of our net capital gain or do distribute at least 90%, but less than 100% of our “REIT taxable income” as adjusted, we will be subject to tax thereon at regular ordinary and capital gain corporate tax rates.

For the six months ended June 30, 2022, we paid dividends of approximately $318.3 million to our common stockholders.

For the nine months ended September 30, 2022, we paid dividends of approximately $475.6 million to our common stockholders.

On February 15, 2022, we paid dividends of $0.67 per outstanding common share to the common stockholders of record as of the close of business on February 7, 2022.

On May 13, 2022, we paid dividends of $0.67 per outstanding common share to the common stockholders of record as of the close of business on May 2, 2022.

On August 15, 2022, we paid dividends of $0.67 per outstanding common share to the common stockholders of record as of the close of business on August 1, 2022.

Material Cash Requirements

During the six months ended June 30, 2022, there were no significant changes to our material cash requirements from those disclosed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report.

As of June 30, 2022, we had $214.5 million of commitments to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments.

Additionally, we have commitments to fund $157.0 million of advancements under existing other investment loans, which includes $24.8 million related to the increased commitment on the Maplewood $250.5 million secured revolving credit facility and a $90.0 million short-term revolving line of credit to an existing operator on which no amount has been drawn as of June 30, 2022.

During the nine months ended September 30, 2022, there were no significant changes to our material cash requirements from those disclosed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report.

As of September 30, 2022, we had $200.1 million of commitments to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments.

Additionally, we have commitments to fund $88.0 million of advancements under existing other investment loans, which includes $14.3 million related to the increased commitment on the Maplewood $250.5 million secured revolving credit facility and $60.0 million related to a $90.0 million short-term revolving line of credit to an existing operator.

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

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We use derivative instruments to hedge interest rate and foreign currency exchange rate exposure as discussed in Note 15 – Derivatives and Hedging in our Annual Report on Form 10-K for the year ended December 31, 2021.

We have seen significant increases in fair value of our hedging instruments in 2022, primarily due to macroeconomic factors impacting interest rates and foreign currency rates.

Cash Flow Summary

Cash, cash equivalents and restricted cash totaled $168.5 million as of June 30, 2022, an increase of $144.1 million as compared to the balance at December 31, 2021.

Cash, cash equivalents and restricted cash totaled $138.2 million as of September 30, 2022, an increase of $113.8 million as compared to the balance at December 31, 2021.

The following is a discussion of changes in cash, cash equivalents and restricted cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows.

Operating Activities – Operating activities generated $305.2 million of net cash flow for the six months ended June 30, 2022, as compared to $378.3 million for the same period in 2021, a decrease of $73.1 million, which is primarily driven by a decrease of $59.9 million of net income, net of $95.8 million of non-cash items, primarily due to a year over year reduction in rental income and mortgage revenue, as discussed in our material changes analysis under Results of Operations above.

Operating Activities – Operating activities generated $472.0 million of net cash flow for the nine months ended September 30, 2022, as compared to $565.6 million for the same period in 2021, a decrease of $93.6 million, which is primarily driven by a decrease of $90.4 million of net income, net of $88.5 million of non-cash items, primarily due to a year over year reduction in rental income and mortgage revenue, as discussed in our material changes analysis under Results of Operations above.

A $3.1 million change in the net movements of the operating assets and liabilities also contributed to the overall decrease in cash provided by operating activities.

Investing Activities – Net cash flow from investing activities was an inflow of $277.2 million for the six months ended June 30, 2022, as compared to an outflow of $387.1 million for the same period in 2021.

Investing Activities – Net cash flow from investing activities was an inflow of $272.4 million for the nine months ended September 30, 2022, as compared to an outflow of $452.2 million for the same period in 2021.

The $724.6 million change in cash flow from investing activities related primarily to (i) a $474.5 million decrease in real estate acquisitions driven by the acquisition of 24 senior living facilities from Healthpeak Properties, Inc.

for $511.3 million in the first quarter of 2021, (ii) a $185.7 million increase in proceeds from the sales of real estate investments largely driven by the sale of 22 facilities previously leased to Gulf Coast for net cash proceeds of $304.0 million in the first quarter of 2022, (iii) a $104.6 million increase in mortgage collections, net of placements driven by a $21.7 million partial principal paydown on the Guardian mortgage loan in the first quarter of 2022 and a $113.7 million partial principal paydown on the Ciena mortgages in the second quarter of 2022 and (iv) a $10.4 million decrease in investments in unconsolidated joint ventures driven by our $10.3 million investment in Second Spring II LLC in the first quarter of 2021, offset by (i) a $106.0 million increase in other investments advances and placements, net of receipts driven by the new $35.6 million mezzanine loan with an existing operator entered into in the second quarter of 2022, the $25.0 million term loan to LaVie entered into in the first quarter of 2022 and additional draws on existing loans, (ii) a $14.3 million decrease in distributions from unconsolidated joint venture in excess of earnings primarily related to the Second Spring Healthcare Investments joint venture due to significant facility sales in the first quarter of 2021, (iii) a $2.9 million decrease in receipts from insurance proceeds, (iv) a $2.5 million decrease in acquisition related deposits and (v) a $1.6 million increase in investment in construction in progress and capital expenditures.

Financing Activities – Net cash flow from financing activities was an outflow of $436.8 million for the six months ended June 30, 2022, as compared to an outflow of $54.3 million for the same period in 2021.

The $382.5 million change in cash flow from financing activities was primarily related to (i) a $221.2 million decrease in cash proceeds from the issuance of common stock in 2022 due to decreased issuances under our DRSPP and our 2021 ATM Program, as compared to the same period in 2021, (ii) $142.3 million of repurchases of shares of common stock in 2022, (iii) a $60.2 million decrease in proceeds from other long-term borrowings, net of repayments, (iv) a $9.7 million increase in redemptions of OP units and (v) a $1.7 million increase in dividends paid.

The overall increase in financing outflows was partially offset by (i) a $48.1 million decrease in payment of financing related costs due to fees and premiums paid in the first quarter of 2021 related to the early redemption of $350 million of principal of the 4.375% senior notes due 2023 and (ii) a $4.6 million decrease in distributions to Omega OP Unit holders .

for $511.3 million in the first quarter of 2021, (ii) a $218.1 million increase in mortgage collections, net of placements driven by a $21.7 million partial principal paydown on the Guardian mortgage loan in the first quarter of 2022 and $158.5 million in partial principal paydowns on the Ciena mortgages in the second and third quarters of 2022, (iii) a $127.4 million increase in proceeds from the sales of real estate investments largely driven by the sale of 22 facilities previously leased to Gulf Coast for net cash proceeds of $303.9 million in the first quarter of 2022 and other 2022 sales related to the restructuring of Guardian and Agemo, (iv) a $70.4 million decrease in investment in construction in progress and capital expenditures related to a $68.0 million development project with Maplewood Senior Living (“Maplewood”) acquired in the third quarter of 2021 and (v) a $10.4 million decrease in investments in unconsolidated joint ventures driven by our $10.3 million investment in Second Spring II LLC in the first quarter of 2021, offset by (i) a $151.4 million increase in other investments advances and placements, net of receipts driven by the new $35.6 million mezzanine loan with an existing operator that we entered into in the second quarter of 2022, the $25.0 million term loan to LaVie Care Centers, LLC (f/k/a Consulate Health Care) that we entered into in the first quarter of 2022, the new $40.0 million mezzanine loan with a new operator that we entered into in the third quarter of 2022 and additional draws on existing loans, (ii) a $16.3 million decrease in distributions from unconsolidated joint venture in excess of earnings primarily related to the Second Spring Healthcare Investments joint venture due to significant facility sales in the first quarter of 2021, (iii) a $5.3 million decrease in receipts from insurance proceeds and (iv) a $2.5 million decrease in acquisition related deposits.

Financing Activities – Net cash flow from financing activities was an outflow of $627.5 million for the nine months ended September 30, 2022, as compared to an outflow of $175.0 million for the same period in 2021.

The $452.5 million change in cash flow from financing activities was primarily related to (i) a $266.6 million decrease in cash proceeds from the issuance of common stock in 2022 due to decreased issuances under our DRSPP and our 2021 ATM Program, as compared to the same period in 2021, (ii) $142.3 million of repurchases of shares of common stock in 2022, (iii) a $88.7 million decrease in proceeds from other long-term borrowings, net of repayments and (iv) a $9.7 million increase in redemptions of OP units.

The overall increase in financing outflows was partially offset by (i) a $48.5 million decrease in payment of financing related costs due to fees and premiums paid in the first quarter of 2021 related to the early redemption of $350 million of principal of the 4.375% senior notes due 2023, (ii) a $4.7 million decrease in distributions to Omega OP Unit holders and (iii) a $1.5 million decrease in dividends paid.

Critical Accounting Policies and Estimates

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Item 3 – Quantitative and Qualitative Disclosures about Market Risk

During the quarter ended June 30, 2022, there were no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021.

During the quarter ended September 30, 2022, there were no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis