Item 7. Management’s Discussion and Analysis
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is based primarily on the consolidated financial statements of Omega Healthcare Investors, Inc. presented in conformity with U.S. generally accepted accounting principles (“GAAP”) for the periods presented and should be read together with the notes thereto contained in this Annual Report on Form 10-K. Other important factors are identified in “Forward-Looking Statements” and “Item 1A – Risk Factors” above.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:
● Business Overview
● Outlook, Trends and Other Conditions
● 2022 and Recent Highlights
● Results from Operations
● Funds from Operations
● Liquidity and Capital Resources
● Supplemental Guarantor Information
● Critical Accounting Policies and Estimates
Business Overview
Omega Healthcare Investors, Inc. (“Parent”) is a Maryland corporation that, together with its consolidated subsidiaries has elected to be taxed as a REIT for federal income tax purposes. Omega is structured as an umbrella partnership REIT (“UPREIT”) under which all of Omega’s assets are owned directly or indirectly by, and all of Omega’s operations are conducted directly or indirectly through, its operating partnership subsidiary, Omega OP. As of December 31, 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.
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Omega has one reportable segment consisting of investments in healthcare-related real estate properties located in the United States (“U.S.”) and the United Kingdom (“U.K.”). Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), and to a lesser extent, independent living facilities (“ILFs”), rehabilitation and acute care facilities (“specialty facilities”) and medical office buildings (“MOBs”). Our core portfolio consists of our long-term leases and real estate loans with healthcare operating companies and affiliates (collectively, our “operators”). Real estate loans consist of mortgage loans and other real estate loans which are primarily collateralized by a first, second or third mortgage lien or a leasehold mortgage on, or an assignment of the partnership interest in the related properties. In addition to our core investments, we make loans to operators and/or their principals. These loans, which may be either unsecured or secured by the collateral of the borrower, are classified as non-real estate loans. From time to time, we also acquire equity interests in joint ventures or entities that support the long-term healthcare industry and our operators.
Our portfolio of real estate investments (including properties associated with mortgages, direct financing leases, assets held for sale and consolidated joint ventures) at December 31, 2022, included 926 healthcare facilities, located in 42 states and the U.K. that are operated by 67 third-party operators. Our real estate investment in these facilities totaled approximately $9.5 billion at December 31, 2022, with approximately 97% of our real estate investments related to long-term healthcare facilities. The portfolio is made up of (i) 665 SNFs, (ii) 169 ALFs, (iii) 20 ILFs, (iv) 16 specialty facilities, (v) two MOBs, (vi) real estate loans, including mortgages on 48 SNFs, two ALFs and two specialty facilities and (vii) two facilities that are held for sale. At December 31, 2022, we also held other real estate loans (excluding mortgages) receivable of $394.6 million and non-real estate loans receivable of $225.3 million, consisting primarily of secured loans to third-party operators of our facilities, and $178.9 million of investments in six unconsolidated joint ventures.
As healthcare delivery continues to evolve, we continuously evaluate potential investments, our assets, operators and markets to position our portfolio for long-term success. Our strategy includes applying data analytics to our investment underwriting and asset management, as well as selling or transitioning assets that do not meet our portfolio criteria.
Outlook, Trends and Other Conditions
The COVID-19 pandemic has significantly and adversely impacted SNFs and long-term care providers due to the higher rates of virus transmission and fatality among the elderly and frail populations that these facilities serve; in addition, the pandemic contributed to occupancy declines, labor shortages and cost increases which continue to significantly impact our operators. As discussed further in “Collectibility Issues” below, during the year we have had several operators that have failed to make contractual payments under their lease and loan agreements, and we have agreed to short-term deferrals, lease and portfolio restructurings and/or allowed the application of security deposits or letters of credit to pay rent for several operators.
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 and adequate reimbursement levels. 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 as scheduled on May 11, 2023. 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. At this time, there is significant uncertainty regarding the impact of such developments.
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 and genetic mutations of the virus into new variants, 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.
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Our facilities, on average, experienced declines, in some cases that are material, in occupancy levels as a result of the pandemic. Occupancy in our facilities has generally improved on average since early 2021; however, average occupancy has not returned to pre-pandemic levels. It remains unclear when and the extent to which demand and occupancy levels will return to pre-COVID-19 levels. We believe these challenges to occupancy recovery may be in part due to staffing shortages, which in some cases have required operators to limit admissions, as well as COVID-19 related fatalities at the facilities, the delay of SNF placement and/or utilization of alternative care settings for those with lower level of care needs, the suspension and/or postponement of elective hospital procedures, fewer discharges from hospitals to SNFs and higher hospital readmittances from SNFs.
While substantial government support was allocated to SNFs and to a lesser extent to ALFs in 2020, federal relief efforts have been limited since 2021 as have been relief efforts in certain states. The additional 6.2% FMAP reimbursement in connection with the pandemic is being phased out in 2023 pursuant to the Consolidated Appropriations Act of 2023 as further discussed under “Government Regulation – Reimbursement Changes Related to COVID-19” under “Item 1 – Business.” The additional 6.2% FMAP provided some of our operators with significant support, based on which states they are located in, and the phase out of such support may adversely affect their operations to the extent that expenses are not reduced or other support is not provided. We believe further government support will be needed to continue to offset these impacts on operators, which could be in the form of direct support or reimbursement rate adjustments to reflect sustained cost changes experienced by operators. It is unclear whether and to what extent such government support will continue to be sufficient and timely to offset these impacts. In particular, while $25.5 billion in federal funding for healthcare providers impacted by COVID-19 was announced in September 2021 with distributions beginning in late 2021 pursuant to the Public Health and Social Services Emergency Fund (“Provider Relief Fund”), we do not expect additional Provider Relief Funds to be allocated to healthcare operators or our operators, and it remains uncertain whether additional Medicaid funds under the American Rescue Plan Act of 2021 (the “American Rescue Plan Act”) or other changes in Medicare or Medicaid reimbursement rates in the U.S., or U.K. reimbursement and relief programs for our U.K. operators, will ultimately support reimbursement to our operators. While certain states have provided pandemic-related relief measures and/or reimbursement increases, there remains uncertainty as to how widespread these measures will continue to be and to what extent they may be distributed to and benefit our operators, especially when the federally declared public health emergency expires as scheduled on May 11, 2023 or previously released federal funds to states have been fully utilized. Likewise, while certain states may in the course of routine rate-setting of Medicaid rates address inflationary factors and other expense-related items, there can be no assurance that these changes will be sufficient to offset existing increased inflation and expenses or that all states will address these items. See the “Government Regulation and Reimbursement” section for additional information. Further, to the extent the cost and occupancy impacts on our operators continue or accelerate and are not offset by continued government relief or reimbursement rates that are 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 ability of our operators to manage the impact of the termination of public health emergency and temporary relief thereunder, the continued efficacy of vaccination 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, the states and the U.K. will continue to offset these incremental costs as well as lost revenues. Notwithstanding vaccination programs, we expect that heightened clinical protocols for infection control within facilities will continue for some period; however, we do not know if future reimbursement rates or equipment provided by governmental agencies will be sufficient to cover the increased costs of enhanced infection control and monitoring.
While we continue to believe that longer term demographics will drive increasing demand for needs-based skilled nursing care, we expect the uncertainties to our business described above to persist at least for the near term until we can gain more information as to the level of costs our operators will continue to experience and for how long, and the level of additional governmental support that will be available to them, the potential support our operators may request from us and the future demand for needs-based skilled nursing care and senior living facilities. We continue to monitor the rate of occupancy recovery at many of our operators, and it remains uncertain whether and when demand, staffing availability and occupancy levels will return to pre-COVID-19 levels.
In addition to the impacts of COVID-19 discussed above, our operators have been and are likely to continue to be adversely affected by labor shortages and increased labor costs as well as other inflation-related cost increases. In addition, our operations have also been and are likely to continue to be impacted by increased competition for the acquisition of facilities in the U.S., which has decreased the number of investment opportunities that would be accretive to our portfolio. As part of our continuous evaluation of our portfolio and in connection with certain operator restructuring transactions, we expect to continue to opportunistically sell assets, or portfolios of assets, from time to time.
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We continue to monitor the impacts of other regulatory changes, as discussed below, including any significant limits on the scope of services reimbursed and on reimbursement rates and fees, which could have a material adverse effect on an operator’s results of operations and financial condition, which could adversely affect the operator’s ability to meet its obligations to us.
2022 and Recent Highlights
Investments
● We acquired 41 facilities for an aggregate consideration of $225.2 million in 2022. The initial cash yield (the initial annual contractual cash rent divided by the purchase price) on these asset acquisitions was between 8% and 9.5%.
● We invested $64.4 million under our construction-in-progress and capital improvement programs in 2022.
● We financed $56.2 million of new real estate loans with a weighted average interest rate of 12% in 2022. Our 2022 new real estate loans primarily relate to two new loans that we entered into during the year. We also advanced $60.0 million under existing real estate loans in 2022.
● During 2022, Ciena Healthcare (“Ciena”) made $158.5 million of early principal payments 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 $40.4 million with maturity dates in 2023).
Dispositions and Impairments
● In 2022, we sold 66 facilities for approximately $759.0 million in net cash proceeds, recognizing a net gain of approximately $360.0 million. Our sales during 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”) – 22 facilities.
● In December 2022, in connection with restructuring negotiations with LaVie Care Centers, LLC (“LaVie,” f/k/a Consulate Health Care ), we sold 11 facilities previously leased to LaVie for a sales price of $129.8 million. Omega provided $104.8 million in senior seller financing, collateralized by first lien mortgages on the 11 facilities, to fund a portion of the purchase price. The senior note has a December 29, 2027 maturity date and bears interest at 8% with required monthly interest payments (due in arrears beginning February 1, 2023), with no principal payments are due until the maturity date. The remaining consideration received under the purchase agreement is the assumption of a $25.0 million liability, incurred by Omega as part of the transaction, by the buyer from Omega. The 11-facility sale does not meet the contract criteria to be recognized as a sale for accounting purposes and we will continue to account for these facilities on our Consolidated Balance Sheets and depreciate the facilities until the sale recognition requirements are met. A contract liability will be recognized on our Consolidated Balance Sheets within accrued expenses and other liabilities for the $25.0 million liability assumed, which will be relieved when the sale is recognized. The loan receivable associated with the seller financing will not be recorded on our Consolidated Balance Sheets until the sale is recognized, and any cash interest received will be deferred and recorded as a contract liability within accrued expenses and other liabilities on our Consolidated Balance Sheets. No interest income or gain or loss will be recognized until the sale recognition requirements are met.
● In 2022, we recorded impairments on real estate properties of approximately $38.5 million on 22 facilities. Of the $38.5 million, $3.5 million related to two facilities that were classified as held for sale and $35.0 million related to 20 held-for-use facilities of which $17.2 million relates to 12 facilities leased to and operated by LaVie that are expected to be impacted by the on-going restructuring negotiations.
Financing Activities
● 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. For the year ended December 31, 2022, we repurchased 5.2 million shares of our outstanding common stock at an average price of $27.32 per share.
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● We sold 0.3 million shares of common stock under our Dividend Reinvestment and Common Stock Purchase Plan (“DRSPP”) during the year ended December 31, 2022. Aggregate net proceeds from these sales generated $9.2 million during 2022.
Other Highlights
● During 2022, we made $126.1 million of new non-real estate loans with a weighted average interest rate of 10.2%. We also advanced $124.8 million under existing non-real estate loans. Of the $124.8 million, an aggregate $105.9 million related to two revolving working capital loans that also had aggregate repayments of $80.0 million during 2022.
● In 2022, Omega was 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.
Collectibility Issues
● During the year ended December 31, 2022, we placed nine operators on a cash basis of revenue recognition. These include LaVie, Maplewood Senior Living (along with affiliates, “Maplewood”), and operators representing 0.4% (“0.4% Operator”), 1.2% (“1.2% Operator”) and 2.0% (“2.0% Operator”) of total revenue (excluding the impact of write-offs), respectively, for the year ended December 31, 2022. In connection with placing these operators on a cash basis, we recognized $119.8 million in total straight-line accounts receivable write-offs through rental income. As of December 31, 2022, 20 operators are on a cash basis. These operators represent an aggregate 36.5% of our total revenues (excluding the impact of write-offs) for the year ended December 31, 2022.
● During the year ended December 31, 2022, we allowed ten operators to defer $27.0 million of contractual rent and interest. The deferrals primarily related to the following operators: Agemo, Guardian, the 3.7% Operator (defined below) and the 1.2% Operator. Additionally, we allowed seven operators to apply collateral, such as security deposits or letters of credit, to contractual rent and interest during the year ended December 31, 2022. The total collateral applied to contractual rent and interest was $11.0 million for the year ended December 31, 2022. These applications of collateral to contractual rent and interest primarily relate to the 2.0% Operator and the 1.2% Operator.
● Agemo, a cash basis operator, continued to not pay contractual rent and interest due under its lease and loan agreements during the year ended December 31, 2022. We have not recorded any rental income or interest income related to Agemo during the year ended December 31, 2022. Subsequent to year end, we entered into a restructuring agreement with Agemo. See Note 5 – Contractual Receivables and Other Receivables and Lease Inducements to the Consolidated Financial Statements - Part I, Item 15 hereto for additional details.
● 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 and fourth quarters 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 $11.3 million for the year ended December 31, 2022 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 and therefore the $6.0 million of interest payments that we received during the year ended December 31, 2022 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 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.
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● In the fourth quarter of 2022, Omega began the process of restructuring our portfolio with LaVie, which primarily consists of two master lease agreements and two term loan agreements. On December 30, 2022, we sold 11 facilities previously subject to one of two lease agreements with LaVie. See further discussion on the sale and the accounting treatment in Dispositions and Impairments above. Concurrent with the sale, we also amended the lease agreement impacted by the sale and our loan agreements with LaVie. As part of the lease amendments, Omega agreed to, among other terms, remove the 11 sold facilities from the lease agreement and reduce monthly contractual rent from $8.3 million to $7.3 million. We amended the loans to, among other terms, extend the loan maturities to November 30, 2036 to align with the lease term, and starting in January 2023, reduce the interest rates to 2%, remove the requirement to make any principal payments until the maturity dates and to convert from monthly cash interest payments to interest paid-in-kind. The restructuring discussions are still ongoing and subject to change, but we anticipate additional restructuring activity related to this operator in 2023. As a result of the restructuring activities during 2022 and future expected restructuring activities, during the fourth quarter of 2022, we placed LaVie on a cash basis of revenue recognition as collection of substantially all contractual lease payments due from them was deemed no longer probable. As a result, we wrote-off approximately $58.0 million of straight-line rent receivables and lease inducements to rental income during the fourth quarter of 2022. In the first quarter of 2023, as part of the restructuring, we have agreed to a partial rent deferral in the first four months of 2023. In doing so, we agreed to allow LaVie to defer up to $10.0 million of contractual rent from January 2023 through April 2023 under one of our lease agreements for 32 facilities. Omega is in discussions to allow LaVie to defer up to $9.1 million of contractual rent from January 2023 through April 2023 under another lease agreement for 41 facilities. In January 2023, as a result, LaVie deferred the full contractual payment of $2.5 million under the 32-facility lease and paid $2.5 million of the $4.7 million of contractual rent due under the 41-facility lease.
● During the fourth quarter of 2022, we placed Maplewood on a cash basis of revenue recognition as collection of substantially all contractual lease payments due from them was deemed no longer probable based on the proposed restructuring of our lease and loan agreements with Maplewood. As a result, we wrote-off approximately $29.3 million of straight-line rent receivables and lease inducements to rental income during the fourth quarter of 2022. Subsequent to year end, we entered into a restructuring agreement with Maplewood. See Note 5 - Contractual Receivables and Other Receivables and Lease Inducements to the Consolidated Financial Statements - Part I, Item 15 hereto for additional details surrounding the restructuring.
● In December 2022, we agreed to allow Healthcare Homes Limited (“Healthcare Homes”), a U.K. based operator, the ability to defer up to £6.7 million of contractual rent from January 2023 through April 2023 with regular payments scheduled to resume in May 2023. The deferred rent balance accrues interest monthly at a rate of 8% per annum and must be fully repaid by December 31, 2024. Healthcare Homes has had near-term liquidity issues in connection with increased staffing and utility costs. Healthcare Homes remains current as of December 31, 2022 and is on a straight-line basis of revenue recognition.
● From January through March 2022, an operator (the “3.7% Operator”) representing 3.7% of total revenue (excluding the impact of write-offs) for the year ended December 31, 2022, 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 December 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 $25.0 million revolving credit facility, which is fully drawn as of December 31, 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.
Dividends
● Quarterly cash dividends paid during 2022 aggregated to $2.68 per share. On January 26, 2023, the Board of Directors declared a cash dividend of $0.67 per share. The dividend will be paid on February 15, 2023 to stockholders of record as of the close of business on February 6, 2023.
Results of Operations
The following is our discussion of the consolidated results of operations for the year ended December 31, 2022 as compared to the year ended December 31, 2021. For a discussion of our results of operation for the year ended December 31, 2021 as compared to the year ended December 31, 2020, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”).
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Comparison of results of operations for the years ended December 31, 2022 and 2021 (dollars in thousands):
Year Ended December 31,
2022
2021
Increase/(Decrease)
Revenues:
Rental income
$
750,208
$
923,677
$
(173,469)
Income from direct financing leases
1,023
1,029
(6)
Interest income
123,919
136,382
(12,463)
Miscellaneous income
3,094
1,721
1,373
Expenses:
Depreciation and amortization
332,407
342,014
(9,607)
General and administrative
69,397
64,628
4,769
Real estate taxes
15,500
12,260
3,240
Acquisition, merger and transition related costs
42,006
1,814
40,192
Impairment on real estate properties
38,451
44,658
(6,207)
Recovery on direct financing leases
—
(717)
717
Provision for credit losses
68,663
77,733
(9,070)
Interest expense
233,244
234,604
(1,360)
Other income (expense):
Other expense – net
(1,997)
(581)
(1,416)
Loss on debt extinguishment
(389)
(30,763)
30,374
Gain on assets sold – net
359,951
161,609
198,342
Income tax expense
(4,561)
(3,840)
(721)
Income from unconsolidated joint ventures
7,261
16,062
(8,801)
Revenues
Following is a description of certain of the changes in revenues for the year ended December 31, 2022 compared to 2021:
● The decrease in rental income was primarily the result of (i) a $85.7 million decrease as a result of a net increase in straight-line rent receivable and lease inducement write-offs in 2022 primarily due to placing operators LaVie, Maplewood and seven other operators on a cash basis for revenue recognition due to collectibility concerns, (ii) a $67.2 million net decrease in rental income from 13 cash basis operators, including Agemo, as a result of not recording straight-line lease revenue and/or receiving less cash rent payments period over period from these operators, (iii) a $36.8 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 and April 2022 and (iv) a $7.1 million decrease related to facility sales, transitions and lease terminations , partially offset by (i) a $18.3 million increase related to facility acquisitions made in 2022 and (ii) a $3.1 million increase related to a lease extension with one operator.
● The decrease in interest income was primarily due to (i) a $17.0 million decrease related to principal payments received during 2021 and 2022, including those on the Ciena mortgage loans discussed above, and (ii) a $12.4 million decrease related to loans placed on non-accrual status, primarily the Guardian mortgage loan, during 2021 and 2022, partially offset by a $16.9 million increase related to new and refinanced loans and additional funding to existing operators made throughout 2021 and 2022. As noted above, in 2022, we funded $116.2 million for new or existing real estate loans and $250.9 million for new or existing non-real estate loans.
Expenses
Following is a description of certain of the changes in our expenses for the year ended December 31, 2022 compared to 2021:
● The decrease in depreciation and amortization expense primarily relates to facility sales and facilities reclassified to assets held for sale, such as the 22 Gulf Coast facilities and 22 Agemo facilities that were sold during 2022, partially offset by facility acquisitions and capital additions.
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● The increase in general and administrative (“G&A”) expense primarily relates to a $5.9 million increase in stock-based compensation expense (see Note 19 – Stock-Based Compensation to the Consolidated Financial Statements for a full summary of stock-compensation movements over the last three years) partially offset by a $2.6 million decrease in payroll and benefits and severance expenses.
● The increase in acquisition, merger and transition related costs primarily relates to costs incurred related to the transition of facilities with LaVie (as discussed further in “Collectibility Issues” above) and other troubled operators.
● 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 20 held-for-use facilities for which the carrying value exceeded the fair value. The 2021 impairments were recognized in connection with 13 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. The 2022 and 2021 impairments were primarily the result of decisions to exit certain non-strategic facilities and/or operators.
● The decrease in provision for credit losses primarily relates to a net decrease in aggregate specific provisions recorded in 2022 compared to specific provisions recorded in 2021, partially offset by increases in the general reserve recorded primarily resulting from increases in loss rates utilized in the estimate of expected losses for loans (see Note 9 – Allowance for Credit Losses to the Consolidated Financial Statements for a full summary of allowance movements over the last three years).
Other Income (Expenses)
The increase in total other income (expense) was primarily due to (i) a $198.3 million increase in gain on assets sold resulting from the sale of 66 facilities in 2022 compared to the sale of 48 facilities in 2021 as we continue to exit certain facilities, operator relationships and/or states to improve the strength of our overall portfolio and (ii) a $30.4 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.
Income Tax Expense
As a REIT, we generally are not subject to federal income taxes on the REIT taxable income that we distribute to stockholders, subject to certain exceptions. For tax year 2022, we made common dividend payments of $632.9 million to satisfy REIT requirements relating to qualifying income. We have elected to treat certain of our active subsidiaries as TRSs. Our domestic TRSs are subject to federal, state and local income taxes at the applicable corporate rates. Our foreign TRSs are subject to foreign income taxes. As of December 31, 2022, one of our TRSs that is subject to income taxes at the applicable corporate rates had a net operating loss (“NOL”) carry-forward of approximately $10.2 million. Also, in connection with the acquisition of one U.K. entity in the first quarter of 2022, we acquired foreign net operating losses of $55.0 million resulting in an NOL deferred tax asset of $13.4 million (see Note 3 – Real Estate Asset Acquisitions and Development and Note 17 – Taxes). The $10.2 million NOL carry-forward was fully reserved as of December 31, 2022, with a valuation allowance due to uncertainties regarding realization.
Under U.S. current law, NOL carry-forwards generated up through December 31, 2017 may be carried forward for no more than 20 years, and our NOL carry-forwards generated in our taxable years ended after December 31, 2017 may be carried forward indefinitely.
For the year ended December 31, 2022, we recorded approximately $1.2 million of federal, state and local income tax provision and approximately $3.4 million of tax provision for foreign income taxes. These amounts do not include any gross receipts or franchise taxes payable to certain states and municipalities.
Income from Unconsolidated Joint Ventures
The decrease in income from unconsolidated joint ventures was primarily due to one of the joint ventures realizing a $14.9 million gain on sale of real estate investments during 2021.
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Funds From Operations
We use funds from operations (“Nareit FFO”), a non-GAAP financial measure, as one of several criteria to measure the operating performance of our business. We calculate and report Nareit FFO in accordance with the definition of Funds from Operations and interpretive guidelines issued by the National Association of Real Estate Investment Trusts (“Nareit”). Nareit FFO is defined as net income (computed in accordance with GAAP), adjusted for the effects of asset dispositions and certain non-cash items, primarily depreciation and amortization and impairment on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures and changes in the fair value of warrants. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis. Revenue recognized based on the application of security deposits and letters of credit or based on the ability to offset against other financial instruments is included within Nareit FFO. We believe that Nareit FFO is an important supplemental measure of our operating performance. As real estate assets (except land) are depreciated under GAAP, such accounting presentation implies that the value of real estate assets diminishes predictably over time, while real estate values instead have historically risen or fallen with market conditions. Nareit FFO was designed by the real estate industry to address this issue. Nareit FFO herein is not necessarily comparable to Nareit FFO of other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us.
We further believe that by excluding the effect of depreciation, amortization, impairment on real estate assets and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, Nareit FFO can facilitate comparisons of operating performance between periods and between other REITs. We offer this measure to assist the users of our financial statements in evaluating our financial performance under GAAP, and Nareit FFO should not be considered a measure of liquidity, an alternative to net income or an indicator of any other performance measure determined in accordance with GAAP. Investors and potential investors in our securities should not rely on this measure as a substitute for any GAAP measure, including net income.
The following table presents our Nareit FFO reconciliation for the years ended December 31, 2022, 2021 and 2020:
Year Ended December 31,
2022
2021
2020
(in thousands)
Net income (1)(2)
$
438,841
$
428,302
$
163,545
Deduct gain from real estate dispositions
(359,951)
(161,609)
(19,113)
Deduct gain from real estate dispositions - unconsolidated joint ventures
(93)
(14,880)
(5,894)
78,797
251,813
138,538
Elimination of non-cash items included in net income:
Depreciation and amortization
332,407
342,014
329,924
Depreciation – unconsolidated joint ventures
10,881
12,285
14,000
Add back impairments on real estate properties
38,451
44,658
72,494
Add back impairments on real estate properties - unconsolidated joint ventures
—
4,430
—
Add back unrealized loss on warrants
—
43
988
Nareit FFO
$
460,536
$
655,243
$
555,944
(1) The years ended December 31, 2022 and 2021 include the application of $11.0 million and $11.8 million, respectively, of security deposits (letter of credit and cash deposits) in revenue.
(2) The year ended December 31, 2021 includes $21.3 million of revenue related to Gulf Coast recognized based on our ability to offset uncollected rent against the interest and principal of certain debt obligations of Omega.
The $194.7 million decrease in Nareit FFO for the year ended December 31, 2022 compared to 2021 is primarily driven by the overall decrease in total revenue, which is discussed in more detail in the Results of Operations above.
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Liquidity and Capital Resources
Sources and Uses
Our primary sources of cash include rental income and interest payment receipts on our loans, existing availability under our Revolving Credit Facility, proceeds from our DRSPP and the 2021 ATM Program, facility sales, and proceeds from mortgage and other investment payoffs. We anticipate that these sources will be adequate to meet our principal cash flow needs through the next twelve months, which include: funding dividends and distributions to our stockholders and non-controlling interest members, making debt service payments (including principal and interest), funding real estate investments (including facility acquisitions, capital improvement programs and other capital expenditures), funding new and committed loan investments and paying normal recurring G&A expenses (primarily consisting of employee payroll and benefits and expenses relating to third parties for legal, consulting and audit services).
Capital Structure
At December 31, 2022, we had total assets of $9.4 billion, total equity of $3.8 billion and total debt of $5.3 billion, with such debt representing approximately 58.4% of total capitalization.
Debt
At December 31, 2022, the weighted-average annual interest rate of our debt was 4.1%. Additionally, as of December 31, 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 December 31, 2022, Omega’s debt obligations consisted of the following:
● A $1.45 billion Revolving Credit Facility that bears interest at LIBOR ( or in the case of loans denominated in GBP, the Sterling overnight index average reference rate plus an adjustment of 0.1193% per annum) plus an applicable percentage (with a range of 95 to 185 basis points) based on our credit ratings. The Revolving Credit Facility matures on April 30, 2025, subject to Omega’s option to extend such maturity date for two six-month periods. As of December 31, 2022, Omega had $19.2 million outstanding on the Revolving Credit Facility.
● A $50.0 million OP Term Loan that bears interest at LIBOR plus an applicable percentage (with a range of 85 to 185 basis points) based on our credit ratings. The OP Term Loan matures on April 30, 2025, subject to Omega OP’s option to extend such maturity date for two six-month periods.
● $4.9 billion of senior unsecured notes with staggered maturity dates in 2023, 2024, 2025, 2026, 2027, 2028, 2029, 2031 and 2033. These notes bear fixed interest rates between 3.25% and 5.25% per annum.
● $366.6 million of secured borrowings consisting of HUD Mortgages and two term loans. We had $344.7 million of outstanding HUD Mortgages as of December 31, 2022, with weighted average interest rates of 3.01% per annum that mature from 2046 to 2052.
As of December 31, 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. For example, our Revolving Credit Facility accrues interest and fees at a rate per annum equal to LIBOR plus a margin that depends upon our credit rating. A downgrade in credit ratings by Moody’s and S&P Global may have a negative impact on the interest rates and fees for our Revolving Credit Facility.
Our credit facilities that reference LIBOR contain customary LIBOR replacement language, including, but not limited to, the use of rates based on the secured overnight financing rate.
Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As of December 31, 2022 and 2021, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.
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As of December 31, 2022 we have five forward starting swaps totaling $400 million that are indexed to 3-month LIBOR. We designated the forward starting swaps as cash flow hedges of interest rate risk associated with interest payments on a forecasted issuance of fixed rate long-term debt. The swaps are effective on August 1, 2023 and expire on August 1, 2033 and were issued at a weighted average fixed rate of approximately 0.8675%. The fair value associated with these swaps was $93.0 million as of December 31, 2022.
Equity
At December 31, 2022, we had 234.3 million shares of common stock outstanding and our shares had a market value of $6.5 billion. As of December 31, 2022, we had the following equity programs in place that we can utilize to raise capital:
● The 2021 ATM Program under which shares of common stock having an aggregate gross sales price of up to $1.0 billion may be sold from time to time. The 2021 ATM Program has a forward sale provision that generally allows Omega to lock in a price on the sale of shares of common stock when sold by the forward sellers but defer receiving the net proceeds from such sales until the shares of our common stock are issued at settlement on a later date. We did not utilize the forward provisions under the 2021 ATM Program during 2022. We have $929.9 million of sales remaining under the 2021 ATM Program as of December 31, 2022.
● We have a DRSPP that allows for the reinvestment of dividends and the optional purchase of our common stock.
Dividends
As a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders in an amount at least equal to (A) the sum of (i) 90% of our “REIT taxable income” (computed without regard to the dividends paid deduction and our net capital gain), and (ii) 90% of the net income (after tax), if any, from foreclosure property, minus (B) the sum of certain items of non-cash income. In addition, if we dispose of any built-in gain asset during a recognition period, we will be required to distribute at least 90% of the built-in gain (after tax), if any, recognized on the disposition of such asset. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for such year and paid on or before the first regular dividend payment after such declaration. In addition, such distributions are required to be made pro rata, with no preference to any share of stock as compared with other shares of the same class, and with no preference to one class of stock as compared with another class except to the extent that such class is entitled to such a preference. To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100% of our “REIT taxable income” as adjusted, we will be subject to tax thereon at regular corporate rates.
Material Cash Requirements
The following table shows our material cash requirements, described below, as of December 31, 2022:
Payments due by period
Less than
More than
Total
1 year
Years 2-3
Years 4-5
5 years
(in thousands)
Debt (1)
$
5,335,865
$
359,898
$
905,185
$
1,317,191
$
2,753,591
Interest payments on long-term debt
1,234,702
222,918
369,614
263,075
379,095
Operating lease and other obligations (2)
43,889
1,992
4,090
3,389
34,418
Total
$
6,614,456
$
584,808
$
1,278,889
$
1,583,655
$
3,167,104
(1) The $5.3 billion of debt outstanding includes: (i) $50 million under the OP Term Loan due April 2025, (ii) $350 million of 4.375% Senior Notes due August 2023, (iii) $400 million of 4.95% Senior Notes due April 2024, (iv) $400 million of 4.50% Senior Notes due January 2025, (v) $600 million of 5.25% Senior Notes due January 2026, (vi) $700 million of 4.5% Senior Notes due April 2027, (vii) $550 million of 4.75% Senior Notes due January 2028, (viii) $500 million of 3.625% Senior Notes due October 2029, (ix) $700 million of 3.375% Senior Notes due February 2031, (x) $700 million of 3.25% Senior Notes due April 2033, (xi) $2.2 million of 8.0% per annum debt held at a consolidated joint venture due February 2023, (xii) $19.8 million of 9.63% per annum debt held at a consolidated joint venture due February 2024 and (xiii) $344.7 million of HUD debt at a 3.01% weighted average interest rate due between 2046 and 2052. Other than the $50 million outstanding under the OP Term Loan, the $344.7 million of HUD debt and the $22.0 million of debt held at consolidated joint ventures, Parent is the obligor of all outstanding debt.
(2) In connection with the adoption of Topic 842, we recognized lease liabilities in connection with ground and/or facility leases. Certain operators pay these obligations directly to the landlord. We recognize rental income for ground and/or facility leases where the operator reimburses us, or pays the obligation directly to the landlord on our behalf.
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Capital Expenditures and Funding Commitments
In addition to the obligations in the table above, as of December 31, 2022, we also had $210.9 million of commitments to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments. Additionally, we have commitments to fund $71.4 million of advancements under existing non-real estate loans. These commitments are expected to be funded over the next several years and are dependent upon the operators’ election to use the commitments.
Other Arrangements
We own interests in certain unconsolidated joint ventures as described in Note 11 to the Consolidated Financial Statements – Investments in Joint Ventures. Our risk of loss is generally limited to our investment in the joint venture and any outstanding loans receivable.
We also hold variable interests in certain unconsolidated entities through our loan and other investments. See disclosures regarding our risk of loss associated with these entities with Note 10 to the Consolidated Financial Statements – Variable Interest Entities.
We use derivative instruments to hedge interest rate and foreign currency exchange rate exposure as discussed in Note 15 to the Consolidated Financial Statements – Derivatives and Hedging. 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
The following is a summary of our sources and uses of cash flows for the year ended December 31, 2022 as compared to the year ended December 31, 2021 (dollars in thousands):
Year Ended December 31,
2022
2021
Increase/(Decrease)
Net cash provided by (used in):
Operating activities
$
625,727
$
722,136
$
(96,409)
Investing activities
442,853
(524,173)
967,026
Financing activities
(789,447)
(341,117)
(448,330)
For a discussion of our consolidated cash flows for the year ended December 31, 2021 as compared to the year ended December 31, 2020, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2021 Form 10-K .
Cash, cash equivalents and restricted cash totaled $300.6 million as of December 31, 2022, an increase of $276.2 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 –The decrease in net cash provided by operating activities is primarily driven by a decrease of $144.9 million of net income, net of $155.4 million of non-cash items, primarily due to a year over year reduction in rental income and interest income, as discussed in our material changes analysis under Results of Operations above. The decrease was partially offset by a $48.4 million change in the net movements of the operating assets and liabilities.
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Investing Activities –The change in cash used in investing activities related primarily to (i) a $440.5 million increase in proceeds from the sales of real estate investments driven by an attractive real estate market in which Omega elected to sell non-strategic assets, (ii) a $391.6 million decrease in real estate acquisitions, primarily related to the acquisition of 24 senior living facilities from Healthpeak in the first quarter of 2021, (iii) a $75.7 million decrease in capital improvements to real estate investments and construction in progress (including $68.0 million related to the purchase of a real estate property located in Washington, D.C. in the third quarter of 2021 that Omega, in conjunction with Maplewood, plans to redevelop), (iv) a $68.9 million increase in loan repayments, net of placements which is primarily driven by higher repayments in 2022 and (v) a $10.4 million decrease in investments in unconsolidated joint ventures primarily related to Second Spring II LLC, a new joint venture investment in 2021. Offsetting these changes were: (i) a $14.5 million decrease in distributions from unconsolidated joint ventures 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 and (ii) a $4.7 million decrease in receipts from insurance proceeds.
Financing Activities –The change in cash used in financing activities was primarily related to (i) a $265.9 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 as a result of implementing a $500 million repurchase program in January 2022, (iii) a $88.7 million decrease in proceeds from other long-term borrowings, net of repayments and (iv) a $9.6 million increase in redemptions of OP units, partially offset by (i) a $48.6 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 $4.8 million decrease in dividends paid primarily resulting from share repurchases throughout 2022 and (iii) a $4.7 million decrease in distributions to Omega OP Unit holders.
Supplemental Guarantor Information
Parent has issued approximately $4.9 billion aggregate principal of senior notes outstanding at December 31, 2022 that were registered under the Securities Act of 1933, as amended. The senior notes are guaranteed by Omega OP.
The SEC adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities, such as our senior notes. As a result of these amendments, registrants are permitted to provide certain alternative financial and non-financial disclosures, to the extent material, in lieu of separate financial statements for subsidiary issuers and guarantors of registered debt securities. Accordingly, separate consolidated financial statements of Omega OP have not been presented. Parent and Omega OP, on a combined basis, have no material assets, liabilities or operations other than financing activities (including borrowings under the senior unsecured revolving and term loan credit facility, Omega OP term loan and the outstanding senior notes) and their investments in non-guarantor subsidiaries.
Omega OP is currently the sole guarantor of our senior notes. The guarantees by Omega OP of our senior notes are full and unconditional and joint and several with respect to the payment of the principal and premium and interest on our senior notes. The guarantees of Omega OP are senior unsecured obligations of Omega OP that rank equal with all existing and future senior debt of Omega OP and are senior to all subordinated debt. However, the guarantees are effectively subordinated to any secured debt of Omega OP. As of December 31, 2022, there were no significant restrictions on the ability of Omega OP to make distributions to Omega.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. Our significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies to the Consolidated Financial Statements. These policies were followed in preparing the Consolidated Financial Statements for all periods presented. Actual results could differ from those estimates.
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We have identified the following accounting policies that we believe are critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant assumptions, judgments and estimates. With respect to these critical accounting policies, we believe the application of assumptions, judgments and estimates is consistently applied and produces financial information that fairly presents the results of operations for all periods presented. The following table presents information about our critical accounting policies, as well as the material assumptions used to develop each estimate:
Nature of Critical Accounting Estimate
Assumptions/Approach Used
Revenue Recognition
Rental income from our operating leases is generally recognized on a straight-line basis over the lease term when we have determined that the collectibility of substantially all of the lease payments are probable. If we determine that it is not probable that substantially all of the lease payments will be collected, we account for the revenue under the lease on a cash basis.
We assess the probability of collecting substantially all payments under our leases based on several factors, including, among other things, payment history of the lessee, the financial strength of the lessee 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 place that operator on a cash basis 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. As a result of placing an operator on a cash basis, we may recognize a charge to rental income for any contractual rent receivable, straight-line rent receivable and lease inducements.
As of December 31, 2022 and 2021, we had outstanding straight-line rent receivables of $166.1 million and $148.5 million, respectively, and lease inducements of $6.0 million and $93.8 million, respectively. During 2022, we wrote-off approximately $119.8 million of contractual receivables, straight-line rent receivables and lease inducements to rental income primarily as a result of placing nine operators on a cash-basis. During 2021, we wrote-off approximately $36.0 million of contractual receivables, straight-line rent receivables and lease inducements to rental income primarily as a result of placing six operators on a cash-basis. If we change our conclusion regarding the probability of collecting rent payments required by a lessee, we may recognize an adjustment to rental income in the period we make a change to our prior conclusion. Changes in the assessment of probability are accounted for on a cumulative basis as if the lease had always been accounted for based on the current determination of the likelihood of collection, potentially resulting in increased volatility of rental income.
Real Estate Investment Impairment
Assessing impairment of real property involves subjectivity in determining if indicators of impairment are present and in estimating the future undiscounted cash flows. The estimated future undiscounted cash flows are generally based on the related lease which relates to one or more properties and may include cash flows from the eventual disposition of the asset. In some instances, there may be various potential outcomes for a real estate investment and its potential future cash flows. In these instances, the undiscounted future cash flows used to assess the recoverability are probability-weighted based on management’s best estimates as of the date of evaluation. These estimates can have a significant impact on the undiscounted cash flows.
We evaluate our real estate investments for impairment indicators at each reporting period, including the evaluation of our assets’ useful lives. The judgment regarding the existence of impairment indicators is based on factors such as, but not limited to, market conditions, operator performance including the current payment status of contractual obligations and expectations of the ability to meet future contractual obligations, legal structure, as well as our intent with respect to holding or disposing of the asset. If indicators of impairment are present, we evaluate the carrying value of the related real estate investments in relation to our estimate of future undiscounted cash flows of the underlying facilities to determine if an impairment charge is necessary. This analysis requires us to use judgment in determining whether indicators of impairment exist, probabilities of potential outcomes and to estimate the expected future undiscounted cash flows or estimated fair values of the facility which impact our assessment of impairment, if any.
During 2022, we recorded impairments on real estate properties of approximately $38.5 million on 22 facilities. During 2021, we recorded impairments on real estate properties of approximately $44.7 million on 14 facilities.
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Nature of Critical Accounting Estimate
Assumptions/Approach Used
Asset Acquisitions
We believe that our real estate acquisitions are typically considered asset acquisitions. The 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. Tangible assets consist primarily of land, building and site improvements and furniture and equipment. Identifiable intangible assets and liabilities primarily consist of the above or below market component of in-place leases.
The allocation of the purchase price to the related real estate acquired (tangible assets and intangible assets and liabilities) involves subjectivity as such allocations are based on a relative fair value analysis. In determining the fair values that drive such analysis, we estimate the fair value of each component of the real estate acquired which generally includes land, buildings and site improvements, furniture and equipment, and the above or below market component of in-place leases. Significant assumptions used to determine such fair values include comparable land sales, capitalization rates, discount rates, market rental rates and property operating data, all of which can be impacted by expectations about future market or economic conditions. Our estimates of the values of these components affect the amount of depreciation and amortization we record over the estimated useful life of the property or the term of the lease.
During 2022 and 2021, we acquired real estate assets of approximately $225.2 million and $604.0 million, respectively. These transactions were accounted for as asset acquisitions and the purchase price of each was allocated based on the relative fair values of the assets acquired and liabilities assumed.
Allowance for Credit Losses on Real Estate Loans, Non-real Estate Loans and Direct Financing Leases
For purposes of determining our allowance for credit loss, we pool financial assets that have similar risk characteristics. We aggregate our financial assets by financial instrument type and by internal risk rating. Our internal ratings range between 1 and 7. An internal rating of 1 reflects the lowest likelihood of loss and a 7 reflects the highest likelihood of loss.
We have a limited history of incurred losses and consequently have elected to employ external data to perform our expected credit loss calculation. We utilize a probability of default (“PD”) and loss given default (“LGD”) methodology.
Periodically, the Company may identify an individual loan for impairment. When we identify a loan impairment, the loan is written down to the present value of the expected future cash flows. In cases where expected future cash flows are not readily determinable, the loan is written down to the fair value of the underlying collateral. We may base our valuation on a loan’s observable market price, if any, or the fair value of collateral, net of sales costs, if the repayment of the loan is expected to be provided solely by the sale of the collateral.
We assess our internal credit ratings on a quarterly basis. Our internal credit ratings consider several factors including the collateral and/or security, the performance of borrowers underlying facilities, if applicable, available credit support (e.g., guarantees), borrowings with third parties, and other ancillary business ventures and real estate operations of the borrower.
Our model’s historic inputs consider PD and LGD data for residential care facilities published by the Federal Housing Administration (“FHA”) along with Standards & Poor’s one-year global corporate default rates. Our historical loss rates revert to historical averages after 36 periods. Our model’s current conditions and supportable forecasts consider internal credit ratings, current and projected U.S. unemployment rates published by the U.S. Bureau of Labor Statistics and the Federal Reserve Bank of St. Louis and the weighted average life to maturity of the underlying financial asset. During 2022 and 2021, we recorded a provision for credit losses of approximately $68.7 million and $77.7 million, respectively. As of December 31, 2022 and 2021, we had a total allowance for credit loss of $188.4 million and $144.5 million, respectively. A 10% increase or decrease in the FHA default rates as of December 31, 2022 would result in an additional provision or recovery for credit losses of $10.1 million or $9.3 million, respectively. If the weighted average yield to maturity on our portfolio increases or decreases by 10%, this will result in an additional provision or recovery for credit losses of $4.6 million or $5.4 million, respectively.