What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-03 · 174 added, 141 removed, 259 unchanged (55% of the section changed)

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(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 long-term impacts of the COVID-19 pandemic on our business and the business of our operators, including without limitation, the announced termination of the federally declared public health emergency and related government and regulatory support scheduled for May 11, 2023, the levels of staffing shortages, increased costs and decreased occupancy experienced by operators of skilled nursing facilities (“SNFs”) and assisted living facilities (“ALFs”) arising from the pandemic, the ability of our operators to comply with infection control and vaccine protocols and to manage facility infection rates or future infectious diseases, and the sufficiency of government support and reimbursement rates to offset such costs and the conditions related thereto;

(3) the long-term impacts of the COVID-19 pandemic on our business and the business of our operators, including without limitation, the termination of the federally declared public health emergency and related government and regulatory support on May 11, 2023, the levels of staffing shortages, increased costs and decreased occupancy experienced by operators of skilled nursing facilities (“SNFs”) and assisted living facilities (“ALFs”) arising from the pandemic, the ability of our operators to comply with infection control and vaccine protocols and to manage facility infection rates or future infectious diseases, 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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● Government Regulation and Reimbursement

● First Quarter of 2023 and Recent Highlights

● Results from Operations

● Second Quarter of 2023 and Recent Highlights

● Results of Operations

● Funds from Operations

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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 March 31, 2023, 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 June 30, 2023, 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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Outlook, Trends and Other Conditions

The effects of the COVID-19 pandemic have 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.

The COVID-19 pandemic significantly and adversely impacted SNFs and long-term care providers during the height of the pandemic 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 post-pandemic.

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, increased expenses, uncertainties regarding adequate reimbursement levels, and changes to government and regulatory support due to the announced termination of the federally declared public health emergency scheduled for May 11, 2023.

The expense increases have been offset to some extent by enhanced reimbursement due to skilling in place, which was permitted via waiver during the pandemic, but which will be discontinued when the federally declared public health emergency expires as scheduled on May 11, 2023.

We believe the expense 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.

The expense increases were offset to some extent by enhanced reimbursement due to skilling in place, which was permitted via waiver during the pandemic, but which was discontinued when the federally declared public health emergency expired on May 11, 2023.

We believe the expense 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, 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 infection control requirements may face potential survey issues and penalties.

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

We remain cautious as these factors may continue to have a significant impact on our operators and their financial conditions, particularly given the 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 the risk of future infectious diseases or pandemics.

We remain cautious as some of these factors may continue to have a significant impact on our operators and their financial conditions, particularly given the 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, uncertainty regarding pending U.S.

federal minimum staffing rules for our industry, 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 the risk of future infectious diseases or pandemics.

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

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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.

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 normal rate setting has not or does not adjust for this phase out or expenses are not reduced.

While substantial government support was allocated to SNFs and to a lesser extent to ALFs in 2020, U.S.

federal relief efforts have been limited since 2021 as have been relief efforts in certain states.

The additional 6.2% Medicaid Federal Medical Assistance Percentage (the “FMAP”) reimbursement enacted in connection with the pandemic is being phased out in 2023 pursuant to the Consolidated Appropriations Act of 2023.

The additional 6.2% FMAP provided some of our operators with significant support, based on the state, and the phase-out of such support may adversely affect their operations to the extent that normal rate setting has not or does not adjust for this phase-out or expenses are not reduced.

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.

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

federal minimum staffing rules, if not accompanied by additional government funding, will further increase expenses for our operators.

While certain states have provided pandemic-related relief measures, we expect such state relief measures to be limited going forward.

Likewise, while certain states have in the course of routine rate-setting of Medicaid rates addressed 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 effects of the industry’s recovery 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 and management of infectious diseases in our facilities, and the extent to which funding support from the federal government, the states and the U.K.

Further, to the extent the cost and occupancy impacts on our operators do not recover or 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 effects of the industry’s recovery on our business, including how long census disruption and elevated costs will last, the continued management of infectious diseases in our facilities, and the extent to which reimbursement increases from the federal government, the states and the U.K.

will continue to offset these incremental costs as well as lost revenues.

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.

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, the duration of such increased costs, the adequacy of government reimbursement increases to cover such costs, 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.

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Our operators, which are primarily based in the U.S., are subject to extensive and complex federal, state and local healthcare laws and regulations;

we also have several U.K.-based operators which are subject to a variety of laws and regulations in their jurisdiction.

we also have several U.K.-based operators that are subject to a variety of laws and regulations in their jurisdiction.

These laws and regulations are subject to frequent and substantial changes resulting from the adoption of new legislation, rules and regulations, and administrative and judicial interpretations of existing law.

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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 its scheduled expiration date of May 11, 2023, allows HHS to provide temporary regulatory waivers and new reimbursement rules, such as a temporary increase in the Medicaid Federal Medical Assistance Percentage and other 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 expired on May 11, 2023, allowed HHS to provide temporary regulatory waivers and new reimbursement rules, such as a temporary increase in the FMAP and other 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.

The three-day prior hospital stay waiver was a significant benefit to the skilled nursing industry during the height of the pandemic, as the reimbursement associated with the ability to skill in place helped to offset some of the increased costs connected with managing the pandemic.

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.

The public health emergency declaration is scheduled to terminate on May 11, 2023;

at that time, we believe federal and state regulators will resume enforcement of those regulations which have been waived or otherwise not been enforced during the public health emergency.

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

Following termination of the public health emergency declaration on May 11, 2023, we believe federal and state regulators have resumed enforcement of those regulations which have been waived or otherwise not been enforced during the public health emergency.

These temporary changes to regulations and reimbursement, as well as emergency legislation, including the CARES Act enacted on March 27, 2020 and discussed below, have had a significant impact on the operations and financial condition of our operators.

The extent of the COVID-19 pandemic’s continued effect, including through prolonged labor shortages, slow occupancy recovery, and expense increases, on the Company’s and our operators’ operational and financial performance will depend on future developments, including the recovery in occupancy and availability of labor, the ability of our operators to manage the impact of the termination of public health emergency and temporary relief thereunder, the sufficiency and timeliness of additional governmental relief and reimbursement rate setting in offsetting cost increases, and the continued efficacy of vaccination, treatment and infection control programs relating to COVID-19, all of which developments and impacts are uncertain and difficult to predict and may continue to adversely impact our business, results of operations, financial condition and cash flows.

The extent of the COVID-19 pandemic’s continued effect, including through prolonged labor shortages, slow occupancy recovery, and expense increases, on the Company’s and our operators’ operational and financial performance will depend on future developments, including the recovery in occupancy and availability of labor, the ability of our operators to manage the impact of the termination of public health emergency and temporary relief thereunder, the sufficiency and timeliness of additional governmental relief and reimbursement rate setting in offsetting cost increases, and the continued efficacy of infection control measures, all of which developments and impacts are uncertain and difficult to predict and may continue to adversely impact our business, results of operations, financial condition and cash flows.

A significant portion of our operators’ revenue is derived from government-funded reimbursement programs, consisting primarily of Medicare and Medicaid.

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Federal Stimulus Funds and Financial Assistance for Healthcare Providers .

In response to the pandemic, Congress has enacted a series of economic stimulus and relief measures.

On March 18, 2020, the Families First Coronavirus Response Act (“FFCRA”) was enacted in the U.S., providing a temporary 6.2% increase to each qualifying state and territory’s Medicaid Federal Medical Assistance Percentage (“FMAP”) effective January 1, 2020.

The temporary FMAP increase was set to extend through the last day of the calendar quarter in which the public health emergency terminates.

In response to the pandemic, Congress enacted a series of economic stimulus and relief measures.

On March 18, 2020, the Families First Coronavirus Response Act (“FFCRA”) was enacted in the U.S., providing a temporary 6.2% increase to each qualifying state and territory’s FMAP effective January 1, 2020, which expired on May 11, 2023 in connection with the expiration of the public health emergency.

In exchange for receiving the enhanced federal funding, the FFCRA included a requirement that Medicaid programs keep beneficiaries enrolled through the end of the month in which the public health emergency terminates.

However, as part of the Consolidated Appropriations Act of 2023 signed into law on December 29, 2022, Congress decoupled the Medicaid continuous enrollment from the public health emergency and terminates this provision effective March 31, 2023.

Additionally, starting April 1, 2023, states that comply with federal rules regarding conducting renewals may begin the phase-down of the enhanced federal funding according to the following schedule:

Additionally, starting April 1, 2023, states that complied with federal rules regarding conducting renewals were eligible to begin the phase-down of the enhanced federal funding according to the following schedule:

6.2 percentage points through March 2023;

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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;

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 that began 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.

HHS continues to evaluate and provide allocations of, and issue regulation and guidance regarding, grants made under the CARES Act.

We do not expect our operators will receive additional funding from HHS.

The CARES Act and related legislation also made other forms of financial assistance available to healthcare providers, which have the potential to impact our operators to varying degrees.

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

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

We believe these repayments commenced for many of our operators in April 2021 and have impacted operating cash flows of these operators in 2021 and 2022.

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

in addition, the American Rescue Plan Act authorized $8.5 billion for rural providers with Medicaid and Medicare patients.

Funds were generally allocated beginning in 2020 in targeted and general distributions, the latter over four phases.

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

We do not expect our operators will receive additional funding from HHS in connection with the pandemic.

The CARES Act and related legislation also made other forms of financial assistance available to healthcare providers, which impacted our operators to varying degrees.

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

These payments were loans that providers were scheduled to repay over a period of several years beginning one year from the issuance date of each provider’s or supplier’s accelerated or advance payment.

We believe these repayments commenced for many of our operators in April 2021 and impacted operating cash flows of these operators in 2021 and 2022.

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

The Budget Control Act of 2011 established a Medicare Sequestration of 2%, which is an automatic reduction of certain federal spending as a budget enforcement tool.

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In addition to COVID-19 reimbursement changes, several regulatory initiatives announced from 2020 to 2022 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 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).

In addition, the Nursing Home Care website and the Five Star Quality Rating System were updated to 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).

Although the American Rescue Plan Act did not allocate specific funds directly to SNF or ALF providers, certain funds were allocated to states who then distributed a portion of these funds to SNF and ALF providers.

In addition, the American Rescue Plan Act allocated funds to quality improvement organizations to provide infection control and vaccination uptake support to SNFs and to the CDC for staffing, training and deployment of state-based nursing home and long-term care “strike teams” to assist facilities with known or suspected COVID-19 outbreaks.

Additionally, the Biden Administration announced a focus on implementing minimum staffing requirements and increased inspections as part of the nursing home reforms announced in the 2022 State of the Union Address, and in July 2022, CMS announced it was evaluating a proposed federal staffing mandate for SNFs.

It is uncertain whether such a mandate will be implemented and, if it is, whether it will be accompanied by additional funding to offset any increased staffing requirements for our operators;

an unfunded mandate to increase staff in SNFs may have a material and adverse impact on the financial condition of our operators.

Additionally, in March 2022, the Biden Administration announced a focus on implementing minimum staffing requirements and increased inspections at nursing homes, and in July 2022, CMS announced it was evaluating a proposed federal staffing mandate for SNFs.

It is uncertain when such a mandate will be announced or become effective, what level of staffing would be required thereunder, and whether any such mandate would be accompanied by additional funding to offset any increased staffing requirements for our operators.

Depending on the level of staffing required, an unfunded mandate to increase staff in SNFs may have a material and adverse impact on the financial condition of our operators.

Of note, the Biden Administration issued an executive order on April 18, 2023 that directed HHS to consider issuing several regulations and guidance documents to build on the minimum staffing standards for nursing homes and condition a portion of Medicare payments on how well a nursing home retains workers.

Many questions surrounding the execution of the proposed actions, such as how Medicare rates will exactly be impacted if nursing homes fail to retain a certain level of workers, remained unanswered, particularly in light of CMS still considering the above-referenced federal minimum staffing standard.

Many questions surrounding the potential execution of these proposed actions, such as how Medicare rates will exactly be impacted if nursing homes fail to retain a certain level of workers, remained unanswered, particularly in light of CMS still considering the above-referenced federal minimum staffing standard.

On June 16, 2020, the U.S.

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The CMS announcement noted concerns regarding the quality of care provided at SNFs owned by private equity firms, REITs and other investment firms.

We are currently reviewing the proposed rule, which was open for public comment through April 14, 2023.

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

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The state did provide for a sizeable increase in rate during the public health emergency based on the FMAP add-on.

however, there is a risk that this increase won’t be captured in normal rate setting when the FMAP add-on expires.

In Florida, added support to our operators during the pandemic has generally been limited, with approximately $100 million in additional FMAP funds announced in November 2021, payable over a three-month period through increased Medicaid rates.

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.

The Medicaid reimbursement rate has been approved to be increased effective September 1, 2023 by at least that same amount.

In Florida, added support to our operators during the pandemic was generally limited, with approximately $100 million in additional FMAP funds announced in November 2021, payable over a three-month period through increased Medicaid rates.

A revised state budget for 2023-2024 has been approved, which increases Medicaid reimbursement rates, effective October 1, 2023, by up to 5%, with a portion of such rate relating to a quality care add-on.

This comes after a 7.8% increase effective October 1, 2022, which was somewhat offset by required 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.

We continue to monitor rate adjustment activity in other states in which we have a meaningful presence, and it is too early to assess whether rates will generally keep pace with increased operator costs.

On July 29, 2022, CMS issued a final rule regarding the government fiscal year 2023 Medicare payment rates and quality payment programs for SNFs, with aggregate Medicare Part A payments projected to increase by $904 million, or 2.7%, for fiscal year 2023 compared to fiscal year 2022.

This estimated reimbursement increase is attributable to a 3.9% market basket increase factor plus a 1.5 percentage point market basket forecast error adjustment and less a 0.3 percentage point productivity adjustment, as well as a $780 million decrease in the SNF prospective payment system rates as a result of the recalibrated parity adjustment described below, which is being phased in over two years.

We continue to monitor rate adjustment activity in other states in which we have a meaningful presence;

however, it is difficult to assess whether rates will generally keep pace with increased operator costs.

On July 31, 2023, CMS issued a final rule regarding the government fiscal year 2024 Medicare payment rates and quality payment programs for SNFs, with aggregate Medicare Part A payments projected to increase by $1.4 billion, or 4.0%, for fiscal year 2024 compared to fiscal year 2023.

This estimated reimbursement increase is attributable to a 6.4% net market basket update to the payment rates, which is based on a 3.0% SNF market basket increase plus a 3.6% market basket forecast error adjustment and less a 0.2% productivity adjustment, as well as a negative 2.3%, or approximately $789 million, decrease in the fiscal year 2024 SNF Medicare payment rates as a result of the second phase of the Patient Driven Payment Model (“PDPM”) parity adjustment recalibration described below, which was being phased in over two years.

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

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

The Patient Driven Payment Model (“PDPM”), which was designed by CMS to improve the incentives to treat the needs of the whole patient, became effective October 1, 2019.

The PDPM, which was designed by CMS to improve the incentives to treat the needs of the whole patient, became effective October 1, 2019.

CMS has stated that it intended PDPM to be revenue-neutral to operators, with future Medicare reimbursement reductions possible if that was not the case.

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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.

Given the ongoing impacts of COVID-19, many operators are and may continue to be restricted from pursuing concurrent and group therapy and unable to realize these benefits.

During the COVID-19 pandemic, many operators were restricted from pursuing concurrent and group therapy and unable to realize these benefits.

Additionally, our operators continue to adapt to the reimbursement changes and other payment reforms resulting from the value-based purchasing programs applicable to SNFs under the 2014 Protecting Access to Medicare Act.

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On May 27, 2020, CMS added physical therapy, occupational therapy and speech-language pathology to the list of approved telehealth Providers for the Medicare Part B programs provided by a SNF as a part of the COVID-19 1135 waiver provisions.

The COVID-19 1135 waiver provisions also allow for the facility to bill an originating site fee to CMS for telehealth services provided to Medicare Part B beneficiary residents of the facility when the services are provided by a physician from an alternate location, effective March 6, 2020 through May 11, 2023, the scheduled end of the public health emergency.

The COVID-19 1135 waiver provisions also allowed for the facility to bill an originating site fee to CMS for telehealth services provided to Medicare Part B beneficiary residents of the facility when the services were provided by a physician from an alternate location, effective March 6, 2020 through May 11, 2023, the expiration of the public health emergency.

On March 30, 2023, CMS issued a memorandum revising and enhancing enforcement efforts for infection control deficiencies found in nursing homes that are targeted at higher-level infection control deficiencies that result in actual harm or immediate jeopardy to residents.

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An adverse resolution of any of these enforcement activities or investigations incurred by our operators may involve injunctive relief and/or substantial monetary penalties, either or both of which could have a material adverse effect on their reputation, business, results of operations and cash flows.

First Quarter of 2023 and Recent Highlights

● We acquired six facilities for an aggregate consideration of $26.4 million during the three months ended March 31, 2023.

The initial cash yield (the initial annual contractual cash rent divided by the purchase price) on this asset acquisition was 8.0%.

● We invested $10.1 million under our construction in progress and capital improvement programs during the three months ended March 31, 2023.

● We financed a $5.0 million new real estate loan with an interest rate of 9% during the three months ended March 31, 2023.

We also advanced $10.7 million under existing real estate loans during the three months ended March 31, 2023.

Second Quarter of 2023 and Recent Highlights

● During the three and six months ended June 30, 2023, we acquired five facilities and 11 facilities for an aggregate consideration of $128.6 million and $155.0 million, 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 10.0%.

● We invested $17.8 million and $27.9 million under our construction in progress and capital improvement programs during the three and six months ended June 30, 2023, respectively.

● We financed $78.9 million and $83.9 million of new real estate loans with a weighted average interest rate of 11.8% and 11.6% during the three and six months ended June 30, 2023, respectively.

We also advanced $5.5 million and $16.2 million under existing real estate loans during the three and six months ended June 30, 2023, respectively.

Dispositions and Impairments

● During the three months ended March 31, 2023, we sold two facilities, one SNF and one medical office building, for approximately $17.6 million in net cash proceeds, recognizing a net gain of approximately $13.6 million.

● During the three months ended March 31, 2023, we recorded impairments on real estate properties of approximately $39.0 million on four facilities.

Of the $39.0 million, $37.0 million related to two held-for-use facilities and $2.0 million related to two facilities that were classified as held for sale.

Of the $37.0 million, $27.5 million relates to one held-for-use facility which was closed during the quarter.

● During the three and six months ended June 30, 2023, we sold ten facilities (nine SNFs and one ILF) and twelve facilities (ten SNFs, one ILF and one medical office building) for approximately $44.7 million and $62.3 million in net cash proceeds, recognizing net gains of approximately $12.2 million and $25.9 million, respectively.

● During the three and six months ended June 30, 2023, we recorded impairments on four facilities and six facilities of approximately $21.1 million and $60.1 million, respectively.

Of the $60.1 million recorded impairment, $57.5 million related to four facilities that were classified as held-for-use for which the carrying values exceeded the estimated fair values, and $2.6 million related to two held for sale facilities for which it was determined that the carrying value exceeded the fair value less costs to sell.

Financing Activities

● We sold 0.1 million shares of common stock under our Dividend Reinvestment and Common Stock Purchase Plan (“DRSPP”) during the three months ended March 31, 2023, generating aggregate gross proceeds of $2.3 million.

● During the three and six months ended June 30, 2023, we sold 6.6 million and 6.7 million shares of common stock under our $1.0 billion At-The-Market Offering Program (“ATM Program”) and Dividend Reinvestment and Common Stock Purchase Plan (“DRSPP”), generating aggregate gross proceeds of $201.6 million and $203.9 million, respectively.

● During the second quarter of 2023, we terminated our five forward starting swaps with $400 million in notional value that were designated cash flow hedges of interest rate risk associated with interest payments on a forecasted issuance of fixed rate long-term debt, and we received a $92.6 million net cash settlement from the swap counterparties.

● During the second quarter of 2023, we entered into an interest rate swap with a notional amount of $50.0 million.

The swap is effective June 30, 2023 and terminates on April 30, 2027.

This interest rate swap is designated as a hedge against our exposure to changes in interest payment cash flow fluctuations in the variable interest rates on the OP term loan.

The interest rate swap contract effectively converts our $50.0 million OP term loan to an aggregate fixed rate of approximately 5.52% through its maturity.

● On August 1, 2023, the Company repaid its $350 million of 4.375% senior notes that matured on August 1, 2023 using available cash.

Other Highlights

● During the three months ended March 31, 2023, we made $10.4 million of new non-real estate loans with a weighted average interest rate of 6%.

● We made $62.0 million and $72.4 million of new non-real estate loans with a weighted average interest rate of 11.4% and 10.6% during the three and six months ended June 30, 2023, respectively.

We also advanced $5.0 million under existing non-real estate loans during the three and six months ended June 30, 2023.

Collectibility Issues

● During the three months ended March 31, 2023, we did not place any additional operators on a cash basis of revenue recognition.

We transitioned 43 facilities associated with three cash basis operators to leases with operators on a straight-line basis of revenue recognition.

As of March 31, 2023, 17 operators are on a cash basis.

These operators represent an aggregate 25.1% of our total revenues (excluding the impact of write-offs) for the three months ended March 31, 2023.

● During the three months ended March 31, 2023, we allowed eight operators to defer $24.4 million in aggregate of contractual rent and interest.

● During the three and six months ended June 30, 2023, we placed two new operators, which Omega has not previously had relationships with prior to the second quarter of 2023, on a cash basis of revenue recognition as collection of substantially all contractual lease payments due from them was not deemed probable.

The new lease agreements with each of these operators were executed in the second quarter of 2023 as part of transitions of facilities from other operators, and we placed them on a cash basis concurrent with the respective lease commencement dates, so there were no straight-line rent write-offs associated with moving these operators to cash basis.

During the three and six months ended June 30, 2023, we transitioned the portfolios of one and four cash basis operators, respectively, with an aggregate of five facilities and 48 facilities, respectively, to leases with operators on a straight-line basis of revenue recognition.

As of June 30, 2023, 18 operators are on a cash basis.

These operators represent an aggregate 25.8% and 32.3% of our total revenues (excluding the impact of write-offs) for the six months ended June 30, 2023 and 2022, respectively.

● During the six months ended June 30, 2023, we allowed nine operators to defer $33.6 million in aggregate of contractual rent and interest.

The deferrals primarily related to the following operators:

LaVie Care Centers, LLC (“LaVie,” f/k/a Consulate Health Care)($14.3 million), Healthcare Homes Limited (“Healthcare Homes”)($6.1 million), Agemo Holdings, LLC (“Agemo”)($1.9 million) and Maplewood Senior Living (along with affiliates, “Maplewood”)($0.4 million).

Additionally, we allowed three operators to apply collateral, such as security deposits or letters of credit, to contractual rent and interest during the three months ended March 31, 2023.

The total collateral applied to contractual rent and interest was $5.2 million for the three months ended March 31, 2023.

LaVie Care Centers, LLC (“LaVie,” f/k/a Consulate Health Care) ($19.0 million), Healthcare Homes Limited ($8.2 million), Agemo Holdings, LLC (“Agemo”) ($1.9 million) and Maplewood Senior Living (along with affiliates, “Maplewood”) ($0.7 million).

Additionally, we allowed four operators to apply collateral, such as security deposits or letters of credit, to contractual rent and interest during the six months ended June 30, 2023.

The total collateral applied to contractual rent and interest was $5.5 million for the six months ended June 30, 2023.

● In the first quarter of 2023, Omega and Agemo, a cash basis operator, entered into a restructuring agreement, an amended and restated master lease and a new loan agreement for two replacement loans.

As part of the restructuring agreement and related agreements, Omega agreed to, among other things, forgive and release Agemo from previously written off past due rent and interest obligations, with contractual rent and interest scheduled to resume on April 1, 2023, reduce monthly contractual base rent from $4.8 million to $1.9 million, extend the initial Agemo lease term to December 31, 2036 and modify the existing Agemo loans into two replacement loans.

We have not recorded any rental income or interest income related to Agemo during the three months ended March 31, 2023.

Agemo resumed making contractual rent payments during the second quarter of 2023 in accordance with the restructuring terms discussed above.

Agemo is on a cash basis of revenue recognition for lease purposes, and we recorded rental income of $5.8 million for the three and six months ended June 30, 2023 for the contractual rent payments that were received.

Additionally, Agemo’s loans are on non-accrual status and are being accounted for under the cost recovery method, so the $0.8 million of interest payments that we received during the three and six months ended June 30, 2023 were applied directly against the principal balance outstanding.

● In the first quarter of 2023, Omega continued the process of restructuring our portfolio with LaVie and agreed to a partial rent deferral for the first four months of 2023.

In doing so, we agreed to allow LaVie to defer up to $19.1 million of contractual rent from January 2023 through April 2023 under our lease agreements.

As a result, in the first quarter of 2023, LaVie paid $7.4 million of contractual rent due under the leases and elected to defer the remaining $14.3 million of the full contractual payment due of $21.7 million.

As a result, during the three and six months ended June 30, 2023, LaVie paid $16.9 million and $24.3 million, respectively, of contractual rent due under the leases and elected to defer the remaining $4.7 million and $19.0 million, respectively, of the full contractual payment due of $21.6 million and $43.4 million, respectively.

In July 2023, LaVie paid $2.5 million of contractual rent, a short pay of $4.7 million of the $7.2 million due under its lease agreement.

● In the first quarter of 2023, we entered into a restructuring agreement, master lease amendments and loan amendments with Maplewood, a cash basis operator.

As part of the restructuring agreement and related agreements, Omega agreed to, among other things, extend the maturity date of the master lease to December 2037, fix contractual rent at $69.3 million per annum and defer the 2.5% annual escalators under our lease agreement through December 31, 2035, pay a $12.5 million option termination fee to Maplewood, extend the maturity date of the secured revolving credit facility to June 2035, increase the capacity of the secured revolving credit facility to $320.0 million and convert the 7% per annum cash interest due on the secured revolving credit facility to all PIK interest in 2023, 1% cash interest and 6% PIK interest in 2024, and 4% cash interest and 3% PIK interest in 2025 and through the maturity date.

We have recorded $18.8 million of revenue related to Maplewood for the three months ended March 31, 2023 for the contractual rent and interest payments that we received during the quarter.

● On April 20, 2023, the Board of Directors declared a cash dividend of $0.67 per share.

The dividend will be paid on May 15, 2023 to stockholders of record as of the close of business on May 1, 2023.

Additionally, we agreed to reduce Maplewood’s share of any future potential sales proceeds (in excess of our gross investment) by the unpaid deferred rent balance, the $22.5 million of capital expenditures granted through the restructuring agreement and the $12.5 million option termination fee payment.

Maplewood short-paid the contractual rent amount due under its lease agreement in June 2023 and July 2023 by $1.0 million each.

We are taking actions to preserve our rights and are in discussions with Maplewood to address the deficiency.

We have recorded $16.3 million and $35.1 million of revenue related to Maplewood for the three and six months ended June 30, 2023, respectively, for the contractual rent and interest payments that we received.

During the third quarter of 2023, we applied $2.0 million of Maplewood’s security deposit toward the unpaid portion of June 2023 rent and July 2023 rent.

Following the application of the security deposit, we have a $2.8 million security deposit remaining.

● On July 20, 2023, the Board of Directors declared a cash dividend of $0.67 per share.

The dividend will be paid on August 15, 2023 to stockholders of record as of the close of business on July 31, 2023.

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.

Comparison of results of operations for the three months ended March 31, 2023 and 2022 (dollars in thousands):

Three Months Ended March 31,

Increase/(Decrease)

Comparison of results of operations for the three and six months ended June 30, 2023 and 2022 (dollars in thousands):

Three Months Ended

Six Months Ended

Rental income

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Impairment on real estate properties

(Recovery) provision for credit losses

Provision (recovery) for credit losses

Interest expense

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Gain on assets sold – net

Income tax benefit (expense)

Income tax (expense) benefit

Income from unconsolidated joint ventures

The following is a description of certain of the changes in revenues for the three months ended March 31, 2023 compared to the same period in 2022:

● The decrease in rental income was primarily the result of (i) a $45.5 million net decrease in rental income from cash basis operators, including Maplewood and LaVie, as a result of not recording straight-line lease revenue and/or receiving lower cash rent payments period over period from these operators, along with a one-time option termination payment of $12.5 million to Maplewood that was recorded as a reduction to rental income during the first quarter of 2023, partially offset by (i) a $9.2 million net increase related to impact of facility transitions and sales, (ii) a $4.6 million increase related to facility acquisitions made throughout 2022 and in the first quarter of 2023 and (iii) a $3.2 million increase as a result of a net decrease in straight-line rent receivable write-offs in the first quarter of 2023.

● The decrease in interest income was primarily due to (i) a $5.4 million decrease related to early principal payments on our mortgage loans with Ciena Healthcare during 2022 and the pay-off of other loans during 2022 and the first quarter of 2023 and (ii) a $2.6 million decrease related to loans placed on non-accrual status, primarily the LaVie loans and Maplewood loan, during 2022, partially offset by a $5.4 million increase related to new and refinanced loans and additional funding to existing operators made throughout 2022 and the first quarter of 2023.

As noted above, during the three months ended March 31, 2023, we funded $15.7 million for new or existing real estate loans and $10.4 million for new non-real estate loans.

The following is a description of certain of the changes in our expenses for the three months ended March 31, 2023 compared to the same period in 2022:

Three Months Ended June 30, 2023 and 2022

The following is a description of certain of the changes in revenues for the three months ended June 30, 2023 compared to the same period in 2022:

● The increase in rental income was primarily the result of (i) a $9.5 million increase as a result of a net decrease in straight-line rent receivable write-offs in the second quarter of 2023, (ii) a $7.1 million increase related to facility acquisitions made throughout 2022 and in the first and second quarters of 2023, (iii) a $2.3 million increase due to higher capital expenditure rent and the impact of lease extensions with existing operators and (iv) a $1.0 million net increase related to impact of facility transitions and sale, partially offset by a $12.0 million net decrease in rental income from cash basis operators, including Maplewood and LaVie, as a result of not recording straight-line lease revenue and/or receiving lower cash rent payments period over period from these operators

● The decrease in interest income was primarily due to (i) a $4.9 million decrease related to loans placed on non-accrual status, primarily the LaVie loans and the Maplewood loan, during 2022 and (ii) a $4.0 million decrease related to early principal payments on our mortgage loans with Ciena Healthcare during 2022 and the pay-off of other loans during 2022 and the first and second quarters of 2023, partially offset by a $6.8 million increase related to new and refinanced loans and additional funding to existing operators made throughout 2022 and the first and second quarters of 2023.

As noted above, during the three months ended June 30, 2023, we funded $84.4 million in new or existing real estate loans and $67.0 million in new or existing non-real estate loans.

The following is a description of certain of the changes in our expenses for the three months ended June 30, 2023 compared to the same period in 2022:

● The decrease in depreciation and amortization expense primarily relates to facility sales and facilities reclassified to assets held-for-sale, partially offset by facility acquisitions and capital additions.

● The increase in general and administrative expense primarily relates to (i) a $1.9 million increase in stock-based compensation expense, (ii) a $1.7 million increase in outside services primarily related to professional fees and (iii) a $1.0 million increase in payroll and benefits.

● The 2023 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 two held-for-use facilities 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.

The 2023 and 2022 impairments were primarily the result of decisions to exit certain non-strategic facilities and/or operators.

● The change in provision for credit losses primarily relates to decreases in the general reserve recorded primarily resulting from decreases in loss rates utilized in the estimate of expected credit losses for loans, partially offset by a net increase in aggregate specific provisions recorded during the first quarter of 2023 compared to specific provisions recorded during the same period in 2022.

● The increase in general and administrative (“G&A”) expense primarily relates to a $2.0 million increase in stock-based compensation expense.

● The decrease in acquisition, merger and transition related costs primarily relates to costs incurred related to the transition of facilities with troubled operators in 2022.

● The 2023 impairments were recognized in connection with one facility that was classified as held for sale for which the carrying values exceeded the estimated fair values less costs to sell and three held-for-use facilities for which it was determined that the carrying value exceeded the fair value.

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

The 2023 and 2022 impairments were primarily the result of the closure of certain facilities and decisions to exit certain non-strategic facilities and/or terminate our relationships with certain non-strategic operators.

● The change in provision for credit losses primarily relates to increases in the general reserve recorded primarily resulting from increases in loan balances and movements in other inputs utilized in our model, partially offset by (i) a net decrease in aggregate specific provisions recorded during the second quarter of 2023 compared to specific provisions recorded during the same period in 2022 and (ii) decreases in loss rates utilized in the estimate of expected credit losses for loans.

Other Income (Expense)

The change in total other income (expense) was primarily due to a $100.0 million decrease in gain on assets sold related to the sale of two facilities in the first quarter of 2023 compared to the sale of 27 facilities, primarily associated with our exit of the facilities associated with Gulf Coast Health Care LLC (together with certain affiliates “Gulf Coast”), during the same period in 2022.

Income Tax Benefit (Expense)

The change in income tax benefit (expense) was primarily due to adjustments made to our deferred tax assets and liabilities in the first quarter of 2023 as a result of the majority of our U.K.

The change in total other income (expense) was primarily due to a $12.9 million decrease in gain on assets sold related to the sale of ten facilities in the second quarter of 2023 compared to the sale of 13 facilities during the same period in 2022.

Six Months Ended June 30, 2023 and 2022

The following is a description of certain of the changes in revenues for the six months ended June 30, 2023 compared to the same period in 2022:

● The decrease in rental income was primarily the result of a $46.3 million net decrease in rental income from cash basis operators, including Maplewood and LaVie, as a result of not recording straight-line lease revenue and/or receiving lower cash rent payments period over period from these operators, along with a one-time option termination payment of $12.5 million to Maplewood that was recorded as a reduction to rental income during the second quarter of 2023.

The overall decrease in rental income was partially offset by (i) a $12.7 million increase as a result of fewer straight-line rent receivable write-offs in the first and second quarters of 2023, (ii) a $11.6 million increase related to facility acquisitions made throughout 2022 and in the first and second quarters of 2023 and (iii) a $1.2 million net increase due to higher capital expenditure rent and the impact of lease extensions with existing operators, along with other movements.

● The decrease in interest income was primarily due to (i) a $9.4 million decrease related to early principal payments on our mortgage loans with Ciena Healthcare during 2022 and the pay-off of other loans during 2022 and the first and second quarters of 2023 and (ii) a $7.5 million decrease related to loans placed on non-accrual status, primarily the LaVie loans and Maplewood loan, during 2022, partially offset by a $12.2 million increase related to new and refinanced loans and additional funding to existing operators made throughout 2022 and the first and second quarters of 2023.

As noted above, during the six months ended June 30, 2023, we funded $100.1 million in new or existing real estate loans and $77.4 million in new or existing non-real estate loans.

The following is a description of certain of the changes in our expenses for the six months ended June 30, 2023 compared to the same period in 2022:

● The decrease in depreciation and amortization expense primarily relates to facility sales and facilities reclassified to assets held for sale, partially offset by facility acquisitions and capital additions.

● The increase in G&A expense primarily relates to (i) a $3.8 million increase in stock-based compensation expense, (ii) a $1.3 million increase in payroll and benefits and (iii) a $0.9 million increase in outside services primarily related to professional fees.

● The decrease in acquisition, merger and transition related costs primarily relates to costs incurred related to the transition of facilities with troubled operators.

● The 2023 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 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 the carrying value exceeded the fair value.

The 2023 and 2022 impairments were primarily the result of decisions to exit certain non-strategic facilities and/or terminate our relationships with certain non-strategic operators.

● The change in provision for credit losses primarily relates to (i) increases in the general reserve recorded primarily resulting from increases in loan balances and movements in other inputs utilized in our model and (ii) a net increase in aggregate specific provisions recorded during the second quarter of 2023 compared to specific provisions recorded during the same period in 2022, partially offset by decreases in loss rates utilized in the estimate of expected credit losses for loans.

Other Income (Expense)

The change in total other income (expense) was primarily due to a $112.9 million decrease in gain on assets sold related to the sale of 12 facilities in the six months ended June 30, 2023 compared to the sale of 40 facilities, primarily associated with our exit of the facilities associated with Gulf Coast Health Care LLC (together with certain affiliates “Gulf Coast”), during the same period in 2022.

Income Tax (Expense) Benefit

The change in income tax (expense) benefit was primarily due to adjustments made to our deferred tax assets and liabilities in the second quarter of 2023 as a result of the majority of our U.K.

portfolio entering into the U.K.

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

The following table presents our Nareit FFO results for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

The following table presents our Nareit FFO results for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Net income (1)

Deduct gain from real estate dispositions

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

(1) The three months ended March 31, 2023 and 2022 includes the application of $5.2 million and $3.3 million, respectively, of security deposits (letter of credit and cash deposits) in revenue.

The $24.6 million decrease in Nareit FFO for the three months ended March 31, 2023 compared to the same period in 2022 is primarily driven by the overall decrease in total revenue, which is discussed in more detail in the Results of Operations above.

(1) The three and six months ended June 30, 2023 includes the application of $0.3 million and $5.5 million, respectively, of security deposits (letter of credit and cash deposits) in revenue.

The three and six months ended June 30, 2022 includes the application of $1.4 million and $4.7 million, respectively, of security deposits (letter of credit and cash deposits) in revenue.

Liquidity and Capital Resources

Sources and Uses

Our primary sources of cash include rental income and interest receipts, existing availability under our revolving credit facility, proceeds from our DRSPP and the $1.0 billion 2021 At-The-Market Offering Program (“2021 ATM Program”), facility sales, and proceeds from real estate loan and non-real estate loan payoffs.

Our primary sources of cash include rental income and interest receipts, existing availability under our revolving credit facility, proceeds from our DRSPP and the ATM Program, facility sales, and proceeds from real estate loan and non-real estate loan payoffs.

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

Capital Structure

At March 31, 2023, we had total assets of $9.3 billion, total equity of $3.7 billion and total debt of $5.3 billion in our consolidated financial statements, with such debt representing approximately 59.1% of total capitalization.

At March 31, 2023 and December 31, 2022, the weighted average annual interest rate of our debt was 4.1%.

Additionally, as of March 31, 2023, 98% of our debt with outstanding principal balances has fixed interest payments.

At June 30, 2023, we had total assets of $9.4 billion, total equity of $3.8 billion and total debt of $5.3 billion in our consolidated financial statements, with such debt representing approximately 58.3% of total capitalization.

At June 30, 2023 and December 31, 2022, the weighted average annual interest rate of our debt was 4.2%.

Additionally, as of June 30, 2023, 99% 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 March 31, 2023, we had long-term credit ratings of Baa3 from Moody’s and BBB- from S&P Global and Fitch.

As of June 30, 2023, 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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A downgrade in credit ratings by Moody’s, S&P Global and/or Fitch may have a negative impact on the interest rates and fees for our revolving credit facility.

We have $350 million of 4.375% senior notes due August 2023 and $400 million of 4.95% senior notes due April 2024.

As of March 31, 2023 we have $1.43 billion of availability under our revolving credit facility and approximately $245 million of cash on our consolidated balance sheet.

In addition, we have $400 million of forward interest rate swaps with a weighted average fixed rate of approximately 0.8675%.

This combination of liquidity sources provides us with flexibility to repay the senior notes due in August 2023 and April 2024.

We currently anticipate that we will repay the 4.375% senior notes due in August 2023 using available cash and proceeds from our revolving credit facility.

On August 1, 2023, the Company repaid its $350 million of 4.375% senior notes that matured on August 1, 2023 using available cash.

As of June 30, 2023, we had approximately $350.7 million of cash and cash equivalents on our Consolidated Balance Sheets.

As of June 30, 2023, we have $400 million of 4.95% senior notes due April 2024.

As of June 30, 2023, we had $1.43 billion of availability under our revolving credit facility.

As discussed below, we also have $730.5 million of potential sales remaining under the ATM Program.

This combination of liquidity sources, along with cash from operating activities, provides us with flexibility to repay the senior notes due in April 2024.

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

As of March 31, 2023 and December 31, 2022, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.

As of June 30, 2023 and December 31, 2022, 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 March 31, 2023 that were registered under the Securities Act of 1933, as amended.

Parent has issued approximately $4.9 billion aggregate principal of senior notes outstanding at June 30, 2023 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 March 31, 2023, there were no significant restrictions on the ability of Omega OP to make distributions to Omega.

At March 31, 2023, we had approximately 234.3 million shares of common stock outstanding, and our shares had a market value of $6.4 billion.

The following is a summary of activity under our equity programs during the three months ended March 31, 2023:

● During the three months ended March 31, 2023, we did not issue any shares of common stock under our 2021 ATM Program and we did not utilize the forward provisions under the 2021 ATM Program.

We have $929.9 million of potential sales remaining under the 2021 ATM Program as of March 31, 2023.

● We issued 81.7 thousand shares of common stock under the DRSPP during the three months ended March 31, 2023.

Aggregate gross proceeds from these sales were $2.3 million during the three months ended March 31, 2023.

● During the three months ended March 31, 2023, we did not repurchase any shares of our outstanding common stock under the $500 Million Stock Repurchase Program.

We have $357.8 million remaining authorized for repurchases under the $500 Million Stock Repurchase Program as of March 31, 2023.

As of June 30, 2023, there were no significant restrictions on the ability of Omega OP to make distributions to Omega.

At June 30, 2023, we had approximately 241.0 million shares of common stock outstanding, and our shares had a market value of $7.4 billion.

The following is a summary of activity under our equity programs during the three and six months ended June 30, 2023:

● We issued 6.5 million shares of common stock under our ATM Program for aggregate gross proceeds of $199.4 million.

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

We have $730.5 million of potential sales remaining under the ATM Program as of June 30, 2023.

● We issued 0.1 million and 0.2 million shares of common stock under the DRSPP during the three and six months ended June 30, 2023, respectively.

Aggregate gross proceeds from these sales were $2.2 million and $4.5 million during the three and six months ended June 30, 2023, respectively.

● We did not repurchase any shares of our outstanding common stock under the $500 Million Stock Repurchase Program.

We have $357.8 million remaining authorized for repurchases under the $500 Million Stock Repurchase Program as of June 30, 2023.

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 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.

For the three months ended March 31, 2023, we paid dividends of approximately $157.4 million to our common stockholders.

For the six months ended June 30, 2023, we paid dividends of approximately $314.8 million to our common stockholders.

On February 15, 2023, we paid dividends of $0.67 per outstanding common share to the common stockholders of record as of the close of business on February 6, 2023.

On May 15, 2023, we paid dividends of $0.67 per outstanding common share to the common stockholders of record as of the close of business on May 1, 2023.

Material Cash Requirements

During the three months ended March 31, 2023, 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 Annual Report on Form 10-K for the year ended December 31, 2022.

As of March 31, 2023, we had $228.5 million of commitments to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments.

During the six months ended June 30, 2023, 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 Annual Report on Form 10-K for the year ended December 31, 2022.

As of June 30, 2023, we had $238.2 million of commitments to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments.

Additionally, we have commitments to fund $48.8 million of advancements under existing other real estate loans and $66.7 million of advancements under existing non-real estate loans.

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Cash Flow Summary

The following is a summary of our sources and uses of cash flows for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 (dollars in thousands):

Three Months Ended March 31,

Cash, cash equivalents and restricted cash totaled $356.5 million as of June 30, 2023, an increase of $55.9 million as compared to the balance at December 31, 2022.

The following is a summary of our sources and uses of cash flows for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 (dollars in thousands):

Six Months Ended June 30,

Increase/(Decrease)

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Financing activities

Cash, cash equivalents and restricted cash totaled $248.5 million as of March 31, 2023, a decrease of $246.3 million as compared to the balance at March 31, 2022.

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.

The following is a discussion of changes in cash, cash equivalents and restricted cash for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Operating Activities – The decrease in net cash provided by operating activities is driven primarily by a decrease of $6.0 million of net income, net of $182.7 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.

A $17.5 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 – The change in cash provided by investing activities primarily related to a $315.0 million decrease in proceeds from the sales of real estate investments driven by the sale of the Gulf Coast facilities in the first quarter of 2022, partially offset by (i) a $86.8 million decrease in real estate acquisitions, (ii) a $44.7 million decrease in loan placements, net of repayments and (iii) a $8.1 million decrease in capital improvements to real estate investments and construction in progress.

Financing Activities – The change in cash used in financing activities primarily related to (i) a $355.2 million decrease in proceeds from other long-term borrowings, net of repayments due to higher cash balances in the first quarter of 2023 as a result of significant facility sale proceeds received in 2022 and (ii) a $3.9 million increase in distributions to Omega OP Unit holders, partially offset by (i) a $27.3 million decrease in repurchases of shares of common stock and (ii) a $3.3 million decrease in dividends paid primarily related to share repurchases during 2022.

Investing Activities – The change in cash used in investing activities primarily related to (i) a $324.6 million decrease in proceeds from the sales of real estate investments driven by the sale of the Gulf Coast facilities in the first quarter of 2022, (ii) a $96.9 million decrease in loan repayments, net of placements due to significant paydowns on the Ciena Healthcare mortgage loans and other loans during 2022, (iii) a $41.8 million increase in real estate acquisitions and (iv) an $8.1 million increase in investments in unconsolidated joint ventures primarily related to the three new joint venture investments in the second quarter of 2023, partially offset by (i) a $6.4 million decrease in capital improvements to real estate investments and construction in progress and (ii) a $3.2 million increase in receipts from insurance proceeds.

Financing Activities – The decrease in cash used in financing activities primarily related to (i) a $198.1 million increase in net proceeds from issuance of common stock, (ii) a $142.3 million decrease in repurchases of shares of common stock, (iii) a $92.6 million increase in proceeds from derivative instruments as a result of the termination of our forward starting swaps in the second quarter of 2023, (iv) a $9.6 million decrease in redemptions of Omega OP units and (v) a $3.5 million decrease in dividends paid primarily related to share repurchases during 2022, partially offset by (i) a $46.3 million decrease in proceeds from long-term borrowings, net of repayments due to higher cash balances in the second quarter of 2023 as a result of common stock issuances, the termination of the forward starting swaps and significant facility sale proceeds received in 2022 and 2023 and (ii) a $4.4 million increase in distributions to Omega OP Unit holders.

Critical Accounting Policies and Estimates

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Item 3 – Quantitative and Qualitative Disclosures about Market Risk

During the quarter ended March 31, 2023, 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, 2022.

During the quarter ended June 30, 2023, 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, 2022.

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