10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 8, 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
(Exact name of registrant as specified in its charter)
(Omega Healthcare Investors, Inc.) |
(Omega Healthcare Investors, Inc.) |
(Omega Healthcare Investors, Inc.) |
(OHI Healthcare Properties Limited |
(OHI Healthcare Properties Limited |
(OHI Healthcare Properties Limited |
(State or other jurisdiction of incorporation or |
(Commission file number) |
(IRS Employer Identification No.) |
(Address of principal executive offices)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Omega Healthcare Investors, Inc. |
OHI Healthcare Properties Limited Partnership |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Omega Healthcare Investors, Inc. |
OHI Healthcare Properties Limited Partnership |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Omega Healthcare Investors, Inc.
Accelerated filer ◻ |
Non-accelerated filer ◻ |
Smaller reporting company ◻ |
Emerging growth company ◻ |
OHI Healthcare Properties Limited Partnership
Large accelerated filer ◻ |
Accelerated filer ◻ |
Smaller reporting company ◻ |
Emerging growth company ◻ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Omega Healthcare Investors, Inc. |
OHI Healthcare Properties Limited Partnership |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Omega Healthcare Investors, Inc. Yes |
No ⌧ |
OHI Healthcare Properties Limited Partnership Yes |
No ⌧ |
Indicate the number of shares outstanding of each of the issuers’ classes of common stock as of May 1, 2020
Omega Healthcare Investors, Inc. |
|
Common Stock, $.10 par value |
|
OHI Healthcare Properties Limited Partnership |
|
N/A |
No common stock outstanding |
(Class) |
(Number of shares) |
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2020 of Omega Healthcare Investors, Inc. and OHI Healthcare Properties Limited Partnership (“Omega OP”). Unless stated otherwise or the context otherwise requires, (i) references to “Omega” or the “Company” mean Omega Healthcare Investors, Inc. and its consolidated subsidiaries, (ii) references to “Parent” refer to Omega Healthcare Investors, Inc. without regard to its consolidated subsidiaries, and (iii) references to “Omega OP” mean OHI Healthcare Properties Limited Partnership and its consolidated subsidiaries.
Omega is a self-administered real estate investment trust (“REIT”) under the Internal Revenue Code of 1986. 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.
Parent directly owned approximately 97% of the issued and outstanding partnership units in Omega OP (the “Omega OP Units”) at March 31, 2020. Each Omega OP Unit (other than those owned by Parent) is redeemable at the election of the holder for cash equal to the then-fair market value of one share of common stock of Parent, subject to Parent’s election to exchange the Omega OP Units tendered for redemption for common stock of the Parent on a one-for-one basis in an unregistered transaction, subject to adjustment as set forth in the partnership agreement. The management of Parent consists of the same members as the management of Omega OP.
The financial results of Omega OP are consolidated into the financial statements of Omega. Omega has no significant assets other than its investments in Omega OP. Omega and Omega OP are managed and operated as one entity. Omega OP has no significant assets other than its interests in non-guarantor subsidiaries.
We believe it is important for investors to understand the few differences between Omega and Omega OP in the context of how we operate as a consolidated company. Omega acts as the general partner of Omega OP. Net proceeds from equity issuances by Parent are contributed to Omega OP in exchange for additional partnership units. Parent and Omega OP incur indebtedness. The net proceeds of the Parent’s borrowings are loaned to Omega OP. The outstanding senior notes and certain other debt of Parent is guaranteed by Omega OP.
The presentations of debt and related interest, including amounts accrued, stockholders’ equity, owners’ equity and noncontrolling interests, are the main areas of difference between the consolidated financial statements of Omega and Omega OP. The differences between debt, stockholders’ equity and owners’ equity result from differences in the debt or equity issued at the Parent and Omega OP levels. With respect to owners’ equity, the units held by the partners in Omega OP other than the Parent are accounted for as owners’ equity in Omega OP’s financial statements and as noncontrolling interests in Omega’s financial statements. Although classified differently, total debt and equity of Omega and Omega OP are the same.
We believe combining the quarterly reports on Form 10-Q of Omega and Omega OP into this single report results in the following benefits:
| ● | combined reports better reflect how management and the analyst community view the business as a single operating unit; |
| ● | combined reports enhance investors’ understanding of Omega and Omega OP by enabling them to view the business as a whole and in the same manner as management; |
| ● | combined reports are more efficient for Omega and Omega OP and result in savings in time, effort and expense; and |
| ● | combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review. |
In order to highlight the differences between Omega and Omega OP, the separate sections in this report for Omega and Omega OP specifically refer to Omega and Omega OP. In the sections that combine disclosure of Omega and Omega OP, this report refers to “we” and “us” and actions or holdings as being “our” actions or holdings. Although Omega OP and its subsidiaries hold all of our assets, we believe that reference to “we,” “us” or “our” in this context is appropriate because the business is one enterprise and we operate substantially all of our business through Omega OP.
OMEGA HEALTHCARE INVESTORS, INC.
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
FORM 10-Q
March 31, 2020
TABLE OF CONTENTS | ||
Page |
||
2 |
||
3 |
||
4 |
||
5 |
||
6 |
||
Financial Statements of OHI Healthcare Properties Limited Partnership: |
||
7 |
||
8 |
||
9 |
||
Consolidated Statements of Changes in Owners’ Equity (unaudited) |
||
10 |
||
11 |
||
12 |
||
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
41 |
|
57 |
||
58 |
||
58 |
||
58 |
||
59 |
||
61 |
||
PART I – FINANCIAL INFORMATION
Item 1 - Financial Statements
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
|
March 31, |
|
December 31, |
||||
|
2020 |
|
2019 |
|
|||
(Unaudited) |
|||||||
ASSETS |
|||||||
Real estate properties |
|
|
|
|
|||
Real estate investments |
$ |
|
|
$ |
|
||
Less accumulated depreciation |
|
( |
|
|
( |
||
Real estate investments – net |
|
|
|
|
|
||
Investments in direct financing leases – net |
|
|
|
|
|
||
Mortgage notes receivable – net |
|
|
|
|
|
||
|
|
|
|
|
|||
Other investments |
|
|
|
|
|
||
Investments in unconsolidated joint ventures |
|
|
|
|
|
||
Assets held for sale – net |
|
|
|
|
|
||
Total investments |
|
|
|
|
|
||
Cash and cash equivalents |
|
|
|
|
|
||
Restricted cash |
|
|
|
|
|
||
Contractual receivables – net |
|
|
|
|
|
||
Other receivables and lease inducements |
|
|
|||||
Goodwill |
|
|
|
|
|
||
Other assets |
|
|
|
|
|
||
Total assets |
$ |
|
|
$ |
|
||
LIABILITIES AND EQUITY |
|
|
|
|
|
||
Revolving line of credit |
$ |
|
|
$ |
|
||
Term loans – net |
|
|
|
|
|
||
Secured borrowings |
|
|
|
|
|
||
Senior notes and other unsecured borrowings – net |
|
|
|
|
|
||
Accrued expenses and other liabilities |
|
|
|
|
|
||
Deferred income taxes |
|
|
|
|
|
||
Total liabilities |
|
|
|
|
|
||
Equity: |
|
|
|
|
|||
Common stock $ |
|
|
|
|
|||
Common stock – additional paid-in capital |
|
|
|
|
|||
Cumulative net earnings |
|
|
|
|
|||
Cumulative dividends paid |
|
( |
|
( |
|||
Accumulated other comprehensive loss |
|
( |
|
( |
|||
Total stockholders’ equity |
|
|
|
|
|||
Noncontrolling interest |
|
|
|
|
|||
Total equity |
|
|
|
|
|||
Total liabilities and equity |
$ |
|
|
$ |
|
||
See notes to consolidated financial statements.
2
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(in thousands, except per share amounts)
|
Three Months Ended |
|||||||
|
March 31, |
|
||||||
|
2020 |
|
2019 |
|
||||
Revenue |
||||||||
Rental income |
$ |
|
$ |
|
|
|||
Income from direct financing leases |
|
|
|
|
|
|||
Mortgage interest income |
|
|
|
|
|
|||
Other investment income |
|
|
|
|
|
|||
Miscellaneous income |
|
|
|
|
|
|||
Total operating revenues |
|
|
|
|
|
|||
Expenses |
|
|
|
|
|
|||
Depreciation and amortization |
|
|
|
|
|
|||
General and administrative |
|
|
|
|
|
|||
Real estate taxes |
|
|
||||||
Acquisition and merger related costs |
|
( |
|
|
|
|||
Impairment on real estate properties |
|
|
|
— |
|
|||
Impairment on direct financing leases |
|
— |
|
|
|
|||
Provision for credit losses |
|
|
|
— |
|
|||
Total operating expenses |
|
|
|
|
|
|||
Other operating income |
||||||||
Gain on assets sold – net |
|
|
||||||
Operating income |
|
|
|
|
|
|||
Other income (expense) |
|
|
|
|
||||
Interest income and other – net |
|
( |
|
|
|
|||
Interest expense |
|
( |
|
( |
|
|||
Interest – amortization of deferred financing costs |
|
( |
|
( |
|
|||
Realized (loss) gain on foreign exchange |
|
( |
|
|
|
|||
Total other expense |
|
( |
|
( |
|
|||
Income before income tax expense and income from unconsolidated joint ventures |
|
|
|
|
|
|||
Income tax expense |
|
( |
|
( |
|
|||
Income from unconsolidated joint ventures |
|
|
|
|
|
|||
Net income |
|
|
|
|
|
|||
Net income attributable to noncontrolling interest |
|
( |
|
( |
|
|||
Net income available to common stockholders |
$ |
|
$ |
|
|
|||
Earnings per common share/unit available to common stockholders: |
|
|
|
|
|
|||
Basic: |
|
|
|
|
|
|||
Net income available to common stockholders |
$ |
|
$ |
|
|
|||
Diluted: |
|
|
|
|
|
|||
Net income |
$ |
|
$ |
|
|
|||
Weighted-average shares outstanding, basic |
|
|
|
|
|
|||
Weighted-average shares outstanding, diluted |
|
|
|
|
|
|||
See notes to consolidated financial statements.
3
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(in thousands)
Three Months Ended |
|||||||
|
March 31, |
|
|||||
|
2020 |
|
2019 |
|
|||
Net income |
$ |
|
$ |
|
|||
Other comprehensive (loss) income: |
|
|
|
||||
Foreign currency translation |
|
( |
|
|
|||
Cash flow hedges |
|
( |
|
( |
|||
Total other comprehensive (loss) income |
|
( |
|
|
|||
Comprehensive income |
|
|
|
|
|||
Comprehensive income attributable to noncontrolling interest |
|
( |
|
( |
|||
Comprehensive income attributable to common stockholders |
$ |
|
$ |
|
|||
See notes to consolidated financial statements.
4
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Three Months Ended March 31, 2020 and 2019
Unaudited
(in thousands, except per share amounts)
Accumulated |
||||||||||||||||||||||||
Common |
Additional |
Cumulative |
Other |
Total |
||||||||||||||||||||
Stock |
Paid-in |
Net |
Cumulative |
Comprehensive |
Stockholders’ |
Noncontrolling |
Total |
|||||||||||||||||
|
Par Value |
|
Capital |
|
Earnings |
|
Dividends Paid |
|
Loss |
|
Equity |
|
Interest |
|
Equity |
|||||||||
Balance at December 31, 2019 |
$ |
|
$ |
|
$ |
|
$ |
( |
$ |
( |
$ |
|
$ |
|
$ |
|
||||||||
Cumulative effect of accounting change (see Note 1) |
- |
- |
( |
( |
( |
( |
||||||||||||||||||
|
|
|
( |
( |
|
|
|
|||||||||||||||||
Stock-based compensation expense |
— |
|
— |
— |
— |
|
— |
|
||||||||||||||||
Vesting/exercising of equity compensation plan, net of tax withholdings |
|
( |
— |
— |
— |
( |
— |
( |
||||||||||||||||
Dividend reinvestment and stock purchase plan |
|
|
— |
— |
— |
|
— |
|
||||||||||||||||
Deferred compensation directors |
— |
|
— |
— |
— |
|
— |
|
||||||||||||||||
Equity Shelf Program |
|
|
— |
— |
— |
|
— |
|
||||||||||||||||
Vesting/exercising of Omega OP Units |
— |
( |
— |
— |
— |
( |
|
— |
||||||||||||||||
Common dividends declared ($ |
— |
— |
— |
( |
— |
( |
— |
( |
||||||||||||||||
Conversion and redemption of Omega OP Units to common stock |
— |
|
— |
— |
— |
|
( |
— |
||||||||||||||||
Omega OP Units distributions |
— |
— |
— |
— |
— |
— |
( |
( |
||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Foreign currency translation |
— |
— |
— |
— |
( |
( |
( |
( |
||||||||||||||||
Cash flow hedges |
— |
— |
— |
— |
( |
( |
( |
( |
||||||||||||||||
Net income |
— |
— |
|
— |
— |
|
|
|
||||||||||||||||
Total comprehensive income |
|
|||||||||||||||||||||||
Balance at March 31, 2020 |
$ |
|
$ |
|
$ |
|
$ |
( |
$ |
( |
$ |
|
$ |
|
$ |
|
||||||||
Balance at December 31, 2018 |
$ |
|
$ |
|
$ |
|
$ |
( |
$ |
( |
$ |
|
$ |
|
$ |
|
||||||||
Stock-based compensation expense |
— |
|
— |
— |
— |
|
— |
|
||||||||||||||||
Vesting/exercising of equity compensation plan, net of tax withholdings |
|
( |
— |
— |
— |
( |
— |
( |
||||||||||||||||
Dividend reinvestment and stock purchase plan |
|
|
— |
— |
— |
|
— |
|
||||||||||||||||
Deferred compensation directors |
— |
|
— |
— |
— |
|
— |
|
||||||||||||||||
Equity Shelf Program |
|
|
— |
— |
— |
|
— |
|
||||||||||||||||
Vesting/exercising of Omega OP Units |
— |
( |
( |
|
— |
|||||||||||||||||||
Common dividends declared ($ |
— |
— |
— |
( |
— |
( |
— |
( |
||||||||||||||||
Conversion and redemption of Omega OP Units to common stock |
|
|
— |
— |
— |
|
( |
— |
||||||||||||||||
Omega OP Units distributions |
— |
— |
— |
— |
— |
— |
( |
( |
||||||||||||||||
Noncontrolling interest - consolidated joint venture |
— |
— |
— |
— |
— |
— |
|
|
||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Foreign currency translation |
— |
— |
— |
— |
|
|
|
|
||||||||||||||||
Cash flow hedges |
— |
— |
— |
— |
( |
( |
( |
( |
||||||||||||||||
Net income |
— |
— |
|
— |
— |
|
|
|
||||||||||||||||
Total comprehensive income |
|
|||||||||||||||||||||||
Balance at March 31, 2019 |
$ |
|
$ |
|
$ |
|
$ |
( |
$ |
( |
$ |
|
$ |
|
$ |
|
||||||||
See notes to consolidated financial statements.
5
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (in thousands)
|
March 31, |
||||||
|
2020 |
|
2019 |
|
|||
Cash flows from operating activities |
|
|
|
|
|
||
Net income |
$ |
|
$ |
|
|||
Adjustment to reconcile net income to net cash provided by operating activities: |
|
|
|
||||
Depreciation and amortization |
|
|
|
|
|||
Impairment on real estate properties |
|
|
|
— |
|||
Impairment on direct financing leases |
|
— |
|
|
|||
Provision for credit losses |
|
|
|
— |
|||
Interest – amortization of deferred financing costs |
|
|
|
|
|||
Accretion of direct financing leases |
|
|
|
|
|||
Stock-based compensation expense |
|
|
|
|
|||
Gain on assets sold – net |
|
( |
|
( |
|||
Amortization of acquired in-place leases – net |
|
( |
|
( |
|||
Effective yield receivable on mortgage notes |
|
( |
|
( |
|||
Interest paid-in-kind |
( |
( |
|||||
Income from unconsolidated joint ventures |
( |
— |
|||||
Change in operating assets and liabilities – net: |
|
|
|
||||
Contractual receivables |
|
( |
|
|
|||
Straight-line rent receivables |
|
( |
|
( |
|||
Lease inducements |
|
( |
|
( |
|||
Other operating assets and liabilities |
|
( |
|
( |
|||
Net cash provided by operating activities |
|
|
|
|
|||
Cash flows from investing activities |
|
|
|
||||
Acquisition of real estate |
|
( |
|
( |
|||
Net proceeds from sale of real estate investments |
|
|
|
|
|||
Investments in construction in progress |
|
( |
|
( |
|||
Proceeds from direct financing lease and related trust |
— |
|
|||||
Placement of mortgage loans |
|
( |
|
( |
|||
Collection of mortgage principal |
|
|
|
|
|||
Investments in unconsolidated joint ventures |
( |
— |
|||||
Distributions from unconsolidated joint ventures in excess of earnings |
|
|
|
|
|||
Capital improvements to real estate investments |
|
( |
|
( |
|||
Receipts from insurance proceeds |
|
|
|
|
|||
Investments in other investments |
|
( |
|
( |
|||
Proceeds from other investments |
|
|
|
|
|||
Net cash (used in) provided by investing activities |
|
( |
|
|
|||
Cash flows from financing activities |
|
|
|
|
|||
Proceeds from credit facility borrowings |
|
|
|
|
|||
Payments on credit facility borrowings |
|
( |
|
( |
|||
Receipts of other long-term borrowings |
|
— |
|
|
|||
Payments of other long-term borrowings |
|
( |
|
— |
|||
Receipts from dividend reinvestment plan |
|
|
|
|
|||
Payments for exercised options and restricted stock |
|
( |
|
( |
|||
Net proceeds from issuance of common stock |
|
|
|
|
|||
Dividends paid |
|
( |
|
( |
|||
Noncontrolling members' contributions to consolidated joint venture |
— |
|
|||||
Distributions to Omega OP Unit Holders |
|
( |
|
( |
|||
Net cash provided by (used in) financing activities |
|
|
|
( |
|||
Effect of foreign currency translation on cash, cash equivalents and restricted cash |
|
( |
|
|
|||
Increase in cash, cash equivalents and restricted cash |
|
|
|
|
|||
Cash, cash equivalents and restricted cash at beginning of period |
|
|
|
|
|||
Cash, cash equivalents and restricted cash at end of period |
$ |
|
$ |
|
|||
See notes to consolidated financial statements.
6
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, |
December 31, |
||||||
|
2020 |
|
2019 |
|
|||
(Unaudited) |
|||||||
ASSETS |
|||||||
Real estate properties |
|
|
|
|
|
||
Real estate investments |
$ |
|
$ |
|
|||
Less accumulated depreciation |
|
( |
|
( |
|||
Real estate investments – net |
|
|
|
|
|||
Investments in direct financing leases – net |
|
|
|
|
|||
Mortgage notes receivable – net |
|
|
|
|
|||
|
|
|
|
||||
Other investments |
|
|
|
|
|||
Investments in unconsolidated joint ventures |
|
|
|
|
|||
Assets held for sale – net |
|
|
|
|
|||
Total investments |
|
|
|
|
|||
Cash and cash equivalents |
|
|
|
|
|||
Restricted cash |
|
|
|
|
|||
Contractual receivables – net |
|
|
|
|
|||
Other receivables and lease inducements |
|
|
|||||
Goodwill |
|
|
|
|
|||
Other assets |
|
|
|
|
|||
Total assets |
$ |
|
$ |
|
|||
LIABILITIES AND OWNERS’ EQUITY |
|
|
|
||||
Term loan – net |
$ |
|
$ |
|
|||
Secured borrowings |
|
|
|||||
Accrued expenses and other liabilities |
|
|
|
|
|||
Deferred income taxes |
|
|
|
|
|||
Intercompany loans payable |
|
|
|
|
|||
Total liabilities |
|
|
|
|
|||
Owners’ Equity: |
|
|
|
|
|||
General partners’ equity |
|
|
|
|
|||
Limited partners’ equity |
|
|
|
|
|||
Total owners’ equity |
|
|
|
|
|||
Noncontrolling interest |
|
|
|||||
Total equity |
|
|
|||||
Total liabilities and equity |
$ |
|
$ |
|
|||
See notes to consolidated financial statements.
7
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(in thousands, except per unit amounts)
Three Months Ended |
|||||||
March 31, |
|||||||
|
2020 |
|
2019 |
|
|||
Revenue |
|||||||
Rental income |
$ |
|
$ |
|
|||
Income from direct financing leases |
|
|
|
|
|||
Mortgage interest income |
|
|
|
|
|||
Other investment income |
|
|
|
|
|||
Miscellaneous income |
|
|
|
|
|||
Total operating revenues |
|
|
|
|
|||
Expenses |
|
|
|
|
|||
Depreciation and amortization |
|
|
|
|
|||
General and administrative |
|
|
|
|
|||
Real estate taxes |
|
|
|||||
Acquisition and merger related costs |
|
( |
|
|
|||
Impairment on real estate properties |
|
|
|
— |
|||
Impairment on direct financing leases |
|
— |
|
|
|||
Provision for credit losses |
|
|
|
— |
|||
Total operating expenses |
|
|
|
|
|||
Other operating income |
|||||||
Gain on assets sold – net |
|
|
|||||
Operating income |
|
|
|
|
|||
Other income (expense) |
|
|
|
||||
Interest income and other – net |
|
( |
|
|
|||
Interest expense |
|
( |
|
( |
|||
Interest – amortization of deferred financing costs |
|
( |
|
( |
|||
Realized (loss) gain on foreign exchange |
|
( |
|
|
|||
Total other expense |
|
( |
|
( |
|||
Income before income tax expense and income from unconsolidated joint ventures |
|
|
|
|
|||
Income tax expense |
|
( |
|
( |
|||
Income from unconsolidated joint ventures |
|
|
|
|
|||
Net income |
|
|
|||||
Net loss attributable to noncontrolling interest |
|
— |
|||||
Net income available to owners |
$ |
|
$ |
|
|||
Earnings per unit: |
|
|
|
|
|||
Basic: |
|
|
|
|
|||
Net income available to owners' |
$ |
|
$ |
|
|||
Diluted: |
|
|
|
|
|||
Net income |
$ |
|
$ |
|
|||
Weighted-average Omega OP Units outstanding, basic |
|
|
|
|
|||
Weighted-average Omega OP Units outstanding, diluted |
|
|
|
|
|||
See notes to consolidated financial statements.
8
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(in thousands)
Three Months Ended |
|||||||
March 31, |
|||||||
|
2020 |
|
2019 |
|
|||
Net income |
$ |
|
$ |
|
|||
Other comprehensive (loss) income: |
|
|
|
||||
Foreign currency translation |
|
( |
|
|
|||
Cash flow hedges |
|
( |
|
( |
|||
Total other comprehensive (loss) income |
|
( |
|
|
|||
Comprehensive income |
|
|
|||||
Comprehensive loss attributable to noncontrolling interest |
|
— |
|||||
Comprehensive income attributable to owners |
$ |
|
$ |
|
|||
See notes to consolidated financial statements.
9
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS’ EQUITY
Three Months Ended March 31, 2020 and 2019
Unaudited
(in thousands, except per unit amounts)
General |
Limited |
|||||||||||||||||||||||
Partners’ |
Partners’ |
Total |
General |
Limited |
||||||||||||||||||||
Omega |
Omega |
Omega |
Partners’ |
Partners’ |
Total Owners' |
Noncontrolling |
Total |
|||||||||||||||||
OP Units |
OP Units |
OP Units |
Equity |
Equity |
Equity |
Interest |
Equity |
|||||||||||||||||
Balance at December 31, 2019 |
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
Cumulative effect of accounting change |
— |
— |
— |
( |
( |
( |
— |
( |
||||||||||||||||
Balance at January 1, 2020 |
|
|
|
|
|
|
|
|
||||||||||||||||
Contributions from partners |
|
— |
|
|
— |
|
— |
|
||||||||||||||||
Distributions to partners |
|
— |
|
— |
|
— |
|
( |
|
( |
( |
— |
( |
|||||||||||
Vesting/exercising of Omega OP Units |
— |
|
|
|
( |
|
|
— |
— |
— |
||||||||||||||
Omega OP Unit conversions |
|
— |
|
( |
|
( |
|
— |
|
( |
( |
— |
( |
|||||||||||
Comprehensive income |
|
|
|
|||||||||||||||||||||
Foreign currency translation |
|
— |
|
— |
|
— |
|
( |
|
( |
( |
— |
( |
|||||||||||
Cash flow hedges |
|
— |
|
— |
|
— |
|
( |
|
( |
( |
— |
( |
|||||||||||
Net income |
|
— |
|
— |
|
— |
|
|
|
|
|
( |
|
|||||||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
||||||||||||||||
Balance at March 31, 2020 |
|
|
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||
Balance at December 31, 2018 |
|
|
|
|
|
$ |
|
$ |
|
$ |
|
$ |
— |
$ |
|
|||||||||
Contributions from partners |
|
— |
|
|
— |
|
— |
|
||||||||||||||||
Distributions to partners |
|
— |
|
— |
|
— |
|
( |
( |
( |
— |
( |
||||||||||||
Noncontrolling interest - consolidated joint venture |
— |
— |
— |
|
— |
|
— |
— |
|
|
||||||||||||||
Vesting/exercising of Omega OP Units |
— |
|
|
|
( |
|
|
— |
— |
— |
||||||||||||||
Omega OP Unit conversions |
|
— |
|
( |
|
( |
|
— |
( |
( |
— |
( |
||||||||||||
Comprehensive income |
|
|
|
|||||||||||||||||||||
Foreign currency translation |
|
— |
|
— |
|
— |
|
|
|
|
— |
|
||||||||||||
Cash flow hedges |
|
— |
|
— |
|
— |
|
( |
( |
( |
— |
( |
||||||||||||
Net income |
|
— |
|
— |
|
— |
|
|
|
|
— |
|
||||||||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
||||||||||||||||
Balance at March 31, 2019 |
|
|
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||
See notes to consolidated financial statements.
10
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (in thousands)
Three Months Ended |
|||||||
March 31, |
|||||||
|
2020 |
|
2019 |
|
|||
Cash flows from operating activities |
|
|
|
|
|
||
Net income |
$ |
|
$ |
|
|||
Adjustment to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|||
Depreciation and amortization |
|
|
|
|
|||
Impairment on real estate properties |
|
|
|
— |
|||
Impairment loss on direct financing leases |
|
— |
|
|
|||
Provision for credit losses |
|
|
|
— |
|||
Interest – amortization of deferred financing costs |
|
|
|
|
|||
Accretion of direct financing leases |
|
|
|
|
|||
Stock-based compensation expense |
|
|
|
|
|||
Gain on assets sold – net |
|
( |
|
( |
|||
Amortization of acquired in-place leases – net |
|
( |
|
( |
|||
Effective yield receivable on mortgage notes |
|
( |
|
( |
|||
Interest paid-in-kind |
( |
( |
|||||
Income from unconsolidated joint ventures |
( |
— |
|||||
Change in operating assets and liabilities – net: |
|
|
|
|
|||
Contractual receivables |
|
( |
|
|
|||
Straight-line rent receivables |
|
( |
|
( |
|||
Lease inducements |
|
( |
|
( |
|||
Other operating assets and liabilities |
|
( |
|
( |
|||
Net cash provided by operating activities |
|
|
|
|
|||
Cash flows from investing activities |
|
|
|
|
|||
Acquisition of real estate |
|
( |
|
( |
|||
Net proceeds from sale of real estate investments |
|
|
|||||
Investments in construction in progress |
|
( |
|
( |
|||
Proceeds from direct financing lease and related trust |
|
— |
|
|
|||
Placement of mortgage loans |
|
( |
|
( |
|||
Collection of mortgage principal |
|
|
|
|
|||
Investments in unconsolidated joint ventures |
|
( |
|
— |
|||
Distributions from unconsolidated joint ventures in excess of earnings |
|
|
|
|
|||
Capital improvements to real estate investments |
|
( |
|
( |
|||
Receipts from insurance proceeds |
|
|
|
|
|||
Investments in other investments |
|
( |
|
( |
|||
Proceeds from other investments |
|
|
|
|
|||
Net cash (used in) provided by investing activities |
|
( |
|
|
|||
Cash flows from financing activities |
|
|
|
|
|||
Repayments of secured borrowing |
( |
— |
|||||
Proceeds from intercompany loans payable to Omega |
|
|
|
|
|||
Repayment of intercompany loans payable to Omega |
|
( |
|
( |
|||
Noncontrolling members' contributions to consolidated joint venture |
— |
|
|||||
Equity contributions from general partners |
|
|
|
|
|||
Distributions to general partners |
|
( |
|
( |
|||
Distributions to limited partners |
|
( |
|
( |
|||
Net cash provided by (used in) financing activities |
|
|
|
( |
|||
Effect of foreign currency translation on cash, cash equivalents and restricted cash |
|
( |
|
|
|||
Increase in cash, cash equivalents and restricted cash |
|
|
|
|
|||
Cash, cash equivalents and restricted cash at beginning of period |
|
|
|
|
|||
Cash, cash equivalents and restricted cash at end of period |
$ |
|
$ |
|
|||
See notes to consolidated financial statements.
11
OMEGA HEALTHCARE INVESTORS, INC. AND OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
March 31, 2020
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business Overview and Organization
Omega Healthcare Investors, Inc. (“Omega”) was formed as a real estate investment trust (“REIT”) and incorporated in the State of Maryland on March 31, 1992. 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 (“Omega OP”). Omega OP was formed as a limited partnership and organized in the State of Delaware on October 24, 2014. Unless stated otherwise or the context otherwise requires, the terms the “Company,” “we,” “our” and “us” means Omega and Omega OP, collectively.
Omega has
Omega OP is governed by the Second Amended and Restated Agreement of Limited Partnership of OHI Healthcare Properties Limited Partnership, dated as of April 1, 2015 (the “Partnership Agreement”). Omega has exclusive control over Omega OP’s day-to-day management pursuant to the Partnership Agreement. As of March 31, 2020, Omega owned approximately
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the interim periods reported herein are not necessarily indicative of results to be expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the financial statements and the footnotes thereto included in our latest Annual Report on Form 10-K filed with the SEC on February 28, 2020.
Omega’s consolidated financial statements include the accounts of (i) Omega, (ii) Omega OP, (iii) all direct and indirect wholly owned subsidiaries of Omega and (iv) other entities in which Omega or Omega OP has a majority voting interest and control. All intercompany transactions and balances have been eliminated in consolidation, and Omega’s net earnings are reduced by the portion of net earnings attributable to noncontrolling interests.
12
Omega OP’s consolidated financial statements include the accounts of (i) Omega OP, (ii) all direct and indirect wholly owned subsidiaries of Omega OP and (iii) other entities in which Omega OP has a majority voting interest and control. All intercompany transactions and balances have been eliminated in consolidation, and Omega OP’s net earnings are reduced by the portion of net earnings attributable to noncontrolling interests.
Risks and Uncertainties
The Company is subject to certain risks and uncertainties affecting the healthcare industry as a result of healthcare legislation and growing regulation by federal, state and local governments. Additionally, we are subject to risks and uncertainties as a result of changes affecting operators of nursing home facilities due to the actions of governmental agencies and insurers to limit the rising cost of healthcare services.
On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. The COVID-19 pandemic has led governments and other authorities in the U.S., U.K. and around the world to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders. We believe many of our operators are incurring significant cost increases as a result of the pandemic, with dramatic increases for facilities with positive cases. We believe these increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of personal protective equipment and supplies. In terms of occupancy levels, we believe many of our operators are experiencing declines, in part due to the elimination of elective hospital procedures. To the extent these trends continue or accelerate and are not offset by sufficient or timely government relief, the operating results of our operators are likely to be adversely affected, some may be unwilling or unable to pay their contractual obligations to us in full or on a timely basis and we may be unable to restructure such obligations on terms as favorable to us as those currently in place. Even if operators are able to avail themselves of government relief to offset some of these costs, they may face challenges in complying with the terms and conditions of government support and may face longer-term adverse impacts to their personnel and business operations from the pandemic, including potential patient litigation and decreased demand for their services. The extent of the COVID-19 pandemic’s effect on our and our operators’ operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, all of which are uncertain and difficult to predict. Due to the speed with which the situation is developing, we are not able at this time to estimate the effect of these factors on our business, but the adverse impact on our business, results of operations, financial condition and cash flows could be material.
Variable Interest Entities
GAAP requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIEs”). A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. We may change our original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affects the characteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary.
Our variable interests in VIEs may be in the form of equity ownership, leases, guarantees and/or loans with our operators. We analyze our agreements and investments to determine whether our operators or unconsolidated joint ventures are VIEs and, if so, whether we are the primary beneficiary.
13
We consolidate a VIE when we determine that we are its primary beneficiary. We identify the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. Factors considered in determining whether we are the primary beneficiary of an entity include: (i) our voting rights, if any; (ii) our involvement in day-to-day capital and operating decisions; (iii) our risk and reward sharing; (iv) the financial condition of the operator or joint venture and (iv) our representation on the VIE’s board of directors. We perform this analysis on an ongoing basis.
As of March 31, 2020, we have not consolidated any VIEs, as we do not have the power to direct the activities of any VIEs that most significantly impact their economic performance and we do not have the obligation to absorb losses or receive benefits of the VIEs that could be significant to the entity.
Real Estate Investments and Depreciation
The costs of significant improvements, renovations and replacements, including interest are capitalized. In addition, we capitalize leasehold improvements when certain criteria are met, including when we supervise construction and will own the improvement. Expenditures for maintenance and repairs are charged to operations as they are incurred.
Depreciation is computed on a
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and highly liquid investments with a maturity date of three months or less when purchased. These investments are stated at cost, which approximates fair value. The majority of our cash, cash equivalents and restricted cash are held at major commercial banks. Certain cash account balances exceed FDIC insurance limits of $
Restricted Cash
Restricted cash consists primarily of liquidity deposits escrowed for tenant obligations required by us pursuant to certain contractual terms and other deposits required by the U.S. Department of Housing and Urban Development (“HUD”) in connection with our mortgage borrowings guaranteed by HUD.
14
Real Estate Investment Impairment
Management evaluates 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, management evaluates the carrying value of the related real estate investments in relation to management’s estimate of future undiscounted cash flows of the underlying facilities. 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. Provisions for impairment losses related to long-lived assets are recognized when expected future undiscounted cash flows based on our intended use of the property are determined to be less than the carrying values of the assets. An adjustment is made to the net carrying value of the real estate investments for the excess of carrying value over fair value. The fair value of the real estate investment is determined based on current market conditions and consider matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties, and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. Additionally, our evaluation of fair value may consider valuing the property as a nursing home or other healthcare facility as well as alternative uses. All impairments are taken as a period cost at that time, and depreciation is adjusted going forward to reflect the new value assigned to the asset. Management’s impairment evaluation process, and when applicable, impairment calculations involve estimation of the future cash flows from management’s intended use of the property as well as the fair value of the property. Changes in the facts and circumstances that drive management’s assumptions may result in an impairment to our assets in a future period that could be material to Omega’s results of operations.
For the three months ended March 31, 2020, we recognized impairment on real estate properties of approximately $
Allowance for Losses on Mortgages, Other Investments and Direct Financing Leases
The allowances for losses on mortgage notes receivable, other investments and direct financing leases (collectively, our “loans”) are maintained at a level believed adequate to absorb potential losses. The determination of the allowances is based on a quarterly evaluation of these loans, including general economic conditions and estimated collectability of loan payments. We evaluate the collectability of our loans receivable based on a combination of factors, including, but not limited to, delinquency status, financial strength of the borrower and guarantors and the value of the underlying collateral. If such factors indicate that there is greater risk of loan charge-offs, additional allowances or placement on non-accrual status may be required. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due as scheduled according to the contractual terms of the loan agreements. Consistent with this definition, all loans on non-accrual status may be deemed impaired. To the extent circumstances improve and the risk of collectability is diminished, we will return these loans to full accrual status. When management identifies potential loan impairment indicators, 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.
15
We account for impaired loans and direct financing leases using (a) the cost-recovery method, and/or (b) the cash basis method. We generally utilize the cost-recovery method for impaired loans or direct financing leases for which impairment reserves were recorded. We utilize the cash basis method for impaired loans or direct financing leases for which no impairment reserves were recorded because the net present value of the discounted cash flows expected under the loan or direct financing lease and/or the underlying collateral supporting the loan or direct financing lease were equal to or exceeded the book value of the loans or direct financing leases. Under the cost-recovery method, we apply cash received against the outstanding loan balance or direct financing lease prior to recording interest income. Under the cash basis method, we apply cash received to principal or interest income based on the terms of the agreement. As of March 31, 2020 and December 31, 2019, we had $
Goodwill Impairment
We assess goodwill for potential impairment during the fourth quarter of each fiscal year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the net assets of the reporting unit. In evaluating goodwill for impairment on an interim basis, we assess qualitative factors such as a significant decline in real estate valuations, current macroeconomic conditions, state of the equity and capital markets and our overall financial and operating performance or a significant decline in the value of our market capitalization, to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the reporting unit is less than its carrying amount. On an annual basis during the fourth quarter of each fiscal year, or on an interim basis if we conclude it is more likely than not that the fair value of the reporting unit is less than its carrying value, we perform a two-step goodwill impairment test to identify potential impairment and measure the amount of impairment we will recognize, if any.
Earnings Per Share/Unit
The computation of basic earnings per share/unit (“EPS” or “EPU”) is computed by dividing net income available to common stockholders/Omega OP Unit holders by the weighted-average number of shares of common stock/Omega OP Units outstanding during the relevant period. Diluted EPS/EPU is computed using the treasury stock method, which is net income divided by the total weighted-average number of common outstanding shares/Omega OP Units plus the effect of dilutive common equivalent shares/units during the respective period. Dilutive common shares/Omega OP Units reflect the assumed issuance of additional common shares pursuant to certain of our share-based compensation plans, including restricted stock and profit interest units, performance restricted stock and profit interest units, the assumed issuance of additional shares related to Omega OP Units held by outside investors. Dilutive Omega OP Units reflect the assumed issuance of additional Omega OP Units pursuant to certain of our share-based compensation plans, including, restricted stock and profit interest units, performance restricted stock and profit interest units.
Noncontrolling Interests
Noncontrolling interests is the portion of equity not attributable to the respective reporting entity. We present the portion of any equity that we do not own in consolidated entities as noncontrolling interests and classify those interests as a component of total equity, separate from total stockholders’ equity or owners’ equity on our Consolidated Balance Sheets. We include net income attributable to the noncontrolling interests in net income in our Consolidated Statements of Operations.
As our ownership of a controlled subsidiary increases or decreases, any difference between the aggregate consideration paid to acquire the noncontrolling interests and our noncontrolling interest balance is recorded as a component of equity in additional paid-in capital, so long as we maintain a controlling ownership interest.
The noncontrolling interest for Omega represents the outstanding Omega OP Units held by outside investors and interests in a consolidated real estate joint venture not fully owned by Omega.
16
The noncontrolling interest for Omega OP represents outside investors interests in a consolidated real estate joint venture not fully owned by Omega OP.
Foreign Operations
The U.S. dollar (“USD”) is the functional currency for our consolidated subsidiaries operating in the U.S. The functional currency for our consolidated subsidiaries operating in the U.K. is the British Pound (“GBP”). For our consolidated subsidiaries whose functional currency is not the USD, we translate their financial statements into the USD. We translate assets and liabilities at the exchange rate in effect as of the financial statement date. Revenue and expense accounts are translated using an average exchange rate for the period. Gains and losses resulting from translation are included in Omega OP’s owners’ equity and Omega’s accumulated other comprehensive loss (“AOCL”), as a separate component of equity and a proportionate amount of gain or loss is allocated to noncontrolling interests, if applicable.
We and certain of our consolidated subsidiaries may have intercompany and third-party debt that is not denominated in the entity’s functional currency. When the debt is remeasured against the functional currency of the entity, a gain or loss can result. The resulting adjustment is reflected in results of operations, unless it is intercompany debt that is deemed to be long-term in nature in which case the adjustments are included in Omega OP’s owners’ equity and Omega’s AOCL and a proportionate amount of gain or loss is allocated to noncontrolling interests, if applicable.
Derivative Instruments
Cash flow hedges
During our normal course of business, we may use certain types of derivative instruments for the purpose of managing interest rate and currency risk. To qualify for hedge accounting, derivative instruments used for risk management purposes must effectively reduce the risk exposure that they are designed to hedge. In addition, at the inception of a qualifying cash flow hedging relationship, the underlying transaction or transactions, must be, and are expected to remain, probable of occurring in accordance with our related assertions. Omega recognizes all derivative instruments, including embedded derivatives required to be bifurcated, as assets or liabilities in the Consolidated Balance Sheets at their fair value which is determined using a market approach and Level 2 inputs. Changes in the fair value of derivative instruments that are not designated in hedging relationships or that do not meet the criteria of hedge accounting are recognized in earnings. For derivatives designated in qualifying cash flow hedging relationships, the gain or loss on the derivative is recognized in Omega OP’s owners’ equity and Omega’s AOCL as a separate component of equity and a proportionate amount of gain or loss is allocated to noncontrolling interest, if applicable. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objectives and strategy for undertaking various hedge transactions. This process includes designating all derivatives that are part of a hedging relationship to specific forecasted transactions as well as recognized liabilities or assets on the Consolidated Balance Sheets. We also assess and document, both at inception of the hedging relationship and on a quarterly basis thereafter, whether the derivatives are highly effective in offsetting the designated risks associated with the respective hedged items. If it is determined that a derivative ceases to be highly effective as a hedge, or that it is probable the underlying forecasted transaction will not occur, we discontinue hedge accounting prospectively and record the appropriate adjustment to earnings based on the current fair value of the derivative. As a matter of policy, we do not use derivatives for trading or speculative purposes. At March 31, 2020 and December 31, 2019, the fair value of certain qualifying cash flow hedges was $
17
Net investment hedge
We are exposed to fluctuations in the GBP against its functional currency, the USD, relating to its investments in healthcare-related investments located in the U.K. The Company uses a nonderivative, GBP-denominated term loan and line of credit to manage its exposure to fluctuations in the GBP-USD exchange rate. The foreign currency transaction gain or loss on the nonderivative hedging instrument that is designated and qualifies as a net investment hedge is reported in Omega OP’s owners’ equity and Omega’s AOCL in our Consolidated Balance Sheets.
Contractual Receivables and Other Receivables and Lease Inducements
Contractual receivables relate to the amounts currently owed to us under the terms of our lease and loan agreements. Effective yield interest receivables relate to the difference between the interest income recognized on an effective yield basis over the term of the loan agreement and the interest currently due to us according to the contractual agreement. Straight-line rent receivables relate to the difference between the rental revenue recognized on a straight-line basis and the amounts currently due to us according to the contractual agreement. Lease inducements result from value provided by us to the lessee, at the inception, modification, or renewal of the lease, and are amortized as a reduction of rental revenue over the non-cancellable lease term.
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 and current and future economic conditions and expectations of performance. If our evaluation of these factors indicates it is probable that we will be unable to collect substantially all rents, we recognize a charge to rental income and limit our rental income to the lesser of lease income on a straight-line basis plus variable rents when they become accruable or cash collected. 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.
On a quarterly basis, and more frequently as appropriate, we review our contractual interest receivables, effective yield interest receivables and direct financing lease receivables to determine their collectability. The determination of collectability of these assets requires significant judgment and is affected by several factors relating to the credit quality of our operators that we regularly monitor, including (i) payment history, (ii) the age of the contractual receivables, (iii) the current economic conditions and reimbursement environment, (iv) the ability of the tenant to perform under the terms of their lease and/or contractual loan agreements and (v) the value of the underlying collateral of the agreement, if any.
18
For a loan recognized on an effective yield basis or a direct financing lease, we generally provide an allowance for effective interest or income from direct financing leases when certain conditions or indicators of adverse collectability are present. If these accounts receivable balances are subsequently deemed uncollectible, the receivable and allowance for doubtful account balance are written off.
A summary of our net receivables by type is as follows:
|
March 31, |
December 31, |
|||||
|
2020 |
|
2019 |
|
|||
(in thousands) |
|||||||
Contractual receivables – net |
$ |
|
$ |
|
|||
Effective yield interest receivables |
$ |
|
$ |
|
|||
Straight-line rent receivables |
|
|
|
|
|||
Lease inducements |
|
|
|
|
|||
Other receivables and lease inducements |
$ |
|
$ |
|
|||
During the first quarter of 2020, we provided approximately $
Accounting Pronouncements Adopted in 2020
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”), which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 specifically excludes from its scope receivables arising from operating leases accounted for under Topic 842. We adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. Upon adoption, we recorded an initial $
Transition Impact of adopting Topic 326
Pre-adoption balance as of |
Impact of adopting |
Post-adoption balance as of |
||||
Financial Statement Line Item |
December 31, 2019 |
Topic 326 |
January 1, 2020 |
|||
(in thousands) |
||||||
Mortgage Notes Receivable |
$ |
|
$ |
( |
$ |
|
Investment in Direct Financing Leases |
|
( |
|
|||
Other Investments |
|
( |
|
|||
Off-Balance Sheet Commitments |
|
( |
|
|||
Total |
$ |
|
$ |
( |
$ |
|
We elected to disaggregate our financial assets within the scope of Topic 326 based on the type of financial instrument. These segments were further disaggregated based on our internal credit ratings. 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 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.
19
Amortized Cost Basis By Year of Origination and Credit Quality Indicator
Rating |
Financial Statement Line Item |
2020 |
2019 |
2018 |
2017 |
2016 |
2015 |
2014 & older |
Revolving Loans |
Balance as of March 31, 2020 |
||||||||||
(in thousands) |
||||||||||||||||||||
1 |
Mortgage Notes Receivable |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
|
$ |
- |
$ |
- |
$ |
|
|
3 |
Mortgage Notes Receivable |
- |
- |
- |
- |
- |
- |
|
- |
|
||||||||||
4 |
Mortgage Notes Receivable |
- |
|
|
|
|
|
|
- |
|
||||||||||
5 |
Mortgage Notes Receivable |
- |
- |
|
|
- |
- |
|
- |
|
||||||||||
6 |
Mortgage Notes Receivable |
- |
- |
- |
- |
- |
- |
|
- |
|
||||||||||
Sub-total |
- |
|
|
|
|
|
|
- |
|
|||||||||||
3 |
Investment in Direct Financing Leases |
- |
- |
- |
- |
- |
|
- |
- |
|
||||||||||
7 |
Investment in Direct Financing Leases |
- |
- |
- |
- |
|
- |
- |
- |
|
||||||||||
Sub-total |
- |
- |
- |
- |
|
|
- |
- |
|
|||||||||||
2 |
Other Investments |
|
- |
- |
- |
- |
|
- |
|
|
||||||||||
3 |
Other Investments |
- |
|
|
- |
- |
|
|
|
|
||||||||||
4 |
Other Investments |
|
|
|
|
|
- |
- |
|
|
||||||||||
5 |
Other Investments |
- |
|
|
- |
- |
- |
- |
|
|
||||||||||
Sub-total |
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||
We have a limited history of incurred losses and consequently have elected to employ external data to perform our expected credit loss calculation. We have elected a probability of default (“PD”) and loss given default (“LGD”) methodology. Our model’s historic inputs consider PD and LGD data for residential care facilities published by the Federal Housing Administration (the “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 United States Bureau of Labor Statistics and the Federal Reserve Bank of St. Louis and the weighted average life to maturity of the underlying financial asset.
20
Allowance for Credit Loss
Segment |
Financial Statement Line Item |
Allowance for Credit Loss at December 31, 2019 |
Allowance for Credit Loss on January 1, 2020 |
Provision for Credit Loss for the period ended March 31, 2020 |
Allowance for Credit Loss as of March 31, 2020 |
|||||
(in thousands) |
||||||||||
Segment A-4 |
Mortgage Notes Receivable |
$ |
- |
$ |
|
$ |
|
$ |
|
|
Segment B-3 |
Mortgage Notes Receivable |
- |
|
|
|
|||||
Segment C-5 |
Mortgage Notes Receivable |
- |
|
( |
|
|||||
Segment E-6 |
Mortgage Notes Receivable |
|
|
|
|
|||||
Sub-total |
|
|
|
|
||||||
Segment A-3 |
Investment in Direct Financing Leases |
|
|
|
|
|||||
Sub-total |
|
|
|
|
||||||
Segment A-4 |
Other Investments |
- |
|
|
|
|||||
Segment B-3 |
Other Investments |
- |
|
|
|
|||||
Segment C-2 |
Other Investments |
- |
|
( |
|
|||||
Segment D-5 |
Other Investments |
- |
|
|
|
|||||
Sub-total |
- |
|
|
|
||||||
Segment A-4 |
Off-Balance Sheet Commitments |
- |
|
( |
|
|||||
Sub-total |
- |
|
( |
|
||||||
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||
As of March 31, 2020, $
On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future London Inter-bank Offered Rate (“LIBOR”) indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
21
NOTE 2 – PROPERTIES AND INVESTMENTS
Leased Property
A summary of our investments in real estate properties subject to operating leases is as follows:
|
March 31, |
December 31, |
|||||
|
2020 |
|
2019 |
|
|||
(in thousands) |
|||||||
Buildings |
$ |
|
$ |
|
|||
Land |
|
|
|
|
|||
Furniture and equipment |
|
|
|
|
|||
Site improvements |
|
|
|
|
|||
Construction in progress |
|
|
|
|
|||
Total real estate investments |
|
|
|
|
|||
Less accumulated depreciation |
|
( |
|
( |
|||
Real estate investments – net |
$ |
|
$ |
|
|||
At March 31, 2020, our leased real estate properties included
Three Months Ended March 31, 2020 |
Three Months Ended March 31, 2019 |
||||||
(in thousands) |
|||||||
Rental income – operating leases |
$ |
|
$ |
|
|||
Variable lease income – operating leases |
|
|
|||||
Total lease income |
$ |
|
$ |
|
|||
The following tables summarize the significant asset acquisitions that occurred during the first three months of 2020:
Number of |
Total |
Building & Site |
Furniture |
Initial |
||||||||||||||||||
|
Facilities |
|
Country/ |
|
Investment |
|
Land |
|
Improvements |
|
& Equipment |
|
Annual |
|||||||||
Period |
SNF |
ALF |
Specialty |
MOB |
State |
(in millions) |
Cash Yield(1) |
|||||||||||||||
Q1 |
|
— |
|
— |
— |
|
UK |
$ |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
% |
||
Q1 |
|
— |
— |
— |
IN |
|
|
|
|
|
% |
|||||||||||
Total |
|
|
|
— |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|||
| (1) | The initial annual cash yield reflects the initial annual cash rent divided by the purchase price. |
MedEquities Merger
On May 17, 2019, Omega and Omega OP completed their merger with MedEquities Realty Trust, Inc. (“MedEquities”) and its subsidiary operating partnership and the general partner of its subsidiary operating partnership. Pursuant to the Agreement and Plan of Merger, as amended by the First Amendment to the Agreement and Plan of Merger, dated March 26, 2019, (the “Merger Agreement”) Omega acquired MedEquities and MedEquities was merged with and into Omega (the “Merger”) at the effective time of the Merger with Omega continuing as the surviving company.
22
In accordance with the Merger Agreement, each share of MedEquities common stock issued and outstanding immediately prior thereto was converted into the right to receive (i)
The following table highlights the fair value of the assets acquired and liabilities assumed on May 17, 2019:
(in thousands) |
|||
Fair value of net assets acquired: |
|||
Real estate investments (1) |
$ |
|
|
Mortgage notes receivable |
|
|
|
Other investments |
|
|
|
Investment in unconsolidated joint venture |
|
|
|
Cash |
|
|
|
Contractual receivables |
|
|
|
Other assets (1) (2) |
|
|
|
Total investments |
|
||
Debt |
( |
||
Accrued expenses and other liabilities (1)(3) |
( |
||
Fair value of net assets acquired |
$ |
|
|
| (1) | With the exception for real estate investments, above market lease assets and below market lease liabilities, the fair value estimates above are final. |
| (2) |
Includes approximately $ |
| (3) |
Includes approximately $ |
The MedEquities facilities acquired in 2019 are included in our results of operations from the date of acquisition. For the three months ended March 31, 2020, we recognized approximately $
23
Pro Forma Acquisition Results
The following unaudited pro forma information presents consolidated financial information as if the MedEquities Merger occurred on January 1, 2019. In the opinion of management, all significant necessary adjustments to reflect the effect of the merger have been made. The following pro forma information is not indicative of future operations.
Pro Forma |
|||||||
Three Months Ended |
|
||||||
March 31, |
|||||||
2020 |
2019 |
||||||
(in thousands, except per share amounts, unaudited) |
|||||||
|
|
|
|
||||
Pro forma revenues |
$ |
|
$ |
|
|||
Pro forma net income |
$ |
|
$ |
|
|||
Earnings per share – diluted: |
|||||||
Net income – as reported |
$ |
|
$ |
|
|||
Net income – pro forma |
$ |
|
$ |
|
|||
Asset Sales and Impairments
During the first quarter of 2020, we sold
Our recorded impairments were primarily the result of decisions to exit certain non-strategic facilities and/or operators. We reduced the net book value of the impaired facilities to their estimated fair values or, with respect to the facilities reclassified to held for sale, to their estimated fair values less costs to sell. To estimate the fair value of the facilities, we utilized a market approach which considered binding sale agreements (a Level 1 input) and/or non-binding offers from unrelated third parties and/or broker quotes (a Level 3 input).
NOTE 3 – DIRECT FINANCING LEASES
The components of investments in direct financing leases consist of the following:
|
March 31, |
December 31, |
|||||
|
2020 |
|
2019 |
|
|||
(in thousands) |
|||||||
Minimum lease payments receivable |
$ |
|
$ |
|
|||
Less unearned income |
|
( |
|
( |
|||
Investment in direct financing leases |
|
|
|
|
|||
Less allowance for credit losses on direct financing leases |
|
( |
|
( |
|||
Investment in direct financing leases – net |
$ |
|
$ |
|
|||
Properties subject to direct financing leases |
|
|
|
|
|||
Number of direct financing leases |
|
|
|
|
|||
24
NOTE 4 – MORTGAGE NOTES RECEIVABLE
As of March 31, 2020, mortgage notes receivable relate to
The principal amounts outstanding of mortgage notes receivable, net of allowances, were as follows:
March 31, |
December 31, |
||||||
|
2020 |
|
2019 |
|
|||
(in thousands) |
|||||||
Mortgage note due |
$ |
|
$ |
|
|||
Mortgage notes due |
|
|
|
|
|||
Other mortgage notes outstanding(2) |
|
|
|
|
|||
Mortgage notes receivable, gross |
|
|
|
|
|||
Allowance for credit losses on mortgage notes receivable |
|
( |
|
( |
|||
Total mortgages — net |
$ |
|
$ |
|
|||
| (1) |
Approximates the weighted average interest rate on |
| (2) |
Other mortgages outstanding have a weighted average interest rate of |
NOTE 5 – OTHER INVESTMENTS
A summary of our other investments is as follows:
|
March 31, |
December 31, |
|||||
|
2020 |
|
2019 |
||||
(in thousands) |
|||||||
Other investment notes due |
$ |
|
|
$ |
|
||
Other investment notes due |
|
|
|
||||
Other investment note due |
|
|
|
||||
Other investment notes due |
|
|
|
|
|||
Other investment notes outstanding (2) |
|
|
|
|
|||
Total other investments, gross |
|
|
|||||
Allowance for credit losses on other investments |
( |
— |
|||||
Total other investments - net |
$ |
|
$ |
|
|||
| (1) | Approximate weighted average interest rate as of March 31, 2020. |
| (2) |
Other investment notes have a weighted average interest rate of |
Other investment notes due 2021-2025
On September 30, 2016, we acquired and amended a term loan with a fair value of approximately $
25
On May 7, 2018, we provided Agemo a $
On November 5, 2019, we provided Agemo a $
On February 28, 2020, we provided an affiliate of Agemo a $
NOTE 6 – VARIABLE INTEREST ENTITIES
As of March 31, 2020 and December 31, 2019, Agemo is a VIE. Below is a summary of our assets and collateral associated with this operator as of March 31, 2020 and December 31, 2019:
March 31, |
December 31, |
||||||
2020 |
2019 |
||||||
(in thousands) |
|||||||
Assets |
|||||||
Real estate investments – net |
$ |
|
$ |
|
|||
Assets held for sale |
|
|
— |
||||
Other investments |
|
|
|
||||
Contractual receivables |
|
|
|
||||
Straight-line rent receivables |
|
|
|
||||
Lease inducement |
|
|
|||||
Subtotal |
|
|
|
||||
Collateral |
|
|
|
||||
Letters of credit |
|
( |
( |
||||
Personal guarantee |
|
( |
( |
||||
Other collateral |
|
( |
( |
||||
Subtotal |
|
( |
( |
||||
Maximum exposure to loss |
$ |
|
$ |
|
|||
In determining our maximum exposure to loss from the VIE, we considered the underlying value of the real estate subject to leases with the operator and other collateral, if any, supporting our other investments, which may include accounts receivable, security deposits, letters of credit or personal guarantees, if any. See Note 5 – Other Investments regarding the terms of the other investments with Agemo and Note 16 – Commitments and Contingencies, regarding our commitment to provide capital expenditure funding to our operators which includes Agemo. In May 2018, we reached an out-of-court restructuring agreement with Agemo that provided for the deferral of rent, the extension of the maturity of our lease and loans, and a working capital loan. If Agemo’s operations deteriorate and they are unable to meet their contractual obligations to us, we may be required to account for rental income from them on a cash basis and reserve approximately $
26
The table below reflects our total revenues from Agemo for the three months ended March 31, 2020 and 2019:
Three Months Ended |
||||||||
March 31, 2020 |
March 31, 2019 |
|||||||
(in thousands) |
||||||||
Revenue |
|
|
|
|
||||
Rental income |
$ |
|
$ |
|
||||
Other investment income |
|
|
|
|
||||
Total (1) |
$ |
|
$ |
|
||||
| (1) |
For the three months ended March 31, 2020 and 2019, we received cash rental income and other investment income from Agemo of approximately $ |
NOTE 7 – INVESTMENTS IN JOINT VENTURES
Unconsolidated Joint Ventures
Omega owns an interest in the following entities that are accounted for under the equity method (dollars in thousands):
Carrying Amount |
|||||||||||||||||
Ownership |
Initial Investment |
Initial |
Facility |
Facilities at |
March 31, |
December 31, |
|||||||||||
Entity (1) |
% |
Date |
Investment(2) |
Type |
3/31/2020 |
2020 |
|
2019 |
|||||||||
Second Spring Healthcare Investments |
$ |
|
SNF |
$ |
|
|
$ |
|
|||||||||
Lakeway Realty, L.L.C. |
|
Specialty facility |
|
|
|||||||||||||
Cindat Joint Venture |
|
ALF |
|
|
|||||||||||||
OMG Senior Housing, LLC |
— |
ILF |
|
— |
|
— |
|||||||||||
OH CHS SNP, Inc. |
|
N/A |
N/A |
|
|
||||||||||||
$ |
|
$ |
|
$ |
|
||||||||||||
| (1) | These entities and their subsidiaries are not consolidated by the Company because it does not control, through voting rights or other means, the joint venture. |
| (2) | Our initial investment includes our transaction costs, if any. |
The following table reflects our income (loss) from unconsolidated joint ventures for the three months ended March 31, 2020 and 2019:
Three Months Ended March 31, |
||||||
Entity |
2020 |
|
2019 |
|||
(in thousands) |
||||||
Second Spring Healthcare Investments |
$ |
|
$ |
|
||
Lakeway Realty, L.L.C. |
|
|
— |
|||
Cindat Joint Venture |
|
|
|
— |
||
OMG Senior Housing, LLC |
|
( |
|
— |
||
OH CHS SNP, Inc. |
|
( |
|
— |
||
Total |
$ |
|
$ |
|
||
27
Asset Management Fees
We receive asset management fees from certain joint ventures for services provided. For the three months ended March 31, 2020 and 2019, we recognized approximately $
NOTE 8 – ASSETS HELD FOR SALE
The following is a summary of our assets held for sale:
|
Properties Held For Sale |
||||
|
Number of |
|
Net Book Value |
||
Properties |
(in thousands) |
||||
December 31, 2019 |
|
|
$ |
|
|
Properties sold (1) |
|
( |
( |
||
Properties added (2) |
|
|
|
||
March 31, 2020 (3) |
|
|
$ |
|
|
| (1) |
In the first quarter of 2020, we sold four facilities for approximately $ |
| (2) |
In the first quarter of 2020, we recorded approximately $ |
(3) We plan to sell the facilities classified as assets held for sale at March 31, 2020 within the next twelve months.
NOTE 9 – INTANGIBLES
The following is a summary of our intangibles as of March 31, 2020 and December 31, 2019:
|
March 31, |
December 31, |
|||||
|
2020 |
|
2019 |
||||
(in thousands) |
|||||||
Assets: |
|
|
|
||||
Goodwill |
$ |
|
$ |
|
|||
Above market leases |
$ |
|
$ |
|
|||
Accumulated amortization |
|
( |
|
|
( |
||
Net intangible assets |
$ |
|
$ |
|
|||
Liabilities: |
|
|
|
||||
Below market leases |
$ |
|
$ |
|
|||
Accumulated amortization |
|
( |
|
|
( |
||
Net intangible liabilities |
$ |
|
$ |
|
|||
Above market leases, net of accumulated amortization, are included in other assets on our Consolidated Balance Sheets. Below market leases, net of accumulated amortization, are included in accrued expenses and other liabilities on our Consolidated Balance Sheets. The net amortization related to the above and below market leases is included in our Consolidated Statements of Operations as an adjustment to rental income. As disclosed in Note 2 – Properties and Investments, certain above market lease assets and below market lease liabilities acquired in the MedEquities Merger are subject to further adjustment pending completion of the purchase accounting.
28
For the three months ended March 31, 2020 and 2019, our net amortization related to intangibles was $
The following is a summary of our goodwill as of March 31, 2020:
|
(in thousands) |
||
Balance as of December 31, 2019 |
$ |
|
|
Add: foreign currency translation |
|
( |
|
Balance as of March 31, 2020 |
$ |
|
|
NOTE 10 – CONCENTRATION OF RISK
As of March 31, 2020, our portfolio of real estate investments consisted of
At March 31, 2020 we had investments with
NOTE 11 – STOCKHOLDERS’/OWNERS’ EQUITY
$
On March 20, 2020, Omega’s Board of Directors authorized the repurchase of up to $
Dividends
The Board of Directors has declared common stock dividends as set forth below:
Record |
Payment |
Dividend per |
|||
Date |
|
Date |
|
Common Share |
|
$ |
|||||
$ |
|
||||
On the same dates listed above, Omega OP Unit holders received the same distributions per unit as those paid to the common stockholders of Omega.
29
$
For the three months ended March 31, 2020 and 2019, we issued approximately
Dividend Reinvestment and Common Stock Purchase Plan
On March 23, 2020, we announced that we suspended our Dividend Reinvestment and Common Stock Purchase Plan. For the three months ended March 31, 2020 and 2019, we issued approximately
Accumulated Other Comprehensive Loss
The following is a summary of our accumulated other comprehensive loss, net of tax where applicable:
|
As of and for the |
||||||
Three Months Ended |
|||||||
March 31, |
|||||||
|
2020 |
|
2019 |
|
|||
Foreign Currency Translation: |
|
|
|
||||
Beginning balance |
$ |
( |
$ |
( |
|||
Translation (loss) gain |
|
( |
|
|
|||
Realized (loss) gain |
|
( |
|
|
|||
Ending balance |
|
( |
|
( |
|||
Derivative Instruments: |
|
|
|||||
Cash flow hedges: |
|
|
|||||
Beginning balance |
|
( |
|
|
|||
Unrealized loss |
|
( |
|
( |
|||
Realized (loss) gain (1) |
|
( |
|
||||
Ending balance |
|
( |
|
|
|||
Net investment hedge: |
|
|
|||||
Beginning balance |
|
( |
|
|
|||
Unrealized gain (loss) |
|
|
|
( |
|||
Ending balance |
|
|
|
( |
|||
Total accumulated other comprehensive loss for Omega OP(2) |
|
( |
|
( |
|||
Add: portion included in noncontrolling interest |
|
|
|
|
|||
Total accumulated other comprehensive loss for Omega |
$ |
( |
$ |
( |
|||
| (1) | Recorded in interest expense on the Consolidated Statements of Operations. |
| (2) | These amounts are included in Owners’ Equity. |
NOTE 12 – TAXES
Omega is a REIT for United States federal income tax purposes, and Omega OP is a pass through entity for United States federal income tax purposes.
30
Since our inception, Omega has elected to be taxed as a REIT under the applicable provisions of the Internal Revenue Code (“Code”). A REIT is generally not subject to federal income tax on that portion of its REIT taxable income which is distributed to its stockholders, provided that at least
If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes on its taxable income at regular corporate rates and dividends paid to our stockholders will not be deductible by us in computing taxable income. Further, we would not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which qualification is denied, unless the Internal Revenue Service grants us relief under certain statutory provisions. Failing to qualify as a REIT could materially and adversely affect our net income; however, we believe we are organized and operate in such a manner as to qualify for treatment as a REIT. We test our compliance within the REIT taxation rules to ensure that we are in compliance with the REIT rules on a quarterly and annual basis. We review our distributions and projected distributions each year to ensure we have met and will continue to meet the annual REIT distribution requirements. In 2020, we expect to pay dividends in excess of our taxable income.
Subject to the limitation under the REIT asset test rules, we are permitted to own up to
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020 modified the NOL carryforward rules applicable to certain of the NOL carryforwards possessed by our TRSs. First, the Act defers the application of 80% of taxable income limitation, which was added to the Code by the 2017 Act, to our TRS’s taxable years ended December 31, 2021, in addition to modifying the computation of the 80% limitation. Additionally, the CARES Act permits the carryback of NOLs generated by our TRSs in 2018, 2019, and 2020 for up to five years to offset taxable income reported in any of those prior tax years and recover income taxes paid in such prior tax years. Other provisions of the CARES Act may also impact the computation of taxable income by any of our TRSs or Omega and Omega OP. The modifications to the NOL carryback rules do not permit the carryback of a NOL by a REIT and, thus, will not impact Omega. We do not anticipate that such changes will materially impact the computation of Omega’s taxable income, or the taxable income of any Omega entity, including our TRSs. We also do not expect that Omega or any Omega entity, including our TRSs, will realize a material tax benefit as a result of the changes to the provisions of the Code made by the CARES Act.
For the three months ended March 31, 2020 and 2019, we recorded approximately $
NOTE 13 – STOCK-BASED COMPENSATION
Stock-based compensation expense was $
31
Time Based Restricted Equity Awards
Restricted stock, restricted stock units (“RSUs”) and profits interest units (“PIUs”) are subject to forfeiture if the holder’s service to us terminates prior to vesting, subject to certain exceptions for certain qualifying terminations of service or a change in control of the Company. Prior to vesting, ownership of the shares/units cannot be transferred. The restricted stock has the same dividend and voting rights as our common stock. RSUs accrue dividend equivalents but have no voting rights. PIUs accrue distributions, which are equivalent to dividend equivalents, but have no voting rights. Once vested, each RSU is settled by the issuance of one share of Omega common stock and each PIU is settled by the issuance of one partnership unit in Omega OP (“Omega OP Unit”), subject to certain conditions. Restricted stock and RSUs are valued at the price of our common stock on the date of grant. The PIUs are valued using a Monte Carlo model to estimate fair value. We expense the cost of these awards ratably over their vesting period. We awarded
Performance-Based Restricted Equity Awards
Performance-based restricted equity awards include performance restricted stock units (“PRSUs”) and PIUs. PRSUs and PIUs are subject to forfeiture if the performance requirements are not achieved or if the holder’s service to us terminates prior to vesting, subject to certain exceptions for certain qualifying terminations of employment or a change in control of the Company. The PRSUs awarded in March 2016, January 2017, January 2018, and January 2019 and the PIUs awarded in March 2016, January 2017, January 2018, January 2019 and January 2020 have varying degrees of performance requirements to achieve vesting, and each PRSU and PIU award represents the right to a variable number of shares of common stock or partnership units. Each PIU once earned is convertible into one Omega OP Unit in Omega OP, subject to certain conditions. The vesting requirements are based on either the (i) total shareholder return (“TSR”) of Omega or (ii) Omega’s TSR relative to other real estate investment trusts in the FTSE NAREIT Equity Health Care Index for awards granted in or after 2016 (both “Relative TSR”). We expense the cost of these awards ratably over their service period.
Prior to vesting and the distribution of shares or Omega OP Units, ownership of the PRSUs or PIUs cannot be transferred. Dividends on the PRSUs are accrued and only paid to the extent the applicable performance requirements are met. While each PIU is unearned, the employee receives a partnership distribution equal to
The number of shares or units earned under the TSR PRSUs or PIUs depends generally on the level of achievement of Omega’s TSR over the indicated performance period. We awarded
The number of shares or units earned under the Relative TSR PRSUs or PIUs depends generally on the level of achievement of Omega’s TSR relative to other real estate investment trusts in the FTSE NAREIT Equity Health Care Index TSR over the performance period indicated. We awarded
32
NOTE 14 – BORROWING ACTIVITIES AND ARRANGEMENTS
The following is a summary of our borrowings:
|
|
Annual |
|
|
|||||||
Interest Rate |
|||||||||||
as of |
|||||||||||
March 31, |
March 31, |
December 31, |
|||||||||
|
Maturity |
|
2020 |
|
2020 |
|
2019 |
||||
|
|
|
(in thousands) |
||||||||
Secured borrowings: |
|
|
|
|
|
|
|
|
|||
HUD mortgages(1)(5) |
|
% |
$ |
|
$ |
|
|||||
Term loan(2)(5) |
|
|
|
% |
|
|
|||||
|
|
||||||||||
Unsecured borrowings: |
|
|
|
|
|
|
|
|
|||
Revolving line of credit(3) |
|
|
|
% |
|
|
|
|
|||
U.S. term loan |
|
|
|
% |
|
|
|
|
|||
Sterling term loan(4) |
|
|
|
% |
|
|
|
|
|||
Omega OP term loan(5) |
|
|
|
% |
|
|
|
|
|||
2015 term loan |
|
|
|
% |
|
|
|
|
|||
Deferred financing costs – net(6) |
|
|
|
|
|
( |
|
( |
|||
Total term loans – net |
|
|
|
|
|
|
|
|
|||
2023 notes |
|
|
|
% |
|
|
|
|
|||
2024 notes |
|
|
|
% |
|
|
|
|
|||
2025 notes |
|
|
|
% |
|
|
|
|
|||
2026 notes |
|
|
|
% |
|
|
|
|
|||
2027 notes |
|
|
|
% |
|
|
|
|
|||
2028 notes |
|
|
|
% |
|
|
|
|
|||
2029 notes |
|
|
|
% |
|
|
|
|
|||
Subordinated debt |
|
|
|
% |
|
|
|
|
|||
Discount – net |
|
|
|
|
|
( |
|
( |
|||
Deferred financing costs – net |
|
|
|
|
|
( |
|
( |
|||
Total senior notes and other unsecured borrowings – net |
|
|
|
|
|
|
|
|
|||
Total unsecured borrowings – net |
|
|
|
|
|
|
|
|
|||
Total secured and unsecured borrowings – net(7) |
|
|
|
|
$ |
|
$ |
|
|||
| (1) |
Reflects the weighted average annual contractual interest rate on the mortgages at March 31, 2020; secured by real estate assets with a net carrying value of $ |
| (2) | Borrowing is the debt of a consolidated joint venture. |
| (3) |
During the first quarter of 2020, we drew approximately $ |
| (4) | Actual borrowing in British Pounds Sterling and remeasured to USD. |
| (5) | Omega OP or wholly owned subsidiaries of Omega OP are the obligor on these borrowings. |
| (6) |
Includes $ |
| (7) | All borrowings are direct borrowings of Omega unless otherwise noted. |
33
$
On
NOTE 15 – FINANCIAL INSTRUMENTS
The net carrying amount of cash and cash equivalents, restricted cash, contractual receivables, other assets and accrued expenses and other liabilities reported in the Consolidated Balance Sheets approximates fair value because of the short maturity of these instruments (Level 1).
At March 31, 2020 and December 31, 2019, the net carrying amounts and fair values of our other financial instruments were as follows:
|
March 31, 2020 |
December 31, 2019 |
||||||||||
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|||||
|
Amount |
|
Value |
|
Amount |
|
Value |
|||||
(in thousands) |
||||||||||||
Assets: |
||||||||||||
Investments in direct financing leases – net |
|
$ |
|
$ |
|
|
$ |
|
|
$ |
|
|
Mortgage notes receivable – net |
|
|
|
|
|
|
|
|
||||
Other investments – net |
|
|
|
|
|
|
|
|
||||
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
||||
Revolving line of credit |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Term loan |
|
|
|
|
||||||||
U.S. term loan |
|
|
|
|
|
|
|
|
||||
Sterling term loan |
|
|
|
|
|
|
|
|
||||
Omega OP term loan |
|
|
|
|
|
|
|
|
||||
2015 term loan |
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|||||||||
HUD mortgages – net |
|
|
|
|
||||||||
Subordinated debt – net |
|
|
|
|
|
|
|
|
||||
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||
34
Fair value estimates are subjective in nature and are dependent on a number of important assumptions, including estimates of future cash flows, risks, discount rates and relevant comparable market information associated with each financial instrument (see Note 2 – Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2019). The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts.
The following methods and assumptions were used in estimating fair value disclosures for financial instruments.
| ● | Direct financing leases: The fair value of the investments in direct financing leases are estimated using a discounted cash flow analysis, using interest rates being offered for similar leases to borrowers with similar credit ratings (Level 3). |
| ● | Mortgage notes receivable: The fair value of the mortgage notes receivables are estimated using a discounted cash flow analysis, using interest rates being offered for similar loans to borrowers with similar credit ratings (Level 3). |
| ● | Other investments: Other investments are primarily comprised of notes receivable. The fair values of notes receivable are estimated using a discounted cash flow analysis, using interest rates being offered for similar loans to borrowers with similar credit ratings (Level 3). |
| ● | Revolving line of credit, secured borrowing and term loans: The fair value of our borrowings under variable rate agreements are estimated using a present value technique based on expected cash flows discounted using the current market rates (Level 3). |
| ● | Senior notes and subordinated debt: The fair value of our borrowings under fixed rate agreements are estimated using a present value technique based on inputs from trading activity provided by a third-party (Level 2). |
| ● | HUD mortgages: The fair value of our borrowings under HUD debt agreements are estimated using an expected present value technique based on quotes obtained by HUD debt brokers (Level 2). |
NOTE 16 – COMMITMENTS AND CONTINGENCIES
Litigation
On November 16, 2017, a purported securities class action complaint captioned Dror Gronich v. Omega Healthcare Investors, Inc., C. Taylor Pickett, Robert O. Stephenson, and Daniel J. Booth was filed against the Company and certain of its officers in the United States District Court for the Southern District of New York (the “Court”), Case No. 1:17-cv-08983-NRB. On November 17, 2017, a second purported securities class action complaint captioned Steve Klein v. Omega Healthcare Investors, Inc., C. Taylor Pickett, Robert O. Stephenson, and Daniel J. Booth was filed against the Company and the same officers in the United States District Court for the Southern District of New York, Case No. 1:17-cv-09024-NRB. Thereafter, the Court considered a series of applications by various shareholders to be named lead plaintiff, consolidated the two actions and designated Royce Setzer as the lead plaintiff.
35
Pursuant to a Scheduling Order entered by the Court, lead plaintiff Setzer and additional plaintiff Earl Holtzman filed a Consolidated Amended Class Action Complaint on May 25, 2018 (the “Securities Class Action”). The Securities Class Action purports to be a class action brought on behalf of shareholders who acquired the Company’s securities between May 3, 2017 and October 31, 2017. The Securities Class Action alleges that the defendants violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), by making materially false and/or misleading statements, and by failing to disclose material adverse facts about the Company’s business, operations, and prospects, including the financial and operating results of one of the Company’s operators, the ability of such operator to make timely rent payments, and the impairment of certain of the Company’s leases and the uncollectibility of certain receivables. The Securities Class Action, which purports to assert claims for violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the Exchange Act, seeks an unspecified amount of monetary damages, interest, fees and expenses of attorneys and experts, and other relief. The Company and the officers named in the Securities Class Action filed a Motion to Dismiss on July 17, 2018. On March 25, 2019, the Court entered an order dismissing with prejudice all claims against all defendants. Plaintiffs have appealed the order to the United States Court of Appeals for the Second Circuit. The appeal is fully briefed, and the Court of Appeals heard oral argument on November 13, 2019. The Company is awaiting a decision on the appeal. In the District Court, on March 26, 2020, Plaintiffs filed a motion for an indicative ruling regarding relief from final judgement based on allegedly newly-discovered evidence and for leave to file an amended complaint. The Company believes that the motion is without merit and filed an opposition on May 1, 2020.
The Board of Directors received a demand letter, dated April 9, 2018, from an attorney representing Phillip Swan (“Swan”), a purported current shareholder of the Company, relating to the subject matter covered by the Securities Class Action (the “Swan Shareholder Demand”). The letter demanded that the Board of Directors conduct an investigation into the statements and other matters at issue in the Securities Class Action and commence legal proceedings against each party identified as being responsible for the alleged activities. After an investigation and due consideration, and in the exercise of its business judgment, the Board determined that it is not in the best interests of the Company to commence litigation against any current or former officers or directors based on the matters raised in the Swan Shareholder Demand. In November 2018, the Board also received shareholder demands from two additional purported shareholders, Tom Bradley (“Bradley”) and Sarah Smith (“Smith”), each represented by the same counsel as Swan, that were substantively identical to the Swan Shareholder Demand (the “Bradley/Smith Shareholder Demands”). The Board reached the same conclusion with respect to those demands as it reached with the Swan Shareholder Demand.
On August 22, 2018, Stourbridge Investments LLC, a purported stockholder of the Company, filed a derivative action purportedly on behalf of the Company in the United States District Court for the Southern District of New York against the current directors of the Company as well as certain officers alleging violations of Section 14(a) of the Securities Exchange Act of 1934 and state-law claims including breach of fiduciary duty. Stourbridge Investments LLC v. Callen et al., No. 1:18-cv-07638. The complaint alleges, among other things, that the defendants are responsible for the Company’s failure to disclose the financial condition of Orianna Health Systems, the alleged non-disclosures that are also the subject of the Securities Class Action described above. The defendants in the action are the three individual defendants named in the Securities Class Action (Messrs. Pickett, Booth and Stephenson), as well as the Company’s non-management directors. The plaintiff did not make a demand on the Company to bring the action prior to filing it, but rather alleges that demand would have been futile. The parties have entered into a stipulation in which they agreed to stay the case, including any response by defendants, pending the entry of judgment or a voluntary dismissal with prejudice in the Securities Class Action. The agreed-upon stipulation and order to stay the case were entered by the Court on October 25, 2018.
36
On January 30, 2019, Swan filed a derivative action in the Baltimore City Circuit Court of Maryland, purportedly on behalf of the Company against certain current and former directors of the Company as well as certain officers, asserting claims for breach of fiduciary duty, waste of corporate assets and unjust enrichment. Swan v. Pickett, et al., No. 24-C-19-000573. Swan alleges that the Swan Shareholder Demand was wrongfully refused. On February 21, 2019, Bradley and Smith filed a derivative action in the Baltimore City Circuit Court of Maryland, purportedly on behalf of the Company against certain current and former directors of the Company as well as certain officers, asserting claims for breach of fiduciary duty, abuse of control, gross mismanagement, and unjust enrichment. Bradley and Smith v. Callen, et al., No. 24-c-19-000972. Bradley and Smith allege that the Bradley/Smith Shareholder Demands were wrongly refused. The derivative actions brought by Swan and Bradley and Smith have been consolidated under the heading of the Swan action. The parties in those actions have agreed to a stay of proceedings pending the issuance of a mandate from the Second Circuit Court of Appeals in the appeal of the dismissal of the Securities Class Action. On October 11, 2019, the Court issued an order adopting the stay of proceedings agreed to by the parties.
The Company believes that the claims asserted against it in these lawsuits are without merit and intends to vigorously defend against them.
Other
In September 2016, MedEquities received a Civil Investigative Demand (“CID”) from the U.S. Department of Justice (“DOJ”), which indicates that it is conducting an investigation regarding alleged violations of the False Claims Act, Stark Law and Anti-Kickback Statute in connection with claims that may have been submitted to Medicare and other federal payors for services rendered to patients at Lakeway Regional Medical Center (the “Lakeway Hospital”) or by providers with financial relationships with Lakeway Hospital. As a result of the acquisition of MedEquities, the Company owns a
37
The Company believes that the acquisition, ownership and leasing of the Lakeway Hospital through Lakeway Realty, L.L.C. was and is in compliance with all applicable laws. However, due to the uncertainties surrounding this matter and its ultimate outcome, we are unable to determine whether it is probable that any loss has been incurred.
In addition, we are subject to various other legal proceedings, claims and other actions arising out of the normal course of business. While any legal proceeding or claim has an element of uncertainty, management believes that the outcome of each lawsuit, claim or legal proceeding that is pending or threatened, or all of them combined, will not have a material adverse effect on our consolidated financial position or results of operations.
Indemnification Agreements
In connection with certain facility transitions, we have agreed to indemnify certain operators in certain events. As of March 31, 2020, our maximum funding commitment under these indemnification agreements was approximately $
Commitments
We have committed to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments. We expect the funding of these commitments to be completed over the next several years. Our remaining commitments at March 31, 2020, are outlined in the table below (in thousands):
Total commitments |
|
$ |
|
||
Amounts funded to date (1) |
|
( |
|||
Remaining commitments |
$ |
|
|||
| (1) | Includes finance costs. |
38
NOTE 17 – EARNINGS PER SHARE/UNIT
The following tables set forth the computation of basic and diluted earnings per share/unit:
Omega |
Omega OP |
||||||||||||
|
Three Months Ended |
|
Three Months Ended |
||||||||||
|
March 31, |
|
March 31, |
||||||||||
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
|||||
(in thousands, except per share amounts) |
|||||||||||||
Numerator: |
|
|
|
|
|
|
|
||||||
Net income |
$ |
|
$ |
|
$ |
|
$ |
|
|||||
(Less) add: net (income) loss attributable to noncontrolling interests |
|
( |
|
( |
|
|
|
— |
|||||
Net income available to common stockholders/Omega OP Unit holders |
$ |
|
$ |
|
$ |
|
$ |
|
|||||
Denominator: |
|
|
|
|
|
|
|
|
|||||
Denominator for basic earnings per share |
|
|
|
|
|
|
|
|
|||||
Effect of dilutive securities: |
|
|
|
|
|
|
|||||||
Common stock equivalents |
|
|
|
|
|
|
|
|
|||||
Noncontrolling interest – Omega OP Units |
|
|
|
|
|
— |
|
— |
|||||
Denominator for diluted earnings per share/unit |
|
|
|
|
|
|
|
|
|||||
Earnings per share/unit - basic: |
|
|
|
|
|
|
|
|
|||||
Net income available to common stockholders/Omega OP Unit holders |
$ |
|
$ |
|
$ |
|
$ |
|
|||||
Earnings per share/unit – diluted: |
|
|
|
|
|||||||||
Net income |
$ |
|
$ |
|
$ |
|
$ |
|
|||||
39
NOTE 18 – SUPPLEMENTAL DISCLOSURE TO CONSOLIDATED STATEMENTS OF CASH FLOWS
The following are supplemental disclosures to the consolidated statements of cash flows for the three months ended March 31, 2020 and 2019:
|
Three Months Ended March 31, |
||||||
|
2020 |
|
2019 |
|
|||
|
(in thousands) |
||||||
Reconciliation of cash and cash equivalents and restricted cash: |
|||||||
Cash and cash equivalents |
$ |
|
$ |
|
|||
Restricted cash |
|
|
|
|
|||
Cash, cash equivalents and restricted cash at end of period |
$ |
|
$ |
|
|||
Supplemental information: |
|
|
|||||
Interest paid during the period, net of amounts capitalized |
$ |
|
$ |
|
|||
Taxes paid during the period |
$ |
|
$ |
|
|||
Non cash investing activities |
|
|
|
|
|||
Non cash acquisition of real estate (see Note 2) |
$ |
— |
$ |
( |
|||
Non cash collection of mortgage principal |
|
— |
|
|
|||
Non cash investment of other investments |
— |
( |
|||||
Non cash proceeds from other investments |
|
— |
|
|
|||
Non cash proceeds from direct financing lease |
|
— |
|
|
|||
Initial non cash right of use asset - ground leases |
— |
|
|||||
Initial non cash lease liability - ground leases |
— |
( |
|||||
Non cash financing activities |
|
|
|
|
|||
Change in fair value of cash flow hedges |
$ |
( |
$ |
( |
|||
Remeasurement of debt denominated in a foreign currency |
|
( |
|
|
|||
40
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Factors Affecting Future Results
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this document, including statements regarding potential future changes in reimbursement. This document contains “forward-looking statements” within the meaning of the federal securities laws. These statements relate to our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements other than statements of historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology including, but not limited to, terms such as “may,” “will,” “anticipates,” “expects,” “believes,” “intends,” “should” or comparable terms or the negative thereof. These statements are based on information available on the date of this filing and only speak as to the date hereof and no obligation to update such forward-looking statements should be assumed. Our actual results may differ materially from those reflected in the forward-looking statements contained herein as a result of a variety of factors, including, among other things:
| (i) | those items discussed under “Risk Factors” in Part I, Item 1A to our annual report on Form 10-K; |
| (ii) | 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; |
| (iii) | the ability of any of Omega’s operators in bankruptcy to reject unexpired lease obligations, modify the terms of Omega’s mortgages and impede the ability of Omega to collect unpaid rent or interest during the pendency of a bankruptcy proceeding and retain security deposits for the debtor’s obligations, and other costs and uncertainties associated with operator bankruptcies; |
| (iv) | our ability to re-lease, otherwise transition, or sell underperforming assets or assets held for sale on a timely basis and on terms that allow us to realize the carrying value of these assets; |
| (v) | the availability and cost of capital to us; |
| (vi) | changes in our credit ratings and the ratings of our debt securities; |
| (vii) | competition in the financing of healthcare facilities; |
| (viii) | the impact of COVID-19 on our business and the business of our operators, including without limitation, the extent and duration of the COVID-19 pandemic, increased costs experienced by operators of skilled nursing facilities (“SNFs”) and assisted living facilities (“ALFs”) in connection therewith, and the extent to which government support may be available to operators to offset such costs and the conditions related thereto; |
| (ix) | additional regulatory and other changes in the healthcare sector; |
| (x) | changes in the financial position of our operators; |
| (xi) | the effect of economic and market conditions generally and, particularly, in the healthcare industry; |
| (xii) | changes in interest rates; |
| (xiii) | the timing, amount and yield of any additional investments; |
| (xiv) | changes in tax laws and regulations affecting real estate investment trusts (“REITs”); |
| (xv) | the potential impact of changes in the SNF and ALF markets or local real estate conditions on our ability to dispose of assets held for sale for the anticipated proceeds or on a timely basis, or to redeploy the proceeds therefrom on favorable terms; |
| (xvi) | our ability to maintain our status as a REIT; and |
| (xvii) | the effect of other factors affecting our business or the businesses of our operators that are beyond our or their control, including natural disasters, other health crises or pandemics and governmental action; particularly in the healthcare industry. |
Overview
Omega Healthcare Investors, Inc. (“Omega”) was formed as a real estate investment trust (“REIT”) and incorporated in the State of Maryland on March 31, 1992. 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 (“Omega OP”). Omega OP was formed as a limited partnership and organized in the State of Delaware on October 24, 2014. Unless stated otherwise or the context otherwise requires, the terms the “Company,” “we,” “our” and “us” means Omega and Omega OP, collectively.
41
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”) and assisted living facilities (“ALFs”), and to a lesser extent, independent living facilities (“ILFs”), rehabilitation and acute care facilities (“specialty facilities”) and medical office buildings (“MOBs”). Our core portfolio consists of long-term leases and mortgage agreements. All of our leases are “triple-net” leases, which require the operators (we use the term “operator” to refer to our tenants and mortgagors and their affiliates who manage and/or operate our properties) to pay all property-related expenses. Our mortgage revenue derives from fixed rate mortgage loans, which are secured by first mortgage liens on the underlying real estate and personal property of the mortgagor. Our other investment income derives from fixed and variable rate loans to our operators and/or their principals to fund working capital and capital expenditures. These loans, which may be either unsecured or secured by the collateral of the borrower, are classified as other investments.
Omega OP is governed by the Second Amended and Restated Agreement of Limited Partnership of OHI Healthcare Properties Limited Partnership, dated as of April 1, 2015 (the “Partnership Agreement”). Omega has exclusive control over Omega OP’s day-to-day management pursuant to the Partnership Agreement. As of March 31, 2020, Omega owned approximately 97% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and investors owned approximately 3% of the Omega OP Units.
Omega’s consolidated financial statements include the accounts of (i) Omega, (ii) Omega OP, (iii) all direct and indirect wholly owned subsidiaries of Omega and (iv) other entities in which Omega or Omega OP has a majority voting interest and control. All intercompany transactions and balances have been eliminated in consolidation, and Omega’s net earnings are reduced by the portion of net earnings attributable to noncontrolling interests. Omega OP’s consolidated financial statements include the accounts of (i) Omega OP, (ii) all direct and indirect wholly owned subsidiaries of Omega OP and (iii) other entities in which Omega OP has a majority voting interest and control. All intercompany transactions and balances have been eliminated in consolidation. Omega OP’s net earnings are reduced by the portion of net earnings attributable to the noncontrolling interest.
As of March 31, 2020, our portfolio of real estate investments consisted of 985 healthcare facilities, located in 40 states and the U.K. and operated by 70 third-party operators. Our investment in these facilities, net of impairments and allowances, totaled approximately $9.7 billion at March 31, 2020, with approximately 97% of our real estate investments related to long-term care facilities. Our portfolio is made up of 778 SNFs, 115 ALFs, 29 specialty facilities, two medical office buildings, fixed rate mortgages on 47 SNFs, two ALFs and four specialty facilities and eight facilities that are held for sale. At March 31, 2020, we also held other investments of approximately $424.7 million, consisting primarily of secured loans to third-party operators of our facilities and $194.4 million of investments in five unconsolidated joint ventures.
As of March 31, 2020 and December 31, 2019, we do not have any material properties or operators with facilities that are not materially occupied.
While the COVID-19 pandemic did not materially impact our rental revenue for the first quarter and we have collected substantially all of our contractual rents due in April, the pandemic is having a significant impact on our operators. As of April 30, 2020, our operators reported 4,136 total confirmed cases of COVID-19 in our facilities which includes cases involving employees and residents, including patients known to be positive at the time of admission from a hospital or healthcare center. The total cases are within 250 facilities as of April 30, 2020, or 25.9%, of our 966 operating facilities as of March 31, 2020. The total confirmed cases reported by our operators may not be adjusted downward for recoveries, discharges or deaths, and may be significantly lower than or different from actual cases based on the availability of testing and the lag time involved in testing and reporting, as well as the accuracy of reporting. We have not independently validated such facility virus incidence information and can provide no assurance regarding its accuracy or that there have not been any changes since the time the information was obtained from our operators; we also undertake no duty to update this information.
42
We believe many of our operators have incurred significant cost increases as a result of the pandemic, with dramatic increases for facilities with positive cases. We believe these increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of personal protective equipment and supplies. In terms of occupancy levels, we believe many of our operators are experiencing declines, in part due to the elimination of elective hospital procedures, which drive post-acute skilled nursing admissions. While we cannot at this time estimate the net impact going forward, we believe that government relief measures at the federal and state levels, including expanded Medicaid reimbursements, may offer meaningful support to offset a portion of these cost increases and impacts to our operators.
There are a number of uncertainties we face as we consider the potential impact of COVID-19 on our business, including how long census disruption and elevated COVID-19 costs will last and the extent to which funding support from the federal government and the states will offset these incremental costs. We also do not know the number of Omega facilities that will ultimately experience widespread, high-cost outbreaks of COVID-19, and while we have requested reporting from operators of their numbers of cases, and CMS has required additional reporting by operators, we may not receive accurate information on the number of cases and may experience a lag in reporting. We expect to see increased clinical protocols for infection control within facilities and the monitoring of employees, guests and others entering facilities; however, we do not know if future reimbursement rates will be sufficient to cover the increased costs of enhanced infection control and monitoring.
As such, while we continue to believe that longer term demographics will drive increasing demand for needs-based skilled nursing care, we expect the uncertainties to our business described above to persist at least for the near term until we can gain more visibility into the costs our operators will experience and the level of governmental support that will be available to them, as well as the potential support our operators may request from us.
Given this uncertainty, we have taken several steps during and following the first quarter to enhance our capital position as a precautionary measure, including a partial draw on our $1.25 billion revolving credit facility in the amount of $300 million during the first quarter, as well as entering into $400 million (notional amount) of 10-year interest rate swaps at an average swap rate of 0.8675% that expire in 2024, which provides us with some cost certainty for the refinancing of our senior notes maturing in 2023. We believe our actions to date provide us with additional liquidity and flexibility to weather a potential pronounced and prolonged impact to our business, and as such, we maintained our dividend level of $0.67 per share for the first quarter dividend. However, we will continue to evaluate any additional steps that may be needed to maintain adequate liquidity.
Taxation
Omega is a REIT for United States federal income tax purposes, and Omega OP is a pass through entity for United States federal income tax purposes.
Since our inception, Omega has elected to be taxed as a REIT under the applicable provisions of the Internal Revenue Code (“Code”). A REIT is generally not subject to federal income tax on that portion of its REIT taxable income which is distributed to its stockholders, provided that at least 90% of such taxable income is distributed each tax year and certain other requirements are met, including asset and income tests. So long as we qualify as a REIT under the Code, we generally will not be subject to federal income taxes on the REIT taxable income that we distribute to stockholders, subject to certain exceptions.
If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes on its taxable income at regular corporate rates and dividends paid to our stockholders will not be deductible by us in computing taxable income. Further, we would not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which qualification is denied, unless the Internal Revenue Service grants us relief under certain statutory provisions. Failing to qualify as a REIT could materially and adversely affect our net income; however, we believe we are organized and operate in such a manner as to qualify for treatment as a REIT. We test our compliance within the REIT taxation rules to ensure that we are in compliance with the REIT rules on a quarterly and annual basis. We review our distributions and projected distributions each year to ensure we have met and will continue to meet the annual REIT distribution requirements. In 2020, we expect to pay dividends in excess of our taxable income.
43
Subject to the limitation under the REIT asset test rules, we are permitted to own up to 100% of the stock of one or more taxable REIT subsidiaries (“TRSs”). We have elected for five of our active subsidiaries to be treated as TRSs. Three of our TRSs are domestic and are subject to federal, state and local income taxes at the applicable corporate rates and the other two are subject to foreign income taxes. As of March 31, 2020, one of our TRSs that is subject to federal, state and local income taxes at the applicable corporate rates had a net operating loss carry-forward of approximately $5.7 million. Up to 100% of the net operating loss carry-forwards arising in taxable years ending prior to January 1, 2018, may be used to reduce taxable income for any taxable year during the eligible carry-forward period. Changes made by the Tax Cuts and Jobs Act of 2017 (the “2017 Act”) limited the amount of net operating loss (“NOL”) carry-forward arising in tax years ending subsequent to December 31, 2018, to reduce 80% of taxable income for any taxable year during the eligible carry-forward period. Our NOL carry-forward was fully reserved as of March 31, 2020, with a valuation allowance due to uncertainties regarding realization. Under current law, our NOL carryforwards generated up through December 31, 2017 may be carried forward for no more than 20 years, and our net operating loss carryforward generated in our taxable years ended December 31, 2019 and December 31, 2018 may be carried forward indefinitely.
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020 modified the NOL carryforward rules applicable to certain of the NOL carryforwards possessed by our TRSs. First, the Act defers the application of 80% of taxable income limitation, which was added to the Code by the 2017 Act, to our TRS’s taxable years ended December 31, 2021, in addition to modifying the computation of the 80% limitation. Additionally, the CARES Act permits the carryback of NOLs generated by our TRSs in 2018, 2019, and 2020 for up to five years to offset taxable income reported in any of those prior tax years and recover income taxes paid in such prior tax years. Other provisions of the CARES Act may also impact the computation of taxable income by any of our TRSs or Omega and Omega OP. The modifications to the NOL carryback rules do not permit the carryback of a NOL by a REIT and, thus, will not impact Omega. We do not anticipate that such changes will impact materially the computation of Omega’s taxable income, or the taxable income of any Omega entity, including our TRSs. We also do not expect that Omega or any Omega entity, including our TRSs, will realize a material tax benefit as a result of the changes to the provisions of the Code made by the CARES Act.
For the three months ended March 31, 2020 and 2019, we recorded approximately $0.4 million and $0.2 million, respectively, of state and local income tax provisions. For the three months ended March 31, 2020 and 2019, we recorded approximately $0.6 million and $0.5 million, respectively, of tax provisions for foreign income taxes. The expenses were included in income tax expense on our Consolidated Statements of Operations.
Government Regulation and Reimbursement
The healthcare industry is heavily regulated. Our operators are subject to extensive and complex federal, state and local healthcare laws and regulations. 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. The ultimate timing or effect of these changes, which may be applied retroactively, cannot be predicted. Changes in laws and regulations impacting our operators, in addition to regulatory non-compliance by our operators, can have a significant effect on the operations and financial condition of our operators, which in turn may adversely impact us. There is the potential that we may be subject directly to healthcare laws and regulations because of the broad nature of some of these regulations, such as the Anti-kickback Statute and False Claims Act, among others.
Additionally, emergency legislation, including the CARES Act enacted on March 27, 2020 and discussed below, and temporary changes to regulations and reimbursement issued by the current administration in response to the 2019 novel coronavirus (“COVID-19”) pandemic continue to have a significant impact on the operations and financial condition of our operators. The extent of the COVID-19 pandemic’s effect on our and our operators’ operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, as well as the difference in how the pandemic may impact SNFs as opposed to ALFs, all of which developments and impacts are uncertain and difficult to predict. Due to the speed with which the situation is developing, we are not able at this time to estimate the effect of these factors on our business, but the adverse impact on our business, results of operations, financial condition and cash flows could be material.
44
The following is a discussion of certain laws and regulations generally applicable to our operators, and in certain cases, to us.
Healthcare Reform. A substantial amount of rules and regulations have been issued under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively referred to as the “Healthcare Reform Law”). The current administration has brought several Congressional efforts to repeal and replace the Affordable Care Act. We expect additional rules, regulations and judicial interpretations in response to legal and other constitutional challenges to be issued that may materially affect our operators’ financial condition and operations. Even if the Healthcare Reform Law is not ultimately amended or repealed, the current administration or Congress could propose changes impacting implementation of the Healthcare Reform Law. The ultimate composition and timing of any legislation enacted under the current administration that would impact the current implementation of the Healthcare Reform Law remains uncertain. Given the complexity of the Healthcare Reform Law and the substantial requirements for regulation thereunder, the impact of the Healthcare Reform Law on our operators or their ability to meet their obligations to us cannot be predicted, whether in its current form or as amended, repealed or interpreted.
Reform Requirements for Long-Term Care Facilities. As part of the Healthcare Reform Law, the Centers for Medicare and Medicaid Services (“CMS”) issued a final rule on October 4, 2016 modifying the conditions of participation in Medicare and Medicaid for SNFs. The extensive changes included provisions related to staff training, discharge planning, infection prevention and control programs, and pharmacy services, among others. While many of the regulations have become effective, the implementation and enforcement of some provisions, particularly with respect to the Quality Assurance Program Improvement (“QAPI”) and compliance and ethics related requirements of the Phase 3 regulations did not become effective until November 28, 2019.
Reimbursement Generally. A significant portion of our operators’ revenue is derived from government-funded reimbursement programs, consisting primarily of Medicare and Medicaid. As federal and state governments continue to focus on healthcare reform initiatives, efforts to reduce costs by government payors will likely continue, which may result in reductions in reimbursement at both the federal and state levels. Additionally, new and evolving payor and provider programs, including but not limited to Medicare Advantage, dual eligible, accountable care organizations, and bundled payments could adversely impact our tenants’ and operators’ liquidity, financial condition or results of operations. Significant limits on the scope of services reimbursed and/or reductions of reimbursement rates could have a material adverse effect on our operators’ results of operations and financial condition, which could adversely affect our operators’ ability to meet their obligations to us.
Reimbursement Changes Related to COVID-19. SNFs have continued to be impacted by the Bipartisan Budget Act of 2018, which extended Medicare sequestration and Medicare reimbursement cuts to providers and plans by 2% across the board through 2027. However, the CARES Act temporarily suspends Medicare sequestration for the period of May 1 through December 31, 2020, resulting in an increase in fee-for-service Medicare payments by approximately 2% as compared to what providers would have otherwise received during this period. In exchange for this temporary suspension, the CARES Act also extends the mandatory sequestration policy by an additional one year, i.e., through 2030. On March 18, 2020, the Families First Coronavirus Response Act was enacted, which provides 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 will extend through the last day of the calendar quarter in which the COVID-19 public health emergency declared by the U.S. Department of Health and Human Services (“HHS”), including any extensions, terminates. As part of the requirements for receiving the temporary FMAP increase, states must cover testing services and treatments for COVID-19 and may not impose deductibles, copayments, coinsurance or other cost sharing charges for any quarter in which the temporary increased FMAP is claimed.
45
Additionally, the CARES Act allocates $100 billion to a Public Health and Social Services Emergency Fund to “reimburse, through grants or other mechanisms, eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus.” Nursing facility operators participating in Medicare and Medicaid may be eligible to receive compensation for costs incurred in the course of providing medical services, such as those related to obtaining personal protecting equipment, COVID-19 related testing supplies, and increased staffing or training, provided that such costs are not compensated by another source. While “lost revenue” is not defined in the CARES Act, it is anticipated that it could include lost revenue due to a decrease in resident census or a change in the margin of services provided to residents. The secretary of the Department of Health and Human Services has broad authority and discretion to determine payment eligibility and the amount of such payments. Further, Congress appropriated $75 billion for healthcare providers through the Paycheck Protection Program and Health Care Enhancement Act. HHS is distributing this money through the Provider Relief Fund, and these payments do not need to be repaid. While we believe that to date, the payouts under the Provider Relief Fund and Public Health and Social Services Emergency Fund have primarily benefited Medicare providers as opposed to Medicaid providers and have provided limited support to senior housing operators, we cannot predict the extent to which any of our operators will receive such funds, and what the financial impact of receiving such funds would be on their operations.
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 the end of the calendar year. Instead of depositing these taxes on a next-day or semi-weekly basis, the deposit due date for 50% of the taxes is deferred to December 31, 2021, with the remaining 50% deferred until December 31, 2022.
In an effort to increase cash flow to providers impacted by COVID-19, CMS had temporarily expanded the Accelerated and Advance Payment Programs on March 28, 2020. CMS is authorized to provide accelerated or advance payments during the period of the public health emergency to any Medicare provider or supplier who submits a request to the appropriate Medicare Administrative Contractor (“MAC”) and meets the required qualifications. Traditionally repayment of these advance/accelerated payments is set to begin at 90 days, however CMS has extended the repayment of these accelerated/advance payments to begin 120 days after the date of issuance of the payment. However, CMS announced on April 26, 2020 that it would not be accepting any new applications for the Advance Payment Program and would be reevaluating all pending and new applications for Accelerated Payments in consideration of the direct payments made available to providers through the HHS Provider Relief Fund. We cannot predict the impact of these programs on the business or financial condition of any of our operators. In addition to COVID-19 reimbursement changes, the current administration announced several quality of care related initiatives on April 30, 2020 related to addressing the COVID-19 pandemic in long-term care facilities. One of the initiatives is the formation of the Coronavirus Commission for Safety and Quality in Nursing Homes, a special task force created for the purpose of addressing the rising death toll of residents in nursing homes. The task force will be composed of leading industry experts, doctors and scientists, resident and patient advocates, family members, infection and prevention control specialists, and state and local authorities. A second announcement was made which advised that the Federal Emergency Management Agency would begin shipping two weeks’ worth of personal protective equipment (“PPE”) to each of the nation’s 15,400 nursing homes, with all nursing homes receiving a total of 14 days’ worth of PPE no later than July 4, 2020. Quantities shipped will be based on facility staffing levels and PPE usage rates. The current administration additionally released an interim final regulation regarding the requirement for nursing home operators to report COVID-19-related data directly to the Centers for Disease Control and Prevention in addition to CMS. Nursing home providers will be required to report infections and death data at least weekly to federal authorities, and by 5 p.m. the next day to residents and family members. An additional announcement was made that CMS will provide states with $81 million from the CARES Act to increase their inspections of nursing homes.
Medicaid. State budgetary concerns, coupled with the implementation of rules under the Healthcare Reform Law, or prospective changes to the Healthcare Reform Law under the current administration or Congress, may result in significant changes in healthcare spending at the state level. Additionally, the need to control Medicaid expenditures may be exacerbated by the potential for increased enrollment in Medicaid due to unemployment and declines in family incomes resulting from the COVID-19 pandemic. Since our operators’ profit margins on Medicaid patients are generally relatively low, more than modest reductions in Medicaid reimbursement or an increase in the percentage of Medicaid patients could adversely affect our operators’ results of operations and financial condition, which in turn could negatively impact us.
46
In the state of Florida, the average Medicaid reimbursement rate for SNFs decreased 4.5% effective July 1, 2019, resulting from the loss of one-time discretionary funding applied to October 1, 2018 Florida Medicaid reimbursement rates to cover the impact of hold-harmless provisions in the new, price-based Prospective Payment System (“PPS”) enacted by Florida at that time. However, the net impact of this rate decrease was to revert the average rate approximately to the pre-PPS, cost-based level as of September 30, 2018, which we believe operators can generally address with operational adjustments to maintain coverage levels. A smaller discretionary increase effective October 1, 2019 will increase the average rate by 0.7%. When the transition hold-harmless provisions expire on September 30, 2021, the PPS rates will no longer be dependent on discretionary funding levels. At March 31, 2020, 14% of our investments were in Florida.
Texas, which represents 10% of our investments as of March 31, 2020, presents a difficult operating environment for SNF operators as a result of lower statewide occupancy levels, as compared to other states, and a Medicaid rate reimbursement that we believe is among the lowest in the United States. Several of our operators have experienced lower operating margins on their SNFs in Texas, as compared to other states, as a result of the foregoing and labor costs.
Additionally, in mid-November 2019, CMS proposed the Medicaid Fiscal Accountability Rule (“MFAR”), which would modify and refine the current federal portion of Medicaid funding for two programs commonly referred to as the upper payment limit (“UPL”) and provider taxes. As proposed, MFAR would further regulate and in some cases materially reform, eliminate or prompt the replacement of certain state Medicaid supplemental payment systems and other allowable financing arrangements that currently benefit healthcare providers. We have operators in two states, Indiana and Texas, that participate in UPL programs and operators in 36 states who received provider tax reimbursements as of March 31, 2020. Based on our analysis of MFAR and discussions with our operators and other industry leaders, we believe MFAR as proposed would eliminate the incremental UPL funds and that most, if not all, states are or will be able to become compliant under the revised provider tax program. We cannot estimate the ultimate potential impact of MFAR on our facilities in Indiana and Texas at this time, in part as we expect any reductions in revenues may be at least partially offset by expense reductions. The proposed MFAR is currently in a comment period and may be changed before a final rule is adopted, or may not be adopted at all. If ultimately implemented, MFAR could reduce reimbursement to our operators in those states affected by the rule, which could ultimately have a material adverse effect on the financial condition of those operators.
Medicare. On July 30, 2019, CMS issued a final rule regarding the government fiscal year (“FY”) 2020 Medicare payment rates and quality payment programs for SNFs, with aggregate payments projected to increase by $851 million, or 2.4 percent, for FY 2020 compared to FY 2019. This estimated reimbursement increase is attributable to a 2.8% market basket increase factor with a 0.4% reduction for the multifactor productivity adjustment mandated by the Improving Medicare Post-Acute Care Transformation Act of 2014 (“IMPACT Act”). 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 (“QRP”). The CMS also adopted two new quality measures in FY 2020 to assess whether certain health information is provided by the SNF at the time of transfer or discharge. The two measures are: 1) Transfer of Health Information to the Provider-Post-Acute Care and 2) Transfer of Health Information to the Patient-Post-Acute Care.
Payments to providers are being 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, rather than the volume of services the patient receives, became effective October 1, 2019 (FY 2020). The PDPM replaces the previous SNF prospective payment system that utilized the Resource Utilization Group IV case-mix methodology to classify SNF patients based on the volume of services received with a methodology that utilizes the International Statistical Classification of Diseases and Related Health Problems (“ICD-10”) to classify SNF patients into certain payment groups based on their clinical disease state. Effective October 1, 2019, group therapy is defined as a qualified rehabilitation therapist or therapy assistant treating two to six patients at the same time who are performing the same or similar activities. Also effective October 1, 2019, CMS established a 25% cap for concurrent and group therapy. Additional changes to reimbursement for group therapy were included in the Bipartisan Budget Act of 2018, which permanently repealed the therapy caps that applied to Medicare Part B therapy services provided as of January 1, 2018 and reduced the reimbursement rate for Medicare Part B therapy services performed by therapy assistants to 85% of the physician fee schedule beginning January 1, 2022. The former cap amounts were retained as a threshold above which claims must include confirmation that services are medically necessary as justified by appropriate documentation in the medical record.
47
While certain of our operators could realize efficiencies and cost savings from increased concurrent and group therapy under PDPM and some have reported some early positive results, it is too early to assess the long-term impact of the PDPM. Given the current and 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. 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, which became effective on October 1, 2018. These reimbursement changes could have an adverse effect on our operators’ financial condition and operations, adversely impacting their ability to meet their obligations to us.
Quality of Care Initiatives. In addition to quality or value based reimbursement reforms, CMS has implemented a number of initiatives focused on the reporting of certain facility specific quality of care indicators that could affect our operators. Since December 2008, CMS has publicly released quality ratings for all of the nursing homes that participate in Medicare or Medicaid under its “Five Star Quality Rating System.” Facility rankings, ranging from five stars (“much above average”) to one star (“much below average”) are updated on a monthly basis. SNFs are required to provide information for the CMS Nursing Home Compare website regarding staffing and quality measures.
Recent updates to the Nursing Home Care website and the Five Star Quality Rating System include revisions to the inspection process and the implementation of new quality measures. It is possible that these rating changes or any other ranking system could lead to future reimbursement policies that reward or penalize facilities on the basis of the reported quality of care parameters.
Office of the Inspector General Activities. The Office of Inspector General (“OIG”) has provided long-standing guidance for SNFs regarding compliance with federal fraud and abuse laws. More recently, the OIG has conducted increased oversight activities and issued additional guidance regarding its findings related to identified problems with the quality of care and the reporting and investigation of potential abuse or neglect at group homes, nursing homes, and skilled nursing facilities. The OIG has additionally reviewed the staffing levels reported by SNFs as part of its August 2018 and February 2019 Work Plan updates, and included a review of involuntary transfers and discharges from nursing homes in the June 2019 Work Plan updates. Regional Recovery Audit Contractor program auditors along with the OIG and Department of Justice are expected to continue their efforts to evaluate SNF Medicare claims for any excessive therapy charges.
Department of Justice. SNFs are under intense scrutiny for ensuring the quality of care being rendered to residents and appropriate billing practices conducted by the facility. The Department of Justice (“DOJ”) launched ten regional Elder Justice Task Forces in 2016 which are coordinating and enhancing efforts to pursue SNFs that provide grossly substandard care to their residents. These Task Forces are composed of representatives from the U.S. Attorneys’ Offices, State Medicaid Fraud Control Units, state and local prosecutors’ offices, HHS, State Adult Protective Services agencies, Long Term Care Ombudsmen programs, and law enforcement. The DOJ has indicated that it is seeking to enhance the work of the Elder Justice Initiative to identify potential criminal charges when they uncover false claims for government reimbursements of care. The DOJ’s civil division has historically used the False Claims Act to pursue nursing homes that bill the federal government for services not rendered or care that is grossly substandard.
Medicare and Medicaid Program Audits. Governmental agencies and their agents, such as the Medicare Administrative Contractors, fiscal intermediaries and carriers, as well as the OIG, CMS and state Medicaid programs, may conduct audits of our operators’ billing practices. Under the Recovery Audit Contractor (“RAC”) program, CMS contracts with RACs on a contingency basis to conduct post-payment reviews to detect and correct improper payments in the fee-for-service Medicare program, to managed Medicare plans and in the Medicaid program. CMS also employs Medicaid Integrity Contractors (“MICs”) to perform post-payment audits of Medicaid claims and identify overpayments. In addition to RACs and MICs, the state Medicaid agencies and other contractors have increased their review activities. Should any of our operators be found out of compliance with any of these laws, regulations or programs, our business, financial position and results of operations could be negatively impacted.
48
Fraud and Abuse. There are various federal and state civil and criminal laws and regulations governing a wide array of healthcare provider referrals, relationships and arrangements, including laws and regulations prohibiting fraud by healthcare providers. Many of these complex laws raise issues that have not been clearly interpreted by the relevant governmental authorities and courts.
These laws include: (i) federal and state false claims acts, which, among other things, prohibit providers from filing false claims or making false statements to receive payment from Medicare, Medicaid or other federal or state healthcare programs; (ii) federal and state anti-kickback and fee-splitting statutes, including the Medicare and Medicaid Anti-kickback statute, which prohibit the payment or receipt of remuneration to induce referrals or recommendations of healthcare items or services, such as services provided in a SNF; (iii) federal and state physician self-referral laws (commonly referred to as the Stark Law), which generally prohibit referrals by physicians to entities for designated health services (some of which are provided in SNFs) with which the physician or an immediate family member has a financial relationship; (iv) the federal Civil Monetary Penalties Law, which prohibits, among other things, the knowing presentation of a false or fraudulent claim for certain healthcare services and (v) federal and state privacy laws, including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996, which provide for the privacy and security of personal health information.
Violations of healthcare fraud and abuse laws carry civil, criminal and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and Medicaid reimbursement and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. Additionally, there are criminal provisions that prohibit filing false claims or making false statements to receive payment or certification under Medicare and Medicaid, as well as failing to refund overpayments or improper payments. Violation of the Anti-kickback statute or Stark Law may form the basis for a federal False Claims Act violation. These laws are enforced by a variety of federal, state and local agencies and can also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or whistleblower actions, which have become more frequent in recent years.
Several of our operators have responded to subpoenas and other requests for information regarding their operations in connection with inquiries by the Department of Justice or other regulatory agencies. In addition, MedEquities Realty Trust, Inc., which we acquired in May 2019, has responded to a Civil Investigative Demand from the Department of Justice in connection with Lakeway Regional Medical Center. See Note 16 – Commitments and Contingencies.
Privacy. Our operators are subject to various federal, state and local laws and regulations designed to protect the confidentiality and security of patient health information, including the federal Health Insurance Portability and Accountability Act of 1996, as amended, the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and the corresponding regulations promulgated thereunder (collectively referred to herein as “HIPAA”). The HITECH Act expanded the scope of these provisions by mandating individual notification in instances of breaches of protected health information, providing enhanced penalties for HIPAA violations, and granting enforcement authority to states’ Attorneys General in addition to the HHS Office for Civil Rights (“OCR”). Additionally, in a final rule issued in January 2013, HHS modified the standard for determining whether a breach has occurred by creating a presumption that any non-permitted acquisition, access, use or disclosure of protected health information is a breach unless the covered entity or business associate can demonstrate through a risk assessment that there is a low probability that the information has been compromised.
49
Various states have similar laws and regulations that govern the maintenance and safeguarding of patient records, charts and other information generated in connection with the provision of professional medical services. These laws and regulations require our operators to expend the requisite resources to secure protected health information, including the funding of costs associated with technology upgrades. Operators found in violation of HIPAA or any other privacy law or regulation may face significant monetary penalties. In addition, compliance with an operator’s notification requirements in the event of a breach of unsecured protected health information could cause reputational harm to an operator’s business.
Licensing and Certification. Our operators and facilities are subject to various federal, state and local licensing and certification laws and regulations, including laws and regulations under Medicare and Medicaid requiring operators of SNFs and ALFs to comply with extensive standards governing operations. Governmental agencies administering these laws and regulations regularly inspect our operators’ facilities and investigate complaints. Our operators and their managers receive notices of observed violations and deficiencies from time to time, and sanctions have been imposed from time to time on facilities operated by them. In addition, many states require certain healthcare providers to obtain a certificate of need, which requires prior approval for the construction, expansion or closure of certain healthcare facilities, which has the potential to impact some of our operators’ abilities to expand or change their businesses.
Americans with Disabilities Act (the “ADA”). Our properties must comply with the ADA and any similar state or local laws to the extent that such properties are public accommodations as defined in those statutes. The ADA may require removal of barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. Should barriers to access by persons with disabilities be discovered at any of our properties, we may be directly or indirectly responsible for additional costs that may be required to make facilities ADA-compliant. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. Our commitment to make readily achievable accommodations pursuant to the ADA is ongoing, and we continue to assess our properties and make modifications as appropriate in this respect.
Other Laws and Regulations. Additional federal, state and local laws and regulations affect how our operators conduct their operations, including laws and regulations protecting consumers against deceptive practices and otherwise generally affecting our operators’ management of their property and equipment and the conduct of their operations (including laws and regulations involving fire, health and safety; quality of services, including care and food service; residents’ rights, including abuse and neglect laws; and the health standards set by the federal Occupational Safety and Health Administration). It is anticipated that our operators will continue to face additional federal and state regulatory requirements related to the operation of their facilities in response to the COVID-19 pandemic.
General and Professional Liability. Although arbitration agreements have been effective in limiting general and professional liabilities for SNF and long term care providers, there have been numerous lawsuits in recent years challenging the validity of arbitration agreements in long term care settings. Effective November 28, 2016, CMS had instituted a prohibition against the use of pre-dispute arbitration agreements between SNFs and residents, thereby increasing potential liabilities for SNFs and long-term care providers. On July 16, 2019, CMS lifted the ban on pre-dispute arbitration agreements offered to residents at the time of admission provided that certain requirements are met. The rule prohibits providers from requiring residents to sign binding arbitration agreements as a condition for receiving care and requires that the agreements specifically grant residents the explicit right to rescind the agreement within thirty calendar days of signing. In addition, certain states have enacted protections from certain types of liability in connection with the provision of COVID-19 related services provided by SNFs and other healthcare providers.
50
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States, and a summary of our significant accounting policies is included in Note 2 – Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the year ended December 31, 2019. Our preparation of the financial statements requires us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and accompanying footnotes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the consolidated financial statements. We have described our most critical accounting policies in our 2019 Annual Report on Form 10-K for the year ended December 31, 2019, in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
There have been no changes to our critical accounting policies or estimates since December 31, 2019, except for the changes that resulted from the adoption of the new credit loss accounting standard on January 1, 2020, as discussed in detail in Note 1 – Basis of Presentation and Significant Accounting Policies, section “Accounting Pronouncements Adopted in 2020” of these unaudited consolidated financial statements under Part 1, Item 1 of this report and the accompanying discussion of the credit loss accounting guidance below. See also Note 2 – Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the year ended December 31, 2019.
Accounting Pronouncements Adopted in 2020
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”), which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 specifically excludes from its scope receivables arising from operating leases accounted for under Topic 842. We adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. Upon adoption, we recorded an initial $28.8 million allowance for expected credit losses with a corresponding adjustment to equity.
Transition Impact of adopting Topic 326
Pre-adoption balance as of |
Impact of adopting |
Post-adoption balance as of |
||||
Financial Statement Line Item |
December 31, 2019 |
Topic 326 |
January 1, 2020 |
|||
(in thousands) |
||||||
Mortgage Notes Receivable |
$ |
773,563 |
$ |
(21,386) |
$ |
752,177 |
Investment in Direct Financing Leases |
11,488 |
(611) |
10,877 |
|||
Other Investments |
419,228 |
(6,688) |
412,540 |
|||
Off-Balance Sheet Commitments |
20,777 |
(100) |
20,677 |
|||
Total |
$ |
1,225,056 |
$ |
(28,785) |
$ |
1,196,271 |
51
Results of Operations
The following is our discussion of the consolidated results of operations, financial position and liquidity and capital resources, which should be read in conjunction with our unaudited consolidated financial statements and accompanying notes.
Three Months Ended March 31, 2020 and 2019
Operating Revenues
Our operating revenues for the three months ended March 31, 2020 totaled $253.0 million, an increase of $29.3 million over the same period in 2019. The $29.3 million increase was primarily the result of (i) a $10.3 million increase in rental income resulting from the May 17, 2019, merger with MedEquities Realty Trust, Inc. (the “MedEquities Merger”), $18.1 million of rental income from the October 31, 2019, $735 million acquisition of 60 SNFs (the “Encore Portfolio Acquisition”) and $0.9 million of additional rental income from other facility acquisitions, facilities placed in service, facility transitions and lease amendments in 2019 and 2020, offset by decreases in rental income resulting from facility sales and rent from cash basis operators and (ii) a $1.6 million increase in mortgage income primarily related to mortgages acquired in the MedEquities Merger and new loans or notes and additional funding to existing operators made throughout 2019 and 2020. These increases were partially offset by a $1.3 million decrease in other investment income primarily related to a deed in lieu transitioned to leased property offset by new loans or notes and additional funding to existing operators made throughout 2019 and 2020.
Operating Expenses
Operating expenses for the three months ended March 31, 2020 totaled $107.1 million, an increase of approximately $5.6 million over the same period in 2019. The $5.6 million increase was primarily due to: (i) a $11.8 million increase in depreciation expense primarily resulting from facilities acquired in the MedEquities Merger, the Encore Portfolio Acquisition and other facility acquisitions, (ii) a $3.6 million increase in impairment on real estate properties related to three facilities to reduce their book values to their estimated fair value less costs to sell or fair value and (ii) a $1.5 million increase related to our provision for credit losses. These increases were partially offset by (i) a $3.2 million decrease in acquisition and merger related costs from the MedEquities Merger and (ii) a $7.7 million decrease in impairments on our direct financing leases.
Other Income (Expense)
For the three months ended March 31, 2020, total other expenses were $56.0 million, an increase of approximately $6.0 million over the same period in 2019. The increase was due to a (i) $4.6 million increase in interest expense primarily related to increased debt balances resulting from our investments during 2019, which includes the HUD debt assumed in the fourth quarter of 2019 and (ii) a $1.1 million increase in interest income and other - net primarily related to the change in the fair value of warrants to acquire shares of another public company.
National Association of Real Estate Investment Trusts Funds From Operations
Our funds from operations (“Nareit FFO”) for the three months ended March 31, 2020 was $181.0 million compared to $144.1 million for the same period in 2019.
52
We calculate and report Nareit FFO in accordance with the definition of Funds from Operations and interpretive guidelines issued by the National Association of Real Estate Investment Trusts (“Nareit”), and, consequently, Nareit FFO is defined as net income (computed in accordance with GAAP), adjusted for the effects of asset dispositions and certain non-cash items, primarily depreciation and amortization and impairment on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures and changes in the fair value of warrants. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis. We believe that Nareit FFO is an important supplemental measure of our operating performance. Because the historical cost accounting convention used for real estate assets requires depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time, while real estate values instead have historically risen or fallen with market conditions. Nareit FFO was designed by the real estate industry to address this issue. Nareit FFO herein is not necessarily comparable to Nareit FFO of other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us.
Nareit FFO is a non-GAAP financial measure. We use Nareit FFO as one of several criteria to measure the operating performance of our business. We further believe that by excluding the effect of depreciation, amortization, impairment on real estate assets and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, Nareit FFO can facilitate comparisons of operating performance between periods and between other REITs. 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 results for the three months ended March 31, 2020 and 2019:
Three Months Ended |
||||||
March 31, |
||||||
|
2020 |
|
2019 |
|||
(in thousands) |
||||||
Net income |
$ |
92,279 |
$ |
72,182 |
||
Deduct gain from real estate dispositions |
(1,838) |
(3) |
||||
Deduct gain from real estate dispositions - unconsolidated joint ventures |
|
(117) |
|
— |
||
|
90,324 |
|
72,179 |
|||
Elimination of non-cash items included in net income: |
|
|
|
|||
Depreciation and amortization |
|
82,643 |
|
70,852 |
||
Depreciation – unconsolidated joint ventures |
|
3,632 |
|
1,372 |
||
Add back impairments on real estate properties |
3,639 |
— |
||||
Add back (deduct) unrealized loss (gain) on warrants |
|
775 |
(284) |
|||
Nareit FFO (a) |
$ |
181,013 |
$ |
144,119 |
||
| (a) | Includes amounts allocated to Omega stockholders and Omega OP Unit holders. |
Portfolio and Recent Developments
The following tables summarize the significant asset acquisitions that occurred during the first three months of 2020:
|
||||||||||||||||||||||
|
Number of |
|
Total |
|
Building & Site |
|
Furniture |
|
Initial |
|
||||||||||||
Facilities |
Country/ |
Investment |
|
Land |
|
Improvements |
|
& Fixtures |
Annual |
|||||||||||||
Period |
|
SNF |
ALF |
Specialty |
MOB |
|
State |
|
(in millions) |
|
Cash Yield(1) |
|||||||||||
Q1 |
|
— |
2 |
— |
— |
UK |
$ |
12.1 |
$ |
3.6 |
$ |
8.0 |
$ |
0.5 |
8.00 |
% |
||||||
Q1 |
|
1 |
— |
— |
— |
IN |
7.0 |
0.7 |
5.8 |
0.5 |
|
9.50 |
% |
|||||||||
Total |
|
1 |
2 |
— |
— |
|
|
$ |
19.1 |
|
$ |
4.3 |
$ |
13.8 |
$ |
1.0 |
|
|
||||
| (1) | The cash yield is based on the purchase price. |
53
Asset Held for Sale
As of March 31, 2020, we have eight facilities, totaling $24.1 million classified as assets held for sale. We expect to sell these facilities over the next twelve months.
Asset Sales, Impairments, Contractual Receivables and Other Receivables and Lease Inducements
Asset Sales
During the first quarter of 2020, we sold six facilities subject to operating leases for approximately $18.1 million in net cash proceeds recognizing a net gain of approximately $1.8 million.
Impairments
During the first quarter of 2020, we recorded impairments on real estate properties of approximately $3.6 million on three facilities. Our recorded impairments were primarily the result of decisions to exit certain non-strategic facilities and/or operators. We reduced the net book value of the impaired facilities to their estimated fair values. To estimate the fair value of the facilities, we utilized a market approach which considered binding sale agreements (a Level 1 input) and/or non-binding offers from unrelated third parties and/or broker quotes (a Level 3 input).
Contractual Receivables and Other Receivables and Lease Inducements
As of March 31, 2020, we have approximately $27.4 million of contractual receivables outstanding. Of the $27.4 million of contractual receivables outstanding, approximately $18.2 million relates to Agemo Holdings LLC (“Agemo,” an entity formed in May 2018 to silo the leases and loans formerly held by Signature Healthcare). In addition to the contractual receivables, we have approximately $57.7 million of straight-line rent receivables and/or lease inducements associated with Agemo as of March 31, 2020. In May 2018, we reached an out-of-court restructuring agreement with Agemo that provided for the deferral of rent, the extension of the maturity of our lease and loans, and a working capital loan. If Agemo’s operations deteriorate and they are unable to meet their contractual obligations to us, we may be required to account for rental income from them on a cash basis and reserve approximately $75.9 million of contractual receivables, straight-line rent receivables and lease inducements. For the three months ended March 31, 2020 and 2019, we recorded rental income of approximately $15.3 million and $14.8 million, respectively, and other investment income of $1.2 million and $1.0 million, respectively, from Agemo.
In addition, we have accounted for Daybreak Venture LLC (“Daybreak”) on a cash basis of accounting since 2017. See “Daybreak” below. We have written-off our contractual rents receivable, straight-line rents receivable and lease inducements, and therefore, we have no net receivables or inducements related to Daybreak as of March 31, 2020. For the three months ended March 31, 2020, we did not record any rental income from Daybreak. For the three months ended March 31, 2019, we recorded rental income of $5.4 million from Daybreak.
Daybreak
Daybreak did not pay any rent to us during the first quarter of 2020. Additionally, we recorded impairments of approximately $1.7 million on two Daybreak facilities that we expect to sell in 2020. We transitioned five Daybreak facilities to existing operators and two additional facilities transitioned from Daybreak to one of those existing operators in the second quarter of 2020. During the fourth quarter of 2019, we transitioned two Daybreak facilities to an existing operator. The total annual contractual rent from the nine transferred facilities is approximately $4.0 million. Over the next several quarters, we intend to selectively downsize Daybreak’s portfolio through sales or releasing. Accordingly, we are in ongoing discussions with several other Texas-based operators about selling and/or leasing several of the facilities. Any such transitions, will of course, be subject to third-party operator due diligence, regulatory approvals, legal documentation and the cooperation of Daybreak.
54
While the ultimate outcome and timing of this process is difficult to ascertain, we expect to derive rent or rent equivalents of between $15 million to $20 million annually from our Daybreak portfolio following the restructuring. However, our ability to implement such restructuring and secure the approvals necessary to do so, the timing and impact on Daybreak’s liquidity from each of the expected benefits discussed above should the portfolio restructuring occur, and the ultimate rental income following any potential transition of select Daybreak facilities to other operators, may be less favorable than expected, and there can be no assurance that such benefits or transition will occur. Should they not occur, we could be required to impair our remaining assets currently leased to Daybreak.
We continue to closely monitor the performance of all of its operators, as well as industry trends and developments generally.
Liquidity and Capital Resources
At March 31, 2020, we had total assets of $10.0 billion, total equity of $4.2 billion and debt of $5.6 billion, representing approximately 56.9% of total capitalization.
Financing Activities and Borrowing Arrangements
$400 Million Forward Starting Swaps
On March 27, 2020, we entered into five forward starting swaps totaling $400 million. We designated the forward starting swaps as cash flow hedges of interest rate risk associated with interest payments on a forecasted issuance of long-term debt, initially expected to occur within the next five years. The swaps are effective on August 1, 2023 and expire on August 1, 2033 and were issued at a fixed rate of approximately 0.8675%. We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of 46 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).
Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As of March 31, 2020 and December 31, 2019, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings. Omega OP, the guarantor of Parent’s outstanding senior notes, does not directly own any substantive assets other than its interest in non-guarantor subsidiaries.
$200 Million Stock Repurchase Program
On March 20, 2020, Omega’s Board of Directors authorized the repurchase of up to $200 million of its outstanding common stock from time to time over the twelve months ending March 20, 2021. We are authorized to repurchase shares of our common stock in open market and privately negotiated transactions or in any other manner as determined by Omega’s management and in accordance with applicable law. The timing and amount of stock repurchases will be determined, in management’s discretion, based on a variety of factors, including but not limited to market conditions, other capital management needs and opportunities, and corporate and regulatory considerations. Omega has no obligation to repurchase any amount of its common stock, and such repurchases, if any, may be discontinued at any time. Omega did not repurchase any of its outstanding common stock through March 31, 2020.
$500 Million Equity Shelf Program
For the three months ended March 31, 2020 and 2019, we issued approximately 49 thousand and 2.2 million, respectively, shares of our common stock at an average price of $37.58 per share and $34.46 per share, respectively, net of issuance costs, generating net proceeds of $1.8 million and $76.5 million, respectively, under our $500 million Equity Shelf Program.
55
Dividend Reinvestment and Common Stock Purchase Plan
On March 23, 2020, we announced that we suspended our Dividend Reinvestment and Common Stock Purchase Plan. For the three months ended March 31, 2020 and 2019, we issued approximately 90 thousand and 0.9 million, respectively, shares of our common stock at an average price of $41.80 per share and $36.19 per share, respectively, through our Dividend Reinvestment and Common Stock Purchase Plan for gross proceeds of approximately $3.7 million and $32.3 million, respectively.
Commitments
We have committed to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments. We expect the funding of these commitments to be completed over the next several years. Our remaining commitments at March 31, 2020, are outlined in the table below (in thousands):
Total commitments |
|
$ |
657,512 |
||
Amounts funded to date (1) |
|
(509,880) |
|||
Remaining commitments |
$ |
147,632 |
|||
| (1) | Includes finance costs. |
Dividends
In order to qualify as a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders in an amount at least equal to (A) the sum of (i) 90% of our “REIT taxable income” (computed without regard to the dividends paid deduction and our net capital gain), and (ii) 90% of the net income (after tax), if any, from foreclosure property, minus (B) the sum of certain items of non-cash income. In addition, if we dispose of any built-in gain asset during a recognition period, we will be required to distribute at least 90% of the built-in gain (after tax), if any, recognized on the disposition of such asset. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for such year and paid on or before the first regular dividend payment after such declaration. In addition, such distributions are required to be made pro rata, with no preference to any share of stock as compared with other shares of the same class, and with no preference to one class of stock as compared with another class except to the extent that such class is entitled to such a preference. To the extent that we do not distribute all of our net capital gain or do distribute at least 90%, but less than 100% of our “REIT taxable income” as adjusted, we will be subject to tax thereon at regular ordinary and capital gain corporate tax rates.
For the three months ended March 31, 2020, we paid dividends of approximately $154.6 million, to our common stockholders. On the 14th of February 2020, we paid dividends of $0.67 per outstanding common share to common stockholders of record as of last business day of January 2020. For the three months ended March 31, 2020, Omega OP paid distributions of approximately $7.3 million to holders of Omega OP Units other than Omega. The Omega OP Unit holders received the same distributions per unit as those paid to the common stockholders of Omega.
Liquidity
We believe our liquidity and various sources of available capital, including cash from operations, our existing availability under our credit facilities, existing equity sales programs, facility sales and expected proceeds from mortgage and other investment payoffs are adequate to finance operations, meet recurring debt service requirements and fund future investments through the next twelve months.
56
We regularly review our liquidity needs, the adequacy of cash flow from operations, and other expected liquidity sources to meet these needs. We believe our principal short-term liquidity needs are to fund:
| ● | normal recurring expenses; |
| ● | debt service payments; |
| ● | capital improvement programs; |
| ● | common stock dividends; and |
| ● | growth through acquisitions of additional properties. |
The primary source of liquidity is our cash flows from operations. Operating cash flows have historically been determined by: (i) the number of facilities we lease or have mortgages on; (ii) rental and mortgage rates; (iii) our debt service obligations; (iv) general and administrative expenses and (v) our operators’ ability to pay amounts owed. The timing, source and amount of cash flows provided by or used in financing activities and in investing activities are sensitive to the capital markets environment, especially to changes in interest rates. Changes in the capital markets environment may impact the availability of cost-effective capital and affect our plans for acquisition and disposition activity.
Cash, cash equivalents and restricted cash totaled $352.0 million as of March 31, 2020, an increase of $318.6 million as compared to the balance at December 31, 2019. The following is a discussion of changes in cash, cash equivalents and restricted cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows.
Operating Activities – Operating activities generated $139.1 million of net cash flow for the three months ended March 31, 2020, as compared to $110.1 million for the same period in 2019, an increase of $29.0 million, which is primarily due to facility acquisitions and transitions, acquired mortgages and other investments.
Investing Activities – Net cash flow from investing activities was an outflow of $55.2 million for the three months ended March 31, 2020, as compared to an inflow of $72.1 million for the same period in 2019. The $127.3 million change in cash provided by investing activities related primarily to (i) an $86.7 million decrease in proceeds from sale of direct financing lease and related trust, (ii) a $45.0 million change in other investments – net and (iii) a $13.2 million increase in real estate acquisitions. Offsetting these changes was primarily a $17.7 million increase in proceeds from the sales of real estate investments.
Financing Activities – Net cash flow from financing activities was an inflow of $235.2 million for the three months ended March 31, 2020, as compared to an outflow of $152.6 million for the same period in 2019. The $387.7 million change in cash used in financing activities was primarily related to a $514.5 million change in our credit facility borrowings (of which $300 million was drawn as a precautionary measure in connection with COVID-19, as previously disclosed) – net offset by (i) a $74.7 million decrease in cash proceeds from the issuance of common stock in 2020, as compared to the same period in 2019, (ii) a $28.5 million decrease in net proceeds from our dividend reinvestment plan in 2020, as compared to the same period in 2019, (iii) an $18.0 million increase in dividends paid and (iv) a $4.1 million change in other long-term borrowings – net.
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
During the quarter ended March 31, 2020, 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, 2019.
57
Item 4 – Controls and Procedures
Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
In connection with the preparation of this Form 10-Q, management evaluated the effectiveness of the design and operation of the disclosure controls and procedures of Omega and Omega OP (for purposes of this Item 4, the “Companies”) as of March 31, 2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures of the Companies were effective at a reasonable assurance level as of March 31, 2020.
Internal Control Over Financial Reporting
There were no changes in the Companies’ internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report identified in connection with the evaluation of our disclosure controls and procedures described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
See Note 16 – Commitments and Contingencies in the Financial Statements - Part I, Item 1 hereto, which is hereby incorporated by reference in response to this item.
Item 1A – Risk Factors
In addition to the risk factors previously disclosed in Item 1A contained in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019, investors should carefully consider the following additional risk factor, which should be read in conjunction with the risk factors set forth in such Form 10-K and the other information contained in this report and our other filings with the Securities and Exchange Commission.
The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations, cash flows and financial condition.
On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. The COVID-19 pandemic has led governments and other authorities in the U.S., U.K. and around the world to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders.
58
We believe many of our operators are incurring significant cost increases as a result of the pandemic, with dramatic increases for facilities with positive cases. We believe these increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of personal protective equipment and supplies. In terms of occupancy levels, we believe many of our operators are experiencing declines, in part due to the elimination of elective hospital procedures. To the extent these trends continue or accelerate and are not offset by sufficient or timely government relief, the operating results of our operators are likely to be adversely affected, some may be unwilling or unable to pay their contractual obligations to us in full or on a timely basis and we may be unable to restructure such obligations on terms as favorable to us as those currently in place. Even if operators are able to avail themselves of government relief to offset some of these costs, they may face challenges in complying with the terms and conditions of government support and may face longer-term adverse impacts to their personnel and business operations from the pandemic, including potential patient litigation and decreased demand for their services.
Numerous state, local, federal and industry-initiated efforts may also affect landlords’ and/or mortgagees’ ability to collect payments due or enforce remedies for the failure to pay amounts due. Certain of our operators and/or mortgagors may incur significant costs or losses responding to the COVID-19 pandemic, lose business due to an interruption in their operations or incur other liabilities related to shelter-in-place orders, quarantines, infection or other related factors. Risks related to the downturn in business of our operators are also described in our risk factor titled “The bankruptcy or insolvency of our operators could limit or delay our ability to recover our investments” under “Risk Factors—Risks Related to the Operators of Our Facilities” in our Annual Report on Form 10-K for the year ended December 31, 2019.
The COVID-19 pandemic has also caused, and is likely to continue to cause, severe economic, market and other disruptions worldwide. We cannot assure you that conditions in the bank lending, capital and other financial markets will not continue to deteriorate as a result of the pandemic, or that our access to capital and other sources of funding will not become constrained, which could adversely affect the availability and terms of future borrowings, renewals or refinancing. In addition, our employees may be impacted directly or indirectly by the pandemic and we may be required to make changes to our internal controls as a result of changes in our business processes or personnel; any such changes may increase our operational and financial reporting risks.
The extent of the COVID-19 pandemic’s effect on our and our operators’ operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, all of which are uncertain and difficult to predict. Due to the speed with which the situation is developing, we are not able at this time to estimate the effect of these factors on our business, but the adverse impact on our business, results of operations, financial condition and cash flows could be material. To the extent the COVID-19 pandemic adversely affects our or operators’ results of operations and financial condition, it may also have the effect of heightening many of the other risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended March 31, 2020, Omega issued an aggregate of 8,060 shares of Omega common stock in exchange for an equivalent number of Omega OP Units tendered to Omega OP for redemption in accordance with the provisions of the Partnership Agreement. The Company issued these shares of Omega common stock in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, based upon factual representations received from the limited partners who received the Omega common stock.
59
Issuer Purchases of Equity Securities
Maximum |
|||||||||
Total Number of |
Number (or |
||||||||
Shares |
Approximate |
||||||||
Purchased as |
Dollar Value) of |
||||||||
Part of Publicly |
Shares that may |
||||||||
Total Number |
Announced |
be Purchased |
|||||||
of Shares |
Average Price |
Plans or |
Under these Plans |
||||||
Period |
|
Purchased |
|
Paid per Share |
|
Programs |
|
or Programs |
|
January 1, 2020 - January 31, 2020 |
|
— |
$ |
— |
|
— |
|
— |
|
February 1, 2020 to February 29, 2020 |
|
— |
|
— |
|
— |
|
— |
|
March 1, 2020 to March 31, 2020 (1) |
|
— |
|
— |
|
— |
|
— |
|
Total |
|
— |
$ |
— |
|
— |
|
— |
|
(1) On March 20, 2020, the Company authorized the repurchase of up to $200 million of our outstanding common stock from time to time over the twelve months ending March 20, 2021. The Company is authorized to repurchase shares of its common stock in open market and privately negotiated transactions or in any other manner as determined by the Company’s management and in accordance with applicable law. The timing and amount of stock repurchases will be determined, in management’s discretion, based on a variety of factors, including but not limited to market conditions, other capital management needs and opportunities, and corporate and regulatory considerations. The Company has no obligation to repurchase any amount of its common stock, and such repurchases, if any, may be discontinued at any time.
60
Item 6–Exhibits
Exhibit No. |
||
10.1 |
||
10.2 |
||
10.3 |
||
31.1 |
||
31.2 |
||
31.3 |
||
31.4 |
||
32.1 |
Section 1350 Certification of the Chief Executive Officer of Omega Healthcare Investors, Inc.* |
|
32.2 |
Section 1350 Certification of the Chief Financial Officer of Omega Healthcare Investors, Inc.* |
|
32.3 |
||
32.4 |
||
101.INS |
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document. |
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document. |
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
104 |
Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101). |
* Exhibits that are filed herewith.
61
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OMEGA HEALTHCARE INVESTORS, INC.
Registrant
Date: May 8, 2020 |
By: |
/S/ C. TAYLOR PICKETT |
C. Taylor Pickett |
||
Chief Executive Officer |
||
Date: May 8, 2020 |
By: |
/S/ ROBERT O. STEPHENSON |
Robert O. Stephenson |
||
Chief Financial Officer |
OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP
Co-Registrant
By: Omega Healthcare Investors, Inc., its General Partner
Date: May 8, 2020 |
By: |
/S/ C. TAYLOR PICKETT |
C. Taylor Pickett |
||
Chief Executive Officer |
||
Date: May 8, 2020 |
By: |
/S/ ROBERT O. STEPHENSON |
Robert O. Stephenson |
||
Chief Financial Officer |
62