10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 3, 2023
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)
(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.
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).
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.
Accelerated filer ◻ |
Non-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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes |
No ☒ |
As of October 31, 2023, there were
OMEGA HEALTHCARE INVESTORS, INC.
FORM 10-Q
September 30, 2023
TABLE OF CONTENTS | ||
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Financial Statements of Omega Healthcare Investors, Inc. (Unaudited): |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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PART I – FINANCIAL INFORMATION
Item 1 - Financial Statements
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
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September 30, |
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December 31, |
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2023 |
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2022 |
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(Unaudited) |
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ASSETS |
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Real estate assets |
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Buildings and improvements |
$ |
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$ |
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Land |
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Furniture and equipment |
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Construction in progress |
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Total real estate assets |
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Less accumulated depreciation |
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Real estate assets – net |
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Investments in direct financing leases – net |
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Real estate loans receivable – net |
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Investments in unconsolidated joint ventures |
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Assets held for sale |
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Total real estate investments |
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Non-real estate loans receivable – net |
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Total investments |
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Cash and cash equivalents |
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Restricted cash |
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Contractual receivables – net |
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Other receivables and lease inducements |
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Goodwill |
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Other assets |
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Total assets |
$ |
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$ |
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LIABILITIES AND EQUITY |
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Revolving credit facility |
$ |
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$ |
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Secured borrowings |
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Senior notes and other unsecured borrowings – net |
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Accrued expenses and other liabilities |
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Total liabilities |
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Preferred stock $ |
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Common stock $ |
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Additional paid-in capital |
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Cumulative net earnings |
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Cumulative dividends paid |
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( |
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( |
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Accumulated other comprehensive income |
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Total stockholders’ equity |
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Noncontrolling interest |
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Total equity |
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Total liabilities and equity |
$ |
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$ |
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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 |
Nine Months Ended |
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September 30, |
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September 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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Revenues |
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Rental income |
$ |
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$ |
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$ |
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$ |
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Income from direct financing leases |
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Interest income |
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Miscellaneous income |
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Total revenues |
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Expenses |
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Depreciation and amortization |
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General and administrative |
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Real estate taxes |
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Acquisition, merger and transition related costs |
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Impairment on real estate properties |
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Provision for credit losses |
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Interest expense |
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Total expenses |
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Other income (expense) |
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Other income (expense) – net |
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( |
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( |
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Loss on debt extinguishment |
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— |
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( |
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( |
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( |
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Gain on assets sold – net |
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Total other income |
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Income before income tax expense and income from unconsolidated joint ventures |
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Income tax expense |
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( |
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( |
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( |
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( |
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(Loss) income from unconsolidated joint ventures |
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( |
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Net income |
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Net income attributable to noncontrolling interest |
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( |
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( |
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( |
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( |
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Net income available to common stockholders |
$ |
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$ |
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$ |
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$ |
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Earnings per common share available to common stockholders: |
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Basic: |
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Net income available to common stockholders |
$ |
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$ |
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$ |
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$ |
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Diluted: |
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Net income available to common stockholders |
$ |
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$ |
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$ |
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$ |
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See notes to consolidated financial statements.
3
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(in thousands)
Three Months Ended |
Nine Months Ended |
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September 30, |
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September 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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Net income |
$ |
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$ |
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$ |
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$ |
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Other comprehensive income (loss) |
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Foreign currency translation |
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( |
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( |
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( |
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Cash flow hedges |
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Total other comprehensive (loss) income |
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( |
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Comprehensive income |
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Comprehensive income attributable to noncontrolling interest |
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( |
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( |
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( |
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( |
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Comprehensive income attributable to common stockholders |
$ |
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$ |
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$ |
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$ |
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See notes to consolidated financial statements.
4
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
Three Months Ended September 30, 2023 and 2022
Unaudited
(in thousands, except per share amounts)
Accumulated |
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Common |
Additional |
Cumulative |
Cumulative |
Other |
Total |
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Stock |
Paid-in |
Net |
Dividends |
Comprehensive |
Stockholders’ |
Noncontrolling |
Total |
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Par Value |
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Capital |
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Earnings |
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Paid |
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Income |
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Equity |
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Interest |
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Equity |
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Balance at June 30, 2023 |
$ |
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$ |
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$ |
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$ |
( |
$ |
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$ |
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$ |
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$ |
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Stock related compensation |
— |
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— |
— |
— |
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— |
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Issuance of common stock |
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— |
— |
— |
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— |
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Common dividends declared ($ |
— |
— |
— |
( |
— |
( |
— |
( |
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Vesting/exercising of Omega OP Units |
— |
( |
— |
— |
— |
( |
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— |
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Omega OP Units distributions |
— |
— |
— |
— |
— |
— |
( |
( |
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Net change in noncontrolling interest holder in consolidated JV |
— |
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— |
— |
— |
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— |
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Other comprehensive loss |
— |
— |
— |
— |
( |
( |
( |
( |
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Net income |
— |
— |
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— |
— |
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Balance at September 30, 2023 |
$ |
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$ |
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$ |
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$ |
( |
$ |
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$ |
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$ |
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$ |
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Balance at June 30, 2022 |
$ |
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$ |
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$ |
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$ |
( |
$ |
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$ |
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$ |
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$ |
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Stock related compensation |
— |
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— |
— |
— |
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— |
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Issuance of common stock |
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— |
— |
— |
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— |
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Common dividends declared ($ |
— |
— |
— |
( |
— |
( |
— |
( |
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Omega OP Units distributions |
— |
— |
— |
— |
— |
— |
( |
( |
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Capital contribution from noncontrolling interest holder in consolidated JV |
— |
— |
— |
— |
— |
— |
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Other comprehensive income |
— |
— |
— |
— |
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Net income |
— |
— |
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— |
— |
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Balance at September 30, 2022 |
$ |
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$ |
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$ |
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$ |
( |
$ |
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$ |
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$ |
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$ |
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See notes to consolidated financial statements.
5
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
Nine Months Ended September 30, 2023 and 2022
Unaudited
(in thousands, except per share amounts)
Accumulated |
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Common |
Additional |
Cumulative |
Cumulative |
Other |
Total |
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Stock |
Paid-in |
Net |
Dividends |
Comprehensive |
Stockholders’ |
Noncontrolling |
Total |
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Par Value |
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Capital |
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Earnings |
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Paid |
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Income (Loss) |
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Equity |
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Interest |
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Equity |
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Balance at December 31, 2022 |
$ |
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$ |
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$ |
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$ |
( |
$ |
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$ |
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$ |
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$ |
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Stock related compensation |
— |
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— |
— |
— |
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— |
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Issuance of common stock |
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— |
— |
— |
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— |
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Common dividends declared ($ |
— |
— |
— |
( |
— |
( |
— |
( |
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Vesting/exercising of Omega OP Units |
— |
( |
— |
— |
— |
( |
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— |
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Conversion and redemption of Omega OP Units to common stock |
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— |
— |
— |
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( |
( |
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Omega OP Units distributions |
— |
— |
— |
— |
— |
— |
( |
( |
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Net change in noncontrolling interest holder in consolidated JV |
— |
( |
— |
— |
— |
( |
( |
( |
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Other comprehensive income |
— |
— |
— |
— |
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Net income |
— |
— |
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— |
— |
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Balance at September 30, 2023 |
$ |
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$ |
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$ |
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$ |
( |
$ |
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$ |
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$ |
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$ |
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Balance at December 31, 2021 |
$ |
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$ |
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$ |
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$ |
( |
$ |
( |
$ |
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$ |
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$ |
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Stock related compensation |
— |
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— |
— |
— |
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— |
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Issuance of common stock |
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— |
— |
— |
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— |
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Repurchase of common stock |
( |
( |
— |
— |
— |
( |
— |
( |
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Common dividends declared ($ |
— |
— |
— |
( |
— |
( |
— |
( |
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Vesting/exercising of Omega OP Units |
— |
( |
— |
— |
— |
( |
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— |
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Conversion and redemption of Omega OP Units to common stock |
— |
— |
— |
— |
— |
— |
( |
( |
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Omega OP Units distributions |
— |
— |
— |
— |
— |
— |
( |
( |
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Capital contribution from noncontrolling interest holder in consolidated JV |
— |
— |
— |
— |
— |
— |
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Other comprehensive income |
— |
— |
— |
— |
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Net income |
— |
— |
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— |
— |
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Balance at September 30, 2022 |
$ |
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$ |
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$ |
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$ |
( |
$ |
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$ |
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$ |
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$ |
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See notes to consolidated financial statements.
6
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (in thousands)
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Nine Months Ended September 30, |
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2023 |
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2022 |
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Cash flows from operating activities |
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Net income |
$ |
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$ |
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Adjustment to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Impairment on real estate properties |
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Provision for rental income |
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Provision for credit losses |
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Amortization of deferred financing costs and loss on debt extinguishment |
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Accretion of direct financing leases |
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Stock-based compensation expense |
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Gain on assets sold – net |
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( |
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( |
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Amortization of acquired in-place leases – net |
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( |
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( |
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Straight-line rent and effective interest receivables |
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( |
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( |
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Interest paid-in-kind |
( |
( |
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Loss (income) from unconsolidated joint ventures |
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( |
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Change in operating assets and liabilities – net: |
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Contractual receivables |
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( |
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Lease inducements |
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( |
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Other operating assets and liabilities |
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( |
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( |
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Net cash provided by operating activities |
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Cash flows from investing activities |
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Acquisition of real estate |
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( |
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( |
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Net proceeds from sale of real estate investments |
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Investments in construction in progress |
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( |
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( |
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Placement of loan principal |
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( |
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( |
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Collection of loan principal |
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Investments in unconsolidated joint ventures |
( |
( |
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Distributions from unconsolidated joint ventures in excess of earnings |
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Capital improvements to real estate investments |
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( |
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( |
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Receipts from insurance proceeds |
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Net cash (used in) provided by investing activities |
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( |
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Cash flows from financing activities |
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Proceeds from long-term borrowings |
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Payments of long-term borrowings |
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( |
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( |
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Payments of financing related costs |
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( |
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( |
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Net proceeds from issuance of common stock |
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Repurchase of common stock |
— |
( |
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Dividends paid |
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( |
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( |
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Net payments to noncontrolling members of consolidated joint venture |
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( |
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Proceeds from derivative instruments |
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— |
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Redemption of Omega OP Units |
( |
( |
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Distributions to Omega OP Unit Holders |
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( |
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( |
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Net cash used in financing activities |
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( |
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( |
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Effect of foreign currency translation on cash, cash equivalents and restricted cash |
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( |
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Increase in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash at beginning of period |
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Cash, cash equivalents and restricted cash at end of period |
$ |
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$ |
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See notes to consolidated financial statements.
7
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
September 30, 2023
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business Overview and Organization
Omega Healthcare Investors, Inc. (“Parent”) is a Maryland corporation that, together with its consolidated subsidiaries (collectively, “Omega,” the “Company,” “we,” “our,” or “us”) invests in healthcare-related real estate properties located in the United States (“U.S.”) and the United Kingdom (“U.K.”). Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), and to a lesser extent, independent living facilities (“ILFs”), rehabilitation and acute care facilities (“specialty facilities”) and medical office buildings. Our core portfolio consists of long-term “triple net” leases and real estate loans with healthcare operating companies and affiliates (collectively, our “operators”). In addition to our core investments, we make loans to operators and/or their principals. From time to time, we also acquire equity interests in joint ventures or entities that support the long-term healthcare industry and our operators.
Omega has elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes and is structured as an umbrella partnership REIT (“UPREIT”) under which all of Omega’s assets are owned directly or indirectly by, and all of Omega’s operations are conducted directly or indirectly through, its operating partnership subsidiary, OHI Healthcare Properties Limited Partnership (collectively with its subsidiaries, “Omega OP”). Omega has exclusive control over Omega OP’s day-to-day management pursuant to the partnership agreement governing Omega OP. As of September 30, 2023, Parent owned approximately
Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all 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 Annual Report on Form 10-K for the year ended December 31, 2022.
Omega’s consolidated financial statements include the accounts of (i) Parent, (ii) all direct and indirect wholly owned subsidiaries of Omega, including Omega OP, (iii) other entities in which Omega or Omega OP has a majority voting interest and control and (iv) variable interest entities (“VIEs”) of which Omega is the primary beneficiary. 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.
Segments
We conduct our operations and report financial results as
Reclassification
Certain line items on our Consolidated Statements of Operations and Consolidated Statements of Cash Flows have been reclassified to conform to the current period presentation.
8
Risks and Uncertainties
The Company is subject to certain risks and uncertainties affecting the healthcare industry, including those that arose from the novel coronavirus (“COVID-19”) global pandemic, which disproportionately impacted the senior care sector, as well as those stemming from healthcare legislation and changing 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.
Recent Accounting Pronouncements
ASU – 2023-05 - Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement
On August 23, 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-05 requiring certain joint ventures, upon formation, to apply a new basis of accounting and initially measure most of their assets and liabilities at fair value in their financial statements. ASU 2023-05 does not affect the accounting by the joint venture’s investors. The guidance is effective for all joint ventures with a formation date on or after January 1, 2025, and early adoption is permitted either prospectively or retrospectively. The Company is still evaluating its adoption timeline, methodology and the impact on its consolidated financial statements.
ASU – 2020-04, Financial Instruments – Reference Rate Reform (Topic 848)
On March 12, 2020, the FASB issued ASU 2020-04, which contains optional practical expedients for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting for contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”). The guidance may be elected over time until December 31, 2022, as reference rate reform activities occur. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extended the practical expedients under ASU 2020-04 to December 31, 2024. The Company had several derivative instruments that referenced LIBOR which were terminated during the second quarter of 2023 (see Note 16 – Derivatives and Hedging). The Company also had a $
NOTE 2 – REAL ESTATE ASSETS
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
2023 |
2022 |
2023 |
2022 |
||||||||||
(in thousands) |
(in thousands) |
||||||||||||
Rental income – operating leases |
$ |
|
$ |
|
$ |
|
$ |
|
|||||
Variable lease income – operating leases |
|
|
|
|
|||||||||
Total rental income |
$ |
|
$ |
|
$ |
|
$ |
|
|||||
Our variable lease income primarily represents the reimbursement of real estate taxes and ground lease expenses by operators that Omega pays directly.
9
Asset Acquisitions
The following table summarizes the asset acquisitions that occurred during the nine months ended September 30, 2023:
Number of |
Total Real Estate |
Initial |
|||||||||
|
Facilities |
|
|
Assets Acquired |
|
Annual |
|||||
Period |
SNF |
ALF |
Country/State |
(in millions) |
Cash Yield(1) |
||||||
Q1 |
|
— |
|
|
U.K. |
$ |
|
(2) |
|
% |
|
Q2 |
|
— |
WV |
|
(3) |
|
% |
||||
Q2 |
|
— |
WV |
|
|
% |
|||||
Q3 |
|
— |
VA |
|
|
% |
|||||
Q3 |
— |
|
U.K. |
|
|
% |
|||||
Total |
|
|
|
|
|
$ |
|
|
|||
| (1) | Initial annual cash yield reflects the initial annual contractual cash rent divided by the purchase price. |
| (2) |
In connection with this acquisition, the Company recorded $ |
| (3) |
In connection with this acquisition, the Company also provided $ |
Construction in Progress and Capital Expenditure Investments
We invested $
NOTE 3 – ASSETS HELD FOR SALE, DISPOSITIONS AND IMPAIRMENTS
Periodically we sell facilities to reduce our exposure to certain operators, geographies and non-strategic assets or due to the exercise of a tenant purchase option.
The following is a summary of our assets held for sale:
September 30, |
December 31, |
||||
2023 |
|
2022 |
|||
Number of facilities held for sale |
|
|
|||
Amount of assets held for sale (in thousands) |
$ |
|
$ |
|
|
During the three months ended September 30, 2023, we reclassified
10
Asset Sales
During the three and nine months ended September 30, 2023, we sold
In the third quarter of 2023, we sold
During the three and nine months ended September 30, 2022, we sold
Real Estate Impairments
During the three and nine months ended September 30, 2023, we recorded impairments on
11
During the three and nine months ended September 30, 2022, we recorded impairments on
To estimate the fair value of the facilities for the impairments noted above, we utilized a market approach that considered binding sale agreements (a Level 1 input) or non-binding offers from unrelated third parties and/or broker quotes (a Level 3 input).
NOTE 4 – 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 income over the non-cancellable lease term.
A summary of our net receivables and lease inducements by type is as follows:
|
September 30, |
December 31, |
|||||
|
2023 |
|
2022 |
|
|||
(in thousands) |
|||||||
Contractual receivables – net |
$ |
|
$ |
|
|||
Effective yield interest receivables |
$ |
|
$ |
|
|||
Straight-line rent receivables |
|
|
|
|
|||
Lease inducements |
|
|
|
|
|||
Other receivables and lease inducements |
$ |
|
$ |
|
|||
Cash Basis Operators and Straight-Line Receivable Write-Offs
We review our collectibility assumptions related to our operator leases on an ongoing basis. During the nine months ended September 30, 2023, we placed
During the three and nine months ended September 30, 2022, we placed
12
During the nine months ended September 30, 2023, we transitioned the portfolios of
During the nine months ended September 30, 2023 and 2022, we also wrote-off $
As of September 30, 2023, we had
Rent Deferrals and Application of Collateral
During each of the nine months ended September 30, 2023 and 2022, we allowed
Additionally, we allowed
Operator Collectibility Updates
Agemo
In the first quarter of 2023, Omega and Agemo entered into a restructuring agreement, an amended and restated master lease and a new loan agreement for two replacement loans. As part of the restructuring agreement and related agreements, Omega agreed to, among other things:
| ● | forgive and release Agemo from previously written off past due rent and interest obligations related to certain periods prior to the 2018 Agemo restructuring and from August 2021 through January 2023, with contractual rent under the lease agreement and contractual interest under the loan agreements scheduled to resume on April 1, 2023; |
| ● |
reduce monthly contractual base rent from $ |
| ● |
extend the initial Agemo lease term from |
| ● |
refinance and restructure the $ |
13
Agemo resumed making contractual rent and interest payments during the second quarter of 2023 in accordance with the restructuring terms discussed above. Agemo is on a cash basis of revenue recognition for lease purposes, and we recorded rental income of $
LaVie
During 2023, we continued the process of restructuring our portfolio with LaVie by amending the lease agreements with LaVie to allow for a partial rent deferral of $
Maplewood
In the first quarter of 2023, we agreed to a formal restructuring agreement, master lease amendments and loan amendments with Maplewood. As part of the restructuring agreement and related agreements, Omega agreed to, among other things:
| ● |
extend the maturity date of the master lease from |
| ● |
fix contractual rent at $ |
| ● |
fund $ |
| ● | extend the maturity date of the secured revolving credit facility from June 2030 to June 2035, with one borrower 2-year extension option; |
| ● |
increase the capacity of the secured revolving credit facility from $ |
| ● |
convert the |
| ● |
pay a one-time option termination fee of $ |
| ● |
reduce Maplewood’s share of any future potential sales proceeds (in excess of our gross investment) by the unpaid deferred rent balance, the $ |
14
Maplewood short-paid the contractual rent amount due under its lease agreement by $
Maplewood is on a cash basis of revenue recognition for lease purposes, and we recorded rental income of $
As discussed further in Note 5 – Real Estate Loans Receivable, we recorded interest income of $
Healthcare Homes
In December 2022, we agreed to allow Healthcare Homes, a U.K.-based operator representing
Guardian
In August and September 2023, Guardian, an operator that was already on a cash basis of revenue recognition, did not pay its contractual amounts due under its lease agreement. During the third quarter of 2023, we applied $
15
NOTE 5 – REAL ESTATE LOANS RECEIVABLE
Real estate loans consist of mortgage notes and other real estate loans which are primarily collateralized by a first, second or third mortgage lien or a leasehold mortgage on, or an assignment of the partnership interest in the related properties. As of September 30, 2023, our real estate loans receivable consists of
The principal amounts outstanding of real estate loans receivable, net of allowances, were as follows:
September 30, |
December 31, |
||||||
|
2023 |
|
2022 |
|
|||
(in thousands) |
|||||||
Mortgage notes due |
$ |
|
|
$ |
|
||
Mortgage note due |
— |
|
|||||
Mortgage note due |
|
|
|||||
Mortgage note due |
|
|
|||||
Other mortgage notes outstanding(3) |
|
|
|
|
|||
Mortgage notes receivable – gross |
|
|
|
|
|||
Allowance for credit losses on mortgage notes receivable |
( |
( |
|||||
Mortgage notes receivable – net |
|
|
|||||
Other real estate loan due |
|
|
|||||
Other real estate loans due |
|
|
|||||
Other real estate loans due |
|
|
|||||
Other real estate loans outstanding(4) |
|
|
|||||
Other real estate loans – gross |
|
|
|||||
Allowance for credit losses on other real estate loans |
|
( |
|
( |
|||
Other real estate loans – net |
|
|
|||||
Total real estate loans receivable – net |
$ |
|
$ |
|
|||
| (1) | Approximates the weighted average interest rate on facilities as of September 30, 2023. |
| (2) | During the second quarter of 2023, this mortgage note was extended from December 31, 2032 to December 31, 2037. |
| (3) |
Other mortgage notes outstanding have a weighted average interest rate of |
| (4) |
Other real estate loans outstanding have a weighted average interest rate of |
Interest revenue on real estate loans is included within interest income on the Consolidated Statements of Operations and is summarized as follows:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||
2023 |
|
2022 |
2023 |
|
2022 |
||||||
(in thousands) |
(in thousands) |
||||||||||
Mortgage notes – interest income |
$ |
|
|
$ |
|
$ |
|
|
$ |
|
|
Other real estate loans – interest income |
|
|
|
|
|
|
|
|
|||
Total real estate loans interest income |
$ |
|
$ |
|
$ |
|
$ |
|
|||
16
Mortgage note due 2031
In the second quarter of 2022, we agreed to a formal restructuring agreement and amended the mortgage loan with Guardian, which among other adjustments, extended the loan’s maturity date and allowed for the deferral of certain contractual interest. The loan amendment was treated as a loan modification provided to a borrower experiencing financial difficulty. Following the execution of the restructuring agreement, Guardian resumed paying contractual rent and interest during the second quarter of 2022 and continued such payments throughout the remainder of 2022 and the first three quarters of 2023, in accordance with the restructuring terms. The mortgage loan was on non-accrual status and was being accounted for under the cost recovery method, under which any payments received were applied against the principal amount. During the three and six months ended June 30, 2023, we received $
In the second quarter of 2023, Guardian completed the sale of the
Other real estate loan due 2035
As discussed in Note 4 – Contractual Receivables and Other Receivables and Lease Inducements, in the first quarter of 2023, Omega entered into a restructuring agreement and a loan amendment with Maplewood that modified Maplewood’s secured revolving credit facility. As part of the restructuring agreement and loan amendment, Omega agreed to extend the maturity date of the facility to June 2035, increase the capacity of the secured revolving credit facility from $
During the three months ended March 31, 2023, we recorded interest income of $
Other real estate loans due 2023-2030
On April 14, 2023, we entered into two mezzanine loans, with principal balances of $
17
NOTE 6 – NON-REAL ESTATE LOANS RECEIVABLE
Our non-real estate loans consist of fixed and variable rate loans to operators and/or principals. These loans may be either unsecured or secured by the collateral of the borrower, which may include the working capital of the borrower. As of September 30, 2023, we had
|
September 30, |
December 31, |
|||||
|
2023 |
|
2022 |
||||
(in thousands) |
|||||||
Notes due |
$ |
|
$ |
|
|||
Notes due |
|
|
|
||||
Notes due |
|
|
|||||
Note due |
|
|
|||||
Note due |
— |
|
|||||
Other notes outstanding(4) |
|
|
|
|
|||
Non-real estate loans receivable – gross |
|
|
|||||
Allowance for credit losses on non-real estate loans receivable |
( |
( |
|||||
Total non-real estate loans receivable – net |
$ |
|
$ |
|
|||
| (1) | Approximates the weighted average interest rate as of September 30, 2023. |
| (2) |
During the third quarter of 2023, the interest rate was amended to increase the interest rate on borrowings in excess of $ |
| (3) | During the first quarter of 2023, this loan was fully repaid. |
| (4) |
Other notes outstanding have a weighted average interest rate of |
For the three months ended September 30, 2023 and 2022, non-real estate loans generated interest income of $
Notes due
During the second quarter of 2023, we entered into $
18
Notes due
As discussed in Note 4 – Contractual Receivables and Other Receivables and Lease Inducements, in the first quarter of 2023, Omega entered into a restructuring agreement and a replacement loan agreement that modified the existing Agemo loans. Under the restructuring agreement, previously written off contractual unpaid interest related to the Agemo WC Loan and the Agemo Term Loan was forgiven. The outstanding principal of the Agemo Term Loan was refinanced into a new $
Prior to the restructuring, the principal of the Agemo WC Loan and the Agemo Term Loan were written down to $
Agemo exercised its option to defer the interest payment due on April 1, 2023 and resumed making interest payments in May 2023 in accordance with the restructuring terms discussed above. During the three and nine months ended September 30, 2023, we received $
Notes due
During the fourth quarter of 2022, we amended an $
19
Note due
On July 8, 2019, the Company entered into a $
Other notes outstanding
$
On June 30, 2023, the Company entered into a $
20
NOTE 7 – ALLOWANCE FOR CREDIT LOSSES
Rating |
Financial Statement Line Item |
Allowance for Credit Loss as of December 31, 2022 |
Provision (recovery) for Credit Loss for the nine months ended September 30, 2023 |
Write-offs charged against allowance for the nine months ended September 30, 2023 |
Other additions to the allowance for the nine months ended September 30, 2023 |
Allowance for Credit Loss as of September 30, 2023 |
||||||||||
(in thousands) |
||||||||||||||||
1 |
Real estate loan receivable |
$ |
|
$ |
|
$ |
— |
$ |
— |
$ |
|
|||||
2 |
Real estate loans receivable |
|
( |
— |
— |
|
||||||||||
3 |
Real estate loans receivable |
|
( |
— |
— |
|
||||||||||
4 |
Real estate loans receivable |
|
|
— |
— |
|
||||||||||
6 |
Real estate loans receivable |
|
( |
( |
(1) |
— |
|
|||||||||
Sub-total |
|
( |
( |
— |
|
|||||||||||
5 |
Investment in direct financing leases |
|
( |
— |
— |
|
||||||||||
Sub-total |
|
( |
— |
— |
|
|||||||||||
2 |
Non-real estate loans receivable |
|
( |
— |
— |
|
||||||||||
3 |
Non-real estate loans receivable |
|
( |
— |
— |
|
||||||||||
4 |
Non-real estate loans receivable |
|
( |
— |
— |
|
||||||||||
5 |
Non-real estate loans receivable |
|
( |
— |
|
(2) |
|
|||||||||
6 |
Non-real estate loans receivable |
|
|
— |
— |
|
||||||||||
Sub-total |
|
|
— |
|
|
|||||||||||
2 |
Off-balance sheet real estate loan commitments |
— |
|
— |
— |
|
||||||||||
3 |
Off-balance sheet real estate loan commitments |
— |
|
— |
— |
|
||||||||||
4 |
Off-balance sheet real estate loan commitments |
|
|
— |
— |
|
||||||||||
2 |
Off-balance sheet non-real estate loan commitments |
|
|
— |
— |
|
||||||||||
3 |
Off-balance sheet non-real estate loan commitments |
|
( |
— |
— |
|
||||||||||
4 |
Off-balance sheet non-real estate loan commitments |
— |
|
— |
— |
|
||||||||||
Sub-total |
|
|
— |
— |
|
|||||||||||
Total |
$ |
|
$ |
|
$ |
( |
$ |
|
$ |
|
||||||
| (1) | This amount relates to the write-off of the allowance for the Guardian mortgage note in connection with the settlement and partial forgiveness of the note in the second quarter of 2023. See Note 5 – Real Estate Loans Receivable for additional details. |
| (2) |
This amount relates to the additional $ |
21
A rollforward of our allowance for credit losses for the nine months ended September 30, 2022 is as follows:
Rating |
Financial Statement Line Item |
Allowance for Credit Loss at December 31, 2021 |
Provision (recovery) for Credit Loss for the nine months ended September 30, 2022 |
Write-offs charged against allowance for the nine months ended September 30, 2022 |
Allowance for Credit Loss as of September 30, 2022 |
||||||||
(in thousands) |
|||||||||||||
1 |
Real estate loans receivable |
$ |
— |
$ |
|
$ |
— |
$ |
|
||||
2 |
Real estate loans receivable |
|
( |
|
|||||||||
3 |
Real estate loans receivable |
|
|
— |
|
||||||||
4 |
Real estate loans receivable |
|
( |
— |
|
||||||||
5 |
Real estate loans receivable |
|
( |
— |
|
||||||||
6 |
Real estate loans receivable |
|
( |
(1) |
( |
(2) |
|
||||||
Sub-total |
|
( |
( |
|
|||||||||
3 |
Investment in direct financing leases |
|
( |
— |
— |
||||||||
4 |
Investment in direct financing leases |
— |
|
— |
|
||||||||
Sub-total |
|
|
— |
|
|||||||||
2 |
Non-real estate loans receivable |
|
|
— |
|
||||||||
3 |
Non-real estate loans receivable |
|
|
(3) |
— |
|
|||||||
4 |
Non-real estate loans receivable |
|
|
— |
|
||||||||
5 |
Non-real estate loans receivable |
|
|
(4) |
— |
|
|||||||
6 |
Non-real estate loans receivable |
|
( |
( |
(5) |
|
|||||||
Sub-total |
|
|
( |
|
|||||||||
3 |
Off-balance sheet real estate loan commitments |
|
( |
— |
|
||||||||
4 |
Off-balance sheet real estate loan commitments |
|
( |
— |
|
||||||||
2 |
Off-balance sheet non-real estate loan commitments |
|
|
— |
|
||||||||
3 |
Off-balance sheet non-real estate loan commitments |
|
( |
— |
|
||||||||
4 |
Off-balance sheet non-real estate loan commitments |
|
( |
— |
— |
||||||||
6 |
Off-balance sheet non-real estate loan commitments |
|
|
( |
(5) |
— |
|||||||
|
|
( |
|
||||||||||
Total |
$ |
|
$ |
|
$ |
( |
$ |
|
|||||
| (1) | This amount primarily relates to the recoveries, net of provision, recorded on the Guardian mortgage loan during the nine months ended September 30, 2022. |
| (2) | During the third quarter of 2022, we wrote-off the loan balance and reserve for a loan that expired during the quarter which had previously been fully reserved. |
| (3) |
This provision includes an additional $ |
| (4) |
This provision includes an additional $ |
| (5) |
In the second quarter of 2022, we recorded an additional reserve of $ |
22
A summary of our amortized cost basis by year of origination and credit quality indicator is as follows:
Rating |
Financial Statement Line Item |
2023 |
2022 |
2021 |
2020 |
2019 |
2018 |
2017 & older |
Revolving Loans |
Balance as of September 30, 2023 |
|||||||||
(in thousands) |
|||||||||||||||||||
1 |
Real estate loans receivable |
$ |
— |
$ |
|
$ |
— |
$ |
— |
$ |
— |
$ |
— |
$ |
|
$ |
— |
$ |
|
2 |
Real estate loans receivable |
|
— |
— |
|
— |
— |
— |
— |
|
|||||||||
3 |
Real estate loans receivable |
|
|
|
— |
— |
— |
|
— |
|
|||||||||
4 |
Real estate loans receivable |
|
|
|
|
|
|
|
|
|
|||||||||
6 |
Real estate loans receivable |
— |
— |
— |
— |
— |
— |
|
— |
|
|||||||||
Sub-total |
|
|
|
|
|
|
|
|
|
||||||||||
5 |
Investment in direct financing leases |
— |
— |
— |
— |
— |
— |
|
— |
|
|||||||||
Sub-total |
— |
— |
— |
— |
— |
— |
|
— |
|
||||||||||
2 |
Non-real estate loans receivable |
|
— |
— |
— |
— |
— |
— |
|
|
|||||||||
3 |
Non-real estate loans receivable |
|
|
— |
— |
|
|
— |
|
|
|||||||||
4 |
Non-real estate loans receivable |
— |
— |
— |
— |
|
— |
|
|
|
|||||||||
5 |
Non-real estate loans receivable |
— |
— |
— |
— |
|
|
— |
— |
|
|||||||||
6 |
Non-real estate loans receivable |
|
|
|
— |
— |
|
|
|
|
|||||||||
Sub-total |
|
|
|
— |
|
|
|
|
|
||||||||||
Total |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|
Year to date gross write-offs |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
( |
$ |
$ |
( |
||||||||
Interest Receivable on Real Estate Loans and Non-Real Estate Loans
We have elected the practical expedient to interest receivable from our allowance for credit losses. As of September 30, 2023 and December 31, 2022, we have excluded $
During the three months ended September 30, 2022, we recognized $
NOTE 8 – VARIABLE INTEREST ENTITIES
Unconsolidated Variable Interest Entities
We hold variable interests in several VIEs through our investing and financing activities, which are not consolidated, as we have concluded that we are not the primary beneficiary of these entities as we do not have the power to direct activities that most significantly impact the VIE’s economic performance and/or the variable interest we hold does not obligate us to absorb losses or provide us with the right to receive benefits from the VIE which could potentially be significant.
23
Below is a summary of our assets, liabilities, collateral and maximum exposure to loss associated with these unconsolidated VIEs as of September 30, 2023 and December 31, 2022:
September 30, |
December 31, |
||||||
2023 |
2022 |
||||||
(in thousands) |
|||||||
Assets |
|||||||
Real estate assets – net |
$ |
|
$ |
|
|||
Assets held for sale |
|
— |
|||||
Real estate loans receivable – net |
|
|
|
||||
Investments in unconsolidated joint ventures |
|
— |
|||||
Non-real estate loans receivable – net |
|
|
|
||||
Contractual receivables – net |
|
|
|
||||
Other assets |
|
|
|||||
Total assets |
|
|
|
|
|||
Liabilities |
|||||||
Accrued expenses and other liabilities |
( |
( |
|||||
Total liabilities |
|
( |
|
( |
|||
Collateral |
|
|
|
|
|||
Personal guarantee |
|
( |
( |
||||
Other collateral(1) |
|
( |
( |
||||
Total collateral |
|
( |
( |
||||
Maximum exposure to loss |
$ |
|
$ |
|
|||
| (1) |
Amount excludes accounts receivable that Omega has a security interest in as collateral under the three loans with operators that are unconsolidated VIEs. The fair value of the accounts receivable available to Omega was $ |
In determining our maximum exposure to loss from the unconsolidated VIEs, we considered the underlying carrying 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, as well as other liabilities recognized with respect to these operators.
The table below reflects our total revenues from the operators that are considered unconsolidated VIEs for the three and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||
2023 |
2022 |
2023 |
2022 |
||||||||
(in thousands) |
(in thousands) |
||||||||||
Revenue |
|
|
|
|
|
|
|
||||
$ |
|
$ |
|
$ |
|
$ |
|
||||
Interest income |
|
|
|
|
|
|
|
|
|||
Total |
$ |
|
$ |
|
$ |
|
$ |
|
|||
Consolidated VIEs
We own a partial equity interest in a joint venture that we have determined is a VIE. We have consolidated this VIE because we have concluded that we are the primary beneficiary of this VIE based on a combination of our ability to direct the activities that most significantly impact the joint venture’s economic performance and our rights to receive residual returns and obligation to absorb losses arising from the joint venture. As of September 30, 2023 and December 31, 2022, this joint venture has $
24
During the fourth quarter of 2022, we acquired
NOTE 9 – INVESTMENTS IN JOINT VENTURES
Unconsolidated Joint Ventures
The following is a summary of our investments in unconsolidated joint ventures (dollars in thousands):
Carrying Amount |
|||||||||||||||||
Ownership |
Initial Investment |
Facility |
Facilities at |
September 30, |
December 31, |
||||||||||||
Entity |
% |
Date |
Investment(1) |
Type |
September 30, 2023 |
2023 |
|
2022 |
|||||||||
Second Spring Healthcare Investments |
$ |
|
SNF |
— |
$ |
|
|
$ |
|
||||||||
Lakeway Realty, L.L.C. |
|
Specialty facility |
|
|
|
||||||||||||
Cindat Joint Venture |
|
ALF |
|
|
|
||||||||||||
OMG Senior Housing, LLC |
— |
Specialty facility |
|
|
— |
|
— |
||||||||||
OH CHS SNP, Inc. |
|
N/A |
N/A |
|
|
||||||||||||
RCA NH Holdings RE Co., LLC(2)(3) |
|
SNF |
|
|
— |
||||||||||||
WV Pharm Holdings, LLC(2)(3) |
|
N/A |
N/A |
|
— |
||||||||||||
OMG-Form Senior Holdings, LLC(3)(4) |
|
ALF |
|
|
— |
||||||||||||
CHS OHI Insight Holdings, LLC |
|
N/A |
N/A |
|
— |
||||||||||||
$ |
|
$ |
|
$ |
|
||||||||||||
| (1) | Our investment includes our transaction costs, if any. |
| (2) |
These joint ventures were entered into in connection with an existing operator’s acquisition of SNFs in West Virginia during the second quarter of 2023, as discussed in Note 5 and Note 6. The acquiring operator in the transaction is the majority owner of these joint ventures. As of September 30, 2023, we have an aggregate of $ |
| (3) | These joint ventures are unconsolidated VIEs and therefore are included in the tables in Note 8 – Variable Interest Entities. |
| (4) |
During the second quarter of 2023, we funded $ |
The following table reflects our income (loss) from unconsolidated joint ventures for the three and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
Entity |
2023 |
|
2022 |
2023 |
|
2022 |
||||||
(in thousands) |
||||||||||||
Second Spring Healthcare Investments |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Second Spring II LLC(1) |
— |
— |
— |
( |
||||||||
Lakeway Realty, L.L.C. |
|
|
|
|
|
|
||||||
Cindat Joint Venture |
|
( |
|
|
|
( |
|
|
||||
OMG Senior Housing, LLC |
|
( |
|
( |
|
( |
|
( |
||||
OH CHS SNP, Inc. |
|
|
|
( |
|
|
|
|
||||
OMG-Form Senior Holdings, LLC |
( |
— |
( |
— |
||||||||
Total |
$ |
( |
$ |
|
$ |
|
$ |
|
||||
| (1) | The assets held by this joint venture have been liquidated, and we have no remaining operations related to this joint venture. |
25
Asset Management Fees
We receive asset management fees from certain joint ventures for services provided. For the three months ended September 30, 2023 and 2022, we recognized approximately $
NOTE 10 – GOODWILL AND OTHER INTANGIBLES
The following is a summary of our goodwill as of September 30, 2023 and December 31, 2022:
|
(in thousands) |
||
Balance as of December 31, 2022 |
$ |
|
|
Foreign currency translation |
|
|
|
Balance as of September 30, 2023 |
$ |
|
|
The following is a summary of our intangibles as of September 30, 2023 and December 31, 2022:
|
September 30, |
December 31, |
|||||
|
2023 |
|
2022 |
||||
(in thousands) |
|||||||
Assets: |
|
|
|
||||
Above market leases |
$ |
|
$ |
|
|||
Accumulated amortization |
|
( |
|
|
( |
||
Net above market leases |
$ |
|
$ |
|
|||
Liabilities: |
|
|
|
||||
Below market leases |
$ |
|
$ |
|
|||
Accumulated amortization |
|
( |
|
|
( |
||
Net below market leases |
$ |
|
$ |
|
|||
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.
For the three months ended September 30, 2023 and 2022, our net amortization related to intangibles was $
NOTE 11 – CONCENTRATION OF RISK
As of September 30, 2023, our portfolio of real estate investments (including properties associated with mortgages, direct financing leases, assets held for sale and consolidated joint ventures) consisted of
26
As of September 30, 2023 and December 31, 2022, we had investments with
As of September 30, 2023, the three states in which we had our highest concentration of investments were Texas (
NOTE 12 – STOCKHOLDERS’ EQUITY
$
We had
Average Price |
||||||
Period Ended |
Shares Repurchased |
Per Share(1) |
Repurchase Cost(1) |
|||
Three Months Ended |
September 30, 2022 |
$ |
$ |
|||
Nine Months Ended |
September 30, 2022 |
|
|
|
||
| (1) | Average price per share and repurchase cost includes the cost of commissions. |
Dividends
The following is a summary of our declared cash dividends on common stock:
Record |
Payment |
Dividend per |
|||
Date |
|
Date |
|
Common Share |
|
$ |
|
||||
|
|||||
|
|||||
|
|||||
Dividend Reinvestment and Common Stock Purchase Plan
The following is a summary of the shares issued under the Dividend Reinvestment and Common Stock Purchase Plan for the three and nine months ended September 30, 2023 and 2022 (in millions):
Period Ended |
Shares issued |
Gross Proceeds |
|||
Three Months Ended |
September 30, 2022 |
|
$ |
|
|
Three Months Ended |
September 30, 2023 |
|
|
||
Nine Months Ended |
September 30, 2022 |
|
|
||
Nine Months Ended |
September 30, 2023 |
|
|
||
27
At-The-Market Offering Programs
The following is a summary of the shares issued under our $
Average Net Price |
|||||||||||
Period Ended |
Shares issued |
Per Share(1) |
Gross Proceeds |
Commissions |
Net Proceeds |
||||||
Three and Nine Months Ended |
September 30, 2022 |
— |
$ |
— |
$ |
— |
$ |
— |
$ |
— |
|
Three Months Ended |
September 30, 2023 |
|
|
|
|
|
|||||
Nine Months Ended |
September 30, 2023 |
|
|
|
|
|
|||||
| (1) | Represents the average price per share after commissions. |
Accumulated Other Comprehensive Income (Loss)
The following is a summary of our accumulated other comprehensive income (loss), net of tax where applicable:
As of and for the |
|
As of and for the |
|||||||||
Three Months Ended |
Nine Months Ended |
||||||||||
September 30, |
September 30, |
||||||||||
2023 |
|
2022 |
|
2023 |
|
2022 |
|||||
(in thousands) |
|||||||||||
Foreign Currency Translation: |
|
|
|
|
|
|
|||||
Beginning balance |
$ |
( |
$ |
( |
$ |
( |
$ |
( |
|||
Translation (loss) gain |
|
( |
|
( |
|
|
|
( |
|||
Realized (loss) gain |
|
( |
|
( |
|
|
|
( |
|||
Ending balance |
|
( |
|
( |
|
( |
|
( |
|||
Derivative Instruments: |
|
|
|
|
|||||||
Cash flow hedges: |
|
|
|
|
|||||||
Beginning balance |
|
|
|
|
|
|
|
|
|||
Unrealized gain (loss) |
|
|
|
|
|
( |
|
|
|||
Realized gain (1) |
|
|
|
|
|
|
|||||
Ending balance |
|
|
|
|
|
|
|
|
|||
Net investment hedges: |
|
|
|
|
|||||||
Beginning balance |
|
|
|
|
|
|
|
( |
|||
Unrealized gain (loss) |
|
|
|
|
|
( |
|
|
|||
Ending balance |
|
|
|
|
|
|
|
|
|||
Total accumulated other comprehensive income before noncontrolling interest |
|
|
|
|
|
|
|
|
|||
Add: portion included in noncontrolling interest |
|
|
|
|
|
|
|
|
|||
Total accumulated other comprehensive income for Omega |
$ |
|
$ |
|
$ |
|
$ |
|
|||
| (1) | Recorded in interest expense on the Consolidated Statements of Operations. |
NOTE 13 – TAXES
Omega was organized, has operated and intends to continue to operate in a manner that enables Omega to qualify for taxation as a REIT under Sections 856 through 860 of the Code. On a quarterly and annual basis, we perform several analyses to test our compliance within the REIT taxation rules. If we fail to meet the requirements for qualification as a REIT in any tax year, we will be subject to federal income tax on our taxable income at regular corporate rates and may not be able to qualify as a REIT for the subsequent years, unless we qualify for certain relief provisions that are available in the event we fail to satisfy any of the requirements.
28
We are also subject to federal taxation of
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. In 2022, we distributed dividends in excess of our taxable income.
We currently own stock in certain subsidiary REITs. These subsidiaries are required to individually satisfy all of the rules for qualification as a REIT. If we fail to meet the requirements for qualification as a REIT for any of the subsidiary REITs, it may cause Omega to fail the requirements for qualification as a REIT also.
We have elected to treat certain of our active subsidiaries as taxable REIT subsidiaries (“TRSs”). Our domestic TRSs are subject to federal, state and local income taxes at the applicable corporate rates.
As of September 30, 2023,
Our foreign subsidiaries are subject to foreign income taxes and withholding taxes. As of September 30, 2023, one of our U.K. subsidiaries had a NOL carryforward of approximately $
The majority of our U.K. portfolio elected to enter the U.K. REIT regime with an effective date of April 1, 2023. In connection with entering the U.K. REIT regime, we recognized several adjustments to our deferred tax balances in the first quarter of 2023 as summarized below.
The following is a summary of deferred tax assets and liabilities (which are recorded in other assets and accrued expenses and other liabilities in our Consolidated Balance Sheets):
September 30, |
December 31, |
|||||
|
2023 |
|
2022 |
|||
(in thousands) |
||||||
U.S. Federal net operating loss carryforward |
$ |
|
$ |
|
||
Valuation allowance on deferred tax asset |
|
( |
|
( |
||
Foreign net operating loss carryforward |
|
|
||||
Foreign deferred tax liability (1) |
|
— |
|
( |
||
Net deferred tax asset |
$ |
|
$ |
|
||
Foreign deferred tax liability (2) |
$ |
|
$ |
— |
||
Net deferred tax liability |
$ |
|
$ |
— |
||
| (1) | The deferred tax liability primarily resulted from inherited basis differences resulting from our acquisition of entities in the U.K. Subsequent adjustments to these accounts result from GAAP to tax differences related to depreciation, indexation and revenue recognition. The foreign deferred tax liabilities were eliminated upon the majority of our U.K. portfolio entering the U.K. REIT regime. |
| (2) | The deferred tax liability resulted from book to tax differences recorded in the U.S. relating to depreciation and revenue recognition in the U.K. recognized upon the majority of our U.K. portfolio entering the U.K. REIT regime. |
29
The following is a summary of our provision for income taxes:
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|||||||||
2023 |
|
2022 |
|
2023 |
|
2022 |
|||||
(in millions) |
|||||||||||
Federal, state and local income tax expense |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Foreign income tax expense |
|
|
|
|
|
|
|
||||
Total income tax expense (1) |
$ |
|
$ |
|
$ |
|
$ |
|
|||
| (1) | The above amounts do not include gross income receipts or franchise taxes payable to certain states and municipalities. |
NOTE 14 – STOCK-BASED COMPENSATION
The following is a summary of our stock-based compensation expense for the three and nine months ended September 30, 2023 and 2022, respectively:
|
Three Months Ended |
|
Nine Months Ended |
||||||||||
|
September 30, |
|
September 30, |
|
|||||||||
|
2023 |
|
2022 |
|
2023 |
|
2022 |
|
|||||
|
(in thousands) |
||||||||||||
Stock-based compensation expense |
|
$ |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
Stock-based compensation expense is included within general and administrative expenses on our Consolidated Statements of Operations.
We granted
We granted
We granted
Time-based and performance-based grants made to named executive officers and key employees that meet certain conditions under the Company’s retirement policy (length of service, age, etc.) vest on an accelerated basis pursuant to the 2018 Stock Incentive Plan.
30
NOTE 15 – BORROWING ACTIVITIES AND ARRANGEMENTS
The following is a summary of our borrowings:
|
|
Annual |
|
||||||||
Interest Rate |
|||||||||||
as of |
|||||||||||
September 30, |
September 30, |
December 31, |
|||||||||
|
Maturity |
|
2023 |
|
2023 |
|
2022 |
||||
|
|
|
(in thousands) |
||||||||
Secured borrowings: |
|
|
|
|
|
|
|
|
|||
HUD mortgages(1)(2) |
|
%(3) |
$ |
|
$ |
|
|||||
2023 term loan(4) |
|
|
N/A |
— |
|
||||||
2024 term loan(5) |
|
|
|
% |
|
|
|||||
Total secured borrowings |
|
|
|||||||||
Unsecured borrowings: |
|
|
|
|
|
|
|
|
|||
Revolving credit facility(6)(7) |
|
|
|
% |
|
|
|
|
|||
|
|
||||||||||
Senior notes and other unsecured borrowings: |
|||||||||||
2023 notes(6)(8) |
|
|
N/A |
|
— |
|
|
||||
2024 notes(6) |
|
|
|
% |
|
|
|
|
|||
2025 notes(6) |
|
|
|
% |
|
|
|
|
|||
2026 notes(6) |
|
|
|
% |
|
|
|
|
|||
2027 notes(6) |
|
|
|
% |
|
|
|
|
|||
2028 notes(6) |
|
|
|
% |
|
|
|
|
|||
2029 notes(6) |
|
|
|
% |
|
|
|
|
|||
2031 notes(6) |
|
% |
|
|
|||||||
2033 notes(6) |
|
% |
|
|
|||||||
2025 term loan(6)(9) |
|
|
% |
|
|
|
— |
||||
OP term loan(10)(11) |
|
|
|
% |
|
|
|
|
|||
Deferred financing costs – net |
|
|
|
|
( |
|
( |
||||
Discount – net |
|
|
|
|
|
( |
|
( |
|||
Total senior notes and other unsecured borrowings – net |
|
|
|
|
|
|
|
|
|||
Total unsecured borrowings – net |
|
|
|
|
|
|
|
|
|||
Total secured and unsecured borrowings – net(12)(13) |
|
|
|
|
$ |
|
$ |
|
|||
| (1) |
Reflects the weighted average annual contractual interest rate on the mortgages at September 30, 2023. The mortgages are secured by real estate assets with a net carrying value of $ |
| (2) | Wholly owned subsidiaries of Omega OP are the obligors on these borrowings. |
| (3) |
Excludes fees of approximately |
| (4) | Borrowing was the debt of a consolidated joint venture. |
| (5) |
Borrowing is the debt of the consolidated joint venture discussed in Note 8 – Variable Interest Entities which was formed in the first quarter of 2022. The borrowing is secured by |
| (6) | Guaranteed by Omega OP. |
| (7) |
During the second quarter of 2023, the Company transitioned its benchmark interest rate for its $ |
| (8) |
On August 1, 2023, the Company repaid the $ |
| (9) |
The weighted average interest rate of the $ |
| (10) | Omega OP is the obligor on this borrowing. |
| (11) |
During the second quarter of 2023, the Company transitioned its benchmark interest rate for its $ |
| (12) | All borrowings are direct borrowings of Parent unless otherwise noted. |
| (13) |
Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. |
31
Unsecured Borrowings
2025 Term Loan
On August 8, 2023, Omega entered into a credit agreement (the “2025 Omega Credit Agreement”) providing it with a new $
NOTE 16 – DERIVATIVES AND HEDGING
We are exposed to, among other risks, the impact of changes in foreign currency exchange rates as a result of our investments in the U.K. and interest rate risk related to our capital structure. As a matter of policy, we do not use derivatives for trading or speculative purposes. Our risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes foreign currency forward contracts, interest rate swaps and debt issued in foreign currencies to offset a portion of these risks. As of September 30, 2023, we have
In August 2023, we entered into
In June 2023, we entered into an interest rate swap with a notional amount of $
32
In March 2020, we entered into
The location and fair value of derivative instruments designated as hedges, at the respective balance sheet dates, were as follows:
September 30, |
December 31, |
||||
2023 |
|
2022 |
|||
Cash flow hedges: |
(in thousands) |
||||
Other assets |
$ |
|
$ |
|
|
Accrued expenses and other liabilities |
$ |
|
$ |
— |
|
Net investment hedges: |
|||||
Other assets |
$ |
|
$ |
|
|
The fair value of the interest rate swap and foreign currency forwards is derived from observable market data such as yield curves and foreign exchange rates and represents a Level 2 measurement on the fair value hierarchy.
NOTE 17 – 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).
33
At September 30, 2023 and December 31, 2022, the net carrying amounts and fair values of our other financial instruments were as follows:
September 30, 2023 |
December 31, 2022 |
|||||||||||
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|||||
|
Amount |
|
Value |
|
Amount |
|
Value |
|||||
(in thousands) |
||||||||||||
Assets: |
||||||||||||
Investments in direct financing leases – net |
$ |
|
$ |
|
|
$ |
|
$ |
|
|||
Real estate loans receivable – net |
|
|
|
|
|
|||||||
Non-real estate loans receivable – net |
|
|
|
|
|
|||||||
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
||||
Revolving credit facility |
$ |
|
$ |
|
|
$ |
|
$ |
|
|||
2023 term loan |
— |
— |
|
|
||||||||
2024 term loan |
|
|
|
|
|
|||||||
2025 term loan |
|
|
— |
— |
||||||||
OP term loan |
|
|
|
|
|
|||||||
|
— |
— |
|
|
||||||||
|
|
|
|
|
||||||||
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HUD mortgages – net |
|
|
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||||||||
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||
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, 2022). 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.
| ● | Real estate loans receivable: The fair value of the real estate loans 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). |
| ● | Non-real estate loans receivable: Non-real estate loans receivable 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 credit facility, OP term loan, 2023 term loan, 2024 term loan and 2025 term loan: The carrying amount of these approximate fair value because the borrowings are interest rate adjusted. Differences between carrying value and the fair value in the table above are due to the inclusion of deferred financing costs in the carrying value. |
| ● | Senior notes: The fair value of the senior unsecured notes payable was estimated based on (Level 1) publicly available trading prices. |
34
| ● | 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 18 – COMMITMENTS AND CONTINGENCIES
Litigation
Shareholder Litigation
The Company and certain of its officers, C. Taylor Pickett, Robert O. Stephenson, and Daniel J. Booth, were named as defendants in a purported securities class action lawsuit in the U.S. District Court for the Southern District of New York (the “Securities Class Action”). Brought by lead plaintiff Royce Setzer and additional plaintiff Earl Holtzman, the Securities Class Action purported to assert claims for violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the Exchange Act, and sought monetary damages, interest, fees and expenses of attorneys and experts, and other relief. The Securities Class Action alleged that the defendants violated 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 plaintiffs and defendants executed a stipulation of settlement dated December 9, 2022 (“Settlement”), which provided for dismissal and release of all claims against the defendants by a class of persons and/or entities who purchased or otherwise acquired Company securities from February 8, 2017 through October 31, 2017 without any admission of wrongdoing or liability on the part of the Company or the individual defendants. On April 25, 2023, following notice to class members and a hearing, the Court entered judgment approving the Settlement, which became effective May 25, 2023, upon the expiration of the period for appealing the Court’s judgment. Upon the effective date of the Settlement, the Settlement payment of $
Certain derivative actions have also been brought against the officers named in the Securities Class Action, and certain current and former directors of the Company, alleging claims relating to the matters at issue in the Securities Class Action.
In 2018, Stourbridge Investments LLC, a purported stockholder of the Company, filed a derivative action purportedly on behalf of the Company in the U.S. District Court for the Southern District of New York, alleging violations of Section 14(a) of the Exchange Act and state-law claims including breach of fiduciary duty. The complaint alleges, among other things, that the named defendants are responsible for the Company’s failure to disclose the financial condition of Orianna Health Systems (“Orianna”), the alleged non-disclosures that were also the subject of the Securities Class Action described above. 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.
In 2019, purported stockholder Phillip Swan by his counsel, and stockholders Tom Bradley and Sarah Smith by their counsel, filed derivative actions in the Baltimore City Circuit Court of Maryland, purportedly on behalf of the Company, asserting claims for breach of fiduciary duty, waste of corporate assets and unjust enrichment against the named defendants. The complaints allege, among other things, that the named defendants are responsible for the Company’s failure to disclose the financial condition of Orianna. Those actions were consolidated. Prior to filing suit, each of these stockholders had made demands on the Board of Directors in 2018 that the Company bring such lawsuits. After an investigation and due consideration, and in the exercise of its business judgment, the Board of Directors 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 demands.
35
In addition, in late 2020, Robert Wojcik, a purported shareholder of the Company, filed a derivative action in the U.S. District Court for the District of Maryland, purportedly on behalf of the Company, asserting violations of Section 14(a) of the Exchange Act, Sections 10(b) and 21D of the Exchange Act, as well as claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. The complaint alleges, among other things, that the named defendants are responsible for the Company’s failure to disclose the financial condition of Orianna, as well as certain alleged discriminatory conduct and lack of diversity concerning the Company. Wojcik also did not make a demand on the Company prior to filing suit.
The Company and individual defendants have reached an agreement in principle with each of the derivative plaintiffs to resolve these derivative actions, as reflected by written memoranda of understanding. The proposed settlements contemplate the Company’s adoption of certain non-monetary corporate governance enhancements and initiatives. The parties are currently negotiating formal stipulations of settlement that will incorporate the substantive terms of the memoranda of understanding and detail the proposed settlements’ operational terms, which will be subject to court approval. The settlements are without any admission of the allegations in the complaints, which the defendants deny.
Other
Gulf Coast Subordinated Debt
In August 2021, we filed suit in the Circuit Court for Baltimore County (the “Court”) against the holders of certain Subordinated Debt (the “Debt Holders”) associated with our Gulf Coast master lease agreement, following an assertion by the Debt Holders that our prior exercise of offset rights in connection with Gulf Coast’s non-payment of rent had resulted in defaults under the terms of the Subordinated Debt. The suit seeks a declaratory judgment to, among other items, declare that the aggregate amount of unpaid rent due from Gulf Coast under the master lease agreement exceeds all amounts which otherwise would be due and owing by an indirect subsidiary of Omega (“Omega Obligor”) under the Subordinated Debt, and that all principal and interest due and owing under the Subordinated Debt may be (and was) offset in full as of December 31, 2021. In October 2021, the Debt Holders filed a motion to dismiss for lack of personal jurisdiction. On November 3, 2022, the Court granted the Debt Holders’ motion to dismiss for lack of personal jurisdiction, and Omega filed a timely appeal of the ruling. While Omega believes Omega Obligor is entitled to the enforcement of the offset rights sought in the action, Omega cannot predict the outcome of the declaratory judgment action, irrespective of whether (a) it is ultimately litigated in the Court if Omega Obligor prevails in its appeal or (b) if the order granting the motion to dismiss for lack of personal jurisdiction is affirmed and the issues are litigated in the Delaware Court (as defined below).
On or about January 19, 2023, the Debt Holders served a lawsuit against the Omega Obligor in the Superior Court of the State of Delaware (the “Delaware Court”), asserting claims for (i) breach of the instruments evidencing the Subordinated Debt, (ii) declaratory judgment, and (iii) unjust enrichment, all claims that are factually based on the claims that are the subject of Omega Obligor’s suit in the Court and that are now on appeal. On February 8, 2023, Omega Obligor filed a motion to dismiss or, in the alternative, to stay this action pending the outcome of the above-referenced lawsuit in Maryland. On July 10, 2023, the Delaware state court case stayed the proceeding pending further developments in the Maryland litigation. Omega believes that the claims are baseless and is evaluating procedural and substantive legal options in connection with this recently filed suit to the extent the stay is lifted.
Other
In addition to the matters above, 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.
36
Indemnification Agreements
In connection with certain facility transitions, we have agreed to indemnify certain operators in certain events. As of September 30, 2023, 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.
Lessor construction and capital commitments under lease agreements |
$ |
|
|||
Non-real estate loan commitments |
|
|
|||
Other real estate loan commitments |
|
|
|||
Construction and capital expenditure mortgage loan commitments |
|
|
|||
Total remaining commitments (1) |
$ |
|
|||
| (1) | Includes finance costs. |
NOTE 19 – EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted earnings per share:
|
Three Months Ended |
|
Nine Months Ended |
|||||||||
|
September 30, |
|
September 30, |
|||||||||
|
2023 |
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2022 |
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2023 |
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2022 |
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(in thousands, except per share amounts) |
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Numerator: |
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|
|
|
|
|||||
Net income available to common stockholders – basic |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Add: net income attributable to OP Units |
|
|
|
|
|
|
|
|||||
Net income available to common stockholders – diluted |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Denominator: |
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|
||||
Denominator for basic earnings per share |
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Effect of dilutive securities: |
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Common stock equivalents |
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Noncontrolling interest – Omega OP Units |
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Denominator for diluted earnings per share |
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||||
Earnings per share – basic: |
|
|
|
|
|
|
|
|
||||
Net income available to common stockholders |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Earnings per share – diluted: |
|
|
|
|
||||||||
Net income available to common stockholders |
$ |
|
$ |
|
$ |
|
$ |
|
||||
37
NOTE 20 – SUPPLEMENTAL DISCLOSURE TO CONSOLIDATED STATEMENTS OF CASH FLOWS
The following are supplemental disclosures to the Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022:
|
Nine Months Ended September 30, |
||||||
|
2023 |
|
2022 |
|
|||
|
(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 |
$ |
— |
$ |
( |
|||
Non-cash financing activities: |
|
|
|
|
|||
Non-cash contribution from noncontrolling member of consolidated joint venture |
$ |
— |
$ |
|
|||
Change in fair value of hedges |
$ |
|
$ |
|
|||
Remeasurement of debt denominated in a foreign currency |
$ |
|
$ |
( |
|||
NOTE 21 – SUBSEQUENT EVENTS
In October 2023, we acquired
In October 2023, we funded a $
Subsequent to quarter end, an additional
38
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Factors Affecting Future Results
Unless otherwise indicated or except where the context otherwise requires, the terms “we,” “us” and “our” and other similar terms in this Quarterly Report on Form 10-Q refer to Omega Healthcare Investors, Inc. and its consolidated subsidiaries.
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this document. 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:
| (1) | those items discussed under “Risk Factors” in Part I, Item 1A to our Annual Report on Form 10-K and Part II, Item 1A herein; |
| (2) | uncertainties relating to the business operations of the operators of our assets, including those relating to reimbursement by third-party payors, regulatory matters and occupancy levels; |
| (3) | the long-term impacts of the COVID-19 pandemic on our business and the business of our operators, including without limitation, the termination of the federally declared public health emergency and related government and regulatory support on May 11, 2023, the levels of staffing shortages, increased costs and decreased occupancy experienced by operators of skilled nursing facilities (“SNFs”) and assisted living facilities (“ALFs”) arising from the pandemic, the ability of our operators to comply with infection control and vaccine protocols and to manage facility infection rates or future infectious diseases, and the sufficiency of government support and reimbursement rates to offset such costs and the conditions related thereto; |
| (4) | additional regulatory and other changes in the healthcare sector, including proposed federal minimum staffing requirements for SNFs that may further exacerbate labor and occupancy challenges for our operators; |
| (5) | the ability of our operators in bankruptcy to reject unexpired lease obligations, modify the terms of our mortgages and impede our ability to collect unpaid rent or interest during the pendency of a bankruptcy proceeding and retain security deposits for the debtor’s obligations, and other costs and uncertainties associated with operator bankruptcies; |
| (6) | 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; |
| (7) | the availability and cost of capital to us; |
| (8) | changes in our credit ratings and the ratings of our debt securities; |
| (9) | competition in the financing of healthcare facilities; |
| (10) | competition in the long-term healthcare industry and shifts in the perception of various types of long-term care facilities, including SNFs and ALFs; |
| (11) | changes in the financial position of our operators; |
| (12) | the effect of economic and market conditions generally and, particularly, in the healthcare industry; |
| (13) | changes in interest rates and the impact of inflation; |
| (14) | the timing, amount and yield of any additional investments; |
| (15) | changes in tax laws and regulations affecting real estate investment trusts (“REITs”); |
| (16) | 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; |
| (17) | our ability to maintain our status as a REIT; and |
| (18) | 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. |
39
Summary
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:
| ● | Business Overview |
| ● | Outlook, Trends and Other Conditions |
| ● | Government Regulation and Reimbursement |
| ● | Third Quarter of 2023 and Recent Highlights |
| ● | Results of Operations |
| ● | Funds from Operations |
| ● | Liquidity and Capital Resources |
| ● | Critical Accounting Policies and Estimates |
Business Overview
Omega Healthcare Investors, Inc. (“Parent”) is a Maryland corporation that, together with its consolidated subsidiaries (collectively, “Omega” or “Company”) has elected to be taxed as a REIT for federal income tax purposes. Omega is structured as an umbrella partnership REIT (“UPREIT”) under which all of Omega’s assets are owned directly or indirectly by, and all of Omega’s operations are conducted directly or indirectly through, its operating partnership subsidiary, OHI Healthcare Properties Limited Partnership (collectively with its subsidiaries, “Omega OP”). As of September 30, 2023, Parent owned approximately 97% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and other investors owned approximately 3% of the outstanding Omega OP Units.
Omega has one reportable segment consisting of investments in healthcare-related real estate properties located in the United States (“U.S.”) and the United Kingdom (“U.K.”). Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on SNFs, ALFs, and to a lesser extent, independent living facilities (“ILFs”), rehabilitation and acute care facilities (“specialty facilities”) and medical office buildings. Our core portfolio consists of our long-term leases and real estate loans with healthcare operating companies and affiliates (collectively, our “operators”). Real estate loans consist of mortgage loans and other real estate loans which are primarily collateralized by a first, second or third mortgage lien or a leasehold mortgage on, or an assignment of the partnership interest in the related properties. In addition to our core investments, we make loans to operators and/or their principals. These loans, which may be either unsecured or secured by the collateral of the borrower, are classified as non-real estate loans. From time to time, we also acquire equity interests in joint ventures or entities that support the long-term healthcare industry and our operators.
Outlook, Trends and Other Conditions
The COVID-19 pandemic significantly and adversely impacted SNFs and long-term care providers during the height of the pandemic due to the higher rates of virus transmission and fatality among the elderly and frail populations that these facilities serve. In addition, the pandemic contributed to occupancy declines, labor shortages and cost increases which continue to significantly impact our operators post-pandemic. As discussed further in “Collectibility Issues” below, during the year we have had several operators that have failed to make contractual payments under their lease and loan agreements, and we have agreed to short-term deferrals, lease and portfolio restructurings and/or allowed the application of security deposits or letters of credit to pay rent for several operators.
40
We believe these operators were impacted by, among other things, reduced revenue as a result of lower occupancy, increased expenses, uncertainties regarding adequate reimbursement levels, and changes to government and regulatory financial support. The expense increases were offset to some extent by enhanced reimbursement due to skilling in place, which was permitted via waiver during the pandemic, but which was discontinued when the federally declared public health emergency expired on May 11, 2023. We believe the expense increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay and reliance on agency staffing due to labor shortages, as well as implementation of new infection control protocols. In addition, operators who do not achieve full compliance with applicable infection control requirements may face potential survey deficiencies and penalties. At this time, there is uncertainty regarding the ultimate impact of such developments.
We remain cautious as some of these factors may continue to have a significant impact on our operators and their financial conditions, particularly given the staffing shortages that continue to impact our operators’ occupancy levels and profitability, uncertainty as to whether Medicare and Medicaid reimbursement rates will be sufficient to address longer-term cost increases faced by operators, uncertainty regarding the ultimate scope and impact of proposed U.S. federal minimum staffing rules for our industry, factors that may impact future virus transmission in our facilities, including vaccination rates and efficacy of the vaccine for staff members and residents at our facilities and the risk of future infectious diseases or pandemics.
Our facilities, on average, experienced declines, in some cases that were material, in occupancy levels as a result of the pandemic. Occupancy in our facilities has generally improved on average since early 2021; however, average occupancy has not returned to pre-pandemic levels. It remains unclear when and the extent to which demand and occupancy levels will return to pre-COVID-19 levels. We believe these challenges to occupancy recovery may be in part due to staffing shortages, which in some cases have required operators to limit admissions, as well as the delay of SNF placement and/or utilization of alternative care settings for those with lower level of care needs.
While substantial government support was allocated to SNFs and to a lesser extent to ALFs in 2020, U.S. federal relief efforts have been limited since 2021 as have been relief efforts in certain states. The additional 6.2% Medicaid Federal Medical Assistance Percentage (the “FMAP”) reimbursement enacted in connection with the pandemic is being phased out in 2023 pursuant to the Consolidated Appropriations Act of 2023. The additional 6.2% FMAP provided some of our operators with significant support, based on the state, and the phase-out of such support may adversely affect their operations to the extent that normal rate setting has not or does not adjust for this phase-out or expenses are not reduced. We believe further government support will be needed to continue to offset these impacts on operators, which could be in the form of direct support or reimbursement rate adjustments to reflect sustained cost changes experienced by operators. It is unclear whether and to what extent such government support or reimbursements will continue to be sufficient and timely to offset these impacts or whether proposed U.S. federal minimum staffing rules for SNFs, if not accompanied by additional government funding, will further increase expenses for our operators.
While certain states have provided pandemic-related relief measures, we expect such state relief measures to be limited going forward. Likewise, while certain states have in the course of routine rate-setting of Medicaid rates addressed inflationary factors and other expense-related items, there can be no assurance that these changes will be sufficient to offset existing increased inflation and expenses or that all states will address these items. See the “Government Regulation and Reimbursement” section for additional information. Further, to the extent the cost and occupancy impacts on our operators do not recover or are not offset by continued government relief or reimbursement rates that are sufficient and timely, we anticipate that the operating results of additional operators may be materially and adversely affected, and some may be unwilling or unable to pay their contractual obligations to us in full or on a timely basis and we may be unable to restructure such obligations on terms as favorable to us as those currently in place.
There are a number of uncertainties we face as we consider the effects of the industry’s recovery on our business, including how long census disruption and elevated costs will last, the continued management of infectious diseases in our facilities, the extent to which reimbursement increases from the federal government, the states and the U.K. will continue to offset these incremental costs, and lost revenues.
41
While we continue to believe that longer term demographics will drive increasing demand for needs-based skilled nursing care, we expect the uncertainties to our business described above to persist at least for the near term until we can gain more information as to the level of costs our operators will continue to experience, the duration of such increased costs, the adequacy of government reimbursement increases to cover such costs, the potential support our operators may request from us and the future demand for needs-based skilled nursing care and senior living facilities. We continue to monitor the rate of occupancy recovery at many of our operators, and it remains uncertain whether and when demand, staffing availability and occupancy levels will return to pre-COVID-19 levels.
In addition to the impacts of COVID-19 discussed above, our operators have been and are likely to continue to be adversely affected by labor shortages and increased labor costs, as well as other inflation-related cost increases.
We continue to monitor the impacts of other regulatory changes, as discussed below, including any significant limits on the scope of services eligible for reimbursement and on reimbursement rates and fees, which could have a material adverse effect on an operator’s results of operations and financial condition, which could adversely affect the operator’s ability to meet its obligations to us.
Government Regulation and Reimbursement
The following information supplements and updates, and should be read in conjunction with, the information contained under the caption Item 1. Business – Government Regulation and Reimbursement in our Annual Report on Form 10-K for the year ended December 31, 2022.
The healthcare industry is heavily regulated. Our operators, which are primarily based in the U.S., are subject to extensive and complex federal, state and local healthcare laws and regulations. We also have several U.K.-based operators that are subject to a variety of laws and regulations in their jurisdiction. These laws and regulations are subject to frequent and substantial changes resulting from the adoption of new legislation, rules and regulations, and administrative and judicial interpretations of existing law. 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.
The U.S. Department of Health and Human Services (“HHS”) declared a public health emergency on January 31, 2020, following the World Health Organization's decision to declare COVID-19 a public health emergency of international concern. This declaration, which expired on May 11, 2023, allowed HHS to provide temporary regulatory waivers and new reimbursement rules, such as a temporary increase in the FMAP and other rules designed to equip providers with flexibility to respond to the COVID-19 pandemic by suspending various Medicare patient coverage criteria and documentation and care requirements, including, for example, suspension of the three-day prior hospital stay coverage requirement and expanding the list of approved services which may be provided via telehealth. The three-day prior hospital stay waiver was a significant benefit to the skilled nursing industry during the height of the pandemic, as the reimbursement associated with the ability to skill in place helped to offset some of the increased costs connected with managing the pandemic. These regulatory actions contributed to a change in census volumes and skilled nursing mix that may not otherwise have occurred. Following termination of the public health emergency declaration, we believe federal and state regulators have resumed enforcement of those regulations which had been waived or otherwise not been enforced during the public health emergency.
42
These temporary changes to regulations and reimbursement, as well as emergency legislation, including the CARES Act enacted on March 27, 2020 and discussed below, have had a significant impact on the operations and financial condition of our operators. The extent of the COVID-19 pandemic’s continued effect, including through prolonged labor shortages, slow occupancy recovery, and expense increases, on the Company’s and our operators’ operational and financial performance will depend on future developments, including the recovery in occupancy and availability of labor, the ability of our operators to manage the impact of the termination of public health emergency and temporary relief thereunder, the ultimate scope and impact of proposed federal minimum staffing rules for SNFs, the sufficiency and timeliness of additional governmental relief and reimbursement rate setting in offsetting cost increases, and the continued efficacy of infection control measures, all of which developments and impacts are uncertain and difficult to predict and may continue to adversely impact our business, results of operations, financial condition and cash flows.
A significant portion of our operators’ revenue is derived from government-funded reimbursement programs, consisting primarily of Medicare and Medicaid. As federal and state governments continue to focus on healthcare reform initiatives, efforts to reduce costs by government payors will likely continue. Significant limits on the scope of services reimbursed and/or reductions of reimbursement rates could therefore have a material adverse effect on our operators’ results of operations and financial condition. Additionally, new and evolving payor and provider programs that are tied to quality and efficiency could adversely impact our tenants’ and operators’ liquidity, financial condition or results of operations, and there can be no assurance that payments under any of these government healthcare programs are currently, or will be in the future, sufficient to fully reimburse the property operators for their operating and capital expenses. In addition to quality and value-based reimbursement reforms, the U.S. Centers for Medicare and Medicaid Services (“CMS”) has implemented a number of initiatives focused on the reporting of certain facility specific quality of care indicators that could affect our operators, including publicly released quality ratings for all of the nursing homes that participate in Medicare or Medicaid under the CMS “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. These rating changes have impacted referrals to SNFs, and it is possible that changes to this system or other ranking systems could lead to future reimbursement policies that reward or penalize facilities on the basis of the reported quality of care parameters.
The following is a discussion of certain U.S. laws and regulations generally applicable to our operators, and in certain cases, to us.
Reimbursement Changes Related to COVID-19:
U.S. Federal Stimulus Funds and Financial Assistance for Healthcare Providers. In response to the pandemic, Congress enacted a series of economic stimulus and relief measures. On March 18, 2020, the Families First Coronavirus Response Act (“FFCRA”) was enacted in the U.S., providing a temporary 6.2% increase to each qualifying state and territory’s FMAP effective January 1, 2020, which expired on May 11, 2023 in connection with the expiration of the public health emergency. In exchange for receiving the enhanced federal funding, the FFCRA included a requirement that Medicaid programs keep beneficiaries enrolled through the end of the month in which the public health emergency terminates. However, as part of the Consolidated Appropriations Act of 2023 signed into law on December 29, 2022, Congress decoupled the Medicaid continuous enrollment from the public health emergency and terminated this provision effective March 31, 2023. Additionally, starting April 1, 2023, states that complied with federal rules regarding conducting renewals were eligible to begin the phase-down of the enhanced federal funding according to the following schedule: 6.2 percentage points through March 2023; 5 percentage points through June 2023; 2.5 percentage points through September 2023 and 1.5 percentage points through December 2023. States cannot restrict eligibility standards, methodologies, and procedures and states cannot increase premiums as required in FFCRA. Primarily due to the continuous enrollment provision, Medicaid enrollment has grown substantially compared to before the pandemic and the uninsured rate has dropped. The extent to which this increase in Medicaid enrollment is sustained following the discontinuation of the continuous enrollment provision is uncertain.
43
In further response to the pandemic, the CARES Act authorized approximately $178 billion to be distributed through the Provider Relief Fund to reimburse eligible healthcare providers for healthcare related expenses or lost revenues that were attributable to coronavirus; in addition, the American Rescue Plan Act authorized $8.5 billion for rural providers with Medicaid and Medicare patients. Funds were generally allocated beginning in 2020 in targeted and general distributions, the latter over four phases. The Provider Relief Fund was administered under the broad authority and discretion of HHS and recipients were not required to repay distributions received to the extent they were used in compliance with applicable requirements. We do not expect our operators will receive additional funding from HHS in connection with the pandemic.
The CARES Act and related legislation also made other forms of financial assistance available to healthcare providers, which impacted our operators to varying degrees. This assistance included Medicare and Medicaid payment adjustments and an expansion of the Medicare Accelerated and Advance Payment Program, which made available accelerated payments of Medicare funds in order to increase cash flow to providers. These payments were loans that providers were scheduled to repay over a period of several years beginning one year from the issuance date of each provider’s or supplier’s accelerated or advance payment. We believe these repayments commenced for many of our operators in April 2021 and impacted operating cash flows of these operators in 2021 and 2022. While not limited to healthcare providers, the CARES Act additionally provided payroll tax relief for employers, allowing them to defer payment of employer Social Security taxes that were otherwise owed for wage payments made after March 27, 2020 through December 31, 2020 to December 31, 2021 with respect to 50% of the payroll taxes owed, with the remaining 50% deferred until December 31, 2022.
The Budget Control Act of 2011 established a Medicare Sequestration of 2%, which is an automatic reduction of certain federal spending as a budget enforcement tool. Originally, the sequester was supposed to be in effect from FY 2013 to FY 2021. However, most recently, the Infrastructure Investment and Jobs Act extended the sequester through FY 2031. Additional legislation, including the CARES Act and the Protecting Medicare and American Farmers Act, suspended the application of the sequester to Medicare from May 1, 2020 through March 30, 2022. It also limited Medicare reductions to 1% from April 1, 2022 through June 30, 2022. The full 2% Medicare sequestration went into effect as of July 1, 2022. The sequestration is currently extended through fiscal year 2031, and gradually increases to 4% from 2030 through 2031.
Quality of Care Initiatives and Additional Requirements Related to COVID-19. In addition to COVID-19 reimbursement changes, several regulatory initiatives announced from 2020 to 2022 focused on addressing quality of care in long-term care facilities, including those related to COVID-19 testing and infection control protocols, vaccine protocols, staffing levels, reporting requirements, and visitation policies, as well as increased inspection of nursing homes. In addition, the Nursing Home Care website and the Five Star Quality Rating System were updated to include revisions to the inspection process, adjustment of staffing rating thresholds, the implementation of new quality measures and the inclusion of a staff turnover percentage (over a 12-month period). Although the American Rescue Plan Act did not allocate specific funds directly to SNF or ALF providers, certain funds were allocated to states who then distributed a portion of these funds to SNF and ALF providers.
Additionally, on September 1, 2023, CMS issued proposed rules regarding minimum staffing requirements and increased inspections at nursing homes. Under the proposed rules, nursing homes participating in Medicare and Medicaid would be required to provide residents with a minimum of 0.55 hours of care from a registered nurse per resident per day, and 2.45 hours of care from a nurse aide per resident per day, which CMS estimates exceed existing standards in nearly all states. In addition, nursing homes would be required to ensure a registered nurse is onsite 24 hours per day, seven days per week, and to complete facility assessments on staffing needs. CMS also announced nursing home workforce initiatives, including investing $75 million in financial incentives such as scholarships and tuition reimbursement, as well as Medicaid institutional payment transparency initiatives related to reporting on compensation of workers as a percentage of Medicaid payments. Further, CMS proposed enforcement initiatives, including expanding audits of nursing home data, increasing facility inspections, reviewing related party transactions, regulating certain prescription practices, and addressing nursing home emergency preparedness. CMS proposed that implementation of the final requirements would occur in three phases over a three-year period for urban facilities, with registered nurse availability requirements beginning two years after rule publication and minimum staffing hour requirements beginning three years from publication. For rural facilities, staffing requirements regarding registered nurse availability would begin three years from publication of the final rule and minimum staffing hour requirements would begin five years from rule publication.
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It is uncertain when the proposed rules will be finalized and become effective, what the ultimate scope and timing of the staffing requirements will be thereunder, and whether any such requirements will be accompanied by additional funding to offset any increased costs associated with meeting these requirements for our operators. Depending on the ultimate level of staffing required, an unfunded mandate to increase staff in SNFs may have a material and adverse impact on the financial condition of our operators, with CMS estimating that three quarters of nursing homes would have to increase staffing in their facilities under the proposed rules.
On June 16, 2020, the U.S. House of Representatives Select Subcommittee on the Coronavirus Crisis announced the launch of an investigation into the COVID-19 response of nursing homes and the use of federal funds by nursing homes during the pandemic. The Select Subcommittee continued to be active throughout the remainder of 2020, 2021 and 2022. In March 2021, the Oversight Subcommittee of the House Ways and Means Committee held a hearing on examining the impact of private equity in the U.S. healthcare system, including the impact on quality of care provided within the skilled nursing industry. The Biden Administration additionally announced in March 2022 a focus on reviewing private equity investment specifically in the skilled nursing sector. Further, on February 13, 2023, CMS issued a proposed rule that would require SNFs participating in the Medicare or Medicaid programs to disclose certain information regarding entities such as REITs that lease real estate to SNFs. The CMS announcement noted concerns regarding the quality of care provided at SNFs owned by private equity firms, REITs and other investment firms. These initiatives, as well as additional calls for government review of the role of private equity in the U.S. healthcare industry, could result in additional requirements on our operators.
Reimbursement Generally:
Medicaid. Most of our SNF operators derive a substantial portion of their revenue from state Medicaid programs. Whether and to what extent the level of Medicaid reimbursement covers the actual cost to care for a Medicaid eligible resident varies by state. While periodic rate setting occurs and, in most cases, has an inflationary component, the state rate setting process does not always keep pace with inflation or, even if it does, there is a risk that it may still not be sufficient to cover all or a substantial portion of the cost to care for Medicaid eligible residents. Additionally, rate setting is also subject to changes based on state budgetary constraints and political factors, both of which could result in decreased or insufficient reimbursement to the industry even in an environment where costs are rising. 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 has in the past, and may in the future, adversely affect our operators’ results of operations and financial condition, which in turn could adversely impact us.
The CARES Act and American Rescue Plan Act contained several provisions designed to increase coverage, expand benefits, and adjust federal financing for state Medicaid programs. While the CARES Act provided for a 6.2% FMAP add-on to the Medicaid program during the public health emergency, only certain states passed on any of this benefit directly to SNF operators either via an enhanced rate or lump sum payments. Additionally, the American Rescue Plan Act provided for a 10% FMAP add-on for state home and community-based service expenditures from April 1, 2021 through March 30, 2022 in an effort to assist seniors and people with disabilities to receive services safely in the community rather than in nursing homes and other congregate care settings. Both of these programs came with conditions that states had to meet to be eligible for the FMAP add-on. There may be future initiatives proposed to allocate funding available for reimbursement away from SNFs in favor of home health agencies and community-based care.
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The risks of insufficient Medicaid reimbursement rates along with possible initiatives to push residents historically cared for in SNFs to alternative settings may impact us more acutely in states where we have a larger presence, including Florida and Texas, our states with the largest concentration of investments. In Texas several of our operators have historically experienced lower operating margins on their SNFs, as compared to other states, as a result of lower Medicaid reimbursement rates and higher labor costs. The state did provide for a sizeable increase in rate during the public health emergency based on the FMAP add-on. The Medicaid reimbursement rate has been approved to be increased effective September 1, 2023 by at least that same amount. In Florida, added support to our operators during the pandemic was generally limited, with approximately $100 million in additional FMAP funds announced in November 2021, payable over a three-month period through increased Medicaid rates. A revised state budget for 2023-2024 has been approved, which increases Medicaid reimbursement rates, effective October 1, 2023, by up to 5%, with a portion of such rate relating to a quality care add-on. This comes after a 7.8% increase effective October 1, 2022, which was somewhat offset by required increased wages for certain nursing home staff. In addition, on April 6, 2022, the State of Florida enacted staffing reforms for SNFs that may provide additional flexibility to our operators in meeting minimum staffing requirements by using supplemental staff. We continue to monitor rate adjustment activity in other states in which we have a meaningful presence; however, it is difficult to assess whether rates will generally keep pace with increased operator costs.
Medicare. On July 31, 2023, CMS issued a final rule regarding the government fiscal year 2024 Medicare payment rates and quality payment programs for SNFs, with aggregate Medicare Part A payments projected to increase by $1.4 billion, or 4.0%, for fiscal year 2024 compared to fiscal year 2023. This estimated reimbursement increase is attributable to a 6.4% net market basket update to the payment rates, which is based on a 3.0% SNF market basket increase plus a 3.6% market basket forecast error adjustment and less a 0.2% productivity adjustment, as well as a negative 2.3%, or approximately $789 million, decrease in the fiscal year 2024 SNF Medicare payment rates as a result of the second phase of the Patient Driven Payment Model (“PDPM”) parity adjustment recalibration described below, which was being phased in over two years. The annual update is reduced by two percentage points for SNFs that fail to submit required quality data to CMS under the SNF Quality Reporting Program. CMS has indicated that these impact figures did not incorporate the SNF Value-Based Program reductions that are estimated to be $185 million in fiscal year 2024. While Medicare reimbursement rate setting, which takes effect annually each October, has historically included forecasted inflationary adjustments, the degree to which those forecasts accurately reflect current inflation rates remains uncertain. Additionally, it remains uncertain whether these adjustments will ultimately be offset by non-inflationary factors, including any adjustments related to the impact of various payment models, such as those described below.
Payments to providers continue to be increasingly tied to quality and efficiency. The PDPM, which was designed by CMS to improve the incentives to treat the needs of the whole patient, became effective October 1, 2019. CMS has stated that it intended PDPM to be revenue-neutral to operators, with future Medicare reimbursement reductions possible if that was not the case. In April 2022, CMS issued a proposal for comment, which included an adjustment to obtain that revenue neutrality as early as the 2023 rate setting period. After considering the feedback received in the rulemaking cycle, CMS finalized recalibration of the PDPM parity adjustment factor of 4.6% with a two-year phase-in period that would reduce SNF spending by 2.3%, or approximately $780 million, in each of fiscal years 2023 and 2024. Prior to COVID-19, we believed that certain of our operators could realize efficiencies and cost savings from increased concurrent and group therapy under PDPM and some had reported early positive results, though many operators were restricted during the pandemic 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. These reimbursement changes have had and may, together with any further reimbursement changes to PDPM or value-based purchasing models, in the future have an adverse effect on the operations and financial condition of some operators and could adversely impact the ability of operators to meet their obligations to us.
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On May 27, 2020, CMS added physical therapy, occupational therapy and speech-language pathology to the list of approved telehealth Providers for the Medicare Part B programs provided by a SNF as a part of the COVID-19 1135 waiver provisions. The COVID-19 1135 waiver provisions also allowed for the facility to bill an originating site fee to CMS for telehealth services provided to Medicare Part B beneficiary residents of the facility when the services were provided by a physician from an alternate location, effective March 6, 2020 through May 11, 2023, the expiration of the public health emergency. The Consolidated Appropriations Act of 2023 extended the ability of occupational therapists, physical therapists and speech-language pathologists to continue to furnish these services via telehealth and bill as distant site practitioners until the end of 2024.
On March 30, 2023, CMS issued a memorandum revising and enhancing enforcement efforts for infection control deficiencies found in nursing homes that are targeted at higher-level infection control deficiencies that result in actual harm or immediate jeopardy to residents. Penalties for the most serious deficiencies include civil monetary penalties and discretionary payment denials for new resident admissions.
Other Regulation:
Office of the Inspector General Activities. The Office of Inspector General (“OIG”) of HHS 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 SNFs. 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. In August 2020, the OIG released its findings regarding its review of staffing levels in SNFs from 2018. The OIG recommended that CMS enhance efforts to ensure nursing homes meet daily staffing requirements and explore ways to provide consumers with additional information on nursing homes’ daily staffing levels and variability. The OIG indicated that while the review was initiated before the COVID-19 pandemic emerged, the pandemic reinforces the importance of sufficient staffing for nursing homes, as inadequate staffing can make it more difficult for nursing homes to respond to infectious disease outbreaks like COVID-19. It is unknown what impact, if any, enhanced scrutiny of staffing levels by OIG and CMS will have on our operators.
Department of Justice and Other Enforcement Actions. 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”) has historically used the False Claims Act to civilly pursue nursing homes that bill the federal government for services not rendered or care that is grossly substandard. For example, California prosecutors announced in March 2021 an investigation into a skilled nursing provider that is affiliated with one of our operators, alleging the chain manipulated the submission of staffing level data in order to improve its Five Star rating. In 2020, the DOJ launched a National Nursing Home Initiative to coordinate and enhance civil and criminal enforcement actions against nursing homes with grossly substandard deficiencies. Such enforcement activities are unpredictable and may develop over lengthy periods of time. An adverse resolution of any of these enforcement activities or investigations incurred by our operators may involve injunctive relief and/or substantial monetary penalties, either or both of which could have a material adverse effect on their reputation, business, results of operations and cash flows.
Third Quarter of 2023 and Recent Highlights
Investments
| ● | During the three and nine months ended September 30, 2023, we acquired 15 facilities and 26 facilities for aggregate consideration of $55.1 million and $210.0 million, respectively. The initial cash yield (the initial annual contractual cash rent divided by the purchase price) on these asset acquisitions was between 8% and 10.2%. |
| ● | We invested $24.5 million and $52.4 million under our construction in progress and capital improvement programs during the three and nine months ended September 30, 2023, respectively. |
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| ● | We financed $26.2 million and $110.1 million of new real estate loans with a weighted average interest rate of 12.0% and 11.3% during the three and nine months ended September 30, 2023, respectively. We also advanced $2.8 million and $19.0 million under existing real estate loans during the three and nine months ended September 30, 2023, respectively. |
Dispositions and Impairments
| ● | During the three and nine months ended September 30, 2023, we sold 25 facilities (25 SNFs) and 37 facilities (35 SNFs, one ILF and one medical office building) for approximately $199.0 million and $261.3 million in net cash proceeds, recognizing net gains of approximately $44.1 million and $70.0 million, respectively. These amounts include $100.3 million in net cash proceeds and a $50.2 million gain recognized on the sale of 11 facilities previously leased to LaVie Care Centers, LLC (“LaVie,” f/k/a Consulate Health Care), related to a December 2022 transaction that did not meet the contract criteria to be recognized under ASC 610-20 at the legal sale date. See Note 3 – Assets Held for Sale, Dispositions and Impairments for additional information. |
| ● | During the three and nine months ended September 30, 2023, we recorded impairments on 19 facilities and 25 facilities of approximately $27.9 million and $88.0 million, respectively. Of the $88.0 million recorded impairment, $85.4 million related to 23 facilities that were classified as held for use for which the carrying values exceeded the estimated fair values, and $2.6 million related to two held for sale facilities for which it was determined that the carrying value exceeded the fair value less costs to sell. |
Financing Activities
| ● | During the three and nine months ended September 30, 2023, we sold 4.0 million and 10.7 million shares of common stock under our $1.0 billion At-The-Market Offering Program (“ATM Program”) and Dividend Reinvestment and Common Stock Purchase Plan (“DRCSPP”), generating aggregate gross proceeds of $126.3 million and $330.2 million, respectively. |
| ● | On August 1, 2023, the Company repaid its $350 million of 4.375% senior notes that matured on August 1, 2023 using available cash. |
| ● | On August 8, 2023, the Company entered into a credit agreement (the “2025 Omega Credit Agreement”) providing it with a new $400 million senior unsecured term loan facility (the “2025 Term Loan”). The 2025 Omega Credit Agreement contains an accordion feature permitting us, subject to compliance with customary conditions, to increase the maximum aggregate commitments thereunder to $500 million, by requesting an increase in the aggregate commitments under the 2025 Term Loan. The 2025 Term Loan bears interest at SOFR plus an applicable percentage (with a range of 85 to 185 basis points) based on our credit rating. The 2025 Term Loan matures on August 8, 2025, subject to Omega’s option to extend such maturity date for two sequential 12-month periods. On September 27, 2023, Omega exercised the accordion feature to increase the aggregate commitment under the 2023 Term Loan by $28.5 million. We recorded $3.3 million of deferred financing costs and a $1.4 million discount in connection with the 2025 Omega Credit Agreement. |
| ● | During the third quarter of 2023, we entered into 11 interest rate swaps with a notional amount of $428.5 million that terminate on August 6, 2027. These interest rate swaps are designated as hedges against our exposure to changes in interest payment cash flows as a result of the variable interest rate on the 2025 Term Loan. The interest rate swap contracts effectively convert our 2025 Term Loan to an aggregate fixed rate of approximately 5.597% through its maturity. |
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Other Highlights
| ● | We made $16.9 million and $89.4 million of new non-real estate loans with a weighted average interest rate of 10.1% and 10.2% during the three and nine months ended September 30, 2023, respectively. We also advanced $13.7 million and $18.7 million under existing non-real estate loans during the three and nine months ended September 30, 2023, respectively. |
Collectibility Issues
| ● | During the nine months ended September 30, 2023, we placed two new operators, which Omega has not previously had relationships with prior to the second quarter of 2023, on a cash basis of revenue recognition as collection of substantially all contractual lease payments due from them was not deemed probable. The new lease agreements with each of these operators were executed in the second quarter of 2023 as part of transitions of facilities from other operators, and we placed them on a cash basis concurrent with the respective lease commencement dates, so there were no straight-line rent write-offs associated with moving these operators to cash basis. During the nine months ended September 30, 2023, we transitioned the portfolios of four cash basis operators with an aggregate of 48 facilities to leases with operators on a straight-line basis of revenue recognition. As of September 30, 2023, 18 operators are on a cash basis. These operators represent an aggregate 25.1% and 32.8% of our total revenues (excluding the impact of write-offs) for the nine months ended September 30, 2023 and 2022, respectively. |
| ● | During the nine months ended September 30, 2023, we allowed nine operators to defer $35.0 million in aggregate of contractual rent and interest. The deferrals primarily related to the following operators: LaVie ($19.0 million), Healthcare Homes Limited ($8.2 million), Agemo Holdings, LLC (“Agemo”) ($1.9 million) and Maplewood Senior Living (along with affiliates, “Maplewood”) ($1.3 million). Additionally, we allowed six operators to apply collateral, such as security deposits or letters of credit, to contractual rent and interest during the nine months ended September 30, 2023. The total collateral applied to contractual rent and interest was $11.4 million for the nine months ended September 30, 2023. |
| ● | In the first quarter of 2023, Omega and Agemo, a cash basis operator, entered into a restructuring agreement, an amended and restated master lease and a new loan agreement for two replacement loans. As part of the restructuring agreement and related agreements, Omega agreed to, among other things, forgive and release Agemo from previously written off past due rent and interest obligations, with contractual rent and interest scheduled to resume on April 1, 2023, reduce monthly contractual base rent from $4.8 million to $1.9 million, extend the initial Agemo lease term to December 31, 2036 and modify the existing Agemo loans into two replacement loans. Agemo resumed making contractual rent payments during the second quarter of 2023 in accordance with the restructuring terms discussed above. Agemo is on a cash basis of revenue recognition for lease purposes, and we recorded rental income of $5.8 million and $11.6 million for the three and nine months ended September 30, 2023, respectively, for the contractual rent payments that were received. Additionally, Agemo’s loans are on non-accrual status and are being accounted for under the cost recovery method, so the $1.2 million and $2.0 million of interest payments that we received during the three and nine months ended September 30, 2023, respectively, were applied directly against the principal balance outstanding. |
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| ● | During 2023, we continued the process of restructuring our portfolio with LaVie by amending the lease agreements with LaVie to allow for a partial rent deferral for the first four months of 2023, transitioning two facilities previously subject to the master lease with LaVie to another operator during the second quarter of 2023 and selling seven facilities previously subject to the master lease with LaVie to a third party during the third quarter of 2023. LaVie elected to defer $19.0 million of contractual rent from January 2023 through April 2023. In the third quarter of 2023, LaVie paid $7.4 million of contractual rent, a short pay of $13.3 million of the $20.7 million due under its lease agreement. As LaVie is on a cash basis of revenue recognition, only the $7.4 million and $31.7 million of contractual rent payments that we received from LaVie were recorded as rental income during the three and nine months ended September 30, 2023, respectively. Subsequent to quarter end, an additional 29 facilities previously leased to LaVie met the criteria to be classified as held for sale. In November 2023, we sold these facilities for $305.2 million in purchase consideration, which consisted of gross cash proceeds of $91.9 million and an aggregate $213.3 million pay-off made by the buyer, on Omega’s behalf, of the outstanding principal and accrued interest on 22 HUD mortgages on the sold properties. Concurrent with the sale, the Company amended the master lease with LaVie to reduce monthly rent to $3.4 million. |
| ● | In the first quarter of 2023, we entered into a restructuring agreement, master lease amendments and loan amendments with Maplewood, a cash basis operator. As part of the restructuring agreement and related agreements, Omega agreed to, among other things, extend the maturity date of the master lease to December 2037, fix contractual rent at $69.3 million per annum and defer the 2.5% annual escalators under our lease agreement through December 31, 2035, pay a $12.5 million option termination fee to Maplewood, extend the maturity date of the secured revolving credit facility to June 2035, increase the capacity of the secured revolving credit facility to $320.0 million and convert the 7% per annum cash interest due on the secured revolving credit facility to all PIK interest in 2023, 1% cash interest and 6% PIK interest in 2024, and 4% cash interest and 3% PIK interest in 2025 and through the maturity date. Additionally, we agreed to reduce Maplewood’s share of any future potential sales proceeds (in excess of our gross investment) by the unpaid deferred rent balance, the $22.5 million of capital expenditures granted through the restructuring agreement and the $12.5 million option termination fee payment. Maplewood short-paid the contractual rent amount due under its lease agreement by $1.0 million in June 2023, and continued to short-pay the contractual rent amount due under its lease agreement by $1.0 million for each month during the third quarter of 2023. During the third quarter of 2023, we applied $3.0 million of Maplewood’s security deposit toward the unpaid portion of rent for June 2023 through August 2023. Following the application of the security deposit in the third quarter of 2023, we had a $1.8 million security deposit remaining as of September 30, 2023, which can be applied to future rent shortfalls. In October 2023, Maplewood short-paid the contractual rent amount due under its lease agreement by $1.0 million. We continue to take actions to preserve our rights and are in discussions with Maplewood to address the deficiency. We have recorded $17.3 million and $50.9 million of revenue related to Maplewood for the three and nine months ended September 30, 2023, respectively, for the contractual rent and interest payments that we received and through the application of Maplewood’s security deposit. The $12.5 million option termination fee payment made in the first quarter of 2023 in connection with the restructuring agreement was accounted for as a lease inducement. As Maplewood is on a cash basis of revenue recognition, the inducement was immediately derecognized and recorded as a reduction to the $50.9 million of rental income recognized for the nine months ended September 30, 2023. |
| ● | In August and September 2023, Guardian, an operator that was already on a cash basis of revenue recognition, did not pay its contractual amounts due under its lease agreement. During the third quarter of 2023, we applied $2.9 million of Guardian’s security deposit to fund the unpaid rent. As Guardian is on a cash basis of revenue recognition, we recorded rental income of $4.4 million for the three months ended September 30, 2023 for the contractual rent payments that were received from Guardian and through the application of Guardian’s security deposit. Following the application of the security deposit in the third quarter of 2023, we had a $4.4 million security deposit remaining as of September 30, 2023, which can be applied to future rent shortfalls. We are in discussions to sell or release to another operator the facilities included in Guardian’s master lease. In October 2023, Guardian did not pay the contractual rent amount due under its lease agreement of $1.5 million. |
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Dividends
| ● | On October 20, 2023, the Board of Directors declared a cash dividend of $0.67 per share. The dividend will be paid on November 15, 2023 to stockholders of record as of the close of business on October 31, 2023. |
Results of Operations
The following is our discussion of the consolidated results of operations, financial position and liquidity and capital resources, which should be read in conjunction with our unaudited consolidated financial statements and accompanying notes.
Comparison of results of operations for the three and nine months ended September 30, 2023 and 2022 (dollars in thousands):
Three Months Ended |
Nine Months Ended |
||||||||||||||||
September 30, |
Increase/ |
September 30, |
Increase/ |
||||||||||||||
2023 |
|
2022 |
(Decrease) |
2023 |
|
2022 |
(Decrease) |
||||||||||
Revenues: |
|||||||||||||||||
Rental income |
$ |
209,948 |
$ |
207,588 |
$ |
2,360 |
$ |
618,126 |
$ |
635,899 |
$ |
(17,773) |
|||||
Income from direct financing leases |
|
254 |
|
256 |
(2) |
|
762 |
|
768 |
(6) |
|||||||
Interest income |
|
30,623 |
|
31,344 |
(721) |
|
88,275 |
|
93,861 |
(5,586) |
|||||||
Miscellaneous income |
|
1,207 |
|
242 |
965 |
|
3,258 |
|
2,866 |
392 |
|||||||
Expenses: |
|
|
|
|
|
|
|
||||||||||
Depreciation and amortization |
|
80,798 |
|
82,709 |
(1,911) |
|
244,008 |
|
248,668 |
(4,660) |
|||||||
General and administrative |
|
20,287 |
|
18,242 |
2,045 |
|
62,971 |
|
53,402 |
9,569 |
|||||||
Real estate taxes |
3,892 |
4,175 |
(283) |
11,814 |
11,495 |
319 |
|||||||||||
Acquisition, merger and transition related costs |
|
121 |
|
185 |
(64) |
|
1,183 |
|
5,658 |
(4,475) |
|||||||
Impairment on real estate properties |
|
27,890 |
|
10,015 |
17,875 |
|
87,992 |
|
21,221 |
66,771 |
|||||||
Provision for credit losses |
|
2,733 |
|
4,106 |
(1,373) |
|
11,643 |
|
4,367 |
7,276 |
|||||||
Interest expense |
|
58,778 |
|
58,238 |
540 |
|
176,100 |
|
174,755 |
1,345 |
|||||||
Other income (expense): |
|
|
|
|
|
|
|
||||||||||
Other income (expense) – net |
|
5,402 |
|
(176) |
5,578 |
|
9,151 |
|
(5,038) |
14,189 |
|||||||
Loss on debt extinguishment |
|
— |
|
(376) |
376 |
|
(6) |
|
(389) |
383 |
|||||||
Gain on assets sold – net |
44,076 |
40,930 |
3,146 |
69,956 |
179,747 |
(109,791) |
|||||||||||
Income tax expense |
|
(1,758) |
|
(1,191) |
(567) |
|
(2,092) |
|
(3,535) |
1,443 |
|||||||
(Loss) income from unconsolidated joint ventures |
|
(1,345) |
|
4,117 |
(5,462) |
|
555 |
|
7,522 |
(6,967) |
|||||||
Three Months Ended September 30, 2023 and 2022
Revenues
The following is a description of certain of the changes in revenues for the three months ended September 30, 2023 compared to the same period in 2022:
| ● | The increase in rental income was primarily the result of (i) a $7.7 million increase related to facility acquisitions made throughout 2022 and 2023, (ii) a $6.0 million increase as a result of a net decrease in straight-line rent receivable write-offs in the third quarter of 2023, (iii) a $4.5 million net increase related to impact of facility transitions, primarily from non-paying cash basis operators to straight-line basis operators, and sales and (iv) a $2.8 million increase due to higher capital expenditure rent and the impact of lease extensions with existing operators, partially offset by a $19.8 million net decrease in rental income from cash basis operators, including Maplewood and LaVie, as a result of not recording straight-line lease revenue and/or receiving lower cash rent payments period over period from these operators. |
51
| ● | The decrease in interest income was primarily due to (i) a $5.1 million decrease related to loans placed on non-accrual status, primarily the LaVie loans and the Maplewood loan, in which we have recognized less interest income period over period as a result of receiving less cash payments or the loans converting to PIK interest and (ii) a $1.4 million decrease related to early principal payments on our loans during 2022 and 2023, partially offset by a $5.8 million increase related to new and refinanced loans and additional fundings to existing operators made throughout 2022 and 2023. As noted above, during the three months ended September 30, 2023, we funded $29.0 million in new or existing real estate loans and $30.6 million in new or existing non-real estate loans. |
Expenses
The following is a description of certain of the changes in our expenses for the three months ended September 30, 2023 compared to the same period in 2022:
| ● | The decrease in depreciation and amortization expense primarily relates to facility sales and facilities reclassified to assets held for sale, partially offset by facility acquisitions and capital additions. |
| ● | The increase in general and administrative (“G&A”) expense primarily relates to a $2.0 million increase in stock-based compensation expense. |
| ● | The 2023 impairments were recognized in connection with 19 held for use facilities for which the carrying value exceeded the fair value. The 2022 impairments were recognized in connection with four held for use facilities for which the carrying value exceeded the fair value. The 2023 and 2022 impairments were primarily the result of decisions to exit certain non-strategic facilities and/or terminate our relationships with certain non-strategic operators. |
| ● | The change in provision for credit losses primarily relates to a net decrease in aggregate specific provisions recorded during the third quarter of 2023 compared to specific provisions recorded during the same period in 2022, partially offset by increases in the general reserve recorded primarily resulting from increases in loan balances and increases in loss rates utilized in the estimate of expected credit losses for loans. |
Other Income (Expense)
The change in total other income (expense) was primarily due to (i) a $5.6 million change in other income (expense) – net primarily related to a legal reserve recorded during the second quarter of 2022 that was settled in the fourth quarter of 2022 and increased interest on short-term investments due to increased interest rates and increased cash balances and (ii) a $3.1 million increase in gain on assets sold related to the sale of 25 facilities in the third quarter of 2023 compared to the sale of four facilities during the same period in 2022.
(Loss) income from unconsolidated joint ventures
The change in (loss) income from unconsolidated joint ventures was primarily due to higher interest rates on outstanding debt and fair value adjustments on derivative instruments within our Cindat Joint Venture.
52
Nine Months Ended September 30, 2023 and 2022
Revenues
The following is a description of certain of the changes in revenues for the nine months ended September 30, 2023 compared to the same period in 2022:
| ● | The decrease in rental income was primarily the result of a $66.4 million net decrease in rental income from cash basis operators, including Maplewood and LaVie, as a result of not recording straight-line lease revenue and/or receiving lower cash rent payments period over period from these operators, along with a one-time option termination payment of $12.5 million to Maplewood that was recorded as a reduction to rental income during the second quarter of 2023. The overall decrease in rental income was partially offset by (i) a $18.9 million increase related to facility acquisitions made throughout 2022 and 2023, (ii) a $18.6 million increase as a result of fewer straight-line rent receivable write-offs throughout 2023, (iii) a $8.1 million net increase related to impact of facility transition, primarily from non-paying cash basis operators to straight-line basis operators, and sales and (iv) a $2.2 million net increase due to higher capital expenditure rent and the impact of lease extensions with existing operators, along with other movements. |
| ● | The decrease in interest income was primarily due to (i) a $12.6 million decrease related to loans placed on non-accrual status, primarily the LaVie loans and Maplewood loan, in which we have recognized less interest income period over period as a result of receiving less cash payments or the loans converting to PIK interest and (ii) a $10.8 million decrease related to early principal payments on our mortgage loans with Ciena Healthcare during 2022 and the pay-off of other loans during 2022 and 2023, partially offset by a $17.7 million increase related to new and refinanced loans and additional fundings to existing operators made throughout 2022 and 2023. As noted above, during the nine months ended September 30, 2023, we funded $129.1 million in new or existing real estate loans and $108.1 million in new or existing non-real estate loans. |
Expenses
The following is a description of certain of the changes in our expenses for the nine months ended September 30, 2023 compared to the same period in 2022:
| ● | The decrease in depreciation and amortization expense primarily relates to facility sales and facilities reclassified to assets held for sale, partially offset by facility acquisitions and capital additions. |
| ● | The increase in G&A expense primarily relates to (i) a $5.8 million increase in stock-based compensation expense and (ii) a $2.1 million increase in payroll and benefits. |
| ● | The decrease in acquisition, merger and transition related costs primarily relates to costs incurred related to the transition of facilities with troubled operators. |
| ● | The 2023 impairments were recognized in connection with two facilities that were classified as held for sale for which the carrying values exceeded the estimated fair values less costs to sell and 23 held for use facilities for which it was determined that the carrying value exceeded the fair value. The 2022 impairments were recognized in connection with two facilities that were classified as held for sale for which the carrying values exceeded the estimated fair values less costs to sell and eight held for use facilities for which the carrying value exceeded the fair value. The 2023 and 2022 impairments were primarily the result of decisions to exit certain non-strategic facilities and/or terminate our relationships with certain non-strategic operators. |
| ● | The change in provision for credit losses primarily relates to increases in the general reserve recorded primarily resulting from increases in loan balances and increases in loss rates utilized in the estimate of expected credit losses for loans, partially offset by a net decrease in aggregate specific provisions recorded during the third quarter of 2023 compared to specific provisions recorded during the same period in 2022. |
53
Other Income (Expense)
The change in total other income (expense) was primarily due to (i) a $109.8 million increase in gain on assets sold related to the sale of 37 facilities in the nine months ended September 30, 2023 compared to the sale of 44 facilities, primarily associated with our exit of the facilities associated with Gulf Coast Health Care LLC (together with certain affiliates “Gulf Coast”), during the same period in 2022 and (ii) a $14.2 million change in other income (expense) – net primarily related to a legal reserve recorded during the second quarter of 2022 that was settled in the fourth quarter of 2022 and increased interest on short-term investments due to increased interest rates and increased cash balances.
Income Tax Expense
The change in income tax expense was primarily due to adjustments made to our deferred tax assets and liabilities in 2023 as a result of the majority of our U.K. portfolio entering into the U.K. REIT regime effective April 1, 2023.
(Loss) income from unconsolidated joint ventures
The change in (loss) income from unconsolidated joint ventures was primarily due to higher interest rates on outstanding debt and fair value adjustments on our derivative instruments within our Cindat Joint Venture.
Funds from Operations
We use funds from operations (“Nareit FFO”), a non-GAAP financial measure, as one of several criteria to measure the operating performance of our business. We calculate and report Nareit FFO in accordance with the definition of Funds from Operations and interpretive guidelines issued by the National Association of Real Estate Investment Trusts (“Nareit”). Nareit FFO is defined as net income (computed in accordance with GAAP), adjusted for the effects of asset dispositions and certain non-cash items, primarily depreciation and amortization and impairment on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures and changes in the fair value of warrants. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis. Revenue recognized based on the application of security deposits and letters of credit or based on the ability to offset against other financial instruments is included within Nareit FFO. We believe that Nareit FFO is an important supplemental measure of our operating performance. As real estate assets (except land) are depreciated under GAAP, such accounting presentation implies that the value of real estate assets diminishes predictably over time, while real estate values instead have historically risen or fallen with market conditions. Nareit FFO was designed by the real estate industry to address this issue. Nareit FFO herein is not necessarily comparable to Nareit FFO of other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us.
We further believe that by excluding the effect of depreciation, amortization, impairment on real estate assets and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, Nareit FFO can facilitate comparisons of operating performance between periods. 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 or cash flow, 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.
54
The following table presents our Nareit FFO results for the three and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
|
2023 |
|
2022 |
2023 |
|
2022 |
|
||||||
(in thousands) |
(in thousands) |
||||||||||||
Net income (1) |
$ |
93,908 |
$ |
105,064 |
$ |
192,274 |
$ |
392,135 |
|||||
Deduct gain from real estate dispositions |
(44,076) |
(40,930) |
(69,956) |
(179,747) |
|||||||||
Deduct gain from real estate dispositions - unconsolidated joint ventures |
|
— |
|
(346) |
|
— |
|
(93) |
|||||
|
49,832 |
|
63,788 |
|
122,318 |
|
212,295 |
||||||
Elimination of non-cash items included in net income: |
|
|
|
|
|
|
|||||||
Depreciation and amortization |
|
80,798 |
|
82,709 |
|
244,008 |
|
248,668 |
|||||
Depreciation – unconsolidated joint ventures |
|
2,514 |
|
2,627 |
|
7,941 |
|
8,258 |
|||||
Add back impairments on real estate properties |
27,890 |
10,015 |
87,992 |
21,221 |
|||||||||
Nareit FFO |
$ |
161,034 |
$ |
159,139 |
$ |
462,259 |
$ |
490,442 |
|||||
| (1) | The three and nine months ended September 30, 2023 includes the application of $5.9 million and $11.4 million, respectively, of security deposits (letter of credit and cash deposits) in revenue. The three and nine months ended September 30, 2022 includes the application of $5.3 million and $9.4 million, respectively, of security deposits (letter of credit and cash deposits) in revenue. |
Liquidity and Capital Resources
Sources and Uses
Our primary sources of cash include rental income and interest receipts, existing availability under our revolving credit facility, proceeds from our DRCSPP and the ATM Program, facility sales, and proceeds from real estate loan and non-real estate loan payoffs. We anticipate that these sources will be adequate to fund our cash flow needs through the next twelve months, which include common stock dividends, debt service payments (including principal and interest), real estate investments (including facility acquisitions, capital improvement programs and other capital expenditures), real estate loan and non-real estate loan advances and normal recurring G&A expenses (primarily consisting of employee payroll and benefits and expenses relating to third parties for legal, consulting and audit services).
Capital Structure
At September 30, 2023, we had total assets of $9.4 billion, total equity of $3.9 billion and total debt of $5.3 billion in our consolidated financial statements, with such debt representing approximately 58.0% of total capitalization.
Debt
At September 30, 2023 and December 31, 2022, the weighted average annual interest rate of our debt was 4.3% and 4.1%, respectively. Additionally, as of September 30, 2023, 99% of our debt with outstanding principal balances has fixed interest payments. Our high percentage of fixed interest debt has kept our interest expense relatively flat year over year despite rising interest rates. As of September 30, 2023, we had long-term credit ratings of Baa3 from Moody’s and BBB- from S&P Global and Fitch. Credit ratings impact our ability to access capital and directly impact our cost of capital as well. For example, our revolving credit facility accrues interest and fees at a rate per annum equal to LIBOR plus a margin that depends upon our credit rating. A downgrade in credit ratings by Moody’s, S&P Global and/or Fitch may have a negative impact on the interest rates and fees for our revolving credit facility.
55
On August 8, 2023, Omega entered into the 2025 Omega Credit Agreement providing us with the 2025 Term Loan. The 2025 Omega Credit Agreement contains an accordion feature permitting us, subject to compliance with customary conditions, to increase the maximum aggregate commitments thereunder to $500 million, by requesting an increase in the aggregate commitments under the 2025 Term Loan. The 2025 Term Loan bears interest at SOFR plus 145 basis points, based on our current credit rating. The 2025 Term Loan matures on August 8, 2025, subject to Omega’s option to extend such maturity date for two sequential 12-month periods. On September 27, 2023, Omega exercised the accordion feature to increase the aggregate commitment under the 2023 Term Loan by $28.5 million. We recorded $3.3 million of deferred financing costs and a $1.4 million discount in connection with the 2025 Omega Credit Agreement.
In August 2023, we entered into ten interest rate swaps with $400.0 million in notional value. The swaps are effective August 14, 2023 and terminate on August 6, 2027. These interest rate swaps are designated as hedges against our exposure to changes in interest payment cash flows as a result of the variable interest rate on the 2025 Term Loan. The interest rate swap contracts effectively convert our $400.0 million 2025 Term Loan to an aggregate fixed rate of approximately 5.565% through its maturity. In September 2023, in connection with the exercise of the accordion feature on the 2025 Term Loan, we entered into one additional interest rate swap with $28.5 million in notional value to hedge the additional $28.5 million under the 2025 Term Loan. This swap is effective September 29, 2023 and terminates on August 6, 2027. These 11 interest rate swap contracts effectively convert our $428.5 million 2025 Term Loan to a new combined aggregate fixed rate of approximately 5.597% through its maturity. The effective fixed rate achieved by the combination of the 2025 Omega Credit Agreement and the interest rate swaps could fluctuate up by 40 basis points or down by 60 basis points based on future changes to our credit ratings.
As of September 30, 2023, we have $400 million of 4.95% senior notes due April 2024. As of September 30, 2023, we had approximately $554.7 million of cash and cash equivalents on our Consolidated Balance Sheets. As of September 30, 2023, we had $1.4 billion of availability under our revolving credit facility. As discussed below, we also have $716.1 million of potential sales remaining under the ATM Program. This combination of liquidity sources, along with cash from operating activities, provides us with flexibility to repay the senior notes due in April 2024.
Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As of September 30, 2023 and December 31, 2022, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.
Supplemental Guarantor Information
Parent has issued approximately $4.6 billion aggregate principal of senior notes outstanding at September 30, 2023 that were registered under the Securities Act of 1933, as amended. The senior notes are guaranteed by Omega OP.
The U.S. Securities and Exchange Commission (“SEC”) adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities, such as our senior notes. As a result of these amendments, registrants are permitted to provide certain alternative financial and non-financial disclosures, to the extent material, in lieu of separate financial statements for subsidiary issuers and guarantors of registered debt securities. Accordingly, separate consolidated financial statements of Omega OP have not been presented. Parent and Omega OP, on a combined basis, have no material assets, liabilities or operations other than financing activities (including borrowings under our outstanding senior notes, revolving credit facility and term loans) and their investments in non-guarantor subsidiaries.
Omega OP is currently the sole guarantor of our senior notes. The guarantees by Omega OP of our senior notes are full and unconditional and joint and several with respect to the payment of the principal and premium and interest on our senior notes. The guarantees of Omega OP are senior unsecured obligations of Omega OP that rank equal with all existing and future senior debt of Omega OP and are senior to all subordinated debt. However, the guarantees are effectively subordinated to any secured debt of Omega OP. As of September 30, 2023, there were no significant restrictions on the ability of Omega OP to make distributions to Omega.
56
Equity
At September 30, 2023, we had approximately 245.0 million shares of common stock outstanding, and our shares had a market value of $8.1 billion. The following is a summary of activity under our equity programs during the three and nine months ended September 30, 2023:
| ● | We issued 0.5 million and 7.0 million shares of common stock under our ATM Program for aggregate gross proceeds of $14.4 million and $213.8 million during the three and nine months ended September 30, 2023, respectively. We did not utilize the forward provisions under the ATM Program. |
| ● | We issued 3.5 million and 3.7 million shares of common stock under the DRCSPP during the three and nine months ended September 30, 2023, respectively. Aggregate gross proceeds from these sales were $111.9 million and $116.4 million during the three and nine months ended September 30, 2023, respectively. |
| ● | We did not repurchase any shares of our outstanding common stock under the $500 Million Stock Repurchase Program. We have $357.8 million remaining authorized for repurchases under the $500 Million Stock Repurchase Program as of September 30, 2023. |
Dividends
As a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders in an amount at least equal to (A) the sum of (i) 90% of our “REIT taxable income” (computed without regard to the dividends paid deduction and our net capital gain), and (ii) 90% of the net income (after tax), if any, from foreclosure property, minus (B) the sum of certain items of non-cash income. In addition, if we dispose of any built-in gain asset during a recognition period, we will be required to distribute at least 90% of the built-in gain (after tax), if any, recognized on the disposition of such asset. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for such year and paid on or before the first regular dividend payment after such declaration. In addition, such distributions are required to be made pro rata, with no preference to any share of stock as compared with other shares of the same class, and with no preference to one class of stock as compared with another class except to the extent that such class is entitled to such a preference. To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100% of our “REIT taxable income” as adjusted, we will be subject to tax thereon at regular corporate rates.
For the nine months ended September 30, 2023, we paid dividends of approximately $479.3 million to our common stockholders. On February 15, 2023, we paid dividends of $0.67 per outstanding common share to the common stockholders of record as of the close of business on February 6, 2023. On May 15, 2023, we paid dividends of $0.67 per outstanding common share to the common stockholders of record as of the close of business on May 1, 2023. On August 15, 2023, we paid dividends of $0.67 per outstanding common share to the common stockholders of record as of the close of business on July 31, 2023.
Material Cash Requirements
During the nine months ended September 30, 2023, there were no significant changes to our material cash requirements from those disclosed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022.
As of September 30, 2023, we had $200.0 million of commitments to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments. Additionally, we have commitments to fund $51.0 million of advancements under existing other real estate loans and $43.1 million of advancements under existing non-real estate loans. These commitments are expected to be funded over the next several years and are dependent upon the operators’ election to use the commitments.
57
Other Arrangements
We own interests in certain unconsolidated joint ventures as described in Note 9 to the Consolidated Financial Statements – Investments in Joint Ventures. Our risk of loss is generally limited to our investment in the joint venture and any outstanding loans receivable. We use derivative instruments to hedge interest rate and foreign currency exchange rate exposure as discussed in Note 15 – Derivatives and Hedging in our Annual Report on Form 10-K for the year ended December 31, 2022.
Cash Flow Summary
Cash, cash equivalents and restricted cash totaled $557.9 million as of September 30, 2023, an increase of $257.3 million as compared to the balance at December 31, 2022. The following is a summary of our sources and uses of cash flows for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 (dollars in thousands):
Nine Months Ended September 30, |
|||||||||
|
2023 |
|
2022 |
Increase/(Decrease) |
|||||
Net cash provided by (used in): |
|||||||||
Operating activities |
$ |
452,756 |
$ |
472,045 |
$ |
(19,289) |
|||
Investing activities |
|
(112,094) |
|
272,421 |
(384,515) |
||||
Financing activities |
|
(83,521) |
|
(627,474) |
543,953 |
||||
The following is a discussion of changes in cash, cash equivalents and restricted cash for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
Operating Activities – The decrease in net cash provided by operating activities is driven primarily by a decrease of $2.8 million of net income, net of $197.1 million of non-cash items, primarily due to a year over year reduction in rental income and interest income, as discussed in our material changes analysis under Results of Operations above. A $16.5 million change in the net movements of the operating assets and liabilities also contributed to the overall decrease in cash provided by operating activities.
Investing Activities – The change in cash used in investing activities primarily related to (i) a $177.0 million decrease in proceeds from the sales of real estate investments driven by the sale of the Gulf Coast facilities in the first quarter of 2022, (ii) a $130.8 million decrease in loan repayments, net of placements due to significant paydowns on the Ciena Healthcare mortgage loans and other loans during 2022, (iii) a $69.9 million increase in real estate acquisitions and (iv) a $12.1 million increase in investments in unconsolidated joint ventures primarily related to the four new joint venture investments in the second and third quarters of 2023 and (v) a $1.9 million increase in capital improvements to real estate investments and construction in progress, partially offset by (i) a $5.4 million increase in receipts from insurance proceeds and (ii) a $1.7 million increase in distributions from unconsolidated joint ventures in excess of earnings.
Financing Activities – The decrease in cash used in financing activities primarily related to (i) a $321.9 million increase in net proceeds from issuance of common stock, (ii) a $142.3 million decrease in repurchases of shares of common stock, (iii) a $92.6 million increase in proceeds from derivative instruments as a result of the termination of our forward starting swaps in the second quarter of 2023 and (iv) a $9.6 million decrease in redemptions of Omega OP units, partially offset by (i) a $10.2 million decrease in proceeds from long-term borrowings, net of repayments due to higher cash balances in the third quarter of 2023 as a result of common stock issuances, the termination of the forward starting swaps and significant facility sale proceeds received in 2022 and 2023, (ii) a $5.3 million increase in distributions to Omega OP Unit holders, (iii) a $3.7 million increase in dividends paid primarily related to share issuances during 2023 and (iv) a $2.9 million increase in payment of financing related costs related to the Company entering into the 2025 Term Loan during the third quarter of 2023.
58
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. 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 accounting policies in Note 2 – Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to our critical accounting policies or estimates since December 31, 2022.
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
During the quarter ended September 30, 2023, there were no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2022.
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 our Form 10-Q as of and for the quarter ended September 30, 2023, management evaluated the effectiveness of the design and operation of the disclosure controls and procedures of the Company as of September 30, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures of the Company were effective at a reasonable assurance level as of September 30, 2023.
Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2023 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 18 – Commitments and Contingencies to the Consolidated Financial Statements - Part I, Item 1 hereto, which is hereby incorporated by reference in response to this Item.
Item 1A – Risk Factors
There have been no material changes to our risk factors as previously disclosed in Item 1A contained in Part I of our Annual Report on Form 10-K for the year ended December 31, 2022.
59
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
From time to time, the Company issues shares of common stock in reliance on the private placement exemption under Section 4(a)(2) of the Securities Act of 1933, as amended, in exchange for Omega OP Units. During the quarter ended September 30, 2023, Omega did not issue any shares of our common stock in exchange for Omega OP Units.
Issuer Purchases of Equity Securities
On January 27, 2022, the Board of Directors authorized the Company to repurchase of up to $500 million of our outstanding common stock from time to time through March 2025. 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.
During the third quarter of 2023, we did not repurchase any shares of our outstanding common stock.
60
Item 6–Exhibits
Exhibit No. |
||
10.1 |
||
31.1 |
||
31.2 |
||
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.* |
|
101 |
The following financial statements (unaudited) from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. |
|
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: November 3, 2023 |
By: |
/S/ C. TAYLOR PICKETT |
C. Taylor Pickett |
||
Chief Executive Officer |
||
Date: November 3, 2023 |
By: |
/S/ ROBERT O. STEPHENSON |
Robert O. Stephenson |
||
Chief Financial Officer |
62