The following discussion and analysis is based primarily on the consolidated financial statements ofOmega Healthcare Investors, Inc. presented in conformity withU.S. generally accepted accounting principles ("GAAP") for the periods presented and should be read together with the notes thereto contained in this Annual Report on Form 10-K. Other important factors are identified in "Forward-Looking Statements" and "Item 1A - Risk Factors" above.
Our Management’s Discussion and Analysis of Financial Condition and Results of
Operations is organized as follows:
? Business Overview
? Outlook, Trends and Other Conditions
? 2022 and Recent Highlights ? Results from Operations ? Funds from Operations
? Liquidity and Capital Resources
? Supplemental Guarantor Information
? Critical Accounting Policies and Estimates
Business Overview
Omega Healthcare Investors, Inc. ("Parent") is aMaryland corporation that, together with its consolidated subsidiaries has elected to be taxed as a REIT for federal income tax purposes. Omega is structured as an umbrella partnership REIT ("UPREIT") under which all of Omega's assets are owned directly or indirectly by, and all of Omega's operations are conducted directly or indirectly through, its operating partnership subsidiary, Omega OP. As ofDecember 31, 2022 , Parent owned approximately 97% of the issued and outstanding units of partnership interest in Omega OP ("Omega OP Units"), and other investors owned approximately 3% of the outstanding Omega OP Units. 33
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Omega has one reportable segment consisting of investments in healthcare-related real estate properties located inthe United States ("U.S.") and theUnited Kingdom ("U.K."). Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities ("SNFs"), assisted living facilities ("ALFs"), and to a lesser extent, independent living facilities ("ILFs"), rehabilitation and acute care facilities ("specialty facilities") and medical office buildings ("MOBs"). Our core portfolio consists of our long-term leases and real estate loans with healthcare operating companies and affiliates (collectively, our "operators"). Real estate loans consist of mortgage loans and other real estate loans which are primarily collateralized by a first, second or third mortgage lien or a leasehold mortgage on, or an assignment of the partnership interest in the related properties. In addition to our core investments, we make loans to operators and/or their principals. These loans, which may be either unsecured or secured by the collateral of the borrower, are classified as non-real estate loans. From time to time, we also acquire equity interests in joint ventures or entities that support the long-term healthcare industry and our operators. Our portfolio of real estate investments (including properties associated with mortgages, direct financing leases, assets held for sale and consolidated joint ventures) atDecember 31, 2022 , included 926 healthcare facilities, located in 42 states and theU.K. that are operated by 67 third-party operators. Our real estate investment in these facilities totaled approximately$9.5 billion atDecember 31, 2022 , with approximately 97% of our real estate investments related to long-term healthcare facilities. The portfolio is made up of (i) 665 SNFs, (ii) 169 ALFs, (iii) 20 ILFs, (iv) 16 specialty facilities, (v) two MOBs, (vi) real estate loans, including mortgages on 48 SNFs, two ALFs and two specialty facilities and (vii) two facilities that are held for sale. AtDecember 31, 2022 , we also held other real estate loans (excluding mortgages) receivable of$394.6 million and non-real estate loans receivable of$225.3 million , consisting primarily of secured loans to third-party operators of our facilities, and$178.9 million of investments in six unconsolidated joint ventures. As healthcare delivery continues to evolve, we continuously evaluate potential investments, our assets, operators and markets to position our portfolio for long-term success. Our strategy includes applying data analytics to our investment underwriting and asset management, as well as selling or transitioning assets that do not meet our portfolio criteria.
Outlook, Trends and Other Conditions
The COVID-19 pandemic has significantly and adversely impacted SNFs and long-term care providers due to the higher rates of virus transmission and fatality among the elderly and frail populations that these facilities serve; in addition, the pandemic contributed to occupancy declines, labor shortages and cost increases which continue to significantly impact our operators. As discussed further in "Collectibility Issues" below, during the year we have had several operators that have failed to make contractual payments under their lease and loan agreements, and we have agreed to short-term deferrals, lease and portfolio restructurings and/or allowed the application of security deposits or letters of credit to pay rent for several operators. We believe these operators were impacted by, among other things, reduced revenue as a result of lower occupancy and increased expenses resulting from the COVID-19 pandemic and uncertainties regarding the continuing availability of sufficient government support and adequate reimbursement levels. These increases have been offset to some extent by increases in reimbursements due to increased skilling in place, which has been necessitated by pandemic-related protocols and may decrease when such protocols subside or when the federally declared public health emergency expires as scheduled onMay 11, 2023 . We believe these increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay and reliance on agency staffing due to staffing shortages, as well as a significant increase in both the cost and usage of personal protective equipment ("PPE"), testing equipment and processes and supplies, as well as implementation of new infection control protocols and vaccination programs. In addition, operators who do not achieve full compliance with applicable vaccination and infection control requirements may face potential survey issues and penalties. At this time, there is significant uncertainty regarding the impact of such developments. We remain cautious as the COVID-19 pandemic continues to have a significant impact on our operators and their financial conditions, particularly given the trend of reduced pandemic-related federal support to our operators beginning in 2021, the persistence of staffing shortages that continue to impact our operators' occupancy levels and profitability, uncertainty as to whether Medicare and Medicaid reimbursement rates will be sufficient to address longer-term cost increases faced by operators, factors that may impact future virus transmission in our facilities, including vaccination rates and efficacy of the vaccine for staff members and residents at our facilities and genetic mutations of the virus into new variants, and the commencement inDecember 2021 of repayment of deferred FICA obligations. We believe that the incidence and severity of COVID-19 among our operators' residents and employees, based on reporting by our operators, tend to correlate with levels of incidence and severity experienced by the applicable community in which such operators' are located, and it remains uncertain whether certain of our facilities will be impacted by future community spread of the virus. 34
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Our facilities, on average, experienced declines, in some cases that are material, in occupancy levels as a result of the pandemic. Occupancy in our facilities has generally improved on average since early 2021; however, average occupancy has not returned to pre-pandemic levels. It remains unclear when and the extent to which demand and occupancy levels will return to pre-COVID-19 levels. We believe these challenges to occupancy recovery may be in part due to staffing shortages, which in some cases have required operators to limit admissions, as well as COVID-19 related fatalities at the facilities, the delay of SNF placement and/or utilization of alternative care settings for those with lower level of care needs, the suspension and/or postponement of elective hospital procedures, fewer discharges from hospitals to SNFs and higher hospital readmittances from SNFs. While substantial government support was allocated to SNFs and to a lesser extent to ALFs in 2020, federal relief efforts have been limited since 2021 as have been relief efforts in certain states. The additional 6.2% FMAP reimbursement in connection with the pandemic is being phased out in 2023 pursuant to the Consolidated Appropriations Act of 2023 as further discussed under "Government Regulation - Reimbursement Changes Related to COVID-19" under "Item 1 - Business." The additional 6.2% FMAP provided some of our operators with significant support, based on which states they are located in, and the phase out of such support may adversely affect their operations to the extent that expenses are not reduced or other support is not provided. We believe further government support will be needed to continue to offset these impacts on operators, which could be in the form of direct support or reimbursement rate adjustments to reflect sustained cost changes experienced by operators. It is unclear whether and to what extent such government support will continue to be sufficient and timely to offset these impacts. In particular, while$25.5 billion in federal funding for healthcare providers impacted by COVID-19 was announced inSeptember 2021 with distributions beginning in late 2021 pursuant to thePublic Health and Social Services Emergency Fund ("Provider Relief Fund "), we do not expect additional Provider Relief Funds to be allocated to healthcare operators or our operators, and it remains uncertain whether additional Medicaid funds under the American Rescue Plan Act of 2021 (the "American Rescue Plan Act") or other changes in Medicare or Medicaid reimbursement rates in theU.S. , orU.K. reimbursement and relief programs for ourU.K. operators, will ultimately support reimbursement to our operators. While certain states have provided pandemic-related relief measures and/or reimbursement increases, there remains uncertainty as to how widespread these measures will continue to be and to what extent they may be distributed to and benefit our operators, especially when the federally declared public health emergency expires as scheduled onMay 11, 2023 or previously released federal funds to states have been fully utilized. Likewise, while certain states may in the course of routine rate-setting of Medicaid rates address inflationary factors and other expense-related items, there can be no assurance that these changes will be sufficient to offset existing increased inflation and expenses or that all states will address these items. See the "Government Regulation and Reimbursement" section for additional information. Further, to the extent the cost and occupancy impacts on our operators continue or accelerate and are not offset by continued government relief or reimbursement rates that are sufficient and timely, we anticipate that the operating results of additional operators may be materially and adversely affected, some may be unwilling or unable to pay their contractual obligations to us in full or on a timely basis and we may be unable to restructure such obligations on terms as favorable to us as those currently in place. There are a number of uncertainties we face as we consider the continuing impact of COVID-19 on our business, including how long census disruption and elevated COVID-19 costs will last, the ability of our operators to manage the impact of the termination of public health emergency and temporary relief thereunder, the continued efficacy of vaccination programs in reducing the spread and severity of COVID-19 in our facilities, the impact of genetic mutations of the virus into new variants on our facilities, and the extent to which funding support from the federal government, the states and theU.K. will continue to offset these incremental costs as well as lost revenues. Notwithstanding vaccination programs, we expect that heightened clinical protocols for infection control within facilities will continue for some period; however, we do not know if future reimbursement rates or equipment provided by governmental agencies will be sufficient to cover the increased costs of enhanced infection control and monitoring. While we continue to believe that longer term demographics will drive increasing demand for needs-based skilled nursing care, we expect the uncertainties to our business described above to persist at least for the near term until we can gain more information as to the level of costs our operators will continue to experience and for how long, and the level of additional governmental support that will be available to them, the potential support our operators may request from us and the future demand for needs-based skilled nursing care and senior living facilities. We continue to monitor the rate of occupancy recovery at many of our operators, and it remains uncertain whether and when demand, staffing availability and occupancy levels will return to pre-COVID-19 levels. In addition to the impacts of COVID-19 discussed above, our operators have been and are likely to continue to be adversely affected by labor shortages and increased labor costs as well as other inflation-related cost increases. In addition, our operations have also been and are likely to continue to be impacted by increased competition for the acquisition of facilities in theU.S. , which has decreased the number of investment opportunities that would be accretive to our portfolio. As part of our continuous evaluation of our portfolio and in connection with certain operator restructuring transactions, we expect to continue to opportunistically sell assets, or portfolios of assets, from time to time. 35 Table of Contents We continue to monitor the impacts of other regulatory changes, as discussed below, including any significant limits on the scope of services reimbursed and on reimbursement rates and fees, which could have a material adverse effect on an operator's results of operations and financial condition, which could adversely affect the operator's ability to meet its obligations to us.
2022 and Recent Highlights
Investments
We acquired 41 facilities for an aggregate consideration of
? 2022. The initial cash yield (the initial annual contractual cash rent divided
by the purchase price) on these asset acquisitions was between 8% and 9.5%.
? We invested
improvement programs in 2022.
We financed
? interest rate of 12% in 2022. Our 2022 new real estate loans primarily relate
to two new loans that we entered into during the year. We also advanced
million under existing real estate loans in 2022.
During 2022,
payments under its mortgage loans. In connection with the partial repayments,
? the maturity date of all the Ciena mortgage notes was extended to
(with exception of two loans with an aggregate principal balance of
million with maturity dates in 2023).
Dispositions and Impairments
In 2022, we sold 66 facilities for approximately
proceeds, recognizing a net gain of approximately
during 2022 were primarily driven by restructuring transactions associated with
? facilities formerly leased to the following operators: Gulf Coast Health Care
LLC (together with certain affiliates “
Healthcare (“Guardian”) – nine facilities, and
22 facilities.
In
previously leased to LaVie for a sales price of
mortgages on the 11 facilities, to fund a portion of the purchase price. The
senior note has a
required monthly interest payments (due in arrears beginning
with no principal payments are due until the maturity date. The remaining
consideration received under the purchase agreement is the assumption of a
? buyer from Omega. The 11-facility sale does not meet the contract criteria to
be recognized as a sale for accounting purposes and we will continue to account
for these facilities on our Consolidated Balance Sheets and depreciate the
facilities until the sale recognition requirements are met. A contract
liability will be recognized on our Consolidated Balance Sheets within accrued
expenses and other liabilities for the
will be relieved when the sale is recognized. The loan receivable associated
with the seller financing will not be recorded on our Consolidated Balance
Sheets until the sale is recognized, and any cash interest received will be
deferred and recorded as a contract liability within accrued expenses and other
liabilities on our Consolidated Balance Sheets. No interest income or gain or
loss will be recognized until the sale recognition requirements are met.
In 2022, we recorded impairments on real estate properties of approximately
? two facilities that were classified as held for sale and
to 20 held-for-use facilities of which
leased to and operated by LaVie that are expected to be impacted by the
on-going restructuring negotiations.
Financing Activities
In
? million of our outstanding common stock from time to time through
For the year ended
outstanding common stock at an average price of$27.32 per share. 36 Table of Contents
We sold 0.3 million shares of common stock under our Dividend Reinvestment and
? Common Stock Purchase Plan (“DRSPP”) during the year ended
Aggregate net proceeds from these sales generated
Other Highlights
During 2022, we made
weighted average interest rate of 10.2%. We also advanced
? existing non-real estate loans. Of the
million related to two revolving working capital loans that also had aggregate
repayments of
In 2022, Omega was included in the Bloomberg Gender-Equality Index (GEI) – one
? of only 418 companies worldwide, and fewer than 15 U.S. REITs, to be included
in the 2022 index. Collectibility Issues
During the year ended
basis of revenue recognition. These include LaVie, Maplewood Senior Living
(along with affiliates, “Maplewood”), and operators representing 0.4% (“0.4%
Operator”), 1.2% (“1.2% Operator”) and 2.0% (“2.0% Operator”) of total revenue
? (excluding the impact of write-offs), respectively, for the year ended December
31, 2022. In connection with placing these operators on a cash basis, we
recognized
through rental income. As of
basis. These operators represent an aggregate 36.5% of our total revenues
(excluding the impact of write-offs) for the year ended
During the year ended
to the following operators: Agemo, Guardian, the 3.7% Operator (defined below)
and the 1.2% Operator. Additionally, we allowed seven operators to apply
? collateral, such as security deposits or letters of credit, to contractual rent
and interest during the year ended
applied to contractual rent and interest was
interest primarily relate to the 2.0% Operator and the 1.2% Operator. Agemo, a cash basis operator, continued to not pay contractual rent and
interest due under its lease and loan agreements during the year ended December
31, 2022. We have not recorded any rental income or interest income related to
? Agemo during the year ended
entered into a restructuring agreement with Agemo. See Note 5 – Contractual
Receivables and Other Receivables and Lease Inducements to the Consolidated
Financial Statements – Part I, Item 15 hereto for additional details.
Guardian did not make rent and interest payments under its lease and loan
agreements during the first quarter of 2022, but it resumed making contractual
rent and interest payments during the second quarter of 2022, and it continued
making such payments in the third and fourth quarters of 2022, in accordance
with the restructuring terms discussed further below. Guardian is on a cash
basis of revenue recognition for lease purposes, and we recorded rental income
of
payments that were received. Additionally, Guardian’s mortgage loan is on
non-accrual status and is being accounted for under the cost recovery method
? and therefore the
year ended
balance outstanding. In the second quarter of 2022, we agreed to a formal
restructuring agreement, master lease amendments and mortgage loan amendments
with Guardian. As part of the restructuring agreement and related agreements,
Omega agreed to, among other things, allow for the retrospective deferral of
required after
interest to an aggregate of$24.0 million per year effective as ofJuly 1, 2022 . 37 Table of Contents
In the fourth quarter of 2022, Omega began the process of restructuring our
portfolio with LaVie, which primarily consists of two master lease agreements
and two term loan agreements. On
previously subject to one of two lease agreements with LaVie. See further
discussion on the sale and the accounting treatment in Dispositions and
Impairments above. Concurrent with the sale, we also amended the lease
agreement impacted by the sale and our loan agreements with LaVie. As part of
the lease amendments, Omega agreed to, among other terms, remove the 11 sold
facilities from the lease agreement and reduce monthly contractual rent from
extend the loan maturities to
and starting in
requirement to make any principal payments until the maturity dates and to
convert from monthly cash interest payments to interest paid-in-kind. The
restructuring discussions are still ongoing and subject to change, but we
? anticipate additional restructuring activity related to this operator in 2023.
As a result of the restructuring activities during 2022 and future expected
restructuring activities, during the fourth quarter of 2022, we placed LaVie on
a cash basis of revenue recognition as collection of substantially all
contractual lease payments due from them was deemed no longer probable. As a
result, we wrote-off approximately
receivables and lease inducements to rental income during the fourth quarter of
2022. In the first quarter of 2023, as part of the restructuring, we have
agreed to a partial rent deferral in the first four months of 2023. In doing
so, we agreed to allow LaVie to defer up to
from
facilities. Omega is in discussions to allow LaVie to defer up to
of contractual rent from
agreement for 41 facilities. In
full contractual payment of
lease.
During the fourth quarter of 2022, we placed Maplewood on a cash basis of
revenue recognition as collection of substantially all contractual lease
payments due from them was deemed no longer probable based on the proposed
restructuring of our lease and loan agreements with Maplewood. As a result, we
? wrote-off approximately
lease inducements to rental income during the fourth quarter of 2022.
Subsequent to year end, we entered into a restructuring agreement with
Maplewood. See Note 5 – Contractual Receivables and Other Receivables and Lease
Inducements to the Consolidated Financial Statements – Part I, Item 15 hereto
for additional details surrounding the restructuring.
In
Homes”), a
contractual rent from
? scheduled to resume in
monthly at a rate of 8% per annum and must be fully repaid by
2024.
increased staffing and utility costs.
From January through
3.7% of total revenue (excluding the impact of write-offs) for the year ended
agreement. In
for a short-term rent deferral for January through
? Operator paid the contractual amount due under its lease agreement from April
through
thousand security deposit from the 3.7% Operator. The 3.7% Operator remains
current on its
of
accounts receivable. The 3.7% Operator remains on a straight-line basis of
revenue recognition. Dividends
Quarterly cash dividends paid during 2022 aggregated to
?
share. The dividend will be paid on
as of the close of business on
Results of Operations
The following is our discussion of the consolidated results of operations for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . For a discussion of our results of operation for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 , see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations" of our Form 10-K for the year ended December 31, 2021 ("2021
Form 10-K").
38
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Comparison of results of operations for the years ended December 31, 2022 and
2021 (dollars in thousands):
Year Ended December 31,
2022 2021 Increase/(Decrease)
Revenues:
Rental income $ 750,208 $ 923,677 $ (173,469)
Income from direct financing leases 1,023 1,029
(6) Interest income 123,919 136,382 (12,463) Miscellaneous income 3,094 1,721 1,373 Expenses: Depreciation and amortization 332,407 342,014 (9,607) General and administrative 69,397 64,628 4,769 Real estate taxes 15,500 12,260 3,240 Acquisition, merger and transition related costs 42,006 1,814 40,192 Impairment on real estate properties 38,451 44,658
(6,207)
Recovery on direct financing leases - (717)
717 Provision for credit losses 68,663 77,733 (9,070) Interest expense 233,244 234,604 (1,360) Other income (expense): Other expense - net (1,997) (581) (1,416) Loss on debt extinguishment (389) (30,763) 30,374 Gain on assets sold - net 359,951 161,609 198,342 Income tax expense (4,561) (3,840) (721) Income from unconsolidated joint ventures 7,261 16,062 (8,801) Revenues
Following is a description of certain of the changes in revenues for the year
ended
The decrease in rental income was primarily the result of (i) a
decrease as a result of a net increase in straight-line rent receivable and
lease inducement write-offs in 2022 primarily due to placing operators LaVie,
Maplewood and seven other operators on a cash basis for revenue recognition due
to collectibility concerns, (ii) a
from 13 cash basis operators, including Agemo, as a result of not recording
straight-line lease revenue and/or receiving less cash rent payments period
? over period from these operators, (iii) a
recognizing no rental income related to
2022, as we received no contractual payments in the first quarter related to
the lease with this operator, and we sold or transitioned 23 of the facilities
subject to the
decrease related to facility sales, transitions and lease terminations,
partially offset by (i) a
acquisitions made in 2022 and (ii) a
extension with one operator. The decrease in interest income was primarily due to (i) a$17.0 million
decrease related to principal payments received during 2021 and 2022, including
those on the Ciena mortgage loans discussed above, and (ii) a
decrease related to loans placed on non-accrual status, primarily the Guardian
? mortgage loan, during 2021 and 2022, partially offset by a
increase related to new and refinanced loans and additional funding to existing
operators made throughout 2021 and 2022. As noted above, in 2022, we funded
or existing non-real estate loans.
Expenses
Following is a description of certain of the changes in our expenses for the
year ended
The decrease in depreciation and amortization expense primarily relates to
? facility sales and facilities reclassified to assets held for sale, such as the
22
partially offset by facility acquisitions and capital additions.
39
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The increase in general and administrative (“G&A”) expense primarily relates to
a
? Stock-Based Compensation to the Consolidated Financial Statements for a full
summary of stock-compensation movements over the last three years) partially
offset by a$2.6 million decrease in payroll and benefits and severance expenses.
The increase in acquisition, merger and transition related costs primarily
? relates to costs incurred related to the transition of facilities with LaVie
(as discussed further in “Collectibility Issues” above) and other troubled
operators.
The 2022 impairments were recognized in connection with two facilities that
were classified as held-for-sale for which the carrying values exceeded the
estimated fair values less costs to sell and 20 held-for-use facilities for
which the carrying value exceeded the fair value. The 2021 impairments were
? recognized in connection with 13 facilities that were classified as
held-for-sale for which the carrying values exceeded the estimated fair values
less costs to sell and one held-for-use facility because of the closure of the
facility in the first quarter. The 2022 and 2021 impairments were primarily the
result of decisions to exit certain non-strategic facilities and/or operators.
?The decrease in provision for credit losses primarily relates to a net decrease in aggregate specific provisions recorded in 2022 compared to specific provisions recorded in 2021, partially offset by increases in the general reserve recorded primarily resulting from increases in loss rates utilized in the estimate of expected losses for loans (see Note 9 - Allowance for Credit Losses to the Consolidated Financial Statements for a full summary of allowance movements over the last three years).
Other Income (Expenses)
The increase in total other income (expense) was primarily due to (i) a$198.3 million increase in gain on assets sold resulting from the sale of 66 facilities in 2022 compared to the sale of 48 facilities in 2021 as we continue to exit certain facilities, operator relationships and/or states to improve the strength of our overall portfolio and (ii) a$30.4 million decrease in loss on debt extinguishment primarily related to fees, premiums, and expenses related to the early redemption of$350 million of principal of the 4.375% Senior Notes due 2023 during the first quarter of 2021.
Income Tax Expense
As a REIT, we generally are not subject to federal income taxes on the REIT taxable income that we distribute to stockholders, subject to certain exceptions. For tax year 2022, we made common dividend payments of$632.9 million to satisfy REIT requirements relating to qualifying income. We have elected to treat certain of our active subsidiaries as TRSs. Our domestic TRSs are subject to federal, state and local income taxes at the applicable corporate rates. Our foreign TRSs are subject to foreign income taxes. As ofDecember 31, 2022 , one of our TRSs that is subject to income taxes at the applicable corporate rates had a net operating loss ("NOL") carry-forward of approximately$10.2 million . Also, in connection with the acquisition of oneU.K. entity in the first quarter of 2022, we acquired foreign net operating losses of$55.0 million resulting in an NOL deferred tax asset of$13.4 million (see Note 3 - Real Estate Asset Acquisitions and Development and Note 17 - Taxes). The$10.2 million NOL carry-forward was fully reserved as ofDecember 31, 2022 , with a valuation allowance due to uncertainties regarding realization. UnderU.S. current law, NOL carry-forwards generated up throughDecember 31, 2017 may be carried forward for no more than 20 years, and our NOL carry-forwards generated in our taxable years ended afterDecember 31, 2017 may be carried forward indefinitely. For the year endedDecember 31, 2022 , we recorded approximately$1.2 million of federal, state and local income tax provision and approximately$3.4 million of tax provision for foreign income taxes. These amounts do not include any gross receipts or franchise taxes payable to certain states and municipalities.
Income from
The decrease in income from unconsolidated joint ventures was primarily due to one of the joint ventures realizing a$14.9 million gain on sale of real estate investments during 2021. 40 Table of Contents Funds From Operations
We use funds from operations ("Nareit FFO"), a non-GAAP financial measure, as
one of several criteria to measure the operating performance of our business. We
calculate and report Nareit FFO in accordance with the definition of Funds from
Operations and interpretive guidelines issued by the National Association of
Real Estate Investment Trusts ("Nareit"). Nareit FFO is defined as net income
(computed in accordance with GAAP), adjusted for the effects of asset
dispositions and certain non-cash items, primarily depreciation and amortization
and impairment on real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures and changes in the fair value of warrants.
Adjustments for unconsolidated partnerships and joint ventures are calculated to
reflect funds from operations on the same basis. Revenue recognized based on the
application of security deposits and letters of credit or based on the ability
to offset against other financial instruments is included within Nareit FFO. We
believe that Nareit FFO is an important supplemental measure of our operating
performance. As real estate assets (except land) are depreciated under GAAP,
such accounting presentation implies that the value of real estate assets
diminishes predictably over time, while real estate values instead have
historically risen or fallen with market conditions. Nareit FFO was designed by
the real estate industry to address this issue. Nareit FFO herein is not
necessarily comparable to Nareit FFO of other REITs that do not use the same
definition or implementation guidelines or interpret the standards differently
from us.
We further believe that by excluding the effect of depreciation, amortization,
impairment on real estate assets and gains or losses from sales of real estate,
all of which are based on historical costs and which may be of limited relevance
in evaluating current performance, Nareit FFO can facilitate comparisons of
operating performance between periods and between other REITs. We offer this
measure to assist the users of our financial statements in evaluating our
financial performance under GAAP, and Nareit FFO should not be considered a
measure of liquidity, an alternative to net income or an indicator of any other
performance measure determined in accordance with GAAP. Investors and potential
investors in our securities should not rely on this measure as a substitute for
any GAAP measure, including net income.
The following table presents our Nareit FFO reconciliation for the years ended
Year Ended December 31,
2022 2021 2020
(in thousands)
Net income (1)(2) $ 438,841 $ 428,302 $ 163,545
Deduct gain from real estate dispositions (359,951) (161,609) (19,113)
Deduct gain from real estate dispositions -
unconsolidated joint ventures (93)
(14,880) (5,894)
78,797 251,813 138,538
Elimination of non-cash items included in net
income:
Depreciation and amortization 332,407 342,014 329,924
Depreciation - unconsolidated joint ventures 10,881 12,285 14,000
Add back impairments on real estate
properties 38,451 44,658 72,494
Add back impairments on real estate
properties - unconsolidated joint ventures - 4,430 -
Add back unrealized loss on warrants -
43 988 Nareit FFO$ 460,536 $ 655,243 $ 555,944
The years ended
(1) million and
credit and cash deposits) in revenue.
The year ended
(2)
the interest and principal of certain debt obligations of Omega. The$194.7 million decrease in Nareit FFO for the year endedDecember 31, 2022 compared to 2021 is primarily driven by the overall decrease in total revenue, which is discussed in more detail in the Results of Operations above. 41
Table of Contents
Liquidity and Capital Resources
Sources and Uses
Our primary sources of cash include rental income and interest payment receipts on our loans, existing availability under our Revolving Credit Facility, proceeds from our DRSPP and the 2021 ATM Program, facility sales, and proceeds from mortgage and other investment payoffs. We anticipate that these sources will be adequate to meet our principal cash flow needs through the next twelve months, which include: funding dividends and distributions to our stockholders and non-controlling interest members, making debt service payments (including principal and interest), funding real estate investments (including facility acquisitions, capital improvement programs and other capital expenditures), funding new and committed loan investments and paying normal recurring G&A expenses (primarily consisting of employee payroll and benefits and expenses relating to third parties for legal, consulting and audit services).
Capital Structure
At
billion
approximately 58.4% of total capitalization.
Debt
AtDecember 31, 2022 , the weighted-average annual interest rate of our debt was 4.1%. Additionally, as ofDecember 31, 2022 , 98% of our debt with outstanding principal balances has fixed interest payments. Our high percentage of fixed interest debt has kept our interest expense relatively flat year over year despite rising interest rates. As ofDecember 31, 2022 , Omega's debt obligations consisted of the following:
A
the case of loans denominated in GBP, the Sterling overnight index average
reference rate plus an adjustment of 0.1193% per annum) plus an applicable
? percentage (with a range of 95 to 185 basis points) based on our credit
ratings. The Revolving Credit Facility matures on
Omega’s option to extend such maturity date for two six-month periods. As of
Facility.
A
? percentage (with a range of 85 to 185 basis points) based on our credit
ratings. The OP Term Loan matures on
option to extend such maturity date for two six-month periods.
? 2024, 2025, 2026, 2027, 2028, 2029, 2031 and 2033. These notes bear fixed
interest rates between 3.25% and 5.25% per annum.
? loans. We had
2022, with weighted average interest rates of 3.01% per annum that mature from
2046 to 2052.
As ofDecember 31, 2022 , we had long-term credit ratings of Baa3 from Moody's and BBB- from S&P Global and Fitch. Credit ratings impact our ability to access capital and directly impact our cost of capital as well. For example, our Revolving Credit Facility accrues interest and fees at a rate per annum equal to LIBOR plus a margin that depends upon our credit rating. A downgrade in credit ratings by Moody's and S&P Global may have a negative impact on the interest rates and fees for our Revolving Credit Facility. Our credit facilities that reference LIBOR contain customary LIBOR replacement language, including, but not limited to, the use of rates based on the secured overnight financing rate. Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As ofDecember 31, 2022 and 2021, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings. 42 Table of Contents As ofDecember 31, 2022 we have five forward starting swaps totaling$400 million that are indexed to 3-month LIBOR. We designated the forward starting swaps as cash flow hedges of interest rate risk associated with interest payments on a forecasted issuance of fixed rate long-term debt. The swaps are effective onAugust 1, 2023 and expire onAugust 1, 2033 and were issued at a weighted average fixed rate of approximately 0.8675%. The fair value associated with these swaps was$93.0 million as ofDecember 31, 2022 .
Equity
AtDecember 31, 2022 , we had 234.3 million shares of common stock outstanding and our shares had a market value of$6.5 billion . As ofDecember 31, 2022 , we had the following equity programs in place that we can utilize to raise capital:
The 2021 ATM Program under which shares of common stock having an aggregate
gross sales price of up to
ATM Program has a forward sale provision that generally allows Omega to lock in
? a price on the sale of shares of common stock when sold by the forward sellers
but defer receiving the net proceeds from such sales until the shares of our
common stock are issued at settlement on a later date. We did not utilize the
forward provisions under the 2021 ATM Program during 2022. We have
million of sales remaining under the 2021 ATM Program as of
? We have a DRSPP that allows for the reinvestment of dividends and the optional
purchase of our common stock.
Dividends
As a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders in an amount at least equal to (A) the sum of (i) 90% of our "REIT taxable income" (computed without regard to the dividends paid deduction and our net capital gain), and (ii) 90% of the net income (after tax), if any, from foreclosure property, minus (B) the sum of certain items of non-cash income. In addition, if we dispose of any built-in gain asset during a recognition period, we will be required to distribute at least 90% of the built-in gain (after tax), if any, recognized on the disposition of such asset. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for such year and paid on or before the first regular dividend payment after such declaration. In addition, such distributions are required to be made pro rata, with no preference to any share of stock as compared with other shares of the same class, and with no preference to one class of stock as compared with another class except to the extent that such class is entitled to such a preference. To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100% of our "REIT taxable income" as adjusted, we will be subject to tax thereon at regular corporate rates.
Material Cash Requirements
The following table shows our material cash requirements, described below, as ofDecember 31, 2022 : Payments due by period Less than More than Total 1 year Years 2-3 Years 4-5 5 years (in thousands) Debt(1)$ 5,335,865 $ 359,898 $ 905,185 $ 1,317,191 $ 2,753,591 Interest payments on long-term debt 1,234,702 222,918 369,614 263,075 379,095 Operating lease and other obligations(2) 43,889 1,992 4,090 3,389 34,418 Total$ 6,614,456 $ 584,808 $ 1,278,889 $ 1,583,655 $ 3,167,104
The
Term Loan due
2023, (iii)
million of 4.50% Senior Notes due
Senior Notes due
(1) 3.375% Senior Notes due
due
consolidated joint venture due
per annum debt held at a consolidated joint venture due
(xiii)
due between 2046 and 2052. Other than the
OP Term Loan, the
held at consolidated joint ventures, Parent is the obligor of all outstanding
debt.
In connection with the adoption of Topic 842, we recognized lease liabilities
in connection with ground and/or facility leases. Certain operators pay these
(2) obligations directly to the landlord. We recognize rental income for ground
and/or facility leases where the operator reimburses us, or pays the
obligation directly to the landlord on our behalf.
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Table of Contents
Capital Expenditures and Funding Commitments
In addition to the obligations in the table above, as ofDecember 31, 2022 , we also had$210.9 million of commitments to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments. Additionally, we have commitments to fund$71.4 million of advancements under existing non-real estate loans. These commitments are expected to be funded over the next several years and are dependent upon the operators' election to use the commitments.
Other Arrangements
We own interests in certain unconsolidated joint ventures as described in Note 11 to the Consolidated Financial Statements - Investments in Joint Ventures. Our risk of loss is generally limited to our investment in the joint venture and any outstanding loans receivable.
We also hold variable interests in certain unconsolidated entities through our
loan and other investments. See disclosures regarding our risk of loss
associated with these entities with Note 10 to the Consolidated Financial
Statements – Variable Interest Entities.
We use derivative instruments to hedge interest rate and foreign currency exchange rate exposure as discussed in Note 15 to the Consolidated Financial Statements - Derivatives and Hedging. We have seen significant increases in fair value of our hedging instruments in 2022, primarily due to macroeconomic factors impacting interest rates and foreign currency rates.
Cash Flow Summary
The following is a summary of our sources and uses of cash flows for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 (dollars in thousands): Year Ended December 31, 2022 2021 Increase/(Decrease) Net cash provided by (used in): Operating activities$ 625,727 $ 722,136 $ (96,409) Investing activities 442,853 (524,173) 967,026 Financing activities (789,447) (341,117) (448,330)
For a discussion of our consolidated cash flows for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 , see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our
2021 Form 10-K .
Cash, cash equivalents and restricted cash totaled$300.6 million as ofDecember 31, 2022 , an increase of$276.2 million as compared to the balance atDecember 31, 2021 . The following is a discussion of changes in cash, cash equivalents and restricted cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows. Operating Activities -The decrease in net cash provided by operating activities is primarily driven by a decrease of$144.9 million of net income, net of$155.4 million of non-cash items, primarily due to a year over year reduction in rental income and interest income, as discussed in our material changes analysis under Results of Operations above. The decrease was partially offset by a$48.4 million change in the net movements of the operating assets and liabilities. 44 Table of Contents Investing Activities -The change in cash used in investing activities related primarily to (i) a$440.5 million increase in proceeds from the sales of real estate investments driven by an attractive real estate market in which Omega elected to sell non-strategic assets, (ii) a$391.6 million decrease in real estate acquisitions, primarily related to the acquisition of 24 senior living facilities from Healthpeak in the first quarter of 2021, (iii) a$75.7 million decrease in capital improvements to real estate investments and construction in progress (including$68.0 million related to the purchase of a real estate property located inWashington, D.C. in the third quarter of 2021 that Omega, in conjunction with Maplewood, plans to redevelop), (iv) a$68.9 million increase in loan repayments, net of placements which is primarily driven by higher repayments in 2022 and (v) a$10.4 million decrease in investments in unconsolidated joint ventures primarily related toSecond Spring II LLC , a new joint venture investment in 2021. Offsetting these changes were: (i) a$14.5 million decrease in distributions from unconsolidated joint ventures in excess of earnings primarily related to the Second Spring Healthcare Investments joint venture due to significant facility sales in the first quarter of 2021 and (ii) a$4.7 million decrease in receipts from insurance proceeds. Financing Activities -The change in cash used in financing activities was primarily related to (i) a$265.9 million decrease in cash proceeds from the issuance of common stock in 2022 due to decreased issuances under our DRSPP and our 2021 ATM program, as compared to the same period in 2021, (ii)$142.3 million of repurchases of shares of common stock in 2022 as a result of implementing a$500 million repurchase program inJanuary 2022 , (iii) a$88.7 million decrease in proceeds from other long-term borrowings, net of repayments and (iv) a$9.6 million increase in redemptions of OP units, partially offset by (i) a$48.6 million decrease in payment of financing related costs due to fees and premiums paid in the first quarter of 2021 related to the early redemption of$350 million of principal of the 4.375% senior notes due 2023, (ii) a$4.8 million decrease in dividends paid primarily resulting from share repurchases throughout 2022 and (iii) a$4.7 million decrease in distributions to Omega OP Unit holders.
Supplemental Guarantor Information
Parent has issued approximately$4.9 billion aggregate principal of senior notes outstanding atDecember 31, 2022 that were registered under the Securities Act of 1933, as amended. The senior notes are guaranteed by Omega OP. TheSEC adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities, such as our senior notes. As a result of these amendments, registrants are permitted to provide certain alternative financial and non-financial disclosures, to the extent material, in lieu of separate financial statements for subsidiary issuers and guarantors of registered debt securities. Accordingly, separate consolidated financial statements of Omega OP have not been presented. Parent and Omega OP, on a combined basis, have no material assets, liabilities or operations other than financing activities (including borrowings under the senior unsecured revolving and term loan credit facility, Omega OP term loan and the outstanding senior notes) and their investments in non-guarantor subsidiaries. Omega OP is currently the sole guarantor of our senior notes. The guarantees by Omega OP of our senior notes are full and unconditional and joint and several with respect to the payment of the principal and premium and interest on our senior notes. The guarantees of Omega OP are senior unsecured obligations of Omega OP that rank equal with all existing and future senior debt of Omega OP and are senior to all subordinated debt. However, the guarantees are effectively subordinated to any secured debt of Omega OP. As ofDecember 31, 2022 , there were no significant restrictions on the ability of Omega OP to make distributions to Omega.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP in theU.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. Our significant accounting policies are described in Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements. These policies were followed in preparing the Consolidated Financial Statements for all periods presented. Actual results could differ from those estimates. 45 Table of Contents We have identified the following accounting policies that we believe are critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant assumptions, judgments and estimates. With respect to these critical accounting policies, we believe the application of assumptions, judgments and estimates is consistently applied and produces financial information that fairly presents the results of operations for all periods presented. The following table presents information about our critical accounting policies, as well as the material assumptions used to develop each estimate: Nature of Critical Accounting Estimate Assumptions/Approach Used Revenue Recognition Rental income from our operating We assess the probability of collecting leases is generally recognized on a substantially all payments under our leases straight-line basis over the lease based on several factors, including, among term when we have determined that the other things, payment history of the lessee, collectibility of substantially all of the financial strength of the lessee and any the lease payments are probable. If we guarantors, historical operations and determine that it is not probable that operating trends, current and future economic substantially all of the lease conditions and expectations of performance payments will be collected, we account (which includes known substantial doubt about for the revenue under the lease on a an operator's ability to continue as
a going
cash basis. concern). If our evaluation of these factors
indicates it is probable that we will be
unable to collect substantially all rents, we
place that operator on a cash basis and limit
our rental income to the lesser of lease
income on a straight-line basis plus variable
rents when they become accruable or cash
collected. As a result of placing an operator
on a cash basis, we may recognize a charge to
rental income for any contractual rent
receivable, straight-line rent receivable and
lease inducements.
As of December 31, 2022 and 2021, we had
outstanding straight-line rent receivables of
$166.1 million and $148.5 million ,
respectively, and lease inducements of $6.0
million and $93.8 million , respectively.
During 2022, we wrote-off approximately
$119.8 million of contractual receivables,
straight-line rent receivables and lease
inducements to rental income primarily as a
result of placing nine operators on a
cash-basis. During 2021, we wrote-off
approximately $36.0 million of contractual
receivables, straight-line rent receivables
and lease inducements to rental income
primarily as a result of placing six
operators on a cash-basis. If we change our
conclusion regarding the probability of
collecting rent payments required by a
lessee, we may recognize an adjustment to
rental income in the period we make a change
to our prior conclusion. Changes in the
assessment of probability are accounted for
on a cumulative basis as if the lease had
always been accounted for based on the
current determination of the likelihood of
collection, potentially resulting in
increased volatility of rental income.
Real Estate Investment Impairment
Assessing impairment of real property We evaluate our real estate investments for
involves subjectivity in determining impairment indicators at each reporting
if indicators of impairment are period, including the evaluation of our
present and in estimating the future assets' useful lives. The judgment regarding
undiscounted cash flows. The estimated the existence of impairment indicators is
future undiscounted cash flows are based on factors such as, but not limited to,
generally based on the related lease market conditions, operator performance
which relates to one or more including the current payment status
of
properties and may include cash flows contractual obligations and expectations of
from the eventual disposition of the the ability to meet future contractual
asset. In some instances, there may be obligations, legal structure, as well as our
various potential outcomes for a real intent with respect to holding or disposing
estate investment and its potential of the asset. If indicators of impairment are
future cash flows. In these instances, present, we evaluate the carrying value of
the undiscounted future cash flows the related real estate investments in
used to assess the recoverability are relation to our estimate of future
probability-weighted based on undiscounted cash flows of the underlying
management's best estimates as of the facilities to determine if an impairment
date of evaluation. These estimates charge is necessary. This analysis requires
can have a significant impact on the us to use judgment in determining whether
undiscounted cash flows. indicators of impairment exist, probabilities
of potential outcomes and to estimate the
expected future undiscounted cash flows or
estimated fair values of the facility which
impact our assessment of impairment, if any.
During 2022, we recorded impairments on real
estate properties of approximately $38.5
million on 22 facilities. During 2021, we
recorded impairments on real estate
properties of approximately $44.7 million on
14 facilities.
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Table of Contents
Nature of Critical Accounting
Estimate Assumptions/Approach Used
Asset Acquisitions
We believe that our real estate The allocation of the purchase price to the
acquisitions are typically related real estate acquired (tangible assets
considered asset acquisitions. The and intangible assets and liabilities)
assets acquired and liabilities involves subjectivity as such allocations are
assumed are recognized by based on a relative fair value analysis. In
allocating the cost of the determining the fair values that drive such
acquisition, including transaction analysis, we estimate the fair value of each
costs, to the individual assets component of the real estate acquired which
acquired and liabilities assumed generally includes land, buildings and site
on a relative fair value basis. improvements, furniture and equipment, and
Tangible assets consist primarily the above or below market component of
of land, building and site in-place leases. Significant assumptions used
improvements and furniture and to determine such fair values include
equipment. Identifiable intangible comparable land sales, capitalization rates,
assets and liabilities primarily discount rates, market rental rates and
consist of the above or below property operating data, all of which can be
market component of in-place impacted by expectations about future market
leases. or economic conditions. Our estimates of the
values of these components affect the amount
of depreciation and amortization we record
over the estimated useful life of the
property or the term of the lease.
During 2022 and 2021, we acquired real estate
assets of approximately $225.2 million and
$604.0 million , respectively. These
transactions were accounted for as asset
acquisitions and the purchase price of each
was allocated based on the relative fair
values of the assets acquired and liabilities
assumed.
Allowance for Credit Losses on
Real Estate Loans, Non-real Estate
Loans and Direct Financing Leases
For purposes of determining our We assess our internal credit ratings on a
allowance for credit loss, we pool quarterly basis. Our internal credit ratings
financial assets that have similar consider several factors including the
risk characteristics. We aggregate collateral and/or security, the performance
our financial assets by financial of borrowers underlying facilities, if
instrument type and by internal applicable, available credit support (e.g.,
risk rating. Our internal ratings guarantees), borrowings with third parties,
range between 1 and 7. An internal and other ancillary business ventures and
rating of 1 reflects the lowest real estate operations of the borrower.
likelihood of loss and a 7
reflects the highest likelihood of Our model's historic inputs consider PD
and
loss. LGD data for residential care facilities
published by the Federal Housing
We have a limited history of Administration ("FHA") along with Standards &
incurred losses and consequently Poor's one-year global corporate default have elected to employ external rates. Our historical loss rates revert
to
data to perform our expected historical averages after 36 periods. Our
credit loss calculation. We model's current conditions and supportable
utilize a probability of default forecasts consider internal credit ratings,
("PD") and loss given default current and projected U.S. unemployment rates
("LGD") methodology. published by the U.S. Bureau of Labor
Statistics and the Federal Reserve Bank of
Periodically , the Company may St. Louis and the weighted average life to
identify an individual loan for maturity of the underlying financial asset.
impairment. When we identify a During 2022 and 2021, we recorded a provision
loan impairment, the loan is for credit losses of approximately $68.7
written down to the present value million and $77.7 million , respectively. As
of the expected future cash flows. of December 31, 2022 and 2021, we had a total
In cases where expected future allowance for credit loss of $188.4 million
cash flows are not readily and $144.5 million , respectively. A 10%
determinable, the loan is written increase or decrease in the FHA default rates
down to the fair value of the as of December 31, 2022 would result in an
underlying collateral. We may base additional provision or recovery for credit
our valuation on a loan's losses of $10.1 million or $9.3 million ,
observable market price, if any, respectively. If the weighted average yield
or the fair value of collateral, to maturity on our portfolio increases or
net of sales costs, if the decreases by 10%, this will result in an
repayment of the loan is expected additional provision or recovery for credit
to be provided solely by the sale losses of $4.6 million or $5.4 million ,
of the collateral. respectively.
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