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MarketScreener Homepage  >  Equities  >  Nyse  >  Omega Healthcare Investors Inc    OHI

OMEGA HEALTHCARE INVESTORS INC

(OHI)
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OMEGA HEALTHCARE INVESTORS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/08/2019 | 04:10pm EDT

Forward-Looking Statements and Factors Affecting Future Results


The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this document, including
statements regarding potential future changes in reimbursement. This document
contains "forward-looking statements" within the meaning of the federal
securities laws. These statements relate to our expectations, beliefs,
intentions, plans, objectives, goals, strategies, future events, performance and
underlying assumptions and other statements other than statements of historical
facts. In some cases, you can identify forward-looking statements by the use of
forward-looking terminology including, but not limited to, terms such as "may,"
"will," "anticipates," "expects," "believes," "intends," "should" or comparable
terms or the negative thereof. These statements are based on information
available on the date of this filing and only speak as to the date hereof and no
obligation to update such forward-looking statements should be assumed. Our
actual results may differ materially from those reflected in the forward-looking
statements contained herein as a result of a variety of factors, including,
among other things:

(i) those items discussed under "Risk Factors" in Part I, Item 1A to our annual

     report on   Form 10-K  ;


      uncertainties relating to the business operations of the operators of our

(ii) assets, including those relating to reimbursement by third-party payors,

regulatory matters and occupancy levels;

the ability of any of Omega's operators in bankruptcy to reject unexpired

lease obligations, modify the terms of Omega's mortgages and impede the

(iii) ability of Omega to collect unpaid rent or interest during the pendency of

a bankruptcy proceeding and retain security deposits for the debtor's

obligations, and other costs and uncertainties associated with operator

bankruptcies;

our ability to re-lease, otherwise transition, or sell underperforming

(iv) assets or assets held for sale on a timely basis and on terms that allow us

to realize the carrying value of these assets;

(v) the availability and cost of capital to us;

(vi) changes in our credit ratings and the ratings of our debt securities;

(vii) competition in the financing of healthcare facilities;

(viii) regulatory and other changes in the healthcare sector;

(ix) changes in the financial position of our operators;

(x) the effect of economic and market conditions generally and, particularly, in

the healthcare industry;

(xi) changes in interest rates;

(xii) the amount and yield of any additional investments;

(xiii) changes in tax laws and regulations affecting real estate investment

trusts ("REITs");

the potential impact of changes in the skilled nursing facility ("SNF") and

assisted living facility ("ALF") markets or local real estate conditions on

(xiv) 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; and

(xv) our ability to maintain our status as a REIT.

Overview


Omega Healthcare Investors, Inc. ("Omega") was formed as a real estate
investment trust ("REIT") and incorporated in the State of Maryland on March 31,
1992.  All of Omega's assets are owned directly or indirectly by, and all of
Omega's operations are conducted directly or indirectly through, its subsidiary,
OHI Healthcare Properties Limited Partnership ("Omega OP"). Omega OP was formed
as a limited partnership and organized in the State of Delaware on October 24,
2014.  Unless stated otherwise or the context otherwise requires, the terms the
"Company," "we," "our" and "us" means Omega and Omega OP, collectively.

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The Company has one reportable segment consisting of investments in
healthcare-related real estate properties located in the United States ("U.S.")
and the United Kingdom ("U.K."). Our core business is to provide financing and
capital to the long-term healthcare industry with a particular focus on skilled
nursing facilities ("SNFs") and assisted living facilities ("ALFs"), and to a
lesser extent, independent living facilities, rehabilitation and acute care
facilities ("specialty facilities") and medical office buildings ("MOBs"). Our
core portfolio consists of long-term leases and mortgage agreements. Except for
one MOB, all of our leases are "triple-net" leases, which require the tenants to
pay all property-related expenses. Our mortgage revenue derives from fixed rate
mortgage loans, which are secured by first mortgage liens on the underlying real
estate and personal property of the mortgagor. Our other investment income is
derived from fixed and variable rate loans to our operators to fund working
capital and capital expenditures.  These loans, which may be either unsecured or
secured by the collateral of the borrower, are classified as other investments.

Omega OP is governed by the Second Amended and Restated Agreement of Limited
Partnership of OHI Healthcare Properties Limited Partnership, dated as of
April 1, 2015 (the "Partnership Agreement"). Omega has exclusive control over
Omega OP's day-to-day management pursuant to the Partnership Agreement. As of
June 30, 2019, Omega owned approximately 97% of the issued and outstanding units
of partnership interest in Omega OP ("Omega OP Units"), and investors owned
approximately 3% of the Omega OP Units.

Omega's consolidated financial statements include the accounts of (i) Omega,
(ii) Omega OP, (iii) all direct and indirect wholly owned subsidiaries of Omega
and (iv) other entities in which Omega or Omega OP has a majority voting
interest and control. All intercompany transactions and balances have been
eliminated in consolidation, and Omega's net earnings are reduced by the portion
of net earnings attributable to noncontrolling interests. Omega OP's
consolidated financial statements include the accounts of (i) Omega OP, (ii) all
direct and indirect wholly owned subsidiaries of Omega OP and (iii) other
entities in which Omega OP has a majority voting interest and control.  Omega
OP's net earnings are reduced by the portion of net earnings attributable to the
noncontrolling interest.  All intercompany transactions and balances have been
eliminated in consolidation.

On May 17, 2019, Omega and Omega OP completed their merger with MedEquities
Realty Trust, Inc. ("MedEquities") and its subsidiary operating partnership and
the general partner of its subsidiary operating partnership. Pursuant to the
Agreement and Plan of Merger, as amended by the First Amendment to the Agreement
and Plan of Merger, dated March 26, 2019, (the "Merger Agreement") Omega
acquired MedEquities and MedEquities was merged with and into Omega (the
"Merger") at the effective time of the Merger with Omega continuing as the
surviving company. At the effective time, each outstanding share of MedEquities
common stock was converted into the right to receive (i) 0.235 of a share of
Omega common stock, plus cash in lieu of fractional shares and (ii) $2.00 in
cash.  Pursuant to the Merger Agreement, MedEquities declared a special dividend
of $0.21 per share of MedEquities common stock (the "Pre-Closing Dividend")
payable to the holders of record of MedEquities common stock as of the trading
day immediately prior to the closing date of the Merger, which dividend was
payable following the effective time of the Merger together with the cash
consideration under the Merger Agreement.



As of June 30, 2019, our portfolio of real estate investments consisted of 949
healthcare facilities, located in 41 states and the U.K. and operated by 75
third-party operators. Our investment in these facilities, net of impairments
and allowances, totaled approximately $9.2 billion at June 30, 2019, with
approximately 97% of our real estate investments related to long-term care
facilities. Our portfolio is made up of 746 SNFs, 117 ALFs, 28 specialty
facilities, two medical office buildings, fixed rate mortgages on 45 SNFs, two
ALFs and four specialty facilities and five facilities that are closed/held for
sale. At June 30, 2019, we also held other investments of approximately $367.2
million, consisting primarily of secured loans to third-party operators of our
facilities and $102.8 million of investments in two unconsolidated joint
ventures.

As of June 30, 2019 and December 31, 2018, we do not have any material properties or operators with facilities that are not materially occupied.

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Taxation

Omega is a REIT for United States federal income tax purposes, and Omega OP is a pass through entity for United States federal income tax purposes.


Since our inception, Omega has elected to be taxed as a REIT under the
applicable provisions of the Internal Revenue Code ("Code"). A REIT is generally
not subject to federal income tax on that portion of its REIT taxable income
which is distributed to its stockholders, provided that at least 90% of such
taxable income is distributed each tax year and certain other requirements are
met, including asset and income tests. So long as we qualify as a REIT under the
Code, we generally will not be subject to federal income taxes on the REIT
taxable income that we distribute to stockholders, subject to certain
exceptions.

If the Company fails to qualify as a REIT in any taxable year, the Company will
be subject to federal income taxes on its taxable income at regular corporate
rates and dividends paid to our stockholders will not be deductible by us in
computing taxable income. Further, we would not be permitted to qualify for
treatment as a REIT for federal income tax purposes for four years following
the year in which qualification is denied, unless the Internal Revenue Service
grants us relief under certain statutory provisions. Failing to qualify as a
REIT could materially and adversely affect the Company's net income; however, we
believe we are organized and operate in such a manner as to qualify for
treatment as a REIT. We test our compliance within the REIT taxation rules to
ensure that we are in compliance with the REIT rules on a quarterly and annual
basis. We review our distributions and projected distributions each year to
ensure we have met and will continue to meet the annual REIT distribution
requirements. In 2019, we expect to pay dividends in excess of our taxable
income.

Subject to the limitation under the REIT asset test rules, we are permitted to
own up to 100% of the stock of one or more taxable REIT subsidiaries ("TRSs").
We have elected for three of our active subsidiaries to be treated as TRSs. Two
of our TRSs are domestic and are subject to federal, state and local income
taxes at the applicable corporate rates and the other is subject to foreign
income taxes. As of June 30, 2019, one of our domestic TRSs had a net operating
loss carry-forward of approximately $5.7 million. The loss carry-forward is
fully reserved as of June 30, 2019, with a valuation allowance due to
uncertainties regarding realization. Our net operating loss carryforwards will
be carried forward for no more than 20 years, subject to certain limitations.

In connection with the MedEquities Merger on May 17, 2019, we acquired MedEquities Realty TRS, LLC. MedEquities Realty TRS, LLC has no assets, liabilities, revenues or expenses and, accordingly, we have no tax accrual or net operating loss carryforward associated with this entity as of June 30, 2019.




For the three months ended June 30, 2019 and 2018, we recorded approximately
$0.3 million and $0.2 million, respectively, of state and local income tax
provisions.  For the six months ended June 30, 2019 and 2018, we recorded
approximately $0.4 million and $0.3 million, respectively, of state and local
income tax provisions.  For the three months ended June 30, 2019 and 2018, we
recorded approximately $0.5 million and $0.6 million, respectively, of tax
provisions for foreign income taxes.  For the six months ended June 30, 2019 and
2018, we recorded approximately $1.1 million and $1.0 million, respectively, of
tax provisions for foreign income taxes.  The expenses were included in income
tax expense on our Consolidated Statements of Operations.

Government Regulation and Reimbursement

The healthcare industry is heavily regulated. Our operators are subject to
extensive and complex federal, state and local healthcare laws and regulations.
These laws and regulations are subject to frequent and substantial changes
resulting from the adoption of new legislation, rules and regulations, and
administrative and judicial interpretations of existing law. The ultimate timing
or effect of these changes, which may be applied retroactively, cannot be
predicted. Changes in laws and regulations impacting our operators, in addition
to regulatory non-compliance by our operators, can have a significant effect on
the operations and financial condition of our operators, which in turn may
adversely impact us. There is the potential that we may be subject directly to
healthcare laws and regulations because of the broad nature of some of these
regulations, such as the Anti-kickback Statute and False Claims Act, among
others. The following is a discussion of certain laws and regulations generally
applicable to our operators, and in certain cases, to us.

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Healthcare Reform.  A substantial amount of rules and regulations have been
issued under the Patient Protection and Affordable Care Act, as amended by the
Health Care and Education and Reconciliation Act of 2010 (collectively referred
to as the "Healthcare Reform Law"). The current administration has brought
several Congressional efforts to repeal and replace the Affordable Care Act.  We
expect additional rules, regulations and judicial interpretations in response to
legal and other constitutional challenges to be issued that may materially
affect our operators' financial condition and operations.  Even if the
Healthcare Reform Law is not ultimately amended or repealed, the current
administration or Congress could propose changes impacting implementation of the
Healthcare Reform Law. The ultimate composition and timing of any legislation
enacted under the current administration that would impact the current
implementation of the Healthcare Reform Law remains uncertain. Given the
complexity of the Healthcare Reform Law and the substantial requirements for
regulation thereunder, the impact of the Healthcare Reform Law on our operators
or their ability to meet their obligations to us cannot be predicted, whether in
its current form or as amended or repealed.

Reform Requirements for Long-Term Care Facilities.  On October 4, 2016, the
Centers for Medicare and Medicaid Services ("CMS") issued a final rule modifying
the conditions of participation in Medicare and Medicaid for SNFs. CMS stated
that the regulations, last updated in 1991, were "necessary to reflect the
substantial advances that had been made over the past several years in the
theory and practice of service delivery and safety" within long-term care. The
extensive modifications require SNFs to implement new processes; make changes to
current practices; and create new policies and procedures within a short
timeframe to remain in compliance with their conditions for participation.
Changes include provisions related to staff training, discharge planning,
infection prevention and control programs, and pharmacy services, among others.
While many of the regulations became effective on November 28, 2016, some of the
regulations became effective in Phase 2 on November 28, 2017, with others
becoming effective in Phase 3, beginning on November 28, 2019. CMS initially
delayed for eighteen months the imposition of any fines for failure to implement
Phase 2 of the new "Requirements of Participation" implemented in November 2017.
However, CMS advised in March 2019 that the moratorium on financial penalties
will expire in May 2019, as previously indicated.  CMS estimated the average
cost for a SNF to implement the 2016 regulations to be $62,900 the first year
and $55,000 each year thereafter.

Reimbursement Generally. A significant portion of our operators' revenue is
derived from government-funded reimbursement programs, consisting primarily of
Medicare and Medicaid. As federal and state governments continue to focus on
healthcare reform initiatives, and as the federal government and many states
face significant current and future budget deficits, efforts to reduce costs by
government payors will likely continue, which may result in reductions in
reimbursement at both the federal and state levels. Additionally, new and
evolving payor and provider programs, including but not limited to Medicare
Advantage, dual eligible, accountable care organizations, and bundled payments
could adversely impact our tenants' and operators' liquidity, financial
condition or results of operations.  Significant limits on the scope of services
reimbursed and/or reductions of reimbursement rates could have a material
adverse effect on our operators' results of operations and financial condition,
which could adversely affect our operators' ability to meet their obligations to
us.

Medicaid.  State budgetary concerns, coupled with the implementation of rules
under the Healthcare Reform Law, or prospective changes to the Healthcare Reform
Law under the current administration or Congress, may result in significant
changes in healthcare spending at the state level. Since our operators' profit
margins on Medicaid patients are generally relatively low, more than modest
reductions in Medicaid reimbursement or an increase in the percentage of
Medicaid patients could adversely affect our operators' results of operations
and financial condition, which in turn could negatively impact us.

In the state of Florida, the average Medicaid reimbursement rate for SNFs
decreased 4.5% effective July 1, 2019, resulting from the loss of one-time
discretionary funding applied to October 1, 2018 Florida Medicaid reimbursement
rates to cover the impact of hold-harmless provisions in the new, price-based
Prospective Payment System ("PPS") enacted by Florida at that time.  However,
the net impact of this rate decrease was to revert the average rate
approximately to the pre-PPS, cost-based level as of September 30, 2018, which
we believe operators can generally address with operational adjustments to
maintain coverage levels.  A smaller discretionary increase effective October 1,
2019 will  increase the average rate by 0.7%.  When the transition hold-harmless
provisions expire on September 30, 2021, the PPS rates will no longer be
dependent on discretionary funding levels. At June 30, 2019, 9% of our
investments were in Florida.

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  Table of Contents

Medicare.  On July 31, 2018, CMS issued a final rule regarding the fiscal year
("FY") 2019 Medicare payment rates and quality payment programs for SNFs, which
continues the trend of shifting Medicare payments from volume to value.
 Proposed aggregate payments to SNFs, which became effective October 1, 2018 for
FY 2019, are expected to increase by $820 million over FY 2017 payments. This
reimbursement increase is attributable to a 2.4% market basket increase as
required under the Bipartisan Budget Act of 2018. As mandated by the Improving
Medicare Post-Acute Care Transformation Act of 2014 ("IMPACT Act"), the annual
update is reduced by two percentage points for SNFs that fail to submit required
quality data to CMS under the SNF Quality Reporting Program ("QRP").

Payments to providers are being increasingly tied to quality and efficiency.

 CMS finalized the previously proposed rule to replace the SNF PPS RUG-IV
case-mix classification methodology with a new value-based Patient Driven
Payment Model ("PDPM").  The PDPM is designed to improve the incentives to treat
the needs of the whole patient, rather on the volume of services the patient
receives.  The PDPM will be effective October 1, 2019 (FY 2020) to allow time
for education and training of SNFs in preparation for the new payment model.

These prospective reimbursement changes as well as the value-based purchasing
programs applicable to SNFs under the 2014 Protecting Access to Medicare Act,
which became effective on October 1, 2018, could have a material adverse effect
on our operators' financial condition and operations, adversely impacting their
ability to meet their obligations to us.

In addition to Medicare payment rates, SNFs continue to be impacted by the "Bipartisan Budget Act of 2018," which extended Medicare sequestration and Medicare reimbursement cuts to providers and plans by 2% across the board, for an additional two years through 2027.


Furthermore, the Bipartisan Budget Act of 2018 permanently repealed the therapy
caps that applied to Medicare Part B therapy services provided as of January 1,
2018.  The former cap amounts were retained as a threshold above which claims
must include confirmation that services are medically necessary as justified by
appropriate documentation in the medical record.  The industry estimates that
these changes may potentially (i) result in the restoration of Medicare Part B
SNF revenues that would have declined had the therapy caps remained in place and
(ii) permit continued medically necessary services to maintain beneficiary
quality of care levels. However, these changes reduced the reimbursement rate
for Medicare Part B therapy services performed by therapy assistants to 85% of
the physician fee schedule beginning January 1, 2022.

Quality of Care Initiatives.  In addition to quality or value based
reimbursement reforms, CMS has implemented a number of initiatives focused on
the quality of care provided by long term care facilities that could affect our
operators. In December 2008, CMS released quality ratings for all of the nursing
homes that participate in Medicare or Medicaid under its "Five Star Quality
Rating System." Facility rankings, ranging from five stars ("much above
average") to one star ("much below average") are updated on a monthly basis.
SNFs are required to provide information for the CMS Nursing Home Compare
website regarding staffing and quality measures. Based on this data and the
results of state health inspections, SNFs are then rated based on the five-star
rating system.

In August 2016, CMS announced a modification to the Five Star Quality Rating
System through the introduction of new quality measures based primarily on
Medicare claims data submitted by hospitals, including: (1) percentage of
short-stay residents who were successfully discharged to the community; (2)
percentage of short-stay residents who have had an outpatient emergency
department visit; (3) percentage of short-stay residents who were
re-hospitalized after a nursing home admission; (4) percentage of short-stay
residents who made improvements in function; and (5) percentage of long-stay
residents whose ability to move independently worsened. These ratings were
incorporated into the nursing home rating system in July 2016 and were phased in
through January 2017.  In March 2019, CMS announced additional updates to the
Nursing Home Care website and the Five Star Quality Rating System beginning in
April 2019.  These changes include revisions to the inspection process,
enhancement of new staffing information, and implementation of new quality
measures.  Additional revisions include a lifting of the 'freeze' on the health
inspection ratings instituted in February 2018. CMS has previously 'frozen' the
health inspection star ratings category after implementing a new survey process
for long-term care facilities.

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CMS is also setting higher thresholds and evidence-based standards for nursing
homes' staffing levels.  Currently, facilities that report seven or more days in
a quarter with no registered nurse onsite are automatically assigned a one-star
staffing rating. In April 2019, the threshold for the number of days without a
registered nurse onsite in a quarter that triggers an automatic downgrade to
one-star will be reduced from seven days to four days.  It is possible that
these rating changes or any other ranking system could lead to future
reimbursement policies that reward or penalize facilities on the basis of the
reported quality of care parameters.

Office of the Inspector General Activities.  Beginning June 15, 2017, the Office
of Inspector General ("OIG") began updating its Work Plan website monthly in
order to enhance transparency around the OIG's continuous work planning efforts.
 The OIG reported in its January 2018 update that it would review the quality of
care provided to Medicare beneficiaries, including elders and disabled persons,
who are being treated at inpatient and outpatient medical facilities for
conditions that may be the result of abuse or neglect. The OIG referenced prior
reviews which indicated problems with the quality of care and the reporting and
investigation of potential abuse or neglect at group homes, nursing homes, and
skilled nursing facilities.  The OIG additionally included a review of the
staffing levels reported by SNFs as part of its August 2018 and February 2019
updates, as well as a continuing review of involuntary transfers and discharges
from nursing homes in its June 2019 updates.  The OIG is continuing to review
whether ambulance services paid by Medicare Part B were appropriately subject to
Part A SNF consolidated billing requirements.

These monthly Work Plan updates supplement the OIG's Work Plan for government
fiscal year 2017 that included seven projects related specifically to nursing
homes: (1) determining to what extent state agencies investigate serious nursing
home complaints within the required timeframes; (2) unreported incidents of
potential abuse and neglect in SNFs; (3) review of SNF Medicare reimbursement
documentation (determine if it meets requirements for each particular resource
utilization group); (4) the SNF Adverse Event Screening Tool, which will
disseminate practical information about the SNF Adverse Event Trigger Tool; (5)
review of the National Background Check Program for long-term care employees;
(6) compliance with the SNF prospective payment system requirement related to a
three-day qualifying inpatient hospital stay; and (7) review of potentially
avoidable hospitalizations of Medicare and Medicaid-Eligible nursing facility
residents and prevention and detection services provided by nursing homes.

Additionally, regional Recovery Audit Contractor program auditors along with the OIG and Department of Justice are expected to continue their efforts to evaluate SNF Medicare claims for any excessive therapy charges.


Department of Justice. SNFs are under intense scrutiny for the quality of care
being rendered to residents and appropriate billing practices. The Department of
Justice launched ten regional Elder Justice Task Forces in 2016 which are
coordinating and enhancing efforts to pursue SNFs that provide grossly
substandard care to their residents. They are also focusing on therapy billing
issues. These Task Forces are composed of representatives from the U.S.
Attorneys' Offices, State Medicaid Fraud Control Units, state and local
prosecutors' offices, U.S. Department of Health and Human Services ("HHS"),
State Adult Protective Services agencies, Long Term Care Ombudsmen programs, and
law enforcement.

Medicare and Medicaid Program Audits.  Governmental agencies and their agents,
such as the Medicare Administrative Contractors, fiscal intermediaries and
carriers, as well as the HHS-OIG and HHS-OCR, CMS and state Medicaid programs,
may conduct audits of our operators' billing practices.  Under the Recovery
Audit Contractor ("RAC") program, CMS contracts with RACs on a contingency basis
to conduct post-payment reviews to detect and correct improper payments in the
fee-for-service Medicare program, to managed Medicare plans and in the Medicaid
program.  CMS also employs Medicaid Integrity Contractors ("MICs") to perform
post-payment audits of Medicaid claims and identify overpayments. In addition to
RACs and MICs, the state Medicaid agencies and other contractors have increased
their review activities. Should any of our operators be found out of compliance
with any of these laws, regulations or programs, our business, financial
position and results of operations could be negatively impacted.

Fraud and Abuse. There are various federal and state civil and criminal laws and
regulations governing a wide array of healthcare provider referrals,
relationships and arrangements, including laws and regulations prohibiting fraud
by healthcare providers. Many of these complex laws raise issues that have not
been clearly interpreted by the relevant governmental authorities and courts.

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These laws include: (i) federal and state false claims acts, which, among other
things, prohibit providers from filing false claims or making false statements
to receive payment from Medicare, Medicaid or other federal or state healthcare
programs; (ii) federal and state anti-kickback and fee-splitting statutes,
including the Medicare and Medicaid Anti-kickback statute, which prohibit the
payment or receipt of remuneration to induce referrals or recommendations of
healthcare items or services, such as services provided in a SNF; (iii) federal
and state physician self-referral laws (commonly referred to as the Stark Law),
which generally prohibit referrals by physicians to entities for designated
health services (some of which are provided in SNFs) with which the physician or
an immediate family member has a financial relationship; (iv) the federal Civil
Monetary Penalties Law, which prohibits, among other things, the knowing
presentation of a false or fraudulent claim for certain healthcare services and
(v) federal and state privacy laws, including the privacy and security rules
contained in the Health Insurance Portability and Accountability Act of 1996,
which provide for the privacy and security of personal health information.

Violations of healthcare fraud and abuse laws carry civil, criminal and
administrative sanctions, including punitive sanctions, monetary penalties,
imprisonment, denial of Medicare and Medicaid reimbursement and potential
exclusion from Medicare, Medicaid or other federal or state healthcare programs.
Additionally, there are criminal provisions that prohibit filing false claims or
making false statements to receive payment or certification under Medicare and
Medicaid, as well as failing to refund overpayments or improper payments.
Violation of the Anti-kickback statute or Stark Law may form the basis for a
federal False Claims Act violation. These laws are enforced by a variety of
federal, state and local agencies and can also be enforced by private litigants
through, among other things, federal and state false claims acts, which allow
private litigants to bring qui tam or whistleblower actions, which have become
more frequent in recent years.

Several of our operators have responded to subpoenas and other requests for
information regarding their operations in connection with inquiries by the
Department of Justice or other regulatory agencies.  In addition, MedEquities
Realty Trust, Inc., which we acquired in May 2019, has responded to a Civil
Investigative Demand from the Department of Justice in connection with Lakeway
Regional Medical Center. See Note 16 - Commitments and Contingencies in the
Financial Statements - Part I, Item 1 hereto.

Privacy. Our operators are subject to various federal, state and local laws and
regulations designed to protect the confidentiality and security of patient
health information, including the federal Health Insurance Portability and
Accountability Act of 1996, as amended, the Health Information Technology for
Economic and Clinical Health Act ("HITECH"), and the corresponding regulations
promulgated thereunder (collectively referred to herein as "HIPAA"). The HITECH
Act expanded the scope of these provisions by mandating individual notification
in instances of breaches of protected health information, providing enhanced
penalties for HIPAA violations, and granting enforcement authority to states'
Attorneys General in addition to the HHS Office for Civil Rights ("OCR").
 Additionally, in a final rule issued in January 2013, HHS modified the standard
for determining whether a breach has occurred by creating a presumption that any
non-permitted acquisition, access, use or disclosure of protected health
information is a breach unless the covered entity or business associate can
demonstrate through a risk assessment that there is a low probability that the
information has been compromised.  The OCR received $28.7 million from
enforcement actions in 2018, surpassing the previous record of $23.5 million
from 2016 by 22 percent.

Various states have similar laws and regulations that govern the maintenance and
safeguarding of patient records, charts and other information generated in
connection with the provision of professional medical services. These laws and
regulations require our operators to expend the requisite resources to secure
protected health information, including the funding of costs associated with
technology upgrades. Operators found in violation of HIPAA or any other privacy
law or regulation may face significant monetary penalties. In addition,
compliance with an operator's notification requirements in the event of a breach
of unsecured protected health information could cause reputational harm to
an
operator's business.

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Licensing and Certification. Our operators and facilities are subject to various
federal, state and local licensing and certification laws and regulations,
including laws and regulations under Medicare and Medicaid requiring operators
of SNFs and ALFs to comply with extensive standards governing operations.
Governmental agencies administering these laws and regulations regularly inspect
our operators' facilities and investigate complaints. Our operators and their
managers receive notices of observed violations and deficiencies from time to
time, and sanctions have been imposed from time to time on facilities operated
by them. In addition, many states require certain healthcare providers to obtain
a certificate of need, which requires prior approval for the construction,
expansion or closure of certain healthcare facilities, which has the potential
to impact some of our operators' abilities to expand or change their businesses.

Americans with Disabilities Act (the "ADA").  Our properties must comply with
the ADA and any similar state or local laws to the extent that such properties
are public accommodations as defined in those statutes. The ADA may require
removal of barriers to access by persons with disabilities in certain public
areas of our properties where such removal is readily achievable. Should
barriers to access by persons with disabilities be discovered at any of our
properties, we may be directly or indirectly responsible for additional costs
that may be required to make facilities ADA-compliant. Noncompliance with the
ADA could result in the imposition of fines or an award of damages to private
litigants. Our commitment to make readily achievable accommodations pursuant to
the ADA is ongoing, and we continue to assess our properties and make
modifications as appropriate in this respect.

Other Laws and Regulations.  Additional federal, state and local laws and
regulations affect how our operators conduct their operations, including laws
and regulations protecting consumers against deceptive practices and otherwise
generally affecting our operators' management of their property and equipment
and the conduct of their operations (including laws and regulations involving
fire, health and safety; quality of services, including care and food service;
residents' rights, including abuse and neglect laws; and the health standards
set by the federal Occupational Safety and Health Administration).

General and Professional Liability.  Although arbitration agreements have been
effective in limiting general and professional liabilities for SNF and long term
care providers, there have been numerous lawsuits challenging the validity of
arbitration agreements in long term care settings. As set forth in the recent
conditions of participation final rule issued on October 4, 2016, CMS prohibited
pre-dispute arbitration agreements between SNFs and residents effective November
28, 2016, thereby increasing potential liabilities for SNFs and long-term care
providers.  Subsequently, the authority of CMS to restrict the rights of these
parties to arbitrate was challenged by litigation in various jurisdictions, and
enforcement by CMS was suspended on November 7, 2016 following the issuance of a
preliminary injunction by the U.S. District Court for the Northern District of
Mississippi.  In a reversal from its previous position, CMS issued a proposed
rule on June 5, 2017 that would lift the ban on pre-dispute arbitration
agreements in the long-term care setting.  The final rule issued by CMS on July
16, 2019 lifted the ban on pre-dispute arbitration agreements offered to
residents at the time of admission, but prohibits providers from requiring
residents to sign them as a condition for receiving care. The final rule also
mandates that providers specifically inform residents or their representatives
that they are not required to agree to a binding arbitration agreement. Further,
the agreement must specifically grant residents the explicit right to rescind
the agreement within thirty (30) calendar days of signing it.



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Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with generally accepted
accounting principles ("GAAP") in the United States, and a summary of our
significant accounting policies is included in Note 2 - Summary of Significant
Accounting Policies to our Annual Report on   Form 10-K   for the year ended
December 31, 2018.  Our preparation of the financial statements requires us to
make estimates and assumptions about future events that affect the amounts
reported in our financial statements and accompanying footnotes.  Future events
and their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment.  Actual results
inevitably will differ from those estimates, and such differences may be
material to the consolidated financial statements.  We have described our most
critical accounting policies in our 2018 Annual Report on   Form 10-K   for
the year ended December 31, 2018, in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations.

There have been no changes to our critical accounting policies or estimates
since December 31, 2018, except for the changes that resulted from the adoption
of the new lease accounting standard on January 1, 2019, as discussed in detail
in Note 1 - Basis of Presentation and Significant Accounting Policies, section
"Accounting Pronouncements Adopted in 2019" of these unaudited consolidated
financial statements under Part 1, Item 1 of this report and the accompanying
discussion of the new lease accounting guidance below.  See also Note 2 -
Summary of Significant Accounting Policies to our Annual Report on   Form 10-K
for the year ended December 31, 2018.

Accounting Pronouncements Adopted in 2019

In February 2016, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842). In 2018, the
FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient
for Transition to Topic 842, ASU 2018-10, Leases (Topic 842): Codification
Improvements to Topic 842, Leases, ASU 2018-11, Leases (Topic 842): Targeted
Improvements and ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for
Lessors. These standards are collectively referred to herein as Topic 842 and
set out the principles for the recognition, measurement, presentation and
disclosure of leases for both parties to a contract (i.e., lessees and lessors).
Topic 842 requires lessees to apply a dual approach, classifying leases as
either finance or operating leases based on the principle of whether or not the
lease is effectively a financed purchase of the leased asset by the lessee. This
classification will determine whether the lease expense is recognized based on
an effective interest method or on a straight-line basis over the term of the
lease. Topic 842 requires lessors to account for leases using an approach that
is substantially equivalent to the previous guidance for sales type leases,
direct financing leases and operating leases. Topic 842 was adopted by us on
January 1, 2019 using the modified retrospective method. Upon adoption, we
applied the package of practical expedients that allowed us to not reassess (i)
whether any expired or existing contracts are or contain leases, (ii) lease
classification for any expired or existing leases and (iii) initial direct costs
for any expired or existing leases. Furthermore, we applied the optional
transition method, which allowed us to initially apply Topic 842 at the adoption
date and recognize a cumulative effect adjustment to the opening balance of
equity in the period of adoption, although we did not record an adjustment as of
January 1, 2019.  During the three months ended June 30, 2019, we made an
immaterial adjustment to the equity balance as of April 1, 2019 of approximately
$8.5 million to reflect our assessment of the collectability of certain
operator's future contractual lease payments based on the facts and
circumstances that existed as of January 1, 2019. Additionally, our leases met
the criteria in Topic 842 to not separate non-lease components from the related
lease component.  We have elected to exclude sales and other similar taxes from
the measurement of lease revenue and expense and we have excluded those costs
paid directly by lessees to third parties.



Upon adoption, we recorded total initial non-cash right of use assets and lease
liabilities of approximately $11.1 million.  We also began recording variable
lease payments as rental income and real estate tax expense for those
facilities' property taxes that we pay directly and are reimbursed by our
operators.  For the three and six months ended June 30, 2019, we recorded $2.8
million and $6.6 million, respectively, of rental income and $4.0 million and
$7.9 million, respectively, of real estate tax expense in our Consolidated
Statements of Operations.  We also began recording rental income and ground
lease expense for those assets we lease and are reimbursed by our operators
and/or are paid for directly by our operators.  For the three and six months
ended June 30, 2019, we recorded $0.2 million and $0.4 million, respectively, of
rental income and $0.3 million and $0.5 million, respectively, of ground lease
expense in our Consolidated Statements of Operations.

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As a lessor, rental income from operating leases is generally recognized on a
straight-line basis over the lease term when we have determined that the
collectibility of substantially all of the lease payments is probable. If we
determine that it is not probable that substantially all of the lease payments
will be collected, we account for the revenue under the lease on a cash basis.
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 revenue.



In addition, provisions for operating lease losses are recognized as a direct
reduction to rental income.  Provisions for operating lease losses prior to
January 1, 2019 were recorded in provision for uncollectible accounts on our
Consolidated Statements of Operations and were not reclassified to conform to
the current period presentation.  See Note 1 - Basis of Presentation and
Significant Accounting Policies, section "Accounting Pronouncements Adopted in
2019" of these unaudited consolidated financial statements under Part 1, Item 1
of this report for additional disclosures.



Recent Accounting Pronouncements - Pending Adoption


In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses
(Topic 326) ("ASU 2016-13"), which changes the impairment model for most
financial assets. The new model uses a forward-looking expected loss method,
which will generally result in earlier recognition of allowances for credit
losses. The measurement of expected credit losses is based upon historical
experience, current conditions, and reasonable and supportable forecasts that
affect the collectability of the reported amount.  ASU 2016-13 is effective for
annual and interim periods beginning after December 15, 2019.  ASU 2016-13
specifically excludes from its scope receivables arising from operating leases
accounted for under Topic 842.  We currently expect to adopt the standard using
the modified retrospective approach.  We continue to evaluate the impact of
adopting ASU 2016-13 on our consolidated financial statements.

Results of Operations

The following is our discussion of the consolidated results of operations, financial position and liquidity and capital resources, which should be read in conjunction with our unaudited consolidated financial statements and accompanying notes.

Three Months Ended June 30, 2019 and 2018

Operating Revenues


Our operating revenues for the three months ended June 30, 2019 totaled $225.3
million, an increase of $5.4 million over the same period in 2018.  The $5.4
million increase was primarily the result of (i) a $12.2 million increase in
rental income resulting from the MedEquities Merger, additional revenue from
facility acquisitions, facility transitions and lease amendments in 2018 and
2019, and $2.8 million of property tax revenue resulting from the adoption of
ASU 2016-02 on January 1, 2019, offset by an approximate $13.0 million decrease
due to facility sales and placing operators on a cash basis and (ii) a $2.0
million increase in mortgage income and a $2.0 million increase in other
investment income primarily related to the MedEquities Merger and new loans or
notes and additional funding to existing operators made throughout 2018 and
2019.  These increases were partially offset by (i) a $0.4 million decrease in
miscellaneous income and (ii) a $0.2 million decrease in the direct financing
lease income related to a facility sale in the second quarter of 2018.

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Operating Expenses
Operating expenses for the three months ended June 30, 2019, totaled $98.5
million, an increase of approximately $14.2 million over the same period in
2018.  The $14.2 million increase was primarily due to: (i) $5.7 million net
impairment charges on two facilities in the second quarter of 2019, as compared
to a $(1.1) million recovery on impairment of real estate properties in the same
period of 2018, (ii) a $4.0 million increase in depreciation expense primarily
resulting from the MedEquities Merger and facility acquisitions, (iii) a $4.0
million increase related to real estate tax expense resulting from the adoption
of ASU 2016-02 on January 1, 2019 and (iv) a $1.2 million increase in
acquisition costs primarily related to the MedEquities Merger.  These increases
were partially offset by (i) a $1.4 million decrease in general and
administrative expenses and (ii) a $0.6 million decrease in provisions for
uncollectible accounts.

Other Income (Expense)

For the three months ended June 30, 2019, total other expenses were $51.0 million, an increase of approximately $1.7 million over the same period in 2018.

 The increase was due to $1.3 million change in interest income and other - net
primarily related to the change in the fair value of warrants to acquire shares
of another public company.

Six Months Ended June 30, 2019 and 2018

Operating Revenues


Our operating revenues for the six months ended June 30, 2019 totaled $449.0
million, an increase of $8.9 million over the same period in 2018.  The $8.9
million increase was primarily the result of a $5.4 million increase in other
investment income and a $3.6 million increase in mortgage income.  These
increases primarily related to MedEquities Merger, new loans or notes and
additional funding to existing operators made throughout 2018 and 2019.  These
increases were partially offset by a $0.6 million decrease in the direct
financing lease income related to a facility sale in the second quarter of 2018.

Operating Expenses


Operating expenses for the six months ended June 30, 2019, totaled $200.0
million, an increase of approximately $16.1 million over the same period in
2018.  The $16.1 million increase was primarily due to: (i) a $7.9 million
increase related to real estate tax expense resulting from the adoption of ASU
2016-02 on January 1, 2019, (ii) a $7.7 million increase in impairment loss on
direct financing leases due to lower than expected accounts receivable
collections by the Orianna Health Systems ("Orianna") bankruptcy trustee, (iii)
a $4.5 million increase in depreciation expense primarily resulting from the
MedEquities Merger and facility acquisitions, (iv) a $4.2 million increase in
acquisition costs related to the MedEquities Merger and (v) a $1.9 million
increase in impairment on real estate properties.  These increases were
partially offset by (i) a $8.4 million decrease in provisions for uncollectible
accounts and (ii) a $1.7 million decrease in general and administrative
expenses.

Other Income (Expense)

For the six months ended June 30, 2019, total other expenses were $101.0 million, an increase of approximately $2.1 million over the same period in 2018.

 The increase was due to $1.6 million change in interest income and other - net
primarily related to the change in the fair value of warrants to acquire shares
of another public company.

National Association of Real Estate Investment Trusts Funds From Operations

Our funds from operations ("Nareit FFO") for the three months ended June 30, 2019 was $157.2 million compared to $154.5 million for the same period in 2018.

Our Nareit FFO for the six months ended June 30, 2019 was $301.3 million compared to $301.9 million for the same period in 2018.


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We calculate and report Nareit FFO in accordance with the definition of Funds
from Operations and interpretive guidelines issued by the National Association
of Real Estate Investment Trusts ("Nareit"), and, consequently, Nareit FFO is
defined as net income (computed in accordance with GAAP), adjusted for the
effects of asset dispositions and certain non-cash items, primarily depreciation
and amortization and impairment on real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures and changes in the fair value of
warrants.  Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect funds from operations on the same basis.  We believe that
Nareit FFO is an important supplemental measure of our operating performance.
Because the historical cost accounting convention used for real estate assets
requires depreciation (except on land), such accounting presentation implies
that the value of real estate assets diminishes predictably over time, while
real estate values instead have historically risen or fallen with market
conditions. Nareit FFO was designed by the real estate industry to address this
issue.  Nareit FFO herein is not necessarily comparable to Nareit FFO of other
REITs that do not use the same definition or implementation guidelines or
interpret the standards differently from us.

Nareit FFO is a non-GAAP financial measure. We use Nareit FFO as one of several
criteria to measure the operating performance of our business. We further
believe that by excluding the effect of depreciation, amortization, impairment
on real estate assets and gains or losses from sales of real estate, all of
which are based on historical costs and which may be of limited relevance in
evaluating current performance, Nareit FFO can facilitate comparisons of
operating performance between periods and between other REITs. We offer this
measure to assist the users of our financial statements in evaluating our
financial performance under GAAP, and Nareit FFO should not be considered a
measure of liquidity, an alternative to net income or an indicator of any other
performance measure determined in accordance with GAAP. Investors and potential
investors in our securities should not rely on this measure as a substitute for
any GAAP measure, including net income.

The following table presents our Nareit FFO results for the three and six months
ended June 30, 2019 and 2018:


                                              Three Months Ended        Six Months Ended
                                                  June 30,                  June 30,
                                              2019         2018        2019          2018
                                                             (in thousands)
Net income                                  $  75,671$  81,986$ 147,853$  169,919
Add back loss (deduct gain) from real
estate dispositions                               267        2,891         264      (14,609)
Add back loss from real estate
dispositions - unconsolidated joint
ventures                                            -          640           -           640
                                               75,938       85,517     148,117       155,950
Elimination of non-cash items included
in net income:
Depreciation and amortization                  73,637       69,609     144,489       139,970
Depreciation - unconsolidated joint
ventures                                        1,675        1,466       3,047         3,123
Add back (deduct) impairments (recovery)
on real estate properties                       5,709      (1,097)       5,709         3,817
Add back impairments on real estate
properties - unconsolidated joint
ventures                                            -            -           -           608
Add back (deduct) unrealized loss (gain)
on warrants                                       270      (1,021)        (14)       (1,602)
Nareit FFO (a)                              $ 157,229$ 154,474$ 301,348$  301,866

(a) Includes amounts allocated to Omega stockholders and Omega OP Unit holders.


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Portfolio and Recent Developments

The following tables summarized the significant acquisitions that occurred during the first six months of 2019:



                      Number of                                  Total                       Building & Site       Furniture       Initial
                      Facilities               Country/       Investment          Land         Improvements        & Fixtures       Annual
 Period      SNF    ALF   Specialty  MOB         State                                  (in millions)                            Cash Yield(1)
   Q1            1      -         -      -        OH         $       11.9 (3)   $   1.1    $             10.1    $        0.7            12.00 %
                                              CA, CT, IN,
                                              NV, SC, TN,
   Q2           20      1        11      1        TX                421.4 (2)      40.1                 368.7            12.6            10.27 %
   Q2            7      1         3      -      PA, VA              131.8 (3)       9.9                 112.7             9.2             9.35 %
 Total          28      2        14      1                   $      565.1$  51.1    $            491.5    $       22.5

(1) The cash yield is based on the purchase price.

The acquisition was accounted for as a business combination. The Company

estimated the fair value of the assets acquired on the acquisition date based

(2) on certain valuation analyses that have yet to be finalized, and accordingly,

the assets acquired, as detailed, are subject to adjustment once the analysis

is completed. The other acquisitions were accounted for as asset

acquisitions.

(3) Acquired via a deed-in-lieu of foreclosure.

On May 17, 2019, Omega and Omega OP completed the MedEquities Realty Trust Inc.
("MedEquities") Merger.  In accordance with the Merger Agreement, each share of
MedEquities common stock issued and outstanding immediately prior thereto was
converted into the right to receive (i) 0.235 of a share of Omega common stock
plus the right to receive cash in lieu of any fractional shares of Omega common
stock, and (ii) an amount in cash equal to $2.00 (the "Cash Consideration").  In
connection with the MedEquities Merger, we issued approximately 7.5 million
shares of Omega common stock and paid approximately $63.7 million of cash
consideration to former MedEquities stockholders.  We borrowed approximately
$350 million under our existing senior unsecured revolving credit facility to
fund the cash consideration and the repayment of MedEquities' previously
outstanding debt.  As a result of the MedEquities Merger, we acquired 33
facilities subject to operating leases, four mortgages, three other investments
and an investment in an unconsolidated joint venture.  We also acquired other
assets and assumed debt and other liabilities.  Based on the closing price of
our common stock on May 16, 2019, the fair value of the consideration exchanged
approximated $346 million.


The following table highlights the preliminary fair value of the assets acquired and liabilities assumed on May 17, 2019:





                                              (in thousands)
Fair value of net assets acquired:
Real estate investments                      $        421,448
Mortgage notes receivable (see Note 7)                108,097
Other investments                                      19,192
Investment in unconsolidated joint venture             73,907
Cash                                                    4,067
Contractual receivables                                 1,461
Other assets (1)                                       32,819
Total investments                                     660,991
Debt                                                (285,100)
Accrued expenses and other liabilities (2)           (30,342)
Fair value of net assets acquired            $        345,549

(1)Includes approximately $26.8 million in above market lease assets. (2)Includes approximately $7.5 million in below market lease liabilities.



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The MedEquities facilities acquired in 2019 are included in our results of operations from the date of acquisition. For the period from May 17, 2019 through June 30, 2019, we recognized approximately $7.1 million of total revenue from the assets acquired in connection with the MedEquities Merger.

For the three and six months ended June 30, 2019, we incurred approximately $1.2
million and $4.2 million, respectively, of acquisition related costs associated
with the MedEquities Merger.


Investment in Consolidated Joint Venture


In February 2019, we entered into a joint venture to construct a 100,000 square
foot medical office building in Lakeway, Texas with an estimated initial
construction budget of approximately $36 million.  The Company owns 90% of the
venture with the remaining 10% owned by outside investors.  During the first
quarter of 2019, this consolidated joint venture acquired a parcel of land
for
approximately $3.6 million.


Investment in Unconsolidated Joint Venture


On May 17, 2019, in connection with the MedEquities Merger, we acquired a 51%
ownership interest in Lakeway Realty, L.L.C. (the "Lakeway Partnership"), a
joint venture that owns the Lakeway Regional Medical Center (the "Lakeway
Hospital").  The other 49% interest is owned indirectly by a physicians group
and a non-physician investor.  The Lakeway Hospital is an acute care hospital
located in Lakeway, Texas. The Lakeway Partnership is also a lessor under a
ground lease for a medical office building which is part of the Lakeway Hospital
campus.  On the merger date, the Company's ownership interest in the Lakeway
Partnership had a preliminary fair value of approximately $73.9 million (subject
to the completion of our purchase accounting).  Our investment in the Lakeway
Partnership consists primarily of real estate.  We estimated the fair value of
the underlying real estate considering the lessees' purchase option (Level 1)
which is discussed in more detail below, third-party appraisals and discounted
cash flows associated with the ground lease (Level 3).  Our preliminary initial
basis difference of approximately $69.9 million is amortized on a straight-line
basis over 40 years to income (loss) from unconsolidated joint ventures in the
accompanying Consolidated Statements of Operations.  We account for our
investment in this joint venture using the equity method.  The accounting
policies for this unconsolidated joint venture are the same as those of the
Company.

The Company also acquired a first mortgage lien issued to Lakeway Partnership in
the original principal amount of approximately $73.0 million bearing interest at
8% per annum based on a 25-year amortization schedule and maturing on March 20,
2025.  We have preliminarily determined the acquisition date fair value of the
acquired mortgage is $69.1 million.

The Lakeway Hospital  is leased pursuant to a triple-net lease to Scott & White
Hospital - Round Rock (the "Baylor Lessee"), with Baylor University Medical
Center ("BUMC") as guarantor. These entities are part of the Baylor Scott &
White Health system.  The lease provides that, commencing after completion of
the third year of the lease (effective September 1, 2019) and subject to certain
conditions, the Baylor Lessee has the option to purchase the Lakeway Hospital at
a price equal to the aggregate base rent payable under the lease for the
12-month period following the date of the written notice from the Baylor Lessee
to exercise the purchase option divided by (i) 6.5% if written notice is
provided after completion of the third lease year and before completion of the
tenth lease year or (ii) 7.0% if written notice is provided any time thereafter.
In addition, the Baylor Lessee has a right of first refusal and a right of first
offer in the event that the joint venture intends to sell or otherwise transfer
Lakeway Hospital.

Other Development



On July 26, 2019, the Company entered into an agreement to purchase 60
facilities for $735 million consisting of approximately $345 million of cash and
the assumption of approximately $390 million (as of August 1, 2019) in mortgage
loans guaranteed by the U.S. Department of Housing and Urban Development
("HUD").  These loans have a blended "all-in" rate (including Mortgage Insurance
Premiums) of 3.66% per annum with maturities between September 2046 and December
2051.



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The 60 facilities consist of 58 SNFs and two ALFs representing 6,590 operating
beds, located in eight states and are leased to two operators in three triple
net leases generating approximately $64 million in 2020 annual contractual
cash
rent.



Completion of the transaction is subject to consent by HUD as well as the
satisfaction of customary closing conditions.  No assurance can be given as to
when or if (i) HUD's consent will be obtained, (ii) the closing conditions will
be satisfied and (iii) the acquisition will be completed.



Asset Held for Sale

As of June 30, 2019, we have four facilities, totaling $4.6 million classified as assets held for sale. We expect to sell these facilities over the next twelve months.

Asset Sales, Impairments, Contractual Receivables and Other Receivables and Lease Inducements and Other

Asset Sales

During the first quarter of 2019, we sold one facility which was previously held for sale at December 31, 2018 for approximately $0.4 million in net cash proceeds recognizing a net gain of approximately $3,000.


During the second quarter of 2019, we sold three facilities subject to operating
leases and a parcel of land for approximately $8.6 million in net cash proceeds
recognizing a net loss of approximately $0.3 million.

During the second quarter of 2019, the Company reached an agreement with
Diversicare Healthcare Services, Inc. to amend its master lease to terminate
operations of ten nursing facilities located in Kentucky. We will concurrently
sell the facilities to an unrelated third party for approximately $84.5 million.
 The transaction is subject to closing conditions, including but not limited to,
state licensure and regulatory approval.  The transaction is expected to become
effective in the third quarter of 2019; however, no assurance can be given as to
when or if the closing conditions are satisfied and the sale completed.



Impairments

During the second quarter of 2019, we recorded impairments on real estate properties of approximately $7.6 million on two facilities. Our second quarter 2019 impairments were offset by $1.9 million of insurance proceeds received related to a facility that was destroyed by a storm.


Our recorded impairments were primarily the result of decisions to exit certain
non-strategic facilities and/or operators. We reduced the net book value of the
impaired facilities to their estimated fair values. To estimate the fair value
of the facilities, we utilized a market approach which considered Level 3 inputs
which generally consist of non-binding offers from unrelated third parties
and/or broker quotes.

Contractual Receivables and Other Receivables and Lease Inducements


As of June 30, 2019, we have approximately $25.9 million of contractual
receivables outstanding. Of the $25.9 million of contractual receivables
outstanding, approximately $18.1 million relates to Agemo Holdings LLC ("Agemo"
an entity formed in May 2018 to silo the leases and loans formerly held by
Signature Healthcare). In addition to the contractual receivables, we have
approximately $45.1 million of straight-line rent receivables and/or lease
inducements associated with Agemo as of June 30, 2019.  Daybreak Venture LLC
("Daybreak") is on a cash basis of accounting for purposes of revenue
recognition, see additional discussion below. For the three months ended June
30, 2019 and 2018, we recorded approximately $21.3 million and $22.9 million of
rental income, respectively, and $1.1 million and $0.8 million, respectively, of
other investment income from these operators.  For the six months ended June 30,
2019 and 2018, we recorded approximately $41.5 million and $42.2 million of
rental income, respectively, and $2.1 million and $1.5 million, respectively, of
other investment income from these operators.

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Other

In March 2018, Orianna commenced voluntary Chapter 11 proceedings in the United
States Bankruptcy Court for the Northern District of Texas, Dallas Division (the
"Bankruptcy Court").  As of December 31, 2018, we had 15 SNFs subject to a
direct financing lease with Orianna with a carrying value of approximately
$120.5 million, net of an allowance of $103.2 million.

On January 11, 2019, pursuant to a Bankruptcy Court order, affiliates of Orianna
purchased the remaining 15 SNFs for $176 million of consideration, comprised of
$146 million in cash received by Orianna and a $30.0 million seller note held by
the Company.  The $30.0 million note bears interest at 6% per annum and matures
on January 11, 2026.  Interest on the unpaid principal balance is due quarterly
in arrears. Commencing on January 11, 2022, quarterly principal payments are due
based on a 15-year amortization schedule on the then outstanding principal
balance of the loan.  On the same date, Orianna repaid the debtor-in-possession
("DIP") financing, including all related interest.



On January 16, 2019, the Bankruptcy Court confirmed Orianna's plan, creating a
Distribution Trust (the "Trust") to distribute the proceeds from Orianna's sale
of the remaining 15 SNFs, as well as the Trust's collections of Orianna's
accounts receivable portfolio.  In January 2019, we reclassified our net
investment in direct financing lease of $115.8 million from the Trust to other
assets on our Consolidated Balance Sheet.  For the period from January 16, 2019
through June 30, 2019, we received approximately $88 million from the Trust as a
partial liquidation including approximately $2.0 million during the three months
ended June 30, 2019.



In March 2019, we received updated information from the Trust indicating
diminished collectability of the accounts receivable owed to us.  As a result,
we recorded an additional $7.7 million allowance during the three months ended
March 31, 2019, reducing our remaining receivable from the Trust to
approximately $21.1 million as of March 31, 2019.  As of June 30, 2019, our
remaining receivable from the Trust is $19.1 million.  As of June 30, 2019, the
Trust was comprised of $20.7 million of cash and accounts receivable, net of an
estimated allowance, of $4.2 million.  We expect that the aggregate of such
amounts will be used to pay estimated costs of $5.9 million to other creditors
and to wind down the Trust, with the remainder paid to us.  The amount payable
to us is contingent upon the collection of the accounts receivable balances and
the estimated costs to wind down the Trust. These amounts are estimated and
remain subject to change. Such changes could be different than the currently
estimated amounts and such differences could have a material impact on our
financial statements.



During the third quarter of 2017, we placed Daybreak on a cash basis for revenue
recognition as a result of nonpayment of funds owed to us. During the fourth
quarter of 2017, we executed a Settlement and Forbearance Agreement with
Daybreak which permitted Daybreak to defer payments up to 23% of their
contractual rent for the remainder of 2017, subject to certain conditions.
 During the fourth quarter of 2018, Daybreak fell behind on rent by
approximately two months and, accordingly, was no longer in compliance with the
2017 Settlement and Forbearance Agreement as a result of not paying the full
contractual amounts due.



On January 30, 2019, we entered into a Second Amendment to Settlement and
Forbearance Agreement under which we agreed to defer approximately $4.2 million
of rent in the fourth quarter of 2018 and approximately $2.5 million (or
approximately one month's rent) in each of the first two quarters of 2019.  With
the exception of $1.1 million in required real estate tax escrows, Daybreak met
their contractual payment obligations through the second quarter of 2019.
 However, continued pressures on overall occupancy, Medicare census, labor costs
and a low Medicaid rate in the state of Texas have resulted in tighter liquidity
for Daybreak.



Confronted with these challenges, we recently engaged a third party consultant
to provide a comprehensive review of Daybreak's overall operations, provide
commentary and recommendations for improvement opportunities, and provide a long
range forecast of Daybreak's future cash flow expectations.  While the results
of our consultants' findings are not yet final, we have reduced our expectations
for future quarterly cash rent receipts from Daybreak for the foreseeable
future.



It is important to point out that this remains a work-in-progress and does not
reflect our long-term view as to the intrinsic value of the Daybreak portfolio
and its ability to generate cash flow and rent to the Company.

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While many of our Texas operators are challenged by Texas' low Medicaid rate and
the continued labor pressures, Daybreak is further challenged by their
widespread geographical footprint across the state, its lack of a presence in
other states with more favorable reimbursement and their concentration in rural
localities which results in a limited Medicare/Medicaid quality-mix and lower
occupancy. While the third quarter of 2019 is expected to be particularly
challenging for Daybreak, we expect that Daybreak will benefit from several
known factors in the fourth quarter, including, (i) the addition of 26 Omega
facilities into the Texas quality incentive payment program ("QIPP"), (ii) the
implementation of PDPM and (iii) the 2.4% Medicare rate increase.  The QIPP
benefit will begin on September 1, 2019 and PDPM and the Medicare rate increase
will begin on October 1, 2019.



The Company continues to closely monitor the performance of all of its operators, as well as industry trends and developments generally.

Liquidity and Capital Resources

At June 30, 2019, we had total assets of $9.1 billion, total equity of $4.1 billion and debt of $4.8 billion, representing approximately 54.1% of total capitalization.

Financing Activities and Borrowing Arrangements


In connection with the MedEquities Merger on May 17, 2019, we assumed a $125.0
million term loan and outstanding borrowings of $160.1 million under
MedEquities' previous revolving credit facility.  We repaid the total
outstanding balance on both the term loan and the revolving credit facility and
terminated the related agreements on May 17, 2019.



Certain of our other secured and unsecured borrowings are subject to customary
affirmative and negative covenants, including financial covenants.  As of June
30, 2019 and December 31, 2018, we were in compliance with all affirmative and
negative covenants, including financial covenants, for our secured and unsecured
borrowings. Omega OP, the guarantor of Parent's outstanding senior notes, does
not directly own any substantive assets other than its interest in non-guarantor
subsidiaries.

$500 Million Equity Shelf Program


For the three months ended June 30, 2019 and 2018, we issued 0.7 million and 0.9
million, respectively, shares of our common stock at an average price of $35.90
and $30.19 per share, respectively, net of issuance costs, generating net
proceeds of $26.3 million and $27.5 million, respectively, under our $500
million Equity Shelf Program.  For the six months ended June 30, 2019 and 2018,
we issued 3.0 million and 0.9 million, respectively, shares of our common stock
at an average price of $34.82 and $30.16 per share, respectively, net of
issuance costs, generating net proceeds of $102.9 million and $27.5 million,
respectively, under our $500 million Equity Shelf Program.

Dividend Reinvestment and Common Stock Purchase Plan

For the three months ended June 30, 2019 and 2018, we issued approximately 0.6
million and 0.8 million, respectively, shares of our common stock at an average
price of $37.02 and $29.22 per share, respectively, per share through our
Dividend Reinvestment and Common Stock Purchase Plan for gross proceeds of
approximately $21.8 million and $22.2 million, respectively.  For the six months
ended June 30, 2019 and 2018, we issued approximately 1.5 million and 0.9
million, respectively, shares of our common stock at an average price of $36.52
and $28.55 per share, respectively, per share through our Dividend Reinvestment
and Common Stock Purchase Plan for gross proceeds of approximately $54.1 million
and $27.1 million, respectively.

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  Table of Contents

Dividends

In order to qualify as a REIT, we are required to distribute dividends (other
than capital gain dividends) to our stockholders in an amount at least equal to
(A) the sum of (i) 90% of our "REIT taxable income" (computed without regard to
the dividends paid deduction and our net capital gain), and (ii) 90% of the net
income (after tax), if any, from foreclosure property, minus (B) the sum of
certain items of non-cash income. In addition, if we dispose of any built-in
gain asset during a recognition period, we will be required to distribute at
least 90% of the built-in gain (after tax), if any, recognized on the
disposition of such asset. Such distributions must be paid in the taxable year
to which they relate, or in the following taxable year if declared before we
timely file our tax return for such year and paid on or before the first regular
dividend payment after such declaration. In addition, such distributions are
required to be made pro rata, with no preference to any share of stock as
compared with other shares of the same class, and with no preference to one
class of stock as compared with another class except to the extent that such
class is entitled to such a preference. To the extent that we do not distribute
all of our net capital gain or do distribute at least 90%, but less than 100% of
our "REIT taxable income" as adjusted, we will be subject to tax thereon at
regular ordinary and capital gain corporate tax rates.

For the six months ended June 30, 2019, we paid dividends of approximately
$273.8 million, to our common stockholders.  On the 15th of February and May
2019, we paid dividends of $0.66 per outstanding common share to common
stockholders of record as of last business day of January and April 2019,
respectively.  For the six months ended June 30, 2019, Omega OP paid
distributions of approximately $12.1 million to holders of Omega OP Units other
than Omega.  The Omega OP Unit holders received the same distributions per unit
as those paid to the common stockholders of Omega.

Liquidity


We believe our liquidity and various sources of available capital, including
cash from operations, our existing availability under our credit facilities,
facility sales and expected proceeds from mortgage and other investment payoffs
are adequate to finance operations, meet recurring debt service requirements and
fund future investments through the next twelve months.

We regularly review our liquidity needs, the adequacy of cash flow from operations, and other expected liquidity sources to meet these needs. We believe our principal short-term liquidity needs are to fund:

 ? normal recurring expenses;


 ? debt service payments;

? capital improvement programs;

? common stock dividends; and

? growth through acquisitions of additional properties.



The primary source of liquidity is our cash flows from operations. Operating
cash flows have historically been determined by: (i) the number of facilities we
lease or have mortgages on; (ii) rental and mortgage rates; (iii) our debt
service obligations; (iv) general and administrative expenses and (v) our
operators' ability to pay amounts owed. The timing, source and amount of cash
flows provided by or used in financing activities and in investing activities
are sensitive to the capital markets environment, especially to changes in
interest rates. Changes in the capital markets environment may impact the
availability of cost-effective capital and affect our plans for acquisition and
disposition activity.

Cash, cash equivalents and restricted cash totaled $34.1 million as of June 30,
2019, an increase of $22.5 million as compared to the balance at December 31,
2018. 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.

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Table of Contents

Operating Activities - Operating activities generated $265.4 million of net cash
flow for the six months ended June 30, 2019, as compared to $217.2 million for
the same period in 2018, an increase of $48.2 million which is primarily due to
a $50.0 million payment to one of our operators to acquire a portion of their
in-the-money purchase option of which approximately $28.4 million was recorded
as a lease inducement during the first quarter of 2018.



Investing Activities - Net cash flow from investing activities was an outflow of
$15.0 million for the six months ended June 30, 2019, as compared to an outflow
of $6.3 million for the same period in 2018.  The $8.8 million change in cash
flow from investing activities related primarily to (i) a $123.9 million
increase in other investments - net, (ii) a $73.3 million increase in proceeds
from sale of direct financing lease assets, (iii) a $46.3 million decrease in
real estate acquisitions and (iv) a $64.6 million increase in mortgages - net.
 Offsetting these changes were primarily: (i) a $212.9 million decrease in
proceeds from sale of real estate investments, (ii) a $59.6 million increase in
cash paid to complete the MedEquities Merger, (iii) a $24.5 million acquisition
related deposit, (iv) a $11.7 million increase in investments in construction in
progress in 2019, as compared to the same period in 2018 and (v) a $5.4 million
increase in capital renovation programs in 2019 compared to the same period
of
2018.



Financing Activities - Net cash flow from financing activities was an outflow of
$227.8 million for the six months ended June 30, 2019, as compared to an outflow
of $294.1 million for the same period in 2018.  The $66.3 million change in cash
from financing activities was primarily related to (i) a $75.4 million increase
in cash proceeds from the issuance of common stock in 2019, as compared to the
same period in 2018, (ii) a $27.1 million increase in net proceeds from our
dividend reinvestment plan in 2019, as compared to the same period in 2018 and
(iii) a $4.3 million increase in other long-term borrowings - net, offset by (i)
a $28.1 million increase in our credit facility borrowings - net and (ii) a
$10.8 million increase in dividends paid.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2019 768 M
EBIT 2019 538 M
Net income 2019 327 M
Debt 2019 4 500 M
Yield 2019 6,58%
P/E ratio 2019 26,8x
P/E ratio 2020 23,5x
EV / Sales2019 17,2x
EV / Sales2020 16,9x
Capitalization 8 701 M
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Number of Analysts 9
Average target price 39,25  $
Last Close Price 40,18  $
Spread / Highest target 4,53%
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Spread / Lowest Target -7,91%
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Managers
NameTitle
Taylor C. Pickett Chief Executive Officer & Director
Craig R. Callen Chairman
Daniel J. Booth Chief Operating Officer
Robert O. Stephenson Chief Financial Officer & Treasurer
Bernard J. Korman Director
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