Forward-Looking Statements and Factors Affecting Future Results
Unless otherwise indicated or except where the context otherwise requires, the
terms "we," "us" and "our" and other similar terms in this Quarterly Report on
Form 10-Q refer to Omega Healthcare Investors, Inc. and its consolidated
subsidiaries.
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this document. This document
contains "forward-looking statements" within the meaning of the federal
securities laws. These statements relate to our expectations, beliefs,
intentions, plans, objectives, goals, strategies, future events, performance and
underlying assumptions and other statements other than statements of historical
facts. In some cases, you can identify forward-looking statements by the use of
forward-looking terminology including, but not limited to, terms such as "may,"
"will," "anticipates," "expects," "believes," "intends," "should" or comparable
terms or the negative thereof. These statements are based on information
available on the date of this filing and only speak as to the date hereof and no
obligation to update such forward-looking statements should be assumed.
Our actual results may differ materially from those reflected in the
forward-looking statements contained herein as a result of a variety of factors,
including, among other things:
(1) those items discussed under "Risk Factors" in Part I, Item 1A to our Annual
Report on Form 10-K and Part II, Item 1A herein;
uncertainties relating to the business operations of the operators of our
(2) assets, including those relating to reimbursement by third-party payors,
regulatory matters and occupancy levels;
the impact of the COVID-19 pandemic on our business and the business of our
operators, including without limitation, the duration of the federally
declared public health emergency and related government and regulatory
support, the levels of staffing shortages, increased costs and decreased
(3) occupancy experienced by operators of skilled nursing facilities ("SNFs") and
assisted living facilities ("ALFs") in connection with the pandemic, the
ability of our operators to comply with infection control and vaccine
protocols and to manage facility infection rates, and the sufficiency of
government support and reimbursement rates to offset such costs and the
conditions related thereto;
the ability of our operators in bankruptcy to reject unexpired lease
obligations, modify the terms of our mortgages and impede our ability to
(4) 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 assets
(5) or assets held for sale on a timely basis and on terms that allow us to
realize the carrying value of these assets;
(6) the availability and cost of capital to us;
(7) changes in our credit ratings and the ratings of our debt securities;
(8) competition in the financing of healthcare facilities;
(9) competition in the long-term healthcare industry and shifts in the perception
of various types of long-term care facilities, including SNFs and ALFs;
(10) additional regulatory and other changes in the healthcare sector;
(11) changes in the financial position of our operators;
(12) the effect of economic and market conditions generally and, particularly, in
the healthcare industry;
(13) changes in interest rates and the impact of inflation;
(14) the timing, amount and yield of any additional investments;
(15) changes in tax laws and regulations affecting real estate investment trusts
("REITs");
the potential impact of changes in the SNF and ALF markets or local real
(16) estate conditions on our ability to dispose of assets held for sale for the
anticipated proceeds or on a timely basis, or to redeploy the proceeds
therefrom on favorable terms;
(17) our ability to maintain our status as a REIT; and
the effect of other factors affecting our business or the businesses of our
(18) operators that are beyond our or their control, including natural disasters,
other health crises or pandemics and governmental action; particularly in
the healthcare industry.
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Overview
Omega Healthcare Investors, Inc. ("Parent") is a Maryland corporation that,
together with its consolidated subsidiaries (collectively, "Omega" or "Company")
has elected to be taxed as a REIT for federal income tax purposes. Omega is
structured as an umbrella partnership REIT ("UPREIT") under which all of Omega's
assets are owned directly or indirectly by, and all of Omega's operations are
conducted directly or indirectly through, its operating partnership subsidiary,
OHI Healthcare Properties Limited Partnership (collectively with its
subsidiaries, "Omega OP"). As of September 30, 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.
Omega has one reportable segment consisting of investments in healthcare-related
real estate properties located in the United States ("U.S.") and the United
Kingdom ("U.K."). Our core business is to provide financing and capital to the
long-term healthcare industry with a particular focus on SNFs, ALFs, and to a
lesser extent, independent living facilities ("ILFs"), rehabilitation and acute
care facilities ("specialty facilities") and medical office buildings. Our core
portfolio consists of our long-term leases and mortgage loans with healthcare
operating companies and affiliates (collectively, our "operators"). All of our
mortgages are secured by first liens on the underlying real estate and personal
property of the operators. 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 other investments.
From time to time, we also acquire equity interests in joint ventures or
entities that support the long-term healthcare industry and our operators.
COVID-19 Pandemic Update
The COVID-19 pandemic has continued to significantly and adversely impact 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. As
a result, many of our operators have been and may continue to be significantly
impacted by the pandemic. As discussed further in "Collectibility Issues" below,
during the year we have had several operators that have failed to make
contractual payments under their lease and loan agreements, and we have agreed
to short-term deferrals 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. 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, genetic mutations of the virus into new variants,
and the commencement in April 2021 for many of our operators of the repayment of
accelerated payments of Medicare funds that were previously received as Advanced
Medicare payments in 2020 and the commencement in December 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. 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. 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.
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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, with a slight
reduction in growth in late 2021 and early 2022 due to the impact of new
variants; 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, primarily through the federal CARES Act in
the U.S. and distribution of PPE, vaccines and testing equipment by federal and
state governments, was allocated to SNFs and to a lesser extent to ALFs in 2020,
federal relief efforts were limited in 2021 as have been relief efforts in
certain states. We believe further government support will be needed to continue
to offset these impacts, which may take the form of stimulus or reimbursement
rate adjustments to reflect sustained cost changes experienced by operators. It
is unclear whether and to what extent such government support will continue to
be sufficient and timely to offset these impacts. In particular, while $25.5
billion in federal funding for healthcare providers impacted by COVID-19 was
announced in September 2021 with distributions beginning in late 2021, it
remains unclear the extent to which these funds or remaining unallocated funds
under the Public Health and Social Services Emergency Fund ("Provider Relief
Fund") will be distributed to our operators in any meaningful way, whether
additional funds will be added to the Provider Relief Fund or otherwise
allocated to healthcare operators or our operators, or whether additional
Medicaid funds under the American Rescue Plan Act of 2021 (the "American Rescue
Plan Act") or other Medicare or Medicaid reimbursement rates changes in the U.S.
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 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. See the "Government Regulation and Reimbursement"
section below 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 that is 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 continued impact of vaccination programs,
including booster doses, and participation levels in those 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 and the states 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.
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Other Trends and Conditions
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. In addition, our operations have also been and are likely
to continue to be impacted by increased competition for the acquisition of
facilities in the U.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.
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.
Government Regulation and Reimbursement
The following information supplements and updates, and should be read in
conjunction with, the information contained under the caption Item 1. Business -
Government Regulation and Reimbursement in our Annual Report on Form 10-K
for the year ended December 31, 2021.
The healthcare industry is heavily regulated. Our operators, which are primarily
based in the U.S., are subject to extensive and complex federal, state and local
healthcare laws and regulations; we also have several U.K.-based operators which
are subject to a variety of laws and regulations in their jurisdiction. These
laws and regulations are subject to frequent and substantial changes resulting
from the adoption of new legislation, rules and regulations, and administrative
and judicial interpretations of existing law. The ultimate timing or effect of
these changes, which may be applied retroactively, cannot be predicted. Changes
in laws and regulations impacting our operators, in addition to regulatory
non-compliance by our operators, can have a significant effect on the operations
and financial condition of our operators, which in turn may adversely impact us.
There is the potential that we may be subject directly to healthcare laws and
regulations because of the broad nature of some of these regulations, such as
the Anti-kickback Statute and False Claims Act, among others.
The U.S. Department of Health and Human Services ("HHS") declared a public
health emergency on January 31, 2020 following the World Health Organization's
decision to declare COVID-19 a public health emergency of international concern.
This declaration, which has been extended through January 11, 2023, allows HHS
to provide temporary regulatory waivers and new reimbursement rules designed to
equip providers with flexibility to respond to the COVID-19 pandemic by
suspending various Medicare patient coverage criteria and documentation and care
requirements, including, for example, suspension of the three-day prior hospital
stay coverage requirement and expanding the list of approved services which may
be provided via telehealth. These regulatory actions have contributed, and may
continue to contribute, to a change in census volumes and skilled nursing mix
that may not otherwise have occurred. It remains uncertain when federal and
state regulators will resume enforcement of those regulations which are waived
or otherwise not being enforced during the public health emergency due to the
exercise of enforcement discretion, and when the public health emergency
declaration will terminate.
These temporary changes to regulations and reimbursement, as well as emergency
legislation, including the CARES Act enacted on March 27, 2020 and discussed
below, continue to have a significant impact on the operations and financial
condition of our operators. The extent of the COVID-19 pandemic's effect on the
Company's and our operators' operational and financial performance will depend
on future developments, including the sufficiency and timeliness of additional
governmental relief, the duration, spread and intensity of the outbreak, the
impact of genetic mutations of the virus into new variants, the impact of
vaccine distributions and booster doses on our operators and their populations,
the impact of vaccine mandates on staffing shortages at our operators, as well
as the difference in how the pandemic may impact SNFs in contrast to ALFs, all
of which developments and impacts are uncertain and difficult to predict. Due to
these uncertainties, we are not able at this time to estimate the effect of
these factors on our business; however, the adverse impact on our business,
results of operations, financial condition and cash flows could be material.
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A significant portion of our operators' revenue is derived from
government-funded reimbursement programs, consisting primarily of Medicare and
Medicaid. As federal and state governments continue to focus on healthcare
reform initiatives, efforts to reduce costs by government payors will likely
continue. Significant limits on the scope of services reimbursed and/or
reductions of reimbursement rates could therefore have a material adverse effect
on our operators' results of operations and financial condition. Additionally,
new and evolving payor and provider programs that are tied to quality and
efficiency could adversely impact our tenants' and operators' liquidity,
financial condition or results of operations, and there can be no assurance that
payments under any of these government healthcare programs are currently, or
will be in the future, sufficient to fully reimburse the property operators for
their operating and capital expenses. In addition to quality and value based
reimbursement reforms, the U.S. Centers for Medicare and Medicaid Services
("CMS") has implemented a number of initiatives focused on the reporting of
certain facility specific quality of care indicators that could affect our
operators, including publicly released quality ratings for all of the nursing
homes that participate in Medicare or Medicaid under the CMS "Five Star Quality
Rating System." Facility rankings, ranging from five stars ("much above
average") to one star ("much below average") are updated on a monthly basis.
SNFs are required to provide information for the CMS Nursing Home Compare
website regarding staffing and quality measures. These rating changes have
impacted referrals to SNFs, and it is possible that changes to this system or
other ranking systems could lead to future reimbursement policies that reward or
penalize facilities on the basis of the reported quality of care parameters.
The following is a discussion of certain U.S. laws and regulations generally
applicable to our operators, and in certain cases, to us.
Reimbursement Changes Related to COVID-19:
U.S. Federal Stimulus Funds and Financial Assistance for Healthcare Providers.
In response to the pandemic, Congress has enacted a series of economic stimulus
and relief measures. On March 18, 2020, the Families First Coronavirus Response
Act was enacted in the U.S., providing a temporary 6.2% increase to each
qualifying state and territory's Medicaid Federal Medical Assistance Percentage
("FMAP") effective January 1, 2020. The temporary FMAP increase will extend
through the last day of the calendar quarter in which the public health
emergency terminates. States will make individual determinations about how this
additional Medicaid reimbursement will be applied to SNFs, if at all.
In further response to the pandemic, the CARES Act authorized approximately $178
billion to be distributed through the Provider Relief Fund to reimburse eligible
healthcare providers for healthcare related expenses or lost revenues that were
attributable to coronavirus. Funds have been allocated since 2020 in targeted
and general distributions, the latter over four phases. In September 2021, HHS
announced the release of $25.5 billion in phase four provider funding, including
$17 billion of the $178 billion previously authorized through the CARES Act and
$8.5 billion for rural providers, including those with Medicaid and Medicare
patients, through the American Rescue Plan Act, with payments beginning in
December 2021. The Provider Relief Fund is administered under the broad
authority and discretion of HHS and recipients are not required to repay
distributions received to the extent they are used in compliance with applicable
requirements. Also in September 2021, the Centers for Disease Control and
Prevention ("CDC") announced it would allocate $500 million to staffing,
training and deployment of state-based nursing home and long-term care "strike
teams" to assist facilities with known or suspected COVID-19 outbreaks. HHS
continues to evaluate and provide allocations of, and issue regulation and
guidance regarding, grants made under the CARES Act. There are substantial
uncertainties regarding the extent to which our operators will receive
additional funding from HHS.
The CARES Act and related legislation also made other forms of financial
assistance available to healthcare providers, which have the potential to impact
our operators to varying degrees. This assistance includes Medicare and Medicaid
payment adjustments and an expansion of the Medicare Accelerated and Advance
Payment Program, which made available accelerated payments of Medicare funds in
order to increase cash flow to providers. These payments are loans that
providers were scheduled to repay beginning one year from the issuance date of
each provider's or supplier's accelerated or advance payment, with repayment
made through automatic recoupment of 25% of Medicare payments otherwise owed to
the provider or supplier for eleven months, followed by an increase to 50% for
another six months, after which any outstanding balance would be repaid subject
to an interest rate of 4%. We believe these repayments commenced for many of our
operators in April 2021 and have adversely impacted, and will continue to
adversely impact, operating cash flows of these operators.
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The Budget Control Act of 2011 established a Medicare Sequestration of 2%, which
is an automatic reduction of certain federal spending as a budget enforcement
tool. Originally, the sequester was supposed to be in effect from FY 2013 to FY
2021. However, most recently, the Infrastructure Investment and Jobs Act
extended the sequester through FY 2031. Additional legislation, including the
CARES Act and the Protecting Medicare and American Farmers Act, suspended the
application of the sequester to Medicare from May 1, 2020 through March 30,
2022. It also limited Medicare reductions to 1% from April 1, 2022 through June
30, 2022. The full 2% Medicare sequestration went into effect as of July 1,
2022. The sequestration is currently extended through fiscal year 2031. Per the
Protecting Medicare and American Farmers from Sequester Cuts Act, the Medicare
sequester percentage in FY 2030 will be 2.25% during the first 6 months of the
FY 2030 and 3% for the next 6 months. Per the Infrastructure Investment and Jobs
Act, the Medicare sequester percentage in FY 2031 will be 4% during the first 6
months of the FY 2031 sequestration order and 0% for the next 6 months (October
2031 through March 2032). While not limited to healthcare providers, the CARES
Act additionally provided payroll tax relief for employers, allowing them to
defer payment of employer Social Security taxes that are otherwise owed for wage
payments made after March 27, 2020 through December 31, 2020 to December 31,
2021 with respect to 50% of the payroll taxes owed, with the remaining 50%
deferred until December 31, 2022.
Quality of Care Initiatives and Additional Requirements Related to COVID-19. In
addition to COVID-19 reimbursement changes, several regulatory initiatives
announced in 2020 and 2021 focused on addressing quality of care in long-term
care facilities, including those related to COVID-19 testing and infection
control protocols, vaccine protocols, staffing levels, reporting requirements,
and visitation policies, as well as increased inspection of nursing homes. In
August 2021, CMS announced it was developing an emergency regulation requiring
staff vaccinations within the nation's more than 15,000 Medicare and
Medicaid-participating nursing homes, and in September 2021, CMS further
announced that the scope of the regulation would be expanded to include workers
in hospitals, dialysis facilities, ambulatory surgical settings, and home health
agencies. In addition, recent updates to the Nursing Home Care website and the
Five Star Quality Rating System include revisions to the inspection process,
adjustment of staffing rating thresholds, the implementation of new quality
measures and the inclusion of a staff turnover percentage (over a 12-month
period). Additionally, the Biden Administration announced a focus on
implementing minimum staffing requirements and increased inspections as part of
the nursing home reforms announced in the 2022 State of the Union Address.
Although the American Rescue Plan Act did not allocate specific funds to SNF or
ALF providers, certain funds were allocated to quality improvement organizations
to provide infection control and vaccination uptake support to SNFs and to the
CDC for staffing, training and deployment of state-based nursing home and
long-term care "strike teams" to assist facilities with known or suspected
COVID-19 outbreaks.
On June 16, 2020, the U.S. House of Representatives Select Subcommittee on the
Coronavirus Crisis announced the launch of an investigation into the COVID-19
response of nursing homes and the use of federal funds by nursing homes during
the pandemic. The Select Subcommittee continued to be active throughout the
remainder of 2020, 2021 and the first three quarters of 2022. In March 2021, the
Oversight Subcommittee of the House Ways and Means Committee held a hearing on
examining the impact of private equity in the U.S. healthcare system, including
the impact on quality of care provided within the skilled nursing industry. The
Biden Administration additionally announced in March 2022 a focus on reviewing
private equity investment specifically in the skilled nursing sector. These
initiatives, as well as additional calls for government review of the role of
private equity in the U.S. healthcare industry, could result in additional
requirements on our operators.
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Reimbursement Generally:
Medicaid. The American Rescue Plan Act contains several provisions designed to
increase coverage, expand benefits, and adjust federal financing for state
Medicaid programs. For example, the American Rescue Plan Act increased the FMAP
by 10 percentage points for state home and community-based services expenditures
beginning April 1, 2021 through March 30, 2022 in an effort to assist seniors
and people with disabilities to receive services safely in the community rather
than in nursing homes and other congregate care settings. As a condition for
receiving the FMAP increase, states must enhance, expand, or strengthen their
Medicaid home and community-based services program during this period. These
potential enhancements to Medicaid reimbursement funding may be offset in
certain states by state budgetary concerns, the ability of the state to allocate
matching funds and to comply with the new requirements, the potential for
increased enrollment in Medicaid due to unemployment and declines in family
incomes resulting from the COVID-19 pandemic, and the potential allocation of
state Medicaid funds available for reimbursement away from SNFs in favor of home
and community-based programs. These challenges may particularly impact us in
states where we have a larger presence, including Florida and Texas. In Texas in
particular, several of our operators have historically experienced lower
operating margins on their SNFs, as compared to other states, as a result of
lower Medicaid reimbursement rates and higher labor costs. Our operators in
Texas may also be adversely impacted by the expected expiration of an add-on by
the state to the daily reimbursement rate for Medicaid patients that will
terminate upon expiration of the federally declared public health emergency. In
Florida, while added support to our operators during the pandemic has generally
been limited, approximately $100 million in additional FMAP funds for nursing
homes was approved by the State in November 2021, with the funds to be
distributed through increased Medicaid payment rates over a three-month period
and in March 2022, a revised state budget for 2022-23, which took effect October
1, 2022, increased Medicaid reimbursement rates by 7.8% to fund, in part,
increased wages for certain nursing home staff. In addition, on April 6, 2022,
the State of Florida enacted staffing reforms for SNFs that may provide
additional flexibility to our operators in meeting minimum staffing requirements
by using supplemental staff. Since our operators' profit margins on Medicaid
patients are generally relatively low, more than modest reductions in Medicaid
reimbursement or an increase in the percentage of Medicaid patients has in the
past and may in the future adversely affect our operators' results of operations
and financial condition, which in turn could adversely impact us.
Medicare. On July 29, 2022, CMS issued a final rule regarding the government
fiscal year 2023 Medicare payment rates and quality payment programs for SNFs,
with aggregate Medicare Part A payments projected to increase by $904 million,
or 2.7%, for fiscal year 2023 compared to fiscal year 2022. This estimated
reimbursement increase is attributable to a 3.9% market basket increase factor
plus a 1.5 percentage point market basket forecast error adjustment and less a
0.3 percentage point productivity adjustment, as well as a $780 million decrease
in the SNF prospective payment system rates as a result of the recalibrated
parity adjustment described below, which is being phased in over two years. The
annual update is reduced by two percentage points for SNFs that fail to submit
required quality data to CMS under the SNF Quality Reporting Program. CMS has
indicated that these impact figures did not incorporate the SNF Value-Based
Program reductions that are estimated to be $186 million in fiscal year 2023.
While Medicare reimbursement rate setting, which takes effect annually each
October, has historically included forecasted inflationary adjustments, the
degree to which those forecasts accurately reflect current inflation rates
remains uncertain. Additionally, it remains uncertain whether these adjustments
will ultimately be offset by non-inflationary factors, including any adjustments
related to the impact of various payment models, such as those described below.
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Payments to providers continue to be increasingly tied to quality and
efficiency. The Patient Driven Payment Model ("PDPM"), which was designed by CMS
to improve the incentives to treat the needs of the whole patient, became
effective October 1, 2019. CMS has stated that it intended PDPM to be
revenue-neutral to operators, with future Medicare reimbursement reductions
possible if that was not the case. In April 2022, CMS issued a proposal for
comment, which included an adjustment to obtain that revenue neutrality as early
as the 2023 rate setting period. After considering the feedback received in the
rulemaking cycle, CMS finalized recalibration of the PDPM parity adjustment
factor of 4.6% with a two-year phase-in period that would reduce SNF spending by
2.3%, or approximately $780 million, in each of fiscal years 2023 and 2024.
Prior to COVID-19, we believed that certain of our operators could realize
efficiencies and cost savings from increased concurrent and group therapy under
PDPM and some had reported early positive results. Given the ongoing impacts of
COVID-19, many operators are and may continue to be restricted from pursuing
concurrent and group therapy and unable to realize these benefits. Additionally,
our operators continue to adapt to the reimbursement changes and other payment
reforms resulting from the value-based purchasing programs applicable to SNFs
under the 2014 Protecting Access to Medicare Act. These reimbursement changes
have had and may, together with any further reimbursement changes to PDPM or
value-based purchasing models, in the future have an adverse effect on the
operations and financial condition of some operators and could adversely impact
the ability of operators to meet their obligations to us.
On May 27, 2020, CMS added physical therapy, occupational therapy and
speech-language pathology to the list of approved telehealth Providers for the
Medicare Part B programs provided by a SNF as a part of the COVID-19 1135 waiver
provisions. The COVID-19 1135 waiver provisions also allow for the facility to
bill an originating site fee to CMS for telehealth services provided to Medicare
Part B beneficiary residents of the facility when the services are provided by a
physician from an alternate location, effective March 6, 2020 through the end of
the public health emergency.
On June 29, 2022, CMS issued new and updated guidance to provide additional
clarity to surveyors on regulatory requirements for participation of long term
care facilities in the Medicare program and to address how compliance will be
assessed. This included guidance related to, among other things, infection
control and prevention, and staffing, as well as recommendations related to
resident room capacity.
Other Regulation:
Department of Justice and Other Enforcement Actions. SNFs are under intense
scrutiny for ensuring the quality of care being rendered to residents and
appropriate billing practices conducted by the facility. The Department of
Justice ("DOJ") has historically used the False Claims Act to civilly pursue
nursing homes that bill the federal government for services not rendered or care
that is grossly substandard. For example, California prosecutors announced in
March 2021 an investigation into a skilled nursing provider that is affiliated
with one of our operators, alleging the chain manipulated the submission of
staffing level data in order to improve its Five Star rating. In 2020, the DOJ
launched a National Nursing Home Initiative to coordinate and enhance civil and
criminal enforcement actions against nursing homes with grossly substandard
deficiencies. Such enforcement activities are unpredictable and may develop over
lengthy periods of time. An adverse resolution of any of these enforcement
activities or investigations incurred by our operators may involve injunctive
relief and/or substantial monetary penalties, either or both of which could have
a material adverse effect on their reputation, business, results of operations
and cash flows.
2022 and Recent Highlights
Investments
During the three and nine months ended September 30, 2022, we acquired $28.2
million and $136.7 million of real estate assets, which included four
? facilities and 34 facilities, respectively. The initial cash yield (the initial
annual contractual cash rent divided by the purchase price) on these asset
acquisitions was between 8.0% and 9.5%.
We invested $16.3 million and $50.5 million under our construction in progress
? and capital improvement programs during the three and nine months ended
September 30, 2022, respectively.
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? We advanced $3.6 million and $8.5 million under existing mortgage loans during
the three and nine months ended September 30, 2022, respectively.
During the three and nine months ended September 30, 2022, Ciena Healthcare
("Ciena") repaid $44.8 million and $158.5 million under its mortgage loans. In
? connection with the partial repayments, the maturity date of all the Ciena
mortgage notes was extended to June 30, 2030 (with exception of two loans with
an aggregate principal balance of $37.7 million with maturity dates in 2022 and
2023).
Dispositions and Impairments
During the three and nine months ended September 30, 2022, we sold four and 44
facilities for approximately $51.4 million and $438.3 million in net cash
proceeds, respectively. As a result of these sales, we recognized net gains of
approximately $40.9 million and $179.7 million during the three and nine months
ended September 30, 2022, respectively. Our sales during the nine months ended
? September 30, 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 "Gulf Coast") - 22
facilities, Guardian Healthcare ("Guardian") - nine facilities and Agemo
Holdings, LLC ("Agemo") - two facilities. In the fourth quarter of 2022, we
completed the sale of an additional 19 facilities related to the ongoing Agemo
restructuring activities for aggregate gross cash proceeds of $315.8 million.
During the three and nine months ended September 30, 2022, we recorded
impairments on four and 10 facilities of approximately $10.0 million and $21.2
? million, respectively. Of the $21.2 million, $3.5 million related to two
facilities that were classified as held for sale and $17.7 million related to
eight held-for-use facilities.
Financing Activities
In January 2022, our Board of Directors authorized the repurchase of up to $500
million of our outstanding common stock, from time to time, through March 2025.
? During the nine months ended September 30, 2022, we repurchased 5.2 million
shares, at an average price of $27.32 per share, of our outstanding common
stock, respectively. No shares were repurchased during the third quarter of
2022.
Other Highlights
During the three and nine months ended September 30, 2022, we made $70.0
million and $151.4 million of new other investment loans with a weighted
average interest rate of 11.1% and 11.0%, respectively. Our 2022 new other
investment loans primarily relate to five new loans that we entered into during
the nine months ended September 30, 2022. During the three and nine months
? ended September 30, 2022, we also advanced $34.3 million and $149.2 million,
respectively, under existing other investment loans. Of the $34.3 million and
$149.2 million, an aggregate $20.3 million and $100.8 million, respectively,
related to two revolving working capital loans that also had aggregate
repayments of $2.8 million and $78.9 million during the three and nine months
ended September 30, 2022, respectively.
In 2022, Omega was again 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 GEI index.
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Collectibility Issues
During the three and nine months ended September 30, 2022, we placed three and
five additional operators, respectively, on a cash basis of revenue recognition
as collection of substantially all contractual lease payments due from them was
no longer deemed probable. These include operators representing 0.5% ("0.5%
Operator"), 1.4% ("1.4% Operator") and 2.2% ("2.2% Operator") of total revenue
(excluding the impact of write-offs), respectively, for the nine months ended
? September 30, 2022. In connection with moving operators to a cash basis, we
recognized $13.2 million and $23.6 million in total straight-line accounts
receivable write-offs through rental income during the three and nine months
ended September 30, 2022, respectively. As of September 30, 2022, we had 17
total operators for which we are recording revenue on a cash basis. These 17
cash basis operators represent an aggregate 15.3% of our total revenues
(excluding the impact of write-offs) for the nine months ended September 30,
2022.
During the three and nine months ended September 30, 2022, we allowed four and
eight operators to defer $1.4 million and $25.4 million of contractual rent and
interest, respectively. The deferrals primarily related to the following
operators: Agemo, Guardian, the 3.7% Operator (defined below) and the 1.4%
Operator. Additionally, we allowed five and seven operators to apply
? collateral, such as security deposits or letters of credit, to contractual rent
and interest during the three and nine months ended September 30, 2022,
respectively. The total collateral applied to contractual rent and interest was
$5.3 million and $9.4 million for the three and nine months ended September 30,
2022, respectively. These applications of collateral to contractual rent and
interest primarily relate to the 2.2% Operator and the 1.4% Operator.
Agemo, a cash basis operator, continued to not pay contractual rent and
interest due under its lease and loan agreements during the nine months ended
September 30, 2022. We have not recorded any rental income or interest income
? related to Agemo during the three and nine months ended September 30, 2022. The
Company is currently in ongoing negotiations to restructure and amend Agemo's
lease and loan agreements. See Note 4 - Contractual Receivables and Other
Receivables and Lease Inducements to the Consolidated Financial Statements -
Part I, Item 1 hereto.
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 quarter 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 $3.7
million and $7.5 million for the three and nine months ended September 30,
2022, respectively, for contractual rent payments that were received.
Additionally, Guardian's mortgage loan is on non-accrual status and is being
? accounted for under the cost recovery method, so the $2.3 million and $3.7
million of interest payments that we received during the three and nine months
ended September 30, 2022, respectively, were applied directly against the
principal 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 $18.0 million of aggregate contractual rent and interest, with
repayment required after September 30, 2024, and reduce the combined rent and
mortgage interest to an aggregate of $24.0 million per year effective as of
July 1, 2022.
From January through March 2022, an operator (the "3.7% Operator") representing
3.7% and 3.3% of total revenue (excluding the impact of write-offs) for the
nine months ended September 30, 2022 and 2021, respectively, did not pay its
contractual amounts due under its lease agreement. In March 2022, the lease
with the 3.7% Operator was amended to allow for a short-term rent deferral for
? January through March 2022. The 3.7% Operator paid the contractual amount due
under its lease agreement from April through September 2022. Omega holds a $1.0
million letter of credit and a $150 thousand security deposit from the 3.7%
Operator. The 3.7% Operator remains current on its $20.0 million revolving
credit facility, which is fully drawn as of September 30, 2022, and is secured
by a first lien on the 3.7% Operator's accounts receivable. The 3.7% Operator
remains on a straight-line basis of revenue recognition.
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Dividends
? On October 21, 2022, the Board of Directors declared a cash dividend for the
quarter ended September 30, 2022 of $0.67 per share.
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 September 30, 2022 and 2021
Revenues
Our revenues for the three months ended September 30, 2022 totaled $239.4
million, a decrease of approximately $42.2 million over the same period in 2021.
Included below is a description of the material changes in revenues for the
three months ended September 30, 2022 compared to the same period in 2021:
Rental income was $207.6 million, a decrease of $39.6 million over the same
period in 2021. The decrease was primarily the result of (i) a $15.9 million
aggregate net reduction in contractual rent payments received from two cash
basis operators, Agemo and the 1.4% Operator; (ii) a $12.6 million decrease due
to a net increase in straight-line rent receivable and lease inducement
write-offs in the third quarter of 2022 compared to 2021 as a result of placing
the 2.2% Operator and 2 other operators on a cash basis; (iii) a $7.4 million
? decrease relating to the sale of 22 facilities formerly leased and operated by
Gulf Coast, which was completed in the first quarter of 2022; (iv) a net
decrease of $3.8 million due to facility transitions, facility sales and lease
extensions related to several operators; and (v) a $2.2 million decrease
related to the restructuring of the Guardian lease agreement, which included
the sale or transition of 17 facilities in 2022 with corresponding reductions
in base rent. The overall decrease in rental income was partially offset by a
$2.8 million increase due to additional rental income in the third quarter of
2022 from acquisitions.
Mortgage interest income was $17.2 million, a decrease of $5.8 million over the
same period in 2021. The decrease was primarily the result of (i) a $3.1
million decrease related to Guardian as a result of recognizing no interest
income in the third quarter of 2022 on the Guardian mortgage loan, as we are
? accounting for the loan using the cost recovery method with interest payments
applied to principal amounts outstanding and (ii) a $3.7 million decrease
related to the aggregate $158.5 million of principal paydowns made on the Ciena
mortgages during the second and third quarter of 2022. These decreases were
partially offset by a $1.1 million write-off of effective interest in the third
quarter of 2021 related to the payoff of a mortgage with an operator.
Other investment income was $14.1 million, an increase of $3.3 million over the
? same period in 2021. The increase is largely due to an overall increase in the
balance of our other investment loans from $434.0 million as of September 30,
2021 to $608.2 million as of September 30, 2022.
Expenses
Our expenses for the three months ended September 30, 2022 totaled $177.7
million, a decrease of approximately $16.5 million over the same period in 2021.
Included below is a description of the material changes in expenses for the
three months ended September 30, 2022 compared to the same period in 2021:
Our depreciation and amortization expense was $82.7 million, a $3.4 million
decrease over the same period in 2021. The decrease primarily relates to
? facility sales and facilities reclassified to assets held for sale, such as the
20 Agemo facilities reclassified to held for sale and the two Agemo facilities
that were sold in the third quarter of 2022, partially offset by facility
acquisitions and capital additions.
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Our general and administrative expense was $18.2 million, a $2.9 million
increase over the same period in 2021. The increase primarily relates to (i) a
? $1.1 million increase in stock-based compensation expense, (ii) a $0.6 million
increase in outside services primarily related to legal and (iii) a $0.6
million increase in payroll and benefits.
Our impairment on real estate properties was $10.0 million, an increase of $5.1
million over the same period in 2021. The 2022 impairments were recognized in
connection with four held-for-use facilities for which it was determined that
? the carrying value exceeded the fair value. The 2021 impairments were
recognized in connection with six facilities that were classified as
held-for-sale for which the carrying values exceeded the estimated fair values
less costs to sell.
Our provision for credit losses was $4.1 million, a $21.4 million decrease over
the same period in 2021. The decrease was primarily as a result of (i) a net
decrease in aggregate specific provisions recorded during the third quarter of
? 2022 compared to specific provisions recorded during the same period in 2021
largely due to reserves on the loans with Agemo and (ii) changes in loan
balances and decreases in loss rates and weighted average years to maturity
(utilized in the estimate of expected losses for loans) in the third quarter of
2022 compared to the same period in 2021.
Other Income (Expense)
For the three months ended September 30, 2022, total other income was $40.4
million, a decrease of approximately $14.4 million over the same period in 2021.
The decrease was mainly due to a $15.2 million decrease in gain on assets sold
related to the sale of four facilities in the third quarter of 2022 compared to
the sale of 15 facilities during the same period in 2021.
Nine Months Ended September 30, 2022 and 2021
Revenues
Our revenues for the nine months ended September 30, 2022 totaled $733.4
million, a decrease of approximately $79.5 million over the same period in 2021.
Included below is a description of the material changes in revenues for the nine
months ended September 30, 2022 compared to the same period in 2021:
Rental income was $635.9 million, a decrease of $70.0 million over the same
period in 2021. The decrease was primarily the result of (i) a $43.0 million
aggregate net reduction in contractual rent payments received from two cash
basis operators, Agemo and the 1.4% Operator; (ii) a $22.0 million decrease due
to recognizing no rental income related to Gulf Coast, a cash basis operator,
in 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 Gulf Coast lease in March 2022; (iii) a $10.3 million decrease
relates to Guardian, due to the restructuring of the lease agreement (discussed
? under "Three Months Ended September 30, 2022 and 2021 - Revenues" above) and as
a result of only receiving six months of payments from Guardian during 2022;
(iv) a $6.0 million decrease due to a net increase in straight-line rent
receivable and lease inducement write-offs in the nine months ended September
30, 2022; and (v) a $4.9 million decrease resulting from the acceleration of
certain in-place lease liabilities due to facility transitions. The overall
decrease in rental income was partially offset by (i) a $13.9 million increase
due to additional rental income in the third quarter of 2022 from acquisitions
and construction in progress facilities being placed in service and (ii) a $2.3
million increase related to an increase in real estate tax income related to
construction in progress facilities being placed in service.
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Mortgage interest income was $57.4 million, a $13.3 million decrease over the
same period in 2021. The decrease was primarily the result of (i) a $9.2
million decrease related to Guardian as a result of recognizing no interest
income in 2022 on the Guardian mortgage loan, as we are accounting for the loan
? using the cost recovery method with interest payments applied to principal
amounts outstanding and (ii) a $5.7 million decrease related to the $158.5
million of aggregate principal paydowns on the Ciena mortgages during the
second and third quarters of 2022. These decreases were partially offset by a
$1.1 million write-off of effective interest in the third quarter of 2021
related to the payoff of a mortgage with an operator.
Other investment income was $36.5 million, an increase of $2.2 million over the
? same period in 2021. The increase is largely due to an overall increase in the
balance of our other investment loans from $434.0 million as of September 30,
2021, to $608.2 million as of September 30, 2022.
Expenses
Our expenses for the nine months ended September 30, 2022 totaled $519.6
million, a decrease of approximately $40.9 million over the same period in 2021.
Included below is a description of the material changes in expenses for the nine
months ended September 30, 2022 compared to the same period in 2021:
Our depreciation and amortization expense was $248.7 million, an $8.1 million
decrease over the same period in 2021. The decrease primarily relates to
? facility sales and facilities reclassified to assets held for sale, such as the
22 Gulf Coast facilities that were sold in the first quarter of 2022 and the 20
Agemo facilities that were reclassified to held for sale in the third quarter
of 2022, partially offset by facility acquisitions and capital additions.
Our general and administrative expense was $53.4 million, a $6.7 million
? increase over the same period in 2021. The increase primarily relates to (i) a
$3.6 million increase in stock-based compensation expense and (ii) a $1.8
million increase in outside services primarily related to consulting.
Our acquisition, merger and transition related costs were $5.7 million, an
? increase of $3.8 million over the same period in 2021. This increase primarily
relates to costs incurred related to the transition of facilities with troubled
operators.
Our impairment on real estate properties was $21.2 million, a decrease of $21.2
million over the same period in 2021. The 2022 impairments were recognized in
connection with two facilities that were classified as held-for-sale for which
the carrying values exceeded the estimated fair values less costs to sell and
? eight held-for-use facilities for which it was determined that the carrying
value exceeded the fair value. The 2021 impairments were recognized in
connection with 12 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.
Our provision for credit losses was $4.4 million, a $23.7 million decrease over
the same period in 2021. The decrease was primarily as a result of (i) a net
decrease in aggregate specific provisions recorded during the third quarter of
2022 compared to specific provisions recorded during the same period in 2021;
(ii) changes in loan balances and decreases in loss rates and weighted average
? years to maturity (utilized in the estimate of expected losses for loans) in
2022 compared to the same period in 2021; and (iii) recoveries for cash
collections received on loan reserved down to the fair value of the collateral.
See further discussion on specific loan reserves in Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Collectibility Issues.
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Other Income (Expense)
For the nine months ended September 30, 2022, total other income was $174.3
million, an increase of approximately $44.4 million over the same period in
2021. The increase was mainly due to (i) a $30.3 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 and (ii) a $19.1 million increase in gain
on assets sold related to the sale of 44 facilities in 2022 compared to the sale
of 45 facilities during the same period in 2021, partially offset by a $3.0
million legal reserve recorded in other (expense) income - net discussed in Note
18 - Commitments and Contingencies.
Income from Unconsolidated Joint Ventures
For the nine months ended September 30, 2022, income from unconsolidated joint
ventures was $7.5 million, a decrease of approximately $7.0 million over the
same period in 2021. The decrease was primarily due to one of the joint ventures
realizing a $14.9 million gain on sale of real estate investments during the
first quarter of 2021.
National Association of Real Estate Investment Trusts 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.
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The following table presents our Nareit FFO results for the three and nine
months ended September 30, 2022 and 2021:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Net income (1)(2) $ 105,064 $ 142,835 $ 392,135 $ 394,064
Deduct gain from real estate dispositions (40,930) (56,169) (179,747) (160,634)
(Deduct gain) add back loss from real
estate dispositions - unconsolidated
joint ventures (346) 2 (93) (14,745)
63,788 86,668 212,295 218,685
Elimination of non-cash items included in
net income:
Depreciation and amortization 82,709 86,097 248,668 256,745
Depreciation - unconsolidated joint
ventures 2,627 2,951 8,258 9,379
Add back impairments on real estate
properties 10,015 4,942 21,221 42,453
Add back impairments on real estate
properties - unconsolidated joint
ventures - - - 4,430
Add back unrealized loss on warrants - - - 43
Nareit FFO $ 159,139 $ 180,658 $ 490,442 $ 531,735 The three and nine months ended September 30, 2022 includes the application
of $5.3 million and $9.4 million, respectively, of security deposits (letter
(1) of credit and cash deposits) in revenue. The three and nine months ended
September 30, 2021 includes the application of $9.3 million and $11.7
million, respectively, of security deposits (letter of credit and cash
deposits) in revenue.
The three and nine months ended September 30, 2021 includes $6.5 million of
(2) revenue related to Gulf Coast recognized based on our ability to offset
uncollected rent against the interest and principal (in the fourth quarter of
2021) of certain debt obligations of Omega.
Liquidity and Capital Resources
Sources and Uses
Our primary sources of cash include rental income and interest receipts,
existing availability under our revolving credit facility, proceeds from our
Dividend Reinvestment and Common Stock Purchase Plan ("DRSPP") and the $1.0
billion 2021 At-The-Market Offering Program ("2021 ATM Program"), facility
sales, and proceeds from mortgage and other investment payoffs. We anticipate
that these sources will be adequate to fund our cash flow needs through the next
twelve months, which include common stock dividends, debt service payments
(including principal and interest), real estate investments (including facility
acquisitions, capital improvement programs and other capital expenditures),
mortgage and other investment loan advances and normal recurring G&A expenses
(primarily consisting of employee payroll and benefits and expenses relating to
third parties for legal, consulting and audit services).
Capital Structure
At September 30, 2022, we had total assets of $9.4 billion, total equity of $3.9
billion and total debt of $5.3 billion in our consolidated financial statements,
with such debt representing approximately 57.8% of total capitalization.
Debt
At September 30, 2022 and December 31, 2021, the weighted-average annual
interest rate of our debt was 4.1%. Additionally, as of September 30, 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 of September 30, 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.
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Certain of our other secured and unsecured borrowings are subject to customary
affirmative and negative covenants, including financial covenants. As of
September 30, 2022 and December 31, 2021, we were in compliance with all
affirmative and negative covenants, including financial covenants, for our
secured and unsecured borrowings.
Supplemental Guarantor Information
Parent has issued approximately $4.9 billion aggregate principal of senior notes
outstanding at September 30, 2022 that were registered under the Securities Act
of 1933, as amended. The senior notes are guaranteed by Omega OP.
The SEC adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01
to simplify disclosure requirements related to certain registered securities,
such as our senior notes. As a result of these amendments, registrants are
permitted to provide certain alternative financial and non-financial
disclosures, to the extent material, in lieu of separate financial statements
for subsidiary issuers and guarantors of registered debt securities.
Accordingly, separate consolidated financial statements of Omega OP have not
been presented. Parent and Omega OP, on a combined basis, have no material
assets, liabilities or operations other than financing activities (including
borrowings under the outstanding senior notes, the revolving credit facility and
the OP term loan) and their investments in non-guarantor subsidiaries.
Omega OP is currently the sole guarantor of our senior notes. The guarantees by
Omega OP of our senior notes are full and unconditional and joint and several
with respect to the payment of the principal and premium and interest on our
senior notes. The guarantees of Omega OP are senior unsecured obligations of
Omega OP that rank equal with all existing and future senior debt of Omega OP
and are senior to all subordinated debt. However, the guarantees are effectively
subordinated to any secured debt of Omega OP. As of September 30, 2022, there
were no significant restrictions on the ability of Omega OP to make
distributions to Omega.
Equity
At September 30, 2022, we had approximately 234.2 million shares of common stock
outstanding, and our shares had a market value of $6.9 billion. The following is
a summary of activity under our equity programs, excluding share repurchases,
which are discussed in Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financing Activities above,
during the three and nine months ended September 30, 2022:
We did not issue any shares of common stock under our 2021 ATM Program during
the three and nine months ended September 30, 2022. We did not utilize the
? forward provisions under the 2021 ATM Program during the three and nine months
ended September 30, 2022. We have $929.9 million of potential sales remaining
under the 2021 ATM Program as of September 30, 2022.
We issued 71.2 thousand and 235.7 thousand shares of common stock under the
? DRSPP during the three and nine months ended September 30, 2022. Aggregate
gross proceeds from these sales were $2.4 million and $7.0 million during the
three and nine months ended September 30, 2022, respectively.
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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 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 nine months ended September 30, 2022, we paid dividends of approximately
$475.6 million to our common stockholders. On February 15, 2022, we paid
dividends of $0.67 per outstanding common share to the common stockholders of
record as of the close of business on February 7, 2022. On May 13, 2022, we paid
dividends of $0.67 per outstanding common share to the common stockholders of
record as of the close of business on May 2, 2022. On August 15, 2022, we paid
dividends of $0.67 per outstanding common share to the common stockholders of
record as of the close of business on August 1, 2022.
Material Cash Requirements
During the nine months ended September 30, 2022, there were no significant
changes to our material cash requirements from those disclosed in the section
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our 2021 Annual Report.
As of September 30, 2022, we had $200.1 million of commitments to fund the
construction of new leased and mortgaged facilities, capital improvements and
other commitments. Additionally, we have commitments to fund $88.0 million of
advancements under existing other investment loans, which includes $14.3 million
related to the increased commitment on the Maplewood $250.5 million secured
revolving credit facility and $60.0 million related to a $90.0 million
short-term revolving line of credit to an existing operator. 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 9
to the Consolidated Financial Statements - Investments in Joint Ventures. Our
risk of loss is generally limited to our investment in the joint venture and any
outstanding loans receivable. We use derivative instruments to hedge interest
rate and foreign currency exchange rate exposure as discussed in Note 15 -
Derivatives and Hedging in our Annual Report on Form 10-K for the year ended
December 31, 2021. 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
Cash, cash equivalents and restricted cash totaled $138.2 million as of
September 30, 2022, an increase of $113.8 million as compared to the balance at
December 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.
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Operating Activities - Operating activities generated $472.0 million of net cash
flow for the nine months ended September 30, 2022, as compared to $565.6 million
for the same period in 2021, a decrease of $93.6 million, which is primarily
driven by a decrease of $90.4 million of net income, net of $88.5 million of
non-cash items, primarily due to a year over year reduction in rental income and
mortgage revenue, as discussed in our material changes analysis under Results of
Operations above. A $3.1 million change in the net movements of the operating
assets and liabilities also contributed to the overall decrease in cash provided
by operating activities.
Investing Activities - Net cash flow from investing activities was an inflow of
$272.4 million for the nine months ended September 30, 2022, as compared to an
outflow of $452.2 million for the same period in 2021. The $724.6 million change
in cash flow from investing activities related primarily to (i) a $474.5 million
decrease in real estate acquisitions driven by the acquisition of 24 senior
living facilities from Healthpeak Properties, Inc. for $511.3 million in the
first quarter of 2021, (ii) a $218.1 million increase in mortgage collections,
net of placements driven by a $21.7 million partial principal paydown on the
Guardian mortgage loan in the first quarter of 2022 and $158.5 million in
partial principal paydowns on the Ciena mortgages in the second and third
quarters of 2022, (iii) a $127.4 million increase in proceeds from the sales of
real estate investments largely driven by the sale of 22 facilities previously
leased to Gulf Coast for net cash proceeds of $303.9 million in the first
quarter of 2022 and other 2022 sales related to the restructuring of Guardian
and Agemo, (iv) a $70.4 million decrease in investment in construction in
progress and capital expenditures related to a $68.0 million development project
with Maplewood Senior Living ("Maplewood") acquired in the third quarter of 2021
and (v) a $10.4 million decrease in investments in unconsolidated joint ventures
driven by our $10.3 million investment in Second Spring II LLC in the first
quarter of 2021, offset by (i) a $151.4 million increase in other investments
advances and placements, net of receipts driven by the new $35.6 million
mezzanine loan with an existing operator that we entered into in the second
quarter of 2022, the $25.0 million term loan to LaVie Care Centers, LLC (f/k/a
Consulate Health Care) that we entered into in the first quarter of 2022, the
new $40.0 million mezzanine loan with a new operator that we entered into in the
third quarter of 2022 and additional draws on existing loans, (ii) a $16.3
million decrease in distributions from unconsolidated joint venture 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, (iii) a
$5.3 million decrease in receipts from insurance proceeds and (iv) a $2.5
million decrease in acquisition related deposits.
Financing Activities - Net cash flow from financing activities was an outflow of
$627.5 million for the nine months ended September 30, 2022, as compared to an
outflow of $175.0 million for the same period in 2021. The $452.5 million change
in cash flow from financing activities was primarily related to (i) a $266.6
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, (iii) a $88.7 million decrease in proceeds from other long-term
borrowings, net of repayments and (iv) a $9.7 million increase in redemptions of
OP units. The overall increase in financing outflows was partially offset by (i)
a $48.5 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 $4.7
million decrease in distributions to Omega OP Unit holders and (iii) a $1.5
million decrease in dividends paid.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with generally accepted
accounting principles ("GAAP") in the U.S. Our preparation of the financial
statements requires us to make estimates and assumptions about future events
that affect the amounts reported in our financial statements and accompanying
footnotes. Future events and their effects cannot be determined with absolute
certainty. Therefore, the determination of estimates requires the exercise of
judgment. Actual results inevitably will differ from those estimates, and such
differences may be material to the consolidated financial statements. We have
described our accounting policies in Note 2 - Summary of Significant Accounting
Policies to our Annual Report on Form 10-K for the year ended December 31,
2021. There have been no material changes to our critical accounting policies or
estimates since December 31, 2021.
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