OMEGA HEALTHCARE INVESTORS, INC. For information with respect to our 2018 activity, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our
10-K for the year ended
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. 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;
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 novel coronavirus ("COVID-19") on our business and the
business of our operators, including without limitation, the extent andduration of the COVID-19 pandemic, increased costs and decreased occupancy
(3) levels experienced by operators of skilled nursing facilities ("SNFs") and
assisted living facilities ("ALFs") in connection therewith, the ability of
operators to comply with new infection control and vaccine protocols, and the
extent to which continued government support may be available to operators to
offset such costs and the conditions related thereto;
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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
(4) 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 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 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;
(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 skilled nursing facility ("SNF") and
assisted living facility ("ALF") markets or local real estate conditions on
(16) 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.
Overview and Outlook
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"), assisted living facilities ("ALFs"), and to a
lesser extent, independent living facilities ("ILFs"), rehabilitation and acute
care facilities ("specialty facilities") and medical office buildings ("MOBs").
Our core portfolio consists of long-term leases and mortgage agreements. All of
our leases to our healthcare operators are "triple-net" leases, which require
the operators (we use the term "operator" to refer to our tenants and mortgagors
and their affiliates who manage and/or operate our properties) to pay all
property-related expenses. Our mortgage revenue derives from fixed rate mortgage
loans, which are secured by first mortgage liens on the underlying real estate
and personal property of the mortgagor. Our other investment income is derived
from fixed and variable rate loans to our operators and/or their principals to
fund working capital and capital expenditures. These loans, which may be either
unsecured or secured by the collateral of the borrower, are classified as other
investments.
Our portfolio of investments atDecember 31, 2020 , included 967 healthcare facilities, located in 40 states and theU.K. that are operated by 69 third-party operators. Our real estate investment in these facilities totaled approximately$9.7 billion atDecember 31, 2020 , with approximately 97% of our real estate investments related to long-term healthcare facilities. The portfolio is made up of (i) 738 SNFs, (ii) 115 ALFs, (iii) 28 specialty facilities, (iv) two medical office buildings, (v) fixed rate mortgages on 56 SNFs, three ALFs and three specialty facilities and (vi) 22 facilities that are held for sale. AtDecember 31, 2020 , we held other investments of approximately$467.4 million , consisting primarily of secured loans to third-party operators of our facilities and$200.6 million of investment in five unconsolidated joint ventures. Omega's consolidated financial statements include the accounts of (i) Parent, (ii) Omega OP, and (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 accounts and transactions have been eliminated in consolidation, and Omega's net earnings are reduced by the portion of net earnings attributable to noncontrolling interests. As healthcare delivery continues to evolve, we continuously evaluate potential investments, our assets, operators and markets to position our portfolio for long-term success. Our strategy includes applying data analytics to our investment underwriting and asset management, as well as selling or transitioning assets that do not meet our portfolio criteria. 31 Table of Contents COVID-19 Pandemic Update For the year endedDecember 31, 2020 , we have collected substantially all of the contractual rents owed to us from our operators. However, the COVID-19 pandemic continues to have a significant impact on our operators. As ofFebruary 9, 2021 , our operators have reported cases of COVID-19 within 535, or 56.4%, of our 949 operating facilities as ofDecember 31, 2020 , which includes cases involving employees and residents. We caution that we have not independently validated such facility virus incidence information, it may be reported on an inconsistent basis by our operators, and we can provide no assurance regarding its accuracy or that there have not been any changes since the time the information was obtained from our operators; we also undertake no duty to update this information. It remains uncertain when and to what extent vaccination programs for COVID-19, which have been implemented in many of our facilities, will mitigate the effects of COVID-19 in our facilities; the impact of these programs will depend in part on the speed, distribution, and delivery of the vaccine in our facilities, as well as participation levels in vaccination programs among the residents and employees of our operators. Our operators have reported considerable variation in participation levels among both employees and residents, which may change over time as additional vaccination clinics are held. In addition to experiencing outbreaks of positive cases and deaths of residents and employees during the pandemic, our operators have been required to, and continue to, adapt their operations rapidly throughout the pandemic to manage the spread of the COVID-19 virus as well as the implementation of new treatments and vaccines, and to implement new requirements relating to infection control, personal protective equipment ("PPE"), quality of care, visitation protocols, staffing levels, and reporting, among other regulations, throughout the pandemic. Many of our operators have reported incurring significant cost increases as a result of the COVID-19 pandemic, with dramatic increases for facilities with positive cases. We believe these increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of PPE, testing equipment and processes and supplies, as well as implementation of new infection control protocols and vaccination programs. In addition, many of our operators have reported experiencing declines, in some cases that are material, in occupancy levels as a result of the pandemic. We believe these declines may be in part due to 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 theU.S. and distribution of PPE, vaccines and testing equipment by the federal government, has been allocated to SNFs and to a lesser extent to ALFs, further government support will likely be needed to continue to offset these impacts and it is unclear whether and to what extent such government support has been and will continue to be sufficient and timely to offset these impacts. Further, to the extent these impacts continue or accelerate and are not offset by additional government relief that is sufficient and timely, the operating results of our operators are likely to be adversely affected, some may be unwilling or unable to pay their contractual obligations to us in full or on a timely basis and we may be unable to restructure such obligations on terms as favorable to us as those currently in place. Citing in part the impact of the COVID-19 pandemic and uncertainties regarding the continuing availability of sufficient government support, during the third and fourth quarters of 2020, four of our operators indicated in their financial statements substantial doubt regarding their ability to continue as going concerns. There are a number of uncertainties we face as we consider the potential impact of COVID-19 on our business, including how long census disruption and elevated COVID-19 costs will last, the impact of vaccination programs and participation levels in those programs in reducing the spread of COVID-19 in 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 visibility into the costs our operators will 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 impact of occupancy declines at many of our operators, and it remains uncertain whether and when demand and occupancy levels will return
to
pre-COVID-19 levels.
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We continue to monitor the impacts of other regulatory changes, as discussed in
Item 1. Business - Government Regulation and Reimbursement, 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.
2020 and Recent Highlights
Acquisition and Other Investments
OnJanuary 20, 2021 , we acquired 24 senior living facilities from Healthpeak Properties, Inc. for$510 million . The acquisition involved the assumption of an in-place master lease with Brookdale Senior Living. The master lease provides for 2021 contractual rent of approximately$43.5 million , and includes 24 facilities representing 2,552 operating units located in located inArizona (1),California (1),Florida (1),Illinois (1),New Jersey (1),Oregon (6),Pennsylvania (1),Tennessee (1),Texas (6),Virginia (1), andWashington (4). InFebruary 2021 , we sold 16 facilities for approximately$149.6 million in cash proceeds and recorded a gain on sale of approximately$94.4 million . These 16 facilities were held for sale as ofDecember 31, 2020 with a carrying value of approximately$49.3 million .
See "Portfolio and Other Developments" below for a description of 2020 acquisitions and other developments.
Financing Highlights
OnOctober 9, 2020 , we issued$700 million aggregate principal amount of our 3.375% Senior Notes due 2031 (the "2031 Senior Notes"). The 2031 Senior Notes mature onFebruary 1, 2031 . The 2031 Senior Notes were sold at an issue price of 98.249% of their face value before the underwriters' discount. Our net proceeds from the 2031 Senior Notes offering, after deducting underwriting discounts and expenses, were approximately$680.5 million . We used the net proceeds from the 2031 Senior Notes offering to repay the outstanding balance on ourU.S. term loan, our 2015 term loan and pay down the Omega OP term loan and revolving
line of credit.
As a result of the repayment of the 2015 term loan and the partial paydown of the Omega OP term loan, onOctober 14, 2020 , we settled certain interest rate swaps (interest rate swaps originated in 2015 and/or assumed in 2019) with an aggregate notional value of$275 million related to the 2015 term loan and the Omega OP term loan and paid our swap counterparties approximately$11 million .
Portfolio and Other Developments
2020 Acquisitions and Other
The following table summarizes the significant asset acquisitions that occurred
in 2020:
Number of Total Initial
Facilities Country/ Investment Annual
Period SNF ALF State (in millions) Cash Yield(1)
Q1 - 2 U.K. $ 12.1 8.00 %
Q1 1 - IN 7.0 9.50 %
Q2 1 - OH 6.9 9.50 %
Q4 6 1 VA 78.4 9.50 %
Total 8 3 $ 104.4
(1) Initial annual cash yield reflects the initial annual contractual cash rent
divided by the purchase price.
In 2020, the Company also invested
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2019 Acquisitions and Other
The following table summarizes the significant transactions that occurred in
2019:
Number of Total Initial
Facilities Country/ Investment Annual
Period SNF ALF Specialty MOB State (in millions) Cash Yield(1)
Q1 1 - - - OH $ 11.9 (3) 12.00 %
CA, CT, IN, NV, SC, TN,
Q2 20 1 11 1 TX 440.7 (2) 9.82 %
Q2 7 1 3 - PA, VA 131.8 (3) 9.35 %
Q3 3 - - - NC, VA 24.9 9.50 %
FL, ID, KY, LA, MS, MO,
Q4 58 2 - - MT, NC 735.2 8.71 %
Total 89 4 14 1 $ 1,344.5 (1) Initial annual cash yield reflects the initial annual contractual cash rent
divided by the purchase price.
(2) The acquisition was accounted for as a business combination. The other
acquisitions were accounted for as asset acquisitions.
(3) Acquired via a deed-in-lieu of foreclosure.
Encore Portfolio Acquisition OnOctober 31, 2019 , we completed the approximate$757 million portfolio acquisition of 60 facilities (the "Encore Portfolio"). Consideration consisted of approximately$369 million of cash and the assumption of approximately$389 million in mortgage loans guaranteed by the HUD. MedEquities Merger OnMay 17, 2019 , we completed our merger (the "MedEquities Merger") withMedEquities Realty Trust, Inc. ("MedEquities") and its subsidiary operating partnership and the general partner of its subsidiary operating partnership. 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 onMay 16, 2019 , the fair value of the consideration exchanged approximated$346 million . The MedEquities facilities acquired in 2019 are included in our results of operations from the date of acquisition. For the period fromMay 17, 2019 throughDecember 31, 2019 , we recognized approximately$35.2 million of total revenue from the assets acquired in connection with the MedEquities Merger. For the year endedDecember 31, 2019 , we incurred approximately$5.1 million of acquisition and merger related costs associated with the MedEquities Merger.
Asset Sales, Impairments, Contractual Receivables and Other Receivables and Lease Inducements
Asset Sales During the fourth quarter of 2020, we sold 16 facilities (12 were previously held for sale atSeptember 30, 2020 ) for approximately$63.7 million in net cash proceeds recognizing a gain on sale of approximately$5.2 million . In 2020, we sold 43 facilities (six were previously held for sale atDecember 31, 2019 ) for approximately$180.9 million in net cash proceeds recognizing a net gain of approximately$19.1 million . In 2019, we sold 34 facilities (one was previously held for sale atDecember 31, 2018 ) for approximately$219.3 million in net cash proceeds recognizing a net gain of approximately$55.7 million . As ofDecember 31, 2020 , 22 facilities, totaling approximately$81.5 million are classified as assets held for sale. We expect to sell these facilities over
the
next twelve months.
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Impairments
During the fourth quarter of 2020, we recorded impairments on real estate
properties of approximately
For the year endedDecember 31, 2020 , we recorded impairments on real estate properties of approximately$76.0 million on 25 facilities. After considering the impairments recorded and facilities sold during the year, the total net recorded investment in these properties was approximately$12.3 million as ofDecember 31, 2020 , with approximately$0.2 million related to properties classified as assets held for sale. Our impairments were offset by approximately$3.5 million of insurance proceeds received related to a facility that was previously destroyed and impaired. For the year endedDecember 31, 2019 , we recorded net impairments on real estate properties of approximately$45.3 million on 23 facilities. After considering the impairments recorded and facilities sold during the year, the total net recorded investment in these properties was approximately$23.4 million as ofDecember 31, 2019 , with approximately$4.6 million related to properties classified as assets held for sale. Our impairments were offset by approximately$3.7 million of insurance proceeds received related to two facilities that were previously destroyed and impaired. Our recorded impairments were primarily the result of decisions to exit certain non-strategic facilities and/or operators. We reduced the net book value of the impaired facilities to their estimated fair values or, with respect to the facilities reclassified to assets held for sale, to their estimated fair values less costs to sell. To estimate the fair value of the facilities, we utilized a market approach which considered binding sale agreements (a Level 1 input) and/or non-binding offers from unrelated third parties and/or broker quotes (a Level 3 input).
Contractual Receivables and Other Receivables and Lease Inducements
December 31, December 31,
2020 2019
(in thousands)
Contractual receivables - net $ 10,408 $ 27,122 Effective yield interest receivables
139,046 275,549
Lease inducements 83,425
92,628
Other receivables and lease inducements
In 2020, we wrote-off approximately$143.0 million of contractual receivables, straight-line rent receivables, and lease inducements to rental income as a result of placing four operators on a cash basis resulting from a change in our evaluation of the collectibility of future rent payments due under the respective lease agreements as further discussed in Note 2 - Summary of Significant Accounting Policies. In part, our conclusions were based on information the Company received from these four operators during the third and fourth quarters of 2020 regarding substantial doubt as to their ability to continue as a going concern. Of the$143.0 million ,$64.9 million related to Genesis Healthcare, Inc. ("Genesis"),$75.3 million related toAgemo Holdings, LLC ("Agemo") and$2.8 million related to two other operators which lease five facilities from the Company. During 2020, we also wrote-off approximately$3.6 million of straight-line rent receivables to rental income as a result of transitioning facilities to other existing operators. In addition, during 2020, we received a one-time rent payment of approximately$55.4 million fromMaplewood Real Estate Holdings, LLC ("Maplewood"), in conjunction with the restructuring of its master lease and loans with Omega. This payment was accounted for as an adjustment to straight-line rent receivables and is being amortized over the remaining term of the master lease. During 2020, we also provided approximately$34.1 million of funding to four operators, which was accounted for as lease inducements. Of the$34.1 million ,$23.9 million was funded to Maplewood for development and start-up related costs.
For the years ended
For the years endedDecember 31, 2020 and 2019, we recorded rental income of approximately$2.3 million and$64.0 million , respectively, and other investment income of$10.6 million and$9.7 million , respectively, from Genesis. 35 Table of Contents Other investments Agemo OnSeptember 30, 2016 , we acquired and amended a term loan with a fair value of approximately$37.0 million with Agemo. A$5.0 million tranche of the term loan that bore interest at 13% per annum was repaid inAugust 2017 . The remaining$32.0 million tranche of the term loan bears interest at 9% per annum and currently matures onDecember 31, 2024 . The$32.0 million term loan is secured by a security interest in certain collateral of Agemo. During the third quarter of 2020, we concluded that the$32.0 million term loan was impaired, based in part on our consideration of information we received in the quarter from the operator regarding substantial doubt as to its ability to continue as a going concern. We recorded a provision for credit loss of$22.7 million to reduce the carrying value of this loan to the fair value of the underlying collateral, which was limited to our$9.3 million letter of credit and placed the loan on a cash basis. We also fully reserved approximately$3.8 million of contractual interest receivable related to the$32.0 million term loan (see Note 2 - Summary of Significant Accounting Policies). As ofDecember 31, 2020 , the carrying amount of the loan, net of allowances is approximately$9.3 million . OnMay 7, 2018 , we provided Agemo a$25.0 million secured working capital loan bearing interest at 7% per annum that matures onApril 30, 2025 . The working capital loan is primarily secured by a collateral package that includes a second lien on the accounts receivable of the borrowers. The proceeds of the working capital loan were used to pay operating expenses, settlement payments, fees, taxes and other costs approved byOmega. As ofDecember 31, 2020 , approximately$25.0 million is outstanding on this working capital loan. During 2020, no incremental provision for credit loss was recorded for this loan given the underlying collateral value. OnNovember 5, 2019 , we provided Agemo a$1.7 million term loan (which was added to the$32.0 million term loan) bearing interest at a fixed rate of 9% per annum with a scheduled maturity inJanuary 2021 . This loan was repaid in 2020. OnFebruary 28, 2020 , we provided an affiliate of Agemo a$3.5 million term loan bearing interest at a fixed rate of 10% per annum (with the interest paid-in-kind) with a scheduled maturity inFebruary 2021 . This loan was repaid in 2020. AtDecember 31, 2020 , the total carrying value of our loans outstanding with Agemo and its affiliates, net of allowances for credit losses, is approximately$34.3 million . Genesis OnMarch 6, 2018 , we amended certain terms of our$48.0 million secured term loan with Genesis. The$48.0 million term loan bears interest at a fixed rate of 14% per annum, of which 9% per annum is paid-in-kind and was initially scheduled to mature onJuly 29, 2020 . The maturity date of this loan was extended toJanuary 1, 2022 . This term loan (and the$16.0 million term loan discussed below) are secured by a first priority lien on and security interest in certain collateral of Genesis. As ofDecember 31, 2020 , approximately$65.2 million is outstanding on this term loan. Also onMarch 6, 2018 , we provided Genesis an additional$16.0 million secured term loan bearing interest at a fixed rate of 10% per annum, of which 5% per annum is paid-in-kind, and was initially scheduled to mature onJuly 29, 2020 . The maturity date of this loan was extended toJanuary 1, 2022 . As ofDecember 31, 2020 , approximately$18.4 million is outstanding on this term loan. As ofDecember 31, 2020 , our total other investments outstanding with Genesis was approximately$83.6 million . We evaluated our loans with Genesis for impairment during 2020, with no incremental provision for credit loss recognized given the underlying collateral value. 36 Table of Contents Orianna OnJanuary 11, 2019 , pursuant to a bankruptcy court order, affiliates ofOrianna Health Systems ("Orianna") purchased the remaining 15 SNFs (during 2018 we recorded$27.2 million of additional impairment to reduce the remaining investment in direct financing lease covering 15 facilities located in the Southeast region of theU.S. to their estimated fair values) subject to the direct financing lease with Orianna 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 onJanuary 11, 2026 . Interest on the unpaid principal balance is due quarterly in arrears. Commencing onJanuary 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$25.0 million of our then outstanding debtor in possession financing, including all related interest. OnJanuary 16, 2019 , the bankruptcy court confirmed Orianna's plan of reorganization, creating aDistribution 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. InJanuary 2019 , we reclassified our net investment in direct financing lease of$115.8 million from the Trust to other assets on our Consolidated Balance Sheets. For the period fromJanuary 16, 2019 throughDecember 31, 2019 , we received approximately$94 million from the Trust as a partial liquidation. InMarch 2019 , we received updated information from the Trust indicating diminished collectibility of the accounts receivable owed to us. As a result, we recorded an additional$7.7 million allowance. As ofDecember 31, 2019 , our remaining receivable from the Trust was approximately$14.1 million which was recorded in other assets on our Consolidated Balance Sheets. During 2020, we received approximately$17.2 million from the Trust of which approximately$3.1 million is recorded in (recovery) impairment of direct financing leases on our Consolidated Statements of Operations.
Daybreak
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 untilJanuary 2018 , subject to certain conditions. During the fourth quarter of 2018, Daybreak was no longer in compliance with the 2017 Settlement and Forbearance Agreement. OnJanuary 30, 2019 , we entered into a Second Amendment to the 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. Except for$1.1 million in required real estate tax escrows, Daybreak met their contractual payment obligations through the second quarter of 2019; however, during the second half of 2019, Daybreak did not meet their full contractual payment obligations to us as we received approximately$1.3 million of cash rent. During 2020, as part of our plan to transition and sell our Daybreak facilities, we transitioned 31 Daybreak facilities to existing operators. The total annual contractual rent from the 31 transitioned facilities is approximately$12.4 million . In 2021, we expect to transition 14 additional facilities to existing operators with annual contractual rent of approximately$4.0 million . We currently plan to sell the remaining four Daybreak facilities (with a net book value as ofDecember 31, 2020 of approximately$1.6 million ) in 2021. The transition or sale of these facilities will complete our exit from our relationship with Daybreak.
During 2020 and 2019, we recorded impairments of approximately
During 2020 and 2019, we sold seven Daybreak facilities and a parcel of land and two Daybreak facilities, respectively for gains on sale of$1.3 million and$0.5 million , respectively. Daybreak did not pay any rent to us in 2020. Upon conclusion of the restructuring of the Daybreak portfolio, we expect to receive rent or rent equivalents of between$15 million to$17 million annually related to that portfolio. 37 Table of Contents Results of Operations The following is our discussion of the consolidated results of operations for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . For a discussion of our results of operation for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 , see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2019 Form 10-K .
Revenues
Our revenues for the year ended
Rental income was
period in 2019. The decrease was primarily the result of (i)
related to placing four operators on a cash basis of revenue recognition due to
information we received from them regarding substantial doubt as to their
ability to continue as a going concern and reserving for our contractual
? receivables, straight-line rent receivables and lease inducements related to
these operators, (ii)
basis, (iii)
2020, offset by (i)
and 2020, (ii)
million related to the acceleration of in-place leases resulting from facility
transitions, lease terminations and acquired leases.
Mortgage interest income totaled
? over the same period in 2019. The increase was primarily due to the new
mortgages and additional funding to existing operators made throughout 2019 and
2020 and mortgages acquired in the MedEquities Merger. Expenses Our expenses for the year endedDecember 31, 2020 , totaled$735.0 million , an increase of approximately$93.5 million over the same period in 2019. Following is a description of certain of the changes in our expenses for the year endedDecember 31, 2020 compared to 2019:
Our depreciation and amortization expense was
? increase was primarily resulting from the MedEquities Merger and Encore
Portfolio acquisition, other facility acquisitions, capital additions and
assets placed in-service offset by a reduction in depreciation expense related
to facility sales and facilities reclassified to assets held for sale.
Our general and administrative expense was
? million for the same period in 2019. The increase primarily related to the
increase in stock based compensation expense offset by a reduction in professional service and other costs.
Our real estate taxes decreased
? 2019. The decrease primarily resulted from lease amendments, facility sales and
transitions.
? Our
primarily resulted from the MedEquities Merger.
?Our impairment on real estate properties was$72.5 million , compared to$45.3 million for the same period in 2019. The 2020 impairments primarily related to 25 facilities to reduce their net book value to their estimated fair value less costs to sell or fair value. The 2019 impairments primarily related to 23 facilities to reduce their net book value to their estimated fair value less costs to sell or fair value. The 2020 and 2019 impairments were primarily the result of decisions to exit certain non-strategic facilities and/or operators. 38 Table of Contents ?Our (recovery) impairment on direct financing leases was approximately$(3.1) million , compared to$7.9 million for the same period in 2019. Our (recovery) impairment on direct financing leases primarily relates to the Orianna bankruptcy and proceeds received from the Trust. ?Our$38.0 million increase in provision for credit losses was the result of adopting Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326) onJanuary 1, 2020 and includes reserves related to our other investments with Agemo.
Our interest expense was
same period in 2019. The increase primarily related to (i) interest on the
? million senior notes issued in
senior notes issued in
we assumed in the Encore Portfolio acquisition, partially offset by paydowns of
certain term loans and the credit facility.
Other Income (Expenses)
For the year endedDecember 31, 2020 , total other income was$4.9 million , a decrease of approximately$51.6 million over the same period in 2019. The decrease was primarily due to (i) a$13.3 million loss on debt extinguishment primarily resulting from the termination of certain interest rate swaps, the write-off of unamortized deferred costs related to the repayment of certain term loans and the prepayment of two mortgage loans guaranteed by HUD and (ii) a$36.6 million decrease in gain on assets sold - net resulting from the sale of 43 facilities and 34 facilities during 2020 and 2019, respectively, as we continue to exit certain facilities, operator relationships and/or states to improve the strength of our overall portfolio.
2020 Taxes
As a REIT, we generally are not subject to federal income taxes on the REIT taxable income that we distribute to stockholders, subject to certain exceptions. For tax year 2020, we made common dividend payments of$612.3 million to satisfy REIT requirements relating to qualifying income. We have elected to treat certain of our active subsidiaries as TRSs. Our domestic TRSs are subject to federal, state and local income taxes at the applicable corporate rates. Our foreign TRSs are subject to foreign income taxes. As ofDecember 31, 2020 , one of our TRSs that is subject to income taxes at the applicable corporate rates had a net operating loss ("NOL") carry-forward of approximately$5.7 million . The loss carry-forward is fully reserved as ofDecember 31, 2020 with a valuation allowance due to uncertainties regarding realization. Under current law, our NOL carry-forwards generated up throughDecember 31, 2017 may be carried forward for no more than 20 years, and our NOL carry-forwards generated in our taxable years endedDecember 31, 2020 ,December 31, 2019 andDecember 31, 2018 may be carried forward indefinitely. The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") modified the NOL carryback rules to limit recovery of taxes paid in prior tax periods. We do not anticipate that such changes will materially impact the computation of Omega's taxable income, or the taxable income of any Omega entity, including our TRSs. We also do not expect that Omega or any Omega entity, including our TRSs, will realize a material tax benefit as a result of the changes to the provisions of the Code made by the CARES Act. For the year endedDecember 31, 2020 , we recorded approximately$1.3 million of federal, state and local income tax provision and approximately$3.6 million of tax provision for foreign income taxes. These amounts do not include any income or franchise taxes payable to certain states and municipalities. National Association of Real Estate Investment Trusts Funds From Operations
Our funds from operations ("Nareit FFO"), a non-GAAP financial measure as
further described below, for the year ended
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We calculate and report Nareit FFO in accordance with the definition of Funds from Operations and interpretive guidelines issued by theNational 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 year endedDecember 31, 2020 and 2019: Year Ended December 31, 2020 2019 (in thousands) Net income$ 163,545 $ 351,947
Deduct gain from real estate dispositions (19,113)
(55,696)
Deduct gain from real estate dispositions - unconsolidated joint ventures (5,894)
(9,345)
138,538 286,906
Elimination of non-cash items included in net income: Depreciation and amortization
329,924 301,683
Depreciation - unconsolidated joint ventures 14,000
6,513
Add back impairments on real estate properties 72,494
45,264
Add back (deduct) unrealized loss (gain) on warrants 988
(410)
Nareit FFO $ 555,944 $ 639,956 Liquidity and Capital Resources
At
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The following table shows the amounts due in connection with the contractual
obligations described below as of
Payments due by period
Less than More than
Total 1 year Years 2-3 Years 4-5 5 years
(in thousands)
Debt(1) $ 5,227,382 $ 130,876 $ 902,274 $ 816,537 $ 3,377,695
Interest payments on long-term
debt 1,419,326 211,832 422,384 319,610 465,500
Operating lease and other
obligations(2) 42,155 1,904 3,943 4,121 32,187
Total $ 6,688,863 $ 344,612 $ 1,328,601 $ 1,140,268 $ 3,875,382 The
under the Revolving Credit Facility due in
the British Pound Sterling term loan facility due
under the Omega OP Term Loan Facility due
4.375% Senior Notes due
due
(vii)
million of 4.5% Senior Notes due
(1) Senior Notes due
(xii)
2021, (xiii)
joint venture due
weighted average interest rate due between 2046 and 2052. Other than the
million outstanding under the Omega OP Term Loan Facility, the
of HUD debt and the $2.3 million of debt held at a consolidated joint
venture, the Parent is the obligor of all outstanding debt.
In connection with the adoption of Topic 842, we recognized lease liabilities
in connection with ground and/or facility leases. Certain operators pay
(2) these obligations directly to the landlord. We recognize rental income for
ground and/or facility leases where the operator reimburses us, or pays the
obligation directly to the landlord on our behalf.
Financing Activities and Borrowing Arrangements
OnOctober 9, 2020 , we issued$700 million aggregate principal amount of our 3.375% Senior Notes due 2031 (the "2031 Senior Notes"). The 2031 Senior Notes mature onFebruary 1, 2031 . The 2031 Senior Notes were sold at an issue price of 98.249% of their face value before the underwriters' discount. Our net proceeds from the 2031 Senior Notes offering, after deducting underwriting discounts and expenses, were approximately$680.5 million . We used the net proceeds from the 2031 Senior Notes offering to repay the outstanding balance on ourU.S. term loan, our 2015 term loan and pay down the Omega OP term loan and revolving
line of credit.
As a result of the repayment of the 2015 term loan and the partial paydown of the Omega OP term loan, onOctober 14, 2020 , we settled certain interest rate swaps (interest rate swaps originated in 2015 and/or assumed in 2019) with an aggregate notional value of$275 million related to the 2015 term loan and the Omega OP term loan and paid our swap counterparties approximately$11 million . HUD Mortgage Loan Payoffs OnAugust 26, 2020 , we paid approximately$13.7 million to retire two mortgage loans guaranteed by HUD. The loans were assumed in 2019 and had an average interest rate of 3.08% per annum with maturities in 2051 and 2052. The payoff included a$0.9 million prepayment fee which is included in loss on debt extinguishment on our Consolidated Statements of Operations.
Subordinated Debt
In connection with a 2010 acquisition, we assumed five separate$4.0 million subordinated notes bearing interest at 9% per annum that mature onDecember 21, 2021 . Interest on these notes is due quarterly with the principal balance due at maturity. These subordinated notes may be prepaid at any time without penalty. To the extent that the operator of the facilities fails to pay rent when due to us under our existing master lease, we have the right to offset the amounts owed to us against the amounts we owe to the lender under the notes. In the fourth quarter of 2019, we had recorded a reserve of$6.5 million in connection with the operator's failure to pay rent, and we began offsetting certain interest and principal amounts payable by us against this reserve. During 2020, expressly subject to our reservation of rights under the terms of the notes and related agreement, we reversed this reserve, and ceased offsetting amounts against our note payments, as a result of the operator's payment of
all
current and past due rent.
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OnMarch 27, 2020 , we entered into five forward starting swaps totaling$400 million . We designated the forward starting swaps as cash flow hedges of interest rate risk associated with interest payments on a forecasted issuance of long-term debt, initially expected to occur within the next five years. The swaps are effective onAugust 1, 2023 and expire onAugust 1, 2033 and were issued at a fixed rate of approximately 0.8675%. InOctober 2020 , we issued$700 million aggregate principal amount of our 3.375% Senior Notes due 2031 and discontinued hedge accounting. Amounts reported in accumulated other comprehensive loss related to these discontinued cash flow hedging relationships will be reclassified to interest expense as interest payments are made on the Company's debt. Simultaneously, we re-designated these swaps in new cash flow hedging relationships of interest rate risk associated with interest payments on another forecasted issuance of long-term debt. We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of 46 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).
Revolving Credit Facility
We have a$1.25 billion senior unsecured revolving credit facility that matures onMay 25, 2021 , subject to Omega's option to extend such maturity date for two, six-month periods (subject to compliance with a notice requirement and other customary conditions). As ofDecember 31, 2020 ,$101.2 million of borrowings were outstanding under our revolving credit facility. We currently plan to refinance our credit facility or exercise our option to extend the maturity of the existing facility byMay 25, 2021 . Our ability to refinance our credit facilities on favorable terms or at all is subject to prevailing market conditions.
General
Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As ofDecember 31, 2020 and 2019, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.
Supplemental Guarantor Information
Parent has issued approximately$4.6 billion aggregate principal of senior notes outstanding atDecember 31, 2020 that were registered under the Securities Act of 1933, as amended. The senior notes are guaranteed by Omega OP. TheSEC adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities, such as our senior notes. As a result of these amendments, registrants are permitted to provide certain alternative financial and non-financial disclosures, to the extent material, in lieu of separate financial statements for subsidiary issuers and guarantors of registered debt securities. Accordingly, separate consolidated financial statements of Omega OP have not been presented. Parent and Omega OP, on a combined basis, have no material assets, liabilities or operations other than financing activities (including borrowings under the senior unsecured revolving and term loan credit facility, Omega OP term loan and the outstanding senior notes) and their investments in non-guarantor subsidiaries. Omega OP is currently the sole guarantor of our senior notes. The guarantees by Omega OP of our senior notes are full and unconditional and joint and several with respect to the payment of the principal and premium and interest on our senior notes. The guarantees of Omega OP are senior unsecured obligations of Omega OP that rank equal with all existing and future senior debt of Omega OP and are senior to all subordinated debt. However, the guarantees are effectively subordinated to any secured debt of Omega OP. As ofDecember 31, 2020 , there were no significant restrictions on the ability of Omega OP to make distributions to Omega. 42 Table of Contents Commitments We have committed to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments. We expect the funding of these commitments to be completed over the next several years. Our remaining commitments atDecember 31, 2020 , are outlined in the table below (in thousands): Total commitments$ 557,119 Amounts funded to date (1) (450,766) Remaining commitments (2)$ 106,353
(1) Includes finance costs.
(2) This amount excludes our remaining commitments to fund under our other
investments of approximately $95.7 million .
OnMarch 20, 2020 , Omega's Board of Directors authorized the repurchase of up to$200 million of its outstanding common stock from time to time over the twelve months endingMarch 20, 2021 . We are authorized to repurchase shares of our common stock in open market and privately negotiated transactions or in any other manner as determined by Omega's management and in accordance with applicable law. The timing and amount of stock repurchases will be determined, in management's discretion, based on a variety of factors, including but not limited to market conditions, other capital management needs and opportunities, and corporate and regulatory considerations. Omega has no obligation to repurchase any amount of its common stock, and such repurchases, if any, may be discontinued at any time. Omega did not repurchase any of its outstanding common stock during 2020.
OnSeptember 3, 2015 , we entered into separate Equity Distribution Agreements (collectively, the "Equity Shelf Agreements") to sell shares of our common stock having an aggregate gross sales price of up to$500 million (the "2015 Equity Shelf Program") with several financial institutions, each as a sales agent and/or principal (collectively, the "Managers"). Under the terms of the Equity Shelf Agreements, we may sell shares of our common stock, from time to time, through or to the Managers having an aggregate gross sales price of up to$500 million . Sales of the shares, if any, are made by means of ordinary brokers' transactions on theNew York Stock Exchange at market prices, or as otherwise agreed with the applicable Manager. We pay each Manager compensation for sales of the shares up to 2% of the gross sales price per share for shares sold through such Manager under the applicable Equity Shelf Agreements.
The table below presents information regarding the shares issued under the
Equity Shelf Program for each of the years ended
Shares issued Average Price Net Proceeds
Year Ended (in millions) Per Share (in millions)
December 31, 2018 2.3 $ 33.18 $ 75.5
December 31, 2019 3.1 34.79 109.0
December 31, 2020 4.2 36.16 152.6
Dividend Reinvestment and Common Stock Purchase Plan
We have a Dividend Reinvestment and Common Stock Purchase Plan (the "DRSPP") that allows for the reinvestment of dividends and the optional purchase of our common stock. OnMarch 23, 2020 , we temporarily suspended the DRSPP and onDecember 17, 2020 , we reinstated the DRSPP. The table below presents information regarding the shares issued under the DRSPP for each of the years endedDecember 31, 2018 , 2019, and 2020: Shares issued Gross Proceeds Year Ended (in millions) (in millions) December 31, 2018 1.5 $ 46.8 December 31, 2019 3.0 115.1 December 31, 2020 0.1 3.7 43 Table of Contents 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.
In 2020, we paid dividends of
The Board has declared common stock dividends as set forth below:
Dividend per
Record Date Payment Date Common Share
January 31, 2020 February 14, 2020 $ 0.67
April 30, 2020 May 15, 2020 0.67
July 31, 2020 August 14, 2020 0.67
November 2, 2020 November 16, 2020 0.67
February 8, 2021 February 16, 2021 0.67
Liquidity
We believe our liquidity and various sources of available capital, including
cash from operations, existing availability under our credit facilities,
proceeds from our DRSPP and the 2015 Equity Shelf Program, 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$167.6 million as ofDecember 31, 2020 , an increase of$134.2 million as compared to the balance atDecember 31, 2019 . The following is a discussion of changes in cash, cash equivalents and restricted cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows. 44 Table of Contents
Operating Activities - Operating activities generated$708.3 million of net cash flow for the year endedDecember 31, 2020 , as compared to$553.7 million for the same period in 2019, an increase of$154.5 million which is primarily due to the MedEquities Merger, the Encore portfolio acquisition, facility transitions and investments in mortgages and other investments. Investing Activities - Net cash flow from investing activities was an outflow of$89.1 million for the year endedDecember 31, 2020 , as compared to an outflow of$379.0 million for the same period in 2019. The$289.9 million change in cash used by investing activities related primarily to (i) a$272.2 million decrease in real estate acquisitions, primarily related to the Encore portfolio acquisition in the fourth quarter of 2019, (ii)$101.5 million decrease in investments in unconsolidated joint ventures primarily related to new joint venture investments in 2019, (iii) a$86.4 million decrease in capital improvements to real estate investments and construction in progress and (iv) a$54.6 million decrease in business acquisitions, primarily related to the MedEquities Merger in the second quarter of 2019. Offsetting these changes were: (i) a$9.0 million change in other investments - net, (ii) a$86.4 million change in mortgages - net which is primarily the result of new mortgages in 2020 and fewer mortgage payoffs in 2020 as compared to 2019, (iii) a$78.3 million decrease in proceeds from sale of direct financing lease assets and related trust and (iv) a$38.4 million decrease in proceeds from the sales of real estate investments. Financing Activities - Net cash flow from financing activities was an outflow of$485.5 million for the year endedDecember 31, 2020 , as compared to an outflow of$154.0 million for the same period in 2019. The$331.6 million change in cash used in financing activities was primarily related to (i) a$351.2 million change in other long-term borrowings - net which is the result of greater other long-term debt repayments in 2020 offset by additional long-term borrowings in 2020 as compared to 2019, (ii) a$252.1 million decrease in cash proceeds from the issuance of common stock in 2020, as compared to the same period in 2019, (iii) a$111.3 million decrease in net proceeds from our dividend reinvestment plan in 2020, as compared to the same period in 2019, and (iv) a$48.2 million increase in dividends paid primarily resulting from additional share issuances throughout 2019 and 2020, offset by (i) a$444.6 million change in our credit facility borrowings - net.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP inthe United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. Our significant accounting policies are described in Note 2 - Summary of Significant Accounting Policies. These policies were followed in preparing the consolidated financial statements for all periods presented.
Actual results could differ from those estimates.
We have identified the following significant accounting policies that we believe are critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant assumptions, judgments and estimates. With respect to these critical accounting policies, we believe the application of assumptions, judgments and estimates is consistently applied and produces financial information that fairly presents the results of operations for all periods presented. The following table presents information about our critical accounting policies, as well as the material assumptions used to develop each estimate:
Nature of Critical Accounting
Estimate Assumptions/Approach Used
Revenue Recognition
Rental income from our We assess the probability of collecting
operating leases is generally substantially all payments under our leases based
recognized on a straight-line on several factors, including, among other
basis over the lease term when things, payment history of the lessee, the
we have determined that the financial strength of the lessee and any
collectability of guarantors, historical operations and operating
substantially all of the lease trends, current and future economic conditions payments are probable. If we and expectations of performance (which includes determine that it is not known substantial doubt about an operator's probable that substantially ability to continue as a going concern). If our
all of the lease payments will evaluation of these factors indicates it is
be collected, we account for probable that we will be unable to collect
the revenue under the lease on substantially all rents, we place that operator
a cash basis. on a cash basis and limit our rental income to
the lesser of lease income on a straight-line
basis plus variable rents when they become
accruable or cash collected. As a result of
placing an operator on a cash basis, we may
recognize a charge to rental income for any
contractual rent receivable, straight-line rent
receivable and lease inducements. If we change
our conclusion regarding the probability of
collecting rent payments required by a lessee, we
may recognize an adjustment to rental income in
the period we make a change to our prior
conclusion. Changes in the assessment of
probability are accounted for on a cumulative
basis as if the lease had always been accounted
for based on the current determination of the
likelihood of collection, potentially resulting
in increased volatility of rental income.
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Nature of Critical Accounting
Estimate Assumptions/Approach Used
Real Estate Investment
Impairment
Assessing impairment of real We evaluate our real estate investments for
property involves subjectivity impairment indicators at each reporting period,
in determining if indicators including the evaluation of our assets' useful
of impairment are present and lives. The judgment regarding the existence of
in estimating the future impairment indicators is based on factors such
undiscounted cash flows. The as, but not limited to, market conditions,
estimated future undiscounted operator performance including the current
cash flows are generally based payment status of contractual obligations and
on the related lease which expectations of the ability to meet future
relates to one or more contractual obligations, legal structure, as well
properties and may include as our intent with respect to holding or
cash flows from the eventual disposing of the asset. If indicators of
disposition of the asset. In impairment are present, we evaluate the carrying
some instances, there may be value of the related real estate investments in
various potential outcomes for relation to our estimate of future undiscounted
a real estate investment and cash flows of the underlying facilities to
its potential future cash determine if an impairment charge is necessary.
flows. In these instances, the This analysis requires us to use judgment in
undiscounted future cash flows determining whether indicators of impairment
used to assess the exist, probabilities of potential outcomes and to
recoverability are estimate the expected future undiscounted cash
probability-weighted based on flows or estimated fair values of the facility management's best estimates as which impact our assessment of impairment, if of the date of evaluation. any. These estimates can have a significant impact on the undiscounted cash flows. Asset Acquisitions We believe that our real The allocation of the purchase price to the estate acquisitions are related real estate acquired (tangible assets and typically considered asset intangible assets and liabilities) involves acquisitions. The assets subjectivity as such allocations are based on a acquired and liabilities relative fair value analysis. In determining the assumed are recognized by fair values that drive such analysis, we estimate allocating the cost of the the fair value of each component of the real acquisition, including estate acquired which generally includes land, transaction costs, to the buildings and site improvements, furniture and individual assets acquired and equipment, and the above or below market liabilities assumed on a component of in-place leases. Significant relative fair value basis. assumptions used to determine such fair values Tangible assets consist include comparable land sales, capitalization primarily of land, building rates, discount rates, market rental rates and and site improvements and property operating data, all of which can be furniture and equipment. impacted by expectations about future market or Identifiable intangible assets economic conditions. Our estimates of the values and liabilities primarily of these components affect the amount of consist of the above or below depreciation and amortization we record over the market component of in-place estimated useful life of the property or the term leases. of the lease. Allowance for Losses on Mortgages, Other Investments and Direct Financing Leases The allowances for losses on We assess the probability of collecting mortgage notes receivable, substantially all payments due under our loans other investments and direct based on several factors, including, among other financing leases things, payment history, the financial
strength
(collectively, our "loans") of the lessee and/or borrower and any guarantors, are maintained at a level that historical operations and operating trends, we believe are adequate to current and future economic conditions, absorb potential losses. The expectations of performance (which includes known determination of the allowance substantial doubt about an operator's ability to is based on a quarterly continue as a going concern) and the value of the evaluation of all outstanding underlying collateral of the agreement, if any. loans. If facts and When we identify a loan impairment, the loan is circumstances indicate that written down to the present value of the expected there is greater risk of loan future cash flows which requires the judgement of charge-offs, additional management. In cases where expected future cash allowances, impairments or flows are not readily determinable, the loan is placement on non-accrual written down to the fair value of the underlying status may be required. A loan collateral. We may base our valuation on a loan's is impaired when, based on observable market price, if any, or the fair current information and value of collateral, net of sales costs, if the events, it is probable that we repayment of the loan is expected to be provided will be unable to collect all solely by the sale of the collateral. amounts due as scheduled according to the contractual terms of the loan agreements.
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