Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
OMEGA HEALTHCARE INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Maryland
1-11316
38-3041398
(State or other jurisdiction of incorporation ororganization)
(Commission file number)
(IRS Employer Identification No.)
303 International Circle, Suite 200, Hunt Valley, MD 21030
(Address of principal executive offices)
(410) 427-1700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.10 par value
OHI
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ⌧
Accelerated filer ◻
Non-accelerated filer ◻
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
No ☒
As of July 30, 2024, there were 257,838,900 shares of common stock outstanding.
June 30, 2024
TABLE OF CONTENTS
PageNo.
PART I
Financial Information
Item 1.
Financial Statements of Omega Healthcare Investors, Inc. (Unaudited):
Consolidated Balance Sheets
2
Consolidated Statements of Operations
3
Consolidated Statements of Comprehensive Income
4
Consolidated Statements of Equity
5
Consolidated Statements of Cash Flows
7
Notes to Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
36
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
54
Item 4.
Controls and Procedures
PART II
Other Information
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.
55
Item 6.
Exhibits
56
PART I – FINANCIAL INFORMATION
Item 1 - Financial Statements
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30,
December 31,
2024
2023
(Unaudited)
ASSETS
Real estate assets
Buildings and improvements
$
6,925,123
6,879,034
Land
876,762
867,486
Furniture and equipment
473,021
467,393
Construction in progress
185,487
138,410
Total real estate assets
8,460,393
8,352,323
Less accumulated depreciation
(2,583,159)
(2,464,227)
Real estate assets – net
5,877,234
5,888,096
Investments in direct financing leases – net
9,437
8,716
Real estate loans receivable – net
1,378,798
1,212,162
Investments in unconsolidated joint ventures
185,270
188,409
Assets held for sale
76,627
81,546
Total real estate investments
7,527,366
7,378,929
Non-real estate loans receivable – net
234,562
275,615
Total investments
7,761,928
7,654,544
Cash and cash equivalents
35,193
442,810
Restricted cash
3,938
1,920
Contractual receivables – net
10,360
11,888
Other receivables and lease inducements
230,428
214,657
Goodwill
643,786
643,897
Other assets
162,913
147,686
Total assets
8,848,546
9,117,402
LIABILITIES AND EQUITY
Revolving credit facility
70,226
20,397
Secured borrowings
—
61,963
Senior notes and other unsecured borrowings – net
4,590,378
4,984,956
Accrued expenses and other liabilities
287,354
287,795
Total liabilities
4,947,958
5,355,111
Preferred stock $1.00 par value authorized – 20,000 shares, issued and outstanding – none
Common stock $0.10 par value authorized – 350,000 shares, issued and outstanding – 254,023 shares as of June 30, 2024 and 245,282 shares as of December 31, 2023
25,402
24,528
Additional paid-in capital
6,951,244
6,671,198
Cumulative net earnings
3,861,804
3,680,581
Cumulative dividends paid
(7,161,897)
(6,831,061)
Accumulated other comprehensive income
34,345
29,338
Total stockholders’ equity
3,710,898
3,574,584
Noncontrolling interest
189,690
187,707
Total equity
3,900,588
3,762,291
Total liabilities and equity
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three Months Ended
Six Months Ended
Revenues
Rental income
214,315
219,355
421,236
408,686
Interest income
38,042
29,232
73,878
57,652
Miscellaneous income
388
1,600
930
2,051
Total revenues
252,745
250,187
496,044
468,389
Expenses
Depreciation and amortization
74,234
82,018
148,791
163,210
General and administrative
22,148
22,158
43,680
42,684
Real estate taxes
3,750
3,925
7,548
7,922
Acquisition, merger and transition related costs
1,780
423
4,383
1,062
Impairment on real estate properties
8,182
21,114
13,474
60,102
(Recovery) provision for credit losses
(14,172)
12,967
(5,702)
8,910
Interest expense
53,966
58,776
111,786
117,322
Total expenses
149,888
201,381
323,960
401,212
Other income (expense)
Other income – net
3,363
1,029
8,639
3,749
Loss on debt extinguishment
(213)
(1,496)
(6)
Gain on assets sold – net
12,911
12,243
11,520
25,880
Total other income
16,061
13,272
18,663
29,623
Income before income tax expense and income from unconsolidated joint ventures
118,918
62,078
190,747
96,800
Income tax expense
(1,980)
(1,626)
(4,561)
(334)
Income from unconsolidated joint ventures
141
1,069
239
1,900
Net income
117,079
61,521
186,425
98,366
Net income attributable to noncontrolling interest
(3,217)
(1,665)
(5,202)
(2,568)
Net income available to common stockholders
113,862
59,856
181,223
95,798
Earnings per common share available to common stockholders:
Basic:
0.46
0.25
0.73
0.41
Diluted:
0.45
0.72
0.40
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Other comprehensive income (loss)
Foreign currency translation
2,292
13,207
(1,996)
24,000
Cash flow hedges
277
7,199
7,154
(2,351)
Total other comprehensive income
2,569
20,406
5,158
21,649
Comprehensive income
119,648
81,927
191,583
120,015
Comprehensive income attributable to noncontrolling interest
(3,293)
(2,251)
(5,353)
(3,189)
Comprehensive income attributable to common stockholders
116,355
79,676
186,230
116,826
CONSOLIDATED STATEMENTS OF EQUITY
Three Months Ended June 30, 2024 and 2023
Accumulated
Common
Additional
Cumulative
Other
Total
Stock
Paid-in
Net
Dividends
Comprehensive
Stockholders’
Noncontrolling
Par Value
Capital
Earnings
Paid
Income
Equity
Interest
Balance at March 31, 2024
24,637
6,705,333
3,747,942
(6,995,876)
31,852
3,513,888
186,705
3,700,593
Stock related compensation
9,247
Issuance of common stock
765
242,071
242,836
Common dividends declared ($0.67 per share)
(166,021)
Vesting/exercising of Omega OP Units
(5,437)
5,437
Exchange and redemption of Omega OP Units for common stock
30
(30)
Omega OP Units distributions
(6,260)
Net change in noncontrolling interest holder in consolidated JV
545
Other comprehensive income
2,493
76
3,217
Balance at June 30, 2024
Balance at March 31, 2023
23,434
6,322,160
3,474,343
(6,344,413)
21,533
3,497,057
188,554
3,685,611
8,855
663
198,963
199,626
(157,486)
(4,118)
4,118
542
544
(621)
(77)
(5,636)
(35)
(193)
(228)
19,820
586
1,665
Balance at June 30, 2023
24,099
6,526,367
3,534,199
(6,501,899)
41,353
3,624,119
188,473
3,812,592
Six Months Ended June 30, 2024 and 2023
Income (Loss)
Balance at December 31, 2023
18,531
873
274,313
275,186
Common dividends declared ($1.34 per share)
(330,836)
(13,159)
13,159
1
361
362
(362)
(16,712)
5,007
151
5,202
Balance at December 31, 2022
23,425
6,314,203
3,438,401
(6,186,986)
20,325
3,609,368
193,914
3,803,282
17,647
672
200,939
201,611
(314,913)
(6,929)
6,929
(14,767)
(171)
(206)
21,028
621
2,568
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (in thousands)
Six Months Ended June 30,
Cash flows from operating activities
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for rental income
13,401
Amortization of deferred financing costs and loss on debt extinguishment
8,534
6,510
Accretion of direct financing leases
70
53
Stock-based compensation expense
18,415
17,550
(11,520)
(25,880)
Amortization of acquired in-place leases – net
(1,062)
(6,775)
Straight-line rent and effective interest receivables
(17,857)
(23,257)
Interest paid-in-kind
(6,674)
(5,221)
Loss from unconsolidated joint ventures
1,617
37
Change in operating assets and liabilities – net:
Contractual receivables
1,406
(610)
Lease inducements
465
(12,146)
Other operating assets and liabilities
(805)
(12,514)
Net cash provided by operating activities
335,577
281,736
Cash flows from investing activities
Acquisition of real estate
(127,973)
(154,927)
Net proceeds from sale of real estate investments
44,894
62,284
Investments in construction in progress
(42,149)
(14,681)
Placement of loan principal
(193,187)
(182,728)
Collection of loan principal
65,435
121,918
(318)
(8,195)
Distributions from unconsolidated joint ventures in excess of earnings
1,250
1,134
Capital improvements to real estate investments
(14,010)
(13,191)
Proceeds from net investment hedges
8,429
Receipts from insurance proceeds
1,657
3,717
Net cash used in investing activities
(255,972)
(184,669)
Cash flows from financing activities
Proceeds from long-term borrowings
478,500
80,000
Payments of long-term borrowings
(890,128)
(86,001)
Payments of financing related costs
(1,892)
Net proceeds from issuance of common stock
Dividends paid
(330,720)
(314,816)
Net payments to noncontrolling members of consolidated joint venture
Proceeds from derivative instruments
92,577
Redemption of Omega OP Units
Distributions to Omega OP Unit Holders
Net cash used in financing activities
(485,221)
(41,685)
Effect of foreign currency translation on cash, cash equivalents and restricted cash
17
485
Decrease in cash, cash equivalents and restricted cash
(405,599)
55,867
Cash, cash equivalents and restricted cash at beginning of period
444,730
300,644
Cash, cash equivalents and restricted cash at end of period
39,131
356,511
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business Overview and Organization
Omega Healthcare Investors, Inc. (“Parent”) is a Maryland corporation that, together with its consolidated subsidiaries (collectively, “Omega,” the “Company,” “we,” “our” or “us”) invests in healthcare-related real estate properties located in the United States (“U.S.”) and the United Kingdom (“U.K.”). Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), and to a lesser extent, independent living facilities (“ILFs”), rehabilitation and acute care facilities (“specialty facilities”) and medical office buildings. Our core portfolio consists of long-term “triple net” leases and real estate loans with healthcare operating companies and affiliates (collectively, our “operators”). In addition to our core investments, we make loans to operators and/or their principals. From time to time, we also acquire equity interests in joint ventures or entities that support the long-term healthcare industry and our operators.
Omega has elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes and is structured as an umbrella partnership REIT (“UPREIT”) under which all of Omega’s assets are owned directly or indirectly by, and all of Omega’s operations are conducted directly or indirectly through, its operating partnership subsidiary, OHI Healthcare Properties Limited Partnership (collectively with its subsidiaries, “Omega OP”). Omega has exclusive control over Omega OP’s day-to-day management pursuant to the partnership agreement governing Omega OP. As of June 30, 2024, Parent owned 97% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and other investors owned 3% of the outstanding Omega OP Units.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the interim periods reported herein are not necessarily indicative of results to be expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the financial statements and the footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Omega’s consolidated financial statements include the accounts of Omega Healthcare Investors, Inc., its wholly-owned subsidiaries and the joint ventures (“JVs”) and variable interest entities (“VIEs”) that it controls, through voting rights or other means. All intercompany transactions and balances have been eliminated in consolidation.
Segments
We conduct our operations and report financial results as one business segment. The presentation of financial results as one reportable segment is consistent with the way we operate our business and is consistent with the manner in which our Chief Operating Decision Maker (CODM), our Chief Executive Officer, evaluates performance and makes resource and operating decisions for the business.
Reclassification
Certain amounts in the prior year period have been reclassified to conform to the current period presentation. Income from direct financing leases, which was previously reported separately on our Consolidated Statements of Operations, is now included in Rental Income for all periods presented. In addition, we previously reported assets held for sale of $93.7 million on the Consolidated Balance Sheet as of December 31, 2023. $12.2 million of these assets no longer qualify as held for sale and have been reclassified to assets held for use within the applicable line items in real estate assets – net on the Consolidated Balance Sheet as of December 31, 2023. Of the $12.2 million reclassified net of $5.4 million of accumulated depreciation, $15.9 million relates to buildings, $0.6 million relates to land and $1.1 million relates to furniture and equipment. We originally reclassified these assets as held for sale in the fourth quarter of 2023 as a result of receiving a notification from an operator of their intent to exercise a purchase option over the assets. Due to regulatory issues encountered in the first quarter of 2024 during the due diligence process that limit our ability to sell these assets, they no longer qualify as assets held for sale.
Recent Accounting Pronouncements
ASU – 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, which is intended to improve reportable segment disclosures, primarily through enhanced disclosures about significant segment expenses, as well as how the CODM uses the reported measure(s) of segment profit or loss in assessing performance. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The guidance is to be applied retrospectively to all periods presented in the financial statements. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and disclosures.
ASU – 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures
In December 2023, the FASB issued ASU 2023-09, which modifies the rules on income tax disclosures to require entities to disclose (i) specific categories in the rate reconciliation, (ii) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (iii) income tax expense or benefit from continuing operations (separated by federal, state and foreign). The guidance also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions. The guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The guidance should be applied on a prospective basis, but retrospective application is permitted. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and disclosures.
NOTE 2 – REAL ESTATE ASSETS
At June 30, 2024, our leased real estate properties included 588 SNFs, 221 ALFs, 19 ILFs, 19 specialty facilities and one medical office building. The following table summarizes the Company’s rental income:
Three Months Ended June 30,
Fixed income from operating leases
210,554
215,307
413,846
400,634
Variable income from operating leases
3,510
3,794
6,887
7,544
Interest income from direct financing leases
251
254
503
508
Total rental income
Our variable income from operating leases primarily represents the reimbursement by operators for real estate taxes that Omega pays directly.
9
Asset Acquisitions
The following table summarizes the asset acquisitions that occurred during the six months ended June 30, 2024:
Number of
Total Real Estate
Initial
Facilities
Assets Acquired
Annual
Period
SNF
ALF
Country/State
(in millions)
Cash Yield(1)
Q1
WV
8.1
10.0
%
U.K.
5.2
9.5
Q2
MI
31.0
11.5
32
50.8
(2)
LA
21.0
33
116.1
Construction in Progress and Capital Expenditure Investments
We invested $34.8 million and $56.2 million under our construction in progress and capital improvement programs during the three and six months ended June 30, 2024, respectively. We invested $17.8 million and $27.9 million under our construction in progress and capital improvement programs during the three and six months ended June 30, 2023, respectively. As of June 30, 2024, construction in progress included two projects consisting of the development of a SNF in Virginia and an ALF in Washington D.C.
NOTE 3 – ASSETS HELD FOR SALE, DISPOSITIONS AND IMPAIRMENTS
Periodically we sell facilities to reduce our exposure to certain operators, geographies and non-strategic assets or due to the exercise of a tenant purchase option.
The following is a summary of our assets held for sale:
Number of facilities held for sale
15
16
Amount of assets held for sale (in thousands)
Asset Sales
During the three and six months ended June 30, 2024, we sold five SNFs and nine SNFs subject to operating leases for $34.8 million and $44.9 million in net cash proceeds, respectively. As a result of these sales, we recognized a net gain of $12.9 million and $11.5 million, respectively.
During the three and six months ended June 30, 2023, we sold ten facilities (nine SNFs and one ILF) and 12 facilities (ten SNFs, one ILF and one medical office building) subject to operating leases, for approximately $44.7 million and $62.3 million in net cash proceeds, respectively. As a result of these sales, we recognized net gains of approximately $12.2 million and $25.9 million, respectively.
10
During the three and six months ended June 30, 2024, we received interest of $0.3 million and $0.6 million, respectively, related to seller financing provided in connection with sales that did not meet the contract criteria to be recognized under ASC 610-20. During the three and six months ended June 30, 2023, we received interest of $2.3 million and $4.4 million, respectively, related to seller financing provided in connection with sales that did not meet the contract criteria to be recognized under ASC 610-20. The interest received was deferred and recorded as a contract liability within accrued expenses and other liabilities on our Consolidated Balance Sheets. As of June 30, 2024, we have one sale that has not been recognized.
Real Estate Impairments
During the three and six months ended June 30, 2024, we recorded impairments on four and seven facilities of $8.2 million and $13.5 million, respectively. Of the $13.5 million, $8.1 million related to five held for use facilities (of which $4.0 million relates to three closed facilities) for which the carrying value exceeded the fair value and $5.4 million related to two facilities that were classified as held for sale for which the carrying values exceeded the estimated fair value costs to sell.
During the three and six months ended June 30, 2023, we recorded impairments on four and six facilities of $21.1 million and $60.1 million, respectively. Of the $60.1 million, $57.5 million related to four held for use facilities (of which $48.0 million relates to three facilities that were closed during the year) for which the carrying value exceeded the fair value and $2.6 million related to two facilities that were classified as held for sale for which the carrying values exceeded the estimated fair value costs to sell.
To estimate the fair value of the facilities for the impairments noted above, we utilized a market approach that considered binding sale agreements (a Level 1 input) or non-binding offers from unrelated third parties and/or broker quotes (a Level 3 input).
NOTE 4 – CONTRACTUAL RECEIVABLES AND OTHER RECEIVABLES AND LEASE INDUCEMENTS
Contractual receivables relate to the amounts currently owed to us under the terms of our lease and loan agreements. Effective yield interest receivables relate to the difference between the interest income recognized on an effective yield basis over the term of the loan agreement and the interest currently due to us according to the contractual agreement. Straight-line rent receivables relate to the difference between the rental revenue recognized on a straight-line basis and the amounts currently due to us according to the contractual agreement. Lease inducements result from value provided by us to the lessee, at the inception, modification or renewal of the lease, and are amortized as a reduction of rental income over the non-cancellable lease term.
A summary of our net receivables and lease inducements by type is as follows:
Effective yield interest receivables
1,575
3,127
Straight-line rent receivables
220,565
202,748
8,288
8,782
11
Cash Basis Operators and Straight-Line Receivable Write-Offs
We review our collectibility assumptions related to rental income from our operator leases on an ongoing basis. During the six months ended June 30, 2024, we placed one new operator on a cash basis of revenue recognition. In the first quarter of 2024, we entered into a lease with the new operator as part of the transition of facilities from another operator. As we had no previous relationship with this new operator and collection of substantially all contractual lease payments due from the new operator was not deemed probable, we placed the new operator on a cash basis of revenue recognition.
During the three and six months ended June 30, 2023, we placed two new operators, which Omega has not previously had relationships with prior to the second quarter of 2023, on a cash basis of revenue recognition as collection of substantially all contractual lease payments due from them was not deemed probable. Our new lease agreements with each of these operators were executed in the second quarter of 2023 as part of transitions of facilities from other operators. We placed these operators on a cash basis concurrent with the respective lease commencement dates, so there were no straight-line rent write-offs associated with moving these operators to a cash basis.
We did not have any straight-line receivable write-offs through rental income as a result of placing operators on a cash basis during either of the three and six months ended June 30, 2024 and 2023, respectively.
As of June 30, 2024, we had 18 operators on a cash basis for revenue recognition, which represent 18.6% and 22.3% of our total revenues for the six months ended June 30, 2024 and 2023, respectively.
Rent Deferrals and Application of Collateral
During each of the six months ended June 30, 2024 and 2023, we allowed three and nine operators to defer $1.8 million and $33.6 million, respectively, of contractual rent and interest. The deferrals during the six months ended June 30, 2024 primarily related to Maplewood Senior Living (along with affiliates, “Maplewood”) ($1.5 million). The deferrals during the six months ended June 30, 2023 primarily related to the following operators: LaVie Care Centers, LLC (“LaVie”) ($19.0 million), Healthcare Homes Limited ($8.2 million), Agemo Holdings, LLC (“Agemo”) ($1.9 million) and Maplewood ($0.7 million). During each of the six months ended June 30, 2024 and 2023, we received repayments of deferred rent of $1.0 million and $0.3 million, respectively.
Additionally, we allowed four and four operators to apply collateral, such as security deposits or letters of credit, to contractual rent and interest during the six months ended June 30, 2024 and 2023, respectively. The total collateral applied to contractual rent and interest was $0.6 million and $5.5 million for the six months ended June 30, 2024 and 2023, respectively.
Operator Collectibility Updates
Maplewood
In the fourth quarter of 2022, Omega began discussions with Maplewood to restructure its portfolio as a result of liquidity issues. As of December 31, 2022, Omega had 17 operating facilities subject to a lease agreement with Maplewood, a construction in progress project in Washington D.C., and a $250.0 million secured revolving credit facility. In view of Maplewood liquidity concerns, Omega and Maplewood entered into a comprehensive restructuring of Maplewood’s lease and loan agreements on January 31, 2023 that, among other things, fixed rent at $69.3 million per annum through December 2025, increased the capacity of the secured revolving credit facility to $320.0 million, converted portions of interest on the secured revolving credit facility from cash to paid-in-kind (“PIK”) for certain periods and provided Maplewood a one-time option termination fee of $12.5 million.
12
Shortly after the restructuring was completed, on March 31, 2023, Greg Smith, the principal and chief executive officer of Maplewood, passed away. Mr. Smith had been a guarantor of Maplewood’s contractual obligations pursuant to a $40.0 million limited unconditional guaranty agreement. Maplewood began to short pay contractual rent under its lease agreement during the second quarter of 2023, which continued through the end of the second quarter of 2024 as discussed further below. Since Mr. Smith’s passing in 2023, Omega has been in discussions with the Greg Smith estate (the “Estate”) in order to protect our interests, including Mr. Smith’s guaranty, and facilitate an orderly transition of Mr. Smith’s controlling equity interest in Maplewood to key members of the existing Maplewood management team (the “Key Principals”). Under the proposed transition, the Key Principals would become the new majority equity holders in the Maplewood entities.
In order to accelerate a negotiated transition process, in May 2024, Omega sent a demand letter to Maplewood and the Estate notifying them of multiple events of default under Maplewood’s lease, loan, and related agreements, including Mr. Smith’s guaranty, with Omega, including failure to pay full contractual rent and interest for periods in 2023 and 2024. Omega exercised its contractual rights in connection with these defaults and demanded immediate repayment of past due contractual rent and replenishment of the security deposit, and accelerated all principal and accrued interest due to Omega under the revolving credit facility, which had $291.2 million outstanding as of June 30, 2024, including PIK interest that is not recorded for accounting purposes.
After sending the demand letter, in June 2024, Omega executed a non-binding term sheet with the Key Principals outlining the terms of the proposed transition, which includes maintaining the Maplewood lease agreement and the secured revolving credit facility provided by Omega. We are currently working with the Estate and the Key Principals to take the steps necessary to complete the transition of Mr. Smith’s equity through a settlement agreement (the “Settlement Agreement”), which will require approval of the probate court overseeing administration of the Estate, as well as regulatory approvals in connection with licensure of the operating assets. On July 31, 2024, we entered into the Settlement Agreement with the Estate subject to the approvals noted above, which formalizes the proposed settlement, including the right in favor of Omega to direct the assignment of Mr. Smith’s equity to the Key Principals, and Omega’s agreement to forbear from exercising contractual rights or remedies in connection with the defaults, and submitted it to the probate court for approval. There is no certainty that the court will approve the Settlement Agreement, or that this transition will be completed as intended, on a timely basis, or at all. While pursuing negotiations with the Estate, we have filed suit to, among other things, foreclose on the pledged equity and assets of Maplewood in the event that the Settlement Agreement is not consummated and/or approved by the probate court or following any appeal therefrom. We anticipate terminating the suit once a final, non-appealable order is entered approving the settlement with the Estate.
In the second quarter of 2024, Maplewood paid $11.8 million of contractual rent, a short pay of $6.2 million of the $18.0 million (consisting of $17.3 million of contractual rent and $0.7 million of contractual interest) due under its lease and loan agreements. Maplewood’s $4.8 million security deposit was fully exhausted in the fourth quarter of 2023, so we were unable to apply collateral to unpaid rent and interest during the first six months of 2024. Maplewood is on a cash basis of revenue recognition for lease purposes, and we recorded rental income of $11.8 million and $16.3 million for the three months ended June 30, 2024 and 2023, respectively. We recorded rental income of $23.1 million and $33.6 million for the six months ended June 30, 2024 and 2023, respectively. Rental income in all periods was limited to payments that were received from Maplewood or the application of available collateral held by Omega. The $12.5 million option termination fee payment made in the first quarter of 2023 in connection with the restructuring agreement was recorded as a reduction to the $33.6 million of gross rental income recognized for the six months ended June 30, 2023.
As discussed further in Note 5 – Real Estate Loans Receivable, we recorded interest income of zero and $1.5 million on the Maplewood secured revolving credit facility during the three and six months ended June 30, 2023, respectively. No interest income was recorded during the three and six months ended June 30, 2024.
In July 2024, Maplewood short-paid the contractual rent and interest amounts due under its lease and loan agreements by $2.0 million.
13
LaVie
We began restructuring our facilities and agreements with LaVie in the fourth quarter of 2022, as a result of on-going liquidity issues at LaVie, and these activities have continued into 2023 and 2024. In January 2023, we amended our lease agreements with LaVie to allow for a partial rent deferral of $19.0 million for the first four months of 2023. During 2023, we transitioned two facilities, previously subject to the master lease with LaVie, to another operator and sold 37 facilities, previously subject to the master lease with LaVie, to a third party. In the first quarter of 2024, we sold two facilities and transitioned two facilities to another operator, all of which were previously subject to the master lease with LaVie.
On June 2 and 3, 2024, LaVie commenced voluntary cases under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Georgia, Atlanta Division (the “Bankruptcy Court”). LaVie will continue to operate, as a debtor-in-possession, the 30 facilities subject to a master lease agreement with Omega, unless and until LaVie’s leasehold interest under the master lease agreement is rejected or assumed and assigned. We committed to provide, along with another lender, $10 million of a $20 million junior secured debtor-in-possession (“DIP”) financing to LaVie, as further discussed in Note 6 – Non-Real Estate Loans Receivable. As a condition of the DIP financing, LaVie is required to pay Omega full contractual rent under its lease agreement. We determined LaVie was a variable interest entity after it became a debtor-in-possession and following the issuance of the DIP financing loan. Omega is not the primary beneficiary of LaVie because we do not have the power to control the activities that most significantly impact LaVie’s economic performance. See Note 8 – Variable Interest Entities, for additional disclosures surrounding our VIEs.
Prior to its bankruptcy filing, LaVie paid Omega $1.5 million in April 2024 and $1.5 million in May 2024. The April 2024 and May 2024 payments were short of full contractual rent by $1.7 million and $1.5 million, respectively. Following the bankruptcy filing, LaVie paid contractual rent of $2.9 million in June 2024, which reflects full contractual rent prorated for the period after LaVie entered bankruptcy and a $0.1 million short pay for the several days prior to the filing. As LaVie is on a cash basis of revenue recognition for lease purposes, rental income recorded was equal to cash received of $5.9 million and $16.9 million during the three months ended June 30, 2024 and 2023, respectively and $10.3 million and $24.3 million during the six months ended June 30, 2024 and 2023, respectively. We did not recognize any interest income related to LaVie during the six months ended June 30, 2024 and 2023 as the three loans outstanding have PIK interest and are on non-accrual status. In July 2024, LaVie paid full contractual rent of $3.0 million due under its lease agreement.
Guardian
In August 2023, Guardian Healthcare (“Guardian”) failed to make the contractual rent payment due under its lease agreement and subsequently did not make any required contractual rent payments due under its lease agreement through the end of the first quarter of 2024. In April 2024, we transitioned the remaining six facilities previously included in Guardian’s master lease to a new operator for minimum initial contractual rent of $5.5 million per annum with the potential to increase contractual rent dependent on revenue received by the operator. We recorded rental income of $2.9 million related to our lease with the new operator for the three months ended June 30, 2024.
Agemo
Agemo failed to pay contractual rent and interest during the first quarter of 2023. Following the execution of a restructuring agreement between Omega and Agemo in the first quarter of 2023, Agemo resumed making contractual rent and interest payments during the second quarter of 2023 and has made all required contractual rent and interest payments through the second quarter of 2024. Rental income includes $6.0 million and $5.8 million related to our lease with Agemo for the three months ended June 30, 2024 and 2023, and $11.9 million and $5.8 million for the six months ended June 30, 2024 and 2023, respectively. As Agemo is a cash basis operator, rental income is limited to the contractual rent payments that were received during the respective periods.
We did not recognize interest income on our loans with Agemo during the six months ended June 30, 2024 and 2023. See Note 6 – Non-Real Estate Loans Receivable for discussion regarding our loans and interest with Agemo.
14
During the six months ended June 30, 2023, we re-leased 48 facilities that were previously subject to leases with four cash basis operators to other operators. Following the transition, we have no remaining relationships with these four cash basis operators. All of the operators to which the 48 facilities were transitioned have leases for which Omega is recognizing revenue on a straight-line basis. The aggregate initial contractual rent for the 48 facilities under these leases is $48.0 million per annum.
In connection with the transition of certain of these facilities, in the first quarter of 2023, Omega made termination payments of $15.5 million that were recorded as initial direct costs related to a lease with a new operator. These termination payments are deferred and will be recognized within depreciation and amortization expense on a straight-line basis over the term of the master lease with the new operator.
NOTE 5 – REAL ESTATE LOANS RECEIVABLE
Real estate loans consist of mortgage notes and other real estate loans which are primarily collateralized by a first, second or third mortgage lien or a leasehold mortgage on, or an assignment of the partnership interest in the related properties. As of June 30, 2024, our real estate loans receivable consists of 15 fixed rate mortgage notes on 65 long-term care facilities and 16 other real estate loans. The facilities subject to the mortgage notes are operated by 13 independent healthcare operating companies and are located in 11 U.S. states and within the U.K. We monitor compliance with our real estate loans and, when necessary, have initiated collection, foreclosure and other proceedings with respect to certain outstanding real estate loans.
A summary of our real estate loans receivable by loan type and by borrower and/or guarantor is as follows:
Mortgage notes due 2030; interest at 11.07%(1)(2)
525,309
514,866
Mortgage notes due 2037; interest at 10.50%
72,420
Mortgage notes due 2024; interest at 10.00%(1)
71,666
Mortgage note due 2025; interest at 7.85%
61,061
62,010
Mortgage note due 2028; interest at 10.00%
50,000
Other mortgage notes outstanding(3)
108,877
55,141
Mortgage notes receivable – gross
889,333
754,437
Allowance for credit losses on mortgage notes receivable
(42,692)
(55,661)
Mortgage notes receivable – net
846,641
698,776
Other real estate loan due 2035; interest at 7.00%
263,580
263,520
Other real estate loans due 2024-2030; interest at 11.76%(1)
116,482
120,576
Other real estate loans due 2025; interest at 13.21%(1)(4)
111,263
106,807
Other real estate loans outstanding(5)
80,121
57,812
Other real estate loans – gross
571,446
548,715
Allowance for credit losses on other real estate loans
(39,289)
(35,329)
Other real estate loans – net
532,157
513,386
Total real estate loans receivable – net
Interest income on real estate loans is included within interest income on the Consolidated Statements of Operations and is summarized as follows:
Mortgage notes – interest income
21,651
16,998
41,494
33,546
Other real estate loans – interest income
9,307
6,981
18,203
13,830
Total real estate loans interest income
30,958
23,979
59,697
47,376
We funded $112.9 million and $154.1 million under eleven new real estate loans with weighted average interest rates of 11.5% and 10.2% during the three and six months ended June 30, 2024, respectively. We also advanced $0.6 million and $3.4 million under existing real estate loans during the three and six months ended June 30, 2024, respectively. Included below is additional discussion on any significant new loans issued and significant updates to any existing loans.
Mortgage Notes due 2024
In May 2024, we funded an aggregate $71.7 million under two new mortgage loans to an existing U.K. operator. Both mortgage loans bear interest at 10.0% and mature on October 28, 2024. Interest is payable monthly in arrears and no principal payments are due until maturity. The loan is secured by a first mortgage lien on two parcels of land that the U.K. operator intends to develop into two facilities.
Other mortgage notes outstanding
In January 2024, we funded $11.7 million under a new mortgage loan to a new operator. In June 2024, we amended the loan and funded an additional $18.0 million under the mortgage loan. The mortgage loan bears interest at 10.0% and matures on January 31, 2027. Interest is payable monthly in arrears and no principal payments are due until maturity. The loan is secured by a first mortgage lien on three SNFs and one ALF.
Other real estate loan due 2035
As discussed within Note 4 – Contractual Receivables and Other Receivables and Lease Inducements, Omega sent a demand letter to Maplewood during the second quarter of 2024 notifying Maplewood that due to multiple existing events of default under Maplewood’s lease, loan, and related agreements, Omega had exercised its contractual rights to immediately accelerate the outstanding principal and accrued interest under the secured revolving loan agreement. After sending the demand letter, in June 2024 Omega executed a non-binding term sheet with the Key Principals outlining the terms of a proposed transition, which includes the assignment of Mr. Smith’s equity in Maplewood to the Key Principals and maintaining the existing Maplewood lease agreement and the secured revolving credit facility (without reflecting the acceleration of the maturity) provided by Omega. We are currently working with the Estate and the Key Principals to take the steps necessary to complete the transition, which will, in part, require approval of the probate court overseeing distribution of the Estate’s assets and regulatory approvals related to licensures. On July 31, 2024, we entered into an agreement with the Estate formalizing the transition plan, including the right to direct the assignment of Mr. Smith’s equity in Maplewood to the Key Principals, and submitted it to the probate court for approval. There is no certainty that court or regulatory approvals will be received or that this transition will be completed as intended, on a timely basis, or at all. If the proposed transition plan is not completed, we may incur a substantial loss on the revolving loan with Maplewood up to the amortized cost basis of the loan. We adjusted the internal risk rating on the loan, utilized as a component of our allowance for credit loss calculation, from a 3 to a 4 in the second quarter of 2023 when Maplewood began to short-pay contractual rent under its lease agreement. In the first quarter of 2024, we again adjusted the internal risk rating from a 4 to 5 to reflect the increased risk of the loan as a result of the missed interest payments in the first quarter of 2024, discussed below, and due to the status of the on-going negotiations with the Estate. We believe the internal risk rating of a 5 appropriately reflects the risks as of June 30, 2024. See the allowance for credit losses attributable to real estate loans with a 5 internal risk rating within Note 7 – Allowance for Credit Losses. As of June 30, 2024, the amortized cost basis of this loan was $263.6 million, which represents 18.0% of the total amortized cost basis of all real estate loan receivables.
During the six months ended June 30, 2024, Maplewood failed to make aggregate cash interest payments of $1.2 million that were required under the loan agreement. During the three months ended March 31, 2023, we recorded interest income of $1.5 million on the secured revolving credit facility for the contractual interest payment received related to December 2022, as the loan was placed on non-accrual status for interest recognition during the fourth quarter of 2022. We did not record any interest income related to the PIK interest during the three and six months ended June 30, 2024 and 2023.
Omega and Maplewood previously entered into a restructuring agreement and a loan amendment during the first quarter of 2023 that modified Maplewood’s secured revolving credit facility. As part of the restructuring agreement and loan amendment, Omega agreed to extend the maturity date of the facility to June 2035, increase the capacity of the secured revolving credit facility from $250.5 million to $320.0 million, including PIK interest applied to the principal, and convert the 7% cash interest due on the secured revolving credit facility to all PIK interest in 2023, with 1% cash interest and 6% PIK interest beginning in 2024, which increases to 4% cash interest and 3% PIK interest in 2025 and through the maturity date. This amendment was treated as a loan modification provided to a borrower experiencing financial difficulty.
NOTE 6 – NON-REAL ESTATE LOANS RECEIVABLE
Our non-real estate loans consist of fixed and variable rate loans to operators or principals. These loans may be either unsecured or secured by the collateral of the borrower, which may include the working capital of the borrower. As of June 30, 2024, we had 42 loans with 23 different borrowers. A summary of our non-real estate loans by borrower and/or guarantor is as follows:
Notes due 2036; interest at 5.63%
75,500
77,854
Notes due 2024-2029; interest at 12.08%(1)(2)
51,914
92,681
Notes due 2024-2026; interest at 10.99%(1)
49,070
53,300
Note due 2025; interest at 9.14%(3)
43,499
44,999
Notes due 2024 and 2036; interest at 2.98%(1)
36,808
32,308
Other notes outstanding(4)
102,244
96,104
Non-real estate loans receivable – gross
359,035
397,246
Allowance for credit losses on non-real estate loans receivable
(124,473)
(121,631)
Total non-real estate loans receivable – net
For the three and six months ended June 30, 2024, non-real estate loans generated interest income of $7.1 million and $14.2 million, respectively. For the three and six months ended June 30, 2023, non-real estate loans generated interest income of $5.3 million and $10.3 million, respectively. Interest income on non-real estate loans is included within interest income on the Consolidated Statements of Operations.
During the three and six months ended June 30, 2024, we funded $10.4 million under five new non-real estate loans with a weighted average interest rate of 10.0%. We advanced $9.6 million and $13.7 million under existing working capital loans during the three and six months ended June 30, 2024, respectively. We received principal repayments of $45.9 million and $52.8 million on non-real estate loans during the three months and six months ended June 30, 2024, respectively. Included below is additional discussion on any significant new loans issued and/or significant updates to any existing loans.
As discussed in Note 4 – Contractual Receivables and Other Receivables and Lease Inducements, in the first quarter of 2023, Omega entered into a restructuring agreement and a replacement loan agreement that modified the existing Agemo loans. The outstanding principal of the Agemo Term Loan was refinanced into a new $32.0 million loan (“Agemo Replacement Loan A”). The outstanding principal of the Agemo WC Loan and the aggregate rent deferred and outstanding under the Agemo lease agreement was combined and refinanced into a new $50.2 million loan (“Agemo Replacement Loan B” and with Agemo Replacement Loan A, the “Agemo Replacement Loans”). The Agemo Replacement Loans bear interest at 5.63% per annum through October 2024, which increases to 5.71% per annum until maturity. The Agemo Replacement Loans mature on December 31, 2036. These amendments were treated as loan modifications provided to a borrower experiencing financial difficulty.
Agemo resumed making interest payments for the Agemo Replacement Loans in May 2023 in accordance with the terms of the restructuring agreement. The Agemo Replacement Loans are on non-accrual status, and we are utilizing the cost recovery method, under which any payments we receive are applied against the principal amount. During the three months and six months ended June 30, 2024, we received $1.2 million and $2.4 million of interest payments from Agemo that we applied against the outstanding principal of the loans, and we recognized a recovery for credit loss equal to the amount of payments applied against principal. During the three months and six months ended June 30, 2023, we received $0.8 million of interest payments from Agemo that we applied against the outstanding principal of the loans, and we recognized a recovery for credit loss equal to the amount of payments applied against principal. As of June 30, 2024, the amortized cost basis of these loans was $75.5 million, which represents 21.0% of the total amortized cost basis of all non-real estate loan receivables. The total reserve as of June 30, 2024 related to the Agemo Replacement Loans was $73.2 million, which reserves the loan down to the fair value of the underlying collateral, consisting of a second lien on the accounts receivable of Agemo.
Notes due 2024 and 2036; interest at 2.98%
As discussed in Note 4 – Contractual Receivables and Other Receivables and Lease Inducements, on June 2 and 3, 2024, LaVie commenced voluntary cases under Chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court. As described in LaVie’s filings with the Bankruptcy Court, we provided $10.0 million of DIP financing to LaVie in order to support sufficient liquidity to, among other things, effectively operate its facilities during bankruptcy. Another lender, TIX 33433, LLC, also agreed to provide $10.0 million of DIP financing to LaVie, which is pari passau to Omega’s loan. The DIP loan bears interest at 10.0% and is paid-in-kind in arrears on a monthly basis. The principal is due upon maturity. Currently, the DIP loan matures on the earlier of (i) October 31, 2024, (ii) the effective date of a plan of reorganization or liquidation in the Chapter 11 cases or (iii) upon an event of default as defined in the DIP loan agreement. The DIP lenders hold a second priority interest in the assets of LaVie, which include cash and accounts receivable. Proceeds of any future asset sales, claims and causes of action and debt or equity issuances all serve as collateral for the DIP loans.
Given the risks associated with the bankruptcy process, we elected to evaluate the risk of loss on the DIP loan on an individual basis. As the fair value of the collateral available to Omega was estimated to be less than the outstanding principal of $4.5 million as of June 30, 2024, we reserved $4.2 million through the provision for credit losses in the second quarter of 2024 to write the loan down to the estimated fair value of the collateral of $0.3 million. The DIP loan was also placed on non-accrual status for interest recognition, and we will utilize the cost recovery method for any proceeds received on the DIP loan.
We also have two existing term loans with LaVie, an $8.3 million unsecured term loan and a $25.0 million secured term loan, that bear interest at 2.0% (which is all PIK interest) and mature on November 30, 2036. The $8.3 million term loan was previously fully reserved in our allowance for credit losses. The $25.0 million secured term loan was previously reserved down to $3.6 million, the estimated fair value of the collateral which consisted of a second priority lien on LaVie’s accounts receivable. As a result of the issuance of the DIP loans discussed above, Omega’s collateral position under the $25 million secured term loan decreased from second to third priority. We estimate there will be insufficient collateral available for this loan following the decrease in priority and therefore recognized a $3.6 million provision for credit losses in the second quarter of 2024 to fully reserve the $25.0 million secured term loan.
We did not record any interest income for any LaVie loans for the three and six months ended June 30, 2024 and 2023.
18
NOTE 7 – ALLOWANCE FOR CREDIT LOSSES
A rollforward of our allowance for credit losses for the six months ended June 30, 2024 is as follows:
Rating
Financial Statement Line Item
Allowance for Credit Loss as of December 31, 2023
Provision (Recovery) for Credit Loss for the six months ended June 30, 2024(1)
Write-offs charged against allowance for the six months ended June 30, 2024
Allowance for Credit Loss as of June 30, 2024
Real estate loan receivable
1,501
(574)
927
Real estate loans receivable
291
460
751
12,635
310
12,945
65,113
(37,237)
27,876
28,032
11,450
Sub-total
90,990
(9,009)
81,981
Investment in direct financing leases
2,489
(790)
1,699
Non-real estate loans receivable
1,151
(158)
993
3,903
(792)
3,111
720
(290)
430
43,404
5,016
48,420
72,453
6,698
(7,632)
71,519
121,631
10,474
(3)
124,473
Unfunded real estate loan commitments
(9)
335
62
397
4,314
(4,263)
51
3,063
Unfunded non-real estate loan commitments
692
(446)
246
46
176
222
63
(36)
27
1,594
(1,594)
92
7,054
(2,955)
4,099
222,164
(2,280)
212,252
19
A rollforward of our allowance for credit losses for the six months ended June 30, 2023 is as follows:
Allowance for Credit Loss at December 31, 2022
Provision (Recovery) for Credit Loss for the six months ended June 30, 2023
Write-offs charged against allowance for the six months ended June 30, 2023
Other additions to the allowance for the six months ended June 30, 2023
Allowance for Credit Loss as of June 30, 2023
162
366
528
157
(88)
69
15,110
(9,465)
5,645
33,666
11,636
45,302
52,265
(3,860)
(36,955)
(1)
101,360
(1,411)
62,994
2,816
(545)
2,271
859
(507)
352
2,079
(1,016)
1,063
634
(430)
204
18,619
(439)
25,200
43,380
61,677
9,003
70,680
83,868
6,611
115,679
207
177
384
29
(27)
84
4,097
4,181
320
4,255
4,575
188,364
185,519
20
A summary of our amortized cost basis by year of origination and credit quality indicator is as follows:
2022
2021
2020
2019
2018 & older
Revolving Loans
Balance as of June 30, 2024
20,000
81,061
29,700
8,480
21,325
59,505
111,153
171,400
29,600
384,573
13,015
89,971
31,429
82,727
441,996
659,138
12,922
153,868
269,851
49,600
103,849
104,052
515,979
1,460,779
11,136
83,148
85,135
19,138
3,652
467
12,700
121,092
1,490
381
1,000
26,158
29,029
5,690
1,843
46,394
53,927
4,500
5,925
24,457
7,851
29,106
71,839
98,240
43,595
5,876
76,967
122,006
158,368
368,091
93,195
111,700
604,082
385,586
1,830,950
Year to date gross write-offs
(3,092)
(4,540)
Interest Receivable on Real Estate Loans and Non-Real Estate Loans
We have elected the practical expedient to exclude interest receivable from our allowance for credit losses. As of June 30, 2024 and December 31, 2023, we have excluded $10.3 million and $10.2 million, respectively, of contractual interest receivables and $1.6 million and $3.1 million, respectively, of effective yield interest receivables from our allowance for credit losses. We write-off contractual interest receivables to provision for credit losses in the period we determine the interest is no longer considered collectible.
During the three months ended June 30, 2024 and 2023, we recognized $1.2 million and $0.1 million, respectively, of interest income related to loans on non-accrual status as of June 30, 2024. During the three months ended June 30, 2024 and 2023, we recognized $2.2 million and $1.6 million, respectively, of interest income related to loans on non-accrual status as of June 30, 2024.
NOTE 8 – VARIABLE INTEREST ENTITIES
Unconsolidated Variable Interest Entities
We hold variable interests in several VIEs through our investing and financing activities, which are not consolidated, as we have concluded that we are not the primary beneficiary of these entities as we do not have the power to direct activities that most significantly impact the VIE’s economic performance and/or the variable interest we hold does not obligate us to absorb losses or provide us with the right to receive benefits from the VIE which could potentially be significant.
21
Below is a summary of our assets, liabilities, collateral and maximum exposure to loss associated with these unconsolidated VIEs as of June 30, 2024 and December 31, 2023:
Assets
1,247,735
996,540
66,130
407,323
370,147
9,234
9,009
7,354
10,679
445
746
1,540
1,423
1,673,631
1,454,674
Liabilities
(47,874)
(46,677)
Collateral
Personal guarantee
(48,000)
Other collateral(1)
(1,313,990)
(1,105,383)
Total collateral
(1,361,990)
(1,153,383)
Maximum exposure to loss
263,767
254,614
In determining our maximum exposure to loss from the unconsolidated VIEs, we considered the underlying carrying value of the real estate subject to leases with the operator and other collateral, if any, supporting our other investments, which may include accounts receivable, security deposits, letters of credit or personal guarantees, if any, as well as other liabilities recognized with respect to these operators.
The table below reflects our total revenues from the operators that are considered unconsolidated VIEs, following the date they were determined to be VIEs, for the three and six months ended June 30, 2024 and 2023:
Revenue
26,715
25,962
45,843
35,800
3,491
979
6,455
3,085
30,206
26,941
52,298
38,885
22
Consolidated VIEs
We own a partial equity interest in a joint venture that we have determined is a VIE. We have consolidated this VIE because we have concluded that we are the primary beneficiary of this VIE based on a combination of our ability to direct the activities that most significantly impact the joint venture’s economic performance and our rights to receive residual returns and obligation to absorb losses arising from the joint venture. As of June 30, 2024 and December 31, 2023, this joint venture has $24.9 million and $27.9 million, respectively, of total assets, and $20.8 million and $20.7 million, respectively, of total liabilities. Of the $20.8 million of total liabilities held by the joint venture at June 30, 2024, $20.5 million relates to a mortgage loan advanced by Omega during the second quarter 2024 to pay-off an existing third-party mortgage loan of the joint venture, as discussed in Note 15 – Borrowing Activities and Arrangements. The $20.5 million Omega mortgage loan is eliminated in consolidation and is not reflected in our Consolidated Balance Sheets.
NOTE 9 – INVESTMENTS IN JOINT VENTURES
Unconsolidated Joint Ventures
The following is a summary of our investments in unconsolidated joint ventures (dollars in thousands):
Carrying Amount
Ownership
Facility
Entity
% (1)
Type
Count (1)
Second Spring Healthcare Investment
15%
8,363
8,945
Lakeway Realty, L.L.C.(2)
51%
Specialty facility
68,233
68,902
Cindat Joint Venture(3)
49%
95,298
97,559
OMG Senior Housing, LLC
50%
OH CHS SNP, Inc.
9%
N/A
899
752
RCA NH Holdings RE Co., LLC(2)(4)
20%
3,400
WV Pharm Holdings, LLC(2)(4)
3,000
OMG-Form Senior Holdings, LLC(2)(4)
2,834
2,609
CHS OHI Insight Holdings, LLC
25%
3,243
3,242
The following table reflects our income (loss) from unconsolidated joint ventures for the three and six months ended June 30, 2024 and 2023:
Second Spring Healthcare Investments
240
292
475
581
Lakeway Realty, L.L.C.
689
677
1,380
1,356
Cindat Joint Venture
(745)
96
(1,450)
97
(110)
41
(222)
(179)
105
147
90
OMG-Form Senior Holdings, LLC
(38)
(45)
(91)
23
NOTE 10 – GOODWILL AND OTHER INTANGIBLES
The following is a summary of our goodwill as of June 30, 2024 and December 31, 2023:
Balance as of December 31, 2023
(111)
The following is a summary of our intangible assets and liabilities as of June 30, 2024 and December 31, 2023:
Assets:
Above market leases
4,214
Accumulated amortization
(3,561)
(3,532)
Net above market leases
653
682
Liabilities:
Below market leases
48,791
(38,269)
(37,177)
Net below market leases
10,522
11,614
Above market leases, net of accumulated amortization, are included in other assets on our Consolidated Balance Sheets. Below market leases, net of accumulated amortization, are included in accrued expenses and other liabilities on our Consolidated Balance Sheets. The net amortization related to the above and below market leases is included in our Consolidated Statements of Operations as an adjustment to rental income.
For the three months ended June 30, 2024 and 2023, our net amortization related to intangibles was $0.6 million and $0.7 million, respectively. For the six months ended June 30, 2024 and 2023, our net amortization related to intangibles was $1.1 million and $6.8 million, respectively. The estimated net amortization related to these intangibles for the remainder of 2024 and the next four years is as follows: remainder of 2024 – $1.1 million; 2025 – $2.1 million; 2026 – $1.8 million; 2027 – $1.5 million and 2028 – $0.9 million. As of June 30, 2024, the weighted average remaining amortization period of above market lease assets is 13 years and below market lease liabilities is seven years.
NOTE 11 – CONCENTRATION OF RISK
As of June 30, 2024, our portfolio of real estate investments (including properties associated with mortgages, direct financing leases, assets held for sale and consolidated joint ventures) consisted of 928 healthcare facilities, located in 42 states and the U.K. and operated by 79 third-party operators. Our investment in these facilities, net of impairments and allowances, totaled $9.4 billion at June 30, 2024, with 97% of our real estate investments related to long-term healthcare facilities. Our portfolio is made up of (i) 588 SNFs, 221 ALFs, 19 ILFs, 19 specialty facilities and one medical office building, (ii) fixed rate mortgages on 50 SNFs, 12 ALFs, two specialty facilities and one ILF, and (iii) 15 facilities that are held for sale. At June 30, 2024, we also held other real estate loans receivable (excluding mortgages) of $532.2 million, non-real estate loans receivable of $234.6 million and $185.3 million of investments in nine unconsolidated joint ventures.
24
As of June 30, 2024 and December 31, 2023, we had investments with one operator or manager that approximated or exceeded 10% of our total investments: Maplewood. Maplewood generated 4.7% and 6.5% of our total revenues for the three months ended June 30, 2024 and 2023, respectively and 4.7% and 4.8% of our total revenues for the six months ended June 30, 2024 and 2023, respectively. The revenue associated with Maplewood for the six months ended June 30, 2023 reflects a reduction of revenue of $12.5 million related to a termination fee payment made by Omega as discussed in Note 4 – Contractual Receivables and Other Receivables and Lease Inducements. During the three and six months ended June 30, 2024, we also have one operator with total revenues that exceeded 10% of our total revenues: CommuniCare Health Services, Inc. (“CommuniCare”). CommuniCare generated 12.5% and 11.5% of our total revenues for the three months ended June 30, 2024 and 2023, respectively and 12.7% and 10.6% of our total revenues for the six months ended June 30, 2024 and 2023. As of June 30, 2024, CommuniCare represented 8.7% of our total investments.
As of June 30, 2024, the three states in which we had our highest concentration of investments were Texas (10.2%), Indiana (6.7%) and California (6.0%). In addition, our concentration of investments in the U.K. is 8.0%.
NOTE 12 – STOCKHOLDERS’ EQUITY
The following is a summary of our declared cash dividends on common stock:
Record
Payment
Dividend per
Date
Common Share
February 5, 2024
February 15, 2024
0.67
April 30, 2024
May 15, 2024
August 5, 2024
August 15, 2024
Dividend Reinvestment and Common Stock Purchase Plan
The following is a summary of the shares issued under the Dividend Reinvestment and Common Stock Purchase Plan for the three and six months ended June 30, 2024 and 2023 (in thousands):
Period Ended
Shares issued
Gross Proceeds
June 30, 2023
77
2,252
413
159
4,530
442
13,897
At-The-Market Offering Programs
The following is a summary of the shares issued under our $1.0 billion At-The-Market Offering Program for the three months and six ended June 30, 2024 and 2023 (in thousands except average price per share):
Average Net Price
Per Share(1)
Net Proceeds
Three and Six Months Ended
6,529
30.20
199,397
197,204
7,212
31.86
231,920
229,754
8,253
31.68
264,215
261,492
25
Accumulated Other Comprehensive Income (Loss)
The following is a summary of our accumulated other comprehensive income (loss), net of tax as of June 30, 2024 and December 31, 2023:
(54,916)
(49,770)
Derivative instruments designated as cash flow hedges
82,265
75,111
Derivative instruments designated as net investment hedges
7,081
3,931
Total accumulated other comprehensive income before noncontrolling interest
34,430
29,272
Add: portion included in noncontrolling interest
(85)
66
Total accumulated other comprehensive income for Omega
During the three months ended June 30, 2024 and 2023, we reclassified $2.6 million and $1.1 million, respectively, of realized gains out of accumulated other comprehensive income into interest expense on our Consolidated Statements of Operations associated with our cash flow hedges. During the six months ended June 30, 2024 and 2023, we reclassified $5.2 million and $2.1 million, respectively, of realized gains out of accumulated other comprehensive income into interest expense on our Consolidated Statements of Operations associated with our cash flow hedges.
NOTE 13 – TAXES
Omega was organized, has operated and intends to continue to operate in a manner that enables Omega to qualify for taxation as a REIT under Sections 856 through 860 of the Code. On a quarterly and annual basis, we perform several analyses to test our compliance within the REIT taxation rules. If we fail to meet the requirements for qualification as a REIT in any tax year, we will be subject to federal income tax on our taxable income at regular corporate rates and may not be able to qualify as a REIT for the four subsequent years, unless we qualify for certain relief provisions that are available in the event we fail to satisfy any of the requirements.
We are also subject to federal taxation of 100% of the net income derived from the sale or other disposition of property, other than foreclosure property, that we held primarily for sale to customers in the ordinary course of a trade or business. We believe that we do not hold assets for sale to customers in the ordinary course of business and that none of the assets currently held for sale or that have been sold would be considered a prohibited transaction within the REIT taxation rules.
As a REIT under the Code, we generally will not be subject to federal income taxes on the REIT taxable income that we distribute to stockholders, subject to certain exceptions. In 2023, we distributed dividends in excess of our taxable income.
We currently own stock in certain subsidiary REITs. These subsidiary entities are required to individually satisfy all of the rules for qualification as a REIT. If we fail to meet the requirements for qualification as a REIT for any of the subsidiary REITs, it may cause Omega to fail the requirements for qualification as a REIT also.
We have elected to treat certain of our active subsidiaries as taxable REIT subsidiaries (“TRSs”). Our domestic TRSs are subject to federal, state and local income taxes at the applicable corporate rates.
As of June 30, 2024, one of our TRSs that is subject to income taxes at the applicable corporate rates had a net operating loss (“NOL”) carry-forward of $9.8 million. Our NOL carry-forward was partially reserved as of June 30, 2024, with a valuation allowance due to uncertainties regarding realization. Under current law, NOL carry-forwards generated up through December 31, 2017, may be carried forward for no more than 20 years, and NOL carry-forwards generated in taxable years ended after December 31, 2017, may be carried forward indefinitely. 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.
26
Our foreign subsidiaries are subject to foreign income taxes and withholding taxes. The majority of our U.K. portfolio elected to enter the U.K. REIT regime with an effective date of April 1, 2023. As of June 30, 2024, we have aggregate NOL carryforwards of $81.9 million associated with two U.K. subsidiaries. These U.K. NOLs have no expiration date and may be available to offset future taxable income. We believe these foreign NOLs are realizable under a “more likely than not” measurement and have not recorded a valuation allowance against the deferred tax asset.
The following is a summary of deferred tax assets and liabilities (which are recorded in other assets and accrued expenses and other liabilities in our Consolidated Balance Sheets):
U.S. Federal net operating loss carryforward
2,048
Valuation allowance on deferred tax asset
(1,979)
(2,024)
Foreign net operating loss carryforward(1)
20,478
9,491
Net deferred tax asset
20,547
9,546
Foreign deferred tax liability (2)
1,320
1,508
Net deferred tax liability
The following is a summary of our provision for income taxes:
Federal, state and local income tax expense
0.2
0.3
0.7
0.6
Foreign income tax expense (benefit) (1)
1.8
1.3
3.9
(0.3)
Total income tax expense (2)
2.0
1.6
4.6
NOTE 14 – STOCK-BASED COMPENSATION
The following is a summary of our Stock-based compensation expense for the three and six months ended June 30, 2024 and 2023, respectively.
9,188
8,806
Stock-based compensation expense is included within general and administrative expenses on our Consolidated Statements of Operations.
We granted 259,781 time-based profits interest units (“PIUs”) during the first quarter of 2024 to certain officers and employees, and those units vest on December 31, 2026 (three years after the grant date), subject to continued employment and vesting in connection with certain other events.
We granted 2,297,064 performance-based PIUs during the first quarter of 2024 to certain officers and employees, which are earned based on the level of performance over the performance period (normally three years) and vest quarterly in the fourth year, subject to continued employment and vesting in connection with certain other events. We also granted 71,106 performance-based restricted stock units (“RSUs”) during the first quarter of 2024 to certain employees, which are earned based on the level of performance over the performance period (normally three years) and vest on December 31, 2026, subject to continued employment.
We granted 24,257 time-based PIUs and 22,488 time-based RSUs to directors during the second quarter of 2024, and those units vest on Omega’s 2025 annual meeting date, subject to the director’s continued service and vesting in certain other events.
Time-based and performance-based grants made to named executive officers and key employees that meet certain conditions under the Company’s retirement policy (length of service, age, etc.) vest on an accelerated basis pursuant to the terms of our 2018 Stock Incentive Plan.
28
NOTE 15 – BORROWING ACTIVITIES AND ARRANGEMENTS
The following is a summary of our borrowings:
Interest Rate
as of
Maturity
Secured borrowings:
HUD mortgages(1)
2049-2051
41,878
2024 term loan(2)
20,085
Total secured borrowings
Unsecured borrowings:
Revolving credit facility(3)(4)
2025
6.66
Senior notes and other unsecured borrowings:
2024 notes(3)(5)
400,000
2025 notes(3)
4.50
2026 notes(3)
2026
5.25
600,000
2027 notes(3)
2027
700,000
2028 notes(3)
2028
4.75
550,000
2029 notes(3)
2029
3.63
500,000
2031 notes(3)
2031
3.38
2033 notes(3)
2033
3.25
2025 term loan(3)(6)
5.60
428,500
OP term loan(7)(8)
5.52
Deferred financing costs – net
(17,587)
(20,442)
Discount – net
(20,535)
(23,102)
Total senior notes and other unsecured borrowings – net
Total unsecured borrowings – net
4,660,604
5,005,353
Total secured and unsecured borrowings – net(9)(10)
5,067,316
NOTE 16 – DERIVATIVES AND HEDGING
We are exposed to, among other risks, the impact of changes in foreign currency exchange rates as a result of our investments in the U.K. and interest rate risk related to our capital structure. As a matter of policy, we do not use derivatives for trading or speculative purposes. Our risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes foreign currency forward contracts, interest rate swaps and debt issued in foreign currencies to offset a portion of these risks. As of June 30, 2024, we have 12 interest rate swaps with $478.5 million in notional value. The swaps are designated as cash flow hedges of the interest payments on two of Omega’s variable interest loans. Additionally, we have 11 foreign currency forward contracts with £258.0 million in notional value issued at a weighted average GBP-USD forward rate of 1.2899 that are designated as net investment hedges.
On February 27, 2024, we terminated two foreign currency forward contracts that were entered into in March 2021 with notional amounts totaling £70.0 million. Omega received a net cash settlement of $8.4 million as a result of termination, which is included within net cash used in investing activities in the Consolidated Statements of Cash Flows. The $8.4 million related to the termination will remain in accumulated other comprehensive income until the underlying hedged items are liquidated. Concurrent with the termination of the two foreign currency forward contracts, also on February 27, 2024, we entered into three new foreign currency forward contracts with notional amounts totaling £78.0 million and a GBP-USD forward rate of 1.2707, each of which mature between March 8, 2027 and March 7, 2031. The new currency forward contracts hedge an intercompany loan between a U.S. and a U.K. subsidiary.
The location and fair value of derivative instruments designated as hedges, at the respective balance sheet dates, were as follows:
Cash flow hedges:
2,987
216
6,533
Net investment hedges:
3,747
8,903
130
The fair value of the interest rate swaps and foreign currency forwards is derived from observable market data such as yield curves and foreign exchange rates and represents a Level 2 measurement on the fair value hierarchy.
NOTE 17 – FINANCIAL INSTRUMENTS
The net carrying amount of cash and cash equivalents, restricted cash, contractual receivables, other assets and accrued expenses and other liabilities reported in the Consolidated Balance Sheets approximates fair value because of the short maturity of these instruments (Level 1).
At June 30, 2024 and December 31, 2023, the net carrying amounts and fair values of our other financial instruments were as follows:
December 31, 2023
Carrying
Fair
Amount
Value
1,361,744
1,258,838
243,311
279,710
1,622,797
1,614,492
1,496,493
1,547,264
2024 term loan
19,750
2025 term loan
425,853
424,662
OP term loan
49,915
49,864
4.95% notes due 2024 – net
399,747
398,888
4.50% notes due 2025 – net
399,587
396,788
399,207
393,240
5.25% notes due 2026 – net
598,906
594,192
598,553
596,508
4.50% notes due 2027 – net
696,034
677,684
695,302
671,538
4.75% notes due 2028 – net
546,429
532,180
545,925
528,704
3.63% notes due 2029 – net
493,703
446,380
493,099
440,785
3.38% notes due 2031 – net
688,067
597,856
687,172
594,734
3.25% notes due 2033 – net
691,884
565,831
691,425
564,809
HUD mortgages – net
31,322
4,359,637
4,739,175
Fair value estimates are subjective in nature and are dependent on a number of important assumptions, including estimates of future cash flows, risks, discount rates and relevant comparable market information associated with each financial instrument (see Note 2 – Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2023). The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts.
The following methods and assumptions were used in estimating fair value disclosures for financial instruments.
31
NOTE 18 – COMMITMENTS AND CONTINGENCIES
Litigation
Shareholder Litigation
Certain derivative actions were brought against three of the Company’s officers, C. Taylor Pickett, Robert O. Stephenson, and Daniel J. Booth, and certain current and former directors of the Company, asserting claims for breach of duty primarily relating to matters at issue in a securities class action in the Southern District of New York that was settled in 2023, including alleged failures to disclose material adverse facts about the Company’s business, operations and prospects, including the financial and operating results of one of the Company’s operators, Orianna Health Systems (“Orianna”), the ability of Orianna to make timely rent payments and the impairment of certain of the Company’s leases and the uncollectibility of certain receivables concerning Orianna.
In 2018, Stourbridge Investments LLC, a purported stockholder of the Company, filed a derivative action purportedly on behalf of the Company in the U.S. District Court for the Southern District of New York, alleging violations of Section 14(a) of the Exchange Act and state-law claims including breach of fiduciary duty (the “Stourbridge Matter”). The complaint alleged, among other things, that the named defendants were responsible for the Company’s failure to disclose the financial condition of Orianna.
In 2019, purported stockholder Phillip Swan by his counsel, and stockholders Tom Bradley and Sarah Smith by their counsel, filed derivative actions in the Baltimore City Circuit Court of Maryland, purportedly on behalf of the Company, asserting claims for breach of fiduciary duty, waste of corporate assets and unjust enrichment against the named defendants. The complaints alleged, among other things, that the named defendants are responsible for the Company’s failure to disclose the financial condition of Orianna. Those actions were consolidated (together, the “Swan Matter”).
In addition, in late 2020, Robert Wojcik, a purported shareholder of the Company, filed a derivative action in the U.S. District Court for the District of Maryland, purportedly on behalf of the Company, asserting violations of Section 14(a) of the Exchange Act, Sections 10(b) and 21D of the Exchange Act, as well as claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets (the “Wojcik Matter”). The complaint alleges, among other things, that the named defendants are responsible for the Company’s failure to disclose the financial condition of Orianna, as well as certain alleged discriminatory conduct and lack of diversity concerning the Company.
In 2023, the Company and individual defendants reached an agreement in principle with each of the derivative plaintiffs to resolve these derivative actions, as reflected by written memoranda of understanding. The proposed settlements contemplated the Company’s adoption of certain non-monetary corporate governance enhancements and initiatives. In February 2024, formal stipulations of settlement incorporating the substantive terms of the memoranda of understanding and detailing the proposed settlements’ operational terms were submitted for court approval. The court overseeing the Swan Matter issued an order in May 2024 granting final approval to a proposed settlement reached with the plaintiffs in the Stourbridge Matter and the Swan Matter, which order became final and non-appealable as of June 20, 2024.
In April 2024, the court overseeing the Wojcik Matter issued an order granting preliminary approval to the proposed settlement reached with the plaintiff in the Wojcik Matter. A hearing is scheduled for August 6, 2024 regarding final approval of the proposed settlement. The proposed settlements are without any admission of the allegations in the complaints, which the defendants deny.
While the Company believes that it was and is in compliance with all applicable laws, in the fourth quarter of 2023, the Company recorded a $2.8 million legal reserve related to the derivative actions which was included within accrued expenses and other liabilities on the Consolidated Balance Sheets. As the settlement amounts are to be paid by insurance, the Company concurrently recorded a receivable for $2.8 million within other assets on the Consolidated Balance Sheet, and consequently there was no impact to the Consolidated Statements of Operations related to these matters. In the second quarter of 2024, the Company’s insurers funded $2.8 million to an escrow account established for the purpose of paying the settlement amounts in accordance with the terms of the applicable settlement, and the Company reversed the previously recorded $2.8 million legal reserve within accrued expenses and other liabilities and the related $2.8 million receivable within other assets on the Consolidated Balance Sheets.
Gulf Coast Subordinated Debt
In August 2021, we filed suit in the Circuit Court for Baltimore County (the “Court”) against the holders of certain Subordinated Debt (the “Debt Holders”) associated with our Gulf Coast master lease agreement, following an assertion by the Debt Holders that our prior exercise of offset rights in connection with Gulf Coast’s non-payment of rent had resulted in defaults under the terms of the Subordinated Debt. The suit seeks a declaratory judgment to, among other items, declare that the aggregate amount of unpaid rent due from Gulf Coast under the master lease agreement exceeds all amounts which otherwise would be due and owing by an indirect subsidiary of Omega (“Omega Obligor”) under the Subordinated Debt, and that all principal and interest due and owing under the Subordinated Debt may be (and was) offset in full as of December 31, 2021. In October 2021, the Debt Holders filed a motion to dismiss for lack of personal jurisdiction. On November 3, 2022, the Court granted the Debt Holders’ motion to dismiss for lack of personal jurisdiction, and Omega filed a timely appeal of the ruling. While Omega believes Omega Obligor is entitled to the enforcement of the offset rights sought in the action, Omega cannot predict the outcome of the declaratory judgment action, irrespective of whether (a) it is ultimately litigated in the Court if Omega Obligor prevails in its appeal or (b) if the order granting the motion to dismiss for lack of personal jurisdiction is affirmed and the issues are litigated in the Delaware Court (as defined below).
On or about January 19, 2023, the Debt Holders served a lawsuit against the Omega Obligor in the Superior Court of the State of Delaware (the “Delaware Court”), asserting claims for (i) breach of the instruments evidencing the Subordinated Debt, (ii) declaratory judgment, and (iii) unjust enrichment, all claims that are factually based on the claims that are the subject of Omega Obligor’s suit in the Court and that are now on appeal. On February 8, 2023, Omega Obligor filed a motion to dismiss or, in the alternative, to stay this action pending the outcome of the above-referenced lawsuit in Maryland. On July 10, 2023, the Delaware state court case stayed the proceeding pending further developments in the Maryland litigation. Omega believes that the claims are baseless and is evaluating procedural and substantive legal options in connection with this recently filed suit to the extent the stay is lifted.
In addition to the matters above, we are subject to various other legal proceedings, claims and other actions arising out of the normal course of business. While any legal proceeding or claim has an element of uncertainty, management believes that the outcome of each lawsuit, claim or legal proceeding that is pending or threatened, or all of them combined, will not have a material adverse effect on our consolidated financial position or results of operations.
Indemnification Agreements
In connection with certain facility transitions, we have agreed to indemnify certain operators in certain events. As of June 30, 2024, our maximum funding commitment under these indemnification agreements was $6.5 million. Claims under these indemnification agreements generally may be made within 18 months to 72 months of the transition date. These indemnification agreements were provided to certain operators in connection with facility transitions and generally would be applicable if the prior operators do not perform under their transition agreements.
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 at June 30, 2024, are outlined in the table below (in thousands):
Lessor construction and capital commitments under lease agreements
163,428
Non-real estate loan commitments
41,719
Real estate loan commitments
46,094
Total remaining commitments (1)
251,241
In the second quarter of 2024, we exercised an option that committed Omega to buy the remaining 51% interest in the Cindat Joint Venture, an unconsolidated joint venture that Omega held a 49% equity interest in as of June 30, 2024. The acquisition of the remaining 51% interest in the Cindat Joint Venture closed in July 2024, as discussed further in Note 21 – Subsequent Events.
NOTE 19 – EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted earnings per share:
Numerator:
Net income available to common stockholders – basic
Add: net income attributable to OP Units
3,463
1,767
5,499
2,815
Net income available to common stockholders – diluted
117,325
61,623
186,722
98,613
Denominator:
Denominator for basic earnings per share
249,366
236,233
247,719
235,594
Effect of dilutive securities:
Common stock equivalents
4,583
2,893
4,170
2,139
Noncontrolling interest – Omega OP Units
7,585
6,974
7,511
6,912
Denominator for diluted earnings per share
261,534
246,100
259,400
244,645
Earnings per share – basic:
Earnings per share – diluted:
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NOTE 20 – SUPPLEMENTAL DISCLOSURE TO CONSOLIDATED STATEMENTS OF CASH FLOWS
The following are supplemental disclosures to the Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023:
Reconciliation of cash and cash equivalents and restricted cash:
350,691
5,820
Supplemental information:
Interest paid during the period, net of amounts capitalized
115,168
111,540
Taxes paid during the period
1,433
1,936
Non-cash financing activities:
Change in fair value of hedges
12,455
(9,258)
Remeasurement of debt denominated in a foreign currency
1,096
NOTE 21 – SUBSEQUENT EVENTS
As of June 30, 2024, we held a 49% interest in the Cindat Joint Venture, an unconsolidated joint venture accounted for using the equity method of accounting that owns 63 facilities in the U.K. In July 2024, we acquired the remaining 51% interest in the Cindat Joint Venture, for a cash consideration of $97.4 million, excluding transaction costs, and deferred contingent consideration between zero and $3.0 million, which becomes payable to the sellers in December 2024, if certain contingencies are satisfied. As part of the acquisition, we assumed a $243.2 million mortgage loan that matures in August 2026 but can be repaid without a prepayment penalty beginning November 2025. The mortgage loan bears interest at SONIA plus an applicable margin of 5.38%. As part of the transaction, we assumed interest rate cap contracts that ensure the annual interest rate does not exceed 10.38%. The 63 facilities are subject to leases with two operators that have contractual rent of $43.6 million per annum with minimum escalators between 1.0% to 2.0% that can escalate further based on certain inflationary measures. Following the acquisition, we own 100% of the entity and will consolidate its results in our consolidated financial statements going forward. The acquired interest will be accounted for as an asset acquisition as substantially all of the fair value of the gross assets acquired is concentrated in a group of similar identifiable assets. Under our existing accounting policy election, we follow the asset acquisition cost accumulation and allocation model.
In July 2024, we acquired one facility in the U.K. for consideration of $5.1 million and leased it to an existing operator. The facility has a weighted average initial annual cash yield of 10.0% with annual escalators of 2.5%.
In July 2024, we made a $27.3 million preferred equity investment, treated as a real estate loan receivable for accounting purposes, in a new real estate joint venture that was formed to acquire a facility in Massachusetts. Omega’s preferred equity investment bears a 10.0% return per annum and must be mandatorily redeemed by the joint venture at the earlier of July 2030 or the occurrence of certain significant events within the joint venture.
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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Factors Affecting Future Results
Unless otherwise indicated or except where the context otherwise requires, the terms “we,” “us” and “our” and other similar terms in this Quarterly Report on Form 10-Q refer to Omega Healthcare Investors, Inc. and its consolidated subsidiaries.
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this document. This document contains “forward-looking statements” within the meaning of the federal securities laws. These statements relate to our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements other than statements of historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology including, but not limited to, terms such as “may,” “will,” “anticipates,” “expects,” “believes,” “intends,” “should” or comparable terms or the negative thereof. These statements are based on information available on the date of this filing and only speak as to the date hereof and no obligation to update such forward-looking statements should be assumed.
Our actual results may differ materially from those reflected in the forward-looking statements contained herein as a result of a variety of factors, including, among other things:
Summary
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:
Business Overview
Omega Healthcare Investors, Inc. (“Parent”) is a Maryland corporation that, together with its consolidated subsidiaries (collectively, “Omega” or “Company”) has elected to be taxed as a REIT for federal income tax purposes. Omega is structured as an umbrella partnership REIT (“UPREIT”) under which all of Omega’s assets are owned directly or indirectly by, and all of Omega’s operations are conducted directly or indirectly through, its operating partnership subsidiary, OHI Healthcare Properties Limited Partnership (collectively with its subsidiaries, “Omega OP”). As of June 30, 2024, Parent owned 97% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and other investors owned 3% of the outstanding Omega OP Units.
Omega has one reportable segment consisting of investments in healthcare-related real estate properties located in the United States (“U.S.”) and the United Kingdom (“U.K.”). Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on SNFs, ALFs, and to a lesser extent, independent living facilities (“ILFs”), rehabilitation and acute care facilities (“specialty facilities”) and medical office buildings. Our core portfolio consists of our long-term leases and real estate loans with healthcare operating companies and affiliates (collectively, our “operators”). Real estate loans consist of mortgage loans and other real estate loans which are primarily collateralized by a first, second or third mortgage lien or a leasehold mortgage on, or an assignment of the partnership interest in the related properties. In addition to our core investments, we make loans to operators and/or their principals. These loans, which may be either unsecured or secured by the collateral of the borrower, are classified as non-real estate loans. From time to time, we also acquire equity interests in joint ventures or entities that support the long-term healthcare industry and our operators.
Outlook, Trends and Other Conditions
Our industry continues to face the long-term impact of the COVID-19 pandemic, which significantly and adversely impacted SNFs and long-term care providers during the height of the pandemic due to the higher rates of virus transmission and fatality among the elderly and frail populations that these facilities serve. In addition, the pandemic contributed to occupancy declines, labor shortages and staffing expense increases, and other cost increases that have not yet returned to pre-pandemic levels and which continue to significantly impact our operators post-pandemic. There continues to be uncertainty regarding the duration of these impacts, particularly given uncertainty as to whether reimbursement increases from the federal government, the states and the U.K. will be effective in offsetting these incremental costs and lost revenues; the impact of potential regulatory changes, including the ultimate scope and impact of recently issued U.S. federal minimum staffing rules for our industry; and the continued ability of our operators to manage infectious diseases in our facilities. See “Government Regulation and Reimbursement” for additional information.
As discussed further in “Collectibility Issues” below, in 2023 and the second quarter of 2024, we have had several operators that have failed to make contractual payments under their lease and loan agreements, and we have agreed to short-term deferrals, lease and portfolio restructurings and/or allowed the application of security deposits or letters of credit to pay rent for several operators. To the extent the cost and occupancy impacts on our operators do not recover or are not offset by continued government relief or reimbursement rates that are sufficient and timely, we anticipate that the operating results of additional operators may be materially and adversely affected, and some may be unwilling or unable to pay their contractual obligations to us in full or on a timely basis and we may be unable to restructure such obligations on terms as favorable to us as those currently in place. While we continue to believe that longer term demographics will drive increasing demand for needs-based skilled nursing care, we remain cautious as some of the long-term impacts of the COVID-19 pandemic noted above may continue to have a significant impact on our operators and their financial conditions.
In addition to the long-term impacts of COVID-19 and regulatory requirements discussed above, our operators have been and are likely to continue to be adversely affected by inflation-related cost increases, which may exacerbate labor shortages and increase labor costs, among other impacts. We continue to monitor these impacts as well as the impacts of other regulatory changes, as discussed below, including any significant limits on the scope of services eligible for reimbursement and on reimbursement rates and fees, which could have a material adverse effect on an operator’s results of operations and financial condition, which could adversely affect the operator’s ability to meet its obligations to us.
On February 21, 2024, Change Healthcare, a unit of UnitedHealth Group, was impacted by a cybersecurity incident involving its information technology systems that disrupted processing of claims, among other transaction services it provides. Certain of our operators that directly or indirectly utilize Change Healthcare’s services experienced reimbursement delays due to the incident and may continue to experience delays until it is resolved. This incident and the resulting reimbursement delays affecting our operators may cause delays in the timing of our operators’ payments to us if not remedied timely. We are continuing to monitor the impact of the incident but at this time do not believe the incident is reasonably likely to materially impact the Company’s financial condition or results of operations.
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, 2023.
The healthcare industry is heavily regulated. Our operators, which are primarily based in the U.S., are subject to extensive and complex federal, state and local healthcare laws and regulations; we also have several U.K.-based operators that are subject to a variety of laws and regulations in their jurisdiction. These laws and regulations are subject to frequent and substantial changes resulting from the adoption of new legislation, rules and regulations, and administrative and judicial interpretations of existing law. The ultimate timing or effect of these changes, which may be applied retroactively, cannot be predicted. Changes in laws and regulations impacting our operators, in addition to regulatory non-compliance by our operators, can have a significant effect on the operations and financial condition of our operators, which in turn may adversely impact us. There is the potential that we may be subject directly to healthcare laws and regulations because of the broad nature of some of these regulations, such as the Anti-kickback Statute and False Claims Act, among others.
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The COVID-19 public health emergency that was declared by the U.S. Department of Health and Human Services (“HHS”) in January 2020 and expired in May 2023, allowed HHS to provide temporary regulatory waivers and new reimbursement rules, such as a temporary increase in the Medicaid Federal Medical Assistance Percentage (the “FMAP”) and other rules designed to equip providers with flexibility to respond to the COVID-19 pandemic by suspending various Medicare patient coverage criteria and documentation and care requirements, including, for example, suspension of the three-day prior hospital stay coverage requirement and expanding the list of approved services which may be provided via telehealth. The three-day prior hospital stay waiver was a significant benefit to the skilled nursing industry during the height of the pandemic, as the reimbursement associated with the ability to skill in place helped to offset some of the increased costs connected with managing the pandemic. These regulatory actions contributed to a change in census volumes and skilled nursing mix that may not otherwise have occurred. Following the termination of the public health emergency, we believe federal and state regulators have resumed enforcement of those regulations which were waived or otherwise not enforced during the public health emergency.
These temporary changes to regulations and reimbursement, as well as emergency legislation, including the CARES Act discussed below, have had a significant impact on the operations and financial condition of our operators. The extent of the COVID-19 pandemic’s continued effect, including through prolonged labor shortages, lower occupancy and expense increases, on the Company’s and our operators’ operational and financial performance will depend on future developments, including the recovery in occupancy and availability of labor, the ultimate scope, implementation timeline and impact of recently issued federal minimum staffing rules for SNFs, the sufficiency and timeliness of additional governmental relief and reimbursement rate setting in offsetting cost increases, and the continued efficacy of infection control measures, all of which are uncertain and difficult to predict and may continue to adversely impact our business, results of operations, financial condition and cash flows.
A significant portion of our operators’ revenue is derived from government-funded reimbursement programs, consisting primarily of Medicare and Medicaid. As federal and state governments continue to focus on healthcare reform initiatives, efforts to reduce costs by government payors will likely continue. Significant limits on the scope of services reimbursed and/or reductions of reimbursement rates could therefore have a material adverse effect on our operators’ results of operations and financial condition. Additionally, new and evolving payor and provider programs that are tied to quality and efficiency could adversely impact our tenants’ and operators’ liquidity, financial condition or results of operations, and there can be no assurance that payments under any of these government healthcare programs are currently, or will be in the future, sufficient to fully reimburse the property operators for their operating and capital expenses. In addition to quality and value-based reimbursement reforms, the U.S. Centers for Medicare and Medicaid Services (“CMS”) has implemented a number of initiatives focused on the reporting of certain facility specific quality of care indicators that could affect our operators, including publicly released quality ratings for all of the nursing homes that participate in Medicare or Medicaid under the CMS “Five Star Quality Rating System.” Facility rankings, ranging from five stars (“much above average”) to one star (“much below average”) are updated on a monthly basis. 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. SNFs are required to comply with new reporting requirements, effective as of January 16, 2024, relating to ownership by and affiliations with private equity firms and REITs, as well as provide information for inclusion on the CMS Nursing Home Care Compare website regarding staffing and quality measures. Any of these reporting requirements may impact occupancy at our properties and our business, results of operations, financial condition and cash flows.
The following is a discussion of certain U.S. laws and regulations generally applicable to our operators, and in certain cases, to us.
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Reimbursement Changes in Response to the Pandemic:
U.S. Federal Stimulus Funds and Financial Assistance for Healthcare Providers. In response to the pandemic, Congress enacted a series of economic stimulus and relief measures. The CARES Act and related legislation authorized distributions of approximately $185 billion to reimburse eligible healthcare providers for healthcare related expenses or lost revenues that were attributable to coronavirus. In addition, federal legislation made other forms of financial assistance available to healthcare providers, which impacted our operators to varying degrees. We do not expect our operators will receive any additional funding from HHS in connection with the pandemic, although certain of our operators have, over the last year, continued to receive distributions at the state level from funding appropriated under the CARES Act and the American Rescue Plan Act of 2021.
Among these forms of financial assistance, the Families First Coronavirus Response Act (“FFCRA”) was enacted in the U.S. on March 18, 2020, which provided a temporary 6.2% increase to each qualifying state and territory’s FMAP reimbursement until it was phased out as of December 31, 2023 following the expiration of the public health emergency in May 2023. In exchange for receiving the enhanced federal funding, the FFCRA included a requirement that Medicaid programs keep beneficiaries enrolled through the end of the month in which the public health emergency terminated. However, Congress decoupled the Medicaid continuous enrollment from the public health emergency and terminated this provision effective March 31, 2023. Beginning April 1, 2023, states that complied with federal rules regarding beneficiary renewals were eligible to begin the phase-down of the enhanced federal funding according to the following schedule: 6.2 percentage points through March 2023; 5 percentage points through June 2023; 2.5 percentage points through September 2023 and 1.5 percentage points through December 2023. Following termination of the continuous enrollment provision, total Medicaid enrollment, which had grown substantially during the pandemic, has declined.
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 intended 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. The full 2% Medicare sequestration went into effect as of July 1, 2022 and gradually increases to 4% from 2030 through 2031.
Quality of Care and Staffing Initiatives. In addition to COVID-19 reimbursement changes, several regulatory initiatives announced from 2020 to 2022 focused on addressing quality of care in long-term care facilities, including those related to COVID-19 testing and infection control protocols, vaccine protocols, staffing levels, reporting requirements, and visitation policies, as well as increased inspection of nursing homes. In addition, the CMS Nursing Home Care Compare website and the Five Star Quality Rating System were updated to include revisions to the inspection process, adjustment of staffing rating thresholds, the implementation of new quality measures and the inclusion of a staff turnover percentage (over a 12-month period).
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Additionally, on April 22, 2024, CMS issued a final rule regarding minimum staffing requirements and increased inspections at nursing homes, which CMS estimates exceed existing staffing standards in nearly all states. The final rule is being implemented on a staggered phase-in basis based on geographic location and will require nursing homes participating in Medicare and Medicaid to maintain a total nurse staffing standard of 3.48 hours per resident day (“HPRD”), which must include at least 0.55 HPRD of direct registered nurse care and 2.45 HPRD of direct nurse aide care. Facilities would be permitted to use any combination of nurse staff (registered nurse, licensed practical nurse and licensed vocational nurse or nurse aide) to account for the additional 0.48 HPRD required to comply with the total nurse staffing standard. In addition, the final rule requires nursing homes to ensure a registered nurse is onsite 24 hours per day, seven days per week, although CMS indicated that a director of nursing role could fulfill such requirement. The final rule also provides possible hardship exemptions for qualifying facilities for some parts of these requirements based on workforce unavailability and other factors. The final rule was not accompanied by additional funding for our operators to offset the costs associated with meeting these increased staffing requirements in an industry that is already facing staffing shortages. In May 2024, multiple SNF industry groups, along with several Texas facilities, filed suit in federal court to overturn the minimum staffing requirements on the basis that CMS exceeded its authority. The increased staffing requirements, if not overturned legislatively or by legal action, or if not accompanied by increased state reimbursement to offset the increased financial burden, may have a future adverse impact on the financial condition of many of our operators, which may be material, but which likely would not be experienced until closer to the point of delayed implementation which ranges from within 90 days of the final rule publication and five years of the final rule publication, depending on the geographic location.
The Biden Administration additionally announced in March 2022 a focus on reviewing private equity investment specifically in the skilled nursing sector. Further, on November 15, 2023, CMS issued a final rule, effective January 16, 2024, that requires SNFs participating in the Medicare or Medicaid programs to disclose certain ownership and managerial information regarding their relationships with certain entities that lease real estate to SNFs, including REITs. The CMS announcement noted concerns regarding the quality of care provided at SNFs owned by private equity firms, REITs and other investment firms. There have also been congressional hearings 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 COVID-19 response of nursing homes and the use of federal funds by nursing homes during the pandemic. Further, in 2024, several U.S. senators proposed legislation that would, if enacted, restrict certain investors, including REITs and private equity firms, from investing in healthcare facilities or impose penalties on certain landlords of or private equity investors in healthcare facilities whose operators subsequently enter into bankruptcy proceedings. In addition, in 2024, the Department of Justice (“DOJ”), HHS, and the Federal Trade Commission published a Request for Information seeking public comment on the effects of mergers and other transactions in the healthcare industry, with a focus on consolidation among health care providers, facilities, and ancillary products or services. These initiatives, as well as additional calls for government review, at the state and federal level, of the role of private equity in the U.S. healthcare industry and proposed legislation related to certain SNF financial arrangements with REITs, could result in additional requirements on our operators or restrictions on REITs.
In addition, on April 22, 2024, CMS issued the Ensuring Access to Medicaid Services final rule, which requires that, beginning six years after the effective date of the final rule, states generally ensure that at least 80% of Medicaid home and community-based services (“HCBS”) payments be put toward compensation for direct care workers. The final rule also requires more transparency regarding how much states pay for HCBS and how those rates are set. It is uncertain what the ultimate impact of the final rule, as well as similar initiatives at the state level, will be on providers of Medicaid HCBS services, given uncertainty related to how HCBS providers are currently spending Medicaid dollars, how many providers fall below the required 80% threshold and how well regulators can measure and track spending by HCBS providers. In addition, it remains unclear whether similar requirements, including those establishing minimum allocations of Medicaid or other reimbursements to direct care workers, will be proposed for SNFs, ALFs and other senior care providers; any such requirements, if enacted, could have a material adverse impact on the financial condition of our operators.
Reimbursement Generally:
Medicaid. Most of our SNF operators derive a substantial portion of their revenue from state Medicaid programs. Whether and to what extent the level of Medicaid reimbursement covers the actual cost to care for a Medicaid eligible resident varies by state. While periodic rate setting occurs and, in most cases, has an inflationary component, the state rate setting process does not always keep pace with inflation or, even if it does, there is a risk that it may still not be sufficient to cover all or a substantial portion of the cost to care for Medicaid eligible residents. Additionally, rate setting is subject to changes based on state budgetary constraints and political factors, both of which could result in decreased or insufficient reimbursement to the industry even in an environment where costs are rising. Since our operators’ profit margins on Medicaid patients are generally relatively low, more than modest reductions in Medicaid reimbursement or an increase in the percentage of Medicaid patients has in the past, and may in the future, adversely affect our operators’ results of operations and financial condition, which in turn could adversely impact us.
As indicated above, the CARES Act and American Rescue Plan Act contained several provisions designed to increase coverage, expand benefits, and adjust federal financing for state Medicaid programs. While the CARES Act provided for a 6.2% FMAP add-on to the Medicaid program during the public health emergency that was phased out as of December 31, 2023, only certain states passed any of this benefit directly to SNF operators either via an enhanced rate or lump sum payments.
The risk of insufficient Medicaid reimbursement rates, along with possible initiatives to push residents historically cared for in SNFs to alternative settings, labor shortages in certain areas and limited pandemic support in certain states, may impact us more acutely in states where we have a larger presence. While state reimbursement rates have generally improved over the last several years, reimbursement support is not consistent across states, and it is difficult to assess whether the level of reimbursement support has or will continue to adequately keep pace with increased operator costs. We continue to monitor rate adjustment activity, particularly in states in which we have a meaningful presence.
Medicare. On July 31, 2024, CMS issued a final rule regarding the government fiscal year 2025 Medicare payment rates and quality payment programs for SNFs, with aggregate Medicare Part A payments projected to increase by $1.4 billion, or 4.2%, for fiscal year 2025 compared to fiscal year 2024. This estimated reimbursement increase is attributable to a 4.2% net market basket update to the payment rates, which is based on a 3.0% SNF market basket increase plus a 1.7% market basket forecast error adjustment and less a 0.5% productivity adjustment. In addition to the payment rate update, CMS stated that it has rebased and revised the SNF market basket to reflect a 2022 base year. The annual update is reduced by 2% 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 $196.5 million in fiscal year 2025. 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.
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 the Patient Driven Payment Model (“PDPM”) or value-based purchasing models, in the future have an adverse effect on the operations and financial condition of some operators and could adversely impact the ability of operators to meet their obligations to us.
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On May 27, 2020, CMS added physical therapy, occupational therapy and speech-language pathology to the list of approved telehealth Providers for the Medicare Part B programs provided by a SNF as a part of the COVID-19 1135 waiver provisions. The COVID-19 1135 waiver provisions also allowed for the facility to bill an originating site fee to CMS for telehealth services provided to Medicare Part B beneficiary residents of the facility when the services were provided by a physician from an alternate location, effective March 6, 2020 through May 11, 2023, the expiration of the public health emergency. The Consolidated Appropriations Act of 2023 extended the ability of occupational therapists, physical therapists and speech-language pathologists to continue to furnish these services via telehealth and bill as distant site practitioners until the end of 2024.
On March 30, 2023, CMS issued a memorandum revising and enhancing enforcement efforts for infection control deficiencies found in nursing homes that are targeted at higher-level infection control deficiencies that result in actual harm or immediate jeopardy to residents. Similar to other serious survey deficiencies, penalties for the most serious infection control deficiencies include civil monetary penalties and discretionary payment denials for new resident admissions.
Other Regulation:
Office of the Inspector General Activities. The Office of Inspector General (“OIG”) of HHS has provided long-standing guidance for SNFs regarding compliance with federal fraud and abuse laws. More recently, the OIG has conducted increased oversight activities and issued additional guidance regarding its findings related to identified problems with the quality of care and the reporting and investigation of potential abuse or neglect at group homes, nursing homes and SNFs. The OIG has additionally reviewed the staffing levels reported by SNFs as part of its August 2018 and February 2019 Work Plan updates and included a review of involuntary transfers and discharges from nursing homes in the June 2019 Work Plan updates. In August 2020, the OIG released its findings regarding its review of staffing levels in SNFs from 2018. The OIG recommended that CMS enhance efforts to ensure nursing homes meet daily staffing requirements and explore ways to provide consumers with additional information on nursing homes’ daily staffing levels and variability. The OIG indicated that while the review was initiated before the COVID-19 pandemic emerged, the pandemic reinforces the importance of sufficient staffing for nursing homes, as inadequate staffing can make it more difficult for nursing homes to respond to infectious disease outbreaks like COVID-19. It is unknown what impact, if any, enhanced scrutiny of staffing levels by OIG and CMS will have on our operators.
Department of Justice and Other Enforcement Actions. SNFs are under intense scrutiny for ensuring the quality of care being rendered to residents and appropriate billing practices conducted by the facility. The 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.
Second Quarter of 2024 and Recent Highlights
Investments
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Dispositions and Impairments
Financing Activities
Other Highlights
Collectibility Issues
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Results of Operations
The following is our discussion of the consolidated results of operations, financial position and liquidity and capital resources, which should be read in conjunction with our unaudited consolidated financial statements and accompanying notes.
Comparison of results of operations for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):
Increase/
(Decrease)
Revenues:
(5,040)
12,550
8,810
16,226
(1,212)
(1,121)
Expenses:
(7,784)
(14,419)
(10)
996
(175)
(374)
1,357
3,321
(12,932)
(46,628)
(27,139)
(14,612)
(4,810)
(5,536)
Other income (expense):
2,334
4,890
(1,490)
668
(14,360)
(354)
(4,227)
(928)
(1,661)
The following is a description of certain of the changes in revenues for the three months ended June 30, 2024 compared to the same period in 2023:
The following is a description of certain of the changes in our expenses for the three months ended June 30, 2024 compared to the same period in 2023:
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Other Income (Expense)
The increase in total other income (expense) was primarily due to (i) a $2.3 million increase in other income – net primarily related an unrealized fair value gain on an investment in the second quarter of 2024 and (ii) a $0.7 million increase in gain on assets sold related to the sale of five facilities in the second quarter of 2024 compared to the sale of ten facilities during the same period in 2023.
The following is a description of certain of the changes in revenues for the six months ended June 30, 2024 compared to the same period in 2023:
The following is a description of certain of the changes in our expenses for the six months ended June 30, 2024 compared to the same period in 2023:
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The decrease in total other income (expense) was primarily due to (i) a $14.4 million decrease in gain on assets sold related to the sale of nine facilities in 2024 compared to the sale of 12 facilities during the same period in 2023 and (ii) a $1.5 million increase in loss on debt extinguishment primarily related to the early repayment of nine HUD mortgages during the first quarter of 2024, partially offset by a $4.9 million increase in other income – net primarily related to increased interest income on short-term investments due to higher invested cash and favorable interest rates in 2024.
Income Tax Expense
The increase in income tax expense was primarily due to (i) adjustments made to our deferred tax assets and liabilities in the first quarter of 2023 as a result of the majority of our U.K. portfolio entering into the U.K. REIT regime effective April 1, 2023 and (ii) an increase in taxable income in the U.K. as a result of acquisitions in 2023 and 2024.
Funds from Operations
We use funds from operations (“Nareit FFO”), a non-GAAP financial measure, as one of several criteria to measure the operating performance of our business. We calculate and report Nareit FFO in accordance with the definition of Funds from Operations and interpretive guidelines issued by the National Association of Real Estate Investment Trusts (“Nareit”). Nareit FFO is defined as net income (computed in accordance with GAAP), adjusted for the effects of asset dispositions and certain non-cash items, primarily depreciation and amortization and impairment on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures and changes in the fair value of warrants. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis. Revenue recognized based on the application of security deposits and letters of credit or based on the ability to offset against other financial instruments is included within Nareit FFO. We believe that Nareit FFO is an important supplemental measure of our operating performance. As real estate assets (except land) are depreciated under GAAP, such accounting presentation implies that the value of real estate assets diminishes predictably over time, while real estate values instead have historically risen or fallen with market conditions. Nareit FFO was designed by the real estate industry to address this issue. Nareit FFO herein is not necessarily comparable to Nareit FFO of other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us.
We further believe that by excluding the effect of depreciation, amortization, impairment on real estate assets and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, Nareit FFO can facilitate comparisons of operating performance between periods. We offer this measure to assist the users of our financial statements in evaluating our financial performance under GAAP, and Nareit FFO should not be considered a measure of liquidity or cash flow, an alternative to net income or an indicator of any other performance measure determined in accordance with GAAP. Investors and potential investors in our securities should not rely on this measure as a substitute for any GAAP measure, including net income.
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The following table presents our Nareit FFO results for the three and six months ended June 30, 2024 and 2023:
Net income (1)
Deduct gain from real estate dispositions
(12,911)
(12,243)
104,168
49,278
174,905
72,486
Elimination of non-cash items included in net income:
Depreciation – unconsolidated joint ventures
2,531
2,743
5,067
5,427
Add back provision for impairments on real estate properties
Nareit FFO
189,115
155,153
342,237
301,225
Liquidity and Capital Resources
Sources and Uses
Our primary sources of cash include rental income and interest receipts, existing availability under our Revolving Credit Facility, proceeds from our DRCSPP and the ATM Program, facility sales, the issuance of additional debt, including unsecured notes and term loans, and proceeds from real estate loan and non-real estate loan payoffs. We anticipate that these sources will be adequate to fund our cash flow needs through the next twelve months, which include common stock dividends and distributions to noncontrolling interest members, debt service payments (including principal and interest), real estate investments (including facility acquisitions, capital improvement programs and other capital expenditures), real estate loan and non-real estate loan advances and normal recurring G&A expenses (primarily consisting of employee payroll and benefits and expenses relating to third parties for legal, consulting and audit services).
Capital Structure
At June 30, 2024, we had total assets of $8.8 billion, total equity of $3.9 billion and total debt of $4.7 billion in our consolidated financial statements, with such debt representing 54.6% of total capitalization.
Debt
At June 30, 2024 and December 31, 2023, the weighted average annual interest rate of our debt was 4.3% and 4.4%, respectively. Additionally, as of June 30, 2024, 99% of our debt with outstanding principal balances has fixed interest payments after reflecting the impact of interest rate swaps that are designated as cash flow hedges. Our high percentage of fixed interest debt has kept our interest expense relatively flat year over year despite rising interest rates. As of June 30, 2024, 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 SOFR plus a margin that depends upon our credit rating. A downgrade in credit ratings by Moody’s, S&P Global and/or Fitch may have a negative impact on the interest rates and fees for our Revolving Credit Facility, OP term loan and 2025 term loan.
As of June 30, 2024, we had $35.2 million of cash and cash equivalents on our Consolidated Balance Sheets. Our next senior note maturity is the $400 million of 4.50% senior notes due January 2025. As of June 30, 2024, we had $443.9 million of potential common share issuances remaining under the ATM Program and $1.4 billion of availability under our Revolving Credit Facility. This combination of liquidity sources, along with cash from operating activities, provides us with ability to repay the senior notes due in January 2025.
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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 June 30, 2024 and December 31, 2023, 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 $4.2 billion aggregate principal of senior notes outstanding at June 30, 2024 that were registered under the Securities Act of 1933, as amended. The senior notes are guaranteed by Omega OP.
Rule 3-10 and Rule 13-01 of Regulation S-X permits registrants to provide certain alternative financial and non-financial disclosures, to the extent material, in lieu of separate financial statements for subsidiary issuers and guarantors of registered debt securities. Accordingly, separate consolidated financial statements of Omega OP have not been presented. Parent and Omega OP, on a combined basis, have no material assets, liabilities or operations other than financing activities (including borrowings under our outstanding senior notes, Revolving Credit Facility and term loans) and their investments in non-guarantor subsidiaries.
Omega OP is currently the sole guarantor of our senior notes. The guarantees by Omega OP of our senior notes are full and unconditional and joint and several with respect to the payment of the principal and premium and interest on our senior notes. The guarantees of Omega OP are senior unsecured obligations of Omega OP that rank equal with all existing and future senior debt of Omega OP and are senior to all subordinated debt. However, the guarantees are effectively subordinated to any secured debt of Omega OP. As of June 30, 2024, there were no significant restrictions on the ability of Omega OP to make distributions to Omega.
At June 30, 2024, we had 254.0 million shares of common stock outstanding, and our shares had a market value of $8.7 billion. The following is a summary of activity under our equity programs during the three and six months ended June 30, 2024:
As a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders in an amount at least equal to (A) the sum of (i) 90% of our “REIT taxable income” (computed without regard to the dividends paid deduction and our net capital gain), and (ii) 90% of the net income (after tax), if any, from foreclosure property, minus (B) the sum of certain items of non-cash income. In addition, if we dispose of any built-in gain asset during a recognition period, we will be required to distribute at least 90% of the built-in gain (after tax), if any, recognized on the disposition of such asset. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for such year and paid on or before the first regular dividend payment after such declaration. In addition, such distributions are required to be made pro rata, with no preference to any share of stock as compared with other shares of the same class, and with no preference to one class of stock as compared with another class except to the extent that such class is entitled to such a preference. To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100% of our “REIT taxable income” as adjusted, we will be subject to tax thereon at regular corporate rates.
For the six months ended June 30, 2024, we paid dividends of $330.7 million to our common stockholders. On February 15, 2024, we paid dividends of $0.67 per outstanding common share to the common stockholders of record as of the close of business on February 5, 2024. On May 15, 2024, we paid dividends of $0.67 per outstanding common share to the common stockholders of record as of the close of business on April 30, 2024.
Material Cash Requirements
During the six months ended June 30, 2024, there were no significant changes to our material cash requirements from those disclosed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023.
As of June 30, 2024, we had $163.4 million of commitments to fund the construction of new facilities, capital improvements and other commitments under lease agreements. Additionally, we have commitments to fund $46.1 million of advancements under existing real estate loans and $41.7 million of advancements under existing non-real estate loans. These commitments are expected to be funded over the next several years and are dependent upon the operators’ election to use the commitments.
In the second quarter of 2024, we exercised an option that committed Omega to buy the remaining 51% equity interest in an unconsolidated joint venture owning 63 facilities in the U.K. (the “Cindat Joint Venture”) and in which Omega held a 49% equity interest as of June 30, 2024. The acquisition of the remaining 51% equity interest in the Cindat Joint Venture closed in July 2024 for total cash consideration of $97.4 million along with the assumption of a $243.2 million mortgage loan.
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 16 – Derivatives and Hedging.
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Cash Flow Summary
Cash, cash equivalents and restricted cash totaled $39.1 million as of June 30, 2024, a decrease of $405.6 million as compared to the balance at December 31, 2023. The following is a summary of our sources and uses of cash flows for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023 (dollars in thousands):
Increase/(Decrease)
Net cash provided by (used in):
Operating activities
53,841
Investing activities
(71,303)
Financing activities
(443,536)
The following is a discussion of changes in cash, cash equivalents and restricted cash for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.
Operating Activities – The increase in net cash provided by operating activities is driven primarily by an increase of $27.5 million of net income, net of $60.6 million of non-cash items, primarily due to a year over year increase in rental income and interest income as discussed in our material changes analysis under Results of Operations above. The $26.3 million change in the net movements of the operating assets and liabilities, also contributed to the overall increase in cash provided by operating activities.
Investing Activities – The increase in cash used in investing activities primarily related to (i) a $66.9 million increase in loan placements, net of repayments due to new loans advanced in 2024 and significant paydowns on loans during the second quarter of 2023, (ii) an $28.3 million increase in capital improvements to real estate investments and construction in progress primarily as a result of the on-going construction of an ALF in Washington D.C., (iii) a $17.4 million decrease in proceeds from the sales of real estate investments and (iv) a $2.1 million decrease in receipts from insurance proceeds, partially offset by (i) a $27.0 million decrease in real estate acquisitions, (ii) an $8.4 million increase in proceeds from net investment hedges related to the termination of two foreign currency forward contracts during the first quarter of 2024 and (iii) a $7.9 million decrease in investments in unconsolidated joint ventures.
Financing Activities – The increase in cash used in financing activities primarily related to (i) a $405.6 million increase in repayments on long-term borrowings, net of proceeds, primarily due to the repayment of $400 million of 4.95% senior notes in April 2024, (ii) a $92.6 million increase in proceeds from derivative instruments as a result of the termination of our forward starting swaps in the second quarter of 2023, (iii) a $15.9 million increase in dividends paid primarily related to share issuances during 2023 and 2024, (iv) a $1.9 million increase in distributions to Omega OP Unit holders, and (v) a $1.9 million increase in payment of financing related costs related to the early repayment of nine HUD mortgages during the first quarter of 2024, partially offset by a $73.6 million increase in net proceeds from issuance of common stock as a result of increased volume under our ATM Program and DRCSPP.
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, 2023. There have been no material changes to our critical accounting policies or estimates since December 31, 2023.
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
During the quarter ended June 30, 2024, there were no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2023.
Item 4 – Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2024. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures of the Company were effective at a reasonable assurance level as of June 30, 2024.
Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2024 (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
See Note 18 – Commitments and Contingencies to the Consolidated Financial Statements - Part I, Item 1 hereto, which is hereby incorporated by reference in response to this Item.
Item 1A – Risk Factors
There have been no material changes to our risk factors as previously disclosed in Item 1A contained in Part I of our Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
From time to time, the Company issues shares of common stock in reliance on the private placement exemption under Section 4(a)(2) of the Securities Act of 1933, as amended, in exchange for Omega OP Units. During the quarter ended June 30, 2024, Omega issued an aggregate of 1,000 shares of Omega common stock in exchange for an equivalent number of Omega OP Units tendered to Omega OP for redemption in accordance with the provisions of the partnership agreement governing Omega OP in reliance on this exemption.
Issuer Purchases of Equity Securities
On January 27, 2022, the Board of Directors authorized the Company to repurchase up to $500 million of its outstanding common stock from time to time through March 2025. The Company is authorized to repurchase shares of its common stock in open market and privately negotiated transactions or in any other manner as determined by the Company’s management and in accordance with applicable law. The timing and amount of stock repurchases will be determined, in management’s discretion, based on a variety of factors, including but not limited to market conditions, other capital management needs and opportunities, and corporate and regulatory considerations. The Company has no obligation to repurchase any amount of its common stock, and such repurchases, if any, may be discontinued at any time.
During the second quarter of 2024, we did not repurchase any shares of our outstanding common stock.
Item 5 – Other Information
Rule 10b5-1 Trading Plans
No officers or directors, as defined in Rule 16a-1(f), adopted, modified and/or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as defined in Regulation S-K Item 408, during the second quarter of 2024.
Item 6–Exhibits
Exhibit No.
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Omega Healthcare Investors, Inc.*
31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Omega Healthcare Investors, Inc.*
32.1
Section 1350 Certification of the Chief Executive Officer of Omega Healthcare Investors, Inc.*
32.2
Section 1350 Certification of the Chief Financial Officer of Omega Healthcare Investors, Inc.*
101
The following financial statements (unaudited) from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
104
Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101).
* Exhibits that are filed or furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Registrant
Date: August 2, 2024
By:
/S/ C. TAYLOR PICKETT
C. Taylor Pickett
Chief Executive Officer
/S/ ROBERT O. STEPHENSON
Robert O. Stephenson
Chief Financial Officer
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